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Library of Congress Cataloging-in-Publication Data
IT outsourcing : concepts, methodologies, tools, and applications / Kirk St.Amant, editor. p. ; cm. Includes bibliographical references and index. Summary: "This book covers a wide range of topics involved in the outsourcing of information technology through state-of-the-art collaborations of international field experts"--Provided by publisher. ISBN 978-1-60566-770-6 (hardcover) -- ISBN 978-1-60566-771-3 (ebook) 1. Contracting out. 2. Information technology. I. Kirk, St. Amant. II. Title. HD2365.I8 2009 004.068'4--dc22
2009015818 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book set is original material. The views expressed in this book are those of the authors, but not necessarily of the publisher.
Editor-in-Chief Mehdi Khosrow-Pour, DBA Editor-in-Chief Contemporary Research in Information Science and Technology, Book Series
Associate Editors Steve Clarke University of Hull, UK Murray E. Jennex San Diego State University, USA Annie Becker Florida Institute of Technology USA Ari-Veikko Anttiroiko University of Tampere, Finland
Editorial Advisory Board Sherif Kamel American University in Cairo, Egypt In Lee Western Illinois University, USA Jerzy Kisielnicki Warsaw University, Poland Keng Siau University of Nebraska-Lincoln, USA Amar Gupta Arizona University, USA Craig van Slyke University of Central Florida, USA John Wang Montclair State University, USA Vishanth Weerakkody Brunel University, UK
Additional Research Collections found in the “Contemporary Research in Information Science and Technology” Book Series Data Mining and Warehousing: Concepts, Methodologies, Tools, and Applications John Wang, Montclair University, USA • 6-volume set • ISBN 978-1-60566-056-1 Electronic Business: Concepts, Methodologies, Tools, and Applications In Lee, Western Illinois University • 4-volume set • ISBN 978-1-59904-943-4 Electronic Commerce: Concepts, Methodologies, Tools, and Applications S. Ann Becker, Florida Institute of Technology, USA • 4-volume set • ISBN 978-1-59904-943-4 Electronic Government: Concepts, Methodologies, Tools, and Applications Ari-Veikko Anttiroiko, University of Tampere, Finland • 6-volume set • ISBN 978-1-59904-947-2 Knowledge Management: Concepts, Methodologies, Tools, and Applications Murray E. Jennex, San Diego State University, USA • 6-volume set • ISBN 978-1-59904-933-5 Information Communication Technologies: Concepts, Methodologies, Tools, and Applications Craig Van Slyke, University of Central Florida, USA • 6-volume set • ISBN 978-1-59904-949-6 Intelligent Information Technologies: Concepts, Methodologies, Tools, and Applications Vijayan Sugumaran, Oakland University, USA • 4-volume set • ISBN 978-1-59904-941-0 Information Security and Ethics: Concepts, Methodologies, Tools, and Applications Hamid Nemati, The University of North Carolina at Greensboro, USA • 6-volume set • ISBN 978-1-59904-937-3 Medical Informatics: Concepts, Methodologies, Tools, and Applications Joseph Tan, Wayne State University, USA • 4-volume set • ISBN 978-1-60566-050-9 Mobile Computing: Concepts, Methodologies, Tools, and Applications David Taniar, Monash University, Australia • 6-volume set • ISBN 978-1-60566-054-7 Multimedia Technologies: Concepts, Methodologies, Tools, and Applications Syed Mahbubur Rahman, Minnesota State University, Mankato, USA • 3-volume set • ISBN 978-1-60566-054-7 Virtual Technologies: Concepts, Methodologies, Tools, and Applications Jerzy Kisielnicki, Warsaw University, Poland • 3-volume set • ISBN 978-1-59904-955-7
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List of Contributors
Adya, Monica \ Marquette University, USA................................................................. 1593, 1997, 2404 Afsarmanesh, Hamideh \ University of Amsterdam, The Netherlands.............................................. 364 Agarwal, Ashish \ Carnegie Mellon University, USA........................................................................ 937 Agrawal, Vijay K. \ University of Nebraska - Kearney, USA........................................................ 1, 474 Akella, Ram \ University of California, USA..................................................................................... 578 Albani, Antonia \ Delft University of Technology, The Netherlands.................................................. 731 Amaral, Filipe \ Grupo Sumol, Portugal............................................................................................ 258 An, Lianjun \ IBM T.J. Watson Research, USA................................................................................ 2164 Anantatmula, Vittal S. \ Western Carolina University, USA........................................................... 1954 Araujo, Andre L. \ College of William & Mary, USA........................................................................ 893 Arisoy, Ozlem \ University of Pittsburgh, USA.................................................................................. 267 Arzi, Yohanan \ ORT Braude College, Israel................................................................................... 1935 Askarzai, Walied \ Melbourne Institute of Technology, Australia..................................................... 398 Atkins, Anthony S. \ Staffordshire University, UK..................................................................... 29, 1140 Audy, Jorge Luis Nicolas \ Pontifícia Universidade Católica do Rio Grande do Sul, Brazil......... 1723 Balakrishnan, Bindu \ San Jose State University, USA,.................................................................. 1670 Balsters, Herman \ University of Groning, The Netherlands........................................................... 2188 Bartczak, Summer E. \ Air Force Institute of Technology AFIT/ENV, USA.................................... 1664 Basu, Subhajit \ Queen’s University Belfast, Northern Ireland....................................................... 1073 Beaumont, Nicholas \ Monash University, Australia........................................................................... 89 Benamati, John “Skip” \ Miami University, USA............................................................................. 534 Beverakis, Georgia \ University of New South Wales, Australia...................................................... 2317 Bidanda, Bopaya \ University of Pittsburgh, USA............................................................................. 267 Binder, Mario \ Aston University, UK................................................................................................ 387 Bradford, Marianne \ North Carolina State University, USA........................................................... 211 Bryant, Barret R. \ University of Alabama at Birmingham, USA.................................................... 2164 Burton, Brian K. \ Western Washington University, USA................................................................ 1109 Camarinha-Matos, Luis M. \ New University of Lisbon, Portugal.................................................. 364 Cameron, Brian H. \ The Pennsylvania State University, USA....................................................... 1419 Cao, Fei \ University of Alabama at Birmingham, USA.................................................................... 2164 Caporarello, Leonardo \ Bocconi University, Italy......................................................................... 1871 Carpenter, Donald A. \ Mesa State College, USA......................................................................... 1, 474 Cartland, Steve \ HP, Australia........................................................................................................ 2148 Case, Peter \ University of the West of England, UK........................................................................ 1897 Casey, Valentine \ University of Limerick, Ireland........................................................................... 1534
Cata, Teuta \ Northern Kentucky University, USA........................................................................... 1456 Cater-Steel, Aileen \ University of Southern Queensland, Australia............................................... 1447 Cecez-Kecmanovic, Dubravka \ University of New South Wales, Australia.................................. 2317 Chakrabarty, Subrata \ Texas A&M University, USA..................................... 126, 188, 488, 967, 1782 Chen, Tao \ Huazhong University of Science and Technology, China.............................................. 2113 Chen, Yuanyuan \ JS3 Global, LLC................................................................................................. 2253 Chen, Yu-Che \ Iowa State University, USA..................................................................................... 1916 Cherukuri, Suvarna \ Siena College, USA........................................................................................ 426 Choi, Hyung Rim \ Dong-A University, Korea.................................................................................. 654 Clegg, Ben \ Aston University, UK...................................................................................................... 387 Cong, Guodong \ Huazhong University of Science and Technology, China.................................... 2113 Corbitt, Brian J. \ Shinawatra University, Thailand........................................................................ 2237 Crk, Igor \ University of Arizona, USA.............................................................................................. 634 Cunha, Maria Manuela \ Polytechnic Institute of Cávado and Ave Higher School of Technology, Portugal................................................................................................................ 1020 Dahab, Sonia \ Universidade Nova de Lisboa, Portugal.................................................................... 258 Dang, Tran Khanh \ National University of Ho Chi Minh City, Vietnam.............................. 2052, 2130 Davison, Robert M. \ City University of Hong Kong, Hong Kong.................................................... 947 Denny, Nathan \ University of Arizona, USA..................................................................................... 836 Dhar, Subhankar \ San Jose State University, USA................................................................. 229, 1670 Dholakia, Nikhilesh \ University of Rhode Island, USA.................................................................. 2265 Dick, Geoffrey N. \ University of New South Wales, Australia........................................................ 2317 do Rosário Alves de Almeida, Maria \ Open University of Lisbon, Portugal.................................. 377 Doldán Tié, Felix R. \ University of A Coruña, Spain...................................................................... 1333 Dottore, Michelle \ San Diego State University, USA...................................................................... 1168 Dowell, Scott J. \ Shirnia & Dowell LLC, USA................................................................................ 1030 Downing, Joe \ Southern Methodist University, USA......................................................................... 910 Eccarius-Kelly, Vera \ Siena College, USA........................................................................................ 426 Efendioglu, Alev M. \ University of San Francisco, USA................................................................ 1409 Eklin, Mark \ Technion - Israel Institute of Technology, Israel....................................................... 1935 England, Ellen C. \ Air Force Institute of Technology AFIT/ENV, USA.......................................... 1664 Evaristo, Roberto \ University of Illinois at Chicago, USA............................................................. 1723 Eze, Uchenna C. \ Multimedia University, Malaysia....................................................................... 1264 Fang, Xiang \ Miami University, USA.............................................................................................. 1557 Feuerlicht, George \ University of Technology, Australia, & University of Economics Prague, Czech Republic........................................................................................................ 929, 2302 Florey, David Ross \ Merrill Lynch Global Business Technology, Singapore.................................... 594 Folz, Jasmine \ Seattle Central Community College, USA............................................................... 1881 Ganguly, Auroop \ Oak Ridge National Laboratory, USA................................................................. 452 Gantz, David A. \ University of Arizona, USA................................................................................... 286 Gapova, Elena \ European Humanities University, Belarus............................................................ 2231 Gillam, Stephen H. \ Accenture, USA.............................................................................................. 1839 Gingras, Robert \ Business Process and Technology Advisor, USA................................................... 211 Goyal, Preeti \ Management Development Institute, India.............................................................. 2378 Goyal, Raj K. \ Harvard Medical School and VA Boston Health Care System, USA...................... 1223 Goyal, Rajneesh \ California State University, USA........................................................................ 1702
Guilloux, Veronique \ Université Paris, France.............................................................................. 1199 Gupta, Amar \ University of Arizona and MIT, USA............................................... 286, 452, 937, 1223 Gupta, Rajen K. \ Management Development Institute, India............................................................. 19 Hauser, Rainer \ IBM Zurich Research, Switzerland....................................................................... 2164 Hickerson, Blake \ Texas Woman’s University, USA............................................................................ 50 Ho, Luke \ Staffordshire University, UK..................................................................................... 29, 1140 Hoecht, Andreas \ University of Portsmouth, UK............................................................................ 1739 Hoelscher, Mark L. \ Illinois State University, USA........................................................................ 1392 Hoffman, James J. \ Texas Tech University, USA............................................................................ 1392 Hollis, Whitney \ University of Arizona, USA.................................................................................. 1189 Hornby, Jonathan \ SAS Institute, USA............................................................................................. 211 Howard, Michael \ Texas Woman’s University, USA............................................................................ 50 Huerta, Esperanza \ Instituto Tecnológico Autónomo de México, Mexico...................................... 1284 Huertas, Paula Luna \ University of Sevilla, Spain......................................................................... 1333 Hussein, Maha \ The American University in Cairo, Egypt............................................................. 1298 Jaiswal, Mahadeo \ Management Development Institute, India...................................................... 2347 Jeng, Jun-Jang \ IBM T.J. Watson Research, USA........................................................................... 2164 Joiner, Keith A. \ University of Arizona, USA.................................................................................. 1223 Kalika, Michel \ Université Paris, France....................................................................................... 1199 Kam, Carol S. P. \ Yahoo! Holding (HK) Ltd, Hong Kong................................................................. 947 Kamel, Sherif \ The American University in Cairo, Egypt............................................................... 1298 Kim, Gyeung-min \ Ewha Womans University, Korea....................................................................... 408 Kim, Hyun Soo \ Dong-A University, Korea...................................................................................... 654 Kim, Saem-Yi \ Ewha Womans University, Korea.............................................................................. 408 Kimble, Chris \ University of York, UK............................................................................................ 1966 King, Kevin \ Clarian Health, USA.................................................................................................... 166 King, William R. \ University of Pittsburgh, USA............................................................................ 1522 Knapp, Karl \ University of Indianapolis, USA................................................................................. 166 Knight, Shaun C. \ The Pennsylvania State University, USA.......................................................... 1419 Kotlarsky, Julia \ University of Warwick, UK........................................................................ 1583, 1656 Kreyling, Jeremy \ University of Arizona, USA................................................................................. 286 Kshetri, Nir \ University of North Carolina at Greensboro, USA.................................................... 2265 Kulkarni, Mahesh \ Center for Development of Advanced Computing, India................................ 2293 Kumar, Rachna \ Alliant International University, USA................................................................. 2099 Kundu, Sumit \ Florida International University, USA................................................................... 2211 Kuruvilla, Sarosh \ Cornell University, USA................................................................................... 1974 Kvinge, Torunn \ Fafo Institute for Labour and Social Research, Norway....................................... 340 Kwak, N. K. \ Saint Louis University, USA........................................................................................ 707 Lai, Kin-Keung \ City University of Hong Kong, China.................................................................. 2113 Langford, John \ University of Victoria, Canada............................................................................ 1360 Lau, Kwok Hung \ Royal Melbourne Institute of Technology University, Australia......................... 763 Lee, Chang Won \ Jinju National University, Korea.......................................................................... 707 Lee, Sooun \ Miami University, USA................................................................................................ 1557 Leeds, Elke \ Kennesaw State University, USA................................................................................ 1839 Leet, Christopher J. M. \ Intuit Inc., USA....................................................................................... 2278 Legorreta, Leonardo \ California State University, USA................................................................ 1702
Lehmann, Hans \ Victoria University of Wellington, New Zealand................................................. 1125 Li, Feng \ University of Newcastle upon Tyne, UK........................................................................... 1966 Li, Yuan \ University of Southern California, USA............................................................................. 947 Lin, Chad \ Curtin University of Technology, Australia................................................................... 1324 Lin, Koong \ National University of Tainan, Taiwan........................................................................ 1324 Logan, Patricia Y. \ Marshall University Graduate College, USA.................................................. 2029 Lojeski, Karen Sobel \ Virtual Distance International, USA........................................................... 1601 Lubbe, Sam \ University of KwaZulu-Natal, South Africa................................................................. 610 Ma, Wun Leong \ Royal Melbourne Institute of Technology University, Australia........................... 763 Maletzky, Martina \ Technische Universtät Berlin, Germany................................................. 310, 1617 Malik, Amit \ Management Development Institute, India................................................................ 1997 Malone, Alan \ Siemens Corporate Research, USA.......................................................................... 1534 Mani, Shivram \ University of Arizona, USA..................................................................................... 836 Martínez López, Francisco Jose \ University of Huelva, Spain...................................................... 1333 Mathiyalakan, Sathasivam \ University of Massachusetts Boston, USA.......................................... 920 McCoy, Jason \ Global Seawater, Inc., USA.................................................................................... 1206 Medlin, B. Dawn \ Appalachian State University, USA................................................................... 1790 Metri, Bhimaraya A. \ Management Development Institute, India................................................. 2378 Mirani, Rajesh \ University of Baltimore, USA.................................................................................. 518 Mishra, Alok \ Atilim University, Turkey.......................................................................................... 1428 Mishra, Deepti \ Atilim University, Turkey....................................................................................... 1428 Misra, Ram B. \ Montclair State University, USA.............................................................................. 996 Mitra, Amit \ TCS Global Consulting Practice, USA......................................................................... 634 Modrák, Vladimír \ Technical University of Košice, Slovakia.......................................................... 754 Mohapatra, Partha S. \ Morgan State University, USA..................................................................... 110 Moore, Sarah \ University of Limerick, Ireland............................................................................... 1534 Morrison, Marshelle \ Texas Woman’s University, USA...................................................................... 50 Mukherji, Sourav \ IIM Bangalore, India.......................................................................................... 452 Müssigmann, Nikolaus \ University of Augsburg, Germany............................................................. 731 Nadella, Ravi Sheshu \ University of Arizona, USA.......................................................................... 836 Nasem Morgan, Jeanette \ Duquesne University, USA................................................................... 1807 Nath, Dhruv \ Management Development Institute, India..................................................... 1997, 2404 Neubauer, Bruce J. \ University of South Florida, USA.................................................................... 782 Niederman, Fred \ Saint Louis University, USA.............................................................................. 2211 Noles, Debra \ Marshall University Graduate College, USA........................................................... 2029 Oshri, Ilan \ Erasmus University, The Netherlands................................................................ 1583, 1656 Ozcelik, Yasin \ Fairfield University, USA.......................................................................................... 371 Pai, Arjun K. \ Queen’s University Belfast, Northern Ireland.......................................................... 1073 Park, Byung Joo \ Dong-A University, Korea.................................................................................... 654 Park, Yong Sung \ Catholic University of Busan, Korea................................................................... 654 Patki, A. B. \ Department of Information Technology, India.................................................... 815, 2293 Patki, Tapasya \ GGSIP University, India, & University of Arizona, USA ............................. 815, 2293 Pennarola, Ferdinando \ Bocconi University, Italy......................................................................... 1871 Piñeiro, Erik \ Royal Institute of Technology of Stockholm, Sweden............................................... 1897 Pires, Iva Miranda \ Faculdade Ciências Sociais e Humanas, Portugal.......................................... 340 Pollack, Jeffrey M. \ Virginia Commonwealth University, USA........................................................ 902
Powell, Philip \ University of Bath, UK............................................................................................ 1098 Prikladnicki, Rafael \ Pontifícia Universidade Católica do Rio Grande do Sul, Brazil................. 1723 Putnik, Goran D. \ University of Minho, Portugal.......................................................................... 1020 Qiu, Robin G. \ The Pennsylvania State University, USA.................................................................... 71 Raisinghani, Mahesh S. \ Texas Woman’s University, USA................................................................. 50 Rajkumar, T.M. \ Miami University, USA.......................................................................................... 534 Ranganathan, Aruna \ Cornell University, USA............................................................................. 1974 Reilly, Richard R. \ Stevens Institute of Technology, USA............................................................... 1601 Richardson, Ita \ University of Limerick, Ireland............................................................................ 1534 Romaniello, Adriana \ Universidad Rey Juan Carlos, Spain.......................................................... 1790 Ross, Steven C. \ Western Washington University, USA................................................................... 1109 Rouse, Anne C. \ Deakin University, Australia............................................ 158, 276, 1648, 2237, 2335 Roussev, Boris \ University of the Virgin Islands, U.S. Virgin Islands............................................... 578 Rowe, Michelle \ Edith Cowan University, Australia....................................................................... 1258 Roy, Jeffrey \ Dalhousie University, Canada................................................................................... 1360 Ruiz Ben, Esther \ Technische Universität Berlin, Germany................................................... 310, 2082 Ryan, Geraldine \ University College Cork, Ireland........................................................................ 1829 Sabbaghi, Asghar \ Indiana University South Bend, USA................................................................. 679 Sabri, Ehap H. \ University of Texas at Dallas, USA......................................................................... 853 Saini, Sanjay \ Harvard Medical School and Massachusetts General Hospital, USA..................... 1223 Salas, Silvia \ Florida International University, USA....................................................................... 2211 Samdal, Jamie \ University of Arizona, USA...................................................................................... 836 Samson, Danny \ University of Melbourne, Australia...................................................................... 1379 Samuel, Delyth \ University of Melbourne, Australia...................................................................... 1379 Sánchez, Carlos Piñeiro \ University of A Coruña, Spain............................................................... 1333 Sando, Shawna \ University of Arizona, USA.................................................................................. 1504 Sarx, Johannes \ ALCIMED, France............................................................................................... 1206 Scavo, Carmine \ East Carolina University, USA............................................................................ 1371 Schwaig, Kathy Stewart \ Kennesaw State University, USA........................................................... 1839 Schwender, Alyssa D. \ Lions Gate Entertainment, USA................................................................. 2278 Seshasai, Satwik \ International Business Machines (IBM) Corp., and Massachusetts Institute of Technology, USA........................................................................................................... 452 Sharma, Suresh \ JS3 Global, LLC.................................................................................................. 2253 Sharma, Sushil \ Ball State University, USA...................................................................................... 166 Sheng, Margaret L. \ Hamline University, USA.............................................................................. 1008 Shinnick, Edward \ University College Cork, Ireland..................................................................... 1829 Shtub, Avraham \ Technion - Israel Institute of Technology, Israel................................................. 1935 Singh, Param Vir \ University of Washington, USA........................................................................... 796 Sinha, Tapen \ Instituto Technológico Autónomo de México, Mexico, & University of Nottingham, UK......................................................................................................... 350 Sixsmith, Alan \ University of Technology Sydney, Australia.......................................................... 1514 Sofiane Tebboune, D. E. \ Manchester Metropolitan University, UK.............................................. 2389 Sorensen, Dane \ Raytheon Missile Systems, USA............................................................................. 634 Spencer, Steve \ San Diego State University, USA........................................................................... 1168 Sreecharana, Devin \ University of Arizona, USA............................................................................. 286 Sridhar, Varadharajan \ Management Development Institute, India.......................... 1060, 1997, 2404
Srivastava, Shirish C. \ National University of Singapore, Singapore.............................................. 110 St.Amant, Kirk \ East Carolina University, USA................................................. 876, 1609, 2020, 2045 Starr, Brandi \ Texas Woman’s University, USA................................................................................... 50 Subhadra, K. \ ICICI Bank, India...................................................................................................... 350 Suomi, Reima \ Turku School of Economics and Business Administration, Finland....................... 1247 Swaminathan, Manish \ University of Arizona, USA........................................................................ 836 Tachibana, Eric \ National University of Singapore, Singapore........................................................ 594 Tai, Jeffrey C. F. \ National Central University, Taiwan.................................................................. 1473 Tao, Tao \ IBM T.J. Watson Research, USA...................................................................................... 2164 Tarnay, Katalin \ University of Pannonia, Hungary........................................................................ 1048 Taylor, Hazel \ University of Washington, USA................................................................................ 1759 Teo, Thompson S. H. \ National University of Singapore, Singapore............................................... 110 Terjesen, Siri \ Queensland University of Technology, Australia..................................................... 1857 Trott, Paul \ University of Portsmouth, UK...................................................................................... 1739 Turner, Jason M. \ Air Force Institute of Technology, USA............................................................. 1664 Tyan, Jonah C. \ Taiwan Semiconductor Manufacturing Company, Taiwan..................................... 721 Tyran, Craig K. \ Western Washington University, USA.................................................................. 1109 Unhelkar, Bhuvan \ MethodScience.com & University of Western Sydney, Australia....................... 398 Vaidyanathan, Ganesh \ Indiana University South Bend, USA................................................. 618, 679 van Fenema, Paul C. \ Netherlands Defense Academy, The Netherlands.............................. 1583, 1656 Vassiliadis, Bill \ Hellenic Open University, Greece........................................................................ 2363 Vidgen, Richard \ University of Bath, UK....................................................................................... 1098 Vorisek, Jiri \ University of Economics Prague, Czech Republic............................................ 929, 2302 Walden, Eric A. \ Texas Tech University, USA......................................................................... 796, 1392 Wang, Eric T. G. \ National Central University, Taiwan................................................................. 1473 Wang, Kai \ Ming Chuan University, Taiwan................................................................................... 1473 Wang, Yue \ University of New South Wales, Australia.................................................................... 1924 Werth, Dirk \ Institute for Information Systems at the German Research Center for Artificial Intelligence, Germany.............................................................................................. 1399 Wieandt, Michaela \ Technische Universtät Berlin, Germany........................................................... 310 Woerndl, Maria \ University of Bath, UK........................................................................................ 1098 Xu, Lai \ Utrecht University, The Netherlands................................................................................... 558 Yadav, Vanita \ Management Development Institute, India............................................. 19, 2347, 2404 Yamaguti, Marcelo Hideki \ Pontifícia Universidade Católica do Rio Grande do Sul, Brazil...... 1723 Yoder, Robert C. \ Siena College, USA.............................................................................................. 426 Zage, Dolores \ Ball State University, USA...................................................................................... 1534 Zaha, Johannes Maria \ Queensland University of Technology, Australia....................................... 731 Zhang, Jinlong \ Huazhong University of Science and Technology, China..................................... 2113 Zhao, Wei \ University of Alabama at Birmingham, USA................................................................ 2164
Contents
Volume I Section I. Fundamental Concepts and Theories This section serves as the foundation for this exhaustive reference tool by addressing crucial theories essential to the understanding of IT outsourcing. Chapters found within these pages provide an excellent framework in which to position outsourcing within the field of information science and technology. Individual contributions provide overviews of why, when, and what to outsource, business determinants of offshoring intensity, and global IT outsourcing, while also exploring critical stumbling blocks of this field. Within this introductory section, the reader can learn and choose from a compendium of expert research on the elemental theories underscoring the research and application of outsourcing. Chapter 1.1. Why, When, and What to Outsource................................................................................... 1 Donald A. Carpenter, Mesa State College, USA Vijay K. Agrawal, University of Nebraska - Kearney, USA Chapter 1.2. A Paradigmatic and Methodological Review of Research in Outsourcing....................... 19 Vanita Yadav, Management Development Institute, India Rajen K. Gupta, Management Development Institute, India Chapter 1.3. IT Outsourcing: Impacts and Challenges.......................................................................... 29 Luke Ho, Staffordshire University, UK Anthony S. Atkins, Staffordshire University, UK Chapter 1.4. Information Technology/Systems Offshore Outsourcing: Key Risks and Success Factors.............................................................................................................. 50 Mahesh S. Raisinghani, Texas Woman’s University, USA Brandi Starr, Texas Woman’s University, USA Blake Hickerson, Texas Woman’s University, USA Marshelle Morrison, Texas Woman’s University, USA Michael Howard, Texas Woman’s University, USA
Chapter 1.5. Information Technology as a Service................................................................................ 71 Robin G. Qiu, The Pennsylvania State University, USA Chapter 1.6. Offshoring: Evolution or Revolution?............................................................................... 89 Nicholas Beaumont, Monash University, Australia Chapter 1.7. Business-Related Determinants of Offshoring Intensity................................................. 110 Shirish C. Srivastava, National University of Singapore, Singapore Thompson S.H. Teo, National University of Singapore, Singapore Partha S. Mohapatra, Morgan State University, USA Chapter 1.8. Making Sense of the Sourcing and Shoring Maze: Various Outsourcing and Offshoring Activities................................................................................... 126 Subrata Chakrabarty, Texas A&M University, USA Chapter 1.9. Information Technology Outsourcing............................................................................. 158 Anne C. Rouse, Deakin University, Australia Chapter 1.10. Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology: Practitioner and Academic Perspectives................................................. 166 Karl Knapp, University of Indianapolis, USA Sushil Sharma, Ball State University, USA Kevin King, Clarian Health, USA Chapter 1.11. Strategies for Business Process Outsourcing: An Analysis of Alternatives, Opportunities, and Risks........................................................................ 188 Subrata Chakrabarty, Texas A&M University, USA Chapter 1.12. Business Process Reengineering and ERP: Weapons for the Global Organization...... 211 Marianne Bradford, North Carolina State University, USA Robert Gingras, Business Process and Technology Advisor, USA Jonathan Hornby, SAS Institute, USA Chapter 1.13. Global IT Outsourcing: Current Trends, Risks, and Cultural Issues............................. 229 Subhankar Dhar, San Jose State University, USA Chapter 1.14. Outsourcing and Strategic Outsourcing........................................................................ 258 Sonia Dahab, Universidade Nova de Lisboa, Portugal Filipe Amaral, Grupo Sumol, Portugal Chapter 1.15. Strategic Decision Making in Global Supply Networks............................................... 267 Ozlem Arisoy, University of Pittsburgh, USA Bopaya Bidanda, University of Pittsburgh, USA Chapter 1.16. An Overview of IT Outsourcing in Public-Sector Agencies......................................... 276 Anne C. Rouse, Deakin University, Australia
Chapter 1.17. Evolving Relationship between Law, Offshoring of Professional Services, Intellectual Property, and International Organizations........................................................................ 286 Amar Gupta, University of Arizona, USA David A. Gantz, University of Arizona, USA Devin Sreecharana, University of Arizona, USA Jeremy Kreyling, University of Arizona, USA Chapter 1.18. Offshoring in the ICT Sector in Europe: Trends and Scenario Analysis....................... 310 Esther Ruiz Ben, Technische Universtät Berlin, Germany Michaela Wieandt, Technische Universtät Berlin, Germany Martina Maletzky, Technische Universtät Berlin, Germany Chapter 1.19. Scales and Dynamics in Outsourcing............................................................................ 340 Iva Miranda Pires, Faculdade Ciências Sociais e Humanas, Portugal Torunn Kvinge, Fafo Institute for Labour and Social Research, Norway Chapter 1.20. Sourcing and Outsourcing Arithmetic........................................................................... 350 Tapen Sinha, Instituto Technológico Autónomo de México, Mexico & University of Nottingham, UK K. Subhadra, ICICI Bank, India Chapter 1.21. Classes of Collaborative Networks............................................................................... 364 Luis M. Camarinha-Matos, New University of Lisbon, Portugal Hamideh Afsarmanesh, University of Amsterdam, The Netherlands Chapter 1.22. IT-Enabled Reengineering: Productivity Impacts......................................................... 371 Yasin Ozcelik, Fairfield University, USA Chapter 1.23. The New Process of Work............................................................................................. 377 Maria do Rosário Alves de Almeida, Open University of Lisbon, Portugal Section II. Development and Design Methodologies This section provides in-depth coverage of conceptual architectures, frameworks and methodologies related to the design and implementation of outsourcing projects. Throughout these contributions, research fundamentals in the discipline are presented and discussed. From broad examinations to specific discussions on particular frameworks and infrastructures, the research found within this section spans the discipline while also offering detailed, specific discussions. Basic designs, as well as abstract developments, are explained within these chapters, and frameworks for designing and planning for successful outsourcing systems, structures, and architectures are presented in these chapters. Chapter 2.1. Managing the Dynamic Reconfiguration of Enterprises................................................. 387 Ben Clegg, Aston University, UK Mario Binder, Aston University, UK
Chapter 2.2. Strategic Approach to Globalization with Mobile Business........................................... 398 Walied Askarzai, Melbourne Institute of Technology, Australia Bhuvan Unhelkar, MethodScience.com & University of Western Sydney, Australia Chapter 2.3. Exploratory Study on Effective Control Structure in Global Business Process Sourcing................................................................................................... 408 Gyeung-min Kim, Ewha Womans University, Korea Saem-Yi Kim, Ewha Womans University, Korea Chapter 2.4. Understanding Global Information Technology and Outsourcing Dynamics: A Multi-Lens Model............................................................................................................................ 426 Robert C. Yoder, Siena College, USA Vera Eccarius-Kelly, Siena College, USA Suvarna Cherukuri, Siena College, USA Chapter 2.5. Offshoring: The Transition from Economic Drivers Toward Strategic Global Partnership and 24-Hour Knowledge Factory.......................................................... 452 Amar Gupta, University of Arizona, USA Satwik Seshasai, International Business Machines (IBM) Corp., and Massachusetts Institute of Technology, USA Sourav Mukherji, IIM Bangalore, India Auroop Ganguly, Oak Ridge National Laboratory, USA Chapter 2.6. Planning for Information Systems Outsourcing.............................................................. 474 Vijay K. Agrawal, University of Nebraska - Kearney, USA Donald A. Carpenter, Mesa State College, USA Chapter 2.7. The Journey to New Lands: Utilizing the Global IT Workforce through Offshore-Insourcing............................................................................................................... 488 Subrata Chakrabarty, Texas A&M University, USA Chapter 2.8. Client-Vendor Relationships in Offshore Applications Development: An Evolutionary Framework............................................................................................................... 518 Rajesh Mirani, University of Baltimore, USA Chapter 2.9. An Outsourcing Acceptance Model: An Application of TAM to Application Development Outsourcing Decisions........................................................................... 534 John “Skip” Benamati, Miami University, USA T.M. Rajkumar, Miami University, USA Chapter 2.10. Outsourcing and Multi-Party Business Collaborations Modeling................................ 558 Lai Xu, Utrecht University, The Netherlands Chapter 2.11. Agile Outsourcing Projects: Structure and Management.............................................. 578 Boris Roussev, University of the Virgin Islands, U.S. Virgin Islands Ram Akella, University of California, USA
Chapter 2.12. Object-Oriented Software Design Patterns Applied to Management Theory............... 594 Eric Tachibana, National University of Singapore, Singapore David Ross Florey, Merrill Lynch Global Business Technology, Singapore Chapter 2.13. The Creation of a Commercial Software Development Company in a Developing Country for Outsourcing Purposes............................................................................ 610 Sam Lubbe, University of KwaZulu-Natal, South Africa
Volume II Chapter 2.14. Networked Knowledge Management Dimensions in Distributed Projects................... 618 Ganesh Vaidyanathan, Indiana University South Bend, USA Chapter 2.15. Leveraging Knowledge Reuse and Systems Agility in the Outsourcing Era................ 634 Igor Crk, University of Arizona, USA Dane Sorensen, Raytheon Missile Systems, USA Amit Mitra, TCS Global Consulting Practice, USA Chapter 2.16. A Multi-Agent System for Optimal Supply Chain Management.................................. 654 Hyung Rim Choi, Dong-A University, Korea Hyun Soo Kim, Dong-A University, Korea Yong Sung Park, Catholic University of Busan, Korea Byung Joo Park, Dong-A University, Korea Chapter 2.17. Integration of Global Supply Chain Management with Small to Medium Suppliers......................................................................................................... 679 Asghar Sabbaghi, Indiana University South Bend, USA Ganesh Vaidyanathan, Indiana University South Bend, USA Chapter 2.18. An Application of Multi-Criteria Decision-Making Model for Strategic Outsourcing for Effective Supply-Chain Linkages......................................................... 707 N. K. Kwak, Saint Louis University, USA Chang Won Lee, Jinju National University, Korea Chapter 2.19. Using Collaborative Transportation Management in Global Supply Chain................. 721 Jonah C. Tyan, Taiwan Semiconductor Manufacturing Company, Taiwan Chapter 2.20. A Reference Model for Strategic Supply Network Development................................. 731 Antonia Albani, Delft University of Technology, The Netherlands Nikolaus Müssigmann, University of Augsburg, Germany Johannes Maria Zaha, Queensland University of Technology, Australia Chapter 2.21. Virtual Logistics from Outsourcing Logistics............................................................... 754 Vladimír Modrák, Technical University of Košice, Slovakia
Chapter 2.22. A Supplementary Framework for Evaluation of Integrated Logistics Service Provider.............................................................................................. 763 Kwok Hung Lau, Royal Melbourne Institute of Technology University, Australia Wun Leong Ma, Royal Melbourne Institute of Technology University, Australia Chapter 2.23. Web Services and Service-Oriented Architectures........................................................ 782 Bruce J. Neubauer, University of South Florida, USA Chapter 2.24. Is the Business Model Broken? A Model of the Difference Between Pay-Now and Pay-Later Contracts in IT Outsourcing.......................................................... 796 Eric Walden, Texas Tech University, USA Param Vir Singh, University of Washington, USA Section III. Tools and Technologies This section presents extensive coverage of the tools and technologies that both derive from and inform IT outsourcing. These chapters provide an in-depth analysis of the use and development of innumerable devices and tools, while also providing insight into new and upcoming technologies, theories, and instruments that will soon be commonplace. Within these rigorously researched chapters, readers are presented with examples of the tools that facilitate and support continued developments and advancements in outsourcing research. In addition, the successful implementation and resulting impact of these various tools and technologies are discussed within this collection of chapters. Chapter 3.1. Innovative Technological Paradigms for Corporate Offshoring..................................... 815 Tapasya Patki, GGSIP University, India A. B. Patki, Department of Information Technology, India Chapter 3.2. Hybrid Offshoring: Composite Personae and Evolving Collaboration Technologies..... 836 Nathan Denny, University of Arizona, USA Shivram Mani, University of Arizona, USA Ravi Sheshu Nadella, University of Arizona, USA Manish Swaminathan, University of Arizona, USA Jamie Samdal, University of Arizona, USA Chapter 3.3. Best Practice in Leveraging E-Business Technologies to Achieve Business Agility...... 853 Ehap H. Sabri, University of Texas at Dallas, USA Chapter 3.4. Open Source and Outsourcing: A Perspective on Software Use and Professional Practices Related to International Outsourcing Activities........................................ 876 Kirk St.Amant, East Carolina University, USA Chapter 3.5. Instrumental and Social Influences on Adoption of Collaborative Technologies in Global Virtual Teams................................................................................................. 893 Andre L. Araujo, College of William & Mary, USA
Chapter 3.6. Improving Employee Selection with Online Testing...................................................... 902 Jeffrey M. Pollack, Virginia Commonwealth University, USA Chapter 3.7. Why First-Level Call Center Technicians Need Knowledge Management Tools........... 910 Joe Downing, Southern Methodist University, USA Chapter 3.8. Application Service Providers......................................................................................... 920 Sathasivam Mathiyalakan, University of Massachusetts Boston, USA Chapter 3.9. Enterprise Application Service Model............................................................................ 929 George Feuerlicht, University of Technology, Australia Jiri Vorisek, University of Economics, Czech Republic Chapter 3.10. Role of Wireless Grids in Outsourcing and Offshoring: Approaches, Architectures, and Technical Challenges........................................................................ 937 Ashish Agarwal, Carnegie Mellon University, USA Amar Gupta, University of Arizona and MIT, USA Chapter 3.11. Web-Based Data Collection in China............................................................................ 947 Robert M. Davison, City University of Hong Kong, Hong Kong Yuan Li, University of Southern California, USA Carol S. P. Kam, Yahoo! Holding (HK) Ltd, Hong Kong Section IV. Utilization and Application This section introduces and discusses the ways in which outsourcing has been used to revolutionize the modern face of business and proposes new ways in which services, goods, and systems can be outsourced. These particular selections highlight, among other topics, sourcing decisions in small companies, outsourcing in the healthcare industry, and virtual environments. Contributions included in this section provide excellent coverage of today’s global environment and insight into how the study and implementation of outsourcing projects impacts the fabric of our present-day global village. Chapter 4.1. Real Life Case Studies of Offshore Outsourced IS Projects: Analysis of Issues and Socio-Economic Paradigms................................................................................................................. 967 Subrata Chakrabarty, Texas A&M University, USA Chapter 4.2. The Use of Outsourcing as a Business Strategy: A Case Study...................................... 996 Ram B. Misra, Montclair State University, USA Chapter 4.3. Global Integrated Supply Chain Implementation: The Challenges of E-Procurement.....1008 Margaret L. Sheng, Hamline University, USA Chapter 4.4. Environments for VE Integration.................................................................................. 1020 Maria Manuela Cunha, Polytechnic Institute of Cávado and Ave Higher School of Technology, Portugal Goran D. Putnik, University of Minho, Portugal
Chapter 4.5. Enterprise Architecture within the Service-Oriented Enterprise................................... 1030 Scott J. Dowell, Shirnia & Dowell LLC, USA Chapter 4.6. Telecommunication Management Protocols................................................................. 1048 Katalin Tarnay, University of Pannonia, Hungary Chapter 4.7. Strategic Outsourcing: Opportunities and Challenges for Telecom Operators............. 1060 Varadharajan Sridhar, Management Development Institute, India Chapter 4.8. Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services............ 1073 Arjun K. Pai, Queen’s University Belfast, Northern Ireland Subhajit Basu, Queen’s University Belfast, Northern Ireland Chapter 4.9. Exploring ASP Sourcing Decisions in Small Firms...................................................... 1098 Maria Woerndl, University of Bath, UK Philip Powell, University of Bath, UK Richard Vidgen, University of Bath, UK Chapter 4.10. Make, Source, or Buy: The Decision to Acquire a New Reporting System............... 1109 Steven C. Ross, Western Washington University, USA Brian K. Burton, Western Washington University, USA Craig K. Tyran, Western Washington University, USA Chapter 4.11. European International Freight Forwarders: Information as a Strategic Product....... 1125 Hans Lehmann, Victoria University of Wellington, New Zealand Chapter 4.12. IT Portfolio Management: A Holistic Approach to Outsourcing Decisions................ 1140 Luke Ho, Staffordshire University, UK Anthony S. Atkins, Staffordshire University, UK Chapter 4.13. A Collaborative Learning Environment to Support Distance Learning Students in Developing Nations.......................................................................... 1168 Michelle Dottore, San Diego State University, USA Steve Spencer, San Diego State University, USA Chapter 4.14. The Role of Prisons in Offshoring.............................................................................. 1189 Whitney Hollis, University of Arizona, USA Chapter 4.15. Human Resources Outsourcing Strategies.................................................................. 1199 Veronique Guilloux, Université Paris, France Michel Kalika, Université Paris, France Chapter 4.16. Offshoring in the Pharmaceutical Industry................................................................. 1206 Jason McCoy, Global Seawater, Inc., USA Johannes Sarx, ALCIMED, France
Chapter 4.17. Outsourcing in the Healthcare Industry: Information Technology, Intellectual Property, and Allied Aspects........................................................................................... 1223 Amar Gupta, University of Arizona, USA Raj K. Goyal, Harvard Medical School and VA Boston Health Care System, USA Keith A. Joiner, University of Arizona, USA Sanjay Saini, Harvard Medical School and Massachusetts General Hospital, USA
Volume III Chapter 4.18. Governing Health Care with IT................................................................................... 1247 Reima Suomi, Turku School of Economics and Business Administration, Finland Chapter 4.19. The Role of Multinationals in Recent IT Developments in China.............................. 1258 Michelle Rowe, Edith Cowan University, Australia Chapter 4.20. E-Business Deployment in Nigerian Financial Firms: An Empirical Analysis of Key Factors.............................................................................................. 1264 Uchenna C. Eze, Multimedia University, Malaysia Chapter 4.21. Fotogenika.com: A Small Virtual Organization Serving the Mexican Market........... 1284 Esperanza Huerta, Instituto Tecnológico Autónomo de México, Mexico Chapter 4.22. Xceed: Pioneering the Contact Center Industry in Egypt........................................... 1298 Sherif Kamel, The American University in Cairo, Egypt Maha Hussein, The American University in Cairo, Egypt Chapter 4.23. IT Outsourcing Practices in Australia and Taiwan...................................................... 1324 Chad Lin, Curtin University of Technology, Australia Koong Lin, National University of Tainan, Taiwan Chapter 4.24. Information Systems/Information Technology Outsourcing in Spain: A Critical Empirical Analysis............................................................................................................ 1333 Felix R. Doldán Tié, University of A Coruña, Spain Paula Luna Huertas, University of Sevilla, Spain Francisco Jose Martínez López, University of Huelva, Spain Carlos Piñeiro Sánchez, University of A Coruña, Spain Chapter 4.25. E-Government, Service Transformation, and Procurement Reform in Canada.......... 1360 John Langford, University of Victoria, Canada Jeffrey Roy, Dalhousie University, Canada Chapter 4.26. Development and Use of the World Wide Web by U.S. Local Governments............. 1371 Carmine Scavo, East Carolina University, USA Chapter 4.27. Government Insurer Enters the Brave New World, A................................................. 1379 Delyth Samuel, University of Melbourne, Australia Danny Samson, University of Melbourne, Australia
Section V. Organizational and Social Implications This section includes a wide range of research pertaining to the social and organizational impact of outsourcing around the world. This chapter begins with an analysis of the role of social capital in outsourcing, while later contributions offer an extensive analysis of organizational development, process improvement, and workplace ethics. The inquiries and methods presented in this section offer insight into the implications of outsourcing at both an individual and organizational level, while also emphasizing potential areas of study within the discipline. Chapter 5.1. Outsourcing Information Technology: The Role of Social Capital............................... 1392 James J. Hoffman, Texas Tech University, USA Eric A. Walden, Texas Tech University, USA Mark L. Hoelscher, Illinois State University, USA Chapter 5.2. Characterization and Classification of Collaborative Tools.......................................... 1399 Javier Soriano, Universidad Politécnica de Madrid (UPM), Spain Rafael Fernández, Universidad Politécnica de Madrid (UPM), Spain Miguel Jiménez, Universidad Politécnica de Madrid (UPM), Spain Chapter 5.3. Outsourcing and Offshoring: Issues and Impacts on Venture Capital........................... 1409 Alev M. Efendioglu, University of San Francisco, USA Chapter 5.4. Enterprise Alignment and the Challenge for Organization Development..................... 1419 Brian H. Cameron, The Pennsylvania State University, USA Shaun C. Knight, The Pennsylvania State University, USA Chapter 5.5. A Study of Software Process Improvement in Small and Medium Organizations....... 1428 Deepti Mishra, Atilim University, Turkey Alok Mishra, Atilim University, Turkey Chapter 5.6. IT Service Departments Struggle to Adopt a Service-Oriented Philosophy................. 1447 Aileen Cater-Steel, University of Southern Queensland, Australia Chapter 5.7. Understanding Outsourcing of Web-Based Applications in Organizations: The Case of E-Insurance.................................................................................................................... 1456 Teuta Cata, Northern Kentucky University, USA Chapter 5.8. Virtual Integration: Antecedents and Role in Governing Supply Chain Integration..... 1473 Jeffrey C. F. Tai, National Central University, Taiwan Eric T. G. Wang, National Central University, Taiwan Kai Wang, Ming Chuan University, Taiwan Chapter 5.9. Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery............... 1504 Shawna Sando, University of Arizona, USA
Chapter 5.10. Managed Services and Changing Workplace Ethics................................................... 1514 Alan Sixsmith, University of Technology Sydney, Australia Chapter 5.11. The Post-Offshoring IS Organization.......................................................................... 1522 William R. King, University of Pittsburgh, USA Chapter 5.12. Globalising Software Development in the Local Classroom...................................... 1534 Ita Richardson, University of Limerick, Ireland Sarah Moore, University of Limerick, Ireland Alan Malone, Siemens Corporate Research, USA Valentine Casey, University of Limerick, Ireland Dolores Zage, Ball State University, USA Chapter 5.13. Perception Gaps about Skills Requirement for Entry-Level IS Professionals between Recruiters and Students: An Exploratory Study....................................... 1557 Sooun Lee, Miami University, USA Xiang Fang, Miami University, USA Chapter 5.14. Building Trust in Globally Distributed Teams............................................................ 1583 Julia Kotlarsky, University of Warwick, UK Ilan Oshri, Erasmus University, The Netherlands Paul C. van Fenema, Netherlands Defense Academy, The Netherlands Chapter 5.15. Government and Corporate Initiatives for Indian Women in IT................................. 1593 Monica Adya, Marquette University, USA Chapter 5.16. Understanding Effective E-Collaboration Through Virtual Distance......................... 1601 Karen Sobel Lojeski, Virtual Distance International, USA Richard R. Reilly, Stevens Institute of Technology, USA Chapter 5.17. The Role of Rhetoric in Localization and Offshoring................................................. 1609 Kirk St.Amant, East Carolina University, USA Chapter 5.18. Intercultural Collaboration in the ICT Sector............................................................. 1617 Martina Maletzky, Technische Universität Berlin, Germany Chapter 5.19. Managing E-Collaboration Risks in Business Process Outsourcing........................... 1648 Anne C. Rouse, Deakin University, Australia Chapter 5.20. Knowledge Transfer and Sharing in Globally Distributed Teams.............................. 1656 Ilan Oshri, Erasmus University, The Netherlands Julia Kotlarsky, University of Warwick, UK Paul C. van Fenema, Netherlands Defense Academy, The Netherlands
Chapter 5.21. Challenges in Developing a Knowledge Management Strategy: A Case Study of the Air Force Materiel Command........................................................................... 1664 Summer E. Bartczak, Air Force Institute of Technology AFIT/ENV, USA Jason M. Turner, Air Force Institute of Technology, USA Ellen C. England, Air Force Institute of Technology AFIT/ENV, USA Section VI. Managerial Impact This section presents contemporary coverage of the managerial implications of outsourcing. Particular contributions address risks, benefits, and challenges of outsourcing, vendor perspectives of outsourced projects, and business strategies for outsourcing. The managerial research provided in this section allows executives, practitioners, and researchers to gain a better sense of how outsourcing practices, projects, and research are continually informed by the changing global landscape. Chapter 6.1. Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices................................................................................................................. 1670 Subhankar Dhar, San Jose State University, USA Bindu Balakrishnan, San Jose State University, USA Chapter 6.2. Managing Risks of IT Outsourcing............................................................................... 1702 Leonardo Legorreta, California State University, USA Rajneesh Goyal, California State University, USA Chapter 6.3. Risk Management in Distributed IT Projects: Integrating Strategic, Tactical, and Operational Levels........................................................................................................ 1723 Rafael Prikladnicki, Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Roberto Evaristo, University of Illinois at Chicago, USA Jorge Luis Nicolas Audy, Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Marcelo Hideki Yamaguti, Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Chapter 6.4. Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)............................................................................... 1739 Paul Trott, University of Portsmouth, UK Andreas Hoecht, University of Portsmouth, UK Chapter 6.5. Outsourced IT Projects from the Vendor Perspective: Different Goals, Different Risks........................................................................................................ 1759 Hazel Taylor, University of Washington, USA Chapter 6.6. Business Strategies for Outsourcing Information Technology Work............................ 1782 Subrata Chakrabarty, Texas A&M University, USA Chapter 6.7. Outsourcing Non-Core Business Processes: An Exploratory Study............................. 1790 Adriana Romaniello, Universidad Rey Juan Carlos, Spain B. Dawn Medlin, Appalachian State University, USA
Chapter 6.8. Establishing Performance Metrics for Managing the Outsourced MIS Project............ 1807 Jeanette Nasem Morgan, Duquesne University, USA Chapter 6.9. The Power of Incentives in Decision Making............................................................... 1829 Geraldine Ryan, University College Cork, Ireland Edward Shinnick, University College Cork, Ireland Chapter 6.10. Project Management Issues in IT Offshore Outsourcing............................................ 1839 Kathy Stewart Schwaig, Kennesaw State University, USA Elke Leeds, Kennesaw State University, USA Stephen H. Gillam, Accenture, USA
Volume IV Chapter 6.11. Outsourcing and Offshoring Finance Activities.......................................................... 1857 Siri Terjesen, Queensland University of Technology, Australia Chapter 6.12. High Performance IT as Strategic Partner for HR Management................................ 1871 Ferdinando Pennarola, Bocconi University, Italy Leonardo Caporarello, Bocconi University, Italy Chapter 6.13. High-Tech Workers, Management Strategy, and Globalization.................................. 1881 Jasmine Folz, Seattle Central Community College, USA Chapter 6.14. Outsourcing in High-Tech Corporations: Voices of Dissent, Resistance, and Complicity in a Computer Programming Community............................................. 1897 Erik Piñeiro, Royal Institute of Technology of Stockholm, Sweden Peter Case, University of the West of England, UK Chapter 6.15. Managing IT Outsourcing for Digital Government.................................................... 1916 Yu-Che Chen, Iowa State University, USA Chapter 6.16. Strategic Management of International Subcontracting: A Transaction Cost Perspective......................................................................................................... 1924 Yue Wang, University of New South Wales, Australia Chapter 6.17. Rough-Cut Cost Estimation in a Capacitated Environment........................................ 1935 Mark Eklin, Israel Institute of Technology, Israel Yohanan Arzi, ORT Braude College, Israel Avraham Shtub, Israel Institute of Technology, Israel Chapter 6.18. Knowledge Management Success: Roles of Management and Leadership................ 1954 Vittal S. Anantatmula, Western Carolina University, USA
Chapter 6.19. Effective Virtual Working through Communities of Practice..................................... 1966 Chris Kimble, University of York, UK Feng Li, University of Newcastle upon Tyne, UK Chapter 6.20. Employee Turnover in the Business Process Outsourcing Industry in India.............. 1974 Aruna Ranganathan, Cornell University, USA Sarosh Kuruvilla, Cornell University, USA Chapter 6.21. Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis: An Exploratory Comparative Study............................................................ 1997 Dhruv Nath, Management Development Institute, India Varadharajan Sridhar, Management Development Institute, India Monica Adya, Marquette University, USA Amit Malik, Management Development Institute, India Section VII. Critical Issues This section addresses conceptual and theoretical issues related to the field of outsourcing, which include security issues, establishing trust, aligning business process, and business continuity challenges. Within these chapters, the reader is presented with analysis of the most current and relevant conceptual inquires within this growing field of study. Overall, contributions within this section ask unique, often theoretical questions related to the study of IT outsourcing and, more often than not, conclude that solutions are both numerous and contradictory. Chapter 7.1. International Outsourcing, Personal Data, and Cyber Terrorism: Approaches for Oversight.................................................................................................................. 2020 Kirk St.Amant, East Carolina University, USA Chapter 7.2. Protecting Patient Information in Outsourced Telehealth Services: Bolting on Security When it Cannot be Baked in.............................................................................. 2029 Patricia Y. Logan, Marshall University Graduate College, USA Debra Noles, Marshall University Graduate College, USA Chapter 7.3. Grey Market Informatics............................................................................................... 2045 Kirk St.Amant, East Carolina University, USA Chapter 7.4. Security Issues in Outsourced XML Databases............................................................ 2052 Tran Khanh Dang, National University of Ho Chi Minh City, Vietnam Chapter 7.5. Quality Standardization Patterns in ICT Offshore........................................................ 2082 Esther Ruiz Ben, Technische Universität Berlin, Germany
Chapter 7.6. Establishing Trust in Offshore Outsourcing of Information Systems and Technology (IST) Development.................................................................................................. 2099 Rachna Kumar, Alliant International University, USA Chapter 7.7. A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk Evaluation.................................................................................... 2113 Guodong Cong, Huazhong University of Science and Technology, China Jinlong Zhang, Huazhong University of Science and Technology, China Tao Chen, Huazhong University of Science and Technology, China Kin-Keung Lai, City University of Hong Kong, China Chapter 7.8. Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data..................................................................................................... 2130 Tran Khanh Dang, National University of Ho Chi Minh City, Vietnam Chapter 7.9. Business Continuity Challenges in Global Supply Chains........................................... 2148 Steve Cartland, HP, Australia Chapter 7.10. Aligning Business Processes with Enterprise Service Computing Infrastructure....... 2164 Wei Zhao, University of Alabama at Birmingham, USA Jun-Jang Jeng, IBM T.J. Watson Research, USA Lianjun An, IBM T.J. Watson Research, USA Fei Cao, University of Alabama at Birmingham, USA Barret R. Bryant, University of Alabama at Birmingham, USA Rainer Hauser, IBM Zurich Research, Switzerland Tao Tao, IBM T.J. Watson Research, USA Chapter 7.11. Merging and Outsourcing Information Systems with UML....................................... 2188 Herman Balsters, University of Groningen, The Netherlands Chapter 7.12. IT Software Development Offshoring: A Multi-Level Theoretical Framework and Research Agenda.................................................................................. 2211 Fred Niederman, Saint Louis University, USA Sumit Kundu, Florida International University, USA Silvia Salas, Florida International University, USA Chapter 7.13. Outsourcing to the Post-Soviet Region and Gender.................................................... 2231 Elena Gapova, European Humanities University, Belarus Chapter 7.14. Analysis of a Large-Scale IT Outsourcing “Failure”: What Lessons Can We Learn?........................................................................................................... 2237 Anne C. Rouse, Deakin University, Australia Brian J. Corbitt, Shinawatra University, Thailand
Section VIII. Emerging Trends This section highlights research potential within the field of outsourcing while exploring uncharted areas of study for the advancement of the discipline. Chapters within this section highlight developments in China and India’s outsourcing practices, eSourcing relationships, and the 24-hour knowledge factory. These contributions, which conclude this exhaustive, multi-volume set, provide emerging trends and suggestions for future research within this rapidly expanding discipline. Chapter 8.1. New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China.............................................................................................................................. 2253 Suresh Sharma, JS3 Global, LLC Yuanyuan Chen, JS3 Global, LLC Chapter 8.2. Comparing China’s and India’s Evolution of Broadband Internet in the Developing World.................................................................................................................... 2265 Nir Kshetri, University of North Carolina at Greensboro, USA Nikhilesh Dholakia, University of Rhode Island, USA Chapter 8.3. Offshoring Entertainment and Media to India.............................................................. 2278 Alyssa D. Schwender, Lions Gate Entertainment, USA Christopher J. M. Leet, Intuit Inc., USA Chapter 8.4. Transformation from the Information Age to the Conceptual Age: Impact on Outsourcing....................................................................................................................... 2293 A. B. Patki, Government of India, India Tapasya Patki, University of Arizona, USA Mahesh Kulkarni, Center for Development of Advanced Computing, India Chapter 8.5. The Impact of New Trends in the Delivery and Utilization of Enterprise ICT on Supplier and User Organizations..................................................................... 2302 Jiri Vorisek, University of Economics Prague, Czech Republic George Feuerlicht, University of Economics Prague, Czech Republic Chapter 8.6. Taking Information Systems Business Process Outsourcing Offshore: The Conflict of Competition and Risk............................................................................................... 2317 Georgia Beverakis, University of New South Wales, Australia Geoffrey N. Dick, University of New South Wales, Australia Dubravka Cecez-Kecmanovic, University of New South Wales, Australia Chapter 8.7. The Governance Implications When it is Outsourced................................................... 2335 Anne C. Rouse, Deakin University, Australia Chapter 8.8. Supplier Capabilities and eSourcing Relationships: A Psychological Contract Perspective.......................................................................................................................... 2347 Vanita Yadav, Management Development Institute, India Mahadeo Jaiswal, Management Development Institute, India
Chapter 8.9. The Grid as a Virtual Enterprise Enabler...................................................................... 2363 Bill Vassiliadis, Hellenic Open University, Greece Chapter 8.10. The Fifth Perspective: Extending the Balanced Scorecard for Outsourcing............... 2378 Preeti Goyal, Management Development Institute, India Bhimaraya A. Metri, Management Development Institute, India Chapter 8.11. The Rationale Behind Strategic Alliances in Application Service Provision.............. 2389 D. E. Sofiane Tebboune, Manchester Metropolitan University, UK Chapter 8.12. Flexible Global Software Development (GSD): Antecedents of Success in Requirements Analysis.................................................................................................................. 2404 Vanita Yadav, Management Development Institute, India Monica Adya, Marquette University, USA Varadharajan Sridhar, Management Development Institute, India Dhruv Nath, Management Development Institute, India
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Preface
As businesses continue to grow, develop, and adapt to an ever-changing world, the concept of outsourcing has emerged as essential to our modern vocabulary. Companies, as well as individuals, partake in outsourcing decisions and experience the ramifications of outsourcing services and facilities. With outsourcing becoming more pervasive and mainstream, a keen understanding of the issues, theories, strategies and emerging trends associated with this rapidly developing field has become increasingly important to researchers, professionals and employees alike. The recent explosion of methodologies in the field has created an abundance of new, state-of-the-art literature related to all aspects of this expanding discipline. This body of work allows researchers to learn about the fundamental theories, latest discoveries, and forthcoming trends in the field of outsourcing. Constant technological and theoretical innovation challenges researchers to remain informed of and continue to develop and deliver methodologies and techniques utilizing the discipline’s latest advancements. In order to provide the most comprehensive, in-depth, and current coverage of all related topics and their applications, as well as to offer a single reference source on all conceptual, methodological, technical, and managerial issues in outsourcing, Business Science Reference is pleased to offer a four-volume reference collection on this rapidly growing discipline. This collection aims to empower researchers, practitioners, and students by facilitating their comprehensive understanding of the most critical areas within this field of study. This collection, entitled IT Outsourcing: Concepts, Methodologies, Tools, and Applications, is organized into eight distinct sections which are as follows: 1) Fundamental Concepts and Theories, 2) Development and Design Methodologies, 3) Tools and Technologies, 4) Utilization and Application, 5) Organizational and Social Implications, 6) Managerial Impact, 7) Critical Issues, and 8) Emerging Trends. The following paragraphs provide a summary of what is covered in each section of this multivolume reference collection. Section One, Fundamental Concepts, Methodologies, Tools, and Applications, serves as a foundation for this exhaustive reference tool by addressing crucial theories essential to understanding outsourcing practices. Some basic topics in the field are examined in this section through articles such as “Why, When, and What to Outsource” by Donald A. Carpenter and Vijay K. Agrawal. As its title suggests, this contribution provides an overview of outsourcing, identifying the primary reasons why a company outsources, the types of services that are outsourced, and the types of environments and situations that make outsourcing possible. The selection “IT Outsourcing: Impacts and Challenges” by Luke Ho and Anthony S. Atkins reviews existing literature on outsourcing and provides a framework for decision making in the field. Additional selections, such as “Outsourcing and Strategic Outsourcing” by Sonia Dahab and Filipe Amaral and “Global IT Outsourcing: Current Trends, Risks, and Cultural Issues” by Subhankar Dhar provide additional insight into the elemental concepts that define and inform modern-day
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outsourcing research. These are only some of the foundational topics provided by the selections within this comprehensive section that allow readers to learn from expert research on the theories underscoring IT outsourcing. Section Two, Development and Design Methodologies, contains in-depth coverage of conceptual architectures and frameworks, providing the reader with a comprehensive understanding of emerging theoretical and conceptual developments within the development and design of outsourcing models and projects. In opening this section, the selection “Managing the Dynamic Reconfiguration of Enterprises” by Ben Clegg and Mario Binder provides a framework for restructuring and strategically managing enterprises. Similarly, the selection entitled “Strategic Approach to Globalization with Mobile Business” by Walied Askarzai and Bhuvan Unhelkar examines the phenomenon of globalization, its impact on mobile business, and strategic approaches for addressing this topic. “Planning for Information Systems Outsourcing” by Vijay K. Agrawal and Donald A. Carpenter provides both historical and current perspectives on successfully outsourcing IS projects. Later chapters, such as “An Outsourcing Acceptance Model: An Application of TAM to Application Development Outsourcing Decisions” by John Benamati and T.M. Rajkumar and “A Reference Model for Strategic Supply Network Development” by Antonia Albani, Nikolaus Müssigmann, and Johannes Maria Zaha present specific models that derive from and are used to inform outsourcing decisions and methodologies. Overall, these selections outline design and development concerns and procedures, advancing research in this vital field. Section Three, Tools and Technologies, presents extensive coverage of various tools and technologies and their use in informing and expanding the reaches of outsourcing. Selections such as “Innovative Technological Paradigms for Corporate Offshoring” by Tapasya Patki and A. B. Patki and “Hybrid Offshoring: Composite Personae and Evolving Collaboration Technologies” by Nathan Denny, Shivram Mani, Ravi Sheshu, Manish Swaminathan, and Jamie Samdal offer perspectives on the ways in which technology impacts and is impacted by outsourcing practices. The use of tools and technologies in the workforce is also explored in selections such as “Improving Employee Selection with Online Testing” by Jeffrey M. Pollack and “Why First-Level Call Center Technicians Need Knowledge Management Tools” by Joe Downing. The rigorously researched chapters contained in this section offer readers countless examples of modern tools and technologies that emerge from or can be applied to outsourcing practices and decisions. Section Four, Utilization and Application, examines the use and implementation of outsourcing in a variety of contexts. This section begins with “Real Life Case Studies of Offshore Outsourced IS Projects: Analysis of Issues and Socio-Economic Paradigms” by Subrata Chakrabarty, which provides an in-depth investigation of two offshore-outsourced software development projects. Specific outsourcing ventures are further analyzed in selections such as “The Role of Prisons in Offshoring” by Whitney Hollis, “Human Resources Outsourcing Strategies” by Veronique Guilloux and Michel Kalika, and “Offshoring in the Pharmaceutical Industry” by Jason McCoy and Johannes Sarx. Similarly, region-specific outsourcing practices are discussed in the selections “IT Outsourcing Practices in Australia and Taiwan” by Chad Lin and “Information Systems/Information Technology Outsourcing in Spain: A Critical Empirical Analysis” by Felix R. Doldán Tié, Paula Luna Huertas , Francisco Jose Martínez López, and Carlos Piñeiro Sánchez. This section, with its focus on specific outsourcing projects and strategies, provides an essential resource for researchers, employers, and users alike. Section Five, Organizational and Social Implications, includes a wide range of research pertaining to the organizational and cultural implications of outsourcing. The section begins with “Outsourcing Information Technology: The Role of Social Capital” by James J. Hoffman, Eric A. Walden, and Mark
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L. Hoelscher, a selection which addresses how connections between social networks impact outsourcing decisions and strategies. Similarly, selections such as “Building Trust in Globally Distributed Teams” by Julia Kotlarsky, Ilan Oshri , and Paul C. van Fenema investigate the ever-important role of individual trust, and the difficultly experienced in building such trust among globally divided team members. Collaboration and e-collaboration are explored at length in chapters such as “Intercultural Collaboration in the ICT Sector” by Martina Maletzky, “Managing E-Collaboration Risks in Business Process Outsourcing ” by Anne C. Rouse, and “Knowledge Transfer and Sharing in Globally Distributed Teams,” also by Ilan Oshri, Julia Kotlarsky, and Paul C. van Fenema. Ultimately, this section demonstrates needs and requirements for successful implementation of outsourcing, both at an individual and organizational level, determining that there are a multitude of factors that impact any outsourcing project. Section Six, Managerial Impact, presents contemporary coverage of the managerial and implications of outsourcing. Core concepts covered include risk and risk management in outsourcing, project management, and effective virtual workplaces. “Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices” by Subhankar Dhar and Bindu Balakrishnan begins the section with an insightful study of the potential problems and obstacles associated with outsourcing. Also included are the articles “Managing Risks of IT Outsourcing” by Leonardo Legorreta and Rajneesh Goyal and “Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)” by Paul Trott and Andreas Hoecht, which expound on potential risks associated with outsourcing. This section continues with insights on topics including outsourcing in high-tech corporations, project quality, employee turnover, and decision making—a few of the subjects necessary to understand the successful management and implementation of outsourcing projects. Section Seven, Critical Issues, presents readers with an in-depth analysis of the more theoretical and conceptual issues within this growing field of study by addressing topics such as quality and security in outsourcing and outsourced goods and services. “International Outsourcing, Personal Data, and Cyber Terrorism: Approaches for Oversight” by the editor of this collection, Kirk St.Amant, “Protecting Patient Information in Outsourced Telehealth Services: Bolting on Security when it cannot be Baked in” by Patricia Y. Logan and Debra Noles, and “Security Issues in Outsourced XML Databases” by Tran Khanh Dang, address necessary security considerations. Issues regarding quality, trust, and correctness are considered in articles such as “Quality Standardization Patterns in ICT Offshore” by Esther Ruiz Ben, “Establishing Trust in Offshore Outsourcing of Information Systems and Technology (IST) Development” by Rachna Kumar, and “Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data,” also by Tran Khanh Dang. Further discussion of critical issues includes obstacles surrounding the alignment of business process, outsourcing and gender, and IT standards. In all, the theoretical and abstract issues presented and analyzed within this collection form the backbone of revolutionary research in and evaluation of IT outsourcing. The concluding section of this authoritative reference tool, Emerging Trends, highlights research potential within the field of outsourcing while exploring uncharted areas of study for the advancement of the discipline. Innovations in outsourcing, specifically in China and India, are explored in selections such as “New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China” by Suresh Sharma and Yuanyuan Chen, “Offshoring Entertainment and Media to India,” by Alyssa D. Schwender and Christopher J. M. Leet and “Comparing China’s and India’s Evolution of Broadband Internet in the Developing World” by Nir Kshetri and Nikhilesh Dholakia. Other new trends, such as developments in the delivery and utilization of ICT, governance implications of outsourcing, and global software development are addressed at length in this concluding section. This final section demonstrates
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that outsourcing, with its propensity for constant change and evolution, will continue to both shape and define the modern face of business, culture and human interaction. Although the contents of this multi-volume book are organized within the preceding eight sections which offer a progression of coverage of important concepts, methodologies, technologies, applications, social issues, and emerging trends, the reader can also identify specific contents by utilizing the extensive indexing system listed at the end of each volume. Furthermore, to ensure that the scholar, researcher, and educator have access to the entire contents of this multi-volume set, as well as additional coverage that could not be included in the print version of this publication, the publisher will provide unlimited, multi-user electronic access to the online aggregated database of this collection for the life of the edition free of charge when a library purchases a print copy. In addition to providing content not included within the print version, this aggregated database is also continually updated to ensure that the most current research is available to those interested in IT outsourcing. As outsourcing practices, studies, and decisions continue to expand, both in variety and usefulness, this exciting and revolutionary field will prove even more necessary to everyday life. Intrinsic to our ever-modernizing, ever-expanding global economy is the propensity to become more efficient and adaptable. Continued progress and innovation will only further establish the necessity of both understanding and adapting to IT outsourcing is in today’s modern, dynamic world. The diverse and comprehensive coverage of IT outsourcing in this four-volume, authoritative publication will contribute to a better understanding of all topics, research, and discoveries in this developing, significant field of study. Furthermore, the contributions included in this multi-volume collection series will be instrumental in the expansion of the body of knowledge in this enormous field, resulting in a greater understanding of the fundamentals while also fueling the research initiatives in emerging fields. We at Business Science Reference, along with the editor of this collection, hope that this multi-volume collection will become instrumental in the expansion of the discipline and will promote the continued growth of IT outsourcing.
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Understanding IT Outsourcing:
A Perspective for Managers and Decision Makers Kirk St.Amant East Carolina University, USA
Examining iT OuTsOurcing: an OvErviEw Outsourcing has become one of the most controversial topics of the new century. To some, outsourcing is a strategy essential to remaining competitive in an age of international market integration. To others, it represents an important opportunity for economic advancement and entry into the global economy. For still others, outsourcing is a boogeyman topic associated with the relocation of jobs and the closing of local businesses. These varied opinions raise the questions “What is outsourcing?” and “What does one need to know to make informed choices about outsourcing practices?” This introduction examines these questions by providing a basic overview of outsourcing practices and trends. While the treatment presented here is by no means comprehensive, it can provide the foundational understanding needed to ask more focused questions or make more informed decisions related to outsourcing. The practice of outsourcing is not new. In fact, outsourcing is perhaps as old as commerce itself and serves as the foundation for any relationship where one person performs an activity on behalf of another. What has made outsourcing such a charged topic in recent years is the kinds of activities others have been requested to perform and the scope or the scale of such requests. One area in which outsourcingrelated tensions have perhaps run the highest is the information technology (IT) industry. Historically, the IT sector has been dominated by companies located in industrialized nations. This dominance was driven primarily by factors of access and proximity. That is, organizations needed quick and ready access to highly trained workers in order to foster the creativity and have the flexibility needed to remain competitive in the rapidly changing world of IT. The importance of access made issues of location paramount, for an organization’s workforce needed to be in relatively close geographic proximity for the organization to have quick and ready access to it. Such were the early rules of the IT industry. All of these rules suddenly changed with the advent of online media.
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Technologies such as the Internet and the World Wide Web flattened barriers of physical distance and allowed companies quick and easy access to workers located in virtually every region. As this online access spread to more parts of the globe, the pool of skilled labor available to organizations grew almost exponentially. Within this new paradigm, IT workers who once benefited from their physical proximity to a company now found themselves competing with skilled IT workers located half way around the world. These new competitors, moreover, could often offer the same level of skills for a fraction of the cost. As a result, an increasing number of organizations began to outsource a variety of skilled knowledge work –including a range of IT work—to employees located in other nations. Thus, the era of international IT outsourcing—or IT offshoring—began. Today, outsourcing is worth some US$300 billion in value and represents over a million jobs worldwide (Ang & Inkpen, 2008; Shao & David, 2007). These numbers, however, are but a drop in the global bucket, for it is estimated that only 10% of the prospective global market for outsourcing has been tapped (Ang & Inkpen, 2008). Perhaps the largest area for growth is in various service sectors—particularly those associated with human resources, accounting, financial prep, and medical information processing—as well as in the IT products and services that support these sectors (Chan, 2007; Outsourcing, 2008). Effectively tapping this outsourcing market, however, is no easy task. Rather, a range of factors must be considered to ensure the outsourcing process is successful, for many outsourcing projects result in negative experiences (Barthelemy, 2003; Raisinghani et at., 2008). Individuals in the IT industry, therefore, need to develop an effective understanding of outsourcing if they wish to make the informed decisions essential to success in today’s global economy.
FundamEnTal cOncEpTs and ThEOriEs OF iT OuTsOurcing In essence, outsourcing involves the transfer of responsibility (Barthelemy, 2003; Outsourcing, 2008; Weimer & Seuring, 2008). In an outsourcing relationship, one party (the client) asks another party (the vendor) to perform a given task. The outsourcing vendor then assumes the responsibility of completing that task according to the client’s guidelines and expectations. Thus, outsourcing is a common activity most persons take advantage of on an almost daily basis. Few individuals, for example, grow all of their own food (a task that is outsourced to farmers) or make all of their own clothes (a task that is outsourced to garment manufacturers). Organizations and individuals also tend to use outsourcing for the same reasons—expertise and time. The idea is that no one organization or person is an expert in all tasks; rather, there are certain core areas in which a business tends to specialize and that an individual tends to enjoy (Barthelemy, 2003; Solli-Sather & Gottschalk, 2008). Pursuing such core activities, however, also requires organizations and individuals alike to engage in a range of ancillary but important activities—such as accounting functions related to the paying of taxes. From an organizational perspective, time spent on such ancillary activities takes organizations away from those core activities they do best, and time spent on such ancillary activities is time that could be spent on improving a core functions (Barthelemy, 2003; Namasivayam, 2004; Rajabzadeh, Rostamy, & Hosseini, 2006). Moreover, such ancillary activities tend to be those tasks in which the organization is not a specialist. Such ancillary activities might thus be performed more efficiently and effectively by another entity—one that has made the activity its own core function and thus has the training and materials needed to operate as a specialist in that area (Chandrasekar, 2004/05; Duarte, Sackett, & Evans, 2004/05; Rajabzadeh, Rostamy, & Hosseini, 2006).
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Within this context, if an organization outsources that ancillary activity to a specialist, then the organization suddenly has more time to dedicate to its core operations. The more time spent focusing on these core functions, the better the organization gets at these tasks, and the more competitive the organization can become in that core area. Conversely, as the organization was not an expert in a particular ancillary area, the organization might have lacked the base of skills, knowledge, or equipment needed to perform that task efficiently—let alone remain abreast of developments related to that task effectively. Thus, by outsourcing ancillary tasks to a specialist, an organization can save time and money (Barthelemy, 2003; Outsourcing, 2008; Shao & David, 2007). According to this approach, organizations can benefit from both direct and indirect savings generated through outsourcing (Michael et al., 2005; Platz & Temponi, 2007; Rajabzadeh, Rostamy, & Hosseini, 2006). Direct savings are related to employee performance. As the outsourcing provider can perform a particular task more efficiently than the client can, the relative cost of performing that activity goes down as the quality improves. A trained accountant, for example, could likely complete a tax form more quickly and more effectively than could a computer programmer with no formal accounting training. Indirect savings are associated with those aspects related to maintaining on-site employees. These indirect factors include: • • • • •
Benefits (e.g., health insurance, retirement, continuing education, etc.) associated with employing in-house workers to perform a non-core task Training needed to keep on-site employees current in non-core tasks Materials needed to perform non-core activities Infrastructure needed to house and accommodate on-site employees so they can perform a non-core activity (e.g., office space, heating and lighting costs, software licensing, etc.) Practices associated with hiring and administering employees involved in non-core functions
Individually, each of these items can consume substantial resources in terms of cost and time (e.g., time to set up a technology, coordinate a task, or perform a process). Collectively, they can create a substantial drain on the resources an organization can dedicate to improving its core business activities. Thus, the cost of outsourcing an activity might actually be less than the combination of directly and indirect expenses related to performing such tasks in house. In fact, outsourcing can reduce a variety of IT and other service-related costs by up to 60% in some instances (Rodgers, 2005). This process is driven by a concept known as leveraging advantage. According to this perspective, the advantage is the core activity, or the task or range of tasks at the center of an organization’s business. Leveraging that advantage refers to taking every opportunity to focus on further developing and using that core activity to attract more business and to excel in the related marketplace. Accordingly, a successful use of outsourcing allows the client organization to channel the money and time saved through outsourcing back into developing its core activities vs. reporting this adjustment as savings or profit (Boguslauskas & Kvedaraviciene, 2008; Namasivayam, 2004). This allocation of savings allows organizations improve the chances they will remain competitive for the long term. Thus, outsourcing provides an organization with a mechanism for creating an advantage when competing with others in the same marketplace. On the surface, this approach seems quite straightforward. There are, however, secondary cost factors organizations need to consider when contemplating outsourcing. One more-hidden factor is that of transaction costs, and if not accounted for, it can easily negate any savings associated with outsourc-
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ing. Transaction costs, moreover, must be identified and assessed before making the final decision to outsource a process. If not, losses could ensue. In general, transactions costs involve interaction and compatibility (Bahli & Rivard, 2003; Gefen & Carmel, 2008; Solli-Saether & Gottschalk, 2008). The notion of interaction relates to the logistics of delivering a product or a service from the outsourcing vendor to the outsourcing client (Bahli & Rivard, 2003; Farrell, Puron, & Remes, 2005). In such situations, a vendor might be able to produce an item or perform a service more cheaply and efficiently offsite. The logistics related to delivering the product to the client or providing the service to the client or the client’s customers, however, might be so complicated or costly that they negate any savings associated with outsourcing that activity. Consider, for example, a vendor that can perform database maintenance for $10 per hour less than a client organization can on site. Interacting with that vendor, however, requires the client to convert its current operating system from one platform to another and purchasing new platform-specific software (Bahli & Rivard, 2003; Farrell, Puron, & Remes, 2005). In this scenario, the costs of making such a transition could outweigh the savings associated with outsourcing that service. For this reason, organizations must perform a preliminary analysis of transactions costs to determine if it is truly in that organization’s best interests to outsource the related process. Moreover, such a realization needs to be made before outsourcing contracts are signed and the client’s on-site abilities to perform the service are dismantled. If not, the results could be financially disastrous for the client. In the case of compatibility, the outsourced product or service can be delivered quickly and cheaply— that is, interactions between client and vendor are not problematic. The problem is the outsourced product or service is provided in a format that cannot be quickly and easily integrated into the client’s core activities. As a result, the client needs to spend un-planned time and money revising the product or process in order to integrate it into the client’s core business practices. If, for example, customers are confused by the online troubleshooting advice provided by an outsourcing vendor, they might increasingly return merchandise to the client organization for servicing. In this case, the client could find itself dedicating unexpected additional time to addressing such returns vs. producing new products or developing new services. Thus, services that do not integrate easily into the clients’ practices or meet client expectations for those services can divert resources from the client organization’s core activities. If these incompatibilities are not immediately noticed, use of that incompatible item or service could hurt the client’s core activities by affecting the quality of the products it produces or the services it provides. (This issue of compatibility was one of the major transactions cost problems that plagued early attempts at offshoring.) In this way, incompatibility can actually threaten the core business practices of an organization. Thus, the decision to outsource needs to involve an examination of transactions costs as well as the financial and strategic benefits of using outside vendors. Transaction costs thus bear risks an organization needs to consider when engaging in outsourcing. The notion of risk in outsourcing generally relates to the control a client organization can exercise over a process once it has been sent to a vendor (Barthelemy, 2003). The desire to outsource, in turn, becomes a matter of assessing and anticipating all of the risks—or potential problems—that could arise once an activity has been assumed by a vendor. After such an assessment is made, the client organization can decide how likely such risk factors are, how such factors might be successfully addressed, and if the prospective of successful outsourcing—and related savings—outweigh the risks related to engaging in such practices (Barthelemy, 2003; Raisinghani, 2008)
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In many cases, concerns related to risk become a matter of trust. That is, the more an outsourcing client trusts the vendor with which it interacts, the more likely that client is use the vendor in outsourcing operations and the greater/more important the tasks to be outsourced to that vendor. Such trust can be established via previous relations with a vendor, by reviewing a vendor’s previous relations with other clients, or through a careful vetting of prospective vendors. Within this framework, trust in a vendor can mitigate concerns related to risk and can result in the outsourcing of various IT production and service tasks (Jain, Kundu, & Niederman, 2008). Aspects of core competencies, leveraging advantage, transactions costs, risk, and trust are but the foundational concepts of outsourcing. These concepts should not be treated lightly when making decisions related to outsourcing. Rather, there are different outsourcing practices and arrangements, as there are certain patterns for the rise of outsourcing’s prominence in a given area. For these reasons, organizations need to understand the dynamics of outsourcing development if they are to make informed decisions about how and when to engage in such practices. It is through informed decisions that organizations can effectively leverage their competitive advantage within a particular area.
iT OuTsOurcing dEvElOpmEnT and dEsign mEThOdOlOgiEs In the last half century, outsourcing has been adopted as a core business strategy by a number of industries. These applications include a variety of tasks and have recently expanded into a range of skilled activities related to a range of IT goods and services (e.g., chip manufacturing, customer support, and financial processing). While the tasks that are outsourced can vary, the outsourcing process tends to follow a relatively standard pattern across industries and activities. In general, the process begins with a small set of businesses (sometimes called early adopters) testing outsourcing as an option to reduce costs and perhaps enhance competitiveness within a particular market (Shao & David, 2007). A hospital, for example, might test-run outsourcing by having limited healthcare processing services (e.g., transcription of medial documents) tasked to an external vendor. Usually, these initial tests are done on a small scale and involve a limited number of mechanical tasks. (These mechanical tasks are simple activities that can easily be performed repeatedly and effectively by a relatively wide range of workers.) Thus, the simplicity of the task generally means goods or services of acceptable quality can be produced with minimal oversight and limited specifications related to client expectations. The idea in this case is to assess areas of risk on a small scale that is easy to mange if problems arise. The better the vendor is at performing such tasks over time, the more trust the client develops toward that vendor, and the larger and more complex (or more risky) the task outsourced to that vendor become (Barthelemy, 2003; Jain, Kundu, & Niederman, 2008). Over time, early adopters start to benefit from outsourcing by both reducing costs and allocating more time and money to enhancing their core activities. As a result, these early adopters begin to gain a competitive advantage in their areas. Soon, competing businesses in the same marketplace realize they are losing or are in danger of losing market share to competitors that use outsourcing. These late adopters then begin to examine outsourcing as a mechanism for remaining competitive within their fields. As these secondary adopters engage in outsourcing, they see their own competitive advantages increase (Shao & David, 2007). This process triggers a sort of arms race as each organization looks for new ways to maximize its competitive advantage through outsourcing. According to this progressions, it is only a matter of time before outsourcing is no longer an option to explore, but becomes a core business strategy organizations must use to remain competitive in their fields.
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Until quite recently, the pursuit of outsourcing options to maximize competitive advantage was constrained by one crucial factor—access. The only vendors an organization could tap for its outsourcing objectives were those to which they had quick and easy access. The limitations created by access restricted the kinds of outsourcing activities in which an organization could engage. These restrictions also affected how far afield organizations could go to find prospective vendors for the outsourcing of IT tasks. Two major developments, however, radically changed this perspective. First, the global diffusion of online media made it increasingly easy to access an international pool of skilled labor—thus reducing physical barriers to outsourcing. Second, a range of international trade agreements—such as the General Agreement on Trade in Services (GATS)—reduced many of the legal restrictions that had limited the cross-border flow of goods and services (Gupta et al, 2008; Namasivayam, 2004; UNESCO, 2004). As more nations—particularly developing nations—gained online access and fell under these trade agreements, they provided organizations in industrialized nations with important outsourcing opportunities. Thus, a new age of international outsourcing—or offshoring—began. From an IT perspective, many of these developing nations offered a range of advantages for interested clients. For example, a shortage of good-paying jobs, compared to the number of well-educated individuals seeking work meant many jobs that are offshored (e.g., IT customer support) tend to experience less employee turnover (Reuters, 2004). These overseas employees also offer organizations an additional benefit related to the costs of skilled labor. In many developing nations, skilled technical workers make a fraction of the salaries earned by counterparts in industrialized nations (Jahns, Hartmann, & Bals, 2006; Shao & David, 2007). The average IT worker in the United States, for example, earns roughly US$75,000 per year, while the average IT worker in Argentina tends to earn US $9,500 per year (King, 2008). The same employee in India, moreover, earns just under US $8,000 per year to perform the same work (King, 2008). By using such international workers to perform IT tasks, a client organization can further reduce the costs of performing this non-core activity. This concept of using different pay scales to further reduce outsourcing costs is known as labor arbitrage, and it has prompted many organizations to engage in the international outsourcing/offshoring of a range of IT work (Gefen & Carmel, 2008). These lower salaries also have important implications for the quality of offshored activities via changes in management structures. IT managers in the Philippines, for example, earn US$25,000 per year—almost a third of what the average IT worker in the US earns (Ho, 2007; King, 2008). As a result, organizations can easily afford to hire more on-site managers to supervise offshoring activities. For example, the ratio of mangers to employees tends to be 1 to 8 in Chinese outsourcing ventures vs. 1 to 20 for similar activities in the United States (Hagel, 2004). These additional managers can dedicate more time to employee training, process oversight, and quality control. The resulting environment is one that can improve the quality of the resulting product or service without incurring any major staffing costs. In this way, the addition of these managers can reduce risks associated with offshoring activities and improve levels of trust related to client-vendor relationships. By itself, savings related to labor costs are not generally enough to prompt an organization to engage in offshoring (Hamm, 2008; Namasivayam, 2004; Reuters, 2004). Rather, different educational systems, professional practices, and cultural preferences could increase transactions costs in a way that would trump savings related to labor arbitrage (Barthelemy, 2003; Jain, Kundu, & Niederman, 2008; Qu & Brocklehurst, 2006). Many skilled IT service, for example, require a worker to follow a particular standard process that might be linked to the legal requirements of a particular nation or to the internal practices of a particular client. If an offshoring vendor did not perform an activity (e.g., software programming)
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according to such requirements, the resulting product might be difficult to integrate quickly into the client’s core business practices. In some cases, this factor has been addressed by providing vendors with effective training in the client organization’s practices for performing a given task (Raisinghani, 2008). Unfortunately, the costs associated with training offshore workers and the subsequent monitoring used to confirm practices are being correctly performed could be cost prohibitive (a major transaction cost). As a result, some form of standardization is often essential to make sure the quality or products and services resulting from offshoring services contributed to the client’s ability to leverage its advantages. The solution, in many cases, comes in the form of automation. From an outsourcing perspective, automation means that technologies—particular computer programs—provide workers with a mechanism that allows them to perform a process in a standard manner (Namasivayam, 2004; Shao & David, 2007). In certain cases, the employee enters data into the program, and the program performs processes according to client-designed specifications. In other cases, the program reviews the employee’s work to confirm it matches client specifications before that work can be finalized. Such standardization of process means the resulting product or service would meet a client’s expectations for correctly completing a particular task (Namasivayam, 2004). Automation also means client specifications related to effectively performing a task can be met without having to engage in more costly and time-consuming training practices. (Granted, some training in the use of the related software would be required.) Thus, automation keeps transactions costs low and allows organizations to maximize the cost benefits of labor arbitrage (Namasivayam, 2004). Automation can also reduce concerns of risk and increase trust based upon a kind of “built in” guarantee a process will be performed according to the client’s expectations. As a result of these factors, automation has created more demand for IT workers and drove much of the growth in international IT outsourcing (Shao & David, 2007). This combination of standardization via automation and labor arbitrage in particular have allowed outsourcing to develop rapidly into a global phenomenon. All of these variables and approaches mean organizations need to be well informed when making outsourcing-related decisions. Fortunately, approaches to outsourcing are not as random as one might think. Rather, a series of somewhat regular best practices to outsourcing have arisen over time. Such approaches can serve as models organizations can use when trying to determine how to use outsourcing and apply outsourcing practices effectively.
usEs and applicaTiOns OF iT OuTsOurcing cOncEpTs According to a model proposed by Duarte, Sackett, and Evans (2004) decisions involving what to outsource and how to engage in outsourcing tend to be governed by two central factors. The first of these factors is financial impact and refers to either the costs saved or the value added by the use of outsourcing in relation to a particular activity. The second factor is strategic importance and involves how important outsourcing is to helping an organization succeed in its core business area (Duarte, Sackett, & Evans, 2004). An organization’s decision to outsource is then based on how it weighs these two factors in relation to how they create a competitive advantage in terms of core business activities. According to this two-part framework, most outsourcing clients—and most early outsourcing adopters—begin their foray into outsourcing by having a vendor perform a few, very basic (i.e., mechanical) tasks (Namasivayam, 2004; Shao & David, 2007). Such tasks, moreover, tend to be of relatively little financial or strategic import. This kind of outsourcing is generally referred to as functional outsourcing,
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and requires limited communication between outsourcing client and vendor in order to have the task performed effectively (Duarte, Sackett, & Evans, 2004). The basic nature of the task also means that completion of the related activity is often assessed according to relatively general and simple criteria (McLaughlin, 2003). Custodial or janitorial services, for example, are often activities subject to functional outsourcing. Like all functional outsourcing activities, custodial and janitorial tasks need to be performed to permit the organization to operate in an effective manner on a day-to-day basis. The completion of these tasks, however, is not connected to an organization’s potential for earnings (low financial impact), nor does it shape the business strategy the organization uses to remain competitive in its field (low strategic importance). Yet functional outsourcing does reduce the indirect costs associated with having to hire in-house employees to perform basic, simple activities associated with daily operations. From an IT perspective, functional outsourcing is a mechanism organizations can use to dedicate more resources to developing and maintaining IT activities. Leverage outsourcing, by contrast, relies on the concept of economies of scale to reduce cost (high financial impact). Such outsourcing, however, is not crucial to a company’s ability to perform its core activities (low strategic importance). Leverage outsourcing generally involves the production of particular goods or the use of somewhat specialized services (Duarte, Sackett, & Evans, 2004). In such outsourcing relationships, the outsourcing vendor not only specializes in producing a particular product or performing a certain task, but does so for a relatively large number of clients. This specialized production or performance of service on a large scale (high volume) means vendors can perform the activity more cheaply offsite than the client could on site (Michael et al., 2005). Leverage outsourcing generally has a relatively high financial impact on a client’s core activities by reducing overall costs associated with those activities (e.g., providing server space and related maintenance for a wide range of clients). At the same time, a relatively large number of vendors tend to perform that same activity. Thus, the service provided by the vendor is not so specialized the client is dependent on the vendor to perform that service. In this way, such outsourcing relationships are of relatively low strategic importance to a client, for the client can turn to a range of vendors for this service (Duarte, Sackett, & Evans, 2004). Thus, leverage outsourcing allows organizations to outsource more standard and mundane IT tasks (e.g., basic server maintenance) and to focus more time and attention on IT activities related to the business’s specific core functions. Strategic outsourcing marks a different situation in which there is a closer relationship between the outsourcing client and vendor. In such relationships, each party relies on the other for the successful completion of its core activities. Such relationships tend to develop around a vendor providing either a specific skill or a specific product. The activities performed by the vendor tend to be unique and involve technologically intense tasks or require specific technologies to perform (Duarte, Sackett, & Evans, 2004). From the client’s perspective, it would not be cost effective to try to perform such activities in house. In such relationships, the vendor provides the client with a service or item that is highly specialized for that client’s particular core business. The related levels of specification also mean there are relatively few vendors that perform the particular service or produce the specific product. Thus, the client is dependent on the vendor in order to engage in its core business activities—a very different case from leverage outsourcing (Duarte, Sackett, & Evans, 2004). For this reason, cost savings associated with the service or product is not a major concern. Rather, the vendor’s activities are considered an essential part of the client’s core business and thus have are of high strategic importance irrespective of costs. (Financial impact is therefore not a central factor in such outsourcing relationships.)
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The relatively narrow nature of the vendor’s specialized business also means there are generally few clients to which the vendor can market its services. As a result, the vendor is highly dependent on the client’s business to remain financially solvent. Thus, the client’s business has a high level of strategic importance for the vendor’s marketplace success. An example of such IT outsourcing would be software firms that produce an application for only certain industries—such as pacemaker monitoring software designed for the medical device industry. The specialized character of the task also requires close and constant communication between vendor and client. This closeness allows the vendor to make adjustments and alterations that reflect the changing nature of the client’s business and the demands of the market in which that business operates. The final and perhaps ultimate state of outsourcing development is known as critical outsourcing and involves an integration of client and vendor activities to the point that the two often seem to operate as a single entity (Duarte, Sackett, & Evans, 2004). In such relationships, the vendor is an expert in a specific intensive and important activity that is central to the success of the client’s core business. Such focused specialization allows the vendor to be more capable of remaining current with updates essential to success in the related area. Additionally, the nature of the outsourced work is usually highly complex and needs to be customized to the specific client’s core business practices. The work also tends to be highly susceptible to change based on the markets serviced by the client organization. This particular combination of factors generally means that, in critical outsourcing, client and vendor need to have a close relationship based on trust and constant communication. In fact, it is not uncommon for the vendor to have an office within the client’s facilities and to participate in the client’s strategic meetings (Duarte, Sackett, & Evans, 2004). (Both parties need access to and involvement in such processes for each to engage effectively in its core practices.) The nature of such relationships, moreover, means they have a high level of financial impact for the client/are essential for the client to succeed in its core business area. Such activities are also closely linked to client success to the point that they are also a central part of its business strategy and thus are of high strategic importance to the organization. As for the vendor, the highly customized nature of the activity usually means the vendor can only provide it to the individual client. Thus, the vendor’s core activities are, in many ways, depending on a short list of specific clients. Examples of such outsourcing relationships in IT would be those where the development and implementation of supply chain management databases and related software is outsourced to a vendor specializing in the creation of such software and its related services. The effective adoption and use of these outsourcing models are no easy process. Rather, careful research, attention to detail, and an understanding of the involved variables are essential to success in each of these four major outsourcing approaches. Such outsourcing practices, moreover, are further complicated when done on an international level. This factor is particularly important in the new specialized kinds of outsourcing sectors that have emerged in recent years. In the last decade, outsourcing has begun to evolve into a series of task-specific disciplines related to knowledge activities and IT work. The more common of these subdivisions include: •
Business Process Outsourcing (BPO): Having a vendor perform a particular business service— generally a knowledge-based service (e.g., payroll processing)—for a client including a range of standard business services associated with worker maintenance (e.g., human resources processing, accounting, and financial administration) (BPO-Business process outsourcing, 2008; Weimer & Seuring, 2008)
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• • •
Application Outsourcing (AO): The process of creating, deploying, and managing a software product designed to meet the needs of a specific client (Application outsourcing, 2007) Infrastructure Outsourcing (IO): Providing clients with the hardware, software, and often the support services needed for them to have a functioning information technology infrastructure for their organization (Murrain & Cohen, 2003) Knowledge Process Outsourcing (KPO): Having vendors perform skilled knowledge-based tasks that result in the production of a unique knowledge product (e.g., original text/content for a website or original research and development results) or that requires unique/situation-specific results related to a particular field (e.g., legal services or market analytics) (Sathe & Aradhana, 2008)
While all of these outsourcing areas have experienced growth—particularly international growth—in the last few years, it is KPO that seems poised to expand the most in the next few years and to do so on a global scale (Sathe & Aradhana, 2008). Also, these divisions reflect the aggregation of tasks currently assigned to outsourcing on a relatively large scale. As organizations continue to define their core activities and to look for additional ways to cut costs and increase competitiveness, new outsourcing divisions might emerge. These same forces could also result in the further subdivision of these current categories (e.g., actuarial outsourcing within BPO or even KPO). When considered with the fact that only 10% of the prospective global outsourcing market has been tapped and international outsourcing is predicted to grow by some 8% in 2008 alone, the prospects for growth in such specialty areas seems quite good (Ang & Inkpen, 2008; Heath, 2008). Curiously, when considering the various options for international IT outsourcing, aspects of cost and automation are not exclusive factors used to make final vendor selections. In fact, some research notes that companies might actually select a more expensive international vendor due to the factor of cultural proximity. The importance of cultural proximity, in turn, results from lessons learned over a decade of offshoring experimentation. Cultural proximity involves how similar or how different two cultures are (Ang & Inkpen, 2008; Gefen & Carmel, 2008). Cultures that are relatively similar have a high cultural proximity –are culturally very close in approaches and attitudes. Cultures that are quite different in terms of behaviors, attitudes, and expectations have a low cultural proximity (a great deal of difference separates them). Earlier forays into offshoring revealed that cultural proximity related to job expectations, contractual obligations, communication styles, and even language can have a major effect on offshoring practices (Beizer, 1990; Kogut & Singh, 1988; Levina & Vaast, 2008). One 2004 study in IT research and development, for example, notes that cultural proximity can have important implications for transaction costs in offshoring. According to the study, when engineers worked together in virtual international projects, such as is characteristic of offshoring, half of their work hours were spent engaging international counterparts in ad hoc interactions. Over half (57%) of these interactions involved trying to come to a common understanding of what was expected of the involved parties (Ang & Inkpen, 2008; Cherry & Robillard, 2004). Just over 30% of that time was dedicated to dispute resolution and addressing problems, and 3% of that time was spent planning future interactions (Ang & Inkpen, 2008; Cherry & Robillard, 2004). (Surprisingly, only 8% of the time spent on such interactions involved the actual offshoring task of developing software (Cherry & Robillard, 2004).) In a different study of 200 US executives, 76% of the individuals surveyed cited cultural differences as a major aspect affecting the success of international outsourcing initiatives (McCue, 2006). All of these factors, in turn, act as transaction costs related to
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providing clients with products and services they can integrate into their operations (Ang & Inkpen, 2008; Levina & Vaast, 2008; Qu & Brocklehurst, 2003). The items causing such problems seem to be the degree of difference between two cultures in relation to a particular topic—such as expectations related to a specific job title (Gefen & Carmel, 2008; Levina & Vaast, 2008). According to this perspective, the greater the similarities between the cultures interacting—or the greater the cultural proximity—the fewer problems tend to arise in offshoring situations. The more different the cultures interacting—or the smaller the cultural proximity/greater the cultural distance—the more communication- and transaction-related problems tend to occur (Ang & Inkpen, 2008; Gefen & Carmel, 2008; Jain, Kundu, & Niederman, 2008). The same situation seems to be the case with language. That is, groups that share a common tongue (e.g., English) tend to interact more effectively than groups that have to communication across a linguistic barrier (Gefen & Carmel, 2008; Levina & Vaast, 2008; Qu & Brocklehurst, 2003). These factors are further exacerbated by international time difference that affect how often, how quickly, and how directly offshoring clients and vendors can communicate in order to address miscommunications (St.Amant, 2008b). The notion of cultural proximity has given rise to a gradated approach to international outsourcing. According to this approach, a company would use onshoring—outsourcing to a vendor in the same nation—for complex tasks that can’t be addressed by automation and that require constant, regular contact and communication (e.g., research and development of security software designed specifically for the client’s corporate intranet). A central factor behind such onshoring decisions is also legal jurisdiction. In such instances, an organization might not want to outsource an important activity to a nation where the client would have no mechanism for legal recourse should the vendor decide to disclose trade secrets or replicate copyrighted or patented materials (Lesk, Stytz, & Trope, 2005). (See the section “Critical Issues in Outsourcing” for a more in-depth discussion of problems involving jurisdiction and outsourcing.) For tasks that involve less direct oversight and are more standardized, but still require regular contact, nearshoring—the process of outsourcing to a vendor located in the client’s same time zone—tends to be used. In the case of the United States, Mexico and Canada tend to be important nearshoring locations. For the EU, Central and Eastern Europe tend to be the primary nearshoring venues (Ang & Inkpen, 2008; Ferguson, 2006). While nearshoring generally means less cost savings via labor arbitrage (e.g., the average Mexican IT worker earns roughly US $18,000 per year while the average IT manager in Vietnam earns only about US $15,500), the need for constant and immediate contact trumps prospective wage-related savings (Ho, 2007; King, 2008). Engineering a particular RFID tracking system to be integrated into the clients overall computing services would be an example where an IT nearshoring relationship might be preferred. Offshoring, represents the greatest geographical—and generally the greatest cultural and linguistic— distance between the outsourcing client and the related vendor (Jain, Kundu, & Niederman, 2008). Offshoring tasks are assigned to workers in far-away time zones or different hemispheres. Such practices tend to be reserved for highly standardized or automated processes where close oversight and constant, direct communication are not crucial to the success of the activity. Interestingly, many IT offshoring practices are also often outsourced to take advantage of international time differences that allow vendors to perform a task during the client’s “off hours” (McLaughlin, 2003). Activities such as IT customer service and even next-day newspaper editing are generally offshored to maximize such time differences. What often makes this kind of outsourcing successful is the use of same-language speakers (e.g., English speakers in India or the Philippines for US practices) to provide these services (Keong, 2007; Lakshman, 2008; Qu & Brocklehurst, 2003). Such services also tend to involve a relatively high degree of standardization and
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automation, such as using grammatical standards or editing software to proofread a newspaper article or a standardized script cataloged in a company’s database to offer technical support to callers. In all of the outsourcing models noted here, communication plays a central role in project success. In the case of outsourcing IT products or services, the specialized nature of such tasks means clear and constant communication is essential to the success of such projects. Yet the speed with which IT practices can change creates challenges related to effective communication in outsourcing relationships. For these reasons, the tools essential to successful IT outsourcing become those that establish and maintain clear channels of communication throughout the outsourcing process. Such tools are also essential to addressing the key problem of transactions costs associated with various outsourcing activities.
iT OuTsOurcing TOOls and ThEir applicaTiOns While so much of outsourcing relies on technology for access and for operations (e.g., automation), perhaps the most important tools related to effective outsourcing are texts or documents that facilitate communication practices in outsourcing situations (Power, Desouza, & Bonifazi, 2005). As many researchers and commentators have noted, for outsourcing to be effective, client and vendor need to have a common understanding of: • • •
What activities are being outsourced? How those activities are to be performed? What constitutes the completion of an activity?
Similarly, client and vendor need to share a common understanding of what criteria will be used to assess the quality of the final product or process—a concept known as benchmarking (Platz & Temponi, 2007; Power, Desouza, & Bonifazi, 2005). Without such a shared understanding, vendors could produce items clients do not need or cannot use. Similarly, vendors could engage in processes that actually hurt a client’s core business (e.g., offering ineffective IT support to the client’s customers). Thus, the tools that help client and vendor come to a meeting of the minds on outsourcing projects are among the most valuable, yet they are also among the most overlooked (Platz & Temponi, 2007; Power, Desouza, & Bonifazi, 2005). Such communication tools, moreover, tend to apply to and affect almost all outsourcing practices and relationships. Additionally, many of the problems encountered in outsourcing—and particularly offshoring—situations involved inadequate communication (Barthelemy, 2003; Raisinghani, 2008). The first and perhaps most important tool for creating mutual understanding is the contract. The contract between the client and the vendor establishes what activity will be outsourced, what conditions the vendor must follow in performing that activity, what final products will result from the activity, and what criteria will be used to assess the effectiveness of the activity. This foundational, paper document is referred to as the legal contract. On the surface, the tenants of such a document seem self-obvious. Aspects of quality, however, are often a matter of internal organizational cultures. Over time, the internal culture of the client organization creates a series of criteria (benchmarks) that members of the organization use to determine when and if an activity is performed correctly (Ang & Inkpen, 2008; Bahli & Rivard, 2003; Power, Desouza, & Bonifazi, 2005). Such perspectives relate to how the members of that organization interpret certain words or conditions within a contract (e.g., meet minimum conditions for completion of a task). These
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implicit assumptions of how one is to carry out the conditions of a contract create a second kind of contract. This implicit contract –often called a psychological contract—exists within the framework created by the legal contract and serves as the client’s method for defining success (i.e., define its actual benchmarks). What makes psychological contracts problematic is they are based upon tacit knowledge and upon common understandings, interpretations, or assumptions that have arisen over time. Thus, psychological contracts are an artifact created by the culture of the client organization (Ang & Inkpen, 2008; Barthelemy, 2003). As vendors are not a part of that organization’s culture, the vendor might associate very different assumptions and interpretations with the same legal contract. The result is the client and the vendor have two different psychological contracts they use to assess the efficacy with which the conditions of the legal contract are met (Ang & Inkpen, 2008; Levina & Vaast, 2008). Such differences can result in disputes among parties or even the creation of goods or the performance of services that do not match with the client’s expectations or needs. In this way, a mismatch between legal and psychological contracts can create risks that greatly increase transaction costs and mitigate the benefits associated with outsourcing (Bahli & Rivard, 2003; Barthelemy, 2003; Gefen & Carmel, 2008). For these reasons, individuals engaged in IT outsourcing need to view contracts as a tool for clarifying the expectations between client and vendor. Clients need to view contracts as not just a mechanism for establishing responsibilities (i.e., legal contracts), but also as a vehicle for clarifying related expectations (Ang & Inkpen, 2008; Bahli & Rivard, 2003). Such expectations would include the conditions used for benchmarking or quality assessment purposes. Vendors, in turn, need to view contracts as an initial platform from which questions can be asked, clarification can be gained, and a common interpretation can be established. This ability to clarify and to create a common interpretation is important not only for the initial success of the outsourcing agreement, but also for creating a sustained relationship between client and vendor over time. Research reveals the more client and vendor work together, the more they are able to understand and address each other’s expectations in a manner that helps the two parties better align their psychological contracts and operate more effectively. (In essence, a discussion of contracts can serve as a mechanism that increases the cultural proximity of the organizations.) It is perhaps for this reason that, when seeking a vendor to perform a service, client organizations tend to favor vendors they have worked with before over a vendor that offers a better price (Bahli & Rivard, 2003; Gefen & Carmel, 2008). In these cases, the more expensive vendor offers the key benefit of a shared or a common understanding of processes or assessment/benchmark standards. By viewing contracts as a tool for establishing a meeting of the minds, parties involved in outsourcing can more effectively establish a mutually recognized psychological contract and maximize benefits of the outsourcing relationship. Doing so reduces risk and increases trust across involved parties. While the contract establishes the initial nature of the outsourcing relationship, other documents maintain the meeting of the minds at a variety of levels during the outsourcing process (Sakthivel, 2007). Specifications, for example, are essential tools a vendor needs in order to meet the client’s expectations (its benchmarks) for creating a quality, an effective, or a complete product (Namasivayam, 2004; Power, Desouza, & Bonifazi, 2005). In IT outsourcing, specifications provide client and vendor with a common measure for how a product should be configured (e.g., coding specifications for software) or how a service should be performed (McLaughlin, 2003). In this way, specifications provide a common foundation client and vendor use to establish if the results of an outsourcing project meet client expectations for that project.
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Closely related to specifications are procedures. If specifications provide client and vendor with a common benchmark for assessing results, then procedures provide the mechanism for making sure those results were achieved (Namasivayam, 2004; Power, Desouza, & Bonifazi, 2005; Qu & Brocklehurst, 2003). That is, procedures tell outsourcing vendors how (through what actions or undertakings) the client expects them to achieve a particular end. Establishing common procedures is important, for the route through which a final product is developed or service is provided can reflect the client’s intended use for that product or application of that service. In the case of IT outsourcing, specifications might require the vendor to address a particular goal through a given service (e.g., use help desk calls to market additional services). While the vendor can use those specifications to guide how to perform a task, the process through which that task is actually performed might reflect the client’s intended greater objective related to that service (e.g., to market a wider range of services to current customers). From a production perspective, a computer chip might need to be produced in a certain way in order to withstand the heat related to a certain kind of rapid processing. A final product designed according to a different procedure, however, might not meet those same client intentions for use. The mismatch of processes might result in a failure when the product is used as the client intended (e.g., the computer chip melts whenever the client tries to use it). The same situation is the case for the outsourcing of service activities. Again, the vendor might meet the objectives of a contract (e.g., answering a caller’s question related to computer help). Failure to follow the client’s expected procedure in providing this service could, however, result in problems (e.g., answering calls in a manner that conflicts with the client’s approach to offering a service or offending customers). Outsourcing clients can improve the chances vendors will match their expectations if those clients • •
Create a set of procedures that reflects how the client expects a process to be performed Explaining the reasons why the process must be performed that way
For clients and vendors to make effective use of such common tools, they must have access to them. Clients and vendors must also have access to each other so that information can be exchanged and questions can be asked in a manner that results in a successful outsourcing relationship. Central to this process is a mechanism or mechanisms that allow such communication and access to occur seamlessly. Thus, all parties can benefit from a project intranet site, or other related database, that allows clients and vendors to access needed contracts, specifications, or procedures. Such a system, in turn, needs to be designed so involved parties are alerted when updates to such items occur. The creation of centralized databases for outsourcing projects, thus, is an important IT tool for client organizations to develop. This kind of centralized repository of knowledge, moreover, becomes important if multiple vendors are working on the same project and the client needs to share information with these vendors. Interfaces, or interface design, thus becomes an important factor in outsourcing. In essence, effective interface design allows clients and vendors to quickly and easily find the information each needs to make the outsourcing relationship a success (Ang & Inkpen, 2008; Sakthivel, 2007). For this reason, the design of interfaces through which outsourcing interactions occur cannot configured randomly. Rather, the interface must be designed in a way that makes it easy for all parties to find and to exchange information (Ang & Inkpen, 2008). This interface must also provide participants with a mechanism for tracking and for being alerted to any updates or alterations made to important materials (e.g., specifications) in the system. So, when considering the design and the architecture of outsourcing-related interfaces and databases, IT professionals need to remember:
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• • •
The central items to which all parties will need access, The kinds of materials they will exchange, and The Varieties of updates that might take place.
By considering such factors, the related developer or designer can create an interface and an underlying architecture that engenders success in outsourcing interactions. Equally important are the media client and vendor use to communicate. To begin, client and vendor alike need to select a common technology through which they will interact (Sakthivel, 2007). Such a technology might be an email software, a document sharing software, or a range of other IT options. In all cases, the client must be sure the vendor possesses both the same software (e.g., shareware) and the same versions of the software that the client does. If, for example the client uses In Design to create certain materials, but the vendor uses Quark to create similar kinds of materials, it might be difficult for client and vendor to review or make use of the items they are exchanging. Similarly, if client and vendor are using different versions of the same software (e.g., Microsoft Word 2007 vs. Microsoft Word 1995), then each party could have a problem using items provided by the other. While such caveats seem rather self obvious, one needs to remember that automation—or the use of computer programs to perform certain functions—is a central component to effective outsourcing, and particularly to effective offshoring. For these reasons, client organizations need to be sure communication technologies are compatible between client and vendor to avoid unexpected transaction costs related to addressing such technology differences (Bahli & Rivard, 2003). While these text and technology tools are central to successful outsourcing, they must also be used or applied effectively so all parties can work toward a common goal. For this reason, client organizations need to work regularly with vendors to make sure there is a commonality of understanding and of tool use that makes the overall process a success (Bahli & Rivard, 2003). Managers, in turn, can be a valuable asset when addressing these factors. Organizations interested in outsourcing thus need to reconsider both the skills individuals need in order to serve as managers and the activities such manager should undertake to facilitate effective outsourcing relationships.
managEmEnT in iT OuTsOurcing EnvirOnmEnTs If effective communication is essential to successful outsourcing, then the successes of managers in outsourcing situations are directly linked to their skills as communicators as well as to their abilities to understand the organization’s business processes (Duarte, Sackett, & Evans, 2004/05; Levina & Vaast, 2008; Sakthivel, 2007). In fact, the primary objective of managers in outsourcing situations is to share their organization’s business goals and objectives with vendors. Vendors can then use this information to provide the goods or services that meet the objectives essential for the success of the client’s core business. In essence, the distributed organizations created by outsourcing make managers the central individuals who bind the different parts of the overall process together (McLaughlin, 2003). It is therefore imperative that managers of outsourcing arrangements be able to share a common vision across working groups. It is equally important managers are able to monitor projects (receive and assess communication) and provide guidance (communicate ideas) in order to help all parts of the decentralized process move toward a common goal (Solli-Saether & Gottschalk, 2008).
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To achieve these objectives, managers must first have a solid grasp of the organization’s business practices, its strategies (both long- and short-term), and its overall goals or objectives (McLaughlin, 2003). This knowledge base is imperative, for such ideas are what the manager must continually communicate to vendors if the outsourcing project is to succeed (Levina & Vaast, 2008). This knowledge base is also closely tied to the idea of using specifications and procedures to reduce transactions costs and reaping the benefits associated with outsourcing. Managers who can continually convey these ideas to vendors will thus maximize the advantages outsourcing can offer their organizations. As noted earlier, outsourcing relationships involve two different kinds of contracts—legal and psychological. The legal contract explains what the vendor is asked to do. If, however, the vendor is not familiar with the client’s expectations and practices, the vendor might not understand how specifically to perform a given activity or why an activity needs to be performed a certain way (Ang & Inkpen, 2008; Levina & Vaast, 2008). The role of the manager is to rectify such legal vs. psychological differences so vendors understand the client’s greater business objectives when performing work for that client. By communicating these concepts from the start, mangers can both educate/train vendors and monitor the quality of overall processes. If, however, a manager is not familiar with how the organization’s core business practices and objectives operate, that manager will have a difficult time communicating such ideas effectively to vendors (Levina & Vaast, 2008). Thus, an understanding of business concepts in general and the client’s core business in particular is essential to effective communication, and thus effective management in outsourcing situations. To effectively communicate the client’s business strategies, managers also need to know what the vendor is doing and how those activities relate to the client’s business objectives. For this reason, managers must have a good understanding of the contracts, specifications, and procedures that govern an outsourcing relationship. As with client business strategies, the only way managers can communicate effectively when discussing such items is to be very familiar with them. For this reason, managers need know—or have written—these materials so they can communicate about them effectively with vendors. (That is, the information contained in these documents is what vendors will use when discussing the client’s project.) Knowledge of these items allows managers to speak the vendor’s language and quickly and efficiently assess communiqués from the vendors as well as convey information to those vendors. Should a client seek to outsource a project simultaneously to multiple vendors, those contracts, specifications, and procedures become the medium the manager uses to communicate effectively across multiple organizations in order to keep all of them on task. As outsourcing practices become more international, new management skills in cross-cultural communication and project decision making become essential (Chandrasekar, 2004/2005). As noted earlier, the greater the difference between two cultures (low cultural proximity), the more difficult it can be to convey ideas and concepts across those cultures. For manages in international outsourcing/offshoring situations, this difficulty is important, for the success of outsourcing projects relies on clear, effective, constant, and often quick communication from client/manger to vendor. The more time spent having to clarify cultural differences in expectations (e.g., what a support technician is supposed to do) or culturecentered business practices (e.g., creating an IT accounting infrastructure that allows for an external audit), the more challenging the communication tasks of the manager become. Should translation also be needed to facilitate such communication, the more difficult the activities of the manager become. As Ang and Inkpen note in their 2004 study, in international collaborative projects—such as outsourcing situations—a relatively large amount of time is spent just addressing issues of miscommunication and creating common perceptions of tasks.
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What further complicates this situation is how savings from offshoring can be used to address management issues in overseas operations. As previously discussed, one benefit of the labor arbitrage is that a client organization can hire more managers per operation to create smaller ratios of managers to employees. While such practices can contribute to better oversight and more on-the-job training, they also mean the individual managing an overall outsourcing operation has more on-site managers he or she needs to communicate with to keep operations focused on achieving the client’s business goals. More managers from other cultures mean more room for cross-cultural miscommunication and more room for error (McCue, 2006). All of these factors do not mean offshoring situations are unmanageable. Rather, they mean mangers of offshoring projects need to develop a foundational knowledge of culture and communication factors (Ang & Inkpen, 2008). With this knowledge, managers can make better choices of how to interact with overseas vendors as well as when to interact (according to the vendor’s cultural expectations) to provide oversight, criticism, or updates. Managers can also use this knowledge to draft specifications, and procedures that might be better suited to the expectations of the overseas IT vendor. This same knowledge can also be used to form strategies on how to communicate the client’s business objectives when discussing the topic with vendors from other cultures. Finally, such cultural knowledge can be used to help the client company make decisions of when to offshore IT functions, what IT practices to offshore, and to where such IT practices should be offshored (Shao & David, 2007). If, for example, the manager knows that daily, real-time interactions are needed for an offshoring project to operate effectively, that manager might suggest the client company rely on nearshoring vs. offshoring. If the manager knows an IT process requires a specific understanding of certain language—and that translation might affect such understanding—that manager could advocate working with a vendor whose employees speak the same language as the client. Thus, mangers with a foundation in cultural and communication can help a client organization succeed in terms of its daily IT operations and in making important choices related to selecting an international IT vendor. More recently, offshoring situations have led organizations to value a new kind of skill for outsourcing management, and that skill is entrepreneurship. The idea is managers who are familiar with an outsourcing—and particularly an offshoring—process can look for new ways to make use of the savings resulting from offshoring (Ang & Inkpen, 2008). One example of such entrepreneurship is the development of new IT products. In industrialized nations, the cost of research and development can greatly limit what projects are approved for research. Research then becomes limited to projects that have the greatest potential returns on the original investment of resources. In offshoring situations, lower labor costs mean that research and development in other nations is a less expensive undertaking. IT vendors in those nations can thus explore a wider range of research and development options than they might be able to in the client’s home nation (Wadhwa, 2007). The results can be new products that create additional value, but the client would not have developed in house due to cost factors. A good example of this entrepreneurial approach is how Ukrainian vendor MacKiev was able to develop low-cost Mac ports of Windows products—something that might not have been undertaken/been seen as too costly if not for offshoring (McLaughlin, 2003). Managers who can recognize such potential in offshoring situations will thus have a great deal to offer client companies in terms of to maximizing competitive advantage (Ang & Inkpen, 2008). This ability to identify potential and maximize competitive advantage also relates to the international IT markets a client organization can access via offshoring. Certain product aspects, such as interface design and conditions of use, generally vary from country to country. These variations tend to be con-
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nected to cultural preferences (e.g., reading direction) and national situations (e.g., the reliability of local power grids). By viewing offshoring vendors as prospective customers, a client organization can work with those vendors and modify its products or services to meet the expectations of the related overseas consumer base (Amelio, 2008). According to this perspective, managers can use offshore IT vendors as a market for testing the client’s IT goods or services for the vendor’s culture. The result is using an existing relationship to gain access to larger international markets (Wadhwa, 2006). The various opportunities outsourcing provides for managers and for client organizations are wide ranging. These opportunities, however, also often bring with them address elements of risk. To make effective outsourcing decisions and to manage outsourcing practice effectively, organizations and individuals need to understand issues and problem areas arising from outsourcing and offshoring approaches. Through such an understanding, managers and client organizations can make more effective decisions that can benefit client organizations in the short and the long term.
criTical issuEs in iT OuTsOurcing One crucial issue in IT outsourcing is the changing nature of intellectual property (IP). IP generally covers information-based products or processes developed by an organization. In most cases, such products represent the original application of an idea to create a new item or to develop a new procedure. Traditionally, the concept of IP has involved notions of copyright, patents, and trade secrets (Sakthivel, 2007). In such situations, information becomes an important commodity, for it is the information used to produce a product or perform a service that is valuable (provides an organization with a competitive advantage). Recent developments in offshoring, however, indicate current perceptions of IP need to be expanded to a range of data organizations collect and process. For these reasons, organizations need to understand various IP nuances to make effective decisions related to offshoring. From an IP perspective, copyright and patent disputes are one of the main problem areas in almost any outsourcing situation. Essentially, the moment an organization allows any information-based product or process to move beyond its prevue, the organization has relinquished its ability to direct the modification, replication, or distribution of the related knowledge. In the case of onshore outsourcing, the organization can rely on common national and cultural traditions of contract law and IP law to establish guidelines for vendors to follow (Rosenthal, 2005; St.Amant, 2008a). These same commonalities provide the client with a legal mechanism to address misuses of its IP. Such mechanisms also act as a deterrent, for both client and vendor know the penalties that can result from the misuse of a client’s IP. The rise and widespread adoption of offshoring, however, creates new legal dilemmas for outsourcing clients. The crux of these problems is jurisdiction—or the geopolitical limits to various legal traditions. In onshoring, client and vendor often exist in the same jurisdiction and operate according to the same legal framework (Lesk, Stytz, & Trope, 2005). Conversely, in offshoring, client and vendor are situated in different nations that could have vague—if not contradictory—legal mechanisms for identifying and addressing IP violations (Swire & Litan, 1998; Rosenthal, 2005; St.Amant, 2008a). In some cases, the laws related to IP protection might be weaker in the vendor’s nation. In other instances, the regulatory and oversight agencies in the vendor’s nation might simply not enforce such laws. At present, such differences have led to conflict involving a range of offshoring areas including pharmaceutical products, medical transcription, and software programming (Lakshman, 2008).
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What makes this IP situation problematic is software-based automation used in many offshoring contexts. Equally problematic is the fact that more companies are offshoring the development of IP products and processes—such as software programming and server maintenance (Barthelemy, 2003; Heath, 2008). Further complicating this problem is some of the growing hotspots for IT offshoring are nations with records of repeated IP violations (Qu & Brocklehurst, 2003; Wadhwa, 2007). Certain research, for example, notes that Vietnam is a known international offenders in terms of software piracy (Lim, 2006). Yet Vietnam is emerging as a hub for IT offshoring and gaming development (Balfour, 2006). Organizations therefore need to carefully research both the vendor and the vendor’s related nation before deciding where to offshore certain tasks. Curiously, the more recent problems related to IP and offshoring are not as much about software as they are about the data such software processes. The crux of this problem involves personal information— particularly the health records or the financial records of specific individuals. In the US, for example, the adoption of laws such as the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and the Sarbanes-Oxley Act of 2002 have required organizations to take on a new range of data collection and data processing tasks (404 tonnes of paper, 2004; Goolsby, 2001a; Goolsby, 2001b). The sheer scope of such activities has prompted a number of organizations to offshore activities such as medical transcription and financial accounting practices (Byrnes, 2005; Lesk, Stytz, & Trope, 2005; St.Amant, 2008a). Thus, large quantities of personal medical records and financial information are now sent abroad for processing. Such information is actually something that has value in relation to a range of legal (e.g., target marketing) and illegal (e.g., identity theft) activities (Michael et al., 2005; Ni & Bretschneider, 2007; St.Amant, 2008a). This information thus constitutes a new kind of intellectual—or information-based—product that can be owned (e.g., property). And, just like traditional IP, the legal context created by offshoring establishes an environment in which abuses can occur (St.Amant, 2008a). More recent examples misuses of personal data include identity theft of financial information and extortion related to the disclosure of medical records (Lazarus, 2004). These IP- and software-related situations mean organizations need to think carefully about the nature of their core activities. The re-assessment of such activities is essential undertaking, for this core should included those activities that could result in IP-related problems if offshored (Shao & David, 2007). Another issue organizations will need to consider is the threat of cyberterrorism in IT outsourcing. The same oversight limitations affecting IP outsourcing—and particularly offshoring—also constitute potential problems in terms of international terrorism (Michael et al., 2005). From an IT perspective, such concerns can take two main forms. The first is the disclosure of sensitive information. In this case, an outsourcing vendor could share or sell details about the security protocols and IT systems of a client. This disclosure leaves the related system vulnerable to attacks from terrorists who can navigate through it, override its defenses, or use known glitches or limitations to wreak havoc on the related organization (Michael et al., 2005). What makes such situations particularly troublesome is the growing number of government agencies that use offshoring for some of their IT work (Ni & Bretschneider, 2007). A related problem area involves the offshoring of software programming. In this case, the programmer could design a software product to contain certain weaknesses that terrorists could later exploit (Michael et al., 2005). Should the client distribute such software to a wide range of customers (e.g., tax preparation software), such purposeful flaws could cause widespread problems. Similarly, a programmer could design a software package to shut down or to create problems (e.g., distribute a virus) that could cause the collapse of the system in which it was used (Michael et al., 2005). (This approach to software as a sort of time-delayed weapon was actually employed successfully by the US against the
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Soviet Union during the Cold War (Michael et al., 2005).) Again, such areas of concern are related to oversight and what constitutes a core activity to outsource or offshore. For these reasons, organizations might consider • • •
How outsourcing will be used in the development of software products What kinds of software development will be outsourced How outsourced software products will be used by the client organization and its related customers
By reviewing these factors, the client organization can more carefully determine if and when outsourcing or offshoring are effective methods for addressing certain situations. The concerns noted here represent the current context of IT outsourcing. They, however, are not the only aspects organizations need to consider when making decisions related to outsourcing. Rather, a number of emerging trends could also influence how client organizations effectively use outsourcing. Organizations must therefore familiarize themselves with such trends and consider approaches for addressing them (Lesk, Stytz, & Trope, 2005; Shao & David, 2007). Only through such foresight will clients to make effective use of outsourcing in future ventures.
OrganizaTiOnal implicaTiOns OF iT OuTsOurcing As noted earlier, current outsourcing practices mark only the tip of a potential global marketplace that remains to be tapped. It is perhaps for this reason that the most interesting emerging trends related to outsourcing involve the changes and potentials of markets in developing nations. Of these developments, perhaps the most interesting is the relatively recent move toward a new kind of outsourcing called worldsourcing. According to the worldsourcing approach, an organization does not just offshore activities to a single nation or to a few nations. Rather, clients now seek to re-distribute all non-core functions to overseas employees in several nations in order to take advantage of labor arbitrage on a truly large/ global scale (Amelio, 2008; Ang & Inkpen, 2008; Jahns, Hartmann, & Bals, 2006). As a result, some of the company’s non-core functions, such as financial services, are performed in a particular location or locations, such as India or China. Other non-core functions, such as healthcare processing, are outsourced to Russia, and legal services are offshored to New Zealand (Sathe & Aradhana, 2008). In some cases, one particular kind of IT or other work is sent to a single vendor or a group of vendors on one nation. In other cases, the same kind of work is distributed to a variety of vendors in multiple nations. Each vendor, in turn, completes a part of an overall specialized puzzle. In both cases, the objective is to re-locate any and all non-core functions to a range of overseas vendors and thus reduce labor costs on a large scale to maximize competitive advantage as much as is possible. The rise of worldsourcing has led different nations to develop their expertise in and their reputation for performing a certain kind of knowledge-based function. Such nation-based specialization has become particularly popular in the realm of knowledge process outsourcing (KPO), and tentatively, certain countries have emerged as front-runners in the quest to create a global outsourcing brand for performing a particular service. A rough breakdown of such worldsourcing services is shown in Table 1. And as more regions gain online access and seek to enter the global marketplace, the prospects for such specialized worldsourcing functions will only increase.
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Table 1. Worldsourcing services (Taken from Sathe & Aradhana, 2008) KPO Specialty Area
Nation
Content Development
India and the Philippines
Financial Services
India and China
Healthcare Processing
Russia and India
IT Research and Development
India, China, and Russia
Legal Processing
New Zealand and India
The rise of worldsourcing has also brought with it new perspectives of the multinational corporation. If, for example, a multinational outsources essentially all of its functions to other nations, does that organization need to have a true global headquarters? Could such an organization instead exist as a disembodied entity in which different regions performed a given function that contributed to the continued market success of the overall whole? While such an approach sounds futuristic, one organization— China’s Lenovo—has begun to examine this model of operation (A bigger world, 2008). According to this corporate framework, there is no such thing as offshoring—just different organizational functions being housed in various nations. Management from each of these divisions then meets at different regional functional location over the course of the year in order to coordinate activities and plan business strategies. This radical approach to worldsourcing means offshoring is no longer a strategy companies employ; rather, it serves as the structure of the overall company.
EmErging TrEnds and sOciETal implicaTiOns OF iT OuTsOurcing On a more modest level, the access offshoring provides to local markets has prompted a number of organizations to re-think where certain core activities—particularly research and development (R&D)— should take place. In terms of R&D, the idea has to do with how well designed products are for a larger global marketplace. According to this perspective, R&D conducted in industrialized nations leads to the development of products and services designed for consumers in those nations. From an IT perspective, such products, however, have been created to meet the income, infrastructure, and other high-tech needs of individuals in those nations. As a result, these products and services are often poorly suited for use in developing nations that lack the infrastructure and other technical aspects needed to operate the IT product or engage in the IT-related process (Farrell, Puron, & Remes, 2005). The company associated with the IT product or service must therefore ask a key question: is it easier or more cost effective to try to revise the existing product or service into a simpler format for consumers in developing nations or develop a completely new, simpler product or service for consumers in those countries? In many cases, neither of these options is cost effective. More recently companies in emerging markets have used their own R&D to develop products, such as laptop computers, designed to meet the needs of consumers in those nations. The result has been a rapid growth in market share for those companies, such as China’s Lenovo, and the use of economies of scale to reap sizable profits (A bigger world, 2008). These developments have prompted a number of companies to consider re-locating R&D activities to developing nations. The idea is that offshoring R&D to such nations will result in products or services that would be basic, and designed for success in these regions. Thus, the related company could tap those markets. At the same time, the relatively
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basic nature of the resulting product or service would be easier to upgrade or revise to address the needs of consumers in industrialized nations. (In sum, it’s cheaper and easier to make a simple product more complex than to try to simplify an inherently complex item.) This reasoning, in combination with the rise of successful R&D activities in developing nations has prompted a number of organizations to consider outsourcing R&D to a number of locations. (At present, India, China, and Russia appear to be the hot locations for such R&D outsourcing in IT (Sathe & Aradhana, 2008).) As noted earlier, effective management is essential to successful outsourcing, particularly international IT outsourcing. As worldsourcing gains in popularity, as more organizations become globally distributed, and as a new range of strategically important (if not core) IT functions is sent overseas, the need for effective managers becomes even greater. The problem is that many of the nations that have become centers for outsourcing activities lack formal programs in management education or have only fledgling programs in that area. As a result, the supply of trained managers in many nations might not be able to keep up with the growing demands created by increased offshoring. One solution to this problem is the expansion of online programs in management education. At present, several institutions provide online instruction to internationally dispersed students. For example, Deakin University in Australia offers a range of Web-based classes and degree programs to students located throughout Asia (Offsite Learning Part I, 2002). Similarly, the Open University of Hong Kong, the Philippines-based Systems Technology Institute (STI), and the Singapore-based Informatics Group’s Center for Open Learning all provide online courses to a growing international student base (Offsite Learning Part I, 2002). At the same time, much of the earlier skepticism about online education has begun to disappear as more companies focus on the skills a student can demonstrate vs. the institution where those skills were acquired (Offsite Learning Pt. II, 2002; Online Degrees Gain Acceptance, 2005). Within this new educational context, business—particularly business management—instruction has become a prominent area. The reason for such importance is capable online programs are able to deliver effective business and management instruction to workers in nations that have either limited or no formal instruction programs these fields (The MBA World Gets Smaller, 2001). These online programs also offer the added benefit of acculturation. That is, they actually prepare students for operating in the decentralized, distributed, and online environments at the center of IT outsourcing practices. Additionally, these programs provide students with initial exposure to working with international colleagues via online media. Such aspects have prompted a number of employers to recognize the advantages or online learning environments in relation to business education (Chassie, 2002; Offsite Learning Pt. I, 2002; Offsite Learning Part II, 2002). Thus, online instruction and the growth of international online programs—particularly in management education—could be driven by and help to address many of the demands created by outsourcing. Managers, however, are not the only trained workers in short supply. By many accounts, the number of available and qualified IT workers in several nations is not enough to keep up with the growing demands created by offshoring (Ni & Bretschneider, 2007; Shao & David, 2007; Yeo, 2006). For example, a number of US companies continually claim there is a lack of trained IT workers in the US. These organizations also cite this shortage as the reason for which they continually search for overseas vendors to perform IT functions (Herbst, 2007). In fact, the high demand for IT offshoring workers has led to a market crunch in many overseas IT hubs (Yapp, 2007; Yeo, 2006). This lack of trained IT workers has led to a variety of developments that will surely affect future practices in offshoring. To being, more IT offshoring vendors are beginning to emerge in nations such as Malaysia, Vietnam, and Sri Lanka in order to meet this demand (Augria, 2008; Birks et al., 2007; Ho,
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2007; Mitchell, 2004). The result has led to a boom in the IT offshoring industry in those nations. The growing demand for IT workers has also caused the salaries of employees in offshoring hotspots like India to soar (Hamm, 2008; King, 2008). As a result, the cost savings associated to offshoring IT work to India is shrinking, and India itself has begun to offshore IT and other service activities to nations where such work can be performed more cheaply (Yapp, 2007). These secondary outsourcing nations include Mexico, Ecuador, and Colombia (King, 2008). And as supply and demand continue to create pressures in offshoring, organizations might see the same online educational models used to train managers used to train IT workers as well. Conversely, in a number of industrialized nations, growing concerns over jobs lost to international outsourcing and prospective security threats have lead to a backlash against offshoring. In some cases, this backlash has taken the form of legislation designed to prevent jobs in certain areas from being offshored (Ni & Bretschneider, 2007; Shao & David, 2007). In 2002, for example, New Jersey state senator Shirley Turner introduced a bill that would keep state contracts for call center services in the US if possible (McLaughlin, 2003). In other cases, offshoring-related concerns have led a number of individuals to question the claims of a shortage of IT workers in nations such as the US. These instances have prompted numerous individuals and agencies to look into these practices and the claims of those organizations seeking to offshore IT and other kinds of technical work. The result is a kind of prospective political instability where outsourcing vendors might not be sure if they can or will be able to work with clients in the future. Such instability, in turn, could prompt organizations interested in de-centralizing their operations to actually avoid creating offices in certain regions.
cOncluding ThOughTs On iT OuTsOurcing From an organizational perspective, the decision to outsource IT-related activities is no small matter. It requires a good understanding of what the organization’s core business is, what strategies the organization uses to achieve competitive advantage in relation to that core, and what benefits IT outsourcing would offer in terms of leveraging that advantage. Effective IT outsourcing can lead to organizational success and better access to the growing global marketplace. Poorly planned and poorly executed IT outsourcing approaches, however, can result in the loss of valuable IP, a decline in market share, and even the destabilization of a business’s core activities. Thus, the more an organization knows about IT outsourcing-related variables affecting IT—basic practices, common approaches, managerial aspects, organizational structures, and potential risks—the better prepared that organization can be to make decisions on if, when, and how to engage in outsourcing activities. This introduction has provided an overview of the general areas and topics related to IT outsourcing practices. The other entries in this collection build upon and expand these ideas in a manner that provides focused insights on outsourcing practices and perspectives. These entries also present new perspectives on and approaches to IT outsourcing practices. While IT outsourcing decisions are often made on a case-by-case basis, these entries offer readers s range of ideas and approaches that can help clarify the conditions of a particular situation. By using the entries in this collection as a resource for outsourcing-related research, organizations can improve their understanding of the factors involved in IT outsourcing and develop business strategies and procedures that successfully address these aspects. In sum, effective outsourcing comes down to one simple concept—information is power, and the readings contained in this collection constitute a mechanism for achieving such empowerment.
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rEFErEncEs 404 tonnes of paper. (2004). The Economist. Retrieved Nov. 10, 2008, from http://www.economist.com/ finance/displaystory.cfm?story_id=E1_PVDPJPT A bigger world. (2008, Sept. 18). The Economist. Retrieved Oct. 10, 2008, from http://www.economist. com/specialreports/displaystory.cfm?story_id=12080751 Ameilo, W. J. (2008). Beyond outsourcing to worldsourcing. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/technology/content/may2008/tc20080529_101827.htm Ang, S. & Inkpen, A. C. (2008). Cultural intelligence and offshore outsourcing success: A framework of firm-level intercultural capability. Decision Science, 39, 337-358. Application outsourcing. (2007). Bitpipe.com. Retrieved Nov. 10, 2008, from http://www.bitpipe.com/ tlist/Application-Outsourcing.html Augria. (2008). IT outsourcing trends. USRCCNE. Retrieved Nov. 10, 2008, from http://www.usrccne. org/news2.phtml?m=424 Bahli, B. & Rivard, S. (2003). The information technology outsourcing risks: A transaction cost and agency theory-based perspective. Journal of Information Technology, 18, 211-221. Balfour, F. (2006). Vietnam’s growing role in outsourcing. BusinessWeek. Retrieved Oct. 12, 2008, from http://www.businessweek.com/technology/content/dec2006/tc20061211_099877.htm Barthelemy, J. (2003). The seven deadly sins of outsourcing. Academy of Management Executive, 17, 87-98. Beizer, B. (1990). Software systems techniques. New York: Van Nostrand Reinhold Company. Birks, et al. (2007). Successful IT outsourcing engagement: Lessons from Malaysia. The Electronic Journal of Information Systems in Developing Countries, 30. Retrieved Nov. 10, 2008, from http://www. ejisdc.org/ojs2/index.php/ejisdc/article/viewFile/391/206 Boguslauskas, V. & Kvedaraviciene, G. (2008). Strategic outsourcing plan and the structure of outsourcing process. Engineering Economics, 58, 60-66. BPO- business process outsourcing. (2008). Sourcingmag.com. Retrieved Oct. 20, 2008, from http:// www.sourcingmag.com/content/what_is_bpo.asp Byrnes, N. (2005). Green eyeshades never looked so sexy. BusinessWeek. Retrieved Oct. 8, 2008, from http://www.businessweek.com/magazine/content/05_02/b3915041_mz011.htm Chan, I. (2007). Asia’s outsourcing biz set to double. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/mar2007/gb20070328_802340.htm Chandrasekar, P. R. (2004/05). Tips for outsourcing. IEEE Engineering Management, 24. Chassie, K. (2002, August/September). The allure of e-learning. IEEE Potentials, 33-35. Cherry, S. & Robillard, P. N. (2004). Communication problems in global software development: Spotlight on a new field of investigation. In Proceedings of the International Workshop on Global Software Development. International Conference on Software Engineering. Edinburgh, Scotland, 48-52.
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Duarte, G. M., Sackett, P., & Evans, S. (2004 Aug./Sept.). One style does not fit all. IEEE Manufacturing Engineer, 44-48. Duarte, G. M., Sackett, P., & Evans, S. (2004/05). Step by step: Breaking outsourcing down into manageable phases. IEEE Engineering Management, 28-30. Farrell, D., Puron, A., & Remes, J. K. (2005). Beyond cheap labor. Lessons for developing economies. McKinsey Quarterly. Retrieved Nov. 6, 2008, from http://www.mckinseyquarterly.com/Beyond_cheap_labor_Lessons_for_developing_economies_1545 From Russia with technology? (2006). BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/magazine/content/06_05/b3969420.htm Ferguson, T. (2006). Eastern Europe outsourcing to triple. BusinessWeek. Retrieved Sept. 10, 2008, from http://businessweek.mobi/detail.jsp?key=4200&rc=bs Gefen, D. & Carmel, E. (2008). Is the world really flat? A look at offshoring at an online programming marketplace. MIS Quarterly, 32, 367-384. Goolsby, K. (2001a). How to get ready for HIPAA: Outsourcing for privacy and security. Outsourcing Center. Retrieved Oct. 10, 2008, from http://www.outsourcing-journal.com/apr2001-headlines.html Goolsby, K. (2001b). Healthcare’s biggest challenge. Outsourcing Center. Retrieved Oct. 12, 2008, from http://www.outsourcing-journal.com/apr2001-aspfocus1.html Gupta, A. et al. (2008). Evolving relationships between law, offshoring of professional services, intellectual property, and international organizations. Information Resource Management Journal, 21, 103-126. Hagel, J. III. (2004). Offshoring goes on the offensive. The McKinsey Quarterly. Retrieved Oct. 20, 2008, from http://www.mckinseyquarterly.com/Operations/Outsourcing/Offshoring_goes_on_the_offensive_1406 Hamm, S. (2008). Outsourcing the offshore operations. BusinessWeek. Retrieved Nov. 5, 2008, from http://www.businessweek.com/technology/content/jul2008/tc20080715_289971.htm Heath, N. (2008). Global outsourcing to grow 8% in 2008. BusinessWeek. Retrieved Nov. 10, 2008, from http://www.businessweek.com/globalbiz/content/jan2008/gb20080110_489999.htm Herbst, M. (2007). Outsourcing: How to skirt the law. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070621_912042.htm Ho, V. (2007). Asia IT managers among the lowest paid. BusinessWeek. Retrieved Nov. 3, 2008, from http://www.businessweek.com/globalbiz/content/oct2007/gb20071023_093538.htm Jahns, C., E. Hartmann, & L. Bals. (2006). Offshoring: Dimensions and diffusion of a new business concept. Journal of Purchasing & Supply Management, 12, 218-231. Jain, N. K., S. K. Kundu, & F. A. Niederman. (2008). Offshoring proprietary information technology services: A firm and country level analysis. Management International Review, 48, 447-461. Keong, L. M. (2007). Outsourcing rivalry doesn’t phase Malaysia. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/dec2007/gb20071214_820595.htm
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King, R. (2008). The new economics of outsourcing. BusinessWeek. Retrieved Nov. 3, 2008, from http:// www.businessweek.com/technology/content/apr2008/tc2008043_531737_page_2.htm Kogut, B. & Singh, H. (1988). The effects of national culture on the choice of entry mode. Journal of International Business Studies, 19, 411-432. Lakshman, N. (2008). Copyediting? Ship the work out to India. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/jul2008/gb2008078_678274.htm Lakshman, N. (2008). Test time for India’s drugmakers. BusinessWeek. Retrieved Oct. 10, 2008, from http://www.businessweek.com/globalbiz/content/mar2008/gb20080312_325398.htm Lazarus, D. (2004). Looking offshore: Outsourced UCSF notes highlight privacy risk. SF Gate. Retrieved Nov 10, 2008, from http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2004/03/28/MNGFS3080R264. DTL Lesk, M., Stytz, M. R., & Trope, R. L. (2005, March/April). Averting security missteps in outsourcing. IEEE Security & Privacy, 70-73. Levina, N. & Vaast, E. (2008). Innovating or doing as told? Status differences and overlapping boundaries in offshore collaboration. MIS Quarterly, 32, 307-332. Lim, J. (2006). Software piracy still a scourge in Asia. BusinessWeek. Retrieved Nov. 15, 2008, from http://www.businessweek.com/globalbiz/content/may2006/gb20060524_858766.htm The MBA world gets smaller. (2001, November 12). The Economist. Retrieved September 10, 2005, from http://www.economist.com/business/globalexecutive/displaystory.cfm?story_id=860807 McCue, A. (2006). Culture clashes harm offshoring. BusinessWeek. Retrieved Sept. 10, 2008, from http:// www.businessweek.com/globalbiz/content/jul2006/gb20060717_515205.htm McLaughlin, L. (2003 May/June). An eye on India: Outsourcing debate continues. IEEE Software, 114-117. Meyer, D. (2008). Nokia: Linux needs to learn business. BusinessWeek. Retrieved Oct. 10, 2008, from http://www.businessweek.com/globalbiz/content/jun2008/gb20080612_288518.htm Mitchell, A. (2004). Offshore labor markets impact IT outsourcing. TechNewsWorld. Retrieved Oct. 10, 2008, from http://www.technewsworld.com/story/36949.html?wlc=1226954419 Michael, J. B. et al. (2005, July/Aug.). The role of policy in balancing outsourcing and homeland security. IT Pro, 19-23. Murrain, M. & Cohen, D. (2003). Infrastructure outsourcing. techsoup. Retrieved Oct. 10, 2008, from http://www.techsoup.org/learningcenter/techplan/archives/page9765.cfm Namasivayam, S. (2004, Jan. Feb.). Profiting from business process outsourcing. IT Pro, 12-18. Ni, A. Y. & Bretschneider, S. (2007, May/June). The decision to contract out: A study of contracting for e-government services in state governments. Public Administration Review, 531-544. Offsite learning: On target? Pt. I. (2002, October 7). The Economist. Retrieved December 5,
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2005, from http://www.economist.com/displaystory.cfm?story_id=1377339 Offsite learning: On target? Pt. II. (2002, October 7). The Economist. Retrieved December 5, 2005, from http://www.economist.com/displaystory.cfm?story_id=1377324 Online degrees gain acceptance. (2005, October 24). eMarketer.com. Retrieved October 24, 2005, from http://www.emarketer.com/Article.aspx?1003647&printerFriendly=yes Outsourcing. (2008). The Economist. Retrieved Nov. 12, 2008, from http://www.economist.com/business/management/displaystory.cfm?story_id=12323287 Platz, L. A., & Temponi, C. (2007). Defining the most desirable outsourcing contract between customer and vendor. Management Decision, 45, 1656-1666. Power, M. J., Desouza, K. C., & Bonifazi, C. (2005, July/Aug.). Developing superior outsourcing programs. IT Pro, 32-38. Qu, Z. & M. Brocklehurst. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of Information Technology, 18, 53-67. Rajabzadeh, A., Rostamy, A. A. A., & Hosseini, A. (2006). Designing a generic model for outsourcing process in public sector: Evidence of Iran. Management Decision, 46, 521-538. Raisinghani, M. R. et al. (2008). Information technology systems offshore outsourcing: Key risks and success factors. Journal of Information Technology Research, 1, 72-92. Reuters. (2004). France outsources, Senegal calls. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/print/0,1294,64262,00.html Rodgers, T.J. (2005). The truth about outsourcing. IEEE Design & Test of Computers, 12-13. Rosenthal, B. E. (2005). New outsourcing risks in 2005 and how to mitigate them. Outsourcing Center. Retrieved Oct. 12, 2008, from http://www.outsourcing-journal.com/jan2005-risks.html St.Amant, K. (2008a). The privacy problems related to international outsourcing: A perspective for technical communicators. In B. Thatcher & C. Evia (Eds.), Outsourcing Technical Communication: Issues, Policies, and Practices (pp. 165-184). Amityville, NY: Baywood Publishing Company. St.Amant, K. (2008b). Virtual office communication protocols: A system for managing international virtual teams. In G. F. Hayhoe & H. M. Grady (Eds.), Connecting People with Technology: Issues in Professional Communication (pp. 219-228). Amityville, NY: Baywood Publishing Company. Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM, 50, 69-75. Sathe, D. & Aradhana. (2008). Knowledge process outsourcing: The big game. Sourcingmag.com. Retrieved Oct. 20, 2008, from http://www.sourcingmag.com/content/c060503a.asp Shao, B. M. & David, J. S. (2007). The impact of offshore outsourcing on IT workers in develop countries. Communications of the ACM, 50, 89-94.
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Solli-Saether, H. & Gottschalk, P. (2008). Maturity in IT outsourcing relationships: An exploratory study of client companies. Industrial Management & Data Systems, 108, 635-649. UNESCO. (2004). Higher education in a globalized society. Paris: United Nations Educational, Scientific and Cultural Organization. Wadhwa, V. (2007). Why small tech companies aren’t outsourcing. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/smallbiz/content/jul2007/sb20070720_787886.htm Wadhwa, V. (2006). The real problem with outsourcing. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/smallbiz/content/nov2006/sb20061107_874214.htm Weimer, G. & Seuring, S. (2008). Information needs in the outsourcing lifecycle. Industrial Management & Data Systems, 108, 107-121. Yapp, E. (2007). India’s outsourcing status under threat. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/jul2007/gb20070716_925725.htm Yeo, V. (2006). India drives to upgrade IT outsourcing workforce. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/dec2006/gb20061204_840686.htm
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About the Editor
Kirk St.Amant is an associate professor of technical and professional communication at East Carolina University where he teaches courses in professional communication in international contexts. He has worked on international projects for companies such as Medtronic, VERITAS Software, the Braun Corporation, and Unisys, and for the non-profit organizations the Humanitarian Demining Information Center (HDIC) and the Consortium for the Enhancement of Ukrainian Management Education (CEUME). Kirk serves on the editorial board for the journal Technical Communication and is the Associate Editor for Globalization and Outsourcing for the IEEE Transactions on Professional Communication—the journal of the IEEE Professional Communication Society.
Section I
Fundamental Concepts and Theories This section serves as the foundation for this exhaustive reference tool by addressing crucial theories essential to the understanding of IT outsourcing. Chapters found within these pages provide an excellent framework in which to position outsourcing within the field of information science and technology. Individual contributions provide overviews of why, when, and what to outsource, business determinants of offshoring intensity, and global IT outsourcing, while also exploring critical stumbling blocks of this field. Within this introductory section, the reader can learn and choose from a compendium of expert research on the elemental theories underscoring the research and application of outsourcing.
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Chapter 1.1
Why, When, and What to Outsource Donald A. Carpenter Mesa State College, USA Vijay K. Agrawal University of Nebraska - Kearney, USA
absTracT
inTrOducTiOn
This chapter presents an overview of the outsourcing phenomenon, focusing on the question of why, when, and what to outsource. It provides an extensive set of guidelines for a business student to understand the nature of outsourcing. Drawing extensively on recent scholarly literature, the chapter presents a wide range of concepts. There are many causes that might lead a company to a decision to outsource. Similarly, there are many factors that contribute to an environment that is conducive to outsourcing. The question of what to outsource is answered by examining core competencies and critical success factors. The chapter also presents trends in outsourcing in specific countries and industries to help the reader understand what is possible.
Today’s business environmental, organizational, and technological factors require businesses to operate efficiently and effectively in order to be competitive. Toward those goals, managers employ many strategies to improve productivity, including standardization, automation, and business process reengineering. Additionally, they restructure the business organizations to be lean and flat so that they can become flexible in responding quickly to changes in environment and customers’ needs. Outsourcing is another valuable strategy managers use to achieve the above goals. Whenever a business procures resources purely from an external source to accomplish business objectives, it engages in outsourcing (Gartner, 1997).
Hence, the term “outsourcing” is one that can be used to describe any external up-line function in a supply chain. When a manufacturer acquires raw materials from a supplier, it engages in outsourcing. When a wholesale company contracts with an external delivery firm, it engages in outsourcing. When a firm hires a computer consultant, it engages in outsourcing. Outsourcing has taken on a new emphasis in today’s business environment. In the interest of either efficiency or effectiveness, a modern organization often contracts out entire business functions to other companies that are specialists in their specific fields. A firm might turn over to external suppliers its human resource functions, its information technology functions, its shipping functions, or any other functions for which an external supplier is more efficient and effective than is the host company. While such outsourcing is not a new strategy — businesses have used outside consultants for as long as there have been businesses — it has gained more attention and usage in recent years. Outsourcing has also received unprecedented attention from politicians and the press in recent elections. Some candidates and journalists have painted outsourcing as an evil to be avoided as economically undesirable to a country’s economy. Those reports often confuse outsourcing with one or two of its logical extensions, namely nearshore outsourcing and off-shore outsourcing, also known as off-shoring. A distinction between those two is that the former typically refers to outsourcing to a country that is on the country of origin’s same continent, for example, a U.S. company outsourcing to one in Mexico; the latter refers to outsourcing to a country across an ocean, for example, a U.S. company outsourcing to a supplier in India. Collectively, both are known as off-shore outsourcing and off-shoring and will be referred to in this chapter as such. Business managers see off-shore outsourcing to lower-wage countries such as China, India, Ireland, and the Philippines in the same light as
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reducing labor cost by automation or technology. Conversely, politicians, the press, and a large proportion of the general population view off-shoring as a threat to local economies. Regardless of one’s perspective, in the absence of government regulation to the contrary, outsourcing and off-shoring, in particular, will grow steadily (Robinson & Kalakota, 2005, p. 16)
hisTOrical pErspEcTivE The predominant supply chain model for several decades was vertically integrated. Each member of a supply chain was considered to be part of the same industry. Automobile manufacturers purchased parts from automotive parts manufacturers, and then sold completed cars to automobile dealers. All the ancillary activities that support the supply chain directly or indirectly were included within the automobile manufacturer. Steadily, products became complex and the scale of operations increased and management of entire operations within one corporation became less feasible. This resulted in the increasingly popular use of outsourcing and has resulted in vertical disintegration of corporations and supply chains. As travel and communication became easier in the 1970s and 1980s, as trade restrictions increased, and as the gap in wages between developed and developing countries increased, outsourcing began to move off-shore. Arguably, the advanced industrialized economies of the United States, Japan, and Europe are the principal candidates for origination of outsourcing transactions (Koveos & Tang, 2004, p. 52). For decades, U.S. industry has outsourced blue-collar jobs to the lower wage countries. That trend now includes white-collar jobs as well. Economic development in Japan and Europe in the past couple decades has generated an environment that has fostered outsourcing practices. In addition, some developed Asian economies have both the experience and the location advantage in outsourcing
Why, When, and What to Outsource
to China and India. Taiwan and Korea are such examples. In 2002, for instance, India had 90% of U.S. organizations’ information technology (IT) off-shore business. However, many Fortune 500 companies that have outsourced to India are looking to diversify the risk associated with dependence on one country (Gupta, 2002). China looms as India’s biggest competitor, although some consider the two as noncomparable at this time. Other countries considered to be attractive as off-shore outsourcing sites include Malaysia, the Czech Republic, Singapore, the Philippines, Brazil, Canada, Chile, Poland, Hungary (Kearney, 2004), Russia, and Vietnam (Computerworld, 2004). In the age of the Internet and World Wide Web, a company’s location hardly matters. In the past, the educated and skilled labor from low-cost countries immigrated to the U.S. During the last decade, faster communications and improved information allow companies to easily send information oriented work to any location on the globe. Ultimately, countries with low-paid but well-educated workers will benefit greatly. However, the country of origin of the outsourcing also benefits. McKinsey Global Institute estimates that every dollar in spending that is diverted offshore creates $1.45-$1.47 of value, of which the U.S. captures $1.12-$1.14 or 78% of the value (Arora & Arora, 2004, p. 23).
why dO Firms OuTsOurcE? Companies outsource functions for reasons that are organizationally driven, improvement driven, financially driven, revenue driven, or cost driven (Outsourcing Index, 2003). Moreover, outsourcing can be viewed as a component of corporate and industry international expansion and restructuring. A recent McKinsey Global Institute Report (Farrell, 2003) identifies five horizons of the global industry value chain:
• •
•
•
•
Market entry: Entering a country for purposes of market expansion. Product specialization: Specialization takes place in different locations. Each location may engage in final goods trade with each other. Value chain disaggregation: Product components are manufactured in a certain location and assembled elsewhere. Value chain reengineering: Reengineering processes to capture additional advantages from production cost differentials. New market creation: New market segments are penetrated as a matter of capturing the full value of the company’s global activities. According to another McKinsey study:
effective outsourcing implies identifying and managing the ‘natural owner’ of every activity in he value chain. Off-shore outsourcing arises from the basic reality of the global environment: any company, in any country, may be the natural owner! It can then lead to a drastic restructuring, including ‘unbundling,’of the companies affected. Indeed, as total interaction costs among companies and industries are changing, companies around the world are reorganizing themselves by providing the answer to their question: what business are we in? (Hagel & Singer, 2004, p.1) A firm can use an outsourcing to supplement its core competencies, by contracting with outside providers for activities in which the firm has no unique capabilities. This “strategic outsourcing” (Quinn & Hilmer, 1995, p.1) can generate several benefits: •
Extracting the maximum benefits from internal activities, since they represent what the firm does best
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Why, When, and What to Outsource
•
• •
Maximizing their competitiveness and protecting or even expanding their market share Effectively utilizing suppliers capabilities Decreasing risks, shortening cycle times and fulfilling customer needs
A survey of 500 human resources executives (Arora & Arora, 2004, pp. 19-20) found that: • •
• • •
92% of the firms that had moved jobs overseas did so to cut costs. An average of 13% of jobs at each company are already located off-shore and an additional 12% could be relocated within the next three years. 45% of the 500 firms have overseas operations. 71% of the remaining companies planned to move some jobs abroad by 2005. Of the firms who are currently using offshore labor, 29% began doing so in the years 1995-1999, while 43% began in 20002003.
whEn TO OuTsOurcE: FacTOrs ThaT suppOrT OuTsOurcing Characteristics of today’s outsourcing environment are many and varied. The strategic change to outsourcing is highly evident in the software industry. Frequent changes to software especially often result in an organization turning to outsourcing as a solution. Reasons studied for this (Agrawal, Haleem & Sushil, 2001; Agrawal, 2005a) can be generalized to all outsourcing, and include: • •
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The turbulent market will need corporations to be customer focused. There are pressures on corporations to continuously develop new product at reduced cost.
• •
Extensive customization is enabled by IT through mass customization. The market need can be fulfilled by flexible and adaptable organizational structure which is possible with IT-enabled processes.
Previously identified factors include timecompression, short product life cycles, strategic discontinuity, increase in knowledge intensity, and customer-focused approach (El Sawy, Malhotra, & Young, 1999). These changes and others will be discussed in subsequent paragraphs.
customer Focus In a traditional sellers’ market, products and services provided by producers and suppliers are consumed. Today, most products and services exist in a buyers market, in which there is extreme competition with customers as a focal point. Moreover, customers have become much more sophisticated and knowledgeable, especially with the huge amount of product and service information available to them on the World Wide Web (Turban et al., 2006, p. 14). In many instances, customers can customize products or services and even name their own price. This provides customers with a huge amount of power (Pitt et. al., 2002). Companies need to be able to respond to that power. A company with no experience in doing so might be wise to turn to outsourcing as a solution to create and operate their customer relationship management (CRM) functions and related information systems (Greenberg, 2002).
shrinkage in product/systems life cycle Intense competition tends to decreases in the length of product or service life cycles. As new products or services are brought to market, the power of the modern consumer comes into play with demands for customization. Such continual customization is labor-intensive. Outsourcing,
Why, When, and What to Outsource
especially off-shoring provides a solution to contain those costs. This impact is particularly evident in the software industry. In a survey of 118 senior financial executives, 73% of the respondents expected to have shorter replacement cycles for software over the next five years (Hoffman, 2005a). Shrinkage in systems life cycle is unfavorable for development of proprietary software and leads to extensive usage of off-the-shelf enterprise-wide software solutions (Agrawal et al., 2001; Agrawal, 2005a).
global Economy Many factors have led to the development of a global economy in which the boundaries of national and regional economic systems have become blurred. A reasonably more stabile world political environment has fostered trade between former Cold War opponents, especially those, like Russia and China that have moved into market oriented economic systems (Naisbitt, 1994). Regional agreements such as the North American Free Trade Agreement (United States, Canada, and Mexico) and the creation of a unified European market with a single currency, the euro, have contributed to increased world trade. Further reduction of trade barriers has allowed production and services to flow more freely around the globe (Turban et al., 2006, pp. 13-14). The existence of a global economy makes it much easier for companies to shift resources from firm to firm internationally. It especially allows them to take advantage of the difference in labor costs. Labor that costs, say, $25 per hour in the U.S. might only cost $1 per hour in many developing countries. Immense advances in telecommunication networks, the Internet and World Wide Web have made the global economy possible (Clinton & Gore, 1997; Kanter, 1995; Negroponte, 1995). The transition to an off-shore economy represents a new form of Internet-enabled globalization, the impact of which will dwarf prior globalization efforts (Robinson & Kalakota, 2005, p. 10).
competition and real-Time Operations Strong competition is one of the hallmarks of today’s business environment. The advent of the global economy logically has led to global competition. Rapid communications systems and improved transportation systems foster such international competition. When governments become involved to modify the competitive arena, challenges to businesses increase. Such government involvement might take the form of subsidies, tax policies, import/export regulations, and other incentives (Turban et al., 2006, p. 14). For companies not accustomed to dealing in such an intensely competitive environment, outsourcing of business functions that deal directly with competition or government regulations can provide the solution. As the world economy moves ever faster, decisions must be made and actions must be taken more quickly in order for firms to remain competitive (Gates, 1999; Davis, 2001; Huber, 2004). Some companies, for example, Cisco Systems, have chosen to respond by closing their accounting books in one day, rather than the ten days previously required (McCleanahen, 2002). Developing systems to handle that might be beyond the capacity of a firm and that firm might turn to outsourcing to fill that need.
changing workforce and Job loss The workforce in both developed and developing countries is changing rapidly and becoming more diversified with more women, single parents, minorities, persons with disabilities, and employees who have deferred retirement in the workforce than ever before work in all types of positions (Turban, et al., 2006, p. 4). Additionally more workers are becoming knowledge workers (Drucker, 2002) and telecommuters. As much as half the U.S. workforce will spend two or more days per week working away from the office by
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the year 2010 (Cole et al., 2003). Those factors, plus the aging population and declining birth rates in developed countries will foster off-shoring (Robinson & Kalakota, 2006, pp. 12-13). World demographics are changing. Developed countries have older average populations than developing countries. According to Business Week, 53% of India’s population is considered to be the MTV generation (under the age of 25), vs. 45% in China. By 2020, 47% of Indians are going to be between 15 and 59 years old, compared with 35% now (Kriplani & Engardio, 2003). A recent survey predicts that an aging U.S. population and slower population growth will lead to a shortfall in the domestic labor supply of 5.6 million jobs by 2010. Of these, immigrant workers will fill nearly 3.2 million jobs and another 1.3 million jobs will be filled by off-shoring (Arora & Arora, 2004, p. 23). Another survey indicates that 3,322,138 U.S. jobs will move off-shore by 2015, with the following breakdown by job category: management, 288,281; business, 348,028; computer, 472,632; architecture, 184,347; life sciences, 36,770; legal, 76,642; art/design, 29,564; sales, 226,564; and office, 1,659,310 (Forrester, 2002). In the IT field, that could translate to as many as 35% to 45% of U.S. and Canadian IT workers being replaced by contractors, consultants, off-shore technicians and part-time workers (Hoffman, 2003). While the most alarming predictions point to the potential negative impacts of off-shoring on the U.S. economy and workforce, as well as those of other developed nations, there is evidence to suggest that off-shoring can lead to domestic job growth rather than reduction (Nakatsu & Iacovou, 2004). The logic supposes that U.S. companies that use off-shoring will keep their product and service prices lower, thereby sustaining competitiveness and maintaining or even increasing market share. As a result, U.S. companies will be able to expand their labor pools. Furthermore, jobs lost by offshoring in one industry are offset by growth in other industries (Times of India, 2004). The sav-
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ing created by outsourcing to India alone, could create $30 billion per year in new investments for U.S. companies by fostering 12,000 new strategic projects at an average of $2.5 million per year per project (Press Trust of India, 2004).
Technological innovations and Obsolescence Technology has played a critical role in creating an environment for global economy that fosters trans-border outsourcing, especially in the area of Web-based information technology (Carr, 2001; Evans & Motiwalla & Hashimi, 2003; Wurster, 2000). Technology also provides for other key factors in the outsourcing arena, such as creating and supporting substitutes for products and alternative service options, as well as providing products and services of a high quality (Turban et al., 2006, p. 15). Another contribution of technology stems from its tendency to become obsolete quite rapidly. Such obsolescence, whether planned or not, thereby spawns competition to develop replacements, whether it is in the IT field itself or in medicine, biotechnology or any other technologydependent field. Other impacts of technology on the outsourcing game exist. Technology allows businesses to be more competitive by allowing them to provide their products and services on a 24/7/365 basis. Higher degrees of automation reduce the dependency on specialists, possibly allowing for easier outsourcing. Conversely, the lack of need for specialists might eliminate the need for outsourcing (Agrawal et al., 2001; Agrawal & Haleem, 2003).
societal, political, and Ethical Factors The increase in outsourcing and off-shoring, in particular, in turn gives rise to many societal, political and ethical issues. The interface between businesses and consumers becomes more trans-
Why, When, and What to Outsource
parent as consumers become more powerful and businesses focus on customer relationship management. That transparency results in a tendency for consumers to place demands on businesses. A case in point is the New Jersey state social services department which hired a company named eFund to provide electronics processing of food stamp and welfare benefits. In 2002, eFund moved its customer call center to Mumbai, India. The resulting public outcry that the move was inconsistent with the agency’s intent to get people off welfare and into jobs caused eFund to move the call center back to the U.S. at an additional cost of $900,000 per year. The irony was that eFund’s U.S. call center was in Wisconsin, which did nothing to create jobs for New Jersey citizens (Hopkins, 2003). A similar situation existed in Indiana, where the public demanded the state cancel a $15 million IT contract with India’s Tata Consultancy Services (Robinson & Kalakota, 2005, p. 15). Despite such consumer involvement in business affairs, off-shoring is an unstoppable megatrend. That will not stop politicians, however, to shape off-shore outsourcing via regulations to appease their constituents. However, government regulations cost money and make it more difficult to compete with countries that lack such regulations (Turban et al., 2006, p. 16). In general, deregulation fosters competition and lower prices to consumers. That concept is sometimes lost on the general public and politicians in today’s fierce political environment. Several national elements that encourage or discourage outsourcing have been identified (Koveos & Tang, 2004). They are: • •
Countries’ attitudes toward international business: Openness breeds openness! Economic conditions: Certain forms of outsourcing generate a great deal of resistance at home, especially when the domestic economy is struggling. Wage rate and productivity differentials between the home
•
•
•
•
•
•
•
•
•
•
country and the provider country can also be a significant factor in the decision. Labor market: Regulations that make it harder to shift operations obviously add to the cost of engaging in an outsourcing activity off-shore. Labor inflexibility: Companies operating in many European countries, including France, Germany, and Scandinavian region find it very costly to lay off workers and restructure effectively. The tax environment: Higher taxes for domestic companies and for providers may serve as an obstacle. Government intervention: The freer the country is from government interference, the greater the ability to engage in off-shore transactions. On the other hand, incentives designed to keep business at home may discourage off-shore activity. Culture, including language: Similarities in the cultural attributes of the two countries can facilitate transactions. Quality of labor force: The greater the level of education and training of a country’s workforce, the lower the costs of adjustment. Technological sophistication: The higher technological sophistication of the home economy, the greater opportunity to benefit significantly from outsourcing activities. Infrastructure: Outsourcingt companies tend to materialize within the countries that have a supporting national infrastructure. The information and communications technology environment: Adequate technologies are critical to support outsourcing of services related to or supported by IT. The legal system, including protection of property and intellectual rights: Lack of a well formulated legal system causes outsourcers to look elsewhere, especially if their intellectual property is not protected.
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Why, When, and What to Outsource
•
•
Local market characteristics, such as competition and suppliers: A competitive market promotes outsourcing for cost advantages. Experience with international market: A history of success encourages future outsourcing endeavors.
Unfortunately, mention must also be made about the impact of terrorist attacks. Since September 11, 2001, there is ever increasing attention paid by organizations to protect themselves against terrorism. Geographically diversifying is one solution and off-shore outsourcing plays a large role in that. Another countermeasure is intensified security systems, and even intelligent systems that identify possible behavioral patterns to prevent cyber-terrorist attacks. The host company might not have the in-house expertise to handle such systems, thereby creating more opportunity for outsourcing (Turban et al., 2006, p. 16). Other outsourcing issues relate to culture and ethics. Just as each country has its own culture, so does each country have its own norms for ethics. The same can be said of corporations and individuals. What is culturally acceptable and ethical to one country, company, or individual might not be culturally acceptable or ethical to the next. That provides challenges on both sides of the outsourcing equation to insure culture and ethical norms of the other party are not compromised or violated.
Organization structure and corporate culture Some organizations will implement outsourcing sooner, more effectively, and more efficiently than others for a variety of internal reasons, not the least of which is a company’s self perception. Managers of some companies have a “small business” mindset and intend their firm to remain small. If a proposed new task can’t be handled in the normal scheme of the business, then there is no reason to
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implement that new task. Such companies will be content to remain with classical outsourcing of legal, accounting, janitorial, or similar functions. Other companies similarly limit themselves by a “not invented here” mentality. If we haven’t done it previously, why do we need to do it at all? On the other end of the scale are those firms that consider changes as a normal phenomenon for survival and growth. Such companies tend to promote outsourcing as a means to reduce costs (Agrawal et al., 2003). The companies who are most successful with outsourcing will have identified and understand their core competencies and critical success factors. This will be elaborated in a subsequent section of this chapter.
whEn TO OuTsOurcE: ThE risks OF OuTsOurcing Despite the purported benefits of outsourcing and the wide range of success stories that have stimulated an unprecedented growth rate, there are potential risks as well. An outsourcing project might fail because of poor selection of the vendor, mismanagement of the outsourcing contract, inferior performance by the vendor, lack of acceptance by the end consumer, or other reasons (Quinn & Hilmer, 1995). It might also be that outsourcing may have higher costs than insourcing the same function (King, 2005; Mears & Bednarz, 2005; Thibodeau, 2005a). A survey of 25 large firms with a combined $50 billion in outsourcing contracts found 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. A quarter of the companies brought outsourced functions back in-house and nearly half have failed to see the cost savings of outsourcing they had anticipated (Mears, 2005). In a time of lower revenues, outsourcing provides a tool to manage costs. However, there are other factors to consider that might cause increased costs. Disgruntled employees, ones who
Why, When, and What to Outsource
did not lose their jobs due to outsourcing, can cause problems and increase costs. When some business functions are outsourced, employees might not have an opportunity to apply as much skill variety, which can lead to lower productivity. Public perception can cause for a more negative corporate image within the community and can result in lower sales.
whaT TO dO and nOT dO TO OuTsOurcE core competencies and critical success Factors Decisions as to what and whether to outsource should be tied to an identification and understanding of an organization’s core competencies and its critical success factors (Luftman, Bullen, Liao, Nash, & Neumann, 2004, p. 320). Such an identification and understanding can be a lengthy process. However, it is the one true way to determine whether a project should be or should not be outsourced. While that recommendation was first applied to IT projects, it can be generalized to all business functions. If a task is a both a core competency and a critical success factor, it should not be considered for outsourcing. Such tasks are at the heart of the company. Success or failure of such functions is directly tied to success or failure of the company as a whole. In general, such functions are critical to an organization’s day-to-day operations, ability to competitively differentiate itself, ability to deliver value to customers and partners, and ability to innovate (Luftman et al., 2004, p. 320). Tasks that are core competencies but not critical success factors should be reassessed. Why engage in such tasks if they are not critical? Often the answer to that is “because we can.” It is typically not a good business decision to continue to engage in such tasks.
Those tasks which are not core competencies are the most likely candidates for outsourcing. The question is how to go about it. If such as task is a critical success factor, it might be wise to establish a strategic alliance; otherwise, a transaction partnership might suffice. The former is a more tightly-coupled arrangement than the latter. Strategic partnerships might even establish some form of mutual ownership or revenue sharing, whereas transaction partnerships are more typical outsourcing arrangements where a company simply contracts with a vendor to provide the service or product. There is another consideration that lies outside the core competency-critical success factor matrix. If an organization intends to bring an outsourced task back in-house at some future time, managers should be cautious. There is overwhelming evidence that certain outsourced activities cannot be reversed, particularly in the IT arena (Luftman et al., 2004, p. 323). Once the expertise has been released to the outsourcer, it is difficult — if not impossible — to regain such expertise in-house.
Outsourcing Trends and Future projections As explained above, the overall trends toward outsourcing and off-shoring in all sectors are expanding. In particular, the trend in the IT sector is growing at a phenomenal rate. However, those trends vary geographically. United States: Successful outsourcing and off-shoring by U.S. organizations from the early 1970’s to the present day is well-documented (Rishi & Saxena, 2004, p. 63). U.S. off-shoring began as a means of taking advantage of cheaper labor in a handful of Latin American and Asian countries, such as Mexico, Korea, Malaysia, and Singapore. In the late 1980s and early 1990s, those practices expanded to include many more countries, including mainland China. The success of the North American Free Trade Agreement
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Why, When, and What to Outsource
(NAFTA) in the mid-1990s greatly expanded U.S. outsourcing efforts in Mexico due to its geographically proximity. The Y2K problem in IT and need to change information systems to handle the new euro currency in the late 1990s spurred U.S. expansion into India to take advantage not only of cheaper labor but also of greater expertise. Lack of caps on temporary L-1 visas allowed for foreign workers to be trained in U.S. businesses, then return to their country of origin to establish consulting firms with their new-found expertise. By 1999, 41% of software services were provided in India rather than on-site at the client’s location, compared to only 5% in 1990 (Bajpai, Sachs, Arora & Khurana, 2004). Current estimates indicate that spending for global sourcing of computer software and services is expected to grow at a compound annual rate of almost 26%, increasing from approximately $10 billion in 2003 to $31 billion in 2008 (ITAA, 2004). Japan: In Japan, outsourcing was stimulated differently (Koveos & Tang, 2004, p. 43) and is tied more to cyclical and structural challenges in the macro and micro foundations of the Japanese economy (Vietor & Evans, 2001). That included a number of measures aimed at restructuring the Japanese economy as well as purposeful promotion of greater integration of Japanese economic and business systems with the rest of Asia and the World. Outsourcing was introduced in Japan in the 1980s by a company initially dealing with one service provider as a means of acquiring temporary help. In the 1990s, outsourcing evolved to include third party logistics (3PL) providers. Today, companies engage in strategic outsourcing policies to allow them to focus on their core competencies (WIT, 2001). A 1997 survey conducted by Japan’s Ministry of International Trade and Industry, 20.1% of outsourcing firms outsourced job training services, 19.7% outsourced information systems services, 17.4% production processes, 14% accounting services, and 13% engaged in
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R&D outsourcing. More than 70% of Japanese firms had achieved their strategic outsourcing objectives (Murphy, 2000). In Japan, the market for IT system development alone has been estimated at 6.7 trillion Yen a year (approximately $104 billion U.S.) (Rowley, 2004) with expected annual growth of 15.6% up to 2008 (Kajino, Kinoshita & Kobayashi, 2004, p. 1). Japanese companies have established relationships with providers in many countries, especially in Asia but also expanding to Europe and North America. Primarily, Japanese companies increasingly look to China (Rowley, 2004) and Russia (Outsourcing-Russia, 2004). They envision North America as a market in which they can offer their own outsourcing services (Koveos & Tang, 2004). Europe: In Europe in the 1990’s, various countries’ economies have faced challenges such as budgetary issues, slumping demand at home, lack of global competitiveness, labor market inflexibility, lower levels of innovation, and production inefficiencies. Outsourcing certainly provided means to cut costs and provide greater organization flexibility, with more than 100 major companies routinely participating, each dealing with numerous subcontractors. However, their approach is seemingly haphazard and even counterproductive rather than as focused as in Japan (Quinn & Hilmer, 1995, pp. 2-13). There are indicators that outsourcing is becoming better planned. A recent survey reports that 40% of Europe’s 500 largest companies have engaged on off-shoring (Farrell, 2003). While the continent has already achieved more in post European Union (EU) times, Europe’s economic and business environment are still plagued by preEU elements that might not be compatible with global sourcing practices, such as labor inflexibility, language differences, cultural openness, and tax laws (Pradhan, 2004). There are bright spots in Europe, such as the Spanish automobile industry, which has intensified outsourcing as it expanded substantially and
Why, When, and What to Outsource
became more export-oriented (Pallares-Barbera, 1998). Likewise, throughout the United Kingdom (UK) the general European reluctance to outsourcing is not as evident (Dash, 2001; Gray, 2003a). The International Trade Agreement (ITO) and other trade arrangements might hold promise for expanded European outsourcing as tactical and strategic mechanisms. ITO’s emphasis is on individual systems or applications rather than entire systems which fosters outsourcing (Gray, 2003b, p. 5; Outsourcing Center, 1999). Of the 58 billion euros ($76 billion) worth of major (greater than $40 million) outsourcing contracts awarded last year, Europe represented 49% of the value, while the U.S. took 44% and Asia 7%. European contracts doubled from 2002 to 2004. Germany is leading the way, accounting for 12.5% of the value of the worldwide contracts awarded in 2004, coming in at the heels of only the UK, with 20%, and the U.S. as the largest country market. Germany’s share has increased from less than 1% in just four years (Pruitt, 2005). Other Asian countries: Korea, Hong Kong, Taiwan, and other Asian countries besides Japan have developed outsourcing arrangements. For instance, Taiwan’s MiTAK-SYNNEX Group can globally deliver 98% of its orders in two days, generating about $20 million per year, due to outsourcing 70% of its back-end operations to China (Miau, 2004). Nonetheless, Asian businesses are known more as suppliers of outsourcing contracts rather than as those that place contracts with others. Specific industries and applications: Outsourcing of manufacturing has been a most logical application historically, primarily due to the labor cost savings and that such jobs only require the untrained labor pools available in developing countries. Consequently, outsourcing of production jobs perhaps is the most visible form as well. Rather than discuss manufacturing applications, the remainder of this chapter will present other less well known outsourcing applications.
Outsourcing of information technology functions is a huge marketplace (Hirschheim, Beena, & Wong, 2004). IT outsourcing began as a cost-reduction tool, but has evolved into a component of businesses’ overall corporate strategies (Linder, 2004). It has grown from simple applications to a much wider set of business functions: logistics, payroll, human resources, legal, and so forth. It has become pervasive and strategic. Outsourcing has evolved from the one vendor-one client contracts to complex multiple vendor-multiple client partnerships and alliances, with parties sharing risks, rewards, and equity positions (Gallivan & Oh, 1999). There are four growth areas in IT outsourcing. Web-based and e-business outsourcing partnerships are common and high growth areas (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). Another is the application service provider (ASP) industry, which buys, installs, and manages enterprise applications at remote data centers and hosts them for customers via a broadband connections (Kern, Lacity & Willcocks, 2002; Susarla, Barua & Whinston, 2003). A third is “back-sourcing,” where companies try to bring back in-house previously outsourced functions when contracts end (Hirschheim, 1998; Overby, 2003). The fourth is IT off-shoring (Morstead & Blount, 2003; Robinson & Kalakota, 2005) which dominates overall off-shoring, rising 890% to $1.66 billion from 2002 to 2003 (E-Business Strategies, 2004). Typical IT functions that are outsourced include: •
•
Applications development, maintenance and support, where 80% of code development is expected to go off-shore (Jepsen, Laplante, Williams, Christensen, Farrante, Chang, & Miller, 2004) Software quality assurance, where $16 billion is spent annually to save the $60 billion per year that software glitches cost U.S. industry alone (Computerworld, 2005)
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Why, When, and What to Outsource
•
• •
•
Security functions such as firewall management and network vulnerability assessment (Vijayan, 2005) Technical support via telephone and Web (Thibodeau, 2005c) Transaction processing for purchases, sales orders, deposits, withdrawals, time cards, and paychecks, insurance claims processing and policy administration, medical record administration and medical diagnostics, medical and legal transcription, digitizing of physical documents, e-mail response centers, and other lower level business processing services (Robinson & Kalakota, 2005, p. 185) Knowledge work such as reading CAT scans, MRIs, and ultrasounds at as little as half the cost of on-shore radiologists (Brice, 2003)
Outsourcing of pharmaceutical functions traditionally has taken the form of outsourcing drug development and manufacturing to contract research organizations (CROs) and contract manufacturing organizations (CMOs). Research and development and marketing were kept in-house as those were core competencies and critical success factors. Today, some of the research and development is also being outsourced globally in the light of proliferation of new technologies and new knowledge (Doshi, 2004, pp. 125-127). The cost of developing one new product increased from $131 million in 1987 to $802 million in 2001 and the average successful launch of a new drug is $250 million. Meanwhile, in 2000-2002, only one of thirteen discovered and clinically trialed drug makes it to market, compared to one out of eight in 1995-2000 (Gilbert, Preston, & Singh, 2003, p. 4). This huge and costly decline in R&D productivity has increased global pharmaceutical outsourcing opportunities to $40 billion per year. Outsourcing of customer care functions by moving entire contact centers off-shore has become very popular. The functions performed by customer service centers are more important
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than their location. The discrepancy between labor, real estate and infrastructure costs on-shore vs. off-shore, makes this a logical function to outsource. Customer contact centers are a $650 billion industry (Cleveland, 2003). “The number of companies outsourcing and off-shoring their contact centers is rising steadily. For example, General Electric Information Services, which offers customer credit cards for retailers such as J.C. Penney, has 3,000 call center employees in the United States and 11,000 in India” (Goldstein, 2003). However the cost and complexity of increasing customer satisfaction has escalated over the past three decades. Robinson and Kalakota (2005, p. 107) estimate that live voice costs between $4 and $8 per contact, interactive voice response (IVR) costs about $1-$2 per contact, Web selfservice between $0.05 and $0.3 per contact, and e-mail averages $3-$10 per contact. Outsourcing finance and accounting (F&A) functions have been prevalent since the beginning of business. Now, there is a growing trend for F&A functions to be outsourced off-shore, primarily to save labor costs (Robinson & Kalakota, 2005, p. 131). For instance, Ford Motor Company has more than 400 people in its business services center in Chennai, India, conducting accounting operations for Ford worldwide. U.S. firms spent about $590 million on off-shore F&A services in 2004, while their European counterparts spent about $480 million. That is expected to increase by 2008 to more than $2 billion (Thibodeau, 2005b). Outsourcing of human resource (HR) functions, such as payroll, recruitment, hiring, training, benefits management, employee assistance programs, executive compensation, as well as health, safety, and regulatory compliance, is gaining momentum (Robinson & Kalakota, 2005, p. 159). While providing and servicing qualified personnel might be critical success factors, they are not viewed as core competencies. There are also multiple points of potential failure in complex HR systems. It appears to be a logical application for outsourcing. For instance, British Telecom
Why, When, and What to Outsource
(BT) (BT, 2003) used outsourcing to handle its HR functions with Accenture HR Services in 2000, transferring 1000 HR employees to Accenture HR, which Accenture was able to reduce to just 600 staff members (Accenture, 2003). It is projected that HR outsourcing will increase at an annual rate of 16.1% to $16 billion in 2009 (Gonsalves, 2005). Outsourcing in the entertainment industry has grown with many U.S. film companies contracting with Indian film companies to handle part of their production work (Abraham, 2005). For example, Global One Entertainment Inc outsourced the production of its film “The Woman from Georgia” to Fast Track Entertainment, an Indian company. They will save 80% of their production costs vs. shooting in the U.S. Outsourcing of research and development (R&D) functions takes various forms. Above, the outsourcing of R&D in the pharmaceutical industry was discussed. In that instance, drug companies contract with outside firms to explore new compounds for possible testing and launching. A different form of R&D outsourcing is used by companies such as Dell, Motorola, and Philips which buy complete design of digital devices from Asian developers, tweak them to their own specifications, and attach their own brand names (Engardio & Einhorn, 2005). Another approach is that used by Boeing Co. which contracts with India’s HCL Technologies to co-develop software for everything from the navigation systems and landing gear to the cockpit controls for its upcoming 7E7 Dreamliner jet (Engardio & Einhorn, 2005). Boeing is also in negotiations with India’s Larsen & Toubro (L&T) to outsource engineering as well as aircraft-related IT services and aircraft parts manufacturing (Hardsamalani, 2005). Such trends will help control R&D budgets and reflect the shift in thinking about where R&D fits in a particular company in terms of critical success factors and core competencies (Engardio & Einhorn, 2005).
summary This chapter has explored the questions of what, when, and why to outsource. Definitions of outsourcing with off-shoring were examined and compared. An historical perspective on outsourcing was presented. On the surface, the question of why to outsource is relatively simple. While there are many secondary reasons, there are two primary thrusts. In the case of on-shore outsourcing, the emphasis is on expertise that a company might not possess and finds the need to contract with an outside vendor. In the case of off-shore outsourcing, a primary motivator is cost savings, mainly due to lower labor costs in developing countries. In actual practice, the decision is usually more complex. The question of when to outsource is equally complex. There are many factors that can support and promote outsourcing effectively. Many of those are internal to an organization. For instance, a company might set an intention to provide customer service, a company might see the life cycle of its products or services shrink, or a company might feel the impact of the global economy or increased competition. There are also many factors that are external to a company. These include changes in the labor pool and other economic factors, as well as political, ethical and societal considerations. The question of what to outsource is answered by examining a company’s core competencies and critical success factors. The chapter presents rules of thumb for each of the four possible combinations of those two factors. It also discusses outsourcing trends in specific companies and industries.
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Nakatsu, R., & Iacovou, C. (2004, Dec 13). Debunking 10 myths of IT offshore outsourcing. Computerworld. Retrieved March 13, 2005, from http://www.computerworld.com/ managementtopics/outsourcing/story/0,10801,98252,00.html Negroponte, N. (1995). Being digital. New York: Knopf. Outsourcing Center. (1999, January). Changing nature of outsourcing fuels growth. Outsourcing Journal. Retrieved March 16, 2006, from http://www. outsourcing-journal.com/jan1999suppliera.html Outsourcing Index. (2003). Outsourcing rationale. Retrieved March 13, 2005, from http://www. outsourcingindex.com. Outsourcing-Russia.com. (2004, Jul 4). Delegation of Japanese IT companies visited Russia for first time. Retrieved March 13, 2005, from http://www. outsourcing-russia.com/news/ 2004/07/09/01/ Overby, S. (2003. March). Bringing IT back home. CIO. Retrieved March 13, 2005, from http://www. findarticles.com/p/articles/mi_kmcio/is_200303/ ai_ kepm295310 Pallares-Barbera, M. (1998). Changing production systems: The automobile industry in Spain. Economic Geography, 74(4). 344-359. Pitt, L. F., Berthon, P. R., Watson, R.T., and Zinkhan, G.M. (2002, July-August). The Internet and the birth of real consumer power. Business Horizons, 45(4), 7-14. Pradhan, B. (2004). Why Europe is indifferent to outsourcing. Rediff.com. Retrieved March 13, 2005, from http://www.rediff.com/cms/print. jsp?doc path=?money/2004/mar/02basab.htm Press Trust of India. (2004, December 16). Outsourcing to India benefits U.S. economy. Press Trust, from http://www.ptinews.com/pti/ptisite. nsf
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Pruitt, S. (2005, January 14). Europe overtakes U.S. in big outsourcing deals. Computerworld. Retrieved March 13, 2005, from http://www. computer world.com/printthis/2005/0,4814, 99086,00.html
Thibodeau, P. (2005b, May 5). Datamonitor: Financial services sector outsourcing to grow. Computerworld. Retrieved June 15, 2005, from http://www.com puterworld.com/ printthis/2005/0,4814,101544,00.html
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Thibodeau, P. (2005c, May 2). Offshore tech support still stirs controversy. Computerworld. Retrieved June 15, 2005, from http://www. computerworld. com/printthis/2005/0,4814, 101456,00.html
Rishi, M., & Saxena, S.W. (2004). Is outsourcing really as bad as it is made to sound? Reassessment and some perspective. Indian Journal of Economics and Business, 3(3), 63-80. Robinson. M., & Kalakota, R. (2005). Offshore outsourcing: Business models, ROI and best practices. Alpharetta, GA: Mivar Press. Rowley, A. (2004, April 27). Japan’s IT outsourcing has 6.7t yen potential. Business Times. Retrieved March 13, 2005 from http://www.asiaone. com.sg/cgi-bin/utils/it/printf.pl? newsprt Susarla, A., Barua, A., & Whinston, A. B. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-123. Thibodeau, P. (2005a, March 7). Premier 100 Q & A: McKesson’s Cheryl Smith on outsourcing. Computerworld. Retrieved March 13, 2005, from http://www.computerworld.com/ printthis/2005/0,4814,100247,00.html
Times of India, The. (2004, Dec 5). Developed nations need not fear outsourcing. Retrieved March 13, 2005, from http://timesofindia.indiatimes.com/ articleshow/947001.cms. Turban, E., Leidner, D., McLean, E., & Wetherbe, J. (2006). Information Technology for Management: Transforming Organizations in Digital Economy. New York: John Wiley. Vietor, R. H. K., & Evans, R. (2001). Japan: Beyond the bubble. Harvard Business Online. Product #702004. Retrieved March 13, 2005, from http:// www.hbsp.harvard.edu. Vijayan, J. (2005, Mar 8). Premier 100: Outsourcing security offers benefits, risks. Computerworld. Retrieved March 13, 2005, from http://www.comp uterworld.com/printthis/2005/0,4814,100266,00. html WIT. (2001). Win by borrowing other’s abilities. Wit Solution Journal Online. Retrieved March 13, 2005, from http://www.ntt-west.co,jp/solution/ eng/journal/tokushu_09/001spe_01. html
This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans, D. Schniederjans, and M. Schniederjans, pp. 17-41, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.2
A Paradigmatic and Methodological Review of Research in Outsourcing Vanita Yadav Management Development Institute, India Rajen K. Gupta Management Development Institute, India
absTracT Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment and synthesis of research activities to date. This article addresses this need and examines the academic literature on information systems outsourcing and business process outsourcing using a paradigmatic and methodological lens. The objective of this article is fourfold. Firstly, it examines the status of outsourcing research from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework. Thirdly, it compares and contrasts the outsourcing research work published
in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and the directions for future research.
inTrOducTiOn Eastman Kodak’s decision to outsource its information systems (IS) function in 1989 to IBM, DEC, and Businessland formally launched the phenomenon of outsourcing in the corporate world which aroused interest worldwide. Outsourcing is defined as the procurement of products and services from sources that are external to the organization (Lankford & Parsa, 1999). The e-commerce revolution has forced the transformation of traditional IS outsourcing structures into new outsourcing service configurations,
A Paradigmatic and Methodological Review of Research in Outsourcing
like Internet service outsourcing, application service outsourcing, and business process (BP) outsourcing (Watjatrakul, 2005). Businesses today are growing in complexity and the world is moving towards globalization. As a result the forces of outsourcing have become a present-day reality and are poised for phenomenal growth in the future. The importance of outsourcing in industry has led to extensive research in this area. Most of the research done in outsourcing is in the field of IS outsourcing. In the last few years, there has been a rise in another more process-centric approach to outsourcingbusiness process outsourcing, in which the outsourcing vendor offers to take responsibility for an entire client process (Harmon, 2003). Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment of research activities to date. This article aims to address this need of exploring and synthesizing the academic literature on outsourcing. Although Dibbern, Goles, Hirschheim, Rudy, and Jayatilaka (2004) and Gonzalez, Gasco, and Llopis (2006) have carried out a survey and analysis of literature in the field of IS outsourcing, the goal of this research is to extend existing insights. The focus of Gonzalez et al.’s (2006) IS outsourcing review was to identify the main topics of IS outsourcing, the methodologies most often applied, and the authors and countries that have contributed most to the area of IS outsourcing. The focus of Dibbern et al.’s (2004) IS outsourcing review was on research objectives, methods used, and theoretical foundations to view outsourcing as an organizational decision process using Simon’s model of decision making. In contrast, our study covers IS as well as BP outsourcing research, and carries out a methodological and paradigmatic examination of literature. Hence this study makes a contribution to the philosophical and methodological foundations of research in outsourcing. Additionally, it also presents a comparative analysis of the outsourcing research trends in leading American and European journals. 20
The objective of this article is fourfold. Firstly, it examines the status of outsourcing research in from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework of Meredith, Raturi, Amoako-Gyampah, and Kaplan (1989). Thirdly, it compares and contrasts the outsourcing research work published in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and directions for future research. The article is organized as follows. In the next section, the review of existing research literature on IS and BP outsourcing is presented. Subsequently, the choice of methodology for collecting and analyzing data is explained, followed by discussion of the results. The article ends with implications of the study, directions of future research, and contributions.
liTEraTurE rEviEw Outsourcing Outsourcing involves contracting with an external provider for the provision of a service which may have been provided using in-house staff (Domberger, Fernandez, & Fiebig, 2000). Outsourcing has been around for more than a decade, but it got formal recognition only after the famous Kodak deal in 1989. Since then it has generated a stir in the practitioner community. Academics, by and large, have been relatively slow to research this phenomenon (Dibbern et al., 2004). While academic research has been slow to follow the practitioner community, it is now being recognized as an important area of research. This article focuses on the following two kinds of outsourcing:
A Paradigmatic and Methodological Review of Research in Outsourcing
•
•
Information Systems Outsourcing: Willcocks and Kern (1998) define IS outsourcing as the handing over to a third party management of IT/IS assets, resources, and/or activities for required results. Cheon, Grover, and Teng (1995) define information technology outsourcing as the organizational decision to turnover part or all of an organization’s IS functions to external service provider(s) in order for an organization to be able to achieve its goals. Business Process Outsourcing: The Accenture Institute for Strategic Change suggests that BP outsourcing goes further than technology infrastructure or even applications. The outsourcing service provider takes primary responsibility for ensuring that the process works, interfaces effectively with other company functions, and delivers the outcome intended. BP outsourcing refers to an outsourcing relationship where a third-party provider is responsible for performing the entire business function for the client organization (Dibbern et al., 2004). A number of industries are considering BP outsourcingin particular, government, financial services, healthcare, transportation, and logistics (Millar, 1994).
research paradigms in is research Orlikowski and Baroudu (1991) and Chen and Hirschheim (2004) indicate that positivism dominates IS research while other paradigms are relatively small in number. The following three references outline the paradigmatic analysis of IS research between 1985 and 2001: •
Orlikowski and Baroudu (1991) examined 155 articles on IS research published between 1985 and 1989 in MIS Quarterly (MISQ), Communications of the ACM (CACM),
•
•
Management Science (MS), and Proceedings of the International Conference on Information Systems (ICIS). Their findings indicated that positivist paradigm overwhelmingly dominated the IS research community and little attention was paid to interpretive paradigm. Chen and Hirschheim (2004) analyzed 1,893 articles on IS research published between 1991 and 2001 in MISQ, Information Systems Research (ISR), Journal of Management Information Systems (JMIS), ICIS, Information and Organization (I&O), Information Systems Journal (ISJ), Journal of Information Technology (JIT), and European Journal of Information Systems (EJIS). Their analysis indicates that while there has been some paradigmatic change in the IS research community since 1990, this change has not significantly manifested itself in journal publications. In most research journals, positivism maintains its prevailing dominant position. Dibbern et al. (2004) examined 84 articles on IS outsourcing published between 1988 and 2000 in I&O, CACM, EJIS, JIT, JMIS, Information and Management (I&M), ISJ, ISR, MISQ, Academy of Management Journal (AMJ), Academy of Management Review (AMR), Decision Sciences (DS), MS, Organization Science (OS), Strategic Management Journal (SMJ), Harvard Business Review (HBR), California Management Review (CMR), Sloan Management Review (SMR), ICIS, and Hawaii International Conference on System Sciences (HICSS). Their results indicate that there is a balanced aggregation of research approaches in IS outsourcing on the positivism-interpretivism continuum. However, the American outlets were dominated by the positivist paradigm and the European outlets were dominated by the interpretive paradigm.
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A Paradigmatic and Methodological Review of Research in Outsourcing
mEThOdOlOgy Journal representations For the purpose of this research, the focus was on mainstream journals that would reflect progress in the field of IS and BP outsourcing in the last 10 years, ranging from 1995 to 2005. The rationale behind the choice of leading journals in IS and management fields has been investigated by Walsham (1995), Orlikowski and Baroudu (1991), and Chen and Hirschheim (2004). The following academic journals were examined: •
•
•
Three mainstream American IS journals: Information Systems Research, MIS Quarterly, and Journal of Management Information Systems. Three mainstream European IS journals: Journal of Information Technology, European Journal of Information Systems, and European Management Journal. Two mainstream management journals: Management Science and Decision Sciences.
paradigmatic representations For paradigmatic analysis, this article uses the Operations Research Paradigm framework by Meredith et al. (1989) as shown in Figure 1. This framework has been used by researchers in the operations management area (Meredith et al., 1989; Sachan & Datta, 2005). It serves as a comprehensive analysis tool in a two-dimensional format and is in the same way applicable to the field of IS research also. Hence this research extends the body of knowledge in the IS arena by using this Operations Research Paradigm framework to analyze the research paradigms in IS and BP outsourcing literature. Here it may be useful to mention that a paradigmatic perspective goes beyond the dichotomous classifications of research methods and techniques. Such a perspective helps
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the research community to undertake a reflective examination of its ontological and epistemological assumptions including the underlying values held by the community. The analysis of this article focuses on the following paradigms: axiomatic, positivist, interpretive, direct observation of object reality, people’s perception of object reality, and artificial construction of object reality.
methodological representations The analysis of research methodology used in the identified journal papers focuses on the following areas: empirical vs. non-empirical; quantitative vs. qualitative; cross-sectional vs. longitudinal; research designs (survey, focus group, case study, experiment, and action research); sources of data; hypothesis testing; and the data analysis techniques (descriptive analysis, regression, factor analysis, correlation, cluster analysis, conjoint analysis, path analysis, Logit model, structural equation modeling).
Empirical vs. Non-Empirical The empirical studies rely on observations and data, and the non-empirical studies rely on ideas and concepts. The categorization in this research is established as empirical if the articles obtain real data or observations, which could be gathered through quantitative, qualitative, or a mixed approach, including archival data (Chen & Hirschheim, 2004).
Quantitative vs. Qualitative The criterion for categorizing research methods as quantitative or qualitative in this article is based on whether studies use a statistical or numerical approach to collect and analyze data (Chen & Hirschheim, 2004). There is a possibility that research could use both quantitative and qualitative methods in different stages of the study. On
A Paradigmatic and Methodological Review of Research in Outsourcing
such occasions, they are categorized as a mixed research method.
non-empirical pieces, or descriptive/argumentative as noted in Galliers’s (1991) classification. Research with secondary data such as public records or existing datasets is also included in this category.
Cross-Sectional vs. Longitudinal Chen and Hirschheim (2004) described longitudinal study as a research that evolves over an uninterrupted period of time and focuses on process. Cross-sectional study, on the other hand, is research that collects data through one snapshot at a particular point of time (Orlikowski & Baroudi, 1991).
Sources of Data The sources of data involve collecting data from primary data sources or secondary data sources. The articles involving scenarios and examples have been categorized under the others category.
Research Designs
Hypothesis Testing
Adapting the research design categorizations from Orlikowski and Baroudi (1991) and Chen and Hirschheim (2004), the following research designs were identified:
A hypothesis is a specific statement of prediction (Sachan & Datta, 2005). The development of science can be seen as a sequence of revisions of hypotheses. Our knowledge of reality involves sequence of trials and errors (Sachan & Datta, 2005). Under hypothesis testing, it is checked in the research paper whether the study involves explicit formulation and testing of research hypotheses.
• • •
•
•
•
Survey: Research articles involving data collection via questionnaires. Focus Group: Group discussions exploring a specific set of issues to generate data. Case Study: Research articles that are involved with a single site or a few sites over a certain period of time that involved in-depth study of a phenomenon. The case study inquiry usually relies on multiple sources of evidences (Yin, 1994). Experiment: Studies that take place within a designed, controlled environment and usually involve special treatment of different groups to contrast the precise relationships among variables (Galliers, 1991). Action Research: The researchers are an integral part of the phenomenon under study. The researchers’ input often influences the outcomes of the phenomenon, and his/her role could change from researcher to subject (Galliers, 1991). Others: Articles that are practitioner oriented (systems or tools development),
Data Analysis Techniques Data analysis techniques help researchers in: • • • •
summarizing data; understanding the effect of variable (s) on the variable under study; minimizing confounding effects inherent in data, such as questionnaire data; and assessing alternative future scenarios.
Major techniques used for data analysis are descriptive analysis, regression factor analysis, correlation, cluster analysis, conjoint analysis, path analysis, Logit model, and structural equation modeling.
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A Paradigmatic and Methodological Review of Research in Outsourcing
rEsulTs This article assessed the state of research in IS and BP outsourcing by examining the research paradigms and research methodologies adopted in 70 articles in eight leading academic journals between 1995 and 2005. The findings of the study reveal that on IS and BP outsourcing, between 1995 and 2005, there were 20 articles in the three American IS journals, 41 articles in the three European IS journals, and nine articles in two management science journals (see Figure 2). The European journals indicated more research in the outsourcing field (see Figure 3).
methodological representations Empirical vs. Non-Empirical Forty-three articles fell under the empirical category and 22 under the non-empirical category (see Figure 4). In American IS journals there were 10 indicating empirical approach and 10 indicating non-empirical approach. The European IS journals had 29 empirical articles and eight non-empirical articles. The management journals had four empirical articles and four non-empirical articles. American journals had an equal balance of empirical and non-empirical articles, whereas the European journals indicated applying mostly empirical approaches (see Figure 5).
Quantitative vs. Qualitative Thirty-eight articles fell under the qualitative category and 24 under the quantitative category (see Figure 6). In American IS journals there were six indicating qualitative approach, 12 indicating quantitative approach, and two indicating mixedmethod approach. The European IS journals had 30 qualitative articles, six quantitative articles, and one mixed-method article. The management journals had two qualitative articles and six quantitative articles. The American journals mainly
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were quantitative research focused, whereas the European journals were qualitative research focused (see Figure 7).
Cross-Sectional vs. Longitudinal Thirty-four articles fell under the cross-sectional category and 6 under the longitudinal category (see Figure 8). In American IS journals there were 12 indicating cross-sectional approach and one indicating longitudinal approach. The European IS journals had 21 cross-sectional articles and four longitudinal articles. The management journals had one cross-sectional article and one longitudinal article. Both the American and European journals involved mostly cross-sectional approaches (see Figure 9). The longitudinal approach was insignificant in number.
Research Designs Fifteen articles fell under the survey research, one under focus group, 18 under case study, and 38 under the ‘others’ category. There were no articles under action research and experimental research. Research in the ‘others’ category included: one literature review paper, nine conceptual modelbuilding papers, 10 mathematical model-building papers, one research commentary paper, and 17 papers based upon secondary data analysis. Case study research was the most predominant research design, followed by secondary data analysis and survey research (see Figures 10 and 11).
Sources of Data There were 30 articles using primary data sources, 31 articles using secondary data sources, and 13 articles in the others category, which included examples and scenarios (see Figure 12). In American IS journals there were eight indicating primary data sources, 13 indicating secondary data sources, and seven indicating other sources. The European IS journals had 20 primary data sources
A Paradigmatic and Methodological Review of Research in Outsourcing
articles, 14 secondary data sources articles, and five other sources articles. The management journals had two primary data sources articles, four secondary data sources articles, and one ‘other’ sources article. European journals mainly relied on primary data sources, whereas the American and management science journals relied on secondary data sources (see Figure 13).
Hypothesis Testing Eight articles indicated hypotheses testing out of the 70 articles reviewed (see Figure 14). The American IS journals had five articles indicating hypotheses testing, the European IS journals had two articles involving hypotheses testing, and the management journals had one article indicating hypotheses testing. Thus the American journals indicated a greater trend towards hypothesis testing than the European journals (see Figure 15).
Data Analysis Techniques There were 28 articles which indicated descriptive analysis, nine involving applied regression, four involving factor analysis, three involving correlation, two indicating Logit model, two involving structural equation modeling, and 23 under the ‘others’ category (see Figure 16). There were no articles applying cluster analysis, conjoint analysis, and path analysis. The ‘others’ category involved qualitative analysis of interview transcripts. American journals applied higher quantitative statistical analysis techniques whereas the European journals were restricted to mainly descriptive and qualitative techniques (see Figure 17).
paradigmatic representations The paradigmatic analysis for IS and BP outsourcing research in 70 papers using the operations research paradigm framework is tabulated in Figure 18.
The literature review highlighted that the American journals are predominantly positivist in approach, but the results show that in the area of IS and BP outsourcing, they are also adopting interpretive paradigms. Although American journals are still more inclined towards positivism (positivist and axiomatic11 articles), the trend towards interpretive research (nine articles) is evident. The European journals belong predominantly to the interpretive paradigm (interpretive30 articles; positivist and axiomaticseven articles).
implicaTiOns Analysis of previous review papers in IS research highlights that positivist paradigm holds a dominant position. A paper by Galliers and Meadow (2003) offers a possible explanation in this regard. They discovered that editorial board members of North American journals like ISR and MISQ were primarily North American researchers (between 75% and 87.5% for ISR, and 51.2% and 86.8% for MISQ), and these journals tended to publish articles written by North American researchers (74% for ISR and 83% for MISQ). A similar situation was reported for European journals where the editorial board members were largely European, as were the papers published (Galliers & Meadow, 2003; Chen & Hirschheim, 2004). Galliers and Meadow (2003) concluded that the IS field maintained a “homegrown” perspective. Further, traditional wisdom has long recognized that positivist research is more easily accepted because its research tradition has been more successfully established (Hirschheim & Klein, 2002). The mainstream North American journal, MISQ, had publicly announced its acceptance of alternate research approaches in 1993. Chen and Hirschheim (2004) reported from their empirical analysis of 1,893 articles that even after years of advocacy of paradigmatic pluralism, not much has changed. On the contrary our findings indicate that a change is noticeable as the American journalsthough
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A Paradigmatic and Methodological Review of Research in Outsourcing
still more inclined towards positivism (positivist and axiomatic11 articles)are also publishing interpretive research (nine articles). However, this can also be attributed to the recency of the phenomenon of outsourcing. Another interesting observation is that highlighted by the comparison between empirical and non-empirical studies. Our analysis revealed that 66% of the papers were empirical in nature. Chen and Hirschheim (2004) have also reported that researchers have increased their use of empirical data collection. Interestingly, our study revealed that the American journals had an equal balance of empirical and non-empirical articles whereas the European journals indicated applying mostly the empirical approach. Chen and Hirschheim (2004) state that as a field matures, theoretical and conceptual developments become less appealing, and empirical studies become more popular because of the need for theory testing and practical relevance. The European journals indicated more research in the outsourcing field (58%) as compared to the American journals (29%). For this reason the European journals could possibly regard outsourcing research as a mature field and show greater adoption of empirical studies. Both the American and European journals mainly involved cross-sectional studies. Longitudinal approach was insignificant in quantum. It can be due to the contention that cross-sectional studies enjoyed more popular positions (Chen & Hirschheim, 2004) and prevalence of a ‘publish or perish’ research publication notion (Walsham, 1995). Also, research using literature reviews, conceptual model building, mathematical model building, and research commentaries were the most predominant research designs followed by case study and survey research. The European journals mainly relied on primary data sources whereas the American journals relied more on secondary data sources. Finally, the American journals applied higher quantitative statistical analysis techniques and indicated a greater trend towards hypothesis testing, whereas the European
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journals applied mainly descriptive and qualitative techniques. To summarize, this study reveals that in the area of outsourcing, interpretive paradigm is beginning to dominate if two sides of the Atlantic are put together. This can probably be attributed to the reality that European journals are publishing more in this area and they are more interpretively inclined. Newness of outsourcing could also be one possible explanation as the more positivist inclined American journals were also reporting interpretive research in this area.
dirEcTiOns FOr FuTurE rEsEarch The IS and BP outsourcing industry is poised for phenomenal growth, and this area has high potential for future research. Outsourcing has emerged as a multifaceted subject. There is a great deal of diversity in terms of research objectives, theoretical foundations, and methods (Dibbern et al., 2004). Additional exploratory content analysis of the papers revealed various emerging research areas. These are summarized as follows: •
•
Longitudinal studies: An evident need for longitudinal studies is a key finding of this study. There is an opportunity for researchers to move beyond the snapshot studies and broaden the perspective of outsourcing by incorporating temporal effects to answer questions like, How does the outsourcing process change over time? Client-vendor relationships: An in-depth understanding of the key issues underlying client-vendor relationships is required. Most of the studies were from the client perspective, and there was a need for further examining the vendor perspective. Additionally, dyadic studies incorporating both the client and vendor perspective would offer better understanding of the dynamics of such engagements.
A Paradigmatic and Methodological Review of Research in Outsourcing
•
•
•
•
Client-vendor governance arrangements: An increasing number of varied outsourcing contracts have increased the complexities of governance mechanisms. There is a need to explore such engagements and understand the dynamics of control. Additionally, the impact of informal relationship between the client and vendor organizations can lead to interesting studies. There is an emerging nature of such relationships. This promising trend to move beyond the contractual engagements can be explored. What is the impact of trust on the governance of such arrangements? How does an outsourcing contract-relationship evolve over time? Risk management: Turning over the entire business process to a vendor brings with itself various risks. Studies conceptualizing and examining comprehensive risk assessment frameworks can aid in better understanding the dynamics of outsourcing risks. Operationalization and measurement of outsourcing success: Success is defined differently in various papers by various stakeholders and researchers. The complicated nature of the perception of success makes it a difficult variable to operationalize. Hence an all-inclusive view of success can be explored. Emerging role of countries: The emerging role of countries—like India, China, the Philippines, and othersfrom cost-saving outsourcing destinations to strategic valueadding outsourcing destinations is also a fertile area for future research.
Furthermore, the dataset of this research was limited to eight journals only. Hence this study can be taken forward by researchers for larger assessment by including other management science journals in the area of information systems, operations, human resources, organizational behavior, finance, and strategy.
cOnclusiOn The purpose of this article was to study the literature on IS and BP outsourcing using a methodological and paradigmatic lens. The analysis of publication trends brings out a growing awareness of non-positivist approaches to doing research in outsourcing. However, the analysis also brings out a continuing divide across the Atlantic Ocean. The authors hope that awareness of such a divide would trigger a meaningful dialogue over the underlying perspectives so that it stimulates more wholesome research across the globe. A better balance between the positivist and interpretive is also likely to save us from making unnecessary blunders due to cultural blindness of the positivist paradigm in the outsourcing phenomenon, which by its very nature straddles far-flung continents and cultural worlds. The analysis also shows the paucity of longitudinal and action research studies, which actually have great potential to generate deeper insights about the challenges to the management of outsourcing. In sum, the article attempts to stimulate a reflective introspection in the research community interested in the emerging phenomenon of outsourcing.
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A Paradigmatic and Methodological Review of Research in Outsourcing
Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102. Domberger, S., Fernandez, P., & Fiebig, D.G. (2000). Modeling the price, performance and contract characteristics of IT outsourcing. Journal of Information Technology, 15, 107-118. Galliers, R.D. (1991). Choosing appropriate information systems research approaches: A revised taxonomy. In H.E. Nissen, H.K. Klein, & R. Hirschheim (Eds.), Informations systems research: Contemporary approaches and emergent traditions (pp. 327-345). North Holland: Elsevier Science. Galliers, R.D., & Meadow, M. (2003). A discipline divided: Globalization and parochialism in information systems research. Working Paper. Gonzalez, R., Gasco, J., & Llopis, J. (2006). Information systems outsourcing: A literature analysis. Information & Management, 43(7), 821-834. Harmon, P. (2003). An overview of business process outsourcing. Business Process Trends, 1(9), 1-12. Hirschheim, R., & Klein, H.K. (2002). Information systems research in the making: A critical reflection on the current state of the IS discipline. Working Paper.
MacCrimmon, K., & Wehrung, D. (1986). Taking risks: The management of uncertainty. New York: The Free Press. Meredith, J.R., Raturi, A., Amoako-Gyampah, K., & Kaplan, B. (1989). Alternative research paradigms in operations. Journal of Operations Management, 8(4), 297-326. Millar, V. (1994). Outsourcing trends. Proceedings of the Outsourcing, Cosourcing and Insourcing Conference, Berkeley, CA. Nash, J.F. (1953). Two-person cooperative games. Econometrica, 21, 128-140. Orlikowski, W., & Baroudi, J.J. (1991). Studying information technology in organizations: Research approaches and assumptions. Information Systems Research, 2, 1-28. Sachan, A., & Datta, S. (2005). Review of supply chain management and logistics research. International Journal of Physical Distribution & Logistics Management, 35(9), 664-705. Walsham, G. (1995). Interpretive case studies in IS research: Nature and method. European Journal of Information Systems, 4, 74-81. Watjatrakul, B. (2005). Determinants of IS sourcing decisions: A comparative study of transaction cost theory versus the resource-based view. Journal of Strategic Information Systems, 14, 389-415.
Klepper, R. (1995). The management of partnering development in IS outsourcing. Journal of Information Technology, 10(4), 249-258.
Willcocks, L.P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of UK inland revenue. European Journal of Information Systems, 7(1), 29-45.
Lankford, W.M., & Parsa, F. (1999). Outsourcing: A primer. Management Decision, 37(4), 310-316.
Yin, R.K. (2003). Case study research: Design and methods. London: Sage.
This work was previously published in Information Resources Management Journal, edited by M. Khosrow-Pour, pp. 27-43, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.3
IT Outsourcing:
Impacts and Challenges Luke Ho Staffordshire University, UK Anthony S. Atkins Staffordshire University, UK
absTracT This chapter provides both practitioner and academic insights into outsourcing. It begins with a review of the literature and practice of outsourcing, followed by a retrospect of its developments since the 1960s, up to present-day emergent trends such as best/smart-sourcing, rural-sourcing and business application grids. Recent legal developments are highlighted, along with their corresponding impacts. Outsourcing decisions tend to focus solely on the short-term benefits of cost reduction and service level improvement and, hence, often lack strategic direction, thus indicating the need for strategic management frameworks in the decision process. This chapter introduces a generic framework for such decision-making and highlights other strategic frameworks developed by researchers. The chapter then concludes by summarizing suggested action points that enable both clients and service providers to best
exploit the recent developments in outsourcing, in order to maintain the strategic edge in an increasingly complex and competitive business environment.
inTrOducTiOn The term outsourcing was coined in the 1970s to describe an agreement where an external organization provides services for a client that were previously carried out internally (Cap Gemini Ernst & Young, 2003). Initially, an arrangement of necessity, and later, a major cost-cutting move, it has evolved to become a mainstream strategy in a myriad of industries. The increasingly competitive markets have introduced further pressures to cut costs, and companies are now more inclined than ever to utilize outsourcing, which has spurred its continued growth over the past years. Reports of
outsourcing mega-deals (i.e., deals with total contract value of $1 billion or more) are increasingly commonplace, indicating the large scale of the outsourcing market. In 2003 alone, a record number of 15 mega-deals were awarded out of the 78 mega-deals publicly announced since that of Kodak Eastman back in 1989. One of the most high-profile of these is the United Kingdom (UK) Inland Revenue organization’s mega-deal with the Cap Gemini Ernst & Young consortium, involving what was reported to be the world’s largest transfer of 3,500 staff in a 10-year deal worth $7-9 billion (Cullen, 2003). Recent statistics indicate that outsourcing is now a $180 billion industry (Anderson, 2004), and Information Technology Outsourcing (ITO) now accounts for one-third of global IT spending (Cap Gemini Ernst & Young, 2003). The promise of massive cost savings in the region of millions is driving the trend towards more outsourcing mega-deals. However, there have been a number of failed high-profile cases, which raises questions about the potential risks involved, particularly the lack of flexibility of long-term contracts. This was highlighted by the collapse of the Bank of Scotland’s (BoS) 10-year $1.2 billion mega-deal with IBM, which was indicated to have failed because of its inflexibility to accommodate the business change following the merger of BoS with Halifax (“Bank bins £700m IBM deal,” 2002). Another trend that has been in the media spotlight is that of Offshore Outsourcing, which has gained considerable negative publicity because of the controversial connotation of job losses to the client country and the potential of long-term adverse effects to its economy. Currently, 50% of all phone calls to the U.K. National Rail Enquiries are handled by operators in India (Nash, 2003); also, IBM plans to move up to 4,700 programming jobs overseas to save costs, and HSBC will transfer 4,000 customer service jobs to Asia by the end of 2005. These statistics illustrate the extent of the trend towards Offshore Outsourcing, which is becoming increasingly prevalent in various
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industries; however, there are risks associated with loss of control and confidentiality issues. In 2003, this was highlighted in a case involving medical transcription, a commonly outsourced process for the medical industry, which the University of California San Francisco (UCSF) Medical Centre had been outsourcing for the past 20 years. Unknown to them, part of the outsourced work was subcontracted to a service provider in Texas, which, without the knowledge of anyone, further subcontracted the work to a physician in Pakistan (Bagby, 2003). The arrangement went without a hitch for 18 months, until the company in Texas refused to pay the physician in Pakistan, who threatened to post the patient medical histories on the Internet if not given the back pay, thereby infringing privacy and confidentiality laws. Although short of total failure in the sense that the outsourcing arrangement was salvaged following private financial settlement with the Pakistani physician, the incident illustrates the potential risks of outsourcing. The decision by businesses to outsource raises a number of critical issues for corporate management (Currie, 1995). To achieve success in outsourcing, companies will need to be aware of the emergent trends, understand their potential impact and utilize framework techniques for strategic management.
backgrOund Outsourcing is defined by Griffiths (2001) as the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. Laudon and Laudon (2000) define it as the process of turning over an organization’s computer operations center, telecommunications networks or application development to external vendors. Incorporating the common theme between these and other slightly different definitions, the authors define outsourcing as the third-party management of assets and resources
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at a required performance standard pre-defined by negotiation. Theorists such as Lonsdale and Cox (2000) perceive outsourcing as one way in which the boundary of a firm (i.e., company) can be adjusted in response to changing economic pressures. This is based on the theory proposed by Ronald Coase in his article “The Nature of a Firm,” which suggested that the motivation behind adoption of their chosen structure is related to the trade-off between the costs of accessing the market and the problem of diseconomies of scale (Coase, 1937). In recent years, outsourcing decision-makers have adopted the concept of core competence from the much publicized article “The Core Competence of the Corporation” by Hamel and Prahalad (1990), which advocates that firms should focus solely on their core business and consider outsourcing the rest. The exact history of outsourcing is somewhat vague: Although documented instances of its use first appeared in the 1950s, outsourcing in the form of subcontracting of work was indicated to have begun as early as the 1800s. In the early years of American history, the making of clipper ships’ sails and covered wagons’ covers was outsourced to workers in Scotland, with raw materials imported from India (Kelly, 2004). It was purported that by the 1830s, England’s textile industry became so efficient that eventually Indian manufacturers were unable to compete, and the work was outsourced to England. Within the U.K., outsourcing was introduced in the 1980s as a public sector management tool to provide a means to cut operational cost, reduce the risk of union strikes and downsize blue-collar workforces. This began primarily on the local government level, then progressed to the central government level in the 1990s, following the government white paper “Competing for quality: buying better public services” by the HM Treasury (1991).
developments of iT Outsourcing Origins Although outsourcing is often marketed as the latest strategic management tool, it is in fact the renaissance of a practice that has existed for decades. There are conflicting accounts of when outsourcing first begun, but the first documented practice of outsourcing appeared to be in the area of information systems when General Electric Corp. contracted with Arthur Andersen and Univac in 1954 (Klepper & Jones, 1998).
The 1960s In the 1960s, outsourcing took the form primarily as a facilities management service (Kelter & Walstrom, 1993; Teng, Cheong, & Grover, 1995). During this time period, computing usually involved the mainframe in a centralized computing model under which numerous users shared the same computer (Currie, Desai, Khan, Wang, & Weerakkody, 2003). As computing capability was very expensive, only the larger companies could afford such mainframes. Smaller companies often had to “piggy-back” their computing needs onto that of larger companies in return for a monetary fee. This arrangement, which involved sharing of the computer process time of the mainframes, was then known as “time-sharing.”
The 1970s Prior to the 1970s, companies who were clients of major hardware (e.g., mainframes) manufacturers had access to a library of software that was bundled in the cost of the hardware (Software History Center, 2002), which ranged from the computer’s operating systems to various utility programs. In the 1970s, generic software from such bundled sources was deemed unable to meet specific needs unique to individual companies, and hence, the need for customized software arose.
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Development of such customized software inhouse was inherently expensive, particularly for smaller companies, due to the skill sets required and the additional personnel that would have to be hired to provide the required expertise. Given the high costs associated with such software development, it was often contracted out, and hence, outsourcing in the form of contract of programming was prevalent in the 1970s.
The 1980s By the 1980s, the cost of computing capability had begun to plummet, due to the arrival of low-cost versions of mini-computers and then Personal Computers (Lee, Huynh, Chi-wai, & Pi, 2000). With reference to the market-standard measurements of Million Instructions Per Second (MIPS), the cost for 1 MIPS has fallen sharply from $1,000 in 1975 to $250 in 1980—a steep 75% drop. Consequently, the cost of maintaining in-house computing facilities became more financially feasible and, as a result, companies began to bring previously outsourced services in-house. Retaining services in-house continued in the mid-1980s on the grounds of the supposedly better internal control and reservations of “opening up” the company to outsiders. However, the large-scale outsourcing contract between Kodak Eastman and IBM in 1989 (Currie et al., 2003) sparked off a massive bandwagon effect (Lacity & Hirschheim, 1993). In retrospect, this trigger is possibly the ground-breaking deal that brought outsourcing into the limelight, and is often quoted as the first instance in which outsourcing was defined as a formal strategy.
The 1990s The early 1990s were characterized by renewed interest in outsourcing (Lee et al., 2000) and strategic use of outsourcing was the focus. Within this time period, outsourcing was utilized for two main purposes.
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First, outsourcing was utilized to force downsizing within companies in order to keep them “lean and mean” for competitive advantage. Second, outsourcing was utilized to upgrade legacy systems operating on 3rd Generation Language (3GL) to 4th Generation Language (4GL). Due to limited in-house resources, companies often encountered challenges while attempting to upgrade the existing applications themselves. As such, many companies had to resort to outsourcing the upgrade to a third party, which was considered to be better equipped in terms of technical skill sets and human resources, in order to ensure a smooth transition. In 1999, there was an increased uptake of onsite facilities management and selective outsourcing, primarily in areas associated with the Y2K problem (i.e., millennium bug). This took form in the use of contracting staff and involved early applications of Offshore Outsourcing, primarily to India.
The 2000s Transformational use has been the main focus of outsourcing in recent years, particularly in the areas of Business Process Outsourcing and Offshore Outsourcing. Business Process Outsourcing has been utilized to redefine the company’s operating model and structure. Administrative, transactional and similar work have been shifted to third parties with the aim of reaping benefits such as cost savings, better access to emerging technology and the freeing of internal staff from administrative trivia to focus on strategic issues more vital to the company. It is now seen as a service where total, defined business processes are given to expert service providers who manage the process and ensure the total integration between outsourced business processes and in-house processes (Kruse & Berry, 2004). Globalization, driven by agreements such as the North American Free Trade Agreement
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(NAFTA) and the liberalization of economies like those of China and India, increased companies’ propensity to outsource overseas to low laborcost countries (Namasivayam, 2004). This form of outsourcing, known as Offshore Outsourcing, is increasingly popular with companies seeking the means to lower costs and maintain a roundthe-clock availability in their quest for higher efficiency. Predictions from Forrester Research Inc. (Engardio, Bernstein, & Kripalani, 2003) indicate that 1 million jobs in the United States (U.S.) will be moved offshore by 2010. Figure 1 illustrates the key locations being considered for Offshore Outsourcing and provides a quick summary of each country’s advantages and risks. India is currently one of the most popular locations for Offshore Outsourcing due to the strong government support for outsourcing and the abundance of low-cost English-speaking workers who are highly skilled. Additionally, the difference in time zone from Western markets makes it an ideal choice for providing roundthe-clock coverage. However, there are concerns about power failures, due to the lack of a reliable infrastructure, which are highly disruptive to computer-based operations. China is predicted by industry experts to be a close competitor to India in the near future (Furniss, 2003), largely due to the liberalization of laws and government policies brought on by its membership into the World Trade Organization. Its political leaders have taken note of the importance of the technical education in India and begun to invest heavily on academia to raise its level of technical competence. China is also regarded because of low labor costs due to its large untapped supply, making it a more favorable location in the future for companies seeking the lowest costs. However, government support for outsourcing is yet to be fully developed and language considerations are still a main concern for companies planning to outsource to China. Emergent markets that companies have begun to consider include Russia, South Africa and the
Philippines. Russia is noticed for its availability of joint-degree graduates with a strong delivery methodology approach; however, there are concerns regarding language skills and political stability. South Africa, which is indicated to be a niche provider of insurance policy administration, has the key advantages of having a good command of English and a time zone close to the UK, but is unable to compete with its Asian counterparts in terms of labor costs and communication costs at present. The Philippines is noted for its strong technical skills and mature infrastructure, along with its close cultural affinity to U.S. businesses and language, but there are security concerns due to the perceived terrorism threat in the region. Central Europe is beginning to catch up in Business Process Outsourcing, despite having entered the market later than India and China. Although it is less favorable in terms of labor costs, typically three to five times that of India and China, Central Europe has the advantages of a diverse language pool (French, Spanish, etc.) and cultural affinity to Western markets. As such, it is expected that outsourcing will be a growth industry for Central Europe, particularly new members of the European Union, such as Poland and Czech Republic.
Types of Outsourcing Willcocks, Feeny and Islei (1997) distinguished between four main types of outsourcing, namely Total Outsourcing, Total Insourcing, Selective Outsourcing and De Facto Outsourcing. Ho, Atkins, and Eardley (2004) extended the distinction to six types, with the inclusion of Offshore Outsourcing and Business Process Outsourcing. This has been further extended to nine types, taking into account Business Transformational Outsourcing, Retro-sourcing and Rural-sourcing from literature reviews, all of which are outlined as follows:
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•
•
•
•
•
•
•
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Total Outsourcing refers to the decision to transfer the provision and management of at least 80% of services to the external service providers. Total Insourcing refers to the decision to retain the provision and management of at least 80% of services internally after a reasoned evaluation of the external service provider market. Selective Outsourcing refers to the decision to source selected services from external service providers while still providing between 20-80% (typically 24%) of services internally. De Facto Outsourcing (Insourcing) refers to the exclusive use of internal resources to provide services, which arises from historical precedent rather than a reasoned evaluation of the external service provider market. Offshore Outsourcing refers to the decision to transfer the provision and management of services to external service providers outside of the client organization’s home country and also on cruise ships off territorial waters. Business Process Outsourcing refers to the decision to transfer selected areas of the client organization’s repeated core and noncore business processes to external service providers; for example, financial statement analysis and statutory reporting. Business Transformational Outsourcing refers to a type of relationship that involves both Information Technology Outsourcing and Business Process Outsourcing. While traditional use of outsourcing is to offload non-core activities and leverage economies of scale, Business Transformational Outsourcing is instead utilized to gain strategic competitive advantage on an enterprise-wide basis and share risks in innovating to enhance business performance.
•
•
Retro-sourcing refers to a cyclic relationship where an offshore service provider outsources some degree of services back to the client organization’s home country, typically by the creation of a business division sometimes misclassified as “Insourcing.” Protagonists of Retro-sourcing claim that it is a positive trend that results in job creation, while antagonists claim that it is merely “outsourcing in sheep’s clothing” (Reisman, 2004). Rural-sourcing refers to an obscure form of Outsourcing in which the provision and management of services are transferred to rural regions of the client organization’s home country. The concept of retaining jobs onshore while benefiting rural communities in the process presents opportunities for companies to project a positive public image; hence, Rural-sourcing is expected to be an increasingly viable alternative to Offshore Outsourcing.
advantages of Outsourcing Cost Reduction Companies that maintain all services in-house may incur vastly higher research, development, making and deployment costs, which can severely reduce their overall competitive advantage. Outsourcing can be utilized to exploit the lower cost base of external service providers, which allows for reduction in operating costs (Namasivayam, 2004) and capitalization (Kruse & Berry, 2004), allowing additional finances to be freed for use in other areas of strategic importance. Typical cost reductions are in the region of 20% to 40% (Davison, 2004; Namasivayam, 2004), primarily by labor cost arbitrage, although some literature have indicated cost reductions of up to 70% (Synergy Infotech, 2004).
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Access to Specialist Resources World-class service providers amalgamate expertise by working with multiple clients facing similar challenges, and make extensive investments in both technological and human resources. Consequently, the careful selection of a service provider with cutting-edge technologies and skills can provide access to world-class capabilities and specialist resources (Kruse & Berry, 2004; Namasivayam, 2004), which can aid in areas such as reducing the risks of technology obsolescence and overtaking competitors on the technological front.
Improved Focus Outsourcing allows a company to focus on its core business by offloading operational aspects to service providers with expertise in their respective fields. The ability to “cherry-pick” a variety of services from leading service providers enables the company to optimize its value chain (Sloper, 2004), focus its resources on meeting client needs and improve contribution towards overall business objectives.
Subcontracting of Workload Each company has limits on the resources available to it; thus, outsourcing can be a particularly viable option in situations where a company’s internal human resources are stretched. By diverting certain components of the existing workload out to external service providers, internal resources can be allocated to business objectives of strategic importance with the aim of achieving higher efficiency and competitive advantage.
Better Risk Management Risks are inherent to almost any business decision (Aubert, Dussault, Patry, & Rivard, 1999) due to ever-changing market competition, gov-
ernment legislations, financial conditions and technologies. It can be both taxing and costly to be fully market-aware of all risk resulting from such economical, political, financial and technical issues. Outsourcing allows companies to exploit the resources and expertise of specialists, thus resulting in better risk management compared to internal handling.
risks of Outsourcing Loss of Organizational Competencies (Tacit Knowledge Loss) One commonly cited risk associated with the use of outsourcing is the loss of organizational competencies, which increases the level of dependence on external service providers. As outsourcing deals often involve transfer of human resources, the internal expertise available in a company may be significantly reduced, hence hampering its ability to maintain competitive advantage and to innovate (Earl, 1996). To reduce the loss of internal expertise, which in turn impacts organizational competencies, companies should conduct a thorough evaluation of all staff, prior to any transition, to identify those that need to be retained for required skill sets.
Reduction in Quality of Service (Service Debasement) Service debasement refers to any reduction in the quality of services received by a client (Aubert, Patry, & Rivard, 1998). Service quality may decline through the contract or may just fall below agreed-upon levels (Bahli & Rivard, 2003). This can be curtailed by the effective use of Service Level Agreements. For successful implementation, companies will need to have the ability to evaluate the performance of outsourced services, and hence, require some technical knowledge of the respective fields.
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Cost Escalation Cost escalation can sometimes occur from unforeseen expenses that result in an overrun of originally contracted estimates (Bahli & Rivard, 2003). This covers a broad range of costs, including the development and maintenance of an exchange relationship (i.e., outsourcing relationship), monitoring exchange behavior (i.e., service level monitoring) and guarding against opportunism (Williamson, 1985). This can be mitigated by a comprehensive financial analysis prior to outsourcing and the use of definitive Service Level Agreements that clearly indicate the financial basis and conditions of the outsourcing arrangement.
Lock-In Lock-in is a risk that often results as an extension of the loss of organizational competencies. A lock-in situation may occur in instances where a company has not retained sufficient in-house expertise or when there are relatively few service providers capable of offering the breadth and depth of services required (Bahli & Rivard, 2003). Contractual and practical safeguards are necessary to militate against lock-in (Sloper, 2004), which include strategic partnerships, based on risk sharing and mutual goals, and dual sourcing strategies involving the use of multiple service providers (Kern, Willcocks, & Van Heck, 2002). Some companies, such as British Aerospace, have deliberately maintained control of strategic IT functions to safeguard against the risk of lock-in.
sTraTEgic FramEwOrks The increasing complexity of outsourcing, as shown from a number of high-profile failures (Bagby, 2003; Cullen, 2003), highlights the need for strategic implications to be considered; consequently, tools to support this strategy have to be formulated and utilized. 36
Figure 2 illustrates the key reasons for outsourcing as identified by a study in 2004 conducted by PMP Research. The study surveyed 100 organizations, comprised of approximately 25% from the public sector and 75% from various elements of the private sector, regarding their view and opinions on the use of outsourcing (Mills, 2004). The two main reasons identified are to reduce operational costs and to improve service levels, both of which are tactical (i.e., short-term) in nature, which hints at the potential lack of strategic considerations in some instances of outsourcing decision-making. Although there are several advantages associated with outsourcing, like any other business move, there is a degree of risk involved; for example, loss of control and privacy issues in the case of Offshore Outsourcing. This underscores the need for a strategic perspective to outsourcing decision-making, rather than a tactical perspective that focuses primarily on short-term benefits.
generic Framework Figure 3 illustrates a generic framework for outsourcing decision-making, which allows for analysis of strategic value of the evaluated function against internal expertise (i.e., in-house) available in the company. The framework provides for classification into one of four possible quadrants, namely:
Best/Smart-Sourcing Candidates Functions classified under this quadrant are high in strategic value but low in internal expertise. These functions should be subject to a reasoned capability evaluation from both internal departments and external service providers to determine its viability for outsourcing. This selection process, which determines the “best” service provider, in terms of cost effectiveness and process efficiency, is known as “best/smart-sourcing.” Examples of such functions include technical help-desk
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(e.g., troubleshooting and end user support) and security management (e.g., anti-virus updates and network security).
ponent that should be retained in-house, hence contradicting the traditional concept of payroll as a strong candidate for outsourcing.
Strategic Retention Candidates
Change Candidates
Functions classified under this quadrant are high in both strategic value and internal expertise. These functions should be retained in-house, as it protects the company’s ability for rapid innovation along with its expertise in the domain. However, in some instances, companies are known to utilize consultants or expert advisors from external service providers to boost or enhance the existing internal capabilities. Examples of such functions are research and development fields, and applications that have been identified as Strategic Information Systems (SIS); that is, they are aligned with business objectives and have significant impact on organizational performance. Some of the classic examples could be American Airlines’ (AA) SABRE System, Baxter Healthcare International’s “stockless inventory” system, and Wal-Mart’s “continuous replenishment” Customer Relationship Management (CRM) system (Laudon & Laudon, 2000).
Functions classified under this quadrant are low in strategic value but high in internal expertise. In an ideal business setting, such functions are not supposed to exist, but they sometimes do exist in real-world business settings due to the isolation of IT functions from business functions that leads to separate agendas; that is, the lack of strategic alignment of IT with business objectives. These functions could be specialist-developed products looking for a business purpose or products that are well in advance of current business needs. These functions should be mitigated within the portfolio, either by elimination (possibly by means of outsourcing) or process re-engineering (possibly for development into strategic applications to be retained in-house). An example of such functions is predictive analysis tools, often developed by internal staff with high skill levels, which apply sophisticated analysis techniques to enterprise data. Although these tools are technically advanced, they produce predictive analysis models that have a low strategic value when utilized alone. However, when such predictive analysis models are combined with organizational business knowledge, they can provide insight into critical issues, such as fraud detection, customer retention and cross-selling strategies. In these instances, the predictive analysis tools are “change candidates” ideal for process re-engineering to develop them into “strategic retention candidates.”
Strong Outsourcing Candidates Functions classified under this quadrant are low in both strategic value and internal expertise. These functions are considered to contribute little value to the core business and are limited in terms of internal expertise, hence are strong potentials for outsourcing. Traditional examples of such functions are payroll systems and hardware maintenance. However, it is important to note the assessment of value contributed to core business may differ for individual companies; thus, each function should be examined in the appropriate business context instead of a generalization. For example, a security company may establish that their staff’s work attitude is linked to being paid efficiently, and thus view payroll as a vital com-
Other Frameworks In addition to the generic framework presented, Ho et al. (2004) identified a number of strategic frameworks for outsourcing decision-making, which are briefly outlined in Table 1.
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Analysis of the identified frameworks indicates that majority are based on the use of the Strategic Grid/Boston Matrix (SG/BM) positioning grid, which is a well-established technique (Earl, 1989; Ward & Peppard, 2002). There is clear consensus in literature of its use in generic business decision-making (Laudon & Laudon, 2000; Pearlson, 2001; Ward & Peppard, 2002) as SG/ BM-based frameworks are intuitive to use for business users. A review of the outsourcing literature emphasizes the need for strategic frameworks to incorporate quantitative measures to help practitioners set priorities and provide the most benefits from outsourcing (Yang & Huang, 2000). The failure to address this aspect is one of the main inadequacies of the majority of the frameworks reviewed, only three of which incorporate quantitative measures. The analysis highlights a lack of financial costing and benchmarking in most of the reviewed frameworks, which is contradictory, as cost savings and service level improvements are commonly identified as the top drivers behind the use of outsourcing. Financial costing is considered to be particularly important within a framework approach, as it facilitates the ability of the business to benchmark its cost position relative to external service providers and provides a comprehensive financial justification in the decision-making process.
Factors for successes and Failures
managEmEnT OF OuTsOurcing
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Like all management operations, a consensus of advantages and associated risks of using third-party contractors (i.e., outsourcing service providers) has to be considered and evaluated. A summary of the factors in terms of outsourcing have been compiled and detailed in the following sections.
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Although the business context in which outsourcing is utilized may vary widely, resulting in a vast combination of variables that influence outcomes, it has been noted that there are some common characteristics and traits in outsourcing moves that indicate its inclination towards success or failure. These commonalities, termed key factors, are briefly outlined as follows:
Factors for Successful Outsourcing •
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Understanding of company goals and objectives: that is, there is a clear understanding of what the company hopes to achieve via the use of outsourcing; for example, access to advanced technology and specialist skills. Strategic vision and plan: that is, a defined roadmap details how outsourcing will aid the company in progressing towards its strategic objectives and long-term goals. Executive and management level buy-in: that is, there is senior executive support and involvement through the outsourcing lifecycle, from the decision process to the implementation process. Comprehensive financial justification in decision process: that is, the outsourcing decision is justified by a detailed financial analysis, which benchmarks the company’s internal cost position against that of external service providers. Use of external expertise in decision process: that is, lawyers, independent consultants and financial advisors are utilized to provide expert insight and advice on the legal, financial, economic, technological, political and organizational aspects. Open communication with affected individuals and groups: that is, employees and trade unions are informed and consulted about the potential outsourcing and its corresponding implications.
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•
•
•
Careful selection of right service provider: that is, there is an objective decision process in which the service provider with the best technical capabilities, financial feasibility and cultural fit is selected. Ongoing management of outsourcing relationship: that is, there is constant monitoring and management of various aspects of the outsourcing lifecycle, from the selection process to the implementation process. Quantifiable performance monitoring: that is, the company has established an objective and measurable method of ascertaining the compliance of performance standards in the service provision.
Factors for Unsuccessful Outsourcing •
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•
•
•
Short-term benefits dominate as the motivation: that is, the outsourcing deal is handled as a purchasing decision rather than a strategic investment opportunity. Service providers are not “pre-qualified” on their total capabilities: that is, service providers are not short-listed by a comprehensive evaluation prior to selection. Service provider literature dominates the decision process: that is, case studies provided by the service provider, which are biased towards reporting only positive results, are used as the basis for deciding to outsource. Management team lacks decisional authority and experience: that is, the lack of experienced staff who have the incentives (personal, professional and economic) and authority to ensure the outsourcing deal succeeds. Lack of defined processes for incident resolution and change management: that is, the lack of defined processes for escalating problems, negotiating change requests and periodically reviewing the service provision contract.
selecting and managing service providers Prior to the selection of service providers, companies need to have identified two important aspects of information; namely, well-defined service expectations and an understanding of their internal cost metrics. Service expectations serve as a guide by which contractual needs can be assembled and then negotiated with potential service providers, while the internal cost metrics can be used to establish a “base case” for use in financial analysis. By using the “base case” as an estimate for current costs, a comprehensive financial analysis can then be conducted to benchmark the company’s cost position relative to that of external service providers. This would, in turn, provide for the financial justification on whether to retain the evaluated services in-house or to outsource them. Companies then need to articulate a clear mission statement for the type of outsourcing relationship to be established between themselves and their potential service providers. There needs to be well-defined objectives and performance metrics by which the services to be provided can be measured on a continuous basis, and companies should ensure that short-listed service providers already have an effective tracking and reporting system in place for that purpose. It is beneficial for companies to have direct access to the service providers’ tracking and reporting software for data capture about the performance of technology within the company, thus allowing technology use to be evaluated and areas for exploitation to be identified. Overall, an outsourcing relationship with the ideal service provider will involve committed and supportive management, which includes continuous service management and performance monitoring on an ongoing basis. In the selection of such service providers, companies have indicated the following to be the most important factors (Sparrow, 2005; 2004 Global IT Outsourcing Study, 2004):
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•
•
•
•
•
Reputation and proven track record: that is, the service provider has achieved results for similar companies that are willing to serve as references. Cultural fit: that is, senior executives and company staff are likely to be able to work well with that of the potential service provider, and are agreeable with its practices and processes. Financial stability: that is, the service provider is profitable, with good long-term growth potential and development prospects. Functional area expertise: that is, the depth and breadth of the service provider’s expertise adequately cater for the needs of the outsourced services. Vertical industry expertise: that is, the service provider has an understanding of the client company’s industry and, hence, is able to customize an outsourcing solution specific to the client’s organizational needs.
In addition to the above, other factors that should be considered include the flexibility of the contract terms, the scope of resources (both personnel and equipment) required for implementation and the service provider’s ability to value-add to the client’s internal capabilities. There needs to be due diligence in documentation procedures; that is, documents should be reviewed periodically and kept up-to-date. Present and proposed hardware/software configurations should be documented, along with the methods utilized to evaluate submitted bids. A summary checklist, which includes service provider name, contact person and bid submission date, should be also compiled for quick reference. In addition to facilitating objective decision-making based on accurate information, the documentation process can aid in the establishment of a formal method for the selection of service providers in future outsourcing processes.
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Service Level Agreements (SLAs) are considered to be integral to the outsourcing process, particularly with regards to service management. SLAs are negotiated agreements of common understanding between clients and service providers that define the services provided along with their expected levels of performance, and corresponding penalties and consequences for non-compliance. They explicitly define the relationship between customers and service providers (Leff, Rayfield, & Dias, 2003) and can be used in the context of any industry (Verma, 2004). For effective and efficient implementation in an outsourcing relationship, companies will need to ensure that the SLAs encompass a good degree of legal adherence, quantitative metrics for performance monitoring and an established exit clause in the event that contract termination is deemed necessary.
stages in Outsourcing implementation Companies should utilize a systematic approach to outsourcing implementation in order to facilitate an objective perspective in the decision process. Figure 4 illustrates such an approach, involving six suggested stages, outlined as follows:
Stage 1: Prepare IT Strategy In the initial stage, companies should clearly articulate defined business objectives and develop an IT strategy that will enable them to progress and align with the business goals. Framework techniques, such as the generic framework or one of the other strategic frameworks earlier outlined, can be utilized to determine what aspects of the existing IT functions (e.g., partial or total) are outsourcing candidates. A thorough evaluation is needed to identify the mission-critical applications for strategic retention, and the level of internal expertise required to prevent loss of organizational competencies, and hence safeguard against lock-in
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risks. A rigorous review of legislative implications is also needed to determine the legal feasibility of outsourcing.
Stage 2: Resource Planning The next stage in the process is resource planning, in which the resources (both personnel and equipment) currently required for maintaining the functions in-house are identified. The identification facilitates the creation of a resource utilization table (e.g., breakdown into volume of data transmission, processor capacity required, etc.) in which the resource commitment for the various functions can be detailed, thus allowing resourceintensive functions to be flagged. Subsequently, these resource-intensive functions can then be evaluated for suitability for streamlining (e.g., Business Process Re-engineering) or elimination (e.g., outsourcing to external service providers). An understanding of the internal cost metrics is required, in order to establish a “base case,” commonly formulated via the Activity-Based Costing (ABC) method, by which submitted tenders can be evaluated against later (Massy, 1999). It is important to ensure that human resource issues are not overlooked at this stage, as outsourcing has a definite impact on staff morale; hence, companies may have to commit more resources (possibly financial) to make corresponding adjustments to restore internal work efficiency. In some instances, it may be appropriate to utilize consultants to help identify the company’s strategic intention at this stage.
the functions to be outsourced. The requirements analysis method will be specific to the context of individual companies; some may prefer the use of formal project methods, while others may prefer the use of informal brainstorming sessions as the basis. Typically, companies have found it helpful to utilize Service Level Specifications to set measurable requirements and performance criteria. Sometimes companies may inevitably omit the required clarity and details, which results in an ambiguous definition; hence, it is recommended that the completed requirements analysis be reviewed by a select management committee before progressing further.
Stage 4: Issue Invitation to Tender (ITT)/Request for Proposal (RFP) The ITT stage, also known as RFP stage, is a procurement procedure where clients invite service providers to tender for the functions to be outsourced. The key component of this stage is the ITT/RFP document, which should comprise the following sections: • •
•
Stage 3: Requirements Analysis Requirements definition is a vital part of the outsourcing implementation process, as inaccurate definition of requirements can result in implementation delays, resource waste and client dissatisfaction. The requirements analysis should begin with business requirements and translate those into performance requirements of
• •
Introduction: for example, industrial context, goals and objectives of the outsourcing move, and the procurement timetable. Background: for example, background information about the company, details of the technical environment and the current business systems in place. Scope and scale of functions: for example, detail and scope of the functions to be outsourced, such as number of users, number of transactions and data transmission volume. Key requirements: for example, the most important requirements, such as legal adherence to data protection legislations. General requirements: for example, a description of service provision and type of outsourcing relationship to be established, such as strategic partnership.
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• • •
•
• •
•
Detailed functional requirements: for example, a full description of what is specifically required from the service provider. Technical requirements: for example, details on technological direction, software and hardware. Cost information required: for example, details of costs for various activities, such as licensing, training, consultancy, development, customization and implementation. Service provider information required: for example, contact details, parent company name, financial backing details, company audits and evidence of ability to deliver. Implementation requirements: for example, timescales, preferred project methodology and resource utilization. Instructions to service provider: for example, format and content of tender responses, selection criteria and submission deadlines. Appendices: for example, organizational charts, glossary of terms and business process diagrams.
process, but it should be noted that a haphazard contract may lead to later complications, which can be costly in terms of both time and finance. In this stage, the service provision issues that should be discussed are performance standards, compliance monitoring, change management procedures, technological review periods and penalties for non-compliance. Typically, these issues are addressed by the establishment of Service Level Agreements. Companies should include acceptance testing into the contract as a means of ascertaining whether the client requirements have been adequately met. Ideally, various safeguards should be worked into the contract, such as the following: • • • • •
It is important to state that service providers must maintain the strict numbering used in the ITT/RFP document, which makes it easier to check whether the service provider has replied to each defined requirement. Companies often also opt to include a compliance grid that service providers have to complete and which facilitates a quick review of requirements fulfilled. It is also important to emphasize the clear cut-off date for tender submission and clarify that tenders delivered after that date will be rejected outright.
Stage 5: Contract Negotiation The contract negotiation stage involves negotiating with the selected service provider to reach a suitable contractual agreement. There is a natural tendency for companies to desire a speedy negotiation after a potentially time-consuming selection
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•
Non-disclosure clause for information identified as confidential or company secret. Unambiguous definition of Intellectual Property (IP) rights. Requirement for implementing a recognized code of practice on information security. Ability to veto the use of sub-contractors (i.e., further outsourcing of functions). Exit clause in the event contract termination is deemed necessary. Procedures to account for business changes where both parties share any potential savings from new technology or process streamlining (i.e., mutual goal sharing).
There should be a clear escalation hierarchy and dispute resolution procedures in terms of problem resolution. In instances where traditional pricing arrangements are deemed inadequate, companies can opt to utilize escrow arrangements, where a third-party intermediary acts as a security buffer between the client and service provider. During this stage, contract negotiation should be built on trust and not developed in an adversarial way. Overall, companies should have a good understanding of the market, and thus have a grasp of their bargaining power in the contract negotiation with service providers.
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Stage 6: Implementation
sourcing strategies
The implementation stage involves the establishment of monitoring procedures and ascertaining the compliance of performance standards in the service provision. For the client-provider relationship to be truly effective, constant communication is a vital key, and thus it is important that communication channels and feedback procedures are established to facilitate constant and open communication. It is also important that formal procedures are developed to resolve issues in a convivial rather than an adversarial way. As outsourcing is a potentially long-term commitment, companies need to build up a working strategic client-provider relationship based on trust, and work towards designing contracts that account for the speed of business changes. It is recommended that companies establish a feedback loop by means of review sessions, typically carried out 4 to 6 weeks after implementation, to identify any best practices and isolate problem areas. This is important, as it provides review information that can be utilized in future implementations to preempt potential problems and can facilitate knowledge transfer, through documented practices, from experienced staff to those in training. Companies should note that the implementation of outsourcing requires considerable time commitment, as illustrated in Figure 5, and hence should be integrated into the organizational strategy. Noticeably, as companies extend the practice of best/smart-sourcing, they accrue knowledge from experience, and the resultant conversance with the process aids in reducing the time cycles of outsourcing implementation.
Some companies are acquiring services from bestof-breed service providers located anywhere in the world, thus potentially involving a combination of on-shore, near-shore and off-shore work. This outsourcing strategy, which is sometimes known as “Best-sourcing” or “Right-shoring,” has been spurred on by the recent globalization effects produced by three forces (Friedman, 2004). First, increased bandwidth, reduced telecommunication costs due to deregulation and dramatic improvements in undersea fiber-optic technology (Namasivayam, 2004) have made it economically possible to globally transmit and store huge amounts of data. Second, the diffusion of computers around the world has proliferated access to computing capabilities; and finally, the increased availability of groupware and collaboration tools have empowered virtual teamwork. The combination of these forces has facilitated the creation of workflow platforms, which can divide almost any service job (e.g., radiology scan analysis and accounting) into various functions. Exploiting this with digitization technology (e.g., conversion of data by high-resolution scanning system) has allowed each function to be outsourced to best-skilled knowledge workers around the world, beyond geographical and physical boundaries. Figure 6 illustrates this concept with the outsourcing of Computerized Axial Tomography (CAT) scan analysis. While the CAT scans are taken on-site within a hospital in the U.S., the analysis and subsequent recommendation on whether to operate can be made by a remote doctor overseas, such as in Israel. Information can be reviewed quickly because of the difference in time zones, thus allowing the CAT scans to be analyzed overnight (working day in Israel). This setup also provides coverage for the US hospital to deal with emergency cases arriving at night that require urgent attention. Due to the seamless integration of information interchange,
EmErgEnT TrEnds To maintain competitive advantage from outsourcing, companies need to identify emergent trends and understand their corresponding implications, a selection of which is outlined as follows:
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boundaries between the US-based components and Israeli-based components are indistinct, and hence, patients are often unaware that the hospital is essentially a virtual organization. Global sourcing strategies have been recently expanded to include an obscure form of outsourcing, known as Rural-Sourcing, in which the provision and management of services are transferred to rural regions of the client organization’s home country (e.g., Arkansas in the U.S.). It has been indicated that Rural-Sourcing has the potential to deliver up to 40% cost savings, which is close to being on par with an offshore offering (Frauenheim, 2004). Furthermore, the concept of retaining jobs onshore and benefiting rural communities in the process presents an opportunity for companies to project a positive public image. As such, Rural-Sourcing is expected to be an increasingly viable alternative to Offshore Outsourcing, which has generated considerable negative publicity due to the controversial connotation of job losses to the client country and the potential of long-term adverse effects to its economy.
regulatory requirements related to Outsourcing There has been an increase in the number of regulatory requirements that must be satisfied to implement an outsourcing deal. Care will need to be taken to ensure that the unique constraints enforced by national legislations are understood and followed for success in global outsourcing operations. The key national legislations that must be taken into account are outlined as follows: •
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The U.S. Sarbanes-Oxley Act (2002) introduced following various corporate financial scandals, such as Enron and WorldCom, requires CEO/CFO certification of financial statements, potentially including those of outsourced activities (penalties of $1 million in fines and up to 10 years of jail time if wrong certification was knowingly submitted).
•
•
•
•
The U.K. Transfer of Undertakings (Protection of Employment) Regulations (1981), recently expanded to include outsourcing, advocates that employees involved in a transfer will automatically continue in their jobs with their existing terms and conditions (for 2 years), and requires that recognized trade unions and elected employee representatives be informed and consulted about the potential transfer along with its corresponding implications. The U.K. Data Protection Act (1998) imposes a duty for “data controllers” to comply with a set of eight data protection principles, and the eighth principle has particular implications to Offshore Outsourcing to regions outside of the European Economic Area (EEA). The Basel II Capital Accord (2004) is a complex new standard for measuring credit risks, market risks and operational risks in financial services organizations, which has implications towards risk management strategies with regard to outsourcing operations. The UK Financial Services Authority Handbook (2005) has developed an outsourcing policy as a statement of good practice for operational risk management, which advocates that a company’s management is accountable for the adequacy of systems and controls for the outsourced activities, and requires advance notification to the Financial Services Authority in the event that an outsourcing decision has been made.
These legal developments present implications and opportunities for both clients and service providers of outsourcing. In the short term, such legislations complicate the outsourcing scenario and require clients to assess the service providers’ capabilities to meet the requirements imposed on the operational components they are managing or
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will manage. On the part of service providers, the legislations will prove to be a challenge as they progress towards understanding and addressing of such requirements, and to prove to potential clients that they have the capabilities to do so. In the long term, it will drive outsourcing opportunities, as service providers gain opportunities and competitive differentiation by cost-effectively and efficiently supporting client needs to meet the complex requirements imposed by the legislations. The legislations are inclined towards requirements of a financial nature; hence, it is expected that service providers with stronger business process and financial services knowledge will fare better against more IT-centric or technically-focused service providers, particularly those located offshore. It is also anticipated that risk assessment, particularly financial-related, will increasingly be of concern to companies in the evaluation of potential outsourcing operations.
business application grids The term “the Grid” was coined in the 1990s to denote a proposed distributed computing infrastructure for advanced science and technology (Foster & Kesselman, 1998). Since then, considerable progress has been made on the construction of such an infrastructure (Foster, 2001); hence grid-based computing is emerging as a viable technology. Grid-based computing can be defined as a network of computation, involving tools and protocols for coordinated resource sharing (e.g., processor execution time and system memory) and problem solving among pooled assets, which are known as virtual organizations (Myer, 2003). It is a form of distributed computing in which a wide-ranging network connects multiple heterogeneous computers into a pool of potential labor, as illustrated in Figure 7, allowing resources to be shared by all end-users. One application of grid-based computing to business enterprises is the Business Application Grid (BAG). As
computing capabilities within companies are typically under-utilized, with desktop machines using 5%-10% of their capability and most servers peaking out at 20% usage (Myer, 2003), the BAG is particularly attractive to companies seeking to harness the full processing capabilities of their computing facilities. This was highlighted by the Charles Schwab insourcing deal managed by IBM, involving the application of a BAG on financial services, which has reduced the internal processing time on an existing wealth management application from more than 4 minutes to 15 seconds (Shread, 2003). The advent of grid-based computing and other distributed on-demand computing technologies present a new service model for outsourcing service providers, known as Services Computing, which will enable companies to purchase processing capabilities as required (Zhang, Li, & Lam, 2004) in a manner akin to IBM’s concept of “On-Demand Business.” This allows leverage of grid-based computing technologies to take advantage of under-utilized computing capability for business applications, thus enabling companies to work towards gaining strategic competitive advantage on an enterprise-wide basis.
cOnclusiOn Outsourcing is now a mainstream strategy in a myriad of industries, and the magnitude of its impact and its potential as an enabling tool is something that few companies can ill afford to ignore. The creation of workflow platforms coupled with digitization technology (e.g., conversion of data by high-resolution scanning system) has allowed business functions to be outsourced around the world, giving round-the-clock coverage. However, even as Offshore Outsourcing becomes an increasingly mature and commonplace process, companies need to carefully evaluate the advantages and risks involved in each location choice and ideally adopt the strategy of “Right-Shoring.”
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With the advent of increasingly changing market dynamics and the complex nature of outsourcingrelated legislations, it is vital that companies handle outsourcing as a strategic investment opportunity rather than a simple purchasing decision. Companies should continuously evaluate existing outsourcing arrangements, and country of operations, to ensure competitive pricing from service providers and prevent over-dependency. To best exploit the recent developments in outsourcing to maintain the strategic edge, companies should consider the following points:
For Clients (and Potential Clients) of Outsourcing •
•
•
•
•
•
•
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Utilize strategic frameworks in the decision process for analysis to identify potential candidates for outsourcing and corresponding concerns. Conduct a comprehensive financial analysis, via costing methods such as ABC, to benchmark the internal cost position against that of external service providers to determine fiscal feasibility of outsourcing. Maintain awareness of new outsourcingrelated legislations and their corresponding impact to determine the need for outsourcing to ensure compliance. Explore the use of BAGs as a means to harness under-utilized computing capability within the organization. Consider the financial viability of RuralSourcing for potential to project a positive image by retaining jobs onshore and benefiting rural communities in the process. Exploit the concept of virtual organizations; for example, in applications such as remote medical diagnosis of CAT scans and providing inter-hospital consultative support using digital images in complex medical procedures. Avoid the use of outsourcing as a means to “dump” problematic internal functions— outsourcing is not a panacea.
For Service Providers of Outsourcing •
•
•
•
•
Cultivate a proactive, effective and efficient approach to service management, focused on user satisfaction, which encourages current clients to act as references. Provide proof of ability to address new legislations to capture a share of the expanding market of outsourcing for legal compliance. Maintain awareness of emergent service provision models (e.g., Services Computing) to synchronize the portfolio of services offered with market demand. Consider the viability of partnerships and joint ventures to establish a multi-national presence to target the potential market from increased adoption of “Right-Shoring.” Develop innovative outsourcing solutions that focus on gaining strategic advantage on an enterprise-wide basis to attract companies moving beyond the traditional objectives of operational cost reduction and service level improvements.
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This work was previously published in IT-Enabled Strategic Management: Increasing Returns for the Organization, edited by B. Walters and Z. Tang, pp. 244-274, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.4
Information Technology/ Systems Offshore Outsourcing: Key Risks and Success Factors Mahesh S. Raisinghani Texas Woman’s University, USA Brandi Starr Texas Woman’s University, USA Blake Hickerson Texas Woman’s University, USA Marshelle Morrison Texas Woman’s University, USA Michael Howard Texas Woman’s University, USA
absTracT The offshore outsourcing of information technology and information systems (IT/IS) is being increasingly practiced among firms that are focusing on core competencies and cost-effectiveness. With the increase in offshore IT/IS operations, a growing number of companies are encountering negative experiences and unpredicted results. The analysis performed in this chapter reveals the possible risks and perceived success factors of
companies outsourcing IT/IS operations offshore. The major points of interest are operational and strategic risks; legal contracts; cultural, security, and financial issues; and noted success factors by companies that participate in offshore outsourcing. The research indicates the importance of risk identification and the formulation of strategic plans that include preventive, detective, and corrective control methods of implementation and evaluation. Effective methods and metrics for measuring the success or failure of IT/IS offshore
Information Technology/Systems Offshore Outsourcing
outsourcing operations is expected to be a continuing development with the increasing growth of this phenomenon. It is not the strongest of the species that survives, or the most intelligent, but the one most responsive to change. —Charles Darwin
inTrOducTiOn Offshore outsourcing with respect to information technology and information systems (IT/IS) or business processes is a key commercial phenomenon. IT/IS offshore outsourcing is the focus of this chapter and is defined as a process undertaken by an organization to subcontract or to sell the organization’s IT/IS assets, staff, and/or activities to a foreign supplier, rather than develop IT/IS resources internally. The contractual relationship requires the vendor to assume responsibility for the client firm’s IT/IS requirements. IT/IS services include software development and maintenance; network and computer operations; and research and development (see Table 3.1) (Dolan, 2006). An extensive report by the National Academy of Public Administration prepared for the United States Congress and the Bureau of Economic Analysis defines offshoring as follows: “United States’ firms shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates” (Norwood et al., 2006). In offshore outsourcing work is outsourced to foreign countries that have cost advantages in various tasks such as application development, product manufacturing, and/or call center and back office operations. It involves complexity and risk not found in typical domestic outsourcing due to factors such as cost (i.e., labor, infrastructure, real estate, and corporate taxes); availability of highly skilled workers; market potential; country risk profile (i.e., disruptive events, security, regulatory
risk, macroeconomic risk such as cost inflation, currency fluctuation, and capital freedom), and intellectual property risk; environment (i.e., government support, business and living environment, accessibility of location such as travel time, flight frequency, and time difference); quality of infrastructure (i.e., telecom and IT, real estate, transportation, and reliability of power supply); improved customer service by way of 24X7 call centers and/or fewer environmental regulations (Farrell, 2005, 2006; Kraemer & Dedrick, 2004). Table 3.1 lists the common IT/IS outsourced services.
industry analysis IT/IS offshore outsourcing is one of the fastest growing businesses in the world due to technological advances including the Internet and mobile services. The advances have changed markets by decreasing communication costs and increasing specialization of service production. Given that the Indian software services account for about $9.9 billion, this does not seem like a huge market share until one looks at the exponential growth rate of this sector. This sector managed to grow by 26% in 2005 and Michael Corbett of the International Outsourcing Professionals postulates a 40% compounded annual growth rate over the next decade (Barrett, 2006). Pressures from dynamic market conditions and market uncertainty have caused business organizations to focus on core competencies and outsource functions in which they that lack expertise in order to show profitability maintain effective cost structures and improve the bottom line. There are increased pressures on management to remain cost effective by accomplishing more with fewer resources at a faster pace. Outsourcing goals and objectives include competitiveness, time to market, round the clock customer service, agility, and access to world class technology. As illustrated in Figure 1, countries and regions with the most outsourced IT professionals are India,
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Table 3.1. IT/IS common outsourced services IT/IS Service
Function
Access Controls
Help organization establish and provision authentication needs
IDS Monitoring
Monitor intrusion detection systems on a 24/7 basis
Contingency Planning
Help facilitate crisis plans and responses, that is, disaster recovery sites
Firewall Management
Assist in configuration of software and monitor logs
Antivirus services
Monitor and act upon malicious attacks
Website Blocking
Filter services
Network Scanning
Identify network vulnerability
Remote Management
Monitor network
Encryption Services
Manage PKI
Software Development
Develop software application/s
Business Process Reengineering/ Outsourcing
Reengineer and/or outsource business process to evaluate and eliminate non-value-added activities
Canada, Ireland, China, Philippines, Israel, Eastern Europe, Russia, Mexico, and South Africa (Kripalani, Foust, Holmes, & Enga, 2006). A recent study measured employee cost; quality; English proficiency; infrastructure; and political and economic risk of countries that have outsourced IT/IS professionals. As illustrated in Figure 3.2, according to a recent study, the best countries and regions for the United States to outsource in are India, Philippines, Canada, Ireland, South Africa, Eastern Europe, Russia, Israel, Mexico, and China (Seewald, 2005). Despite the short-term successes, IT/IS offshore outsourcing has several risks and challenges that increase the possibility of long-term adverse effects on the client company. Studies show that negative effects and consequences of offshore
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outsourcing such as hidden costs, vendor complacency, lack of vendor flexibility, high employee turnover, and lack of expertise are increasing among major corporations subcontracting IT/IS services (see Figure 3.3) (Dolan, 2006). A recent survey of 25 Fortune 500 corporations indicated that 70% of outsourced operations resulted in numerous negative experiences. Fifty-two percent of the companies surveyed experienced negative experiences and problems three times in two months (Accenture, 2004). The long-term effects of these negative experiences are difficult to measure because the value of IT/IS is intangible, hidden, and long term (Arbore & Ordanini, 2006; Greaver & Kipers, 2005; Hatch 2005). This obstacle raises the following questions:
Information Technology/Systems Offshore Outsourcing
Figure 3.1. Countries and their outsourced IT professionals (Source: “Countries receiving the Most Outsourcing, 2004.” Wired, February, p 101. Business Rankings Annual 2005) countries with the most Outsourced iT professionals 160000 140000 120000 100000 80000 60000 40000 20000 0
ia ind
da na ca
d lan ire
ina ch
es pin ilip h p
l ae
isr
rn ste Ea
pe ro Eu
a o ric xic af me th u so
ia ss ru
Figure 3.2. Best countries and regions for U.S. outsourcing (Source: Seewald, S. (2005). “Best Countries for U.S. Outsourcing, 2005.” Wired, February, Business Rankings Annual 2005, p. 101)
na Ch i
o ex ic M
Is ra el
a Ru ss i
Eu ro pe
ca Af ri
Ea st er n
So ut h
Ca na da
In di a Ph ilip pi ne s
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
What hazards contribute to encountering negative results and how are thriving companies achieving success? What topics and areas are researched the most often in the IS outsourcing field? Risks and success factors seem to be the common threads for the most frequent topics in IS outsourcing. It is also worth mentioning the increase in the number of articles focusing on offshore/global outsourcing. The use of cheaper communications technology, the Internet, economic globalization, and easy
access to IT professionals with lower salaries are some of the reasons for this phenomenon. Among the many articles dealing with the economics of outsourcing, involve agency theory, transaction cost theory, game theory, resource-based theory, and resource-dependence theory (Dibbern et al., 2004; Gonzalez, Gasco, & Llopis, 2006; Iyengar & Rolf, 2007; Nyrhinen & Dahlberg, 2007). In order to evaluate possible causes for adverse long-term affects, a risk identification and suc-
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Information Technology/Systems Offshore Outsourcing
Figure 3.3. Negative effects and consequences of offshore outsourcing (Source: Deloitte Consulting Outsourcing Study, October—December 2004) negative Experiences by client Firms Employee Turnover rate vendor complacency lack of Flexibility hidden costs lack of knowledge limited Transparency Quality/delivery issues management change complex government 0%
cess factor analysis have been developed to gain further understanding.
Risk Identification Several risks such as cultural, political, financial, technological, commercial, and legal have been linked to the failure of IT/IS offshore collaborations. Adverse risk is heightened because of the geographical distance between the client firm and the vendor firm (Beiling, 2006). Geographical distance, costs, time, and resources prevent the client firm from exercising appropriate control over the vendor. Common risks include operational, strategic, cultural, and financial risks.
Operational Risk Operational risk is identified as the increased chance of poor quality and output due to limitations of the communications and transmission systems, complexity of operations, and geographic
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10%
20%
30%
40%
50%
60%
separation between the two firms (Patterson, 2006). Loss of control is a significant threat to the ongoing operations because it decreases the manageability and power of value chains and inhibits client firms to give accurate performance evaluation. Performance evaluation and monitoring is often overlooked due to increased pressures of keeping costs down. An agent’s lack of experience for a specific activity also increases the risk of poor quality of services, and the client’s inability to measure the performance causes the client firm to become vulnerable to the agent’s results and services.
Strategic Risk Strategic risks result from opportunistic behavior of the vendor client. Shirking is an example of strategic risk. Shirking is defined as deliberate underperformance while claiming full payment (Patterson, 2006). As globalization changes the basis of competition, strategic sourcing is moving from the periphery of corporate functions to the
Information Technology/Systems Offshore Outsourcing
core, and research indicates that service providers are tempted to fail to perform their best work when they know the performance is difficult for their client to measure (Gottfredson, Puryear, & Phillips, 2005; Willcocks & Feeny, 2006). Performance pressures cause a number of offshore companies to cut corners to make certain the product is delivered despite product reliability or product completion (Beiling, 2006). Software development integrity is often violated as a result of the competitive position of providing ISs at the lowest possible cost for the highest achievable quality at the quickest time (Gottschalk, 2006). Opportunistic recognition is another form of strategic risk. It derives from one party changing the terms of a contract after its inception. Opportunistic recognition occurs when the client discovers that it has no alternative source of support, goods, or services and, as result, must pay the supplier whatever price the supplier demands in the future (Arbore & Ordanini, 2006; Willcocks & Feeny, 2006).
Security Risks Offshore outsourcing increases the risks on intellectual property violation and loss of confidentiality because it allows vendors access to private business information (Patterson, 2006). In many countries there is a lack of adherence to security and quality standards. Integrity is often violated because of the pressures of performance standards. Many vendor companies have multiple clients and there is no guarantee that a contracting organization’s data, programs, and applications will not be duplicated for other clients (Arbore & Ordanini, 2006). Intellectual property theft is steadily increasing, and protecting rights in foreign countries can be difficult. Countries like China have copyright laws but they tend to favor Chinese companies. Privacy campaigners argue that the processing of sensitive financial and data records in foreign countries do not meet the high privacy standards
of the United States (Chan, 2005; Lyons, 2006). Their argument is supported by a particular instance when a woman from Pakistan threatened to post sensitive United States medical records on the Internet (McLean, 2006). As a result, other medical organizations have returned their data processing back to the United States. Other financial companies that offshore ISs are worried they will be open to lawsuits if they can not guarantee acceptable standards of privacy. In a recent study by Booz Allen Hamilton, information security has become a top concern among companies evaluating offshore outsourcing (Dunlop & Smith, 2005). The respondents also felt there was a significantly higher security risk in working with offshore providers over those in the United States, due to a lack of trust in legal and regulatory environments in developing countries. Protection of corporate and personal data in any offshore outsourcing venture is critical in order to protect the business from cyber crime and theft of customer data. Information security ranked as one of the top three factors when selecting an outsourcing partner. It was rated ahead of financial strength, business stability, and reputation. At the February 20, 2006 Outsourcing World Summit, the International Association of Outsourcing Professionals announced an increasing concern over data security while considering offshore outsourcing (Hunt, 2006). More than 90% of the respondents stated that data security breaches would be “catastrophic “to their business. A key factor is not being able to verify vendor’s claims of security capabilities. More companies are concerned with theft or misuse of outsourced data than they are about the threat of terrorism.
Cultural Challenges Culture is the “totality of socially transmitted behavior patterns, arts, beliefs, institutions, and all other products of human work and thought” (dictionary.com, n.d.). Cultural differences and communication difficulties have numerous effects
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on business operations including no information sharing, poor communications of decisions, and no interaction between team members. Breakdown in communication often results in inadequate task priority and lack of overall business comprehension. Differences in culture often lead to miscommunication, which can result in considerable chaff. Memories of war and religious animosities make it difficult to build and maintain trust. Another concern is the simulation of a nonforeign facade to the clients who call these centers. Studies show that employees feel alienated from their own culture because of the shrinkage of local traditions to meet client expectations (Beiling, 2006). Workers become exhausted from working in a foreign language and tend to have growing resentments for the American people because of the decreased identity and cultural differences (Willcocks &Feeny, 2006). Although these overseas positions train the employees on the specifics of job expectations, there is little transferable job experience and no preparation for future career growth (Seabrook, 2004).
Financial Risks As illustrated in Figure 3.4, despite increased cash flow and cost effectiveness, there are many hidden costs associated with IT/IS offshore outsourcing. Tailored contracts, lack of transparency, and
bundling of services result in costly unexpected spending. There can be extensive, unpredictable costs due to a lack of due diligence. Vendor firms’ unclear pricing and cost structure make it very difficult to understand cost savings. Bundling or grouping of services is a frequent dilemma and causes confusion in unit costs (Dolan, 2006). Hidden costs are most likely the result of broad and ambiguous contracts that fail to define present and future IT requirements (McLean, 2006). Hidden costs can derive from dismissing or transferring staff, transfer of licenses by software vendors, travel costs, investigation costs, and the cost of developing infrastructure to support off-site operations.
Offshore Outsourcing’s success Factor analysis Global giant, Dupont, has developed a framework for its ISs offshore outsourcing operations. The company’s IS frame consist of nine core capabilities including: (1) leadership, (2) business systems thinking, (3) relationship building, (4) architecture planning, (5) making technology work, (6) informed buying, (7) contrast facilitation, (8) contract monitoring, and (9) vendor development (Willcocks & Feeny, 2006; Willcocks, Feeny, & Olson, 2006). IBM has been noted for its exceptional global
Information Technology/Systems Offshore Outsourcing
offshore outsourcing and credits its success to their IBM Relationship Alignment Process (Petershack, 2005). Their model is centered on relationship determinants including: commitment, predisposition, mutual benefits, linkage, unique resources, and shared knowledge. Success factors of IT/IS offshore outsourcing consists of precise risk analysis; detailed cost benefit analysis; relationship management and cultural understanding; understanding legal issues and contracts; and implementing risk controls.
application server outsourcing is right for them. Cost benefit analysis indicates whether offshore outsourcing is financially sound for companies. As illustrated in Table 3.2, when determining IT/ IS offshore outsourcing, a cost benefit analysis should include a review of potential gains, costs, and possible risk(s) of each alternative; appropriate contract period; intangibles and hidden costs; contracting and legal costs; vendor’s fee; conversion costs; IS salaries and severance payments; cash; contract cancellations; staff morale; and share price.
Risk Analysis Risk analysis enables client firms to determine the financial consequences of risk. As illustrated in Figure 3.5, a risk breakdown structure in risk analysis involves discovering and prioritizing of important risks that need protection and analyzing threats to assets to estimate potential losses. Successful companies determine the relative importance of each risk and then verify the level of impact it will have on their company in terms of costs, schedule, and quality. Successful firms identify the priority of each risk and determine the goals of the project accordingly (Bardhan, Whitaker, & Mithas, 2006; Patterson, 2006).
Cost Benefit Analysis Potential customers need to do a cost-benefit analysis to determine whether database or
Relationship Management and Cultural Understanding Research indicates that the level of partnership between a client firm and a vendor firm will increase when high levels of cultural similarity exist between them as evidenced by the insurance company USAA (Arbore & Ordanini, 2006; Chakrabarty, Gandhi, & Kaka, 2006). Identification-based trust is associated with successful offshore outsourcing because a mutual understanding allows for both parties to recognize and appreciate the other’s wants. Identificationbased trust has been linked to information sharing behavior and the overall quality of communication between the two firms (Bardhan et al., 2006). The parties involved in an offshore outsourcing relationship belong to distinct cultures and it is vital that these differences are accepted. A recent
Information Technology/Systems Offshore Outsourcing
Table 3.2. Cost analysis Costs
Factors
Intangibles and Hidden Costs
Administering the outsourcing contract and coordination efforts between internal users and outsourcing company upgrades
Contracting Costs
Legal costs including monetary and opportunity costs involved in contracting, renegotiating, and vendor disputes
Vendor Fees and Prices
Potential increase in costs if initial vendor low-balling of fees/ rough-order-of-magnitude price estimates lead to higher vendor fees and prices after the initial contract
Conversion Costs
Costs associated with transfer of software licenses
IS Salaries and Severance Pay
Staff retained, terminated, and possible legal costs from disgruntled employees
Contract Cancellation Costs
Cost of new negotiation, training of staff, hardware or software replacement
Share Price
Will announcement of outsourcing hurt or help stock prices?
study by Gartner (Heib, 2006) pointed to culture as a key differentiator to IT success and discussed the need for the IT organization to establish trust, commitment, two-way communication, clarity of purpose, and agility as vital components of the IT organization. Healthy communication is a crucial element to a working relationship. The effectiveness of the relationship between management personnel of both teams is dependent on the understanding and strong working relationships among the firms. Studies of offshore outsourcing success stories have demonstrated that working chemistry in management and peer friendships among employees have proved to be important determinants in forming long-term relationships that yield real value (Patterson, 2006). Industrial relatedness has also been a significant indication of successful offshore outsourcing. IT/IS offshore outsourcing between firms in related industries outperformed firms in unrelated industries (Kripalani et al., 2006). Firms from different industries have more difficulties understanding and collaborating with each other. Firms in related industries communicate their needs
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more effectively because they share a common language, socialization, institutional history, and organizational practices. Flexibility, modularity, and process knowledge are important business culture elements to study when determining a vendor firm. The client firm needs to determine the adaptability of the vendor to adjust to the changing demands of business and IT environment. The client firm must also know the vendor’s ability or willingness to add, delete, or modify services. Lastly, the vendor firm must know enough about the client firm’s industry to successfully deliver needed services.
Understanding Legal Issues and Contracts Legal issues regarding offshore outsourcing of IT/IS functions into emerging economies can be broken down into two parts: (1) the need for laws to govern international business operations, and (2) the ability to enforce international laws. Hall and Liedtka (2007) discussed the implications of the Sarbanes Oxley Act for large-scale IT outsourcing. First, companies and nations realize
Information Technology/Systems Offshore Outsourcing
that international laws and agreements are needed in order to ensure that physical and intellectual properties are protected. Second, countries have different laws and policies regarding ownership and control of physical and intellectual properties, and the ability to enforce the international laws and agreements that have been established is critical. In 1883, the Paris Convention for the Protection of Industrial Property was established (WIPO Treaties, 2006). This became the first international treaty to help people of one country obtain protection in other countries for intellectual properties in the form of industrial property rights (inventions, patents, trademarks, and industrial designs). As the volume and different types of intellectual property grew, there grew new requirements to protect intellectual property. In 1970, the World Intellectual Property Organization (WIPO) came into existence (WIPO Treaties, 2006). The WIPO was established to promote the protection of intellectual property throughout the world through cooperation between nations and, where appropriate, in collaboration with any other international organization. In 1974, the WIPO became a specialized agency of the United Nations system of organizations. At present the organization has 181 member nations and the need to expand the scope of laws to protect intellectual property continues to grow as global business grows. The World Trade Organization (WTO) plays in important part in the establishment of intellectual property rules. The WTO’s Agreement on trade-related aspects of intellectual property rights (TRIPS), negotiated in the 1986-1994 Uruguay Round, (Understanding the WTO, n.d.) introduced intellectual property rules into the global trading market for the first time. The agreement is supposed to narrow the gaps in how these rights are protected and bring common international rules into play. Although there has been extensive cooperation between many of the nations of the world, there still exist many nations that do not
adhere to the international laws that have been established to provide protection to companies. As we look at emerging nations the risk of doing business with these nations increases depending on their acceptance and enforcement of established international laws. The majority of subjects who participated in the Booz Allen survey felt that the regulatory and legal infrastructure in Asia and South America is not adequate (Dunlop & Smith, 2005). The survey revealed that only 5% of companies surveyed believed that China has a strong and legal infrastructure, South America was 5%, and Southeast Asia was 11%. The 27% of the respondents indicated that India, which is a major country for offshore outsourcing, had a good legal infrastructure. There is a feeling that there is a high potential risk for loss of customer or corporate data in these countries. Companies have to weigh the savings of lower costs that could be realized by offshore outsourcing in these countries to the potential impact to their companies from data loss. International laws continue to change as outsourcing companies and potential countries to outsource realize the importance of having legally binding contracts. Many countries have worked to improve their legal systems to work with the companies that want to outsource to their country. Russia, for example, has established laws to offer some protection to offshore outsourcing companies (, 2005). Companies must still do due diligence in advance of any potential outsourcing contract. What can companies do to protect themselves in emerging countries? First, it is critical to understand the laws and legal infrastructure of the country that the potential vendor is located. Does the company belong to trade groups or industry associations that have established standards for security of company and customer data? A company should have legal counsel that is experienced in the laws of the offshore country and may want to hire local counsel in the country to
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assist in legal matters. Companies must invest the time to research trade laws of the countries they are looking to outsource in. In addition, a company should research the legal performance history of potential vendors. The company may want to have a third party security audit or an independent security evaluation be completed before any agreements are formalized. The terms of the contract is an important part of any potential offshore outsourcing agreement. Time should be taken to agree in detail exactly what each party is responsible for. This will lessen the potential of trying to identify which party is to blame when things are not done correctly or on time. The initial development of detailed requirements will make the working relationship operate smoother. If your requirements are not clearly documented in the contract, a company will find it very difficult for any international legal system to rule in their favor. Another area that needs to be agreed upon is the metrics that will be used to measure progress and success or failure. Service level agreements are necessary and can be an outstanding tool to have if legal issues should arise regarding performance at a future date. The service level agreements should be agreed to and fully understood by both organizations prior to implementing any offshore outsourcing relationship.
Risk Controls Best practices indicate performing risk controls decrease chances of offshore outsourcing risks (Willcocks & Feeny, 2006). Preventive, detective, and corrective controls are common tools that are implemented for risk reduction. Preventive controls lessen the impact of risk or prevent it before having an impact. Preventive controls include clarifying assumptions, involvement planning, establishment of standards, and hiring translators. Detective controls reveal the existence of a risk and expose future impact under similar conditions. Detective controls include collecting metrics on project performance and conducting frequent audits of offshore vendor sites. Corrective controls involve determining the impact of risk and require establishing measures to prohibit future impacts. Examples of corrective controls are rescheduling of tasks on a critical path, alternate offshore vendor sites, and hiring more translators (Ramanujan & Jane, 2006; Sakthivel, 2007).
discussiOn and Final analysis Due to the complexity of IT/IS projects and metrics, evaluating the long-term value and effectiveness of offshore outsourcing has been very difficult. Figure 3.6 illustrates that 30% of all these ventures fail to provide the desired
Figure 3.6. Cost effectiveness of IS/IT outsourcing
pErcEnTagEs
hOw wEll is iT wOrking 35% 30%
Increase in Cost No Savings
25% 20% 15% 10%
0 - 20% Savings 21 - 40% Savings 41 - 60% Savings
5% 0%
61+ % Sa vings 1 rEasOns
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outcome and 25% of these partnerships create no cost savings to the firm investing in them. Due diligence and strategic planning are key elements to achieve excellence in an effort to improve productivity. Dun and Bradstreet’s Barometer of Global Outsourcing study indicates that as many as 25% of all outsourcing relationships fail because the client does not clearly communicate its needs, costs exceed expectations, and quality of service is poor (Nair, 2002). As illustrated in Figure 3.7, poor client preparation and joint clientvendor planning accounted for 49% of root failure causes (Telecoms & Technology, 2005). Despite increased risks and negative statistics, IT/ IS offshore outsourcing can still be cost effective and successful if the right combination of due diligence and strategic planning is in place. The most cited problem that leads to failure results from ambiguous contracts. Elements of the contract are often overlooked and left out. Many companies have paid a significant amount of money in hidden costs due to vague contract agreements and ambiguous requirements (Kripalani et al., 2006). In order to decrease risks, companies must first identify those risks and verify the costs of each possibility. A cost analysis is also essential in the
planning process. Cost analysis foresees possible cost associated with the production of the desired product. Building and maintaining relationships with the vendor company is an essential success factor that many companies overlook. Statistics show that companies that have healthy working relationships are less likely to have intellectual property laws violated and duplication of applications (Tucci, 2005). IT/IS offshore outsourcing can lead to a long relationship that should be nourished and monitored (Gupta, Seshasai, Mukherji, & Ganguly, 2007). Next we discuss the eservices capability model (eSCM) and the capability maturity model integration (CMMI) framework that help enhance the success factors and minimize negative risk in a offshore outsourcing project. The eSCM best practices framework provides direction on measuring and improving the value of outsourcing relationships by way of enhanced productivity, reduced cycle time, decreased transaction costs and improved time to market. It was developed at Carnegie Mellon University (CMU) to guide organizations doing process outsourcing, especially IT enabled process out sourcing, to form, manage and expand outsourcing relationships. Adopting the eSCM framework (illustrated in
Figure 3.7. Root case analysis of failures in offshore outsourcing projects (Source: Telecoms & Technology Forecast Americas; June 2005, pp. 10-16) rOOT FailurE causEs
Wrong Answer Client Team Morale & Support Miscommunication & Culture
10% 14%
21%
Vendor Team Performance Other
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Figure 3.8. Overview of eSCM elements, phases and capability levels (Source: Adapted from Hyder, Kumar, Mahendra, Siegel, Heston, Gupta, Mahaboob, & Subramanian, 2002 and Nair, 2002)
Figure 3.8) enables a service provider to implement organization-wide practices required for succeeding in a process-outsourcing situation. Organizations can consider the eSCM as a holistic reference framework for implementing processes within their organization around critical elements of offshore out sourcing (organizational management, people, business operations, technology and knowledge management) and the different phases in an outsourcing relationship (precontract, contract execution, and post contract). The eSCM offers client organizations a means to select capable providers who are committed to delivering consistently high quality services and
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developing continually improving relationships. Also, we expect this model to provide guidance to service providers so they can more effectively manage IT-enabled outsourcing relationships (CMU, 2001; Nair, 2002;). The capability maturity model integration (CMMI) developed by the Software Engineering Institute (SEI) at Carnegie Mellon University is used to improve processes for organizations to guide projects, divisions, or entire organizations. Improving processes increases product and service quality when organizations apply them to their business objectives (CMMI, 2005). The success factors have been incorporated into the
Information Technology/Systems Offshore Outsourcing
CMMI model to demonstrate how companies can integrate these factors into their goals and plans (see Figure 3.9). For example, India has far more SEI CMM Level 5 (representing the best software
development practices) than any other country in the world. It had 42 companies at SEI CMM Level 5 assessment and the quality maturity of the Indian software industry can be measured from
Figure 3.9. IT/IS offshore outsourcing success factors applied to the CMMI model Process Area 1
Process Area 2: Goals and Practices
Specific Goals Due Diligence
Culture Expertise
Develop Transparent Contract
Generic Goals Risk Analysis
Achieve Specific Goals
Understand laws and legal infrastructure
Third party security audit or an independent security evaluation Research trade laws
Obtain Legal Council Identify Service level Agreement
Develop Optimizing Process
Generic Practices Intangibles and Hidden Costs
Research the legal performance history of potential vendors
Plan Process Corrective Controls Provide Resources
IS Salaries and Severance Pay Train People
Identify Culture Similarities Identify Differences Organize Social Events
Assign Responsibility
Detective Controls
Determine financial consequences of risk
Prioritize of important risks
Verify the level of impact on costs, schedule, and quality
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the fact that already 316 Indian software companies have acquired quality certifications (e.g., ISO 9000) and more companies in India, China, and the Philippines are in the pipeline to do so (www.nasscom.com; Barrett, 2006; Palvia, 2006). Companies can use the CMMI model and become successful in combining their management and engineering processes as well as ensuring that their products or services meet their customers’ expectations. Companies can incorporate lessons that they have learned and address additional organizational functions that are essential to their services and products (CMMI, 2005). Companies have also aligned their internal practices with the People CMM framework and by use of Six Sigma methodology for reducing variation and assuring “end-to-end” quality in all company operations (Palvia, 2006). It is important for the organization to apply the appropriate options such as in-house, outsourced, or hybrid options (e.g., build-operate-transfer or equity investments) to the CMMI model carefully, extend an IT service and measurement culture into business processes; map the offshore location to the organization’s global presence; identify appropriate projects for global sourcing; define and measure business process performance and progress from a focus on cost to a focus on value;
and focus on measuring business value after IT projects end. Firms expect to benefit from globally recognized quality processes and will outsource offshore to get quality service which would otherwise take the in-house operation several years to achieve. To conquer the culture dilemma, IT organizations cannot simply try harder or place more pressure on their offshore vendor to deliver. Rather, they must address the issue at the source, within their own organization. Process and project management are the solutions many companies are turning toward. A sign of this trend is found with the 182% increase in companies completing the CMMI assessment from 2005 and 2006 (sei. cmu.edu, 2007). Table 3.3 illustrates the comparison of the benefits and challenges of CMMI when determining if this model would best fit within the target organization.
implications for management The market is changing as user requirements shift from supporting customized, internally focused IT environments to shared infrastructure, applications, and processes that are based on open standards. Incremental efficiencies are not enough
Table 3.3. Benefits and challenges of CMMI level 2 process adoption
Requires up to 100% more formal project manager roles than previously existed
Level 2 processes enforce establishing proper project risk monitoring through status and risk reports
Requires organizations understand how to apply resource management and project management simultaneously
Change control is formalized and documented once the project scope is agreed upon
Can be viewed by the internal and external customers as bureaucracy
Establishes processes required to measure work performed for time, quality, and commitments
Requires tools to manage scheduling and project plans
Minimizes the number of different processes used by different groups to accomplish the same thing
May be taken too far, meaning processes become rigid and restricting rather than facilitating
Can create more efficiency by reducing duplicated processes and steps
Similar gains in efficiency, quality, and commitments can be achieved without CMMI; commonly consultant companies are used to recommend process lightening and improvements.
Information Technology/Systems Offshore Outsourcing
in the age of outsourcing and offshoring; managers need to shift their emphasis to breakthrough innovation in processes that increase revenue (Koch, 2007). Managing successful IT/IS offshore outsourcing requires the intense strategic planning and full comprehension of the vendor firm culture. Important success factors include tactical entry strategies and planned control strategies. Due diligence and appropriate forecasting of costs and risks are essential for all projects. Appendix A lists the risk assessment factors and their implications for global/offshore outsourcing. In order for offshore projects to reach full potential, there must be a full identification and respect of cultural differences and similarities. Identification of the culture provides a foundation for a stronger relationship and increased job focus. As a result of deficient metrics in the evaluation of IT/ IS offshore outsourcing operations, ongoing tests and vendor monitoring can increase the possibility of discovering potential dilemmas as root causes of the problem. Organizations must understand the strategic business value of offshore outsourcing that is instrumental in enhancing growth, cost, speed, and agility. Success will be undermined if the organization focuses solely on cost reduction or tactical problems. To prepare for the future, organizations must assess their sourcing competencies and evaluate their sourcing execution and strategy capabilities.
implications for research Due to the lack of metrics in association with the evaluation of IT/IS offshore outsourcing projects, there is very little research available on the effects of offshore outsourcing on host companies and how these companies are adapting to these changes and challenges. Directions for future research include a survey methodology for crosssectional or longitudinal data collection using the CMMI framework illustrated in Figure 3.9 and inquiries concerning the client company size and financial stability, countries of vendor firms with
increasing negative results, and employee overall satisfaction of offshore outsourcing change. Future researchers may find it interesting to determine if there is a causal relationship between the degree of hierarchy within the organization, formality of relationships, and the success of the offshore outsourcing contracts. Future research could address what developing countries are doing to increase the availability and caliber of project management professionals; the real cost associated with implementing a CMMI process framework and the process level that has the greatest return on investment; and efficiency improvements in offshore outsourcing projects. IT and corporate executives would benefit from understanding the percentage of onshore versus offshore project success after factoring in the various dimensions of risk.
cOnclusiOn This chapter has explored the risks of offshore outsourcing and integrated the success factors into the CMMI model to demonstrate how companies can integrate these success factors into their goals and plans. It is perceived that offshore outsourcing of IT/IS services allows companies to become more cost effective and focus on core competencies and competitive edge. Despite a growing movement of this offshore development, an alarming number of companies are experiencing negative results while outsourcing. The lack of metrics in this domain has made it very difficult to evaluate appropriate levels of satisfaction. As a result, companies should identify technical and business risks and formulate a strategic plan that includes preventive, detective, and corrective methods of implementation and evaluation. Cultural relationships should also be emphasized in order to develop a dedicated operations focus. To ensure success, firms involved in offshore outsourcing need to make use of more advanced and complex means of communication and
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coordination in order to overcome issues such as geographical distance and cultural differences; demand economic transparency and a strong business case; adopt flexible contracts; tightly manage service level agreements; keep and build the right skills; and build accountability at all levels. Methods of measuring IT/IS operations is expected to be a key development in years to come with the increased growth of computer technology, and more quantitative measurements and evaluations will provide companies with more precise performance evaluations in the future. Most critically, the significance of achieving winwin relationships by balancing customer savings objectives with vendor margin and overhead goals will help organizations transform competitive advantage into measurable success.
rEFErEncEs Accenture. (2004). Driving high-performance outsourcing: Best practices from the masters. Executive survey results. Retrieved March 26, 2006, from http://www.accenture.com/xdoc/en/ services/outsourcing/ps/global/landing_ps.pdf Arbore, A., & Ordanini, A. (2006). Broadband divide among SMEs: The role of size, location and outsourcing strategies. International Small Business Journal, 24(1), 83-90. Bardhan, I., Whitaker, J., & Mithas, S. (2006). Information technology, production process outsourcing, and manufacturing plant performance. Journal of Management Information Systems, 23(2), 13-25. Barrett, D. R. (2006). Offshore outsourcing: Key commercial and legal issues. In C. Evans (Ed.), The Euromoney outsourcing handbook (pp. 39-48). Beiling, Y. (2006). Demand for skills in Canada: The role of foreign outsourcing and informationcommunication technology. The Canadian Journal of Economics, 39(1), 53-60.
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Capability Maturity Model Integration (CMMI) Overview. (2005). Retrieved May 7, 2006, from http://www.sei.cmu.edu/cmmi/general/general. html accessed 5/8/06 Carnegie Mellon University. (2001, October 4). Determining capabilities of IT-enabled outsourcing service providers: A capability model and methods. Retrieved May 25, 2007, from http://www.globaletp.com/images/clientExecSum_1.0_100401 Chakrabarty, S. K., Gandhi, P., & Kaka, N. (2006). The untapped market for offshore services. The McKinsey Quarterly, 16-22. Chan, S. S. (2005). IT outsourcing in China: How China’s five emerging drivers are changing the technology landscape and its industry. Retrieved April 9, 2006, from http://www.outsourcing, com/ china_trends/index.html Dhar, S. (2008). Global IS outsourcing: Current trends, risks, and cultural issues. In M. S. Raisinghani (Ed.), Global information technology management in the digital economy. Hershey, PA: IGI Global. Dolan, K. A. (2006). Offshoring the offshorers. Forbes, 177(8), 1-12. Dunlop, A., & Smith, C. (2005). Outsourcing: Know your legal position. Retrieved April 2, 2006, from http://www.computing.co.uk//computing/features/2072392/outsourcing-know-legalposition Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of Management Studies, 42(3), 675-683. Farrell, D., Dibbern, J., Goles, T., Hirschheim, Rudy & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102.
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Gonzalez, R., Gasco, J., & Llopis, J. (2006). Information systems outsourcing: A literature analysis. Information & Management, 43(7), 821-834. Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic sourcing: From periphery to the core. Harvard Business Review, 132-139. Gottschalk, P. (2006). Research propositions for
IT outsourcing destination: Russia. (2005). Retrieved April 16, 2006, from http://www. sourcingmag.com/outsource_by_region/russia_central_eastern_europe.html Iyengar, P., & Rolf, J. (2007). Factors to weigh before going offshore. Retrieved April 30, 2007, from http://outsourcing.weblog.gartner.com/weblog/index.php?blogid=9
knowledge management systems supporting IT outsourcing relationships. The Journal of Computer Information Systems, 46(3), 110-116.
Koch, C. (2007, February 1). IT builds a better. CIO, 34-40.
Greaver, M., & Kipers, K. (2005). Outsourcing. Retrieved on March 26, 2006, from http://www. valuecreationgroup.com/outsourcing_advantages.html
Kraemer, K., & Dedrick, D. (2004). Offshoring in Orange County: Leader, follower, or mirror of international trends? University of California Irvine, Personal Computing Industry Center, Graduate School of Management.
Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007). Offshoring: The transition from economic drivers toward strategic global partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. (An updated version of this paper is reproduced as Chapter 1 of this book). Hall, J. A., & Liedtka, S. L. (2007). The Sarbanes-Oxley Act: Implications for large-scale IT outsourcing. Communications of the ACM, 50(3), 12-20. Hatch, P. J. (2005). Offshore 2005 research preliminary findings and conclusions. Retrieved on March 26, 2006, from http://www.ventoro.com/ Offshore2005ResearchFindings.pdf Heib, B. R. (2006, May). Characteristics of successful care delivery: Organization IT cultures (pp. 2-3). Gartner Industry Research. Hunt, T. (2006, March 7). Concern over data security on the rise in outsourcing industry. Retrieved April 30, 2006, from http://www.marketwire.com/ mw/release-html Hyder, E. B., Kumar, B., Mahendra, V., Siegel, J., Heston, K. M., Gupta, R., et al. (2002, October 21). eSourcing capability model for IT-enabled service providers v. 1.1. Retrieved May 25, 2007, from http://reports-archive.adm.cs.cmu.edu/ anon/2002/CMU-CS-02-155.pdf
Kripalani, M., Foust, D., Holmes, S., & Enga, P. (2006). Five offshore practices that pay off. Business Week, 30(3969), 60. McLean, J. (2006). Slaves to technology? The British Journal of Administrative Management, 16. Nair, N. T. (2002). eServices capability model (eSCM)—A new quality standard for outsourcing activities. Retrieved May 23, 2007, from http:// ewh.ieee.org/r10/kerala/April_June_2002.htm Norwood, J., Carson, C., Deese, Ms., Johnson, N. J., Reeder F. S., Rolph J. E., et al. (2006, January). Offshoring: An elusive phenomenon. A Report of the Panel of the National Academy of Public Administration for the U.S. Congress and the Bureau of Economic Analysis. Nyrhinen, M., & Dahlberg, T. (2007, January). Is transaction cost economics theory able to explain contracts used for and success of firm-wide IT-infrastructure outsourcing? In 40th Annual Hawaii International Conference on System Sciences (HICSS). Palvia, S. (2006). A model for choosing a destination country for outsourcing of IT and IT enabled services. In C. Evans (Ed.), The Euromoney outsourcing handbook (pp. 39-48).
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Patterson, D. A. (2006). Offshoring; Finally facts vs. folklore. Communications of the ACM, 49(2), 41-49. Petershack, R. (2005, July 18). Consider the legal issues before outsourcing offshore. Retrieved April 9, 2006, from http://www.wistechnology. com/article.php? Id=2007 Ramanujan, S., & Jane, S. (2006). A legal perspective on outsourcing and offshoring. Journal of American Academy of Business, 8(2), 51-58. Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM, 50(4), 69-75. Seabrook, J. (2004, October 30). Offshore outsourcing. Retrieved March 30, 2006, from http:// www.countercurrents.org/glo-seabrook301003. html Seewald. (2005, February 2004). Best countries for U.S. outsourcing, 2004. Wired,101. Smarter offshoring. (2006). Harvard Business Review, 85-92. Telecoms & Technology Forecast Americas. (2005, June). Forecast on the telecommunications and technology sector (pp. 10-16).
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Tucci, L. (2005, April 5). Outsourcing needs strong RX. Retrieved April 9, 2006, from http://searchcio. techtarget.com/originalContent/0,289142,sid19_ gcil075783, 00.html Understanding the WTO—Intellectual property: Protection and enforcement. (n.d.). Retrieved April 9, 2006, from http://www.wto.org/english/ theWTO_e/whatis_e/tif_e/agrm7_e.htm Willcocks, L., Feeny, D., & Olson, N. (2006). Implementing core IS capabilities: Feeny-Willcocks IT governance and management framework revisited. European Management Journal, 24(1), 28-37. Willcocks, L. P., & Feeny, D. (2006). IT outsourcing and core IS Capabilities: Challenges and lessons at Dupont. Information Systems Management, 23(1), 49-57. WIPO-administered treaties, WIPO treaties, treaties and contracting parties: General information. (n.d.). Retrieved April 9, 2006, from http://www. wipo.int/treaties/en/
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appEndix Table A.1. Risk assessment factors and their implications for global/offshore outsourcing Risk assessment factor
Description
Implications for Global /Offshore Outsourcing
People
The people risk emerges from the experience level, training, and human resource deployment policies of the vendor. In addition, redeployment of existing IT staff of the customer is also a risk assessment factor.
Globally distributed teams with different skills and experience contribute to risk
Knowledge (Functional, Technological, Managerial)
Functional knowledge is the expertise, understanding, and experiences in the given functional area of the activity. Technological knowledge is associated with the expertise in the areas technology selection, analysis, architecture, design, development, integration, and maintenance support. Managerial knowledge is associated with the project management, risk management, resource management, developing and administrating management processes to carry out the activities.
The level of functional, technological, and managerial knowledge contributes to risk in offshore outsourcing. Managerial knowledge is extremely important in a global context.
Cultural
Cultural risks arise from the dominant culture prevalent with the vendor. The attitudes, communication skills, language, selection policies, performance motivation, team spirit, level of cohesiveness, autonomy, participatory decision making, work ethics, management style, customer-orientation, and related organizational behavioral factors that shape the culture.
Country specific cultures can add risk in global outsourcing. Language and work ethics vary from country to country and that may contribute to risk.
Political
Political risks arise out of trading restrictions imposed by the sovereign, permissible ownership rights, nationalistic aspirations, type of government, and political and economical stability.
Political instability is a major concern for global outsourcing as the government rules and regulations may have adverse effect on outsourcing.
Financial
Financial risks arise out of project accounting standards, cash flow, asset base, and currency stability.
Accounting standards and variation in currency exchange rate contribute to risk.
Quality Standards
Software Capability Maturity Model (CMM) and ISO 9000 compliance are hallmarks of the quality standards. The ability to prepare test plans, and performance standards is seen favorably while assessing the risks due to quality standards.
Quality standards vary from one country to another and contribute to risk.
Measurement
Performance measurement standards, benchmarking, and assurance of the performance are key elements in evaluating measurement risks.
Performance measurement standards vary from country to country which contributes to risk.
Scope, Cost, and Time Estimates
Ability to formulate the scope of the project, accurate cost and time estimation poses the risk.
It is quite difficult to accurately determine scope, cost, and time estimates in global outsourcing. This contributes to risk.
Company Specific Risks
Company specific risks are largely due to outsourcer’s financial strength, area of core competence, management, relationships and alliances with other major organizations, and (potential) acquisitions and mergers activities.
Different companies in foreign countries have different management and core competencies. Those contribute to risk.
Legal Contracts and Intellectual Property
Intellectual property rights and their legal status in the country, brand protection, contractual bindings, and arbitration policies of the outsourcer constitute the risk.
IP standards and law vary from one country to another and contribute to risk.
continued on following page
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Table A.1. continued Security
Access control, authentication, usage of secure protocols, encryption, and security policies adopted by the outsourcer constitute the risk.
Security is a major concern in global outsourcing as protection and control of data pose a problem.
Disaster Recovery
Ability to protect software code, and related data, level of replication, redundancy, and back-up and recovery policies are the main factors in deciding the risks due to disasters.
Loss of control over disaster recovery contribute to risk.
Contract Management
Contract management involves formulating contracts, schedule planning, activity planning, sending and accepting deliveries, dispute resolution, and signing off. Inability to properly formulate or execute the contracts constitutes the risk.
Contract management in global outsourcing is a risky business as monitoring the project activities become a challenge.
Relationships & Alliances
Ability to formulate customer-vendor interface at executive and working levels, customer relationship management, and developing long-term alliances offers synergy at organizational level.
Inability to manage relationships and alliances constitutes the risk in global outsourcing.
Geographic Location
The country, province, and city may be in different time zones, which require working at odd hours for the customer or outsourcer. The communication infrastructure, distance, industrial peace and stability in the region, availability of supporting infrastructure, social-economical-political stability constitutes the risk.
Vendor’s geographic location poses some risks. Communication infrastructure failure in offshore projects incurs significant loss.
Multi-vendor Arrangements
Synchronization of development efforts, data format exchange standardizations, complexities due to multi-layer architecture dependencies or non-contagious independent parts constitute the risk with ability to work with multi-vendor arrangements.
In global outsourcing with multi-vendor arrangements, coordination has to be efficient. Otherwise execution becomes a problem and contributes to risk.
Source: Dhar S. (2008). Global IS Outsourcing: Current Trends, Risks, and Cultural Issues, in Global Information Technology Management in the Digital Economy, Mahesh S.Raisinghani (Ed.), Idea Group Inc.
This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 1, edited by M. Khosrow-Pour, pp. 72-92, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.5
Information Technology as a Service Robin G. Qiu The Pennsylvania State University, USA
absTracT In this information era, both business and living communities are truly IT driven and service oriented. As the globalization of the world economy accelerates with the fast advance of networking and computing technologies, IT plays a more and more critical role in assuring real-time collaborations for delivering needs across the world. Nowadays, world-class enterprises are eagerly embracing service-led business models aimed at creating highly profitable service-oriented businesses. They take advantage of their own years of experience and unique marketing, engineering, and application expertise and shift gears toward creating superior outcomes to best meet their customers’ needs in order to stay competitive. IT has been considered as one of the high-value services areas. In this chapter, the discussion will focus on IT as a service. We present IT development, research, and outsourcing as a knowledge service;
on the other hand, we argue that IT as a service helps enterprises align their business operations, workforce, and technologies to maximize their profits by continuously improving their performance. Numerous research and development aspects of service-enterprise engineering from a business perspective will be briefly explored, and then computing methodologies and technologies to enable adaptive enterprise service computing in support of service-enterprise engineering will be simply studied and analyzed. Finally, future development and research avenues in this emerging interdisciplinary field will also be highlighted.
inTrOducTiOn With the significant advances in networks, telecommunication, and computing technologies, people, organizations, systems, and heterogeneous information sources now can be linked together
more efficiently and cost effectively than ever before. The quick advances of IT in general significantly transform not only science and engineering research, but also expectations of how people live, learn, and work as we witnessed during the last decade or so. Life at home, work, and leisure gets easier, better, and more enjoyable. In the business world, because of rich information linkages, the right data and information in the right context can be delivered to the right user (e.g., people, machines, devices, software components, etc.) in the right place and at the right time, resulting in the substantial increase of the degree of business-process automation, the continual increment of production productivity and services quality, the reduction of service lead time, and the improvement of end users’ satisfaction. As a variety of devices, hardware, and software become network aware, almost everything is capable of being handled over a network. Many tasks can be done on site or remotely, and in the same manner, so are a variety of services provided or even self-performed over the Internet. At the end of day, end users or consumers do not care about how and where the product was made, by whom, and how it was delivered; what the end users or consumers essentially care about is that their needs are met in a satisfactory manner. In manufacturing, the deployment of integrated information systems is accelerating (Qiu, 2004). A typical IT-driven manufacturing business can be created by deploying enterprise-wide information systems managing the life cycle of both the business and its electronic aspects; that is, an order is taken over the Internet, and the products are made and delivered as promised. For instance, customers submit their orders via Internet browsers directly through a sales-force automation center, which automatically triggers the generation of the appropriate material releases and production requirements. It also informs all the other relevant planning systems, such as those for advance production schedule, finance, supply chain, logistics, and customer-relationship man-
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agement, of the new order entry. The scheduler then assigns or configures an on-site or remote production line through the production control in the most efficient way possible, taking into account raw material, procurement, and production capacity. A shop-floor production-execution schedule is then generated, in which problems are anticipated and appropriate adjustments are made accordingly in a corresponding manufacturing execution system. In the designated facility, the scheduled work is accomplished automatically through a computer-controlled production line in an efficient and cost-effective manner. As soon as the work is completed, the ordered product gets automatically warehoused and/or distributed. Ultimately, the customers should be provided the least cost and best quality goods, as well as the most satisfactory services (Qiu, Wysk, & Xu, 2003). No matter what is made and how services are delivered, in reality, high living standards with a better quality of life are what we are pursuing as human beings. When the communities we are living in are deeply studied, we understand that our communities are truly IT driven and service oriented in the information era. Here are a few daily noticeable, inescapable, and more contemporary service examples that could be on demand at any time and place (Dong & Qiu, 2004; Qiu, 2005). •
A passenger traveling in a rural and unfamiliar area suddenly has to go to a hospital due to sickness, so local hospital information is immediately required at the point of need. The passenger and his or her companions wish to get local hospital information through their cellular phones. Generally speaking, when travelers are in an unfamiliar region for tourism or business, handy and accurate information on routes and traffic, weather, restaurants, hotels, hospitals, and attractions and entertainment in the destination region will be very helpful.
Information Technology as a Service
•
•
•
A truck fully loaded with hazardous chemical materials is overturned on a suburban highway. Since the chemicals could be poisonous, people on site need critical knowledge (i.e., intelligent assistance) to quickly perform life-saving and other critical tasks after one calls 911 (in the United States). However, people on site most likely cannot perform the tasks effectively due to limited knowledge and resources. Situations could be worse if tasks are not done appropriately, which could lead to an irreversible and horrible result. Intelligent assistant services are necessary at the point of need. Obviously, the situation demands a quick response from the governmental IT-driven emergency response systems. Transportation plays a critical role in warranting the quality service and effectiveness of a supply chain. When a truck is fully loaded with certain goods, certain attention might be required from the driver from time to time, for instance, to the air, temperature, and/or humidity requirements. Only when the requirements are met on the road can the goods in transit be maintained with good quality. Otherwise, the provided transportation service will not be satisfactory. Due to the existence of a variety of goods, it is impossible for drivers to master all the knowledge on how the goods can be best monitored and accordingly protected on the highway as many uncertain events might occur during the transportation of the goods. On-demand services to assure warranty are the key for an enterprise to lead competitors. As manufacturing and services become global, more challenges are added into this traditional service. The growing elderly population draws much attention throughout the world, resulting in issues on the shortage of laborers and more importantly the lack of effective health-care delivery. Studies show that elderly patients
(65 or older) are twice as likely to be harmed by a medication error because they often receive complex drug regimens and suffer from more serious ailments that make them particularly vulnerable to harmful drug mistakes. Outpatient prescription-drug-related injuries are common in elderly patients, but many could be prevented. For instance, about 58% adverse drug events could be prevented if continuity-of-care record plans and related health-care information systems are adopted for providing prompt assistant services; over 20% of drug-related injuries could be prevented if the given medication instructions are provided at the point of need so the instructions are adhered to by the patients. Apparently, the real-time flow of information and quick delivery of relevant information and knowledge at the point of need from an information-service provider or system is essential for providing quality services to meet the on-demand needs descried in all the above scenarios. In a broader view, the service-oriented society is clearly evidenced by the largest labor migration in history around the world. According to Rangaswamy and Pal (2005), total-solution services (enabled performances for the customer’s benefit rather than a physical good) constitute the prime marketplace battlefield of the day. For instance, in the U.S. economy, over 70% of the 2005 gross domestic product was generated from services businesses. Similar numbers dominate many other developed economies worldwide. Even in some developing countries like China and India, 35% of labor is service oriented, and the number continues to climb every year. The world-developed economy is clearly heading to one that is IT driven, technology based, and services led. Because of the fast development of IT, the globalization of the world economy is accelerating. Under the umbrella of global virtual enterprises through collaborative partnerships, enterprises
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can provide best-of-breed goods and services at a more competitive price while meeting the changing needs of today’s on-demand business environment. As competition in the globalizing economy unceasingly intensifies, it becomes essential for enterprises to rethink their operational and organizational structures to meet the consumers’ fluctuating demand for innovation, flexibility, and shorter lead times for their provided goods and services. For example, for farsighted manufacturers in the developed economy, as their product technologies might quickly lose their competitiveness, they recognize that only their services components would distinguish themselves from their competitors. Therefore, enterprises are keen on building highly profitable service-oriented businesses by taking advantage of their own unique engineering and application expertise, aimed at shifting gears toward creating superior outcomes to best meet their customers’ needs in order to stay competitive (Rangaswamy & Pal, 2005). The value of provided goods or delivered services lies in their ability to satisfy an end user’s need, which is not simply and strictly seen in the physical attributes of the provided product or the technical characteristics of the delivered service. For today’s competitive enterprise, a superior outcome provided to its customer inevitably constitutes services contributing to the entire customer solution through the well-established and highly collaborated value net, including the support of solution engineering, the sale of a physical product, product sustaining, personnel training, and/or a knowledge-transformation service in a satisfactory manner. This new and emerging field is truly interdisciplinary in nature and explores new frontiers of research, attempting to build a true science and engineering base and establish the foundation for understanding future competitiveness (IBM, 2004; Rangaswamy & Pal, 2005). As discussed above, IT plays a critical role in facilitating today’s geographically dispersed
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manufacturing and services delivery. It is IT that enables real-time information flow. When enterprise-wide information systems are fully integrated throughout the whole customer order fulfillment process, all of the order information, lot travelers, material consumptions, customer services, and accounting ledgers can be continuously updated. Therefore, top management can keep abreast of how efficiently the enterprises are running and thus make the optimal decisions possible with real-time information on sales, finances, resources, and capacity utilizations. As a result, enterprises are staying due to better competitive advantages as customers are totally satisfied with their on-demand needs. Total satisfaction typically drives further sales. As the economy shifts from being manufacturing based to information-services based, better understanding of services marketing, innovation, design, engineering, operations, and management will be essential. Evidently, IT is a service from an end user’s perspective. By aggregating the concepts and research from the latest literature, this chapter presents the author’s point of view on this emerging interdisciplinary field, focusing on how enterprise service computing might be evolving from the current research and development. In the remainder of the chapter, numerous research and development aspects of service-enterprise engineering from the business perspective will be first discussed, and then some technologies to enable adaptive enterprise service computing in support of future service-enterprise engineering will be briefly introduced and analyzed.
aspEcTs OF sErvicEs-EnTErprisE EnginEEring With the push of the ongoing industrialization of information technologies, enterprises must aggregate products and services into total solutions by implementing an integrated and complete
Information Technology as a Service
value net over all of their geographically dispersed collaborative partners to deliver services-led solutions in order to stay competitive (Figure 1). The essential goal of applying total solutions to value networks is to enable the discovery, design, deployment, execution, operation, monitoring, optimization, analysis, transformation, and creation of coordinated business processes across the value chain: a collaborating ecosystem. Ultimately, the profit across the whole value network can be maximized as it becomes the top business objective in today’s global business environment (Karmarkar, 2004). The shift from a manufacturing base to a services base makes enterprises rethink their business strategies and revamp their operational and organizational structures to meet the customers’ fluctuating demands for services delivered in a satisfactory fashion. Enterprises across the board in general are eager to seek new business opportunities by streamlining their business processes; building complex, integrated, and more efficient IT-driven systems; and embracing the worldwide Internet-based marketplace. It is well recognized that business-process automation, outsourcing, customization, offshore sourcing, businessprocess transformation, and self-services became another business wave in today’s evolving global services-led economy. Services sectors nowadays cover commercial transportation, logistics and distribution, healthcare delivery, financial engineering, e-commerce, retailing, hospitality and entertainment, issuance,
supply chains, knowledge transformation and delivery, and consulting. In the developed countries, services enterprises are the new industrial base of the economy. For instance, almost four out of five jobs are currently offered by these services sectors in the United States. On the other hand, in the developing countries, more traditional labor-intensive manufacturing and services are still the core businesses. However, the developing countries actively participate in the global economy, mainly providing the physical attributes of goods and services through the manufacturing and delivering of labor-intensive services and business functions. The global economy in the 21st century requiring a business ecosystem for better effectiveness, efficiency, and manageability thus involves all the collaborated business-function organisms with their operational settings. The global ecosystem indeed includes participants from both the developed and developing countries. Although this new wave seems to be repeating the trends that afflicted U.S. manufacturing in the 1970s, it gets more complicated in demanding higher efficiency and better cost effectiveness across the geographically dispersed value chains. Moreover, compared to industry’s knowledge of mature manufacturing business practices, services-enterprise engineering is still substantially uncharted territory (Rangaswamy & Pal, 2005). According to IBM (2004): Services sciences, Management and Engineering [as an emerging interdisciplinary field] hopes to
Figure 1. Service-oriented business value net Customer satisfaction
Value Net (Product Design, Production, Delivery, and Services)
Enterprise 1 (supplier)
Enterprise 2 (manufacturer)
Enterprise n-1 Enterprise n (distributor) (services provider)
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bring together ongoing work in computer science, operations research, industrial engineering, business strategy, management sciences, social and cognitive sciences, and legal sciences to develop the skills [and knowledge] required in a servicesled economy. Only recently have there been some international initiatives to promote research and education in this emerging field in a comprehensive manner. Research and education in services-enterprise engineering to cultivate and empower the ecosystem driven by services, technology, and management have been lagging behind when compared to many other areas as many scholars from leading universities and professionals from industrial bellwethers have only recently started to pay more attention to services-enterprise-engineering research. More importantly, the services and services-enterprise-engineering scope have evolved and expanded enormously as the world economy accelerates the pace of globalization due to the tremendous advances in IT (including computing, networks, software, and management science). Consequently, little is really known about how services sciences, management, and engineering can be systematically applied for the delivery of a services-led value chain from end to end. As mentioned earlier, today’s services concept evolves beyond the traditional nonagricultural and/or nonmanufacturing performance for the consumer’s benefit. For example, many new and emerging high-value areas, such as IT outsourcing, postsales training, and on-demand innovations consulting (including any work helping customers improve their products, business processes, goods and services delivery, and supportive IT systems), are well recognized as services, drawing substantial attention from many industrial bellwethers (Fitzgerald, 2005; Rosmarin, 2006). On one hand, unique and satisfactory services differentiate an enterprise from its competitors; on the other hand, highly satisfactory services
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delivery frequently drives more product sales. As the shift from a manufacturing base to a services base becomes inescapable for both the developed countries and the developing countries, enterprises are gradually embracing defining and selling anything as a service (Rosmarin). To ensure the prompt and cost-effective delivery of innovative and satisfactory services for customers throughout the geographically dispersed value net, enterprises nowadays have to rethink their operational and organizational structures by overcoming a variety of social and cultural barriers. Challenges appear in many aspects from business strategy, marketing, modeling, innovations, design, and engineering to operations and management. Since the general services topic is too broad and vague, the following discussions mainly focus on the needs for research and education in IT services, aimed at providing some fundamental understanding for business executives, managers, knowledge workers, and professionals in the relevant business sectors and research fields.
business strategy As an enterprise is diving into building a highly profitable service-oriented business by taking advantage of its own unique engineering expertise and services knowledge, aimed at shifting gears toward creating superior outcomes to best meet customer needs, an adequate business-service strategy will be vital for the enterprise’s growth in the long run. As discussed earlier, it is the mainstream for enterprises to collaborate with their worldwide partners to deliver best-of-breed services to their customers. Despite the recognition of the importance of service-enterprise-engineering research, the shift to focus on services in the information era has created a research gap due to the overwhelming complexity of interdisciplinary issues across service-business modeling, information technologies, and workforce management. Filling the gap is essential. According to Rust (2004, p. 211):
Information Technology as a Service
We can move the field forward not only by understanding and serving the customer but by designing efficient systems of service delivery; training and motivating service providers; using new service technologies; and understanding how service affects the marketplace, the economy, and government policy.
•
• The development of a business strategy meeting the long-term growth of a services enterprise should ensure that the defined business road map organically integrates corporate strategy and culture with organizational structure and functional strategy, and allows managing the interface of strategy and technology in a flexible and costeffective fashion. In general, the development of business strategy for enterprises adaptable to a new business environment requires great understanding of incorporations of solutions to addressing at least the following challenges in the services-led economy (Cherbakov, Galambos, Harishankar, Kalyana, & Rackham, 2005; Wright, Filatotchev, Hoskisson, & Peng, 2005). •
•
Maximizing the total value across the value chain: The outcome of the value chain nowadays is clearly manifested by customer satisfaction, which is mainly dependent upon the capability of providing on-demand, customizable, and innovative services across the value net. The international transferability of staying competitive: Enterprises reconstruct themselves by taking advantage of globalization in improving their profit margins, resulting in the fact that subcontracting and specialization prevail. Radically relying on efficient and cost-effective collaborations, a services provider essentially becomes a global ecosystem in which international transferability plays a critical role. International transferability could cover a variety of aspects from human capital, worldwide
•
trade and finance, social structures, and natural resources to cultures and customs. Organizational learning as competitive advantage: The globalization of the services workforce creates new and complex issues due to the differences in cultures, time, and skills. Coping with the complexities, uncertainties, and changes: Change is the only certain thing today and tomorrow. As the complexities, uncertainties, and changes are reconfiguring the business world, an enterprise should be able to quickly adapt to the change. Aligning business goals and technologies to execute world-class best practices: Business componentization cultivates value nets embracing best-of-breed components throughout collaborative partnerships. The value nets essentially are social-technical systems and operate in a network characterized by more dynamic interactions, real-time information flows, and integrated IT systems. Apparently, aligning business goals and IT is indispensable to the successful execution of applied world-class best practices in services enterprises.
services marketing “[Today’s] business reality is that goods are commodities; the service sells the product,” says Roland Rust (2004, p. 211), a leading professor and the David Bruce Smith chair in marketing at the Robert H. Smith School of Business at the University of Maryland. It is not a secret that quality services essentially lead to high customer satisfaction. Satisfaction characterized as a superior outcome then further drives customer decisions. The services-led total solution measured by performance for the customer’s final benefit rather than the functionality of physical goods become the prime competition in the global services-led marketplaces.
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There are many new business opportunities in numerous newly expanded areas under the new concept of services, for example, e-commence, e-services, auctions, and IT consulting (Menor, Tatikonda, & Sampson, 2002). Although these emerging services have gained much popularity with consumers, many new issues solicit more exploration for a better understanding of marketing to ensure that business goals can be met in the long run. Rust and Lemon (2001) discuss that Internet-based e-services can better serve consumers and exceed their expectations through real-time interactive, customizable, and personalized services. Effective e-service strategy and marketing play a significant role in growing the overall value of the services provider. A set of research questions in many customer-centric areas is proposed, aimed at leading to a stronger understanding of e-service and consumer behavior. Cao, Gruca, and Klenz (2003) model the relationships between e-retailer pricing, price satisfaction, and customer satisfaction so a more competitive business can be operated. According to Rangaswamy and Pal (2005), service marketing as a fundamental servicevalue driver is much less understood compared to product marketing. Typically, a service outcome is freshly “manufactured” or “remanufactured” at the customer’s site when it is delivered; it depends heavily on a well-defined and consistent process applied by trained personnel time after time, and leads to winning future competition through future innovations. It is hardly an easy transition from traditional business or consumer-product marketing techniques.
services design and Engineering There have been many publications in the literature illustrating a variety of approaches to services design and engineering across industries. Although some of them present their scientific methodologies to realize the targeted goals specified by customers, the majority of them simply
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show their empirical and heuristic methods to deliver services design and engineering processes. In the emerging high-value IT-services area, there is a great need for methodologies for the design and engineering of long-term, high-quality, and sustaining services in order to meet the defined business strategy of a services provider. Zhang and Prybutok (2005) study the design and engineering factors impacting service quality in the e-commerce services sector. Introducing new products and services indeed would certainly help new revenue generation. However, retaining customers’ high satisfaction and alluring them for purchasing further products and services are highly dependent upon other numerous critical factors, for instance, system reliability, ease of use, localization and cultural affinity, personalization, and security. As the levels of price satisfaction might not be increased simply by lowering prices, competing on price hence is not a viable long-term strategy for online retailers. Cao et al. (2003) model the relationships between e-retailer pricing, price satisfaction, and customer satisfaction through analyzing the whole services process. They find that the design and engineering of a satisfactory ordering process generates higher overall ratings for fulfillment satisfaction, which better retains loyal customers and accordingly helps a services provider to stay competitive. As discussed earlier, services sectors cover both traditional services (e.g., commercial transportation, logistics and distribution, health-care delivery, retailing, hospitality and entertainment, issuance, and product after-sale services) and contemporary services (e.g., supply chains, knowledge transformation and delivery, financial engineering, e-commerce, and consulting). The competitiveness of today’s services substantially depends on efficient and effective services delivery networks that are constructed using talent and comprehensive knowledge with a combination of business, management, and technology. The services processes should be flexibly engineered by effectively bridging the science of modeling and
Information Technology as a Service
algorithms on one hand, and business processes, people skills, and cultures on the other hand.
prise should be clearly described using a service innovation framework (Figure 2):
services modeling and innovation Framework
The framework can guide the creation of customer value and demand, and the processes and organizations that deliver services successfully—all of it catalyzed by emerging technologies.
Services innovations are the key to stay a step or two ahead of competitors. James Spohrer, director of IBM Services Research, has an insightful view of the need for the investigation of service innovations and modeling. He states: Increasingly over the past ten years, the new frontier of service research and teaching has shifted more and more towards business-to-business process transformation models. Process reengineering, IT productivity paradox, and other case studies highlight the need to constantly redesign work to improve productivity through multiple types of innovation in demand, business value, process, and organization. A well-defined services model and innovation framework will effectively guide services enterprises to best design, develop, and execute their well-defined strategic plan for long-term growth. New service-delivery models are essentially derived by working closely with customers to cocreate innovative and unique solutions best meeting customers’ inevitably changing needs. According to Rangaswamy and Pal (2005), a competitive service business model for an enter-
Although detailed panel views of customer value, demand, process, and organization have been given in the white paper by Rangaswamy and Pal (2005), there is still the lack of a systematic approach to address how such a model and innovation framework can be enabled in practice. Given the tremendous complexity and variance from service to service, vertical service-domain knowledge of modeling and frameworks should be first investigated. Only when a better understanding of a variety of services domains is accomplished can an integrated and comprehensive methodology to address the services model and innovation framework across industries be explored and acquired.
services Operations and management Operations research and management with focus on business-internal efficiency has made significant progress and developed a huge body of knowledge during the last 65 years or so. The relevant research and algorithm development has been mainly conducted in the areas of optimiza-
Figure 2. Services innovations framework and modeling
Vision/ Value Governance Technology Road Map Execution Technology Deployment
Customer Value
Cocreation + Q uality
Demand
Relationship + Preference
Process
Augmentation + Automation
Organization
People + Culture + Metrics
Services Driver
Services Enabler
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tion, statistics, stochastic processes, and queuing theory. Current applications cover areas from vehicle routing and staffing, supply-chain modeling and optimization, transportation modeling, revenue management, risk management, servicesindustry resource planning and scheduling to airline optimization and forecasting. In general, operations research has unceasingly improved living standards as it has been widely applied in practice for the improvement of production management and applications productivity. Operations research and management originated from practice and has been growing as a more quantitative, mathematical, and technical field. Larson (2005) argues that practice makes perfect operations research. As new problems are identified and framed, formulated, and solved by applying operations-research approaches, tremendous impact will be provided and accordingly a new theory might be created. Sociotechnical services systems show a more practical nature and are extremely complex, and they are typically modeled and formulated using qualitative approaches. An understanding of such a complex problem involves deep and thoughtful discussion and analysis using common sense, basic principles, and modeling. Through new initiatives, the operations-research body of knowledge can be perfectly applied to these practical problems. Services operations and management are essentially operations research and management applied to services settings. As discussed earlier, on one hand, the research and development of IT is a service. On the other hand, when IT helps enterprises streamline their business processes to deliver quality and competitive goods and services, it essentially functions as a knowledge service. However, efficient IT-service delivery to meet the needs of adaptive enterprises requires talent and comprehensive knowledge with a combination of business, management, and IT. Therefore, service-based operations research and management is in demand as it matches the
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emerging realization of the importance of the customer and a more customer-oriented view of operations. Services operations and management fits well with the growing economic trend of globalization, which requires operations research in services practice. According to Bell (2005), operations research applied to services has much to offer that could improve the lives of everyone. He presents seven useful operations research frameworks that can be effectively used in addressing practical and complex problems like services delivery networks. Moreover, services operations are closely synchronized with the business operations of other collaborative partners as well as customers, aimed at cocreating value for customers in a satisfactory manner while meeting the business objectives across the value net. Given the industrialization of services and the economy of globalization, reorganizing, realigning, redesigning, and restructuring enterprises’ strategies, processes, IT systems, and people for the challenges ahead are essential for ensuring that services providers are agile and adaptive, and stay competitive (Karmarkar, 2004). In summary, given the increasing complexity of building sociotechnical services systems for improving living standards by applying operation research and management science in practice, services operations and management should cover more initiatives for the rooted practical aspects of research, linking operational performance to business drivers, performance measurement and operations improvement, service design, service technology, human capital, the design of internal networks, and the management of service capacity (Johnston, 1999). The study should also take into consideration high performance, distributed computing, humans’ and systems’ behavioral and cognitive aspects (which emerges as the new look of the interface to systems engineering), and highly collaborative interaction natures.
Information Technology as a Service
adapTivE EnTErprisE sErvicE cOmpuTing Enterprises are eagerly embracing building highly profitable service-oriented businesses through properly aligning business and technology and cost effectively collaborating with their worldwide partners so that the best-of-breed services will be generated to meet the changing needs of customers. To be competitive in the long run, it is critical for enterprises to be adaptive given the extreme dynamics and complexity of conducting businesses in today’s global economy. In an adaptive enterprise, people, processes, and technology should be organically integrated across the enterprise in an agile, flexible, and responsive fashion. As such, the enterprise can quickly turn changes and challenges into new opportunities in this on-demand business environment. IT service is a high-value services area that plays a pivotal role in support of business operations, logistics, health-care delivery, and so forth. IT service in general requires people who are knowledgeable about the business, IT, and organization structures, as well as human behavior and cognition that go deep into successful services operations (IBM, 2004). For IT systems to better serve the service-oriented enterprise, service-oriented business components based on business-domain functions are necessary (Cherbakov et al., 2005). The question is what systematic approach and adequate computing technologies will be suitable for IT development leading to the success of building an adaptive enterprise. Computing technologies (e.g., software development) unceasingly increase in their complexities and dependencies. Aiming to find a better approach to managing complexities and dependencies within a software system, the practice of software development has gone through several methods (e.g., conventional structural programming, object-oriented methods, interface-based models, and component-based constructs). The emergence of developing coarse-grained granu-
larity constructs as a computing service allows components to be defined at a more abstract and business-semantic level. That is, a group of lower level and finer grained object functions, information, and implementation software objects and components can be choreographically composed as coarse-grained computing components, supporting and aligning business services. The componentization of the business is the key to the construction of best-of-breed components for delivering superior services to the customers. Successful operations of a componentized business require seamless enterprise integration. Thus, service-oriented IT systems should be able to deal with more amounts of interaction among heterogeneous and interconnected components, and be more flexible and adaptive. Obviously, adaptive and semantic computing services representing business functions meet the needs of the service-oriented IT systems. When computing components manifest business services at the semantics level, an IT system is a component network, fundamentally illustrating a logic assembly of interconnecting computing components: The need for flexibility across the value net requires that the component network be flexible; that is, the enterprise can “in-source” an outsourced component and vice versa; replace, on demand, a current partner with a different partner; change the terms of the contract between the two components, and so on. (Cherbakov et al., 2005) A generic service-oriented IT computing architecture for the development of a component network is illustrated in Figure 3. The top two layers represent services operations from the business-process perspective while the bottom three layers show the value-adding services processes from the computing perspective. Apparently, how to optimally align enterprise-level business strategies with value-adding operations and activities is the key to the success of the deployment of an agile enterprise service-oriented IT system (Qiu, in press). 81
Information Technology as a Service
Figure 3. Service-oriented component-network architectural model
Integration Framework
Enterprise Business Application
Plant Front-End Applications (e.g., ERP, SCM , and CRM )
Interoperable Services M odules (Semantic Services, M essages,…)
Process Services (Services and Service Co mpositions)
Aggregated Business Services (Web Services, etc.)
Ru les and Logics (Co mputing Operat ions)
Business Logics, Algorithms, Domain M odules/Applications
(a) The enterprise service computing architectural model
However, the exploitation, establishment, control, and management of dynamic, interenterprise, and cross-enterprise resource-sharing relationships and the realization of agility in a serviceoriented IT system require new methodologies and technologies. The remaining discussions focus on the following four emerging synergic IT research and development areas aimed at providing some basic understanding of the emerging methodologies and technologies in support of the future deployment of IT services that enable adaptive enterprise service computing. •
•
•
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Integration Backbone
Service-oriented architecture (SOA): SOA is considered the design principle and mechanism for defining business services and computing models, thus effectively aligning business and IT. Component-process model (CPM): A component business-process model facilitates the construction of the business of an enterprise as an organized collection of business components (Cherbakov et al., 2005). Business-process management (BPM): BPM essentially provides mechanisms to transform the behaviors of disparate and heterogeneous systems into standard and interoperable business processes, aimed at effectively facilitating the conduct of ITsystem integration at the semantics level (Smith & Fingar, 2003).
•
(b) An implementation
Web services: Web services are simply a suite of software-development technologies based on Internet protocols, which provide the best interoperability between IT systems over the network.
service-Oriented architecture According to Datz (2004), “SOA is higher level of [computing] application development (also referred to as coarse granularity) that, by focusing on business processes and using standard interfaces, helps mask the underlying complexity of the IT environment.” Simply put, SOA is considered the design principle and mechanism for defining business services and computing models, thus effectively aligning business and IT (Figure 4; Newcomer & Lomow, 2005). Based on the concept of SOA, a deployed service-oriented IT system can provide a common way of cost effectively and efficiently managing and executing distributed heterogeneous services across enterprises. To properly implement serviceoriented IT systems complying with SOA, three major levels of abstraction throughout collaborated IT systems are necessary (Zimmermann, Krogdahl, & Gee, 2004). •
Business processes: A business process typically consists of a set of actions or activities executed with specifically defined
Information Technology as a Service
Figure 4. Aligning business and information technology Service-Oriented B usiness • Delivering services to customers, clients, citizens, and partners
Staff
Human-Mediated Services
Custome rs
Self-Services
Partners
System-to-System Services Delivery
Aligns Business & Technology Service-Oriented Architecture • A blueprint that governs creating, deploying, executing, and managing reusable business services • Services/operations can be enabled using Web services
•
•
Serv ice-Oriented Architecture ( SOA)
ERP/SCM Info
long-term business goals. A business process usually requires multiple computing services. Service invocations frequently involve business components across the network. Examples of business processes are the initiation of a new employee, the selling of products or services, a project’s status, and order-fulfillment information. Services: A service represents a logical group of low-level computing operations. For example, if customer profiling is defined as a service, then looking up customers from data sources by telephone number, listing customers by name and postal code on the Web, and updating data for new requests represent the associated operations. Operations: A computing operation represents a single logical unit of computation. In general, the execution of an operation will cause one or more data sets to be read, written, or modified. In a well-defined SOA implementation, operations have a specific, structured interface and return structured responses. An SOA operation can also be composed of other SOA operations for better structures and maintainability.
SOA as a design principle essentially is concerned with designing and developing integrated systems using heterogeneous network-addressable and standard interface-based computing ser-
Account Info
Customer Support
vices. Over the last few years, SOA and service computing technology have gained tremendous momentum with the introduction of Web services (a series of standard languages and tools for the implementation, registration, and invocation of services). Enterprise-wide integrated IT systems based on SOA ensure the interconnections among integrated applications in a loosely coupled, asynchronous, and interoperable fashion. It is believed that BPM (as transformation technologies) and SOA enable the best platform for integrating existing assets and future deployments (Bieberstein, Bose, Walker, & Lynch, 2005).
component-process model Given the increasing complexity and dynamics of the global business environment, the success of a business highly relies on its underlying ITsupportive systems to support the changing best practices. In adaptive enterprise service computing, the appropriate design of IT-driven business operations mainly depends on well-defined constructs of business processes, services, and operations. Hence, to make this promising SOA-based component-network architectural model able to be implemented, it is essential to have a well-defined, process-driven analytical and computing model that can help analysts and engineers understand and optimally construct the business model of an enterprise for IT implementation.
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A business process typically consists of a series of services. As a business process acts in response to business events, the process should be dynamically supported by a group of services invoked in a legitimate sequence. To ascertain the dynamic and optimal behavior of a process, the group of underlying computing services should be selected, sequenced, and executed in a choreographed rather than predefined manner according to a set of business rules. A service is made of an ordered sequence of operations. CPM basically is a design and analytical method and platform to ensure that well-designed operation, service, and process abstractions can be characterized and constructed systematically for adaptive enterprise service computing (Cherbakov et al., 2005; Kano, Koide, Liu, & Ramachandran, 2005; Zimmermann et al., 2004). CPM essentially provides a framework for organizing and grouping business functions as a collection of business components in a wellstructured manner so that the components based on business processes can be modeled as logical business-service building blocks representing corresponding business functions. Figure 5 schematically illustrates a simplified components-process model for a service provider (Cherbakov et al., 2005). Just like many business-analysis diagrams, CPM can also be refined into a hierarchy. In other
words, a process can be composed of a number of refined processes in a recursive fashion. As CPM can accurately model business operations using well-defined services in SOA terms, CPM helps analyze a business and develop its componentized view of the business. Furthermore, the developed model for the business will define components concentrating on the interfaces and service-level agreements between the services. As a result, each business component will be supported by a set of IT-enabled services, while meeting the requirements of the deployment of adaptive enterprise service computing. Most importantly, as the business evolves, CPM can help analyze the hot spot of the business operations. When business-performance transformation is required as the business settings change, CPM and the underlying IT systems can be quickly transformed to meet the needs of on-demand businesses (Cherbakov et al., 2005).
business-process management BPM emerges as a promising guiding principle and technology for integrating existing assets and future deployments. BPM is new in the sense that it describes existing disparate and heterogeneous systems as business-process services when conducting IT-system integration for better
Workforce Administration Production Administration
Sales-Force Automation
Competency
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time data flows, BPM provides the capability of addressing a range of choreographic business challenges and improving business operations in nearly real time. BPML is defined for modeling complex business processes. Using the BPML specification to describe the business model of an enterprise provides the abstract model of the enterprise. The abstracted model is programmatically structured and represented using extensible markup language (XML) syntax to express the defined executable business processes and supporting entities for the enterprise. BPMN provides the capability of defining and understanding internal and external business operations for the enterprise through a business-process diagram. Through visualization, it gives the enterprise the ability to communicate these modeling and development procedures in a standard manner. BPEL for Web services then defines a standard way of representing executable flow models, which essentially extends the reach of business-process models from analysis to implementation through leveraging the power of Web-service technologies. The emergence of BPM introduces an innovative platform for conducting IT-system integration. BPM enables service-oriented IT systems over the network to be able to dynamically and promptly coordinate the behaviors of disparate
business agility rather than simply integrating those systems using EAIs (enterprise application integrations), APIs (application programming interfaces), Web-services orchestration, and the like. By providing mechanisms to transform the behaviors of disparate and heterogeneous systems into standard and interoperable business processes, BPM essentially aims at enabling a platform to effectively facilitate the conduct of IT-system integration at the semantics level (Smith & Fingar, 2003). Since an SOA computing service at the system level essentially is the business function provided by a group of components that are network addressable and interoperable, and might be dynamically discovered and used, BPM and SOA computing services can be organically while flexibly and choreographically integrated, which is schematically illustrated in Figure 6 (Newcomer & Lomow, 2005). In essence, BPM takes a holistic approach to enterprise service computing from the businessprocess execution perspective, substantially leveraging the power of standardization, virtualization, and management. BPM initiatives include a suite of protocols and specifications, including the business process modeling language (BPML), business process modeling notation (BPMN), and business process execution language (BPEL). By treating the business-process executions as real-
Figure 6. BPM merging with SOA services BPM
B us iness-Process Laye r: B PML/B PM N Se rv ices Laye r:
B PEL
(We b) Se rv ices
Web-Services Platform SOAP, WSDL, UUDI …
PeopleSoft
SAP
Custom/ Legacy
Office/ Exchange
SAS
Applicatio n Laye r
Java/ J2EE DBMS
C++ /Unix MQ
.NET/ Windows LDAP
Mobile
PKI
CICS/ OS/390 Te chno log y Laye r
Modeling, Execution, Monitoring, Optimization (Life-Cycle Management, Cross-Function, End-to-End Business Processes)
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and heterogeneous computing services across enterprises. It is through BPM that business agility is retained while the return of IT investment is maximized.
Web services represent the evolution of Web technology to support high performance, scalability, reliability, interoperability, and availability of distributed service-oriented IT systems across enterprises around the whole world.
web services Apart from traditional software technologies, Web technology in general is nonproprietary and platform independent. Using standard Internet protocols, a Web service is a self-contained, selfdescribing, and network computing component. A Web service can be conveniently deployed, published, located, and invoked across the network. As Web services can be assembled and reassembled as needed across the network, the needs of adaptive enterprise computing of a business can be cost effectively supported. Web-services technology essentially consists of a stack of protocols and specifications for defining, creating, deploying, publishing, locating, and invoking black network components. The stack mainly includes the simple object access protocol (SOAP), XML and XML namespaces, Web service description language (WSDL), and universal description, discovery, and integration (UDDI). A computing service deployed as a Web service has to strictly comply with the stack of protocols and specifications. SOAP is the underlying communication protocol between the service provider and consumer, and explicitly defines how the service provider and consumer interact and what the enabled computation results in. WSDL is the language for defining the computing service, and basically specifies the location of the computing service and the operations the service exposes. UDDI then provides the formal interface contract and the global base for the registration and discovery of the deployed computing service. Web services are standard run-time technologies over the Internet, providing best-ever mechanisms for addressing heterogeneous computing issues. By converging SOA and Web technology,
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cOnclusiOn This chapter aimed at providing a basic understanding of the IT-driven, service-led economy. By discussing the challenges of services marketing, innovations, design, engineering, operations, and management from an IT perspective, this chapter gave the author’s point of view on how service-enterprise engineering should be evolving from the current research and development. For an enterprise to be adaptive and able to quickly turn changes and challenges into opportunities so that the needs of the on-demand business can be optimally met, the workforce, processes, and technologies have to be organically aligned and integrated across the enterprise in an agile, flexible, and responsive fashion. The following four design and computing methodologies and technologies are currently proposed as the necessities of enabling adaptive enterprise service computing. SOA is the design methodology to ensure the best aligning of the business and IT-driven system. CPM is a structured view of a business, which helps analysts and designers to optimally construct the long-term architectural and functional models for IT implementation. BPM is a rigorous method to embody the design and development of CPM, which essentially provides mechanisms to transform the behaviors of disparate and heterogeneous systems into standard and interoperable business processes so that the conduct of IT-system integration can be accomplished at the semantics level. BPEL and Web services are the run-time technologies suited for this need of BPM materialization. Grid computing is emerging as a new and powerful computing technology to enable re-
Information Technology as a Service
source sharing for complex problem solving across businesses, institutions, research labs, and universities. Well-informed operational, tactical, and strategic decisions can only be made when nearly perfect and real-time visibility of the fulfillment of products and services can be provided in the on-demand e-business environments. It is envisioned that grid computing will join services science, management, and engineering in support of IT-driven system deployment for enabling real-time adaptive enterprise service computing in the near future.
rEFErEncEs Bell, P. (2005). Operations research for everyone (including poets). OR/MS Today, 32(4), 22-27. Bieberstein, N., Bose, S., Walker, L., & Lynch, A. (2005). Impact of service-oriented architecture on enterprise systems, organizational structures, and individuals. IBM Systems Journal, 44(4), 691-708. Cao, Y., Gruca, T., & Klemz, B. (2003). Internet pricing, price satisfaction, and customer satisfaction. International Journal of Electronic Commerce, 8(2), 31-50. Cherbakov, L., Galambos, G., Harishankar, R., Kalyana, S., & Rackham, G. (2005). Impact of service orientation at the business level. IBM Systems Journal, 44(4), 653-668. Datz, T. (2004). What you need to know about service-oriented architecture. CIO Magazine, 78-85. Dong, M., & Qiu, R. (2004). An approach to the design and development of an intelligent highway point-of-need service system. The 7th International IEEE Conference on Intelligent Transport Systems, 673-678.
2006, from http://www.technologyreview.com/ articles/05/05/issue/brief_ibm.asp IBM. (2004). Service science: A new academic discipline? Retrieved February 4, 2006, from http://www.research.ibm.com/ssme Johnston, R. (1999). Service operations management: Return to roots. International Journal of Operations & Production Management, 19(2), 104-124. Kano, M., Koide, A., Liu, T., & Ramachandran, B. (2005). Analysis and simulation of business solutions in a service-oriented architecture. IBM Systems Journal, 44(4), 669-690. Karmarkar, U. (2004). Will you survive the services revolution? Harvard Business Review, 82(6), 100-107. Larson, R. (2005). Practice makes perfect O.R. OR/MS Today, 32(2), 6-7. Menor, L., Tatikonda, M., & Sampson, S. (2002). New service development: Areas for exploitation and exploration. Journal of Operations Management, 20(2), 135-157. Newcomer, E., & Lomow, G. (2005). Understanding SOA with Web services. Addison-Wesley Professional. Qiu, R. (2004). Manufacturing grid: A next generation manufacturing model. 2004 IEEE International Conference on Systems, Man and Cybernetics, 4667-4672. Qiu, R. (2005). An Internet computing model for ensuring continuity of healthcare. 2005 IEEE International Conference on Systems, Man and Cybernetics, 2813-2818. Qiu, R. (in press). A service-oriented integration framework for semiconductor manufacturing systems. International Journal of Manufacturing Technology and Management.
Fitzgerald, M. (2005). Research in development. MIT Technology Review. Retrieved February 4,
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Qiu, R., Wysk, R., & Xu, Q. (2003). An extended structured adaptive supervisory control model of shop floor controls for an e-manufacturing system. International Journal of Production Research, 41(8), 1605-1620. Rangaswamy, A., & Pal, N. (2005). Service innovation and new service business models: Harnessing e-technology for value co-creation (eBRC white paper). 2005 Workshop on Service Innovation and New Service Business Models. Retrieved September 10, 2005, from http://www. smeal.psu.edu/ebrc/ Rosmarin, R. (2006). Sun’s serviceman. Retrieved February 6, 2006, from http://www.forbes. com/2006/01/13/sun-microsystems-berg_cx_ rr_0113sunqa_print.html Rust, R. (2004). A call for a wider range of service research. Journal of Service Research, 6, 211.
Services Science Global (SSG). (2006). Services Science Global: A non-profit research consortium. Retrieved February 6, 2006, from http://www. ssglobal.org Smith, H., & Fingar, P. (2003). Business process management: The third wave. Tampa, FL: Meghan-Kiffer Press. Wright, M., Filatotchev, I., Hoskisson, R., & Peng, M. (2005). Strategy research in emerging economies: Challenging the conventional wisdom. Journal of Management Studies, 42(1), 1-33. Zhang, X., & Prybutok, V. (2005). A consumer perspective of e-service quality. IEEE Transactions on Engineering Management, 52(4), 461-477. Zimmermann, O., Krogdahl, O., & Gee, C. (2004). Elements of service-oriented analysis and design. Retrieved February 5, 2006, from http://www-128. ibm.com/developerworks/library/ws-soad1/
Rust, R., & Lemon, K. (2001). E-service and the consumer. International Journal of Electronic Commerce, 5(3), 85-101.
This work was previously published in Enterprise Service Computing: From Concept to Deployment, edited by R. Qiu, pp. 1-24, copyright 2007 by Information Science Publishing (an imprint of IGI Global).
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Chapter 1.6
Offshoring:
Evolution or Revolution? Nicholas Beaumont Monash University, Australia
absTracT This chapter describes the emergence of offshoring. It defines relevant concepts, and documents its rapid growth. The factors differentiating offshoring from outsourcing are discussed, especially access to markedly lower costs, extra risks, and cultural differences. A methodology for deciding what processes to offshore, and establishing, maintaining, and renewing offshoring projects is proposed. Offshoring is no longer the preserve of organizations; individuals can obtain an increasing variety of services from overseas. Offshoring is contentious because it threatens to replace high-paid jobs in First World countries with less well-paid Third World jobs. Most outsourcing depends on organizations’ ability to transfer data instantly, accurately, and at nearly zero marginal cost. This chapter suggests that the ramifications for individuals, organizations, and societies of this technical advance are underestimated. Further
research, especially on the ramifications, is suggested. The difficulty of researching offshoring, a sensitive topic for many organizations, is noted.
inTrOducTiOn Outsourcing of business processes has become popular among management, management consultants, and governments, although it has been used for centuries. Its recent prominence is attributable to changes in technology— exemplified by the World Wide Web (WWW)—that have made it easy for organizations to share large amounts of data almost instantly, with high fidelity, and at almost zero marginal cost. Outsourcing is perhaps the latest managerial fad (Shapiro, 1995), but has more substance than predecessors such as total quality management, business process re-engineering, and empowerment. The latest manifestation of outsourcing is “offshoring;” or-
ganizations have discovered that some costs can be substantially reduced by locating operations in Third World countries. Customers’ expectations of constantly improving value for money and competitive pressure will force firms to adopt outsourcing and especially offshoring. Now that techniques such as total quality management and business process re-engineering have been fully exploited, offshoring is the cost reduction method with greatest short-term potential. This chapter defines relevant terms; describes contemporary offshoring’s historical precedents; describes the costs and benefits of outsourcing and offshoring; evidences the growth of offshoring; proposes a methodology for establishing and running offshoring projects, outlines the risks inherent in offshoring; notes the emergence of personal offshoring; and discusses offshoring’s social and political implications. Conclusions and suggestions for future research are given.
supplying primary produce (first wool, then meat) to England and Europe, Australia had intrinsic advantages of cheap labor and land. Technical advances (especially to transport) such as railways, refrigeration, and the “stump-jump” plough and cheaper inputs (e.g., of fencing wire) reduced the cost, improved the quality, and increased the scope of Australian products, with disastrous effects on British farmers but beneficial effects for British consumers and downstream industries.
Manufacturing
Modern offshoring is the last of three waves, reminiscent of Krondatief cycles, each driven by access to lower costs and radical technical changes yielding reduced costs, product or service improvement, and/or increases in scope. Increasing scope means operating in more geographic areas; selling to more kinds of customers; and/or selling products and services fulfilling more functions. Offshoring is an aspect of globalization (Business Council of Australia, 2004) that has progressively expanded by including trade in agriculture, manufactures, and services. Globalization’s progress has been lubricated by reductions in protection and regulation, and advances in technology exemplified by the World Wide Web.
In the 1970s and 1980s, manufacturing’s migration to the Third World caused much First World angst. This migration was caused by improvements in communication (exemplified by the fax machine, cheaper and more reliable international phone calls, and cheaper and better travel), lower wage costs, and lower transport costs (exemplified by the container). Better control systems exemplified by information technology, total quality management, and just-in-time made it easier to specify and monitor manufacturing processes. Increased Third World literacy was perhaps a contributing factor. Bronfenbrenner and Luce (2004) and Bardhan and Kroll (2003) report on the transfer of manufacturing from the United States to countries such as Mexico, China, and India; the rate of transfer increased between 2001 and 2004, and the lower cost of manufacturing in Third World countries offset the extra costs of transport and managing at a distance (Bronfenbrenner & Luce, 2004). Conventional wisdom is that more skilled aspects of manufacturing such as product design and market analysis could be retained in America, but Bardhan and Kroll (2003) note that foreign manufacturers’ skills constantly improve.
Agriculture
services
Agricultural products and minerals have long been obtained by First World countries from overseas. Blainey (1966) points out that, when
A wide variety of services is being, or could be, sourced more cheaply from low-wage countries, exemplified by India, than from the First World.
a historical perspective
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Offshoring
Some services commonly offshored are: call centers, software development, product development, and back-office functions such as entering transaction data. The contribution of Indian programmers toY2K may have been an icebreaker to treating offshoring as a standard business procedure. As shown below, the offshoring market’s rapid growth is explained by its benefits to business.
rEasOns FOr using OuTsOurcing Outsourcing is defined as “having work that was formerly done inside the organization performed by an external organization” (Beaumont & Sohal, 2004, p. 689) or “the act of transferring some of a company’s recurring internal activities and decision rights to outside providers as set forth in a contract” (Greaver, 1999, p. 3). Perhaps illogically, the term is usually applied to services, not manufacture of components, and to continuing business functions, not projects. Lonsdale and Cox (2000, pp. 445-449) summarize the history of outsourcing, noting that it has supplanted once fashionable enthusiasms for conglomeration, horizontal integration, and vertical integration. Offshoring is having business processes performed overseas, primarily to exploit low labor costs; it conventionally includes wholly-owned overseas subsidiaries. The terms client and vendor are the firms respectively obtaining and supplying services through an outsourcing agreement. In this chapter, the archetypal client and vendor are American and Indian firms respectively (for brevity, the term “firm” encompasses all organizations, profit and non-profit). The client’s customers may be affected by offshoring. Coase (1937) asked why, given that the market allocates resources efficiently, do firms exist? There are several answers: Some assets (such as a large oil refinery) are immobile, have high fixed costs and low variable costs, have a narrow
range of applications, and have few or no external potential buyers or sellers of inputs and outputs. Such assets are inoperable without a cluster of peripheral assets and high levels of skill and knowledge in the firm and its suppliers. There is no perfect market for such assets; investment in them is only practical in a planned environment that provides a guaranteed market for a high volume of very specific outputs and guaranteed supply of specific components. Information technology has weakened some of these reasons (applicable mostly to physical processes). In particular, immediate, accurate, and convenient transfer of data among organizations at nearly zero marginal cost enables data and information processes (interpreted broadly) to be performed out-of-house. A related question is: “Why do firms choose to outsource some activities and retain others?” There are myriad reasons (see Table 1 and Table 2), but outsourcing is fundamentally a compromise between vertical integration (associated with cumbersome hierarchies and bureaucratic procedures) and reliance on market mechanisms. The latter entails administrative costs (identifying appropriate vendors and verifying their competence, communicating changing requirements to them, providing feedback, and monitoring their performances), communication costs (transferring data and information between vendor and client), and risks (of vendors failing or being unable to meet specifications, or clients failing to pay). Deciding whether to outsource depends on comparisons of the long-term costs, benefits, and risks of different modes of supply. A long-term outsourcing relationship with a trusted vendor may be preferable to securing supply by backward integration, or developing or retaining an in-house capacity. An organization will always outsource some activities (the supply of water and electricity), but in-source others such as employee assessment or strategic planning.
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Table 1. Reasons for adopting outsourcing Reason
Comment
Reduce processing costs
By accessing lower input costs, economies of scale, or expertise
Focus
Outsource non-core activities and concentrate on areas of competence. Identifying core activities may not be straightforward (Quinn & Hilmer, 1994).
Access expertise
On taking responsibility for a client’s human resource management, a human resource executive consultant opined that she expected to cut costs by between 20% and 50% by using proven systems and applying experience without lessening service quality (personal communication, March 2004). Vendors are advantaged by knowing about their industry’s costs and service quality standards. Client function managers may not know that their costs exceed the industry average.
Avoid internal cultural differences
The IT department having anomalous working conditions and compensation (attributable to the need to retain competent staff) may cause resentment among other employees.
Financial and cost restructuring
Outsourcing can be used to manipulate cost structures and cash flows. Instead of purchasing delivery vehicles (a capital cost), outsourcing can be used to re-express deliveries as an ongoing expense.
Benchmark internal operations
It is very difficult for top management to determine whether the firm’s IT department is as efficient as those of their competitors. Outsourcing some IT functions may give some insight.
Eliminate an unsatisfactory department
Top management may be dissatisfied with the IT department and/or feel unable to control it. Relations between IT and other departments may be so strained that the best course is to close down the department and rely on vendors. The mere threat of outsourcing may improve performance.
Uneven resource requirement
It may be economic to meet base load for call center services or delivery from the firm’s own resources and use outsourcing to meet peak or unanticipated demand.
Fractional resource requirement
A small firm without enough demand to employ a lawyer full-time will outsource its legal requirements.
Risk avoidance
Firms can avoid financial uncertainty by using a fixed cost per transaction. If a new computer system is proposed, management may prefer to eliminate risk by accepting an outsider’s quote than have the work done in-house and risk time and cost overruns.
Careers
A firm with a small IT department will not be able to offer careers in IT, and may therefore be unable to retain competent IT staff. It may be difficult for managers to assess the performance of the IT department.
Avoid legal constraints
Offshoring, especially to Third World countries, may make it possible to avoid the costs of First World legislation pertaining to pollution, unionization, discrimination, or work practices. This is best exemplified by the U.S.’s rendition of prisoners.
Ideology and fashion
The current Australian government has an ideological commitment to outsourcing, opining that the private sector is intrinsically more efficient than the public sector. Offshoring may be the “flavor of the month” among executives.
Tangible Costs and Benefits of Offshoring The prime motivation for offshoring is lower labor costs. India has a huge pool of graduates, especially IT graduates, for whom a job as a call center operator or programmer compares well with other opportunities. The consensus is that Indian labor costs about 15% of U.S. labor (see Table 3). There is some indication that Third World workers are more motivated, harder working, and more
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productive than their First World counterparts (Dutta, Lanvin, & Paua, 2003). Costs in India especially may increase in response to demand and because of increased congestion and operating costs, for example, in Bangalore. McKinsey’s (2003) analysis of the effect of offshoring on cost components is summarized in Table 4 and discussed as follows. Although labor savings dominate, offshoring changes other costs.
Offshoring
Table 2. Reasons for not adopting outsourcing Reason
Comment
Dependence
Outsourcing a critical business function may make the client uncomfortably dependent on the vendor. The client should ensure that, in extremis, a critical process could be resumed in-house.
Confidentiality
Keep confidential data in-house. The dangers of misuse are multiplied if data is available to two organizations.
Intellectual property
It may be strategically disadvantageous to give other firms access to intellectual property or learning opportunities. An American automotive firm engaged a Japanese firm to manufacture carburetors. The arrangement was satisfactory in the short-run. However, the Japanese firm used this opportunity to develop design and manufacturing expertise, eventually becoming a formidable competitor.
Loss of distinctive competencies
Outsourcing may atrophy in-house skills. A firm that outsources stimulating legal work or systems development may not be able to attract or retain creative staff.
Loss of flexibility
A three-year outsourcing contract may reduce the ability to adjust to changes in the client’s environment or to exploit new technology.
Personnel and change problems
Staff made redundant by outsourcing may have to be dismissed or redeployed. This may create anxiety among remaining staff.
Information asymmetry
A practiced vendor has the experience to accurately assess the cost of performing an outsourced business process and estimate how technology will affect that cost over time. A less well-informed client may be disadvantaged in negotiation.
Project management risk
Poor methodology (especially in specifying requirements and failure to detect that the proposed vendor is incompetent or unscrupulous), negotiation, or monitoring may result in project failure.
Cultural differences
May create misunderstandings and communication failures
Negotiation difficulties
The operation is so complex that it is impossible to agree on and codify performance criteria.
Complexity
A computer application may be so interwoven with other applications that it cannot be separated out and handed to a vendor.
Table 3. Comparative costs of different skills ($U.S.) Reference (McKinsey & Company, 2003)
Skill or task
Relative costs ($U.S.)
Software development
“$60/hour in the U.S ... $6/hour in India” (p.1)
Data entry
$20/hour in U.S., $2/hour in India
(Field, 2002)
Programmer
Salaries $63,000 US, India $5,850.
(Overby, 2006)
Programmer
The average salaries of programmers in 26 countries from Asia and the Far East, Europe and Africa, and the Americas are given. Some Asian and ex-communist countries have very low programmer salaries.
(Neelakantan, 2003)
Medical procedures
“Open heart surgery ... (could cost up to) $150,000 in the USA; in India’s best hospitals, it could cost between $3,000 and $10,000”, “Dental, high and cosmetic surgeries in Western countries cost three to four times as much as in India.” (p.54) Citizens can avoid lengthy delays by having procedures performed in India.
(Cronin, Catchpowle, & Hall, 2004, p. 18)
Not specified
“ ... low cost labour offshore, typically 20% of UK levels.”
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Table 4. Offshoring’s effect on costs Component
Increase (+) or reduction (-) in costs
Labor
-60 to 65%
Additional communication
+5 to 10%
Additional management
•
•
•
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+5%
Consolidations and standardization
-6 to 10%
Skills and training
-2 to 3%
Task re-engineering
-5 to 7%
Economies of scale
-3 to 5%
Process re-engineering
-15%
Net effect of offshoring
-65 to 70%
Greater communication and management costs: Communication costs are dropping precipitously (Edwards, 2004), since optical fiber’s enormous capacity and nearly zero intrinsic marginal costs are independent of distance. Telecommunications costs are likely to become negligible within 10 years. Offshoring entails executive travel and accommodation, executives distracted from other duties, and an increased likelihood of illness. When establishing an offshore outsourcing arrangement, the search and transition costs are higher than for onshore outsourcing. However, once a relationship is established with a reputable Indian vendor, the cost of managing and monitoring the relationship may be less than anticipated. Large Indian vendors such as Infosys, Wipro, and Tata are practiced and competent. Consolidation and standardization: Large organizations, especially those growing through takeovers, often inherit a variety of administrative systems. Different locations and departments tend to resist central office’s attempts to impose uniformity. Offshoring a business process may reduce costs by forcing standardization. Training and enhanced skills: Consolidation and more employees make improved methods of employee selection and monitoring, and specialized training more economi-
•
•
cal. The outsourcing contract may specify employee selection criteria and skills to be taught. Changes in scope: Lower processing costs may allow changes in the tasks and the scope of tasks undertaken. For example, it may now be economic to accept orders that were unprofitable when administrative costs were higher, or to pursue small debts formerly written off. A greater range of language skills may allow a call center to service more countries. Process reengineering: The different costs of labor and different skills available in First and Third World countries may allow different parts of a process to be located in different places so as to exploit cheaper labor or available skills. Lower labor costs may imply less capital-intensive technology. Digital x-ray images taken in First World countries may be transmitted electronically to Third World countries where the analysis is done and recorded, with the reports then being returned electronically to the originating doctor for discussion with the patient. Eyeglasses prescribed in New York may be manufactured in Mexico. Loan applications and insurance claims originating in New York may be assessed in New Delhi, with reports being returned to consultants for discussion with clients. Architectural concepts
Offshoring
•
•
developed in Australia were translated into blueprints by Indonesian draftspeople (personal communication, September 2004). Economies of scale: Offshoring often results in the establishment of large operations in Third World countries. Most business operations, exemplified by the call center, have fixed (communications, selection, and training procedures, design of dialogues, and software) and variable cost components. A 1,000-seat call center is not twice as expensive as a 500-seat center. External: There are other tangible costs and benefits relevant to offshoring. There may be a difference between the First and Third World in the cost of land, equipment, and premises. Taxes (on property values, labor costs, inputs, and profits), the cost of inputs and services such as electricity, water, and insurance may vary among countries and regions. Some governments may offer
inducements such as tax relief to attract foreign business.
growth of Offshoring The fundamental reasons for the explosive increase in offshoring are that technology makes India’s lower costs accessible from the First World and has removed the barriers that protected internal departments from external competition. For example, payroll data can be transferred to a vendor instantly, accurately, and at a nearly zero marginal cost that is independent of distance. Some evidence for the growth of offshoring is given in Table 5.
an Offshoring methodology There are several interrelated decisions that have to be made when deciding to offshore the whole or part of a business process. A fundamental
Table 5. Evidence of the growth of offshoring (McKinsey & Company, 2003, p. 5)
“Offshoring is expected to grow at ... 30 to 40% per year over the next five years.” “Forrester ... the number of U.S. jobs offshored will grow from 400,000 to 3.3 million by 2015.”
(National Computing Center, 2004, p. 3)
“Growth in offshoring has been in the region of 30% in monetary terms ... ”
(Dieffenbach, 2003)
“A recent report by TowerGroup… forecasts a 46% annual growth rate in U.S. financial companies’ use of offshore outsourcing ... ”
EBS (www.ebstrategy.com/outsourcing/trends/ statistics.htm) contains quotes from many sources, some of which are repeated here.
“International data Corporation (IDC) has predicted that the global IT-enabled services market will account for revenues of $1.2 trillion by 2006.” “Meta group predicts that offshore outsourcing will grow by more than 20% annually ... from $7B in 2003 to $10B in 2005.” “McKinsey and others forecast that the Information Technology and Enterprise Solutions (ITES) market in India will reach $142B by 2009 and that it would cost $532B to provide those services in the USA.” “According to WR Hambrecht, the offshore PPO market is expected to grow at a CAGR of 79% through 2008. The offshore IT service market is expected to grow at a CAGR of 43%.”
(Information Technology Association of America, 2004, p. 1)
“Spending for global sourcing of computer software and services is expected to grow at a compound rate of almost 26% p.a. ... ”
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question is what functions should be offshored. Subsequent but related decisions depend on the organization’s strategy and objectives (broadly classifiable as lower costs, superior service, or flexibility); the attitude to risk and public criticism; its relationship with its workforce; and the intensity of competition. Intense competition may force the organization to use offshoring to reduce costs regardless of other considerations. We summarize the methodology and describe the steps in detail only where offshoring (as opposed to on-shoring) raises additional issues. Many writers have proposed overviews, methodologies, checklists, and lists of critical success factors. Some of these are Ho, Torres, and Vu (2004); Keane, Inc. (2004); Ker, Murphy, and Valle (2000); and National Computing Center (2004). Cronin, Catchepowle, and Hall (2004) compare the costs, benefits, and risks of implementing and using offshoring and outsourcing arrangements. Moore (2002) discusses the risks, costs, and rewards of offshoring. Several writers, for example, Overby (2003a) and Ho, Torres, and Vu present successful or unsuccessful examples of offshoring.
The Outsourcing cycle The term “outsourcing cycle”, mentioned by Beaumont and Sohal (2004) and perhaps implicit in some texts, for example, Sturm, Morris, and Jander (2000), denotes a sequence of stages into which an outsourcing project can be broken; analogous approaches are espoused by Franceschini, Galetto, Pignatelli, and Varetto (2003) and Momme (2002). The concept is often used in industry. In common with other methodologies recommended for change projects (commonly pertaining to quality improvement), and software development projects; outsourcing methodologies tend to emphasize the broader business aspects such as ascertaining business requirements, motivating staff, and monitoring the anticipated performance improvements. Cyclicity is often
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emphasized: Once a project is completed, other change opportunities should be sought. The outsourcing cycle presented here is derived primarily from project management methodologies and comprises the following steps: • • • • • • • •
Identify a process that might be advantageously offshored. Define objectives. Choose a vendor. Negotiate a service level agreement (SLA). Implement the agreement, that is, transfer the process to the vendor. Monitor vendor performance. Incrementally modify the agreement. Renew/cancel the arrangement.
Identify a Process That Might be Advantageously Offshored Only some kinds of work can be taken offshore but the scope is increasing, especially as overseas workers acquire new skills, communication costs decline, and new technology is deployed. Customer relationship management, telephone selling, and medical tourism (see below) exemplify emerging applications. Several writers give selection criteria, identify suitable processes suitable for offshoring, and give examples of offshoring (McKinsey & Company, 2003; National Computing Center, 2004; Robinson & Kalakota, 2004). Classic applications are: call centers and help desks; back-office operations that have not been wholly automated (these include processing applications for loans, mortgages, and insurance claims; debt collection, processing employee expenses (Edwards, 2004); data entry, analysis of x-ray images; creating databases of, for example, newspaper articles); architectural or engineering design; and computer programming. It may be appropriate to offshore running legacy IT systems, releasing domestic staff for work on new systems (National Computing Center, 2004).
Offshoring
Edwards (2004) identifies three layers of services. The top layer, comprising services tailored to individual businesses, is unlikely to be outsourced. The bottom layer, comprising processes common to all business, is very likely to be outsourced. The thick middle layer comprises services that are capable of being standardized, then outsourced. Enterprise resource planning (ERP) packages such as SAP, are accelerating standardization and the potential for outsourcing. That standardizing internal processes may facilitate accessing lower costs through offshoring is itself a force for standardization (Gere, 2003). Karmarkar (2004) notes the huge size, increasing automation of, increasing self-service in, and growth of the global services market, and suggests that certain categories of services can be offshored. A complex service can be expressed as a sequence of services, some of which require face-to-face contact (e.g., doctor and patient), but some of which might be automatable and executable offshore. The potential is enormous; an authority estimates that the world’s companies spend about $U.S. 19 trillion on expenses, of which only $U.S. 1.4 trillion is outsourced (Edwards, 2004). ADP (a firm providing payroll services) paying one in six private sector American workers is a harbinger. There are a number of constraints on what processes should be offshored. Processes such as sales calls or medical consultations that ostensibly require face-to-face contact cannot be offshored. However, many of the back-office processes (such as identifying potential clients or analyzing x-ray images) preceding or following a consultation can be advantageously offshored. Some transactions that used to require face-to-face contact can now be mediated by computers; many sales transactions are consummated on the Web. It is possible for an Indian salesperson to present to an American customer by video link. Quinn and Hilmer (1994) suggest that noncore processes and common business processes should be outsourced, and that processes giving
strategic advantage be retained and improved, although identifying core processes may not be straightforward. Mechanical aspects of business processes can be outsourced provided the client precisely defines the work which vendors do and monitors vendors’ performances. Customer relationship management manifest in call center services can be outsourced provided that the client precisely defines and controls the selection criteria and training used and the dialogues that call center staff are to use on its behalf. Organizations might be reluctant to outsource, let alone offshore, some business processes. Obstacles include concerns about the reduced flexibility inherent in a three-year agreement, and creating dependence on a supplier. Mechanizing processing of individuals’ tax returns might conceal opportunities for better service that would be revealed by expertise or first-hand knowledge of a customer’s circumstances. A more practical concern is that a large organization’s systems might have so many interfaces and entanglements with each other that it is not safe to run one of these systems independent of the others (see Table 2).
Define Objectives The objectives of an offshoring project should be clarified. The prime objective will probably be to reduce costs; direct and indirect, tangible and intangible costs should all be considered. Offshoring is probably a good way of reducing direct costs, but there may be long-term advantages in using offshoring to access expertise, improve quality, or strip out routine activities, thereby allowing management to concentrate on and exploit expertise (see Table 1).
Choose a Vendor Robinson and Kalakota (2004) cover this issue thoroughly. The time taken to select and become comfortable with an overseas vendor is longer and
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more costly than for an onshore vendor. Large Indian vendors have front offices in the USA which may contribute to confidence. Field (2002) describes the pros and cons of using brokers to choose foreign vendors. Overby (2006) compares 26 countries offering offshoring services, noting each country’s overall rating, its geopolitical risk, English proficiency, and average programmer salary. Selection processes may be less thorough for “tactical” (mostly short-term) than “strategic” (mostly long-term) relationships (National Computing Center, 2004). Executives selecting an onshore vendor would probably have access to informal information gleaned from colleagues, the media, and acquaintances. That network will not help when selecting an offshore vendor. The possible delays and misunderstandings caused by differences in culture, time zones, and language mean that an offshore project requires more careful planning than an onshore project.
be provided, prices, performance criteria, penalties, and scope precisely defined. Negotiations between parties from different cultures (see The Effect of Cultural Differences) and countries can be impeded by: •
•
Negotiate a Service Level Agreement (SLA) A service level agreement (SLA) is a contract precisely defining the services to be provided by a vendor, and minimum acceptable levels of service; procedures for measuring performance; payments and penalties for underperformance; and procedures for resolving differences and renegotiating the agreement itself. SLAs are “formally negotiated agreements that enable IT organizations (and vendors of other services) and their customers to collaboratively identify, discuss, and manage ... service expectations” (Karten, 1998, p. 1.7). The contents and negotiation of an SLA are discussed in Beaumont (2006) and elsewhere (Anonymous, 2004; Davies, 2004; Karten, 1998; Kobitzsch, Rombach, & Feldmann, 2001; McLaughlin, 2003; Robinson & Kalakota, 2004; Sturm et al., 2000). Negotiating an SLA is vital and difficult. Only in the SLA are the services to
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•
Language differences: The parties may have different masteries of English and different understandings of important words and technical terms; an oral “yes” may be interpreted as agreement, but intended as an acknowledgment. Ironical or facetious comments may be interpreted literally. English is becoming the universal business language, and non-English-speaking countries may have fewer offshoring opportunities (Karmarkar, 2004; McKinsey & Company, 2003). Misinterpreted body language: Asians consider Americans staring at a speaker to be rude and aggressive. Indians’ body language may wrongly suggest to an American that an audience is uninterested. A nod may be interpreted as agreement whereas “please continue” is intended. Modalities and signals may be misunderstood or misinterpreted: The other negotiating team may not comprise decision-makers but minions who take instruction from decision makers between sessions. The negotiation process may be an entertainment for one party, much more interesting than routine work. Handshakes may signify agreement and commitment in one culture, mere polite acknowledgment in another. Signing a document may signify commitment in one culture, a form of noting progress in another. Americans may be baffled by making no progress for several weeks, then experiencing a sudden breakthrough when an Asian team reaches consensus. Americans may be frustrated by Asians (perhaps prudently) insisting on a perfect document rather than agreeing on
Offshoring
broad principles and letting subordinates and lawyers fill in the gaps. Asians may resist American “man-to-man” approaches, hiding behind formal manners, and attempts to resolve issues behind the scenes.
Modifying, Canceling or Renewing the Agreement The associated negations may be impeded by distance and the cultural differences affecting negotiation.
Transfer the Process to the Vendor The differences between offshoring and onshoring are not marked, except that the number of employees displaced by offshoring back-office processes or call centers may be larger than usual with less opportunity to move to the vendor’s employ or be transferred to other of the client’s functions. Gere (2003) cogently notes that effective exploitation of an offshoring relationship may entail changes to the client’s structure, strategy, systems, culture, and staffing. The vendor may require the client to use the vendor’s forms, software, and procedures. Outsourcing requires managers to get results through negotiation and co-operation with partners instead of instructing subordinates. New internal skills will be required, for example, in writing and negotiating service level agreements with vendors. If the IT function is outsourced, a small IT group must be retained to monitor and liaise with the vendor, monitor advances in technology, anticipate future IT needs, and negotiate the contract’s renewal or the reabsorbing of outsourced processes.
intangible costs and risks of Offshoring Some hidden costs and risks of offshoring, noted by Pinto (2005) and Overby (2003b) are:
Geopolitical The previously hospitable host country government could be overthrown, introduce hampering legislation, restrict repatriation of profits, or yield to xenophobia directed at foreigners or their “lackeys.” Terrorism and crime may be less well controlled and protection money may be extorted. The infrastructure, especially water, electricity, or telecommunications system, may be unreliable, and travel and accommodation may be below Western standards. The social environment may make it difficult to find First World employees willing to stay on-site for long periods. Currency fluctuations may make the whole operation more expensive or cheaper than planned.
The Effect of Cultural Differences Monitor Vendor Performance There should be no difference between offshoring and onshoring so far as tangible performance measures are concerned. Because the operation is distant, it may be slightly more difficult to monitor intangible measures such as the recruitment and training processes used that may have a long-term effect on service quality. Different cultures may have very different understandings of, for example, the term “empathy” and how much empathy help call center operators should display.
Cultural differences that might impede efficiency and the client’s knowledge have often been noted. We list some often cited cultural differences, the effects they may have, and measures that can be taken to minimize their effects. Many Asian organizations are as conscious of cultural differences as their Western counterparts and take their own steps to lessen their effects. Davies (2004) and Kobayashi-Hillary (2005) each devote chapters to Indian culture and living and traveling in India. Brett and Gelfand (2005) illustrate the fruitfulness of culturally-sensitive action. Cultural differences
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Offshoring
can be discussed using five dimensions identified by Hofstede and Bond (1988): •
•
•
•
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Power distance measures the degree of inequality between people in the country’s society. High Power Distance may imply reluctance to openly disagree with superiors. If disputing a superior’s statements is considered rude, progress and status reports may be distorted. Programmers who regard systems analysts as hierarchically superior may be reluctant to dispute or discuss program specifications handed down. Individualism reflects the balance between individuals’ rights and responsibilities (America) and respect for groups (Asia). Asians usually have a greater regard for group processes. It is asserted that a group of Asian workers will not accept a change until it has been accepted by the whole group. Implementation of the change will then proceed rapidly. North Americans, used to allocating responsibility to individual project leaders, may be frustrated with Asian concern for group processes and the apparent lack of progress. Masculinity is high if the society reinforces traditional models of male achievement, control, and power. Interactions between men and women, especially of men with women in authority, or members of different races, castes, or religions may be especially fraught if masculinity is high. North Americans are conditioned, perhaps even compelled, to frame issues in terms of tangible criteria, especially cash flow. Other cultures may frustrate Americans by treating the wellbeing and morale of employees and their families as equally important. Uncertainty avoidance reflects the level of tolerance for uncertainty, risk-taking, and ambiguity.
•
Long or short-term orientation reflects the degree to which the society habitually uses long or short-term time horizons.
Other cultural differences may arise when socializing with foreigners. Westerners may be unused to blatant corruption or the influence of patriarchs in small organizations.
Security and Confidentiality The standards pertaining to securing company assets and customer confidentiality, implemented and monitored at home, may not apply or be as well policed in other countries. Even if the procedures are as good as those prevailing in the First World, it takes an effort to verify this. Dieffenbach (2003) notes that potential security, disaster recovery, and privacy risks are greater for offshoring than onshoring.
Information Asymmetry American clients may be disadvantaged when negotiating with an Indian vendor. The vendor has knowledge of local conditions such as input prices, possible changes in government policies, and infrastructure that the client cannot readily obtain. This may result in the vendor retaining a disproportionate share of cost savings. The client may find monitoring service levels provided to its customers (e.g., by a call center) difficult. The vendor may save money by employing people with less competence than was contracted or compromise the client’s data by subcontracting some aspect of the client’s task to an unreliable organization. In 2003, a medical transcriber in Pakistan threatened to post patients’ records online unless the University of California San Francisco (UCSF) Medical Center paid the wages owed to her by the U.S. subcontractor that had sent the work to her. Most importantly, the client, not plugged into the local network, may not be
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forewarned by rumor that the vendor is about to go bankrupt.
Intangibles and Offshoring Some other intangible costs and benefits of offshoring should be noted: •
• •
•
•
The need to retain some backup of data and skills at home: If the offshoring deal comes unstuck, could the client resume the in-house operation, or have the necessary skills eroded? Offshoring may expose corporations to two sets of laws. Major customers may be concerned to find that their sensitive data are stored offshore. The cost of dealing with displaced employees (transferred to other departments or dismissed?). Unpopularity caused by the client “exporting jobs” and possible domestic boycotts.
mOdEs OF OFFshOring Deciding whether and how to offshore a business process entails making several interrelated decisions. Assuming that a business process is being considered for offshoring, decisions have to be made on what mode of offshoring should be used. The three dimensions are: • • •
Location: Farshore, nearshore, onshore, or in-house Ownership: In-house, insource, outsource, or joint venture The degree of control granted to the vendor
Location and ownership decisions are independent, low labor costs can be exploited by establishing a wholly-owned operation in a foreign country,
and a vendor could use the client’s premises and/or equipment. We simplify discussion by assuming that the process is currently located in the USA and owned and operated by the client.
location Location is the physical location of the operation. Farshore signifies a location (classically India) with markedly lower labor costs but potential difficulties exemplified by differences in language, culture, and infrastructure. Nearshore means a location exemplified by Canada or Australia with lower labor costs but a similar business culture and language. Onshore means that the operation is performed in the home country, obviating cultural and language difficulties. An in-house operation is conducted on the client’s premises; possibly by a vendor. Onshore is obviously necessary for processes entailing face-to-face contact with customers and some services such as delivery or physical security. The National Computing Center (2004) defines offshoring and several terms used in this context. Cronin, Catchpowle, and Hall (2004) suggest a typology and enumerate the differential costs and benefits of onshoring and offshoring. Kennedy and Kolding (2003) discuss the pros and cons of local, farshore, and nearshore sourcing. They usefully distinguish between short-term arrangements (e.g., creating a computer system) and long-term engagements (running a business process). The Business Council of Australia (2004) gives several examples of nearshoring to Australia.
Ownership Regardless of location, the process may be retained in-house, in-sourced, outsourced, or run as a joint venture. Gere (2003) details different possible commercial arrangements relating the vendor and client and location, and proposes a framework for identifying processes that should be offshored.
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General Electric established its own call center in India, subsequently deciding to sell it. By establishing its own software house in China, Microsoft exploited lower labor costs, choosing not to use a vendor with local knowledge as its intermediary. The British companies, Standard Chartered Bank and Prudential, successfully established their own processing centers in India, enjoying control of critical processes, access to abundant skilled labor, and significant cost savings (Preston, 2004). Preston argues that the benefits of “do-it-yourself” are underestimated and that it is unnecessary to share profits with a vendor. Insourcing is the formalization of a pseudocommercial supply relationship between two departments of the same organization. The supplying department commits to agreed performance criteria. Payments and penalties are expressed in internal currency and may affect executives’ remuneration. In some cases, a joint venture between the client and vendor is appropriate. The design and installation of a major new computer system may require intense day-to-day cooperation between both parties. It may be impossible to specify the system requirements in advance; they emerge from the vendor’s investigation of the client’s systems and requirements, and on the client learning from the vendor the potential of new computer systems. Especially if the vendor will gain valuable experience and an enhanced reputation from a new and challenging project, it may be appropriate for the parties to share risks and rewards by creating a joint venture in which they have (usually) equal shares. Industry members might decide to set up their own subsidiary offering common services, most frequently lobbying and defining industry standards.
degree of control Outsourcing comes in a variety of flavors that in part reflect the day-to-day control the vendor retains and the degree of cooperation required.
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Strassmann (1997) defines out-tasking as outsourcing in which the client designs and retains full control over the business process, the vendor simply providing the resources (usually labor or computer resources). Out-tasking is exemplified by a call center operation in which the client defines the scripts which the operators must follow. General Electric’s Trading Process Network (TPN) entails putting GE’s tender documents on the Web, in effect precisely defining, that is, outtasking, work that was often offshored. In this case, offshoring was not essentially different from onshoring. When distance, language, and culture are obstacles, out-tasking to a foreign entity may be less demanding. Contrastingly, a client may “black box”; that is, grant the vendor full control over how the operation (delivery, security, back-office) is performed (exploiting the vendor’s expertise) and simply monitor the amount and quality of work done.
Personal Offshoring Offshoring is usually treated as an option only for organizations. However, cheap communications and cheap travel also empower individuals. Banally, computer-literate consumers can purchase an increasingly wide range of goods and services (e.g., gambling and entertainment) non-locally from Amazon.com or E-bay, intensifying competitive pressures on local businesses once protected by distance. Duty-free shops could be construed as examples of offshoring. More controversially, consumers can avoid some of their country’s legal restrictions and imposts by using the Web to acquire pharmaceuticals, music, and pornography, and/or facilitate self-diagnosis of real or imagined ailments. The most striking example of personal offshoring is the recent emergence of “medical tourism” (Bradley & Kim, 1994; Colvin, 2004; Neelakantan, 2003). Customers save money (see Table 3) and avoid lengthy queues by having medical procedures performed overseas. It would
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be technically possible for customers to enter symptoms at a Web page, have measurements of blood pressure, temperature, and so forth, done locally by paramedics, and receive diagnoses written by Indian doctors. It seems likely that Americans will increasingly obtain otherwise expensive professional services such as legal advice and accountancy from overseas.
pOliTical and sOcial implicaTiOns privacy and security issues The U.S. has a number of laws (e.g., the GrammLeach-Bliley Act) that allow corporations to share customers’ private data, provided certain criteria are met. Most of these laws were written before offshoring became prominent and do not forbid offshoring of individuals’ financial or health data. In Ohio, allegations that citizens’ birth records had been sent to a facility in Sri Lanka led to the U.S. company that had offshored the work being barred from state contract work for 15 months. A number of U.S. state legislatures have proposed laws preserving employments by restricting offshoring, but few such proposals have been enacted. “European consumers are afforded considerably greater protection (than U.S. citizens) by a European Union (EU) law that permits personal data to be sent offshore only to countries whose privacy laws have been deemed to provide equivalent privacy protections and that have been found to have strong enforcement capabilities. Because most countries cannot meet these ‘safe harbour’ requirements, European jobs that involve the handling of confidential information have been offshored at a far slower rate than in the United States” (Public Citizen, 2006).
Job creation and destruction The 1970s and 1980s saw a contraction, or “hollowing out,” of manufacturing in First World countries (Bronfenbrenner & Luce, 2004). Price differences and data mobility imply that, on the face of it, white-collar jobs will move from First to Third World countries. Not just clerical and call center jobs are threatened. It is reasonable to believe that work such as architectural drafting, product design, legal analysis, financial and market analysis, indexing of newspaper articles, programming, and systems design could be carried out in low-wage countries. Professional work can be loosely defined as transforming and analyzing data, or as obtaining information from data; any work done primarily on a PC can be done in a low-wage country. Some labor markets are now unconstrained by national boundaries; an emerging global market, for example, for English-speaking call center operators, will supplant national markets and reflect converging remuneration for U.S. and Indian workers with identical skills. Many consultants and interested parties have forecast the effects of offshoring on the First World job markets (Bardhan & Kroll, 2003; Business Council of Australia, 2004; Mann, 2003; McKinsey & Company, 2003). McKinsey argues that offshoring will increase the U.S. standard of living; $1 spent offshore will generate direct and indirect net benefits conservatively estimated at $1.12-$1.14, but the benefits of spending onshore are not given. EBS (2005) cites the following opinions: •
•
“By 2015, Forrester research estimates that as many as 3.3 million US jobs and $US13 6B in wages could be moved to countries such as India, China, and Russia.” “According to Deloitte consulting, 2 million jobs will move from the United States and Europe to cheaper locations in the financial services business alone. The exodus of
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•
service jobs across all industries could be as high as 4 million.” Gartner opines that “500,000 of the 10.3 million U.S. technology jobs could move offshore in 2003-2004.” The Information Technology Association of America (2004, p. 1) opines that “In the software and services area, the economy is expected to create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 jobs without it. Of these 516,000 new jobs, 272,000 are expected to go offshore, while 244,000 are expected to remain onshore.” The report details essentially beneficial effects on growth, inflation, incomes, job markets, and interest rates.
The effect on job markets can be best understood using narrow and broad perspectives.
Narrow Perspective This perspective considers the direct effects only. Assume that a firm transfers work from the USA to India, exploiting 80% labor cost reductions. U.S. workers and shareholders in supplanted suppliers lose jobs and income. The benefits are transferred to Indian workers through better working conditions and remuneration and to the clients’ customers and shareholders. In competitive markets, customers will enjoy most of the benefit as lower prices and/or better quality. This scenario perhaps characterizes the cutthroat U.S. auto market.
Broad Perspective The broad perspective considers the indirect as well as the direct effects. Some indirect effects are: •
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Stakeholders in Indian vendors spend their increased income. This will have a multiplier
•
•
effect on the Indian economy, stimulating imports some of which will come from the U.S., increasing employment. For example, more Indians will be able to afford American holidays. American consumers will have their quality of life increased by cheaper and better quality services. Clients’ shareholders will enjoy increased income, and consumers will spend a high proportion of the time and money saved on other goods and services. The extra competition will benefit consumers by limiting inflation and eroding the excess profits and restrictive practices of some industries hitherto protected from foreign competition. The medical and legal professions might suffer most.
The U.S. job market is dynamic. Edwards (2004, pp. 12-13) notes that most new technologies have been perceived as a threat to employment, but that new occupations emerge. “ ... Who would have guessed that America ... now has 139,000 psychologists, 104,000 floral designers, and 51,000 manicurists and pedicurists?” It is important to realize that a serious socio/ political problem remains (surfacing in the 2004 U.S. elections). The benefits of offshoring for the U.S., although large, are thinly spread and not immediate. The considerable costs of offshoring are shared among a comparatively few employees who lose well paid and stimulating jobs and may find it difficult to find equally satisfying employment. The adjustment process is likely to be more prolonged in other countries (e.g., Europe) with more protected and rigid labor markets. Firms have been understandably reluctant to admit that they are offshoring. It is tempting to fudge the issue by outsourcing work to an ostensibly domestic vendor and taking care not to find out where the work is actually performed.
Offshoring
an ausTralian casE: QanTas We illustrate some of the complexities of offshoring by summarizing an Australian company’s as yet tentative steps. Qantas is Australia’s dominant airline company. To reduce costs, it is threatening to offshore activities traditionally performed in Australia. Some major offshoring decisions were proposed early in 2005. The company has to evaluate the cost savings, transition costs, the costs of possible strike action, and the possible loss of reputation that would be caused by “exporting” Australian jobs. Some characteristics of Qantas and its environment are: Qantas does not operate in a perfect market, for example, the Australian government protects Qantas’s share of the lucrative AustralianNorth American market, but insists on Qantas being Australian majority-owned (restricting its ability to raise capital). The company is locked into long-term contracts with pilots and cabin crew who are probably receiving compensation higher than they would in a perfect market. In common with other airlines, Qantas has to cope with air travel becoming commoditized and extremely competitive (there is excess capacity, and the failure of some U.S. airlines is symptomatic). Threats of terrorist activities, airport congestion, and SARS have deterred travelers. Although Qantas dominates the Australian domestic market, it would like to obtain economies of scale by merging with other airlines (e.g., Air New Zealand), but it has been frustrated by governments and regulations enforcing competition. Qantas has taken some steps. Better information and accounting systems have facilitated better monitoring of costs (accentuating the competition between internal and external suppliers). Partly to circumvent extant agreements with unions, Qantas has established Jetstar, a low-cost airline. A new generation of aircraft will substantially reduce passenger-mile costs.
Offshoring in an airline is less visible than in other domestic businesses. Aircraft receive between-flight maintenance wherever they land, crew must be accommodated overseas, and some food is loaded overseas. In 2002, Qantas’s CIO stated that [the] offshoring of technology work to India was “a strategy for survival.” (Hayes, 2002, p. 36) In January, 2005, Qantas released plans to move more than 7,000 jobs offshore. These initiatives included proposals to: •
•
•
Hire overseas-based cabin crew who would be paid less than their Australian counterparts. This provoked Australian employees, but it has obvious benefits. The outcome was an agreement with the flight attendants’ union for some staff to be based (more cheaply) in London. Have non-Australian contractors supply and load more passenger meals. This issue is not yet resolved. Have aircraft maintenance performed overseas. The outcome was some consolidation of maintenance operations and an agreement with the union on productivity targets. The union proposed cost savings that contributed to the maintenance being done in Australia.
It is not clear (and scarcely matters) whether management’s ostensible intent to offshore was an ambit claim used in negotiations with unions or a firm intention. The issues of offshoring information technology and catering are in abeyance. Qantas recently agreed to outsource $A1.4B worth of Information Technology and data center services to IBM and Telstra (Australia’s dominant telecommunications company). The vendors could have some of Qantas’s work done overseas. Qantas constantly opines that it will have to continuously reduce costs to stay competitive (a claim belied by its large and growing profits and cash flows), and that offshoring is a way of obtaining drastic rather than incremental cost reduction.
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This section was sourced from the Qantas Chairman and CEO’s reports at http://www.qantas. com.au/info/about/investors/annualReports, Qantas press releases at http://www.qantas.com.au/ regions/dyn/au/publicaffairs/introduction?, and reports from various Australian newspapers.
cOnclusiOn and suggEsTEd FurThEr rEsEarch summary The forces (especially access to lower wages) underlying outsourcing and especially offshoring are irresistible. Competition and customers demanding constant improvements in quality and price will force the most squeamish firms’ hands. Offshoring is the simplest and quickest way for First World firms to obtain substantial cost savings and improved service quality. Offshoring is an aspect of intensified and globalized competition (Porter, 2003), and services offshoring follows the offshoring of primary production and manufacturing. Because it will affect millions of white-collar workers who are more numerous and articulate than their blue-collar counterparts, offshoring will be a live political topic for several years. Especially pleasant (for some) and painful (for others) will be the emergence of a global market and converging remuneration, for example, for programming skills. There are many choices to be made when offshoring a business process; managerial discipline and adherence to a methodology multiply the chances of success. This chapter discusses the costs and benefits of offshoring and estimates of the offshoring market’s size and growth. The economic and societal effects of offshoring are noted. It suggests an offshoring methodology, and that more care is required when planning and monitoring an offshore relationship. There are several business models incorporating decisions on location, ownership, and degree of control that should be considered. Cultural dif-
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ferences, some cost components, and some risks particular to offshoring should be noted.
suggested Further research Offshoring suggests several research problems. As the bibliography implies, academic research on outsourcing and especially offshoring is not proportionate to its importance to industry. This may be attributable to the research difficulties adumbrated here. Some outstanding research issues are: •
•
•
The size and growth of the offshoring market needs to be ascertained. This is difficult and expensive. Executives may be reluctant to admit that they are using offshoring or know that work offshored to an ostensibly local vendor is done overseas. An international research consortium might be appropriate. The tangible and intangible costs and benefits of offshoring to participants and broader society need to be ascertained. So too does the interaction between offshoring and organizations’ strategies and evolution. Case studies are probably the most appropriate instrument. However, a comprehensive study of one firm would require several interviews in the firm and with its vendors and/or clients; it is likely that some parties would decline participation. Low response rates would limit the generalizability of findings. Research determining the success of different methodologies and applications of offshoring is appropriate. Anecdotal evidence suggests that the relationship between vendor and client is often fraught. Typically, euphoria experienced when the contract is signed sometimes sours when unanticipated difficulties emerge; a working relationship emerges after much hard work. These difficulties can be exacerbated by geographic and cultural differences. The influence on
Offshoring
•
•
business success of the relationship between the two parties (intimate or arms-length) and its contractual basis (especially service level agreements) merits research. Statistical studies relating knowledge of a firm’s use of offshoring and financial success might be illuminating. For example, iconoclast Strassmann (1997) provides statistical evidence that heavy use of outsourcing presages a firm’s failure. The socio-political effects of offshoring merit investigation. Will they be as severe as some alarmists anticipate? What government policies would help spread offshoring benefits rapidly and widely? Will public disquiet impede free trade negotiations or fuel xenophobic political movements?
Bradley, R., & Kim, E. (1994). Loosening the reins: Autonomy boosts Cuban medical industry. Harvard International Review, 16(4), 66. Brett, J. M., & Gelfand, M. J. (2005, January). Lessons from abroad: When culture affects negotiating style. Negotiation, 3-5. Bronfenbrenner, K., & Luce, S. (2004). Offshoring: The evolving profile of corporate global restructuring. Multinational Monitor, 25(12), 26-29. Business Council of Australia (2004). Offshoring, global outsourcing and the Australian economy—continuing Australia’s integration into the world economy. Canberra: Business Council of Australia. Coase, R. H. (1937). The nature of the firm. Economica N. S., 4, 386-405.
rEFErEncEs Anonymous. (2004). Explaining offshoring/ outsourcing in India/What’s this India business: Offshore outsourcing and the global services revolution. Transnational Corporations, 13(3), 151. Bardhan, A. D., & Kroll, C. A. (2003). The new wave of outsourcing. Berkeley, CA: Fisher Center for Real Estate & Urban Economics. Beaumont, N. B. (2004). Outsourcing: A multidimensional relationship. Contract Management in Practice, 1(8), 84-86. Beaumont, N. B. (2006). An overview of service level agreements. In H. Kehal & V. Singh (Eds.), Outsourcing and offshoring in the 21st century: A socio-economic perspective. Hershey, PA: Idea Group. Beaumont, N. B., & Sohal, A. (2004). Outsourcing in Australia. International Journal of Operations and Production Management, 24(7), 688-700. Blainey, G. (1966). The tyranny of distance. Melbourne, Australia: Sun Books.
Colvin, G. (2004, December 13). Think your job can’t be sent to India? Just watch. Fortune, 150, 80. Cronin, B., Catchpowle, L., & Hall, D. (2004). Outsourcing and offshoring. CESifo Forum, 5(2), 17-21. Davies, P. (2004). What’s this India business? Offshoring, outsourcing, and the global services revolution. London: Nicholas Brearley International. Dieffenbach, J. (2003). A passport through issues in global outsourcing. Retrieved November 14, 2006 from http://library.findlaw.com/2003/ Jun/30/132840.html Dutta, S., Lanvin, B., & Paua, F. (Eds.). (2003). The global information technology report 20022003: Readiness for the networked world. Oxford University Press. EBS. (2005). Trends, statistics and perspectives 2005. Retrieved November 14, 2006 from http://www.ebstrategy.com/outsourcing/trends/ statistics.htm
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Edwards, B. (2004, November 13). A world of work: A survey of outsourcing. The Economist, 1-16.
Kennedy, E., & Kolding, M. (2003). Offshore services: IDC’s view (No. R105K). International Data Corporation.
Field, T. (2002, April 1). The man in the middle. CIO US, 15, 70.
Ker, S., Murphy, T., & Valle, C. D. (2000). Mapping offshore: A new competitive landscape (No. 21645). International Data Corporation.
Franceschini, F., Galetto, M., Pignatelli, A., & Varetto, M. (2003). Outsourcing: Guidelines for a structured approach. Benchmarking: An International Journal, 10(3), 246 - 261.
Kobayashi-Hillary, M. (2005) Outsourcing to india: The offshore advantage (2nd ed.) New York: Springer
Gere, T. (2003). Accessing offshore: Options for strategies and relationships (No. 29459). International Data Corporation.
Kobitzsch, W., Rombach, D., & Feldmann, R. L. (2001). Outsourcing in India (software development). IEEE Software, 18(2), 78-86.
Greaver, M. F. (1999). Strategic outsourcing: A structured approach to outsourcing decisions and initiatives. New York: Amacom.
Lonsdale, C., & Cox, A. (2000). The historical development of outsourcing: The latest fad? Industrial Management & Data Systems, 100(9), 444-450.
Hayes, S. (2002, November 12) Taking an extra step in the airline world. The Australian, (p. 36). Ho, L., Torres, M., & Vu, P. (2004). The dynamics of outsourcing: Offshoring, insourcing, and a case study: India. Hofstede, G., & Bond, M. (1988). The Confucius connection: From cultural roots to economic growth. Organizational Dynamics, 16, 5-21. Information Technology Association of America. (2004). Executive summary: The comprehensive impact of offshore IT software and services outsourcing on the U.S. economy and the IT industry. Arlington, VA: Information Technology Association of America. Karmarkar, U. (2004). Will you survive the services revolution? Harvard Business Review, 82(6), 100-107. Karten, N. (1998). How to establish service level agreements. Randolph, MA: Naomi Karten. Keane Inc. (2004). A balanced approach to offshore outsourcing: Gain strategic improvements in business performance. Boston: Keane Inc.
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Mann, C. (2003). Globalisation of IT services and white collar jobs: The next wave of productivity growth. Washington, DC: Institute for International Economics. McKinsey & Company (2003). Offshoring: Is it a win-win game? McKinsey Global Institute. McLaughlin, L. (2003). An eye on India: Outsourcing debate continues. IEEE Software, 20(3), 114-117. Momme, J. (2002). Framework for outsourcing manufacturing: Strategic and operational implications. Computers in Industry, 49(1), 59-76. Moore, S. (2002). Critical success factors for offshore outsourcing. Giga Information Group Inc. National Computing Center (2004). Guidelines for IT management: Planning for offshore outsourcing. London: National Computing Center. Neelakantan, S. (2003, November 6). India’s global ambitions. Far Eastern Economic Review, 166, 52-54.
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Overby, S. (2003a, July, 2003). Inside outsourcing in India. CIO 16(1). Overby, S. (2003b, September, 2003). The hidden costs of offshore outsourcing. [Electronic version] CIO. Retrieved November 14, 2006 from http:// www.cio.com/archive/090103/money.html Overby, S. (2006). 2006 Global outsourcing guide; Risks, rewards, challanges and opportunities, country by country [Electronic version]. CIO 19(1). Retrieved November 14, 2006 from http://64.28.79.79/offshoremap/ Pinto, J. A. M. (2005). Swimming against the tide: The hidden costs of offshoring. The CPA Journal, 75(1), 9-11. Porter, M. E. (2003). Strategy and the Internet. Harvard Business Review, 79(3), 62-78. Public Citizen. (2006). Global trade watch. Retrieved November 14, 2006 from http://www. citizen.org/trade/offshoring/privacy/index.cfm
Preston, S. (2004). Lost in migration: Offshore need not mean outsourced. Strategy & Leadership, 32(6), 32-36. Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-55. Robinson, M., & Kalakota, R. (2004). Offshore outsourcing: Business models, ROI, and best practices. Alpharetta, GA: Mivar Press. Shapiro, E. C. (1995). Fad surfing in the boardroom. Sydney, Australia: Harper Collins. Strassmann, P. A. (1997). The squandered computer: Evaluating the business alignment of information technologies. New Canaan, CT: Information Economics. Sturm, R., Morris, W., & Jander, M. (2000). Foundations of service level management. Indianapolis, IN: SAMS.
This work was previously published in Knowledge and Technology Management in Virtual Organizations: Issues, Trends, Opportunities and Solutions, edited by G. Putnik and M. Cunha, pp. 69-94, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.7
Business-Related Determinants of Offshoring Intensity Shirish C. Srivastava National University of Singapore, Singapore Thompson S.H. Teo National University of Singapore, Singapore Partha S. Mohapatra Morgan State University, USA
absTracT Some researchers view information systems (IS) offshoring as extension of onshore IS outsourcing. However, others have the opinion that IS offshoring has its unique characteristics because of which, we cannot extend research made in onshore IS outsourcing without testing its applicability to the offshore context. This tension motivates our research to examine whether determinants of IS offshoring are indeed the same as determinants of onshore IS outsourcing? We examine the role of some firm level determinants of offshoring intensity. The four business related determinants that we analyze in this study are: business size, business cost, business financial leverage, and business performance. Results indicate a significant relationship between business size and
offshoring intensity, and also between business financial leverage and offshoring intensity. Based on the results, we analyze similarities and differences between traditional onshore IS outsourcing and IS offshoring. Implications and contributions arising out of this study are also discussed.
inTrOducTiOn Arnett and Jones (1994) define information systems (IS) outsourcing as the transfer of IS assets, leases, and staff to outsourcing vendors. In other words, IS outsourcing can be viewed as the decision and process by which firms transfer various functional aspects of their IS to thirdparty vendors. IS outsourcing has been a popular phenomenon since the time Kodak signed its
Business-Related Determinants of Offshoring Intensity
first outsourcing deal in 1989 (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). But during this period, most of the outsourcing phenomenon was restricted within the borders of the country. In other words, most of the IS outsourcing work was onshore outsourcing. It is for this reason existing literature on IS outsourcing primarily focuses on onshore outsourcing. IS offshoring, which is an offshoot of IS outsourcing, is a relatively new phenomenon. IS offshoring refers to the migration of all or part of the development, maintenance, and delivery of IS services to a vendor in a country different from that of the client (Hirschheim, Loebbecke, Newman, & Valor, 2005). Developments in information and communication technologies (ICTs) in the last decade enabled effective and efficient delivery of digitized information across borders. Along with this, deregulations and removal of trade barriers spurred the development of IS offshoring. Firms now have convenient, real-time access to the skills of knowledge workers from countries across the globe. IS outsourcing and IS offshoring can be visualized as a decision which firms make regarding their strategy to cross the firm and the country
boundaries. This can be represented in a 2x2 matrix (see Figure 1). Simply speaking, the transcending of a firm’s boundary for IS functions can be described as IS outsourcing, whereas crossing the nation’s boundary for IS-enabled functions can be viewed as IS offshoring. Figure 1 illustrates that offshoring (quadrants II and III) can be both outsourcing and insourcing, bringing out the fundamental difference between definitions of onshore outsourcing and offshoring. Offshoring projects might be outsourced, or alternatively they might be insourced to a subsidiary of the parent company. In addition to the differences in definitions of outsourcing and offshoring, the firms’ motivations for such actions might also be very divergent. Outsourcing normally enables firms to focus on their core competencies. Firms can strategically outsource those business processes which they do not intend to develop and nurture as a core competency (Slaughter & Ang, 1996). In contrast, in addition to focusing on core competencies, offshoring purports to strategically route the required services from those countries which offer comparable or better skills at a cheaper price. It makes it possible to extend enterprise boundaries
Inside
Firm Boundary
Outside
Figure 1. The boundaries of outsourcing and offshoring
I Onshore Outsourcing
II Offshore Outsourcing
IV Onshore Insourcing
III Offshore Insourcing
Inside
Outside
Country Boundary
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to effectively access skills from distant places without physical movement of labor (Hirschheim et al., 2005; Rao, 2004). This phenomenon of taking jobs to the country of the skilled worker allows firms to tap the services of that segment of labor, which may otherwise be unwilling to move away physically, from their home country. Hence, firms not only have an incentive in terms of cost reduction but can also exercise a wider choice in terms of labor skills (Rao, 2004). Another critical difference between onshore IS outsourcing and IS offshoring lies in the modalities for such arrangements. Unlike offshoring, it is relatively easier to monitor onshore outsourcing. There are two key reasons for this: the small physical distance, and the fact that both vendor and client are usually in the same time zones. In general, any function that does not require physical monitoring and can be easily digitized for transmission through electronic means is an offshore candidate. Thus, IS offshoring includes not only the firm’s IS functions and processes, but also its IS-supported business processes (Trampel, 2004). Though there has been a phenomenal increase in IS offshoring (Gardner, 2006; Ribeiro 2006; Watson, 2005), scholarly deliberations on the subject are relatively sparse. Current research on IS offshoring focuses on three broad themes: offshoring relationship development and evolution (Carmel & Agarwal, 2002; Kaiser & Hawk, 2004; Khan, Currie, & Guah, 2003; Nicholson & Sahay, 2004), best practices, management and impact of offshoring (Aron, Clemons, & Reddi, 2005; Mani, Barua, & Whinston, 2005; Rottman & Lacity, 2004), and the factors affecting growth of offshoring (Dutta & Roy, 2005; Whitaker, Mithas, & Krishnan, 2005). Though there is a need for deeper understanding in all the three above mentioned areas, it is equally important to understand whether IS offshoring is just an extension of the onshore IS outsourcing phenomenon or is it fundamentally different. The research agenda is important in light of the
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fact that some researchers view IS offshoring as an extension of onshore IS outsourcing (Aron et al., 2005; Pfannenstein & Tsai, 2004) while others view IS offshoring as an altogether different phenomenon with its own unique contexts (Stack & Downing, 2005). In this article, we address two broad research questions. First, what are the important firmlevel business characteristics associated with the firms’ offshoring intensity1? Second, is the IS offshoring phenomenon different from onshore IS outsourcing in terms of the identified firmlevel characteristics? To answer these two broad questions, we identify some of the important firm-level business characteristics from onshore IS outsourcing literature2 and test their applicability in the offshoring scenario. The rest of the article is organized as follows. First, using literature on organization theory and onshore IS outsourcing, we identify businessrelated antecedents that explains firms’ offshoring intensity. Next, using firm-level data, we test the hypotheses that we formulated. Finally, we discuss the results and conclusions of this study.
rEsEarch mOdEl and hypOThEsEs Many recent studies on offshoring have investigated the host country characteristics contributing to a firm’s decision to offshore its business processes to that nation (Lewin & Furlong, 2005; Lewin, Peacock, Peeters, Russell, & Sutton, 2005; Rao, 2004). Surprisingly, there is little empirical research exploring the firm-level determinants of offshoring. In this article, we develop a model for the firm-level business-related characteristics which determine its offshore intensity. We define offshoring intensity as the amount of production or service that has been transferred by the company from its parent country to a foreign destination. We posit that the firm-level economic constructs prior to the offshoring event guide not only
Business-Related Determinants of Offshoring Intensity
the firm’s decision to offshore, but also determine the volume of its offshored activities. Economic constructs related to IS outsourcing activity have been conceptualized in the past literature (Loh & Venkatraman, 1992; Smith, Mitra, & Narasimhan, 1998). Taking onshore IS outsourcing literature as the point of departure, we hypothesize in a similar way for IS offshoring. Past literature on determinants of IS offshoring has focused primarily on the binary decision of whether to offshore or not (Whitaker et al., 2005). In contrast to this, our study accounts for the differences in offshoring volumes across the firms. Based on the theory of IS alignment (Henderson & Venkatraman, 1992; Teo & King, 1997), we suggest the specific constructs of the business domain that should be aligned with the decision for IS offshoring. The theory of IS alignment suggests that the business structure of the organization should be aligned with the IS strategy for better performance (Chan, Huff, Barclay, & Copeland, 1997). Consequently, offshoring, which can be a realized IS strategy, should be aligned and dependent on the business structure of the firm. Thus, we posit that the firm’s offshore intensity is dependent on the prior structural business characteristics of
the firm which include business size, business cost, business financial leverage, and business performance (return on assets, return on sales, and return on equity). The research framework for this study is depicted in Figure 2.
business size Past research finds organizational size, defined as total assets for the company, to be a major determinant of the firm’s actions. Larger firms are more capable of taking advantage of the opportunities to enter new and promising markets than smaller firms (Damanpour, 1992; Haveman, 1993). The decision to offshore is a strategic decision for the firm. It involves a major shift in the firm’s sourcing strategy and involves a lot of risk in terms of transferring a part of its value chain to a distant land with a different political, cultural, and social environment. Increased size of the organization gives it access to a greater amount of resources, leading to its ability to better manage the risks associated with offshoring decisions (Aron et al., 2005; Swartz, 2004). Further, larger firms tend to have more experience in dealing with overseas partners than smaller firms, and consequently
Figure 2. Research model: Business-related determinants of offshoring intensity Business Size
H1 Business Cost
H2 Offshoring Intensity
H3 Business Financial Leverage
H4
Business Performance - ROA - ROS - ROE
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Business-Related Determinants of Offshoring Intensity
may have greater confidence in managing offshore contracts. Thus, we hypothesize: Hypothesis 1: The larger the size of the firm, the higher will be its offshoring intensity.
business cost Business cost is the total cost directly associated with the actual production and coordination of a firm’s product line (Loh & Venkatraman, 1992). Firms in a competitive marketplace are exploring ways to reduce their business costs to increase profitability (Porter, 1980). Firms having relatively high costs will consider the available options for bringing down their business cost. IS offshoring has been highlighted as a means to reduce the transaction costs for firms (Hirschheim et al., 2005; Khan et al., 2003; Pfannenstein & Tsai, 2004). Though traditional outsourcing reduces costs, offshoring purports to bring about greater reduction in costs because of significant cost arbitrage across national boundaries (Rao, 2004). For instance, cheap labor in India helps companies like American Express to reduce costs to the extent of millions of dollars (Agrawal, Farrell, & Remes, 2003). Thus, IS offshoring is one of the options which firms may exercise for reducing their business costs. This implies that firms that have relatively high business costs will be more inclined to follow this option. This argument is also supported by transaction cost theory, which suggests offshoring as an option to reduce the transaction costs (Carmel & Nicholson, 2005). Therefore, we hypothesize that a firm’s prior business cost is one of the vital determinants of its offshoring intensity: Hypothesis 2: The higher the prior business cost of a firm, the higher will be its offshoring intensity.
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business Financial leverage Financial leverage describes the degree to which a firm’s business is utilizing borrowed money. Though financial leverage is not always bad, companies that are highly leveraged may risk bankruptcy if they are unable to service these debts. Financial leverage is one of the vital components describing a firm’s business governance strategy (Loh & Venkatraman, 1992). When financial leverage is high, firms are burdened with high debt. Offshoring arrangements generally include significant initial contractual arrangements and financial risks with vendors because of transactions beyond national boundaries. Firms that are already burdened with high debts may not want to risk this new offshoring strategy. Prior research shows that firms with high financial leverage do not want to take risky initiatives and are averse to new investments (Ertugrul, Sezer, & Sirmans, 2006; Gloy & Baker, 2002; Myers, 1977). Consequently, we hypothesize that firms with a high level of financial leverage will be less motivated to offshore their activities: Hypothesis 3: The higher the prior financial leverage of a firm, the lower will be its offshoring intensity.
business performance A vital component guiding the strategic decisions that firms make is their business performance. When business performance of firms does not match the desired levels, they are on the look out for ways to improve their performance. With this objective in view, the changes incorporated in the firms may not only be related to improving direct operations, but may also include changing strategic business mechanisms (Loh & Venkatraman, 1992; Smith et al., 1998). One of the changes in the business mechanisms that firms may consider is the use of IS offshoring to improve their business
Business-Related Determinants of Offshoring Intensity
performance. The strategic change literature also suggests that firms having low performance will attempt a turnaround through strategic change (Barker & Duhame, 1997; Kimberly & Quinn, 1984; Zhang, 2006). The strategic change may be in terms of a change in the arrangement of a firm’s resource allocation to different functional areas (Ginsberg, 1988). Thus, firms having a low business performance may be motivated to use offshoring as a viable option. In our study, we use three measures of business performance: return on assets (ROA), return on sales (ROS), and return on equity (ROE) (Loh & Venkatraman, 1992; Smith et al., 1998; Zhang, 2006). Hence, we hypothesize that the prior level of business performance of a firm is associated with its offshoring intensity: Hypothesis 4: The lower the prior business performance of a firm, the higher will be its offshoring intensity. Hypothesis 4a: The lower the prior ROA of a firm, the higher will be its offshoring intensity. Hypothesis 4b: The lower the prior ROS of a firm, the higher will be its offshoring intensity. Hypothesis 4c: The lower the prior ROE of a firm, the higher will be its offshoring intensity.
mEThOdOlOgy Though the research questions in our study can be answered by using any of the two prevalent methodologies in IS studies, namely case study approach or questionnaire survey, we chose to use secondary data analysis for four important reasons. First, because of the political sensitivity surrounding offshoring, companies are unwilling to participate in surveys. Further, companies participating in surveys may not be willing to divulge details of their offshoring endeavors. Second, audited financial data provide a more objective evaluation of the firm’s performance and other characteristics than the perception-based data used in case studies and surveys. Third, second-
ary data research is easily reproducible, thereby making it easier for other researchers to extend our work. Fourth, it gives an opportunity to deal with larger samples than when using in-depth case studies, which increases the generalizability of results. However, the limitation of using secondary data for research is that we have to depend on the information available in the databases. For our research, the dependent variable is offshoring intensity. In this article, we define offshoring intensity as the amount of production or service that has been transferred by the company from its parent country to a foreign destination. To operationalize the offshoring intensity, we use the number of jobs offshored by the company. Currently, there are relatively few secondary sources of information which provide information related to offshoring firms in the U.S. because of the political sensitivity of offshoring3 The data on the number of jobs offshored has been collected from the TechsUnite4 Web site database (TechsUnite, 2006). TechsUnite is a union for high-tech workers whose objective is to safeguard the interests of technical workers. The TechsUnite database tracks the number of jobs offshored by U.S. companies from the year 2000 onwards. Two researchers gathered data from this Web site database in early 2006 and the data collection took about five weeks. The data collected indicates the cumulative total number of jobs offshored by each firm from the year 2000 to the present. For testing the validity of the data collected from this Web site, we followed a two-fold analysis. First, we corroborated and checked the names of the firms listed in the Web site, whether they really offshore or not. This we checked by comparing with the list of offshoring firms available at CNN’s Web site on “Exporting America”5 Second, we explored the various newspaper reports referenced as the source of offshoring information on the TechsUnite Web site for 10% of firms in the dataset and found the information to be generally correct and updated. Following this two-step process gave us
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Business-Related Determinants of Offshoring Intensity
confidence about the validity of our dependant variable (offshore intensity). We included those firms in our analysis (a total of 152 firms) for which we could get the data on all the variables in our research model. The firm-related independent variables have been taken from Compustat for the year 2000, which is taken as the pre-event year6. There are two reasons for choosing the year 2000 as the pre-event base year for the firm-level variables. First, the TechsUnite database recognizes the year 2000 as the critical year for the start of widespread offshoring phenomenon and tracks the number of jobs offshored by U.S. companies from the year 2000 onwards. Further, Reingold (2004) and Hirschheim, George, and Wong (2004) have stated that the current wave of offshoring took off from the Y2K phenomenon because of which foreign vendors got a chance to show their effectiveness in the U.S. market. Hence, the year 2000 marks the start of IT-enabled offshoring. Studying firm characteristics before IS offshoring may provide us with an understanding of firm characteristics that precipitated the decision to offshore. For measuring the business size, we take the total assets of that particular firm. This measure for size has been used by previous studies such as Ang and Cummings (1997), Loh and Venkatraman (1992), and Ang and Straub (1998). The business cost structure is indicated by the cost of goods sold (e.g., Loh & Venkatraman, 1992; Smith et al., 1998), and business financial leverage is directly reported from financial reports (e.g., Loh & Venkatraman, 1992). The business performance is indicated by the three measures of return on
assets, return on sales, and return on equity (e.g., Tam, 1998). In addition to the research variables, we controlled for the industry types in our analysis. To control for industry sector, we divided firms into five sectors based on the North American Industry Classification System (NAICS) and created a dummy for each sector: manufacturing and industrial, wholesale and retail trade, services, finance and real estate, and information (see Table 1). These five sectors comprehensively cover almost all the manufacturing and service industries in the U.S. Such industry controls have been used in past outsourcing/offshoring studies such as Brynjolfsson, Malone, Gurbaxani, and Kambil (1994) and Whitaker et al. (2005).
rEsulTs and analysis The descriptives and correlations among the various independent variables in our research framework are given in Table 2. Serious multicollinearity problems may lead to deviation in the estimation of regression statistics (Stevens, 2002; Tebachnick & Fidell, 2001). From Table 1, we see that all correlations are below 0.80, signifying no serious problem of multicollinearity in our data (Gujarati, 2003). But we also see that one of the correlations, between ROA and ROS, is rather high (> 0.70). Hence, to be confident that there is no serious problem of multicollinearity among the independent variables, we tested for multicollinearity among the independent variables by examining the Variance Inflation Factor (VIF), the results for which are given in Table 3.
Table 1. Industry dummies created as control
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Sl. No.
NAICS 2-digit codes
Description
1
11, 21, 22, 23, 31-33
Manufacturing and industrial
2
42, 44-45
Wholesale and retail trade
3
48-49, 54, 55, 56, 61, 62, 71, 72, 81, 92, 99
Services and others
4
51
Information
5
52, 53
Finance and real estate
Business-Related Determinants of Offshoring Intensity
Table 2. Descriptives and correlations Variable
Std. Dev.
2106.82
3683.12
1
2
1
Offshoring Intensity
2
Size (Assets)
58547.95
139159.41
0.250**
1.000
3
Business Cost
11647.11
22557.52
0.223**
0.480**
4
Financial Lev.
5 6 7 *
Mean
3
4
5
1.000
**
1.000 0.211**
4.75
6.14
-0.015
0.630
ROA
2.64
15.09
0.162
-0.008
0.058
-0.051
1.000
ROS
15.42
34.70
0.078
0.222*
0.074
0.261**
0.717**
ROE
13.90
6
81.00
0.059
0.019
0.034
1.000
0.123
**
0.365
1.000 0.231**
p < 0.05 ;**p < 0.01 (two-tailed test)
Table 3. VIF for independent variables Independent Variables
VIF
1
Size (Assets)
1.459
2
Business Cost
1.057
3
Financial Lev.
2.683
4
ROA
1.083
5
ROS
1.096
6
ROE
1.036
Dependent variable: Offshoring intensity
VIF measures the impact of collinearity among the predictors in a regression model on the precision of estimation. In other words, it expresses the degree to which collinearity among the predictors degrades the precision of an estimate. Researchers suggest that multicollinearity is not a significant problem if the value of VIF is below 10 (Allison, 1999; Belsley, Kuh, & Welsch, 1980; Stevens, 2002). In our case, the VIF values for all the independent variables are below 5 (Pedhazur, 1997), which is the conservative limit for multicollinearity. Hence, we conclude that there is no significant problem of multicollinearity among the independent variables in our study. Table 4 presents the results of multiple hierarchical regression analysis where the dependent variable is offshoring intensity. In addition to the control variables, the independent variables were entered into the regression equation in four steps. After entering the industry dummies as controls,
the business size variable (assets) was entered in the first step, the business cost variable (cost of goods sold) was entered in the second step, the business financial leverage variable was added in the third step, and business performance variables (ROA, ROS, ROE) were added in the last step. Results in Table 4, Model 1 indicate a strong support for Hypothesis 1 (β=0.370, p<0.001). The results with size as a predictor of onshore IS outsourcing were generally found to be mixed by previous researchers. In some of the previous onshore IS outsourcing studies, size was not a significant predictor of outsourcing (e.g., Loh & Venkatraman, 1992), whereas some studies found size to be significant predictor of outsourcing in the opposite direction (e.g., Ang & Straub, 1998). For IS offshoring, the results from our study indicate that the size is a positive predictor of offshoring intensity. Further, we know that offshoring is more closely related to labor and employees, as the common rationale for offshoring is to derive labor cost arbitrage. Hence, we also tested the model using ‘number of employees’ as a measure of size, in place of total assets. The model using number of employees as an indicator of size was also significant. (β=0.399, p<0.001), providing robustness check for our results. Past studies like Ang and Cummings (1997), Loh and Venkatraman (1992), and Ang and Straub (1998) had considered only assets or sales as a measure of size.
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Business-Related Determinants of Offshoring Intensity
Table 4. Results of hierarchical regression analyses for offshoring intensity Variables†
Model 1
Model 2
Model 3
Model 4
0.370***
0.323**
0.372***
0.378***
0.071
0.090
0.088
-0.228*
-0.204††
Step 1: Business Size Size (Assets)
Step 2: Business Cost Structure Business Cost
Step 3: Business Financial Leverage
Step 4: Business Performance ROA
0.219*
ROS
-0.113
ROE
0.036
R2 Adjusted R
2
F
0.227
0.231
0.201
0.199
8.596
***
∆ R2 †
***
0.247
0.273
0.210
0.222
***
7.243
6.749
5.308***
0.004
0.016**
0.026
We control for industry segment by creating five industry dummies as per NAICS classification (Table 1)
††
p < .1; * p < .05; ** p < .01; *** p < .001 (one-tailed test); N = 152
This aspect of IS offshoring, having firm size as a significant positive predictor of offshoring intensity, is different from onshore IS outsourcing. A plausible explanation for this difference is that larger firms have more resources and are able to better manage offshoring than smaller firms due to the larger scale of their business operations. Further, larger firms may have more experience and expertise in managing contracts with overseas firms. This international experience may influence the firms’ propensity to offshore. Also, firms with a greater number of employees may have a greater incentive to reduce their manpower through offshoring. Size has been used as a control variable in many of the previous studies (e.g., Loh & Venkatraman, 1992). Entering the ‘size’ (assets) variable in the first step of multiple hierarchical regression also serves as a control for ‘size’ or ‘total assets’, thus making the subsequent results more meaningful.
118
The results in Table 4, Model 2 show that there is no association between business cost and offshoring intensity (β=0.071, ns). Hence, from the results, we conclude that Hypothesis 2 is not supported. This result is different from that for onshore IS outsourcing. Previous studies have shown significant relationship between business cost and onshore IS outsourcing (Loh & Venkatraman, 1992; Smith et al., 1998). IS offshoring is a strategic decision to derive a long-term cost reduction, but in the short run it might lead to an increase in cost. Highlighting this difference in short-term costs, and long-term costs of offshoring, Rost (2006) states: “The rather high costs of establishing the offshore scenario are present only during the first few projects. Thus, later projects will not be affected by these initial costs” (p. 33). Hence, firms that have a high business cost may not be in a position to afford the initial high cost in an offshore decision. Since onshore IS
Business-Related Determinants of Offshoring Intensity
outsourcing involves relatively less initial costs and immediate savings, firms that have a high business cost may resort to onshore outsourcing as found in Loh and Venkatraman (1992). From the results in Table 4, Model 3, we see that that the third step of the hierarchical regression model is significant. This implies that business financial leverage is significantly negatively associated with offshoring intensity as hypothesized (β=-0.228, p<0.05). Thus, Hypothesis 3 is supported. This result is different from that for onshore IS outsourcing (Loh & Venkatraman, 1992; Smith et al., 1998). One plausible reason for this result is that firms with high financial leverage tend to be risk averse, hence they tend to avoid offshoring. In the last step, Table 4, Model 4, we added the business performance metrics of ROA, ROS, and ROE. From the figures of R 2 change (∆ R 2 = 0.026, ns), we see that in overall analysis, Hypothesis 4 is not supported. Hence, business performance is not a significant predictor of offshoring intensity. On analyzing the individual hypotheses for the three performance variables, we find that relationship between ROA and offshoring intensity (Hypothesis 4a) is not supported but is significant in the direction opposite to the hypothesized direction (β=0.219, p<0.05). For ROS, the relationship with offshoring intensity is not significant (β=-0.113, ns). For ROE, the relationship is also not significant (β=0.036, ns). One plausible reason for ROA being positively related to offshoring intensity may be fact that offshoring entails the firms to undertake inherent risks in the business processes (Aron et al., 2005; Swartz, 2004), and the firm’s ability to do well in the ROA signifies efficient management of firm resources, which indirectly implies effective management of risk. Though the overall result of the relationship between business performance and offshoring intensity being not significant is similar to that for onshore IS outsourcing (Loh & Venkatraman, 1992; Smith et al., 1998), the significant relationship of ROA with offshoring intensity in the opposite direction
provides interesting differences for the offshoring phenomenon. This result reiterates the importance of resource and risk management ability of firms as an important determinant for their offshoring intensity. The lack of support for Hypotheses 4b and 4c may indicate that, as business performance is affected by many internal and external variables, its relationship with offshoring intensity is rather weak. Indeed, previous literature has shown a mix of firms which decide to offshore. Even firms that are doing well may be on the constant lookout for ways to reduce their costs even further, and consequently may resort to offshoring. A summary of results from this research is given in Table 5. Table 6 gives a comparison of the results of past studies for the determinants of onshore IS outsourcing with the results from the present study on IS offshoring. In Table 6 and from the discussion in the previous section, we observe that the determinants of onshore outsourcing and offshoring are different in a number of important aspects, thus emphasizing the point for studying IS offshoring as a phenomenon different from onshore IS outsourcing.
limiTaTiOns Though this research analyzes some of the important questions related to IS offshoring, there are a few limitations that raise various issues that can be explored by future research. We do not address the role of a firm’s IS competence in determining its offshoring intensity. Future research can further broach on this subject. The current research is also limited by the fact that it only explores conditions under which firms offshore, but does not suggest whether those conditions are ameliorated after offshoring. In other words, did offshoring have the intended impact? This aspect also needs to be investigated in future research. Further, owing to the dynamic nature of offshoring, it would be interesting to know if determinants of offshoring have evolved over time. Future research needs to
119
Business-Related Determinants of Offshoring Intensity
Table 5. Summary of results Hypothesis
Result
Hypothesis 1: The larger the size of the firm, the higher will be its offshoring intensity.
Strongly supported
Hypothesis 2: The higher the prior business cost of a firm, the higher will be its offshoring intensity.
Not supported
Hypothesis 3: The higher the prior financial leverage of a firm, the lower will be its offshoring intensity.
Supported
Hypothesis 4: The lower the prior business performance of a firm, the higher will be its offshoring intensity.
Not supported
Hypothesis 4a: The lower the prior ROA of a firm, the higher will be its offshoring intensity.
Not supported (significant in opposite direction)
Hypothesis 4b: The lower the prior ROS of a firm, the higher will be its offshoring intensity.
Not supported
Hypothesis 4c: The lower the prior ROE of a firm, the higher will be its offshoring intensity.
Not supported
Table 6. Comparison of business-related determinants of onshore outsourcing and offshoring (adapted from Dibbern et al., 2004) Outsourcing Constructs
References
Results
Offshoring Construct
Results (this study)
Cost structure (+)
Loh and Venkatraman (1992)
Supported
Cost efficiency (+)
Smith et al. (1998)
Supported
Business cost (+)
Not supported
Financial performance (-)
Loh and Venkatraman (1992)
Not supported
Financial performance (-)
Not supported
Financial leverage (+)
Loh and Venkatraman (1992)
Not supported
Financial leverage (-)
Supported
Firm size (assets) (+)
Ang and Cummings (1997)
Supported
Firm size (assets) (-)
Ang and Straub (1998)
Supported
Supported
Firm size (assets and sales) (+)
Firm size (assets) (+)
Loh and Venkatraman (1992)
Not supported
be done with longitudinal data to investigate this phenomenon further.
cOnTribuTiOns and cOnclusiOn Despite these limitations, our research offers the following important contributions that have implications for practitioners and academics. First, our study analyzes the role of antecedent business-related variables as determinants of a firm’s decision to offshore. Past studies aiming
120
to understand the antecedents of offshoring have used the decision to offshore as a binary variable (either a yes or a no) (Whitaker et al., 2005). We go beyond this, to understand the role of businessrelated variables in determining the intensity of offshoring. This is analogous to research on IS adoption where some researchers (e.g., Rai & Patnayakuni, 1996) advocate that there might be different degrees of adoption rather than just conceptualizing adoption as a dichotomous variable. Second, we analyze the similarities and differences in the determinants of offshoring from
Business-Related Determinants of Offshoring Intensity
that of the traditional onshore IS outsourcing phenomenon. Our research points out important differences between the two and emphasizes the importance of treating the two business arrangements as related, but different phenomena. This has important implications for firms resorting to onshore outsourcing as well as offshoring simultaneously. It also has important implications for researchers as it provides further avenues for research to determine the nature and reason for these differences. Third, two of the important differences between offshoring and traditional onshore IS outsourcing emerging from this research are the importance of the firm size and return on assets in determining the decision to offshore. Larger firms generally have deeper pockets in terms of greater amount of resources (hence more risk-taking ability), and firms with a higher ROA generally have a better ability to manage risks. Thus, these two determinants for offshoring intensity (size and ROA) suggest that offshoring firms not only have a greater risk-taking ability but also a better risk management ability. Thus, risk-taking and managing ability emerge as major determinants for the offshoring decision. Future research can explore this finding in greater detail. Fourth, the two other differences between the determinants of onshore IS outsourcing and IS offshoring brought out from this study concern the aspects of prior business cost. IS offshoring intensity is not associated with a high prior business cost, but is significantly associated with low prior financial leverage. Both these results for offshoring indicate the long-term strategic perspective taken by the firms deciding to offshore. Since the decision to offshore is not dependent on high prior business cost, these firms are not looking for immediate cost reduction; rather they are looking for long-term stable cost reduction (Rost, 2006). At the same time, firms that have low debts (low financial leverage) can afford to take risks to go for offshoring. It is important for firms to realize that offshoring is a long-term
decision having strategic business implications, and firms should not be looking for short-term gains from offshoring contracts. Fifth, the research assists offshoring vendors to target those companies with the identified firm characteristics as possible offshoring clients. The IS offshoring phenomenon is increasingly gaining importance in the industry. Thus, it is important that we answer the fundamental question: What makes firms offshore? Hence, understanding the determinants of offshoring is vital. In addition to understanding these determinants, we need to know how these determinants differ from determinants of traditional onshore IS outsourcing. Such knowledge will lead to a better appreciation of the offshoring phenomenon and may help managers to enhance firm performance. If offshoring is different from traditional onshore IS outsourcing, offshoring firms resorting to a strategy similar to that for IS outsourcing may require refocusing their agenda, so as to address the particular issues associated with the implementation of offshore contracts. Through this study on IS offshoring, we understand the role of firm-level business-related variables (business size, business cost, business financial leverage, and business performance) in determining the intensity of offshoring activity. We also analyze how these are similar or different from previous research on onshore IS outsourcing activity. The results from this research suggest that offshoring is different from onshore outsourcing and needs greater academic as well as practitioner attention.
rEFErEncEs Agrawal, V., Farrell, D., & Remes, J.K., (2003). Offshoring and beyond. McKinsey Quarterly, (Special Edition: Global Directions), 25-35. Allison, P.D. (1999). Logistic regression using the SAS: Theory and application. Cary, NC: SAS Institute.
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Offshoring intensity is defined as the amount of production or service that has been transferred by the company from its parent country to a foreign destination and is operationalized by the number of jobs offshored by that company. IS outsourcing literature generally refers to the context of onshore IS outsourcing. The distinction from offshore outsourcing became noteworthy only after the growth of information and technological capabilities that could facilitate offshore outsourcing. The US press and media are replete with articles or shows debating the offshoring activity, example: CNN’s Lou Dobbs show on Exporting America. Techsunite.org (http://www.TechsUnite. org) is the nationally-oriented web site of WashTech/CWA, the nation’s leading union for high-tech workers. TechsUnite is a project of the Communications Workers of America, AFL-CIO, in collaboration with the following site partners, supporters and stakeholders: Alliance@IBM, CarolTrevelyan Strategy Group (CTSG), Center on Wisconsin Strategy, CWA National Education and Training Trust, Washington
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5
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Alliance of Technology Workers, and Working Today. http://www.cnn.com/CNN/Programs/lou. dobbs.tonight/popups/exporting.america/ content.html Year after which offshoring phenomenon became widely prevalent in business
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 44-58, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.8
Making Sense of the Sourcing and Shoring Maze: Various Outsourcing and Offshoring Alternatives Subrata Chakrabarty Texas A&M University, USA
absTracT Many terminologies have grown out of the outsourcing and offshoring bandwagon. While the corporate world continues to experience these phenomena, the academic world continues to research the same. An attempt has been made to give an overview of the various outsourcing and offshoring alternatives. We first discuss the basic sourcing strategies (insourcing and outsourcing) and the shoring strategies (onshoring and offshoring). We then move deep and wide into the maze and unravel the multiple alternatives that businesses exercise in order to get the best deal for their information system (IS) needs. Approximately 50 terminologies that are related to this growing maze have been discussed. The literature was scanned for various sourcing alternatives and terminologies. The purpose of this chapter is to compile and elucidate the various facets of domestic and global sourcing of IS
needs. The reader will gain holistic perspective of a phenomenon that is continuously changing the way business is carried out globally.
inTrOducTiOn “Outsourcing” and “offshoring” are two of the media-friendly terms being bandied about in recent times. However, there are many other aspects to the phenomenon. These terminologies are often confused and misunderstood. The notion that jobs move out of some economically rich countries due to “outsourcing” may not be terminologically correct. For example, in “onshore-outsourcing” (or “domestic-outsourcing”) the jobs have simply been outsourced to a vendor in the same country. The terminologically correct notion is that jobs move out from one country to another country due to “offshoring.” Similarly when programmers think that “offshoring” of software development implies that
their code will be written by people of a different company, they may not be terminologically correct. In “offshore-insourcing” (or “globalinsourcing”), the task is still performed by the same company, though in a different land. In brief, work is “outsourced to vendors” and “offshored to another country.” Outsourcing of work is across organizational borders, while offshoring of work is across geographical borders. A large number of terminologies are already being used, and as the business world explores and experiences new information system (IS) sourcing alternatives, newer terminologies will be coined, and existing terminologies may be subjected to multiple interpretations. This chapter will attempt to elucidate many the existing terminologies. We broadly define a client as anyone in need of services. For the purposes of maintaining clarity, the terms “client”, “customer” and “buyer” have been treated synonymously to imply a firm (or even an individual) that is seeking services, from either internal service providers (like the client’s own internal department, or a subsidiary) or from external service providers (a vendor/supplier ). The client owns any “client-entity” such as the client’s internal IS department or a subsidiary. In the same vein, the terms “vendor,” “supplier,” “third party”, and external “consultant” have been treated synonymously to imply an “external service provider” or a non-client entity whose business is to provide services to the client. In this chapter, the term “information system” (IS) has been assumed to broadly refer to not just information technology (IT), but also various types of information systems whose functioning has been influenced by use of IT (e.g., financial, accounting, health care, educational, human resource, customer service, logistics, management and other information systems). This has been done as the concepts in this chapter can be applied to a wide variety of industries and services that gather, process, store, transmit, display, disseminate, and act on information. For example,
the term IS department when understood in the context of this chapter, can be considered as any department that engages in collecting, processing, editing, storing, transmitting and supplying data or information relating to a certain area of application.
ThE basic “sOurcing” sTraTEgiEs Insourcing and outsourcing are the two basic sourcing strategies. Simplistically, it is the choice between either “walking the path alone” or “building on acquaintances along the way” such that a firm’s business interests are best served.
insourcing •
The service provider is a client entity
Often organizations have their own IS departments or IS subsidiaries from where they insource their IS needs. The responsibility and delegation of tasks involved the firm’s IS needs are handled internally (in-house). Hence, when the service provider to the client is a client-entity such as a subsidiary or the internal IS department, it is known as insourcing. Insourcing has also been interpreted as being part of a multi-sourcing continuum having two possible insourcing strategies: (a) the “OK as is” strategy where the status quo of insourcing IS activities is considered the best sourcing strategy, and (b) the “fix and keep in-house” strategy where insourcing is again considered the best strategy but the internal IS department needs to adopt better practices to become more efficient and effective (Wibbelsman & Maiero, 1994, as cited in Dibbern, Goles, Hirschheim & Jayatilaka, 2004, p. 11).
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Outsourcing •
The service provider is a non-client entity
Due to various factors, organizations (clients) often need to outsource work to external entities. Hence, when the service provider is a non-client entity, such as a vendor/supplier it is known as outsourcing. Outsourcing has been defined in many interesting ways in the literature, which are quoted below, further aid our understanding: Outsourcing means selectively turning over to a vendor some or all of the IS functions, ranging from simple data entry to software development and maintenance, data centre operations and full system integration. (Apte, Sobol, Hanaoka, Shimada, Saarinen, Salmela & Vepsalainen, 1997, p. 289) Outsourcing is the contracting of various information systems’sub-functions by user firms to outside information systems vendors. (Chaudhury, Nam & Rao, 1995, p. 131) ...we define broadly outsourcing of IS functions as: the organizational decision to turn over part
or all of an organization’s IS functions to external service provider(s) in order for an organization to be able to achieve its goals. (Cheon, Grover & Teng, 1995, p. 209) Information systems (IS) outsourcing is an increasingly common business practice in which a company contracts all or part of its information systems operations to one or more outside information service suppliers. (Hu, Saunders & Gebelt, 1997, p. 288) The term ‘outsourcing’, although not specific to IS in that it reflects the use of external agents to perform one or more organizational activities (e.g., purchasing of a good or service), is now in vogue in the IS domain and applies to everything from use of contract programmers to third party facilities management. (Lacity & Hirschheim, 1993b, p. 2) IS outsourcing refers to the third party management of IS assets, people, and or activities required to meet pre-specified performance levels. (Lacity & Hirschheim, 1995, p. 4)
Table 1. Categorization of sourcing alternatives based on “Percentages of IS Budget as a Differentiator Between Total and Selective Sourcing Decisions” (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10) # Terminology
Definition as quoted in literature (Lacity and Hirschheim, 1995, p. 4, pp. 223-224; see also Dibbern et al., 2004, p. 10)
1. Total Outsourcing
“… to refer to those organizations that decided to outsource at least 80% of their IS budgets to third party providers.” “…refers to those organizations that formally evaluated outsourcing but selected their internal IS departments’ bid over external vendor bids, thus keeping over 80% of the IS budget provided by the internal IS department.” “…refers to organizations that opted to use third party vendors for certain IS functions which represents between 20 and 60% of the IS budget (typically around 40%) while still retaining a substantial internal IS department.”
2. Total Insourcing
3. Selective Sourcing
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We define IT outsourcing as the significant contribution by external vendors in the physical and/ or human resources associated with the entire or specific components of the IT infrastructure in the user organization. (Loh & Venkatraman, 1992, p. 9) IT outsourcing ... a decision taken by an organization to contract-out or sell the organizations IT assets, people, and/or activities to a third party vendor, who in return provides the services for a certain time period and monetary fee. (Willcocks & Kern, 1998, p. 2) Outsourcing has also been interpreted as being part of a multi-sourcing continuum having two possible outsourcing strategies: (a) the “option to reverse” strategy where IS functions are outsourced to a vendor but there is a planned roadmap which would allow the functions to return in-house without undue hardship at a later date if desired, and (b) the “divest completely” strategy where IS functions that are perceived to be non-core business functions and that are thought to be best handled by a vendor are outsourced permanently (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11).
categorization of various sourcing alternatives in literature Let us now understand how some sourcing alternatives are categorized in literature. At this stage, we directly quote the literature, and then proceed in later sections to explain these categorized sourcing alternatives along with many other sourcing alternatives. As shown in the following table, Lacity and Hirschheim (1995, pp. 4, 223-224) categorized the sourcing alternatives into total outsourcing, total insourcing and selective sourcing, by using the percentages of IS budget as a differentiator between total and selective sourcing decisions (see Table 1).
Dibbern et al. (2004, p. 11) cited the categorization of sourcing alternatives by Wibbelsman and Maiero (1994) where the focus is on “how should we source” instead of “should be outsource”, and the entire sourcing scenario has been treated as a continuum (see Table 2). Currie and Willcocks (1998) have categorized the sourcing alternatives on how the client manages or utilizes the vendors into total outsourcing, multiple-supplier sourcing, joint venture/strategic alliance sourcing, and insourcing (see Table 3).
categorization of Outsourcing in literature Some of the categorizations of outsourcing terminologies in the literature are quoted. The terms defined in these categorizations, have been explained independently in later sections of this chapter. Lacity and Hirschheim (1993a) categorized outsourcing into Body Shop, Project Management and Total Outsourcing (see Table 4). Lacity and Hirschheim (1995, pp. 4-5) have cited the work of Millar (1994), which categorizes outsourcing on the basis of how the client manages or utilizes the suppliers, and have described general, selective, value-added, cooperative, transitional, business process outsourcing and business benefit contracting (see Table 5). Gallivan and Oh (1999, pp. 1-6), categorized outsourcing on the basis of number of clients and vendors into dyadic, multi-vendor, co-sourcing and complex outsourcing (see Table 6).
ThE “shOring” sTraTEgiEs As described earlier, the client’s service provider can be either internal (its own IS department or a subsidiary) or external (a vendor). In our shrinking world, where exactly is this service provider located?
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Table 2. Categorization of sourcing alternatives based on “How Should We Source” Instead of “Should We Outsource” (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11) # Terminology
Definition as quoted in literature (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11)
1. multi-sourcing (continuum)
“The multiple sourcing of IS services. More specifically, they see multi-sourcing as a continuum. The end points of their continuum span from ‘OK as is’ to ‘divest completely’.” Various strategies of the multi-sourcing continuum described in the literature are: Main Strategy insourcing co-sourcing
outsourcing
Sub-Strategy “OK as is” “fix and keep in-house” “rehabilitation and return” “transition assistance” “capability development” “option to reverse” “divest completely”
2. (multi-sourcing continuum:) insourcing -> “OK as is” strategy
“The ‘OK as is’ point on the continuum relates to the belief that the status quo is the best sourcing strategy; IS activities are insourced.”
“This strategy believes that insourcing is the best strategy but the internal IS department needs to adopt better practices to become more efficient and effective.” “…the IS organization is reformed through the assistance of a third party and then kept in-house.”
“…a third party takes on certain IS activities while the internal IS group transitions itself to a new set of skills.” “…a third party takes on either permanently or temporarily IS activities while the IS organization develops new capabilities. This option allows the IS organization to focus on certain core capabilities.” “…hereby IS is outsourced to a third party but there is a specific plan which would allow the function to return inhouse without undue hardship at a later time if the management of the company deems this desirable.” “…the IS function is outsourced permanently. In such cases, IS is perceived to be a non-core business function best handled by an outsourcer.”
Making Sense of the Sourcing and Shoring Maze
Table 3. Categorization of sourcing alternatives based on How the Client Manages or Utilizes the Suppliers (Currie & Willcocks, 1998, pp. 122-125) # Terminology
Definition as quoted in literature (Currie & Willcocks, 1998, pp. 122-125)
1. Total Outsourcing
“Total outsourcing is when an organization chooses to outsource as much as 70-80% of its IT facility, usually to a large single supplier. These contracts are usually for between 5 and 10 years.” “…entered into IT sourcing arrangements with a variety of suppliers”
“An organization enters into a joint venture with a supplier on a shared risk/reward basis. This may involve selecting an existing IT supplier or helping to create a new company to which work can be outsourced. Sometimes an organization may take share ownership in an existing IT supplier or vice-versa.” “An organization opts to retain a large centralized IT department and insource management and technical capabilities according to the peaks and troughs of IT work. Contractors may be given employment contracts lasting between 3 months and a year, although there are many examples of them staying with an organization for several years.”
Table 4. Categorization of outsourcing capturing the range of Outsourcing Options (Lacity & Hirschheim, 1993a, pp. 17-18)
# Terminology
Definition as quoted in literature (Lacity & Hirschheim, 1993a, pp. 1718)
1. Body Shop
“…management uses outsourcing as a way to meet short-term demand. The most common type of body shop outsourcing is the use of contract programmers/personnel that is managed by company employees.” “…management outsources for a specific project or portion of IS work.” “…the vendor is responsible for managing and completing the work.” “…the vendor is in total charge of a significant piece of IS work.”
2. Project Management 3. Total outsourcing
•
•
Onshoring: The service provider is located in the same country as the client. This is also known as domestic sourcing or onshore sourcing. Nearshoring: The service provider is located in a country which is geographically close the client’s country. Hence, countries which share borders, or are neighbors can be considered as “nearshore” countries. Ireland and Spain may be considered as nearshore for the United Kingdom, whereas Mexico
•
and Canada may be considered as nearshore for U.S. This is also known as nearshore sourcing. Offshoring: The service provider is located in a country which is geographically far away from the client’s country. India and China may be considered as “offshore” for both the United Kingdom and U.S This is also known as offshore-sourcing.
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Table 5. Categorization of outsourcing based on How the Client Manages or Utilizes the Suppliers (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5)
# Terminology
Definition as quoted in literature (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5)
1. General outsourcing
“… encompasses three alternatives: (a) selective outsourcing …(b) value-added outsourcing … or (c) cooperative outsourcing …” “ …where one particular area of IS activity is chosen to be turned over to a third party, such as data center operations” “…where some area of IS activity is turned over to a third party who is thought to be able to provide a level of support or service which adds value to the activity that could not be cost effectively provided by the internal IS group” “…where some targeted IS activity(ies) is (are) jointly performed by a third party provider and the internal IS department”
2. (General outsourcing:) selective outsourcing 3. (General outsourcing:) value-added outsourcing 4. (General outsourcing:) cooperative outsourcing 5. Transitional outsourcing 6. Business process outsourcing 7. Business benefit contracting
“…involves the migration from one technological platform to another.” “…refers to an outsourcing relationship where a third party provider is responsible for performing an entire business function for the client organization.” “…contractual agreement that defines the vendor’s contribution to the client in terms of specific benefits to the business and defines the payment the customer will make based upon the vendor’s ability to deliver those benefits. The goal is to match actual costs with actual benefits and to share the risks.”
“Shore” in the words onshore, nearshore and offshore does not necessarily imply that the respective country has land along the edge of a body of water. It only indicates a different geographical location. The geographical distance is a predominant classifier when comparing between onshore, nearshore and offshore locations. At the same time, the time zones of the locations may also be considered. In the IS industry, as communication technology improves, the exact geographical distance is a lesser barrier when compared to the time zones. It may not be wrong if we choose to classify between onshore, nearshore and offshore on the basis of both time zones and geographical distance.
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One may do away with the specific term “nearshoring,” and generally use “offshoring” instead. The term “offshoring” is often used to broadly imply “nearshoring” too. When someone says, that work has been “offshored,” it may simply imply that work has been sent away from onshore (i.e., to nearshore or offshore). Hence, we can adopt a simpler binary logic of onshore versus offshore, where anything that is not “onshore” can be simply called “offshore”. Offshoring may therefore be defined as a scenario where the service provider is located in a country that is different from the client’s country; this is also known as “global sourcing”.
Making Sense of the Sourcing and Shoring Maze
Table 6. Categorization of outsourcing based on Number of Clients and Vendors (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp.12-13) # Terminology
Definition as quoted in literature (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp.12-13)
1. Dyadic outsourcing arrangement
“one client, one vendor” “…presume that client firms seeking IT services act independently of each other, while IT vendors do the same. Thus the assumed relationship between client firm and IT vendor has been a simple ‘dyadic’ one.” “one client, multiple vendors” “A one-to-many relationship indicates that one client uses multiple outsourcing vendors to achieve its objectives, and that division-of-labor is jointly negotiated and understood by all parties to the agreement.” “many clients, one vendor” “A many-to-one alliance where several clients contract with a single IT vendor for services.” “many clients, many vendors” “…combining multiple clients and multiple vendor firms into a single contract or alliance”
2. multi-vendor
3. co-sourcing
4. complex outsourcing
basic cOmbinaTiOns OF ThE shOring and sOurcing sTraTEgiEs The shoring strategy may be either an onshore, nearshore or offshore strategy. And the basic sourcing strategy may be either insourcing or outsourcing. As illustrated by Figure 1 (onshorecentric view of sourcing and shoring), the various combinations are onshore-insourcing, onshoreoutsourcing, nearshore-insourcing, nearshoreoutsourcing, offshore-insourcing and offshoreoutsourcing:
Domestic Sourcing or Onshore Sourcing or Onshoring Alternatives •
Onshore-Insourcing: Both the client and its subsidiary or IS department that provides the services are located in the same country. This is also termed as domestic insourcing.
•
Onshore-Outsourcing: Both the client and the vendor are located in the same country. This is also termed as “domestic outsourcing”. This is also termed as domestic outsourcing.
Global Sourcing Alternatives •
• •
•
Nearshore-Insourcing: The client’s subsidiary or IS department that provides the service is located in a country which is geographically close the client’s country. Nearshore-Outsourcing: The vendor is located in a country that is geographically close the client’s country. Offshore-Insourcing: The client’s subsidiary or IS department that provides the service is located in a country that is geographically far away from the client’s country. Offshore-Outsourcing: The vendor is located in a country that is geographically far away from the client’s country.
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Figure 1. Sourcing and shoring: Onshore centric view
Figure 2. Sourcing and shoring: Insourcing centric view
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Figure 2 illustrates an insourcing-centric view of sourcing and shoring; the various combinations shown are onshore-insourcing, nearshore-insourcing, offshore-insourcing, onshore-oursourcing, nearshore-outsourcing, and offshore-outsourcing. As discussed earlier, the term “offshore” is often used to imply “nearshore”, too, that is, anything that is not “onshore” may simply be called “offshore”. While the term “domestic” relates to “onshore”, the term “global” relates to “offshore”, where “offshore” encompasses “nearshore” too (Dibbern et al., 2004, p. 43). Hence, for the purposes of simplification, one can narrow down the above classification to the following four basic choices, where the earlier nearshore sourcing options are now encompassed within the offshore sourcing options. Domestic sourcing or onshore sourcing or onshoring alternatives: 1. 2.
Onshore-insourcing or domestic-insourcing Onshore-outsourcing or domestic-outsourcing
Global sourcing or offshore sourcing or offshoring alternatives: 3. 4.
Offshore-insourcing or global-insourcing Offshore-outsourcing or global-insourcing
Therefore, in offshore-insourcing, the subsidiary or IS department (of the client) which provides the service is located in a country different from the client’s country; while in offshore-outsourcing, the vendor is located in a country different from the client’s country.
OvErviEw OF variOus sOurcing alTErnaTivEs Let us now gain an understanding of the various sourcing alternatives.
list of sourcing alternatives The sourcing alternatives that will be eventually discussed are summarized and listed in Table 7. The definitive feature of each term is provided along with information on the possible basic sourcing strategy (insourcing, outsourcing, both or any) and the possible shoring strategy (onshoring, offshoring or simply anywhere). We will now briefly explain each of the terms listed in the Table 7.
application service provision / application service providing / net-sourcing / On-demand •
Accessing remotely hosted IS applications
An application service provider (ASP) is a vendor that provides access to remotely hosted IS-applications over a wide area network (WAN), a virtual private network (VPN), or over the Internet (Susarla, Barua, & Whinston, 2003, p. 103). Bennett and Timbrell (2000, p. 196) define application service provision as a form of selective outsourcing where an organization rents generally available packaged software applications and related services. Dewire (2000, p. 14) states that an “application service provider (ASP) provides a contractual software-based service for hosting, managing, and providing access to an application from a centrally managed facility.” Furthermore, clients have remote web-access to the applications that are running on the ASP’s servers. Figure 3 illustrates a client having remote access to applications on servers hosted and managed by the vendor (ASP), over a wide area network (WAN),
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Table 7. List of sourcing alternatives Basic sourcing strategy: o Insourcing o Outsourcing o Both o Any Outsourcing
Shoring strategy focus: o Onshore o Offshore o Anywhere
Insourcing what was outsourced Linking payments to realization of benefits
Insourcing Outsourcing
Anywhere Anywhere
Using contract personnel Vendor performs client’s entire business processes Multiple clients and multiple vendors in a single contract or alliance Client’s internal IS department and the vendor perform IS activity cooperatively Client’s performance determines vendor’s revenue Helping the client’s IS department mature Multiple clients jointly seek services from vendor Innovative contracts for better deals Vendor has teams both at onshore and offshore Independent client dealing with independent vendor Vendor maintains the client’s assets Sharing ownership of facilities needed by each Selective, value-added and cooperative outsourcing Large vendor delivering services from various global locations to clients at various global locations Outsourcing the process of setting up facilities for offshore-insourcing One contract with multiple vendors multiple sourcing strategies in a continuum Client dealing with multiple interdependent vendors
Outsourcing Outsourcing
Anywhere Anywhere
Outsourcing
Anywhere
Both
Anywhere
Outsourcing
Anywhere
Outsourcing Outsourcing
Anywhere Offshore
Outsourcing
Anywhere
Outsourcing Both
Anywhere Anywhere
Outsourcing /Both Outsourcing
Anywhere
Outsourcing
Offshore
Outsourcing Both
Anywhere
Outsourcing
Anywhere
Vendor manages a project
Outsourcing
Anywhere
Terminology
Definitive feature
Application Service Provision / Application Service Providing / Netsourcing / On-Demand Backsourcing Benefit based relationships / Business benefit contracting Body Shop Outsourcing Business Process Outsourcing Complex sourcing
Accessing remotely hosted IS applications
Cooperative Sourcing Co-sourcing
Creative Contracting Distributed Consulting Dyadic outsourcing arrangement Facilities Management Facilities Sharing General outsourcing Global Delivery Managed Offshore Facilities Multi-sourcing
Table 7. Continued Basic sourcing strategy: o Insourcing o Outsourcing o Both o Any Both
Shoring strategy focus: o Onshore o Offshore o Anywhere
An IS department that now sells to the market Sharing risks and rewards
Any
Anywhere
Outsourcing
Anywhere
Outsourcing for rapid solution to problems
Outsourcing
Anywhere
Insourcing maximum % of IS budget Outsourcing maximum % of IS budget Vendor having complete charge of significant IS work Streamlining of client’s internal organization alongside outsourcing Outsourcing during a major changeover Combined strengths for the market Vendor adding value to IS activity
virtual private network (VPN), internet/extranet or a dedicated line. IDC (International Data Corp.) explains the following about ASP (as cited in Dewire, 2000, p. 14): An end user accesses an application resident on a server, just as he or she would on a LAN or in the enterprise data center. However, the server resides at the ASP’s third-party data center and is reached via a dedicated line or the internet (or extranet). The applications can range from low-end, productivity programs (e.g., word processing) to high-end ERP modules. The service is provided on a subscription basis and can bundle a full range of hosted application services. The Application Service Provider Consortium defines an ASP as an organization that “manages and delivers application capabilities to multiple entities from a data center across a wide area network (WAN)” (as cited in Susarla et al., 2003, p. 92). Hence, ASPs purchase/develop/customize, install, and manage software applications at remote locations and host them for clients over the Internet
Figure 4. Backsourcing
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(or maybe over a VPN or Extranet). Various flavors of this kind sourcing have also been termed as “Net-sourcing” (Kern, Lacity & Willcocks, 2002), “on demand” service, “application utilities”, “real-time delivery” and “software-as-a-service” (SAAS), all of which encourage the delivery of online and externally managed information systems (Pring & Ambrose, 2004).
backsourcing •
Insourcing what was outsourced
When the IS functions that had previously been outsourced are brought back in-house, it is known as backsourcing (Dibbern et al., 2004, p. 12). Backsourcing is the insourcing of previously outsourced IS functions. As illustrated by figure 4, the client decides to insource its previously outsourced IS needs from either its own internal IS department or its subsidiary.
Making Sense of the Sourcing and Shoring Maze
Benefit-Based Relationships / Business Benefit Contracting •
Linking payments to realization of benefits
In benefit-based relationships, both the parties (customer and external service provider) make an upfront investment in a relationship, and thereafter share both the benefits and the risks (Sparrow, 2003, p. 13). Sparrow (2003, pp. 13-14), has given the example of the UK government’s employment service which formed a public-private, benefitbased relationship with EDS to deliver IS services, thus securing business benefits from use of IS,
while establishing a payment methodology that links EDS’s reward to realizing those benefits. As illustrated by this example, private sector companies invest up-front in developing public sector services with payments based on outcomes or benefits gained from these services. In business benefit contracting, a contractual agreement defines the vendor’s contribution to the client in terms of specific benefits to the business and defines the payment the client will make based upon the vendor’s ability to deliver those benefits, thereby matching actual costs with actual benefits and sharing the risks (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As illustrated in Figure 5, the client makes its
Figure 5. Benefit-based relationships / business benefit contracting
Figure 6. Body shop outsourcing
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payments to the vendor depending on the specific benefits received. Lacity and Hirschheim (1995), note that though business benefit contracting is used often in the marketing of outsourcing services by vendors, it is typically not adopted due to the difficulty associated with measuring benefits. Furthermore, in business benefit contracting the vendor’s revenue and margin potential is linked to the benchmarks, and therefore it is not surprising that getting an agreement by both parties on the benchmarks proves to be problematic.
body shop Outsourcing •
Using contract personnel
Body shop outsourcing is a way for firms to meet short term demands, by the use of contract personnel (such as programmers), who are managed by the employees of the hiring firm (Lacity & Hirschheim, 1993a, pp. 17-18). As illustrated in Figure 6, the client contracts skilled personnel from a vendor; these contract personnel are the vendor’s paid employees who work at the client site, under the supervision of the client. The client shops for skilled bodies from vendors.
Figure 7. Business process outsourcing
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business process Outsourcing •
Vendor performs client’s entire business processes
Business process outsourcing refers to an outsourcing relationship where a vendor is responsible for performing an entire business function for the client (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As shown in Figure 7, the client transfers certain business processes to the vendor, and the vendor site is now the back office for the client’s outsourced business processes. In business process outsourcing, companies hire external service providers to manage entire business process functions such as hotlines, helpdesks, claims management, call centers, document processing and storage, data management, payroll, financial services (banks and insurance), accounting, auditing, transportation, travel management systems, logistics and various IS services (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5; Sparrow, 2003, p. 11). Vendors provide a range of services spanning all areas of business with the overall aim to improve and allow seamless and consistent levels of customer service.
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complex sourcing •
Multiple clients and multiple vendors in a single contract or alliance
As illustrated in Figure 8, complex sourcing is a many-to-many relationship that involves both multiple clients and vendors in the same outsourcing contract or in an alliance (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13). Moreover, this can be interpreted as a combination of both the multi-vendor and cosourcing relationships as defined by Gallivan and Oh (1999).
cooperative sourcing •
Client’s internal IS department and the vendor perform IS activity cooperatively
When a targeted IS function is performed jointly by the client’s internal IS department and the vendor, it is known as cooperative sourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As shown in the Figure 9, the client’s IS department works closely with the vendor as
a single team, towards the successful completion of the IS activity.
co-sourcing • • •
Client’s performance determines vendor’s revenue Helping the client’s IS department mature Multiple clients jointly seek services from vendor
Three interpretations of the term co-sourcing exist. While the first interpretation is based on performance being linked to revenue, the second interpretation is based on the role of the vendor in the growth or maturation of the processes in the client’s IS department, and the third interpretation is based on clients jointly seeking IS services. When the vendor’s revenue from the client to which it is providing services is linked to the performance of the client, it is known as co-sourcing (Willcocks & Lacity, 1998, pp. 26, 30-31). As shown in Figure 10, the vendor provides services to the client with the underlying contractual expectation that it would positively affect the client’s performance; the client evalu-
ates the improvement in its own performance due to the vendor’s contribution and pays the vendor proportionately. As shown in Figure 11, co-sourcing has also been interpreted as being part of a multi-sourcing continuum having three possible co-sourcing strategies: (a) the “rehabilitation and return” strategy where the internal IS department is reformed through the assistance of a vendor or consultant and the IS functions are kept in-house, (b) the “transition assistance” strategy where a vendor takes on certain IS activities while the internal IS department transitions itself to a new
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set of skills, and (c) the “capability development” strategy where the internal IS department develops new capabilities and focuses on certain core capabilities, while a vendor either permanently or temporarily takes on IS activities (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11). Going by this interpretation, co-sourcing can be defined as a process where the vendor assists in the growth or maturation of the processes in the client’s IS department, as dictated by the needs of the client. The “transition assistance” part of co-sourcing has also been termed as “transitional
Making Sense of the Sourcing and Shoring Maze
Figure 11. Co-sourcing: Helping the client’s IS department mature
Figure 12. Co-sourcing: Multiple clients jointly seek services from vendor
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outsourcing” (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). Finally, in another interesting interpretation as shown in Figure 12, co-sourcing is defined as a many-to-one relationship where multiple clients form an alliance by pooling their needs and resources, and contract with a single vendor for joint delivery of IS services (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13). Furthermore, Gallivan and Oh (1999) state that in addition to IS outsourcing such client alliances can also be found in business disciplines such as marketing (i.e., co-marketing) and management (i.e., R&D consortia), and have advantages of risk sharing and reduction, increased bargaining power, and buyer economies of scale.
creative contracting •
Innovative contracts for better deals
In creative contracting, the client is a tougher shopper and includes special clauses in the contract in order to satisfy its own needs and get better deals (Willcocks & Lacity, 1998, pp. 26, 32). The client examines various options and is looking for the best deal.
Figure 13. Creative contracting
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As illustrated in Figure 13, the clients include ingenious and favorable clauses in the contract so that it can get the best deal. Willcocks and Lacity (1998, pp. 32-33), list the following four creative contracting practices:
• • • •
Inclusion of a customer-written contract with the request for proposal. Provide for competitive bidding of services beyond the contract. Flexible pricing mechanisms. Beginning a long term relationship with a short term contract.
distributed consulting •
Vendor has teams both at onshore and offshore
In the case of offshore-outsourcing, there is often a need to have vendor team both at onshore and offshore, where the onshore vendor team coordinates face-to-face with client and the bulk of the outsourced work is carried out by the offshore vendor team, this is known as distributed consulting (see Figure 14).
Making Sense of the Sourcing and Shoring Maze
Figure 14. Distributed consulting
This is a widely accepted practice to ensure effective coordination between onshore-based clients and offshore-based vendors. For example, TCS (http://www.tcs.com), Infosys (http://www. infosys.com), Wipro (http://www.wipro.com) and Satyam (http://www.satyam.com), all large software service providers (primarily based in India), have for long incorporated this concept into what they call the “global delivery model.” Kobyashi-Hillary (2004, p. 153) calls this particular concept of having offshore/onshore blends of vendor teams as distributed consulting.
dyadic Outsourcing arrangement •
Independent client dealing with independent vendor
A dyadic outsourcing arrangement assumes a one-to-one relationship between a client and a vendor, the presumption being that the client firms seeking IS services act independently of each other and that the vendor firms providing the IS services act independently of each other (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13).
As shown in Figure 15, in dyadic outsourcing arrangements a client can engage multiple vendors for various IS functions, however its vendors are independent of each other; similarly, a vendor can provide services to multiple clients, but its clients are independent of each other. There is a one-to-one relationship between each client and each vendor providing services to that client.
Facilities management •
Vendor maintains the client’s assets
In “facilities management” outsourcing, the client owns the technology assets but hires a vendor to take over the operational control of these assets (Dibbern et al., 2004, p. 7; Sparrow, 2003, pp. 6-7). As illustrated in Figure 16, the ownership of the technology assets (which may reside at either the client’s premises or elsewhere) is not transferred to the vendor. The vendor is expected to offer expertise and also lower the costs of maintaining these technology assets. For example, a vendor may be hired to manage the computer hardware and also regularly upgrade the software needs of the customer more efficiently. The vendor may involve in
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Figure 15. Dyadic outsourcing arrangement
Figure 16. Facilities management
operational and systems programming tasks (for the technology assets being managed), but not in the development of applications (which are outside the scope of “facilities management”).
Facilities sharing •
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Sharing ownership of facilities needed by each
As shown in the Figure 17, in the “facilities sharing” form of outsourcing, a firm chooses to share ownership of IS facilities with either a vendor or others in the same industry (Dibbern et. al., 2004, p. 7). This can be prove to be a cost effective approach, where more than one firm chooses to share the ownership of the IS facilities required by each of the firms. The details regarding maintaining operational control over these shared facilities will need to be worked out.
Making Sense of the Sourcing and Shoring Maze
Figure 17. Facilities sharing
On one hand, a firm may choose to share both the ownership and operational control of facilities with another firm. On the other hand, a firm may choose to share the ownership of the facilities with a vendor, and in addition the vendor is hired by the firm to assume operational control over the shared facilities.
global delivery
The “global delivery model” is an offshoreoutsourcing model that takes advantage of the global talent pool to give the best value to the client in terms of cost and quality. As illustrated in Figure 18, the work is broken down into logical components, which are then distributed to suitable global locations such that the client gets access to the vendor’s global talent and also creates maximum value for the client in terms of cost and quality (Infosys, n.d.). For example, in the case of software production, the onshore vendor team can be involved in client interaction and co-ordination, systems planning and selection, systems analysis, requirements determination, high level design, acceptance testing, implementation, and rapid maintenance support; while the offshore vendor team can be involved in project management, requirements analysis, detailed design, coding, testing and integration, documentation, and maintenance.
•
managed Offshore Facilities
general Outsourcing •
Selective, value-added and cooperative outsourcing
General outsourcing encompasses the three alternatives of selective outsourcing, value-added outsourcing, and cooperative outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5).
Large vendor delivering services from various global locations to clients at various global locations
In global delivery, a large vendor’s IS delivery centers are located worldwide and are comprehensively networked with collaborative systems that allow seamless integration of projects delivered from multiple locations and thereby providing economies of scale and scope (Tata Consultancy Services, n.d.).
•
Outsourcing the process of setting up facilities for offshore-insourcing
As illustrated in the Figure 19, in “managed offshore facilities”, the client outsources the process of creating its offshore subsidiary to a vendor; once the offshore facility is up and running, the client can take full ownership and hence carry out
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Figure 18. Global delivery
Figure 19. Managed offshore facilities
its offshore-insourcing operations. Also, vendors may be given the task of “facilities management” of the client’s offshore subsidiary. Managed offshore facilities is a variant of the Build-Operate-Transfer model, where the vendor manages the process of creating the offshore facility, and the client has the option of taking full ownership by a specified date (i-Vantage, n.d.;
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Kobyashi-Hillary, 2004, p. 153). This outsourcing alternative has the potential to reduce many hassles for a firm that decides to set up a subsidiary for offshore-insourcing.
Making Sense of the Sourcing and Shoring Maze
multi-sourcing • •
One contract with multiple vendors Multiple sourcing strategies in a continuum
The term multi-sourcing has been interpreted in two ways. In one interpretation of multi-sourcing, the client has one outsourcing contract with multiple suppliers (Willcocks & Lacity, 1998, pp. 26, 29-30). Willcocks and Lacity (1998) note that in multi-sourcing, while the risks of being dependent on a single vendor are reduced, additional time and resources are required to manage multiple vendors. This interpretation of Multi-sourcing has also been termed as “multi-vendor outsourcing” by Gallivan and Oh (1999) and as “multi-supplier sourcing” by Currie and Willcocks (1998). In another interpretation as shown in Figure 20, multi-sourcing has been defined as the multiple sourcing of IS services, specifically seen as a continuum, where the end points of the continuum
span from “OK as is” to “divest completely” (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11). Furthermore, the various strategies of the multi-sourcing continuum have been given as: (1a) (1b) (2a) (2b) (2c) (3a) (3b)
Insourcing -> “OK as is” Insourcing -> “fix and keep in-house” Co-sourcing -> “rehabilitation and return” Co-sourcing -> “transition assistance” Co-sourcing -> “capability development” Outsourcing -> “option to reverse” Outsourcing -> “divest completely”
Client dealing with multiple interdependent vendors
In multi-vendor outsourcing a one-to-many relationship exists, indicating that one client
Figure 20. Multi-sourcing continuum
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uses multiple vendors and that division of labor is jointly negotiated and understood by all parties to the agreement (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13). As shown in Figure 21, multi-vendor or multi-supplier outsourcing arrangements allow a client to engage multiple vendors for various IS functions which are then jointly performed by the multiple vendors through an agreed upon division of labor. This implies that a cooperative and also competitive environment exists between the vendors working together. In multiple-supplier sourcing the client enters into IS sourcing arrangements with a variety of suppliers/vendors (Currie & Willcocks, 1998, pp. 122-123). Currie and Willocks (1998), state the following three advantages of multiple-supplier sourcing: (a) the client can safeguard against being dependent upon a single vendor, and prevent a scenario where a single vendor controls all its IS assets, (b) the client with short-term contracts that are and liable for renewal not necessarily with the same vendor (or combination of vendors) encourages competition and innovation, and (c) the client can concentrate on its core business while the suppliers manage and provide IS services. The identical concepts of multi-vendor outsourcing (Gallivan & Oh, 1999, pp. 1-6) and multiple-supplier sourcing (Currie & Willcocks,
Figure 21. Multi-vendor outsourcing
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1998) have also been termed as simply “multisourcing” by Willcocks and Lacity (1998). Klotz and Chatterjee (1995, p. 1317) have used the term “dual sourcing” to indicate a scenario where a client sources from two vendors, which prevents the client from being held by hostage by a monopolistic vendor over time, and helps the client to derive cost advantages due to the competition between the vendors.
project management Outsourcing •
Vendor manages a project
In project management outsourcing, the client outsources a specific project or portion of the IS work, and the vendor is responsible for managing and completing the work (Lacity & Hirschheim, 1993a, pp. 17-18). Further, project management outsourcing may involve the use of vendors for development of new systems, maintenance of existing systems, providing training, managing networks, and handle disaster recovery.
Selective sourcing or smart sourcing is the practice of outsourcing select IS applications to vendors, while retaining other IS applications in-house (Lacity, Willcocks & Feeny, 1996, pp. 13-14). Right sourcing, flexible sourcing, and modular sourcing are synonyms of the same. When one particular area of the client’s IS activity is chosen to be turned over to a vendor, it is known as selective outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As illustrated in Figure 22, firms often prefer to keep select IS functions in-house based on their own strengths and capabilities, and outsource the IS functions which they feel can be better performed by a vendor. This is a flexible and modular form of outsourcing where all the IS functions are broken down into multiple modules, some of which are outsourced and some are retained in-house based on cost analysis, technology and resource needs. Selective sourcing, which eschews the allor-nothing approach in favor of more flexible, modular outsourcing, is characterized by shortterm contracts of less that five years for specific activities, and hence meets the customer’s needs while minimizing risks associated with total
outsourcing approaches (Lacity et al., 1996, pp. 13-14). In selective sourcing, clients outsource between 20 to 60% of the IS budget to vendors (typically around 40%) while still retaining a substantial internal IS department (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10). Furthermore, this recommended approach is capitalizes on the respective strengths of both internal and external service providers.
spin-Offs •
An IS department that now sells to the market
A spin-off is an entity, which was originally an internal IS department of a firm, and is now selling its services to the market (Willcocks & Lacity, 1998, pp. 26, 31-32). The parent firm either totally or selectively sources IS functions from the spin-off (Dibbern et al., 2004, p. 12). A spin-off is a client entity as long as its ownership control remains with the client, however if the client gives up the ownership control (for example by divesting its majority equity stake) it becomes a non-client
As shown in the Figure 23, a client enters into a strategic alliance or partnership with a vendor on a shared risk/reward basis which may involve (a) contracting with a vendor to share risk/rewards, (b) helping to create a new joint venture company to which work can be outsourced, or (c) take share/ equity holding in each other (Currie & Willcocks, 1998, p. 124; Sparrow, 2003, p. 12; Willcocks & Lacity, 1998, pp. 26, 27-28). Furthermore, by entering into a joint venture a client has greater control of the vendor’s activities. Currie and Willcocks (1998) have treated the terms “joint venture” and “strategic alliance” synonymously. Benefit-based relationships (Sparrow, 2003, p. 13) and business benefit contracting (Millar, 1994, as cited in Lacity & Hirschheim, 1995,
pp. 4-5) may be considered as methodologies to share risk/reward on the basis of the contractual agreement. The client and vendor can set up a separate “joint venture” organization which has its own management team, and its IS staff can be provided by both the parties, thus enabling the client to gain access to new technical skills and resources, reorganize IS functions and processes and investigate new sources of revenue (Sparrow, 2003, p. 12). In equity holding deals, the client takes an equity position in the vendor, and vendor may also take an equity position in the client (Willcocks & Lacity, 1998, pp. 26, 27-28). In strategic sourcing, a customer decides in a wider business context on what, when, and how to outsource, and hence aiming to achieve a significant improvement in business performance rather than a short-term cost saving alone; the customer and supplier work towards mutual interests and are willing to share risk and rewards (Sparrow, 2003, p. 8). Ideally, a partnership, joint venture or strategic alliance is best classified as an arrangement for sharing risks and rewards between
a client and a vendor. Dibbern et al. (2004, p. 52) interestingly state the following: It should be noted that the terms partnership, alliance, and relationship are loosely defined in the outsourcing literature. For example, Grover et al. (1996) suggest a connection between the presence of certain elements of ‘partnership’ and outsourcing success. However, they go on to note that other researchers (Lacity & Hirschheim, 1993; Fitzgerald & Willcocks, 1994) believe the relationship between an outsourcing vendor and its customer should not be characterized as a partnership unless there is a true sharing of risks and rewards. In another example, Lacity and Willcocks (1998) state that the term “partnership” was commonly used by firms when referring to feefor-service contracts. The vague and inconsistent use of these terms contributes to the difficulties in comparing results among studies.
its internal IS departments’ bid over vendor bids, thus keeping over 80% of the IS budget in-house (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10). Furthermore, total insourcing can sometimes be a poor IS strategy because it may fail to capitalize on the inherent cost advantages provided by vendors, and may create a political environment of complacency.
Total Outsourcing / Traditional Outsourcing • •
Outsourcing maximum percentage of IS budget Vendor having complete charge of significant IS work
Total insourcing
There are two interpretations of total outsourcing. One is based on the percentage of IS budget outsourced, and the other is based on the totality of the work or project outsourced. In the first interpretation of total outsourcing, clients outsource at least 80% of there IS budgets to vendors (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10). Furthermore, total outsourcing can sometimes be a poor IS strategy because it fails to capitalize on the potential inherent cost advantages of internal IS departments. Total outsourcing has also been referred to as traditional outsourcing (Dibbern et al., 2004, p. 12). In the second interpretation of total outsourcing, the vendor is in complete charge of a significant piece of IS work, such as entire hardware operations (e.g., data center and/or telecommunications) and software support (sometimes including applications development) (Lacity & Hirschheim, 1993a, pp. 17-18).
Tactical outsourcing is adopted to solve a particular need or problem rapidly over a short period of time; it is also known as contractingout or out-tasking (Sparrow, 2003, p. 8). When a firm finds itself short of in-house resources to complete a particular task in quick time, the task can be contracted out to competent firms or individuals thereby giving the firm rapid access to new technical skills.
Insourcing maximum percentage of IS budget
In total insourcing, though a firm formally evaluates outsourcing options, it finally selects
•
Streamlining of client’s internal organization alongside outsourcing
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In transformational outsourcing, companies transform by comprehensive reorganization and streamlining of its business processes and technology infrastructure and the outsourcing of IS needs, in order to reduce costs and improve services (Sparrow, 2003, p. 10). As shown in Figure 24, a company (client) decides to transform by reorganizing and streamlining the way it operates; and a component of such reorganization and streamlining would be outsourcing.
Transitional Outsourcing •
Outsourcing during a major changeover
When companies need to introduce a major transition, such as migration from one technological platform to another involving the outsourcing
Figure 24. Transformational outsourcing
Figure 25. Transitional outsourcing
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of one or more of the following three phases: (a) management of the legacy systems, (b) transition to the new technology/systems, and (c) stabilization and management of the new platform, it is known as “transitional outsourcing” (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5), which is illustrated in Figure 25. Firms sometimes undertake transitions like infrastructure overhauls and IS consolidation in order to bring in more efficiency, and make use of newer technologies. Conceptually, transitional outsourcing has also been addressed as “transition assistance” in the co-sourcing continuum (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11).
Making Sense of the Sourcing and Shoring Maze
value-added Outsourcing • •
Combined strengths for the market Vendor adding value to IS activity
There are two interpretations of the term “value-added outsourcing”. One interprets on the basis of selling jointly developed products and services in the marketplace, and other interprets on the basis of additional value added to a service by the vendor. In the first interpretation of value-added outsourcing that is shown in Figure 26, both the client and the vendor combine their strengths to jointly develop and market new products and services (Willcocks & Lacity, 1998, pp. 26-27). Willcocks and Lacity (1998) argue that because each partner shares revenue from the external sales, the partnership resulting from value-added outsourcing is an alliance with shared risks and rewards. As per the second interpretation, when some area of the client’s IS activity which could not be cost effectively provided by the internal IS department, is turned over to a vendor that can provide a level of support or service that adds value to the activity, it is known as value-added outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5).
FuTurE TrEnds As the reader would gauge after reading this chapter, a large number of terminologies are already being used in the world of IS sourcing. There are two highly noticeable aspects that come to fore. The first is that most of the terminologies in literature deal with the client’s perspective (for example, what is best for the client and how the client should handle vendors), and the vendor’s perspective is almost absent. The second is that most of the terminologies in literature relate to the insourcing versus outsourcing line of thought and relatively fewer terminologies relate to the lateral phenomenon of offshoring. A large majority of available literature has analyzed issues from the perspective of the client. The lack of literature giving the vendor perspective implies that this gap may be filled in the future, leading to a greater understanding of the vendor’s methodologies. This would imply more terminologies being added with the vendor’s perspective in mind (like global delivery). Though offshoring in the manufacturing and textile industries had taken place a long time back, the offshoring of IS work is a relatively new phenomenon. Most the sourcing alternatives that were discussed in this chapter are conceptually applicable to both onshoring and offshoring. However, due to various advantages (like cost savings, skilled labor pool, etc.) and disadvantages
Figure 26. Value-added outsourcing
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Making Sense of the Sourcing and Shoring Maze
(like communication and coordination problems, etc. …), the offshore versions of insourcing and outsourcing are quite distinctive from the conventional onshore versions. Hence, there is the possibility of a more onshore versus offshore line of research (for both insourcing and outsourcing).
cOnclusiOns This chapter compiled the maze of sourcing alternatives and terminologies that have come into being in recent times. The sheer number of these alternatives justifies the need for this chapter. This pursuit for terminologies and concepts resulted in the understanding of various sorts of insourcing, outsourcing, onshoring and offshoring of business needs and therefore elucidated this behemoth of a phenomenon that is continuously changing the way business is carried out globally.
rEFErEncEs Apte, U. M., Sobol, M. G., Hanaoka, S., Shimada, T., Saarinen, T., Salmela, T. & Vepsalainen, A. P. J. (1997). IS outsourcing practices in the U.S.A., Japan and Finland: A comparative study. Journal of Information Technology, 12, 289-304. Bennett, C., & Timbrell, G. (2000). Application service providers: Will they succeed? Information Systems Frontiers, 2(2), 195-211. Chakrabarty, S. (2006). The journey to new lands: Utilizing the global IT workforce through offshore-insourcing. In P. Yoong & S. Huff (Ed.), Managing IT professionals in the Internet age. Hershey, PA: Idea Group Publishing.
information systems. Journal of Information Technology, 10(4), 209-210. Currie, W. L. (1998). Using multiple suppliers to mitigate the risk of IT outsourcing at ICI and Wessex Water. Journal of Information Technology, 13(3), 169-180. Currie, W. L., & Willcocks, L. P. (1998). Analyzing Four Types of IT Sourcing Decisions in the Context of Scale, Client/Supplier Interdependency and Risk Mitigation. Information Systems Journal, 8(2), 119-143. Dewire, D. T. (2000). Application service providers. Information Systems Management, 17(4), 14-19. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Fitzgerald, G., & Willcocks, L. P. (1994). Contracts and partnerships in the outsourcing of IT. Proceedings of the 15th International Conference on Information Systems, Vancouver, Canada (pp. 91-98). Gallivan, M. J., & Oh, W. (1999). Analyzing IT outsourcing relationships as alliances among multiple clients and vendors. Proceedings of the 32nd Annual International Conference on System Sciences, Hawaii. Grover, V., Cheon, M. J., & Teng, J. T. C. (1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89-116.
Chaudhury, A., Nam, K., & Rao, H. R. (1995). Management of information systems outsourcing: A bidding perspective. Journal of Management Information Systems, 12(2), 131-159.
Hirschheim, R. A., & Lacity, M. C. (1998). Reducing information systems costs through insourcing: Experiences from the field. In Proceedings of the 31s t Annual Hawaii International Conference on System Sciences, Hawaii (pp. 644-653).
Cheon, M. J., Grover, V., & Teng, J. T. C. (1995). Theoretical perspectives on the outsourcing of
Hu, Q., Saunders, C., & Gebelt, M. (1997). Re-
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search report: Diffusion of information systems outsourcing: A reevaluation of influence sources. Information Systems Research, 8(3), 288-301. Infosys. (n.d.). Global delivery model. Retrieved January 27, 2005, from http://www.infosys.com/ gdm/default.asp i-Vantage. (n.d.). Global insourcing services. Retrieved January 27, 2005, from http://www.ivantage.com/GlobalInsourcingServices.html Kern, T., Lacity, M. C., & Willcocks, L. P. (2002). Netsourcing: Renting business applications and services over a network. New York: Prentice Hall. Klotz, D. E., & Chatterjee, K. (1995). Dual sourcing in repeated procurement competitions. Management Science, 41(8), 1317-1327. Kobyashi-Hillary, M. (2004). Outsourcing to India: The offshore advantage. Berlin: SpringerVerlag. Lacity, M. C., & Hirschheim, R. A. (1993a). Implementing information systems outsourcing: Key issues and experiences of an early adopter. Journal of General Management, 19(1), 17-31. Lacity, M. C., & Hirschheim, R. A. (1993b). Information systems outsourcing: Myths, metaphors, and realities. Chichester, UK: Wiley. Lacity, M. C., & Hirschheim, R. A. (1995). Beyond the information systems outsourcing bandwagon: The insourcing response. Chichester, UK: Wiley. Lacity, M. C., & Willcocks, L. P. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363-408. Lacity, M. C., Willcocks, L. P., & Feeny, D. F. (1996). The value of selective IT sourcing. Sloan Management Review, 37(3), 13-25.
Loh, L., & Venkatraman, N. (1992). Determinants of information technology outsourcing: A cross-sectional analysis. Journal of Management Information Systems, 9(1), 7-24. Pring, B., & Ambrose, C. (2004). Vendors vie for competitive position in ASP market. Gartner Research (Publication Date: 3 November 2004, ID Number: G00124388). Sparrow, E. (2003). Successful IT outsourcing. London: Springer-Verlag. Susarla, A., Barua, A., & Whinston, A. B. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-123. Tata Consultancy Services. (n.d.). Flexible global delivery. Retrieved January 27, 2005, from http:// www.tcs.com/investors/BusinessOverview/ FlexibleGlobal Delivery.aspx Tata Consultancy Services. (n.d.). Our industry practices. Retrieved January 27, 2005, from http:// tcs.com/0_industry_practices/index.htm Tata Consultancy Services. (n.d.). Our service practices. Retrieved January 27, 2005, from http:// tcs.com/0_service_practices/index.htm Willcocks, L., & Lacity, M. (1998). Strategic sourcing of information systems. Chichester, UK: Wiley. Willcocks, L. P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland revenue. European Journal of Information Systems, 7(1), 29-45.
nOTE The author may be contacted at schakrabarty@ tamu.edu or [email protected].
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 18-53, copyright 2006 by IGI Publishing (an imprint of IGI Global). 157
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Chapter 1.9
Information Technology Outsourcing Anne C. Rouse Deakin University, Australia
inTrOducTiOn
backgrOund
Organizations have used external vendors to supply information technology (IT) functions since the first commercial implementations. In the sixties, the use of facilities management, contract programmers, and contract project management were common, but during the 70s, many organizations relied increasingly on internal delivery of IT services. The term “outsourcing” arose in the late 80s. Since that time industry has seen a fundamental change in the way information technology (IT) services are organized and delivered, with increasing reliance on external, outsourced providers. Managing outsourced IT service delivery has now become a core competence for organizations
According to Willcocks and Lacity (1998, p. 3), outsourcing involves “handing over to a third party [the] management of IS/IT assets, resources and/ or activities for required results”. There is general consensus that outsourcing involves delegating the responsibility for “how” to produce definable outcomes to an external party, while retaining responsibility for specifying “what” is to be delivered. Instead of controlling the behavior of service staff directly, the purchaser controls performance through a contract or service agreement, which articulates the services required, and the performance criteria. The rise of the term “outsourcing” occurred when, in the 80s, several large U.S. corporations announced they were handing over control of their IT function to one or more vendors. The most prominent of these was Eastman Kodak. At that time, it was common in the trade literature
(and some academic literature) to argue that IT had become a commodity. By outsourcing IT, it was asserted that organizations could more easily concentrate on core business. In the early 90s, announcements like Eastman Kodak’s tended to produce a rise in share price, as the market anticipated consequent cost savings or improved organizational performance. Thus, the stock market response was an important outsourcing driver. Another significant driver was the growth of communications technologies, which enabled vendors to provide services remotely. A less-frequently acknowledged reason for the rise in outsourcing was IBM’s entry into the IT services arena, joining Electronic Data Systems (EDS), which had been spun off as a separate IT service vendor from its parent, General Motors. The dwindling profitability of hardware and software sales acted as an impetus, as outsourcing provided a relatively stable and long-term source of income and profits. Thus, in many ways, outsourcing is a vendor-driven phenomenon. In the fifteen years since IT outsourcing emerged as an academic topic, the phenomenon has grown and adapted, and now embraces a range of variants. These include “business process outsourcing” (BPO), “off shore outsourcing” or “offshoring”, and “application service provider” services (ASPs). Gartner (2005) reports that outsourcing is the prime driver for the IT services market, estimated to be around $US600 billion in 2004. While growth in the IT outsourcing market has slowed, the growth in new outsourcing forms (offshoring, and BPO) is reportedly strong, so the topic is likely to remain important in the IS discipline for some time.
ThEOrETical undErpinnings There is no generally agreed “theory” of outsourcing but a range of theories drawn from economics, strategy, marketing, and public policy have been used to understand the phenomenon.
Economic Theory Economic theories tend to view outsourcing as a variation on the “make or buy” decision that organizations must take and to view sourcing decisions as being based on relative costs. Outsourcing is seen to lead to lower cost of delivery under certain circumstances. The most influential economic theory, and probably the most widely used in outsourcing research, is transaction cost theory (TCT) (Williamson & Masten, 1999). This theory predicts when decision makers will choose the market to deliver services and when they will choose in-house delivery through the organizational hierarchy. These are seen as polar forms of service provision, although a range of hybrid forms are possible. According to TCT, the relative costs for these two strategies depend on two types of costs: production costs—usually reduced in markets because of competition—and transaction costs; and the costs of finding, contracting with and dealing with vendors in the market. Transaction costs are difficult to measure and can be so high as to outweigh the outsourcing savings associated with reduced production costs. TCT predicts that several factors will influence whether outsourcing leads to cost savings, including level of uncertainty, frequency of transactions, and extent to which the services are “asset specific”, that is, tailored to a specific vendor or purchaser and so not easily deployed elsewhere. Some TCT propositions have been confirmed for IT outsourcing (Aubert, Rivard, & Patry, 2004) though it is also argued that many of the TCT constructs are difficult to operationalize and so the theory is difficult to disprove (Ghoshal & Moran, 2005). Resource dependency theory, and the Resource-based view (RBV) of the firm are two economic theories that underlie the “core competency” argument discussed next. Resource dependency theory argues that organizations will
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seek to reduce dependency on external providers for key resources and that factors increasing dependency include a small number of potential suppliers, and switching costs. Resource-based theory (Barney, 2002) argues that it is differences (heterogeneity) in resources between firms that allow some to sustain competitive advantage and that outsourcing allows firms to access resources (usually intangible) they do not currently have. They can then devote attention to resources and capabilities they do possess that are likely to lead to greater profitability. These include resources/ capabilities that are rare, valuable, difficult to imitate, and not easily substituted—such services should not be outsourced. Another economic theory with implications for outsourcing is agency theory (Laffont & Martimort, 2002). This recognizes that the provider has different motives from the purchaser and that there is often information asymmetry between the two. This theory proposes that the purchaser needs different forms of control for different types of services. Where it is difficult to measure the effort involved in service delivery, agency theory predicts that an outcomes-based, contractual form of control (like that associated with outsourcing) will lead to lower costs.
strategic management Theories Much of the impetus to outsource IT has come from strategic theories related to the idea of core competency and the notion that managerial attention is a limited resource. The underlying proposition is that modern organizations cannot concentrate on all business functions and still achieve sustainable advantage so they must focus on those key processes or capabilities where they have unique advantages. Organizations should delegate to external providers as many non-core processes as possible, in the expectation that vendors will, through specialization and economies of scale, be able to provide higher quality services at lower cost.
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As a result of this theory, there appears to be general consensus (e.g., Lacity & Willcocks, 2001) that core, or “strategic” IT services, should be kept in-house, while non-core services and commodities should be outsourced. However, this proposition has proved difficult to test as few IT services are commodities, and it is not easy to operationalize “core” services. An assumption underlying the core-competency view is that managing the relationship with a vendor will drain less attention than providing services in-house and that economies of scale and specialization will reduce vendor production costs low enough to outweigh increased transaction costs. These propositions have not been empirically verified.
marketing Theories While economic theories concentrate on the relative costs of outsourcing, marketing theories concentrate on the way quality, success, and value are judged by purchasers of outsourced services, and the way relationship elements, like trust, affect these judgments. An important notion that is used in studying outsourcing is that of service quality (Parasuraman & Zeithaml, 2002), which predicts long-term satisfaction with a vendor and intention to re-purchase. There has been increasing attention devoted in the IT outsourcing literature to the effects that the quality of the outsourcing relationship and notions of trust have on outsourcing satisfaction and other success measures (Kern & Willcocks, 2002; Lee, Huynh, Kwok, & Pi, 2003). Theories underlying this research include service quality theory, theories related to trust, and exchange theory. Good overviews of service marketing and relationship theories can be found in White and Schneider (2003).
public policy Theories The public sector is a major user of IT outsourcing, and in some regions (particularly, the
Information Technology Outsourcing
UK and Australasia) has pioneered large-scale outsourcing arrangements. In the public policy literature, outsourcing is often couched as part of the “steer rather than row” philosophy (Osborne & Gaebler, 1993). This philosophy, in turn, has been influenced by strategic management theories discussed previously.
OuTsOurcing rEsEarch A brief check of electronic resources (like ABI Inform) reveals thousands of articles on outsourcing and hundreds of papers labeled “peer reviewed” or “academic”. An examination of these, though, will show that most of them are practitioner (or academic) opinion. Much of the IT outsourcing literature is written either directly, or indirectly by staff employed by outsourcing vendors or by specialist outsourcing advisory services. A detailed review of the mainstream academic literature to 2001 is found in Dibbern, Goles, Hirschheim, and Jayatilaka (2004). This reveals that systematic empirical research into outsourcing has been limited and that much of this has concentrated on the reasons purchasers choose to outsource (or not outsource). The predominant research methodology has been “case studies” but the depth to which case studies are reported, and the extent to which the researchers adopted a critical, theory-testing approach, has varied. There have been few theory-testing studies in the literature and very few studies that have statistically tested propositions related to outsourcing practices. A widely cited and influential paper was published by Lacity and Willcocks (1998). This summarized 61 sourcing cases the authors had undertaken (of which around half involved outsourcing). The authors compared these cases to explore various outsourcing propositions but recognized that opportunistic cases are often atypical and that their research might not generalize to wider populations. More recent survey research (Lee & Kim, 1999; Rouse & Corbitt,
2003) has not been able to confirm one of their most widely-recognized assertions—that “selective” outsourcing is generally more successful than “total” outsourcing. It is possible that other findings Lacity and Willcocks reported were unique to the cases they studied. Drawing on either their own outsourcing experience, or on case studies, a number of writers have produced practical guidebooks for managing outsourcing arrangements. The prescriptions supplied in these guides provide rich source material for researchers, though few recommended practices have been confirmed empirically. Instead, much of the empirical research has investigated motivations for IT outsourcing. The most common goals include: to save costs, to concentrate more on core business, to gain access to skills and technologies not provided in-house, and to get better quality service or advice. Outsourcing is often employed to gain greater long-term flexibility by exchanging fixed costs or capital for variable costs. Public sector agencies also seek to outsource to increase accountability. Surprisingly, little evidence exists to confirm that these benefits (other than access to new skills and technologies) are widely obtained from outsourcing. More recent qualitative research has been concerned with the quality of the outsourcing relationship (e.g., Kern & Blois, 2002; Barthelemy, 2003; Levina & Ross, 2003; Lacity, Feeny, & Willcocks, 2004). Confirmatory research has also investigated the role of relationship elements in outsourcing success (e.g., Lee, 2001). However, confirmatory research is currently held back by the lack of agreement about what the dependent variable should be and how it should be measured. It is not yet clear whether judgments about the relationship are the result of vendor performance, and consequent purchaser satisfaction, or whether a high quality relationship leads to satisfaction. There is growing interest in the academic literature on the reconciliation of competing goals, and the management of the downsides or risks of outsourcing. Hirschheim and Lacity
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(2000) warned that in many cases there is a trade off between different goals. So, for example, flexibility often involves higher short-term costs while exchanging capital for variable costs is often more expensive in the long run. A common theme in the literature is that outsourcing tends to bring both benefits and downsides and that even after 15 years of research still involves substantial risks. These may include failure to obtain expected cost savings, reduced business flexibility, loss of control, increased dependence on the provider (even “lock in”), threats to privacy/ confidentiality, and intellectual property issues (Aubert et al., 2004). Key researchers currently conducting empirical research into IT outsourcing are included in Table 1. Excluded from this table are researchers who have reported one-off case studies or studies into the motivations/drivers of outsourcing. In summary, a review of the literature reveals that, despite a large body of academic literature,
the empirical evidence base for making outsourcing decisions is surprisingly thin. The research available to guide decision makers consists mainly of singular case studies, argumentation, and opinion, and there have been few attempts to validate claims.
FuTurE TrEnds A growing trend in the trade literature has been the reporting of “consultant” surveys claiming IT outsourcing has generally failed to meet expectations, particularly for cost savings. This may be self-serving, though the limited academic data that has been gathered to date tends to confirm it (see Rouse & Corbitt, 2003). It is expected that more researchers will undertake hypothesis testing studies to determine whether the theoretical benefits of outsourcing are widely encountered and what the boundary conditions are.
Table 1. Key IT outsourcing researchers and their research focus Researcher(s) Ang; Ang and Straub
Nature of research Large quantitative studies
Aubert, Rivard and Patry
Quantitative studies, theoretical studies, case studies Case studies
Barthelemy
Kern; Kern and Willcocks; Willcocks and colleagues
Case studies focusing on vendor-client relationship
Lacity, Hirschheim
In depth case studies of outsourced and insourced IT services Case studies; cross case comparisons; small-n surveys, global outsourcing
Lacity, Willcocks, Feeny and colleagues
Lee, Leet et al., Lee and Kim Rouse; Rouse and Corbitt
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Large quantitative studies Large quantitative study, longitudinal case study, focus groups
Key findings Outsourcing is related to skills shortage; outsourcing success is predicted by fulfilled obligations; outsourcing adopters tend to concentrate on production cost savings but non-adopters on transaction costs. Uncertainty is the major deterrent to outsourcing, access to technical skills is the major driver; outsourcing is risky; risk management model proposed. Outsourcing needs both hard (contractual) and soft management strategies; outsourcing has hidden costs, though some can be mitigated. A range of practices recommended as likely to lead to success; outsourcing can result in negative outcomes where both vendor and client suffer from over-promising; the vendor-client relationship evolves over time and involves contractual and non contractual elements; post contract management is important to success. Outsourcing motives are frequently political; the strategy has substantial risks; outsourcing benefits can often be obtained through in-house delivery; outsourcing usually involves trade-offs. The search for cost savings is the major driver for outsourcing; “selective outsourcing” is generally successful; a range of practices are recommended as likely to be successful; models of the outsourcing process proposed; key criteria for benchmarking suppliers and determining “knowledge potential” proposed. Relationship quality and trust predict outsourcing success; outsourcing falls into distinct configurations. Outsourcing is riskier than recognized; outsourcing leads to satisfaction, cost savings, in only a minority of organizations; some practices lead to discernible benefits, while others (e.g. “selective outsourcing”) do not; selective outsourcing not more successful than total outsourcing.
Information Technology Outsourcing
The growth in new variations of outsourcing (BPO, offshoring, and ASPs) provides additional research focuses, and proponents argue that these may lead to greater economic benefits than IT outsourcing has been able to provide. However, as with IT outsourcing, there has been little systematic research to date, and the little research that has been done has generally involved isolated, often anecdotal case studies. An emerging topic is how the risks and downsides of IT outsourcing (and later variants like BPO and offshoring) can better be identified and managed (e.g., Bahli & Rivard, 2005; Rouse & Corbitt, 2003b) . There is growing interest in the quality of the vendor-client relationship. With increasing proportions of IT services now outsourced, this is likely to be an area of growing interest in the future.
cOnclusiOn Despite more than 15 years of study, there are large gaps in academic knowledge related to IT outsourcing. The emphasis on case study research, and the scarcity of statistically-reliable studies have resulted in an abundance of conflicting findings and claims, with limited hypothesis-testing research to reconcile these. Consequently, a number of unchallenged recommendations regarding when, what, and how to outsource have arisen. There is a need for researchers to shift emphasis from theory-generation to theory testing so as to discover which plausible recommendations are supported by evidence, and to determine the boundaries for current theory. This in turn requires that attention be paid to the dependent variable(s) associated with outsourcing success and to the various competing expectations and consequent trade-offs that outsourcing involves.
rEFErEncEs and kEy rEadings Ang, S., & Straub, D. (1998). Production and transaction economies and IS outsourcing. A study of the U.S. banking industry. MIS Quarterly, 22( 4), 535-552. Aubert, B. A., Rivard, S., & Patry, M. (2004). A transaction cost model of IT outsourcing. Information and Management, 41(7), 921-933. Bahli, B., & Rivard, S. (2005). Validating measures of information technology outsourcing risk factors. Omega, 33(2), 175-187. Barney, J. (2002). Gaining and sustaining competitive advantage (2nd ed.). NJ: PrenticeHall. Barthelemy, J. (2003). The hard and soft sides of IT outsourcing management. European Management Journal, 21(5), 539-549. Dibbern , J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004, Fall). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Gartner (2005). Outsourcing drives IT services growth. Retrieved May 2005, from www.gartner.com/5_about/press_releases/pr2004.jsp Ghoshal, S., & Moran, P. (2005). Bad for practice: A critique of the transaction cost theory. In J. Birkinshaw & G. Piramal (Eds.), Sumantra Ghoshal on management: A force for good. NJ: Prentice-Hall. Hirschheim, R., & Lacity, M. (2000). the myths and realities of information technology insourcing, Communications of the ACM, 43(2), 99-107. Kern, T., & Willcocks, L. P. (2002) The relationship advantage: Information technologies, sourcing, and management. Oxford: Oxford University Press.
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Lacity, M., Feeny, D., & Willcocks, L. (2004). Commercializing the back office at Lloyd’s of London: Outsourcing and strategic partnerships revisited. European Management Journal, 22(2), 127-140. Lacity, M. C., & Willcocks, L. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363-408. Lacity, M. C., & Willcocks, L. (2001).Global IT outsourcing: In search of business advantage. Chichester, UK: Wiley. Laffont, J. J., & Martimort, D. (2002). The theory of incentives: The principal-agent model. Princeton NJ: Princeton University Press. Lee, J. N. (2001) The impact of knowledge sharing, organizational capability and partnership quality on IS outsourcing success. Information and Management, 323-335. Lee, J.-N., & Kim, Y.-G. (1999, Spring). Effect of partnership quality on IS outsourcing: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29-61. Lee, J. N., Huynh, M. A., Kwok, R. C., & Pi, S. M. (2003). IT outsourcing evolution: Past, present, and future. Communications of the ACM, 46(5), 84-89. Levina, N., & Ross, J. W. (2003). From the vendor’s perspective: Exploring the value proposition in IT outsourcing. MIS Quarterly, 27(3), 331-364. Osborne, D., & Gaebler, T. (1993). Reinventing government: How the entrepreneurial spirit is transforming the public sector. Reading, MA: Addison-Wesley. Parasuraman, A., & Zeithaml, V. A. (2002). Measuring and improving service quality: A literature review and research agenda. In B.
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Weitz (Ed.), Handbook of marketing. CA: Sage Publications. Rouse, A. C., & Corbitt, B. (2003). Revisiting IT outsourcing risks: Analysis of a survey of Australia’s Top 1000 organizations. The 14th Australasian Conference on Information Systems, Perth. Rouse, A., & Corbitt, B. J. (2003b). Minimising risks in IT outsourcing: Choosing target services. The 7th Pacific Asia Conference on Information Systems, Adelaide, South Australia. White, S. S., & Schneider, B. (2003). Service quality: Research perspectives. CA: Sage Publications. Williamson, O. E., & Masten, S. E. (1999). The economics of transaction costs: Elgar critical writings reader. London: Edward Elgar Publishing. Willcocks, L., & Lacity, M. C. (1998). Strategic sourcing of information systems: Perspectives and practices. Chichester, UK: Wiley.
kEy TErms Application Service Provider (ASPs): Standardized IT applications (such as enterprise processing, office systems, and e-mail) or software that is hosted by a provider, and accessed over the Internet by purchasers, who are charged on a transaction basis. Business Process Outsourcing (BPO): The outsourcing of relatively complex IT-supported business functions or processes. In practice, this often also involves “offshoring”. IT Insourcing: This is a term with multiple meanings and so often unclear. It can mean services delivered in-house; services put to tender and then awarded to an in-house team in competition with the market; or services originally outsourced
Information Technology Outsourcing
then brought back in house (this latter is sometimes labelled “backsourcing”). IT Outsourcing: The provision, at an agreed price, of specified IT services by an external vendor that is contracted to manage the day-today activities (and IS/IT assets and resources) so as to meet agreed performance and quality standards. Outsourcing can involve either the once-off development of a new information system or the ongoing provision of IT services (such as mainframe operations, PC support, software maintenance, etc.) over a specific period. Off-Shore Outsourcing or “Offshoring”: Outsourcing that is provided across national borders. In most cases this involves sourcing services from a low-salary nation like India, China, or parts of the former Soviet Union, where “salary arbitrage” (definition follows) leads to reduced costs.
Salary Arbitrage: Differences in average salary rates between developing nations (such as India, China, various South American countries) and developed nations in Europe, North America, etc. Transaction Costs: The costs of contracting with a vendor through the marketplace, in contrast to coordinating and managing service provision “in-house” (i.e., through the hierarchy). Key costs include finding, choosing, contracting with, monitoring, and controlling the work of the vendor, as well as coordinating the vendor’s activities with others being carried out by the purchaser.
This work was previously published in Encyclopedia of Information Science and Technology, Second Edition, edited by M. Khosrow-Pour, pp. 2030-2035, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.10
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology:
Practitioner and Academic Perspectives Karl Knapp University of Indianapolis, USA Sushil Sharma Ball State University, USA Kevin King Clarian Health, USA
absTracT Offshore IT outsourcing has been gaining acceptance among corporations as a mainstream alternative to in-house operations. Various studies conducted over the last 10 years have shown that outsourcing allows firms to reduce high overhead costs and improve productivity, contribute flexibility, and thus improve overall performance of the firm. However, offshore IT outsourcing brings new challenges and risks. The skeptics believe that outsourcing may weaken the local business competitiveness of the region, investors’ confi-
dence in investing in local businesses, and may create a spiral effect on economic indicators such as unemployment, enrollment in schools, living styles, housing, and construction, etc. Little deliberate research has been conducted to date. This study investigates the macro- and socio-economic consequences of offshore IT outsourcing in the United States using a system dynamics model. The research finds significant effects perceived and experienced by IS professionals. The research also finds significant differences in the perceptions of practitioners and the academy, especially students whose inflated expectations may cause
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
disappointment with the reality of the current IS professions.
inTrOducTiOn Offshore information technology (IT) outsourcing has grown rapidly in recent years. Outsourcing now spans across IT, operations and call center functions. Offshore IT outsourcing has become a major trend as it harnesses the power of information technology from distant locations to bring economies of scale and cost competitive operations. The term offshore IT outsourcing has variously been defined in the information systems (IS) literature. We define offshore IT outsourcing as: “…the contracting of various information systems’ sub-functions by user firms to outside information systems vendors” (Chaudhury, Nam, & Rao, 1995, p. 132) or “…the organizational decision to turn over part or all of an organization’s IS functions to external service provider(s) in order for an organization to be able to achieve its goals” (Cheon, Grover, & Teng, 1993, p. 209). In today’s high-tech world, the terms “onsite,” “offsite,” and “offshore” only refer to the physical locations. Outsourcing has enabled firms to reduce cost, improve cycle time, and speed timeto-market (Carmel & Agarwal, 2003; D’Costa, 2002; De Looff, 1995; Gurbaxani, 1996; Quinn, 1999, 2000; Quinn & Hilmer, 1994; Sheperd, 1999). Offshore IT outsourcing is becoming mainstream for a variety of business processes in retail, banking, financial services, insurance, and telecom industries. The larger Fortune 1000 firms are aggressively moving forward by offshoring to service providers in India, Singapore, Hong Kong, China, the Philippines, Vietnam, Thailand, Hungary, South Africa, Malaysia, and Russia. A study by Logica CMG predicts that “the outsourcing of IT and other business processes is likely to move from a 2005 average of 12% of organizational costs to 20 % by 2008” (Logica
CMG, 2005). According to Forrester Research Inc., 3.3 million white-collar jobs will go overseas by 2015 (Computerweekely.com, 2003; McKinsey Global Institute Report, 2003; Susan, 2003; Tekrati, 2004). International Data Corporation (IDC) also reports that offshore outsourcing is the dominant trend in the IT services industry, with 42% of the application management contracts now having some offshore component (Benko, 1992, 1993; Computerweekely.com, 2003; Muthuswamy & Crow, 2003; Tekrati, 2004). Making outsourcing decisions also means confronting the social stigma that comes with sending jobs out of the US Employment in the technical sector has fluctuated and Congress is facing a voting populace more worried about themselves than other countries (The Wall Street Journal, 2004). The current debate regarding immigration has fueled the debate regarding foreign workers and foreign sourcing. Along with the potential social stigma, offshore IT outsourcing brings new challenges, risks, and uncertainties (Barthelemy, 2001; Barthelemy & Geyer, 2001; Dibbern, Heinzl, Hirschheim, Heinzl, & Dibbern, 2002). The risk areas include the legal and regulatory environment of the outsourcing country, the geopolitical, economic, and physical stability of the offshore country, regional turmoil, poor infrastructure, intellectual property, and data security issues, loss of control over physical protection of data and quality monitoring, and cultural and human resources issues and lack of exposure to Western business culture (Quinn, 1999, 2000, Quinn et al., 1994). The purpose of this study is to investigate the macro-economic and social impacts of IT outsourcing using a system dynamics model. The study identifies and examines significant relationships among the macro- and socio-economic variables relating to offshore IT outsourcing. The research also documents varying perceptions of practitioners from the perceptions of those in academia. The socio-economic effects and
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Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
potential disconnect with the reality of the IS professional market may have long-term impact on the IS educational field. A great deal of this debate is covered recently in practitioners’ professional and trade journals, yet little deliberate research has been conducted to date. Most of the research in offshore IT outsourcing has been largely focused on justifying how offshore IT outsourcing will help both outsourcer and its partners in a win-win situation. There has been no serious attempt to study potential socioeconomic loss from outsourcing. Our intention in this article is to concentrate solely on research that directly addresses offshore IT outsourcing. The article is structured as follows: Section 2 describes the literature review. Section 3 discusses the research methodology research framework adopted for creation of hypothesis. Section 4 analyzes the results of the data and summarizes the findings. Lastly, the discussion section offers reflective thoughts regarding the possible implications of our findings on research and practice.
liTEraTurE rEviEw Information systems play a key roll in the US economy. During the 1990s, firms increased their investment in information systems seeking strategic advantage. Some of this increase is attributable the firms’ strategic reactions to the rise of the Internet. In the late 1990s, firms felt increasing pressure to hold down costs in order to increase profits. As information systems budgets grew, they became targets for cost reduction. These pressures for cost reduction have not abated and continue today.
Outsourcing business Functions Outsourcing information systems function is a continuing trend. International Data Corporation (IDC) estimated that the worldwide IT
168
outsourcing services market will grow 7.7% a year, to reach nearly $1 trillion in sales in 2007 (Gilbert, 2003). Encouraged by the projections of phenomenal cost savings, many Fortune 500 firms are jumping on to the “outsourcing bandwagon” (Lacity & Hirschheim 1993a, 1993b; Jones, 1997). A survey of US CEOs shows that 42% of communication firms, 40% of computer manufacturers, and 37% of semiconductor companies rely on outsourcing from foreign firms. These same CEOs expect the figures on outsourcing to exceed 50% before the mid-1990s (Malhotra, 1995). Yet, despite its growth, outsourcing is frequently perceived to be poorly controlled, high in cost, and a drain on quality and service performance (Barthelemy, 2001; Barthelemy et al., 2001; Jacobson & LaLonde, 1993,). Cost savings has often been cited as the main driver for the IS outsourcing decision (Ang & Slaughter, 1998a; Ang & Straub, 1998b; Due, 1992; Loh & Venkatraman, 1992a, 1992b). The transaction cost of these arrangements has also fallen (Ang et al., 1998a; Ang et al., 1998b). Firms may also outsource to an external supplier so that they can better focus on their core business or gain access to scarce skills (Aubert, Rivard, & Patry, 1996; Grover et al., 1993; Huber, 1993; Lacity et al., 1993a, 1993b; Lacity & Willcocks, 1998; Palvia, 1995; Quinn 1990). Companies also consider outsourcing when the internal IS function is perceived to be inefficient, ineffective or technically incompetent (Lacity et al., 1993a, 1993b). Some critics (Due 1992; Lacity et al., 1993a) argue that IS outsourcing can result in loss of control over information systems and technology assets, the loss of IS expertise, and a decline in the morale and performance of the remaining employees (Richey, 1992). They also suggest that the anticipated cost savings might also be achieved internally (Benko, 1992; Carlyle, 1990; Davis, 1992; Due, 1992; Lacity et al., 1993a; Sharp, 1993). Most controversy regarding IS
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
outsourcing remains around the issue of balance between strategic implications and financial returns (DiRomualdo & Gurbaxani, 1998).
is Outsourcing decision processes A review of the literature on information systems outsourcing yields some disconcerting observations on the IS outsourcing decision process. De Looff (1995) found that formal methods were often not used in the outsourcing decision; a one-sided emphasis on cost was the driver; the decisions were made at high levels, with very little knowledge of the IS function. Fowler and Jeffs (1998) found similar results in a case study of a UK firm. They found that the decisions were driven from a desire for economic benefit, but insufficient attention was being paid to the full array of the more subtle costs and risks with outsourcing arrangements. They further suggested that outsourcing decisions were sometimes driven by business managers’ frustration with information systems professionals. Other studies conducted demonstrate that offshore outsourcing was in the interests of business (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). Their argument is that when jobs move offshore from the US, they not only allow US firms to procure cheaper labor abroad, but they also free up talent within the US that can be re-skilled and used elsewhere. Freenstra and Hanson (1996) found that outsourcing production jobs has contributed substantially to the increase in the relative demand for non-production labor for the period of 1970 to 1990. Outsourcing also accounts for more than 30% of the increase in the non-production wage share that occurred in the 1980s (Freenstra & Hanson, 1995). However, a recent report generated much media attention when Gartner Inc. predicted that 1 out of 20 US corporate IT jobs and 1 out of 10 jobs in IT vendors and technology service firms will be moved offshore (Hoffman, 2003).
Displaced IT workers and organized labor are lobbying to prevent government agencies from outsourcing their IT services offshore, either directly or indirectly (Glasner, 2003; Thibodeau, 2003). But has protectionism helped the US economy in the past? After a thorough review on protectionism and the US textile industry, Finger, Harrison, and Krueger (1996) concluded that the protection granted to the textile industry, while substantial, was not enough to prevent significant increases in import competition. With the increased import penetration, the textile industry was more successful in downsizing its labor force than achieving substantial increases in productivity.
rEsEarch mEThOdOlOgy Both practitioner and academic populations were surveyed to measure perceptions of socio-economic consequences of offshore IT outsourcing. The sample includes members with responsibilities throughout the entire spectrum of information systems tasks and is representative of trends in the mid-western information systems labor market. Seventy-six former members of an information systems department dislocated due to a merger 2 years prior to the study comprised the largest information systems sample. This group contains 56 information systems professionals and 13 managers. This group provides insight into both the perceptions of information systems professionals on offshore outsourcing, as well as information on the IS job market. Their dislocation was in no way related to outsourcing, although most are aware of this trend. In order to provide a balanced and statistically valid sample of information systems managers, the 30 member central Indiana chapter of the Society for Information Management (SIM) is also included in the analysis (SIM, 2004). Two groups from the Miller School of Business at Ball State University represent the academic perspective in the study. These groups include
169
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
the 110 members of the business school faculty, who are informed about the topic of offshore outsourcing, but from different academic disciplines. The second group from the Miller School of Business includes three sections of a required junior-senior level course in operations management taught by one of the authors. These sections include 130 students from a similar representative range of business disciplines; 103 students participated in the survey. The students had engaged in a variety of discussions over the course of the semester regarding the evaluation of make-buy (outsourcing) decisions, cross-cultural challenges and opportunities of international business, and the micro- and macro-economic theories and consequences of outsourcing.
apparatus The survey instrument was designed to specifically test the hypotheses under study. The instrument was pilot-tested and refined with the same four groups (IS professionals, IS managers, educators and students) drawn from similar but different firms and institutions. The pilot-test groups are representative of the sample population. For information systems professionals and managers, the instrument is also designed to gather information regarding recent personal employment and personal financial experience.
procedure The survey instrument was developed in both paper and electronic forms. The electronic form is the preferred method so as to reduce cost and potential transcription error of the survey. The electronic form of the survey was utilized to reach the information systems and educator populations. Their participation was solicited through electronic mail announcements of the study that included a link to the survey web site. Two subsequent reminder notices were sent during the course of a three-week period in order
170
to increase the response rate. The electronic form of the survey was anonymous and set up without specific login parameters. Participants were offered the opportunity to receive copies of the final study by entering their email address along with their survey answers. For those that chose to enter this information, their perception of the anonymity of the study may have been somewhat compromised, depending on the ease of identification of the email address. Links to the web-address of the survey were limited to those contained in the solicitation email messages and no search engines or other web sites provided access to the survey. This process was utilized to limit the participants of the survey to those specifically solicited. The student sample was measured using a paper-based version of the same online survey instrument. In order to ensure that the paper and online instruments were identical, the web-site software utilized in the online survey was used to print the paper version of the instrument.
Theoretical Framework We model the offshoring phenomenon using the system dynamics methodology. The system dynamics approach maps the dynamic relationships between variables to understand the possible consequences of those relationships. This allows exploration of the effects of different levels of intervention, or enables theories to be developed about them. Causal loop diagrams are used for this study consisting of arrows connecting variables in a way that shows how one variable affects another - a theorized cause-and-effect relationship. The offshoring phenomenon is behavior generated by a socio-economic system consisting of different components. Therefore system dynamics approach is especially well suited to capture this behavior containing positive and negative feedback loops (Richardson, 1996). Based on the literature review, the following figure (Figure 1) shows a possible set of causal relationships. A plus (+) sign implies that a change
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
Figure 1. Systems dynamics model of information systems offshore outsourcing Competitve -ness
Security & Privacy Concerns
-
Community Investment
Time with Family
+
-
-
Retirement Age
+
Business Investment
-
-
-
-
-
-
Social Impacts
Business Climate
-
-
-
+
Brain Drain
-
IS Outsourcing -
-
Macro Economic Impact
-
Consumer Spending
Income Distribution
-
+
+ +
White Collar Unemployment
-
+ +
Unionization
+ + -
+
Availability of Labor
Consumer Confidence
Protectionism
+ +
Tax Changes for Wealth Distribution
+ -
Lower Wage Jobs
Tax Revenue
+
+ +
-
+ -
Savings & Retirement
Standard of Living
Value of Currency
+ +
Welfare Benefits
IS Program Enrollment
in the variable will cause a change in the variable in the same direction. Similarly, a minus (-) sign implies that a change in the variable will cause a change in the variable in the opposite direction. Because system dynamics involves the study of the relationships between feedback structure and dynamic behavior, there is a great impetus to try to infer dynamic behavior from representations of structure. That impetus has apparently led to a set of definitions of the polarities of causal-loops, which are phrased in terms of behavior over time (Coyle, 1998; Goodman, 1974).
NonTraditional Enrollment
hypotheses The information systems literature does not include studies of the effect of outsourcing on the employees and the community where they work. While this gap is fairly clear, the development of hypotheses can be guided by the literature on the predicted and actual effects of free trade, the movement of labor between markets, and on the effects on the workers and economy when events occur that cause a displacement of workers.
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Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
unemployment Effects In the case of two trading nations with factor differences in labor-abundance (e.g., India) and capital-abundance (e.g., the United States), economic theory predicts that this imbalance leads to a decline in the natural rate of unemployment in the labor-abundant nation (India), but a rise in the natural rate of unemployment in the capitalabundant nation (the United States) (Hoon, 1991). Further economic modeling somewhat softens this prediction if increased product-market competition offsets the adverse effects of unemployment (Hoon, 2001). Studies of a similar market condition prior to the enactment of NAFTA were conducted where the majority of economic models indicated that free trade and the movement of labor and goods would result in modest positive effects for the US and significant positive effects for Mexico (Almon, 1992; Bachrach & Mizrahi, 1991; Hufbauer & Schott, 1992; Roland-Holst & Reinert, 1992). The popular press is frequently critical of the effect of NAFTA on US unemployment. Academic studies are not conclusive in establishing a correlation between NAFTA and the higher levels of US unemployment. The rise of the Indian IT outsourcing destination has been almost simultaneous with the rise in unemployment of US information systems workers. The economic theory of labor / capital inequality between India and the US predicts a rise in the unemployment rate for US information technology workers as the movement of labor is facilitated by enabling communication technologies. •
Hypothesis 1: US information systems outsourcing is a positively correlated with unemployment of US information systems workers.
An increase in unemployment has the effect of increasing the availability of skilled labor. With an oversupply of skilled labor, laborers must seek
172
employment in other areas, frequently in lower classes of employment. Workers that are displaced often experience a decline in occupational status, or “occupational skidding,” which includes decline in job status, pay, or lower work satisfaction upon reemployment (Bluestone & Harrison, 1982). Displaced workers experience earnings declines from 9 to 15% as compared with continuously employed workers (Farber, 1993; Moore, 1990; Stevens, 1997). Declines are most significant for high tenure workers (with six or more years tenure) (Jacobson et al., 1993). Displaced workers frequently endure significant drops in earnings and benefits, experienced decreased work satisfaction, and unstable employment patterns (Aronson & KcKersie, 1980; Dorsey & Eckstein, 1967; Knapp & Harms, 2002). Older displaced workers suffer greater amounts of earnings loss than do younger displaced workers (Koeber and Wright 2001); they experience longer spells of unemployment (Knapp et al., 2002; Love & Torrence, 1989); they may experience not only a loss in earnings but in assets (Chan & Stevens 1999); and are less likely to be hired in jobs that provide fringe benefits (Scott et al., 1995). The theory and effects of increased unemployment lead to several hypotheses and predicted effects for information systems workers displaced by outsourcing: •
• •
Hypothesis 2: The availability of skilled information systems labor is positively correlated with information systems workers taking jobs in other employment areas at lesser wage rates, with a greater predicted effect for long tenured employees. Thus, tenure of displaced workers is positively related to new employment wage rates. Hypothesis 3: Change in wages (decrease) is positively correlated with worker standard of living. Hypothesis 4: Change in wages (decrease) is positively correlated with worker savings
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
• •
(as savings are drawn down to support a prior standard of living). Hypothesis 5: Decrease in wages are positively correlated with decrease in the level of retirements funds. Hypothesis 6: The availability of skilled information systems labor has a positive correlation with demand for non-information systems training programs.
The employment and wage attractiveness of a particular industry has an effect on the number of students interested in that area of study. If students see potential employment and wage growth opportunity, they will be drawn to that field. On the other hand, if students see an increase in unemployment and reduction in wages in a particular field, they may be less likely to study and subsequently seek employment in that field. This effect may lag because students who are already enrolled in programs either may not wish to change, or may not be aware of the changes in the labor market. •
Hypothesis 7: The availability of skilled information systems labor is negatively correlated with demand for information systems training programs.
income distribution Effects Globalization and the increase in free trade reduce poverty. But as competitive systems produce winners and losers, they do not necessarily reduce the inequality that is increasingly visible in a globalized world (Pitts, 2002). The inequality of wealth and income is increasing in the US despite the fact that nationwide the level of education, which has traditionally been associated with higher income, has risen. In an economy which is energized by high levels of technology, a reduction in disparities of income is not easy to obtain (Stewart, 2002). Outsourcing of information systems is a part in this drive toward globalization.
•
Hypothesis 8: US information systems outsourcing is positively correlated with a wider distribution of wealth in the US and in India.
The widening distribution of income may, in turn, have significant effects in the attitudes of workers in the markets with this widening distribution. A world in which the assets of the 200 richest people are greater than the combined income of the more than 2 billion people at the other end of the economic ladder should give everyone pause. In global terms, this mix of rising inequality, slow growth, and falling or stagnant wages increases excess capacity across the globe. As big business has gone global, the labor movement has become more internationalist. Globalization is most destructive in countries where independent unions do not exist and organizing is suppressed (Mazur, 2000). Some displaced workers adopt more critical attitudes toward big business and government and strengthen support for organized labor (Knapp et al., 2002). The workers’ attitudes toward their employers and toward government as a result of globalization and job displacement may provide motivation for employees to seek structural changes in the economy including an increase in protectionist sentiment (Atkinson, 1997). • • •
Hypothesis 9: A wider distribution of wealth is positively correlated with attitudes toward unionization. Hypothesis 10: A wider distribution of wealth is positively correlated with attitudes toward protectionism. Hypothesis 11: A wider distribution of wealth is positively correlated with attitudes toward tax law changes that result in a narrower distribution of wealth.
173
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
social Effects As workers’ income levels, status, education, and attitudes about business and the role of government change, clearly several significant social effects may arise from these changes (Earl, 1996). As workers attempt to maintain their standard of living on lower wage rates in lesser status jobs, they may be forced to work longer hours to earn the same total wages. This may have the unfortunate direct effect of workers spending less time with their families. Offshore outsourcing also raises concerns about extended retirement age, deleterious effects on US intellectual capital, and the security of information stored at offshore firms. • • • •
Hypothesis 12: US information systems outsourcing is negatively correlated with time spent with family. Hypothesis 13: US information systems outsourcing is positively correlated with retirement age. Hypothesis 14: US information systems outsourcing is positively correlated with the brain drain on US intellectual capital. Hypothesis 15: US information systems outsourcing is negatively correlated with the security and privacy of domestic firms’ information systems.
business climate Effects The local/regional economy may face several deterioration effects as a result of outsourcing of information systems. Information systems jobs have historically been attractive because of higher average wage rates and the positive economic effect of these higher paying jobs. Offshore outsourcing of these kinds of jobs creates negative economic effects for the local and regional economies affected. The preceding discussion leads to the following hypotheses that US information systems outsourcing has a negative correlation with (1) the
174
competitiveness of the local economy and region (H16); (2) the investment in infrastructure and development of the local community (H17); (3) the business investment in the community (H18); (4) consumer spending (H19); (5) tax revenue of the local, state, and US government (H20); (6) consumer confidence (H21); (7) increasing welfare benefits paid (H22); (8) and value of the US currency (H23).
spiral Effects Some firms will be unable to take advantage of the lower price of local labor in the information systems area due to internal equity issues with current employees. If a firm has several incumbents in a particular area in information systems, the firm is limited in the amount it can offer to new employees. Internal equity issues must be addressed in employee compensation. The lure of the available skilled labor at lower wage rates can cause firms to make drastic changes in order to reap the benefits. Because of internal equity issues, some firms may seek to outsource an entire functional area in IS in order to reap these benefits. The lowered wages rates caused by structural changes in the information systems area can cause a spiral effect on outsourcing. Outsourcing increases supply of available skilled labor and lowers labor cost. Internal equity issues cause firms to outsource in order to take advantage of the lower wage rates (Garaventa & Tellefsen, 2001). This in turn can lead to additional outsourcing until equilibrium is reached with the offshore market in terms of total cost of the internal versus external costs. Researchers conclude that, contrary to domestic apprehensions, outsourcing is not a zero-sum game and it has benefited the US overall. Game theory says that a zero sum game is a condition where one’s gain is another’s loss (Elitzur & Wensley, 1997). A 2003 study conducted by the McKinsey Global Institute (MGI) revealed that
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
offshoring creates wealth for the United States as well as for outsourcing partners. (“Offshoring: Is It a Win-Win Game?” McKinsey Global Institute, August 2003.) The MGI study asserts that every $1.00 offshored yields $1.14 in benefits for the US economy, a net gain of $0.14. However, the same calculation that yields $0.14 in benefits for the US economy shows a $0.26 loss for US workers resulting from every $1.00 offshored.
rEsulTs The hypothesized increase in IS unemployment (H1) yields homogeneous perception between the four groups, widely varying perceptions among the four groups, and is not supported by actual IS unemployment statistics. An analysis of variance on H1 indicates the perception of the four population groups (IS professionals, IS managers, college educators and students) is statistically homogeneous (F=1.40, df=3, p=0.25). Hypothesized IS unemployment has the widest variation in perception within respondents with
Table 1. Analysis of variance for perceptions between groups Source
df
F
η2
p
IS Unemployment (H1)
3
1.40
2.27
0.25
IS Wages (H2)
3
26.23*
30.54
4.13E-14
IS Standard of Living (H3)
3
23.17*
27.97
1.02E-12
IS Savings Account Balances (H4)
3
18.06*
23.36
2.73E-10
IS Retirement Account Balances (H5)
3
18.55*
24.03
1.67E-10
Demand of Non-IS Training (H6)
3
5.33*
8.11
1.54E-3
Demand for IS Training (H7)
3
16.15*
21.30
2.47E-9
Distribution of Wealth (H8)
3
0.94
1.55
0.43
Attitudes Toward Unionization (H9)
3
9.60*
13.79
6.52E-6
Attitudes Toward Protectionism (H10)
3
10.90*
15.44
1.31E-6
Attitudes Toward Tax Law Change (H11)
3
3.74*
5.89
0.01
Time Spent with Family (H12)
3
6.05*
9.30
6.06E-4
IS Retirement Age (H13)
3
1.89
3.14
0.13
Brain Drain (H14)
3
30.51*
33.71
5.38E-16
Security & Privacy Concerns (H15)
3
14.82*
19.80
1.16E-8
Competitiveness of Local Economy (H16)
3
10.16*
14.55
3.28E-6
Development of Local Economy (H17)
3
12.44*
17.25
1.99E-7
Business Investment in Local Economy (H18)
3
10.83*
15.37
1.42E-6
Consumer Spending (H19)
3
10.86*
15.18
1.35E-6
Tax Revenue (H20)
3
10.21*
14.82
3.13E-6
Consumer Confidence (H21)
3
3.97*
6.10
0.01
Welfare Benefits (H22)
3
1.57
2.62
0.20
Value of US Currency (H23)
3
3.34*
5.22
0.02
Note. *p<.05
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Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
49% overall believing that IS unemployment would rise. H1 is not supported by actual unemployment statistics from the US Department of Labor showing the opposite of the hypothesized trend: a decrease in the unemployment rate of computer and mathematical occupations from 6.0% to 5.1% for the period April 2003 to April 2004 (Labor, 2004). IS unemployment is related to the availability of IS labor. The hypothesized increase in availability of IS labor yields homogeneous perception between the four groups and is supported by actual
IS employment statistics within the largest IS job category (programmers). An analysis of variance indicates the perception of the four groups is statistically homogeneous (F=0.86, df=3, p=0.46). The perception of the survey respondents shows that 55% believe that the supply of IS labor would increase. The hypothesis and perception of an increase in available IS labor is not supported by the actual overall IS employment statistics from the US Department of Labor. The three-year employment level for computer occupations has increased by a modest 1.2% for the period from
Table 2. Post-hoc scheffe test for perceptions between groups (f-statistics) Source
df
SxE
SxP
SxM
ExM
PxM
IS Wages (H2)
179
7.46*
16.39*
13.15*
0.23
0.38
0.04
IS Standard of Living (H3)
179
7.76*
15.08*
9.64*
0.11
0.04
0.01
IS Savings Account Balances (H4)
178
5.15*
10.08*
10.13*
0.06
0.36
0.18
IS Retirement Account Balances (H5)
176
6.56*
10.38*
9.30*
0.00
0.07
0.06
Demand of Non-IS Training (H6)
181
1.01
4.40*
1.70
0.38
0.04
0.16
Demand for IS Training (H7)
179
3.26*
10.14*
8.78*
0.48
0.76
0.08
ANOVA not significant, Scheffe test not conducted
Distribution of Wealth (H8) Attitudes Toward Unionization (H9)
180
2.19
5.41*
0.00
8.72*
1.49
2.75*
Attitudes Toward Protectionism (H10)
179
0.26
8.52*
2.14
6.42*
2.34
0.79
Attitudes Toward Tax Law Change (H11)
179
2.72*
0.30
0.26
3.36*
0.88
0.71
Time Spent with Family (H12)
177
0.04
4.84*
1.54
2.90
1.20
0.29
Brain Drain (H14)
180
2.12
20.96*
Security & Privacy Concerns (H15)
180
1.38
Competitiveness of Local Economy (H16)
179
3.62*
Development of Local Economy (H17)
179
Business Investment in Local Economy (H18)
ANOVA not significant, Scheffe test not conducted
IS Retirement Age (H13)
16.20*
3.84*
3.56*
0.01
9.90*
2.36
10.70*
4.49*
0.95
3.62*
6.81*
0.08
0.24
0.69
4.51*
8.50*
4.28*
0.07
0.01
0.15
179
0.28
7.77*
5.26*
2.40
1.79
0.01
Consumer Spending (H19)
182
0.22
7.92*
5.10*
2.53
1.85
0.01
Tax Revenue (H20)
176
0.04
5.88*
6.18*
2.44
3.07*
0.13
Consumer Confidence (H21)
183
0.04
2.89*
1.30
1.87
1.05
0.06
182
0.01
Welfare Benefits (H22) Value of US Currency (H23)
ANOVA not significant, Scheffe test not conducted 3.12*
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
April 2001 to April 2003 (Labor, 1999, 2000, 2001, 2002, 2003). However, when looking at programmers (the largest IS job category), the hypothesis is supported by a decline in employment (and subsequent increase in available programmers) of 13.9% for the three-year period from April 2001 to April 2003 Labor, 1999, 2000, 2001, 2002, 2003). The hypothesized decrease in IS wage rates (H2) yields statistically significant differences in perception between the four groups and is supported by actual IS wage statistics. An analysis of variance on H2 indicates the perception of the four population groups is statistically different (F=26.23, df=3, p=4.13E-14). A post-hoc Scheffe test reveals that the perception of students on the effect IS wages is different than the perceptions of the other three groups. Students generally believed that IS wages had risen (45%) while the other groups perceived that IS wages had fallen (educators 54%, IS professionals 68%, and IS managers 84%). H2 is supported by actual wage statistics from the US Department of Labor. Overall wage statistics show that the mean hourly wage rate for computer and mathematical occupations has decreased 1.3% for the period April 2001 to April 2003 (Labor, 1999, 2000, 2001, 2002, 2003). This decline in actual wages is also reported by the IS
professionals and managers in the study. Nearly half (49%) of the participants report a decline in wages where only 29% report an increase (see Table 3 for more detail). The same pattern of students having different and more positive perceptions than the other groups (educators, IS professionals and IS managers) continues for the individual and local economic hypotheses and also for interest in nonIS and IS training (see Tables 1 and 2). Students’ perceptions are mixed regarding IS workers standard of living (H3). The other groups’ perceptions are in alignment with H3 that IS workers standard of living has fallen (educators 68%, IS professionals 73%, and IS managers 78%). H3 is supported by actual standard of living changes reported by the IS study participants. 41% of IS professionals and managers report that their standard of living has decreased over the past three years where only 14% report that it has increased (45% unchanged; see Table 3 for more detail). Students perceptions are mixed regarding IS workers savings accounts (H4). The perceptions of the other groups were more negative and in alignment with H4 believing that savings accounts for IS professionals and managers have fallen (educators 76%, IS professionals 81%, and
Table 3. Reported actual experience of IS professionals and IS managers Source
SD
D
S
I
SI
My Wages Have (H2)
29%
20%
22%
25%
4%
My Standard of Living Has (H3)
19%
22%
45%
13%
1%
My Savings Account Balances Have (H4)
26%
27%
21%
20%
6%
My Retirement Account Balances Have (H5)
29%
17%
27%
23%
4%
0%
0%
28%
45%
28%
My Interest in IS Training Has (H7)
21%
23%
39%
11%
6%
My Time Spent with Family Has (H12)
12%
25%
53%
6%
4%
My Planned Retirement Age Has (H13)
6%
3%
38%
31%
22%
My Interest in Non-IS Training Has (H6)
Note. *SD=Significantly Declined, D=Somewhat Declined, S=Stayed About the Same, I=Somewhat Increased, SI=Significantly Increased
177
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
IS managers 88%). H4 is supported by actual savings account changes reported by the IS study participants. Forty-six percent of IS professionals and managers report that their savings accounts have decreased over the past three years (see Table 3 for more detail). The perceptions of the groups and actual experiences regarding IS retirement accounts (H5) were nearly identical to those of savings accounts (see Table 3 for more detail). Student perception is positive regarding interest in both non-IS (H6) and IS training programs (H7); 62% and 67% reporting increased interest in non-IS and IS training respectively. The perception of educators is more positive for non-IS training (H6) (82% perceive increased interest) than for IS training (only 27% perceive increased interest). This same distribution holds for IS professionals and IS managers, but is more pronounced. Eightseven percent of IS professionals and 79% of IS managers perceive increased interest in non-IS training programs (H6) but only 13% of IS managers and IS professionals perceive increased interest in IS training programs. H6 is supported by actual personal interest in non-IS training programs reported by the IS study participants (see Table 3). Seventy-three percent of IS professionals and managers report that their interest in non-IS training programs has increased. H7 is also supported by lack of actual personal interest in IS training programs. The last set of hypotheses where students held significantly different perceptions about the impact of offshore IS outsourcing than the other three groups were in the local macro-economic effects. Again, students’ perceptions are more positive than the other three groups. The percentage of students reporting that the competitiveness (H16), infrastructure, and development (H17) and business investment in the local economy has increased is 58%, 35%, and 26% respectively. This is contrasted by the perceptions of educators, IS professionals and IS managers who are more pessimistic about changes in local economic competitiveness, development and investment as
178
a result of offshore IS outsourcing. Educators’ perceptions were moderately more negative than IS professionals and IS managers. The most negative group, 44%, 50%, and 64% of IS managers perceived declines in these areas. For most of the hypotheses relating to the individual social impacts and attitudes toward income distribution, the perceptions of IS professionals statistically differed from those in academia (students and educators). (See Tables 4, 5, and 6 for the specific perceptions of IS professionals, students, and educators on these issues). All four groups perceive that the distribution of wealth has widened in the US with between 71% and 81% supporting this view. The perceptions of these four groups support hypothesis 8. The attitudes toward unionization were significantly different between those in academia and IS professionals. Seventy-four percent of IS professionals believe that there should be union protections against offshore IS outsourcing. This is opposed to only 50% of students, 28% of educators, and not surprisingly 58% of IS managers who support greater unionization of IS work. Hypothesis 9 is supported only within the group of IS professionals. Similarly, attitudes toward US protectionist measures against offshore IS outsourcing were more strongly supported within the IS professional group as compared with those in academia with 79% supportive. Only 34% of students and 27% of educators support trade protections. Attitudes toward tax law changes for a wider distribution of wealth (H11) are different between educators and two groups, students and IS professionals. Educators are generally negative on this issue with 62% against tax law changes. Students and IS professionals are generally more positive with 49% of students and 58% of IS professionals supporting tax law changes for a greater distribution of wealth. The perceptions of IS professionals is statistically different than those in academia on the changes in time that IS professionals spend with
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
Table 4. Perception of students on individual social impact and attitudes on income distribution
Source
Strongly Disagree
Strongly Agree Disagree
Neutral
Agree
Distribution of Wealth is Widening (H8)
2%
10%
10%
50%
29%
Unions Should Protect IS Workers (H9)
8%
12%
31%
45%
5%
Protectionist regulations should be enacted (H10)
7%
28%
32%
24%
10%
13%
22%
17%
36%
13%
Significantly Decreased
Decreased
About Same
Increased
Significantly Increased
3%
38%
42%
17%
0%
IS Retirement Age (H13)
4%
22%
33%
38%
2%
Brain Drain (H14)
4%
11%
26%
49%
11%
Tax laws should distribute wealth more widely (H11)
Time Spent with Family (H12)
Security & Privacy Concerns (H15)
0%
11%
20%
49%
21%
Consumer Spending (H19)
7%
27%
32%
32%
2%
Tax Revenue (H20) Consumer Confidence (H21) Welfare Benefits (H22) Value of US Currency (H23)
4%
36%
41%
19%
0%
17%
44%
21%
17%
1%
4%
22%
42%
30%
2%
10%
66%
19%
6%
0%
Table 5. Perception of educators on individual social impact and attitudes on income distribution Strongly Disagree
Disagree
Neutral
Agree
Distribution of Wealth is Widening (H8)
0%
14%
14%
52%
19%
Unions Should Protect IS Workers (H9)
18%
36%
18%
23%
5%
Protectionist regulations should be enacted (H10)
23%
23%
27%
9%
18%
Tax laws should distribute wealth more widely (H11)
38%
24%
19%
14%
5%
Significantly Decreased
Decreased
About Same
Increased
Significantly Increased
10%
20%
50%
20%
0%
0%
0%
50%
50%
0%
10%
29%
29%
24%
10%
5%
23%
18%
41%
14%
Source
Time Spent with Family (H12) IS Retirement Age (H13) Brain Drain (H14) Security & Privacy Concerns (H15) Consumer Spending (H19)
Strongly Agree
5%
36%
41%
14%
5%
14%
32%
27%
27%
0%
Consumer Confidence (H21)
9%
55%
14%
23%
0%
Welfare Benefits (H22)
5%
14%
52%
29%
0%
Value of US Currency (H23)
9%
55%
14%
23%
0%
Tax Revenue (H20)
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Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
Table 6. Perception of IS professionals on individual social impact and attitudes on income distribuSource
Strongly Disagree
Neutral
Agree
Strongly Agree
Distribution of Wealth is Widening (H8)
3%
5%
11%
32%
49%
Unions Should Protect IS Workers (H9)
5%
5%
16%
26%
47%
Protectionist regulations should be enacted (H10)
8%
8%
5%
22%
57%
18%
13%
11%
32%
26%
Significantly Decreased
Decreased
About Same
Increased
Significantly Increased
21%
50%
21%
8%
0%
5%
19%
27%
32%
16%
27%
43%
22%
8%
0%
0%
5%
0%
18%
76%
Consumer Spending (H19)
27%
46%
19%
8%
0%
Tax Revenue (H20)
31%
39%
25%
6%
0%
Consumer Confidence (H21)
42%
34%
16%
8%
0%
8%
5%
38%
35%
14%
42%
34%
16%
8%
0%
Tax laws should distribute wealth more widely (H11)
Time Spent with Family (H12) IS Retirement Age (H13) Brain Drain (H14) Security & Privacy Concerns (H15)
Welfare Benefits (H22) Value of US Currency (H23)
their family. Seventy-one percent of IS professionals perceive that they will spend less time with their family as a result of offshore IS outsourcing, where only 41% of students and 30% of educators perceive this negative result. Surprisingly, the IS professionals perception of the overall impact is significantly different than the actual experiences that they report. Only 36% of IS professionals report that they spend less time with their family than they did three years ago. These statistics are not supportive of hypothesis 12. The perceptions of the four groups were statistically similar on the issue of changes in IS retirement age (H13). The perception results were statistically different than the actual plans of IS professionals and IS managers. Fifty-four percent of IS professionals and 75% of IS managers report that their actual planned retirement age had increased. These statistics on actual plans are supportive of hypothesis 13. On the issue of a drain in intellectual resources as a result of offshore IS outsourcing (H14), those
180
Disagree
in academia held different views that those in practice. Sixty percent of students and 34% of educators perceived that the intellectual capital of US firms has increased. This is in stark contrast with the negative perceptions of IS professionals and IS managers where 70% and 84% report that intellectual capital has decreased. The practitioners in the study support hypothesis 14 where those in academia do not support it. All of the four groups report increased data security and privacy concerns as a result of offshore IS outsourcing. The perceptions of IS professionals and IS managers were once again, much more negative. Seventy percent of students and 55% of educators report increased data security concerns where 94% of IS professionals and 92% of IS managers perceive increased data security concerns. Seventy-two percent of students and 50% of educators report increased privacy concerns where 95% of IS professionals and 88% of IS managers have increased privacy concerns. All of these four groups support hypothesis 15,
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
but the IS practitioners report overwhelming concern in this area. Student perceptions on the macro-economic impact of offshore IS outsourcing are generally different than those of IS professionals and IS managers. In regards to impact on consumer spending (H19) and tax revenues (H20), student perceptions were generally mixed (34% perceived spending had decreased and 40% perceived tax revenues decreased). IS professionals and IS managers were both negative on these issues (73% of IS professionals and 63% of IS managers perceive that consumer spending has decreased; 70% of IS professionals and 75% of IS managers perceive that tax revenues have decreased). The perceptions of IS professionals and IS managers support the hypotheses that consumer spending and tax revenues have decreased (H19 and H20). The perceptions of students and IS professionals were both negative, but differ on the issues of consumer confidence and the value of the US
currency. Sixty-one percent of students perceive that consumer confidence has decreased and 76% that the dollar has decreased. This is compared with 76% of IS professionals perceiving that consumer confidence has decreased and 87% that the value of the dollar has decreased. The negative perceptions of consumer confidence and the value of the dollar are also shared by educators and IS managers (see Tables 4, 5, 6, and 7 for specific percentages). These negative perceptions of the four groups support H21 and H23. The perceptions of the four groups were in alignment on the issue of changes in welfare benefits as a result of offshore IS outsourcing. The perceptions were moderate and mixed. The hypothesis that the amounts paid out in welfare benefits as a result of offshore IS outsourcing H22) is not supported.
Table 7. Perception of IS managers on individual social impact and attitudes on income distribution Strongly Disagree
Disagree
Neutral
Agree
Strongly Agree
Distribution of Wealth is Widening (H8)
4%
13%
4%
42%
38%
Unions Should Protect IS Workers (H9)
25%
4%
13%
33%
25%
Protectionist regulations should be enacted (H10)
13%
8%
8%
38%
33%
Tax laws should distribute wealth more widely (H11)
17%
29%
13%
33%
8%
Significantly Decreased
Decreased
About Same
Increased
Significantly Increased
13%
50%
29%
8%
0%
9%
30%
22%
39%
0%
13%
71%
17%
0%
0%
4%
4%
0%
38%
54%
25%
38%
38%
0%
0%
Source
Time Spent with Family (H12) IS Retirement Age (H13) Brain Drain (H14) Security & Privacy Concerns (H15) Consumer Spending (H19) Tax Revenue (H20)
33%
42%
25%
0%
0%
Consumer Confidence (H21)
21%
63%
13%
4%
0%
Welfare Benefits (H22) Value of US Currency (H23)
0%
17%
50%
33%
0%
21%
63%
13%
4%
0%
181
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
discussiOn Since 2001, according to the US Bureau of Labor Statistics, more than 500,000 people in IT professions in the United States have lost their jobs. Some were caught in the dot-com bust, others were laid off by cost cuts, shrinking budgets, a poor economy, and a desire to satisfy shareholders quarter by quarter. Now, a growing number of IT professionals are having their jobs displaced as IT work moves to offshore providers. The advantages of offshore IT outsourcing are convincing, but the challenges and impacts are equally intimidating. The study reveals significant differences in perception between students and the other three groups in the study: educators, IS professionals, and IS managers. Students’ perceptions are consistently positive regarding factors such as IS professional wage rates, standard of living, savings, retirement accounts, and local macro-economic factors. These positive perceptions exist in the face of actual declining wage rates for IS professionals. Not only do the actual statistics differ, the perception of educators, IS professionals and IS managers are consistently negative regarding these same variables. These differences suggest a disconnect between student expectations and reality (current and anticipated future) of the IS profession in the United States. The study also reveals significant differences in perception between those in academia and IS practitioners. While educators are in agreement with practitioners in regard to the micro-economic impact of offshore outsourcing on the IS profession, they differ on some of the macro-economic factors and prescriptive measures. Where IS practitioners are generally supportive of greater unionization and protectionist measures, those in academia are not. This same difference exists with the social impact of outsourcing on time with family and drain on intellectual capital. Although the IS practitioners held negative views on these
182
social issues, they do not report a significant decrease in their own time spent with family. It may be that these are anticipated changes that have not yet been experienced. US Department of Labor statistics and IS practitioners in the study suggest that IS outsourcing has at least a short-term negative impact on practitioners in the IS field. As noted, IS wage rates have declined 1.3% from April 2001 to April 2003. The IS practitioners in the study note a decrease in their wages, standard of living, savings accounts and retirement accounts. They also report an increase in their planned retirement age. All of the groups agreed on several perceived impacts of offshore outsourcing of IS. They perceived that IS unemployment would rise; they shared concerns about the impact on data security and privacy; and they theorized that planned retirement ages for IS practitioners would rise. It would be difficult to generalize from this relatively small sample to the overall population of IS practitioners. Indeed, given the complexity of global macro-economic systems, the effects reported by the practitioners may only be partly attributable to the offshore outsourcing of information systems. Nevertheless, practitioners hold a very negative view of offshore outsourcing of information systems and share perceptions that the practice raises negative economic and social issues. IS practitioners’ concern regarding information security and privacy is important to note. The apparent disconnect between those in academia and those in practice raises some very important issues—especially the disconnect with students. Students may be disappointed as they graduate from IS programs with unrealistic expectations about the availability of jobs and the wage rates that they expect to command. In the short-term, this disconnect can cause a large amount of dissatisfaction with recent graduates. In the long-term, if these negative perceptions ultimately yield negative actual experience in the
Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
IS field, we can expect a decrease in interest in IS educational programs and careers as employment and wages decline. This study gives rise to several additional areas of inquiry. Further study with a larger sample of IS practitioners would provide replication and increases the ability to generalize the findings. The perceptions of those in governmental and policy-making positions would also provide valuable insight. The specific issues of data security and privacy raised by offshore outsourcing are also an important area of additional study.
limitations of the study Although statistically significant correlations are revealed within this study, the generalizability of these results are constrained by the small number of organizations and restricted sample size. This exploratory analysis should serve as a heuristic guideline for future research.
offshore IS outsourcing. Negative impact to real IS wages are being perceived and also experienced by IS professionals. The IS professionals report significant negative impacts to their financial and social situations. These individual experiences are supported by the larger economic data on real wages in IS technical professions. These negative impacts are perceived and understood by educators in the academy, but are largely unknown to students. This significant difference in perception regarding salary and job prospects in IS fields may create significantly negative experiences for recent graduates. In the long-term, if these negative pressures on real wages in IS fields continue, enrollment in IS programs will likely experience long-term declines in enrollment. Additional research is certainly warranted to broaden and also to replicate these results. It is hoped that this research will provide a framework and initial findings to carry this research agenda forward.
rEFErEncEs cOnclusiOn The results of this study strongly suggest that system dynamics modeling will help explain socio-economic components to obtain a more holistic view of offshore IT outsourcing. This research raises questions for evaluation of offshore IT outsourcing. More research needs to be conducted, particularly in light of the positive findings about the relationship between IT offshore outsourcing and negative socio-economic results. Future research should also be directed more broadly to identify the appropriate levels of IS investment, and appropriate IS management structures. Investigating these issues will not only help practitioners make informed decisions regarding IS investment and management but also enrich management and organizational theory. The results of this research show that there are significant negative socio-economic impacts to the individuals and local economies as a result of
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Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology
Richardson, G. P. (1996). Modeling for management. Aldershot, UK: Dartmouth Publishing Co. Richey, M. W. (1992). The impact of corporate downsizing on employees. Business Forum, 17(3), 9-13. Roland-Holst, D., & Reinert, K. (1992). North American free trade commission. Economy-wide Modeling of the Economic Implications of an FTA with Mexico and a NAFTA with Canada and Mexico. Washington, D.C., United States International Trade Commission. Scott, F. A., Berger, M. C., et al. (1995). Do health insurance and pension costs reduce the job opportunities for older workers? Industrial and Labor Relations Review, 48(4), 775-791. Sharp, B. (1993). Is it time to in source your financial apps? Datamation, 75-77. Sheperd, A. (1999). Outsourcing IT in a changing world. European Management Journal, 17(1), 64-84.
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This work was previously published in International Journal of E-Business Research, Vol. 3, Issue 4, edited by I. Lee, pp. 112132, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.11
Strategies for Business Process Outsourcing: An Analysis of Alternatives, Opportunities, and Risks Subrata Chakrabarty Texas A&M University, USA
absTracT This chapter provides a comprehensive overview of business process outsourcing (BPO) strategies and analyzes related issues. The discussions in this chapter can serve as an aid to decision makers who face the great dilemma of whether to insource or outsource a process, and additionally how to handle outsourcing to offshore locations. While business processes themselves are activities that need to be performed efficiently, outsourcing them is essentially a strategic decision that can ultimately impact the competitiveness of the client firm. This chapter explores the risks and opportunities associated with the numerous strategies related to outsourcing and offshoring alternatives, business process migration, contracting and alliance building, the role of the vendor, the nature of the relationship, multiclient or multivendor relationships, infusing maturity and ushering transformations in business processes, locating
required expertise and quantity of workers, and also utilizing on-demand software services from application service providers.
inTrOducTiOn In business process outsourcing (BPO), a client’s business process is performed by a vendor. Certain business processes of the client are transferred over to the vendor, and the vendor’s office then becomes the “back office” for the client’s outsourced business processes. The vendors are given the responsibility to manage the client’s business processes, such as call centers, emergency hotlines, claims management, helpdesks, data management, document processing and storage, financial services (banks and insurance), payroll, auditing, accounting, travel management systems, various logistics and information systems services (Millar, 1994, as cited in Lacity & Hirschheim,
1995, pp. 4-5; Sparrow, 2003, p. 11). Hence, a BPO vendor needs to have the capability to provide consistent levels of customer service spanning across a range of services and businesses. Though BPO has inherent risks, it also provides many benefits to the client. Apart from focusing on short-term cost savings and operational efficiencies, it is important that BPO be performed with a strategic mindset, whereby decisions are based on wider business context and help in gaining competitive advantages in the tough external environment (Sparrow, 2003, p. 8). For effective BPO, an organization should segregate its business processes into two broad categories: (1) the ones where its own core competencies are strong and which have strategic significance, and (2) those that can be performed better by a vendor (Adler, 2003, p.53). In most cases, business processes that represent the client’s core competencies and have high strategic stakes are best performed in-house. In order to identify its “core competencies,” an organization needs to be very clear about where its own strengths lie and identify the processes that truly give the organization its business value. In order to identify processes that are “strategic,” the organizations need to be able to identify processes that differentiate it from its competitors in the marketplace, or processes that gives it the competitive advantage (Porter, 1996). Importantly, the market is dynamic where the demands and competition changes over time and, therefore, the core competencies or the strategic nature of associated business processes may accordingly change. Hence, organizations also need to have a clear vision of their goals and future strategy in the dynamic marketplace and, accordingly, identify its business processes for outsourcing. Failure to do so can make an organization overly dependent on the BPO vendors for its core or strategic business processes, and it would effectively be at the mercy of vendors. The key here is to have complete power and control over one’s core and strategic business processes, while gaining maximum advantages out of the
various vendors’ strengths in noncore business processes. This chapter discusses the various alternative strategies that clients should consider while pursuing BPO.
sTraTEgiEs: basics OF OuTsOurcing and OFFshOring business process insourcing and Outsourcing The two basic strategies in sourcing business processes are insourcing and outsourcing. While in business process insourcing a firm executes business processes on its own, in business process outsourcing (BPO) the client firm establishes a contractual relationship and hands over the responsibility of executing the business processes to a vendor. In other words, a company “insources” from within and “outsources” to an external company, that is, outsourcing is the sourcing of work across organizational boundaries. •
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Insourcing: The business processes are performed by the client itself or a client entity (such as a subsidiary or an internal department). Outsourcing: The business processes are performed by a nonclient entity (such as a vendor/supplier).
When a firm decides to insource its business processes, there are two basic strategies: (1) the “OK as is” strategy where the client feels that it is running its business processes efficiently and satisfactorily, and hence the strategy is to simply continue with the status quo, and (2) the “fix and keep in-house” strategy where the client might be a bit unsatisfied with the efficiency of its in-house business processes, but believes that insourcing is still the best option, and decides to invest in
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the adoption of better practices to identify and fix the deficiencies (Wibbelsman & Maiero, 1994, as cited in Dibbern, Goles, Hirschheim, & Jayatilaka, 2004, p. 11). Here, firms target the highest efficiency levels (achieved by competitors or vendors), set them as the benchmarks, and are self driven and motivated to achieve those high efficiencies in their business processes. When a firm decides to outsource its business processes, two basic strategies are (1) the “option to reverse” strategy where business processes are outsourced to a vendor, but it also takes into account the possibility of bringing the outsourced business processes back in-house whenever needed, and (2) the “divest completely” strategy where business processes that are perceived to be best managed by a vendor are outsourced permanently (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11). Additionally, it is also important to note that a client’s option is not limited to outsourcing to just one vendor, and it can potentially outsource to multiple vendors. Similarly, vendors often provide services to multiple clients. The strategic aspects related to multiple clients and multiple vendors will be discussed later in the chapter.
organizations were considering the discontinuation of outsourcing, which involved getting the outsourced work back in-house by either waiting for the contract period to end or by simply renegotiating/terminating the contract. Outsourcing is not easy, and a great amount of planning along with immaculate execution is needed for it to be completely successful. Based on an extensive review of the academic literature, some of the salient advantages of insourcing and outsourcing are compiled (Ang & Straub, 1998; Aubert, Rivard, & Patry, 1996; Chakrabarty, 2006b; Currie & Willcocks, 1998; Earl, 1996; Jurison, 1995; Loh & Venkatraman, 1992; Loh & Venkatraman, 1995; Nam, Rajagopalan, Rao, & Chaudhury, 1996; Nelson, Richmond, & Seidmann, 1996; Poppo & Zenger, 1998):
making the insourcing vs. Outsourcing choice
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To evaluate the experiences of organizations with outsourcing, 14 case studies were carried out by Hirschheim and Lacity (2000). The case studies show that when departments executing in-house business processes get the required support from the upper management, they too can improve performance and imitate the various cost-reducing and efficiency-enhancing tactics adopted by the vendors, and thus provide a strong alternative to outsourcing. Furthermore, they highlight the risk of lesser control and lower–than-expected service levels that may result from large-scale outsourcing. Moreover, they report that some
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Advantages of business process insourcing: •
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•
•
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Insourcing allows greater control over the strategic assets and resources that are used in the business processes. Possibility of opportunistic behavior of a vendor is a major hassle, and insourcing safeguards against this risk. Insourcing is best when high uncertainty is associated with the business process Many business processes require very high amounts of firm specific knowledge (business/technical) for their effective execution. Transferring such knowledge to a vendor not only takes time and effort, but may also compromise the confidentiality of the firmspecific knowledge. Negotiating intellectual property rights associated with business processes (with a vendor) are always a tricky issue, and insourcing reduces the risk of IP rights violations. Not all business processes can be effectively carried out by vendors (no matter what the sales/marketing representatives of the ven-
Strategies for Business Process Outsourcing
dors say). Hence, insourcing is sometimes the only option when competent vendors are absent. Advantages of business process outsourcing (BPO): •
•
•
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BPO can lead to considerable cost advantages: º The client does not have to invest in the infrastructure or the technology required to execute the business processes and hence saves on capital expenditure. º The vendor’s economies of scale and economies of scope help in reducing the costs of running the business processes. º The very process of bidding for and negotiating the outsourcing contract makes the respective vendors give estimates on the costs involved in executing the business processes, which in turn makes the costs more predictable for the client. BPO allows organizations to focus its core business, and outsource the noncore business that take up a considerable amount of management time and resources. BPO makes a client’s transition to newer business processes easier, wherein the legacy or current business processes are outsourced to a vendor during the transition period. BPO gives more flexibility in managing labor: º Any upsurge or downswing in the volume of business process work would entail variations in the required manpower. The client does not need to worry about this because the recruitment and staffing for outsourced business processes would be the vendor’s responsibility. A vendor organization can more easily manage variations
•
in manpower needs since it would be executing a huge number of business processes (for various clients) that involve a large number of vendor employees working on similar tasks. The vendor can easily balance out variations in staffing needs across its various BPO projects. º BPO frees up a client’s in-house resources (infrastructure, manpower, etc.) from noncore activities, and they can instead be utilized in the development of core competencies and processes that could give the client a competitive edge in the market. º BPO gives the client access to the process and technical expertise of the vendor personnel, which can have a positive impact on the way the client’s business processes are executed. To stay competitive, most vendors strive to adopt the best business process maturity models that can guarantee better quality and service. Hence, clients can benefit from the quality provided by the best-in-class vendors.
Apte and Mason (1995, p. 1258; see also Dibbern et al., 2004, p. 33) proposed that the choice between insourcing and outsourcing can be ascertained by the “strategic importance” and the client’s “relative efficiency” in carrying out an activity in-house. Insourcing of business processes is suitable when both the strategic importance and the relative efficiency of performing the business processes in-house are high. However, if both these factors are low, the BPO is favorable. But what if the strategic importance is high but the client’s relative efficiency is low? In this case the client has the following options: (1) invest time, money, and effort into increasing the efficiency of these strategic or core competency business processes, (2) ask external consultants or vendors to come to the client site and suggest the necessary changes
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to infuse efficiency, and (3) consider building a strategic-alliance with a vendor who is an expert in executing the relevant business processes. Options (2) and (3) would need the imposition of strict controls that would prevent any compromise on the strategic importance or confidentiality associated with the business processes. And finally, it is suggested that if the business processes are not of strategic importance but the organization has extremely high efficiency in executing them, then the organization should consider setting up a subsidiary or spin-off that offers its expertise to other organizations in the external market. It should be noted that firms rarely outsource “everything,” and instead adopt a cautious and sensible approach of selectively picking out the business processes that it feels can be best performed by the vendors. This is discussed in the next section.
strategy for selective bpO Is it a good strategy to outsource all business processes? Or is it better if they are all retained in-house? Well, it would be nice if the answers were as simplistic as the questions posed. The outsourcing decision is rarely an all-or-nothing approach. As discussed earlier, an optimum balance is reached between the number of business processes to be outsourced and the ones to be retained in-house. Selective BPO is the practice of outsourcing carefully selected business processes to vendors, while retaining the others in-house (Lacity, Willcocks, & Feeny, 1996, pp. 13-14). Clients often outsource the business processes that they feel can be better performed by a vendor, but prefer to keep select business processes in-house based on their own strengths and capabilities. This selective approach is based on an analysis of costs and benefits, technology/infrastructure availability, and human resource availability. Selective BPO shuns the all-or-nothing approach in favor of a smarter way of outsourcing that involves
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careful judgment and discernment, and that meets the customer’s needs while minimizing risks associated with total outsourcing approaches (Lacity et al., 1996, pp. 13-14). This widely recommended selective approach capitalizes on the strengths of both the client and the vendors.
strategy for Offshore bpO: going global Offshoring and Outsourcing Classifications As described earlier, the client’s business processes can be executed or managed by entities that are either internal (its own department, subsidiary, or captive center) or external (a vendor). In this world where globalization is having astounding effects on the way business is conducted, where exactly is the location where the client’s business processes are being executed? When the client’s business processes are being executed in the same country as that of the client, it is known as onshore sourcing, domestic sourcing, or simply onshoring (Chakrabarty, 2006b). On the other hand, if the business processes are being executed in a country that is different from the client’s country it is known as offshore sourcing or global sourcing (Chakrabarty, 2006b). Hence, offshoring is the transfer of work across geographical boundaries. But then, the question arises whether the business processes are being executed by a client entity (such as a subsidiary or department) or a nonclient entity (a vendor)? Hence, the following possibilities arise (see figure-1): •
Onshore-insourcing of business processes: When both the client and the client-entity that executes the business processes (such as its own subsidiary or internal department) are located in the same country it is known as onshore BPI (business process insourcing) or domestic BPI.
Strategies for Business Process Outsourcing
•
•
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Offshore-insourcing of business processes: When the client entity (such as a subsidiary, department, or captive center) that executes the business processes is located in a country that is different from the client’s country it is known as offshore BPI or global BPI. Onshore-outsourcing of business processes: When both the client and the vendor that is executing the client’s business processes are located in the same country it is known as onshore BPO (business process outsourcing) or domestic BPO. Offshore-outsourcing of business processes: When the vendor that is executing the client’s business processes is located in a country that is different from the client’s country it is known as offshore BPO or global BPO.
1.
2.
Why Offshore Outsourcing is Gaining Prevalence There are many reasons that are attributed to the growth of offshore BPO, and the major ones can be summarized as follows:
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Business processes can be executed round the clock: By distributing the work globally across multiple time zones, business processes can be run 24×7. This can lead to a faster execution time in completing any business process cycle (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002) and also allow 24×7 management and supervising that is crucial for business processes. 24×7 services can be a competitive strategy for any client in today’s global market. Cost savings due to high availability of cheap skilled labor: The predominant cause for the offshoring trend is certainly the cost advantage derived out of the lower pay scales of skilled professionals and the lower cost of living in some developing countries such as India and China. The high supply of skilled labor in such countries boosts the low-cost advantage (Apte & Mason, 1995, p. 1252; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002; Sobol & Apte, 1995). Modern communication and collaboration technologies: The Internet has surely promoted the growth of offshoring by provid-
insOurcing From Client Entities
Distance
Figure 1. Outsourcing and offshoring
global location
domestic location
Global / Offshore Business Process Insourcing Domestic / Onshore Business Process Insourcing client headquarters / Office
domestic location
To Vendor Entities
Distance
OuTsOurcing
global location
Domestic / Onshore Business Process Outsourcing
Global / Offshore Business Process Outsourcing
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4.
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ing a platform for the latest communication and collaboration technologies at reasonably low costs (e-mailing, teleconferencing, videoconferencing, instant messengers with text messaging, voice chat and Web cams, etc.). Thanks to these latest technologies, geographical distance is becoming less of a barrier for collaboration and coordination among globally distributed teams, also known as “global virtual teams” (Carmel & Agarwal, 2002, p. 66; Chakrabarty, 2006d). Business process discipline, maturity and quality improvement: When a business process is outsourced to a vendor in a different country, the vendor personnel are obliged to understand and adopt the business process completely to make it operationally effective. The vendor personnel would attempt to understand the business process from a ”fresh” perspective without any baggage of past or local experiences in the particular business process (Aron & Singh, n.d.). This would throw open the business process to questioning, and possible avenues for improvement. It is important to note that most vendors strive to adopt the best business process maturity models that can guarantee better quality and service, and hence attract more clients. Offshore outsourcing of business processes can therefore bring into it the much needed ”process discipline” that makes: (1) the process globally understood—through removal of any ambiguity and improperly synthesized information, and enforcement of universally understood standards and procedures, and (2) the tasks in the process optimally sequenced—through elimination of redundant tasks and modification of defective tasks (Aron & Singh, n.d.). This evaluation of the outsourced business processes from the unadulterated third-party perspective of the offshore personnel, if well utilized (by requesting and acting upon
the feedback), can lead to improvements in the business process in terms of discipline, maturity, and quality. Hence, the remoteness of the vendor or offshore personnel can also turn out to be an advantage.
Why Offshore Outsourcing is a Risk Offshore outsourcing brings in various risks that need to be addressed by the clients and the vendors (Apte & Mason, 1995, pp. 1252-1253; Carmel & Agarwal, 2002, p. 68; Chakrabarty, 2006d; Sinha & Terdiman, 2002; Sobol & Apte, 1995, p. 271), and these risks include: •
•
•
Behavioral risks: These risks include lack of trust, cultural differences, communication, and coordination issues. Risks due to global laws, norms, and environments: Getting visas/work-permits for global travel has become difficult and time consuming due to various factors (such as fears of job loss, and terrorist threats), laws and norms in various nations on cross-border data flow and services are sometimes unclear, and finally there is always a possibility of unstable economic, political, or social environments in any nation (in varying degrees). Information and knowledge related risks: There is sometimes a risk due to possible violations of intellectual property rights and privacy, since many business processes deal with sensitive data (such as credit card numbers). There is also the difficulty in knowledge transfer from the client to the vendor. The offshore vendor would lack domain knowledge about the client’s industry, market, customers, organizational culture, and the nitty-gritty about the way the client operates. How much should the client reveal? How much should be kept confidential? Also, how much time and effort will go into ensuring effective knowledge transfer?
Strategies for Business Process Outsourcing
•
Business process management risks: It might be difficult to control quality and schedule unless proper mechanisms to ensure the same are in place. Also, how quickly, accurately, and efficiently can changes in business processes be affected?
Distributed Consulting and Global Delivery Offshore BPO is not always “purely offshore.” An offshore BPO can have a minor onshore component along with a major offshore component. Often, a need arises to have a small vendor team at onshore in addition to the large number of vendor personnel at offshore executing who are executing the business processes (see Figure 2). While the offshore vendor personnel have the responsibility of carrying out the bulk of the work, the onshore vendor team has the role of coordinating faceto-face with client. This is known as distributed consulting (Kobyashi-Hillary, 2004, p. 153). This method is a widely accepted practice to ensure effective coordination between onshore-based clients and offshore-based vendors. Companies such as TCS, Infosys (whose BPO arm is called Progeon), and Wipro, all large software service providers (primarily based in India),
are now aggressively providing BPO services, and have for long incorporated the concept of distributed consulting into what they call the “global delivery model,” whereby these large vendors execute the business processes from various global locations for their clients situated at various other global locations (Chakrabarty, 2006b). Table 1 gives some of the BPO services being aggressively offered by these companies. Though India is one of the predominant players in the market, it is mentioned here only as an example, and it is important to realize that numerous organizations from various other countries are also competitively providing BPO services (Kempf, Scholl, & Sinha, 2001). The vendor’s offices, where the client’s business processes are executed, are located worldwide (based on various factors such as availability of skilled manpower at low costs), and there is comprehensive networking with the latest telecommunications and collaborative technologies that allow seamless integration of business processes delivered from multiple locations and thereby providing economies of scale and scope. Hence, the “global delivery model” is an offshore BPO model that takes advantage of the global talent pool to give the best value to the client in terms of cost and quality.
Figure 2. Distributed consulting & global delivery ONSHORE vendor Team
client (face-to-face)
vendor personnel (execute Outsourced business processes)
OFFSHORE
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Table 1. BPO services
This section focused exclusively on offshore BPO. However, the strategies discussed throughout the remaining chapter apply to both domestic/ onshore BPO and global/offshore BPO.
sTraTEgiEs FOr businEss prOcEss migraTiOn strategy for migration of business processes from client to vendor site It is interesting to note how some of the vendors are trying to convince the clients to take up the
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risk of BPO, and it also shows how very confident the vendors are in their ability to execute thirdparty business processes from a far-off location. For example, the Wipro Web site (http://www. wipro.com/bpo/methodology.htm) tries very hard to market the importance it lays on the smooth transfer of business processes from the client site to the vendor site: For BPO projects, we follow the Wipro Service Delivery Model, which is a robustly defined framework to manage the complete BPO process migration and transition management and has been developed based on the experience gained from migrating more than 400 remote business processes to India over the past ten years. This
Strategies for Business Process Outsourcing
proven service transfer platform is designed to ensure process integrity and minimize inherent migration risks. The model includes a tried and tested Transition Toolkit to support transition management by ensuring that there is a documented methodology with formats, tools, guidelines and past learnings in place to aid the transition team in de-risking the transition of a customer’s processes and reducing the pain of migration as much as possible. A coordinated project management system captures critical client documentation and incorporates an extensive knowledge base that assists the transition management team in understanding, duplicating, and migrating mission-critical business processes. The Infosys Web site (http://www.infosys. com/bpo/methodology.asp) gives a good overview of the steps and planning that goes into BPO from the vendor perspective. They provide the following step-by-step approach for BPO execution:
a different fashion. The risk here is that the client cannot afford to trust the vendor completely, and should remain alert on the approaches the vendor takes in transferring the business processes. The outsourced business process may be highly integrated with other business processes at the client site, and efforts must be made by the client to ensure that the interfacing between the in-house business processes and the outsourced business processes is satisfactory. There is something more for the client to ponder about. The vendor takes proactive initiatives to make sure that the client is comfortable with BPO and that the transfer or migration of business processes occurs smoothly. But if someday the client decides to get these business processes back in-house, then would the vendor be as cooperative in ensuring the effective and smooth transfer of the business processes back to the client site?
Step1: “Assessment – Build the case and ready the client organization for BPO.” Step 2: “Transition – Migrate the processes after mapping processes, creating technology infrastructure and training resources.” Step 3: “Parallel run – Phase out the process at the client (site) and put in place measures for ongoing tracking and monitoring.” Step 4: “Steady State – Manage the process in the steady state – ensure continuity, and continuous quality and process improvement.”
strategy for getting the business process back in-house
If a client chooses a vendor that has already been involved in a lot of BPO deals, then the vendor would already be aware of the better ways to migrate the business processes from the client site to the vendor site. However, most business processes are interlinked to other business processes, and (before outsourcing) all these business processes harmonize with each other like parts of a welloiled machine. BPO is equivalent to dismantling some parts of this well-oiled machine, and then reassembling the removed parts back together in
What does an organization do when its wants to bring back in-house the business processes that it had previously outsourced? The term “backsourcing” was coined for this strategy (Hirschheim & Lacity, 1998). But why would an organization want to bring back business processes that it had previously decided to outsource? There can be a variety of reasons (Hirschheim & Lacity, 1998). On a positive side, it might be something that was actually planned during the initial outsourcing decision itself. For example, it is possible that the organization was going through a major transformation (Sparrow, 2003, p. 10), or needed a major realignment of processes, labor, or work allocation, and had therefore decided that some of its business processes could be temporarily outsourced during that period. On the other hand, the backsourcing may be an unplanned compul-
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sion, such as the result of dissatisfaction from BPO experiences (for example, poor customer feedback, high overhead costs, breach of contracts or trust, or simply too many conflicts with the vendor), or as a result of certain business processes turning out to be more strategic and closely associated with the client’s core competence than previously thought (irrespective of the performance of the vendor). The process of bringing back previously outsourced business processes has its own risks and is a challenge for any organization (Hirschheim & Lacity, 1998). During the time the processes were outsourced, the client organization might have lost key resources (such as employees with relevant expertise, infrastructure, and tacit knowledge). Setting up the business processes again and integrating them back into the organization would require significant investments of time, money, and effort.
sTraTEgiEs FOr cOnTracTing and alliancE building strategy of linking realization of Benefits from BPO to Payments How can a client ensure that it would, in fact, receive the benefits from BPO being promised by the vendor’s marketing team? What if the client does not receive the benefits being promised? One way to get over the dilemma is to contractually link the realization of the promised benefits from BPO to the payments. The contract would attempt to clearly define the specific expectations of the client organization from BPO, and the client would pay the vendor in proportion to the realized benefits. This has been termed as business benefit contracting (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5), and it enables the sharing of risks by linking a client’s costs to the realization of the expected benefits from BPO.
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Hence, well-defined client expectations can be embedded in the contract, and detailed evaluations of whether and how much the vendor actually contributed towards the client’s performance would have to be carried out (Willcocks & Lacity, 1998, p. 26, pp. 30-31). However, the major risk lies in not being able to come to mutually agreeable interpretations of the specific benefits or benchmarks that are linked to the payments. For example, the client may put across a pessimistic view of the benefits actually gained from BPO in order to reduce the amount of payments due to the vendor, while the vendor may put across an overly rosy scenario of the benefits gained by the client in order to get the highest possible payments from the client. With the vendor’s revenue/profits from its clients being linked to benchmarks, problematic disagreements on the benchmarks may emerge, and hence, due to the difficulties associated with the related measurements and negotiations “business benefit contracting” is difficult to adopt (Lacity & Hirschheim, 1995).
strategy of getting the best bpO deals with innovative contracts In order to be competitive clients need to get the best out of their outsourcing relationships in terms of costs and value addition. For many of business processes that can be possibly outsourced, there are a plethora of vendors willing to bid for the contracts. It is important for clients to recognize that its bargaining power is probably the highest at the point of drafting and signing the contracts. Hence, the client should always be on the lookout for the best deals to satisfy its needs, and adopting the attitude of a hard bargainer or tough shopper in the contract formulation stage might be the right thing to do. Willcocks and Lacity (1998, pp. 32-33), for example, have discussed “creative contracting,” which has ingenious practices, such as short term contracts, flexible pricing, competitive
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bidding for extra or value-added services, and so forth. By using short-term contracts (even if the intention is to have long-term relationships) the vendor can keep the vendor on its toes, and also renegotiate better terms every time a contract is renewed based on past experiences and future expectations. The risk here is that the vendor may be hesitant in making long-term investments (into manpower or infrastructure) for the outsourced business processes since it would be unsure about the renewal of the short-term contracts. The client may also ask the prospective vendors the question: “what more can you give us apart from meeting our basic requirements?” In other words what would be the vendor’s value addition? What can the vendor do to beat the client’s expectations? Hence, the client can induce a competitive spirit among the prospective vendors to gain maximum value from BPO. Moreover, the client may also insist on pricing mechanisms that are flexible and that bring in the possibilities of rewarding the vendor for exceptional performances and penalize the vendor for below expectation performances.
strategies for sharing Ownership Business benefit contracting, which was discussed earlier, is a method of sharing benefits and risks. However, its major deficiency lies in the difficulties involved in defining and measuring the specific benefits or benchmarks in the contract. Sharing of ownership might be a much more effective BPO strategy, and would eventually lead to risk sharing (see Figure 3). A strategic alliance or partnership between a client and a vendor that ensures sharing of risks and rewards may be implemented in the following three forms: (1) contracts that specify clauses on sharing of risks and rewards, (2) creating a joint venture company that would perform the outsourced business processes, and (3) both the client and vendor hold shares or equity in each other (Currie & Willcocks, 1998, p. 124; Sparrow, 2003, p. 12; Willcocks & Lacity, 1998, p. 26, pp. 27-28). As discussed earlier, “business benefit contracting” is an effective risk sharing mechanism based on a contractual agreement linking realization of expected benefits to payments, and “creative contracting” can have pricing mecha-
Figure 3. Strategies for sharing ownership
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nisms that reward exceptional performances and penalize poor performances. However, given the difficulties in measuring specific benefits in a mutually agreeable manner, the sharing of ownership strategies through joint ventures or share/equity holding may be better alternatives. When a client and vendor invest to form a joint venture, it truly honors their commitment and dedication towards the success of the BPO endeavor. If the joint venture fails to meet expectations, it is a loss for both the client and the vendor. And similarly, when the joint venture performs well, it is a win-win situation for both the client and vendor. The resources (such as manpower, infrastructure, knowledge, etc.) for the joint venture organization can be provided by both the parties. This enables the client to gain access to the vendor’s capabilities and skills, to reorganize and induce efficiency into business processes, and to gain new sources of revenue by offering the joint venture’s services to the external market (Sparrow, 2003, p. 12). The client does not lose total control of the outsourced business processes since it would have invested in the joint venture, and at the same time it will be assured that the vendor would use its best expertise to bring in operational efficiencies (Currie & Willcocks, 1998). The vendor, on the other hand, would feel more secure and will be willing to invest more time and effort into the venture, since a joint venture is essentially a long-term relationship. However, joint ventures can also fail due to various factors (Reuer, Zollo & Singh, 2002), and the client might have outsourced large amounts of business process work to the failed joint venture. Hence, the risk here is that the outsourced business processes and their contribution to the client’s competitiveness would be at the mercy of the success or failure of the joint venture. If the amount of business processes that need to be outsourced (or some other factor) does not justify the viability of a joint venture, can the ownership still be shared? An equity holding deal is the answer. In a share/equity holding deal,
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the client can purchase substantial equity in the vendor, thereby giving the client greater power and control in its relationship with the vendor. The vendor may also take an equity position in the client, and that would ensure that both the client and vendor keep each other’s interests in mind, thereby leading to a situation where risks and rewards are effectively shared through ownership (Willcocks & Lacity, 1998, p. 26, pp. 27-28).
sTraTEgiEs On ThE rOlE OF ThE vEndOr and naTurE OF ThE rElaTiOnship
strategy for bpO That demands client-vendor cooperation What does an organization do when all the functions related to a particular business process cannot be outsourced? For example, though an organization may outsource its call-center or help-desk activities, it may still need to retain the technical staff that actually fixes the problems reported. There would need to be effective cooperation between the outsourced call centers/ help desk and the in-house technical staff to address customer complaints. Hence, to a certain extent, the execution of such business processes would be done jointly by the client and the vendor, and it is known as cooperative sourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). The risk lies in not being able to lay down effective protocols that would ensure high cooperation and easy conflict resolution. For example, in addition to the frequent meetings needed for building cooperation, it is also important to actually document the communications/decisions/ schedules/plans made, and enable easy and quick access to such documentation whenever the need arises. Of course, tacit or intangible factors such as
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trust or personal relationships are very important in ensuring cooperation (Chakrabarty, 2006a). However, such formalization or protocols in the relationship encourages accountability and fixes responsibility, which can lead to better cooperation in executing the business processes.
strategies for the number of clients and vendors in bpO relationships A client may not be able to find a vendor with the capability to perform a wide array of business processes all by itself. In such a scenario, the client may decide to opt for specialized vendors, and the different business processes would be outsourced to the respective specialist vendors (Chakrabarty, 2006c). This is known multivendor outsourcing (Gallivan & Oh, 1999, pp. 1-6) or multisupplier outsourcing (Currie & Willcocks, 1998) or simply multisourcing (Willcocks & Lacity, 1998). Such a one-to-many outsourcing arrangement (one-client-to-many-vendors) would allow a client to engage multiple vendors for various business processes. Let us first discuss the case where interdependent business processes need to be outsourced to multiple vendors. For example, though the HR functions and payroll processes may be interdependent, the client may outsource HR-specific processes to one vendor and payroll processes to another vendor. Similarly, there might be other interdependent business processes that are outsourced. Since the processes are interdependent, the division of work and related contracts would be jointly negotiated, understood, and agreed upon by the client and all the involved vendors (Gallivan & Oh, 1999, pp. 1-6). This form of multivendor outsourcing, where the outsourced business processes are interdependent, would require all the vendors and client to cooperate and work together (Chakrabarty, 2006c). The risks would arise out of the difficulties in cooperation, and the need for timely and accurate exchange of information amongst the various vendors and
the client. The client would have to take the lead in ensuring and verifying that there is proper coordination between the vendors and that the interdependent business processes are being executed harmoniously. On the other hand, the task probably becomes easier when the business processes outsourced to multiple vendors are independent (that is, they are not interdependent). Such an example would be the outsourcing of financial services (banks and insurance) to one vendor, and travel/transportation management to another vendor. Here the client would not have to worry about coordination between the respective vendors. Importantly, clients can sometimes take advantage of multiple vendors, competing in the marketplace, that provide services for the same business process. For example, there are multiple vendors that offer call center services. In such a scenario, the client can distribute chunks of the same business process to multiple vendors to safeguard against being overly dependent on a single vendor, and thereby negate the possibility of any vendor gaining complete power and control over the client’s business process. The client can encourage competition among the vendors to provide the same business process at the best possible value and quality by using “short-term contracts” that are not necessarily liable for renewal with the same vendor. Hence, if a client engages two or more vendors for the same business process, it yields cost advantages due to intervendor competition, and also prevents the risk of a client firm being held hostage by a monopolistic vendor (Klotz & Chatterjee, 1995, p. 1317). Additionally, if the perceived risks associated with any business process are high, then the client can share the risks with the multiple vendors through various ownership sharing mechanisms (such as business benefit contracting, joint ventures, strategic alliances, and equity holding deals, which were discussed earlier). Just like a single client can engage multiple vendors in a one-to-many relationship, multiple clients
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can also engage a single vendor in a many-to-one relationship (see Figure 4). In such a multiclient outsourcing relationship, multiple clients can pool their requirements and resources to form an alliance, and contract with a single vendor for joint delivery of certain generic business processes. For example, multiple clients can get together and jointly negotiate and bargain for the best possible deal from prospective vendors for all their payroll services. Hence, this leads to buyer economies of scale, increased client bargaining power, and risk sharing. Examples of such relationships have been found in information systems outsourcing, co-marketing, and R&D consortia (Gallivan & Oh, 1999, pp. 1-6). Lastly, relationships can get even more complex with many-to-many relationships, aptly termed as “complex sourcing” (Gallivan & Oh, 1999, pp. 1-6). This involves multiple clients and vendors in the same outsourcing contract, and can be conceptually interpreted as a combination of the multivendor and multiclient relationships described earlier (see Figure 4). It is important to note that, most often, a one-to-one or dyadic relationship actually exists between a client and a vendor, even though the overall scenario may first point to a multiclient, multivendor, or complex sourcing environment (Gallivan & Oh, 1999, pp. 1-6). For example, a vendor may execute the business processes outsourced by multiple clients, but its clients are
independent of each other, with separate contracts between each client and the vendor. Similarly, a client can outsource its business processes to multiple vendors, but its vendors are independent of each other, with separate contracts between each vendor and the client.
strategy of utilizing vendors while infusing maturity and ushering Transformations in client’s business processes Can a client use the expertise of a vendor for infusing maturity or growth into its own business processes? Wibbelsman and Maiero (1994, as cited in Dibbern et al., 2004, p. 11) provided an interesting framework in which the client could use three strategies to retain its business processes in-house over the long term, and use the vendor’s expertise to improve them. The three strategies were named as (a) rehabilitation and return, (b) transition assistance, and (c) capability development, and each strategy can be adapted to BPO (see Figure 5). There are subtle differences between the three strategies. “Rehabilitation and return” involves bringing inefficient processes back to life, “transition assistance” involves a changeover to newer processes, and “capability development” involves the strengthening of a client’s business processes and core competencies.
Figure 4. Number of clients and vendors in outsourcing
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Figure 5. Utilizing vendors while infusing maturity and ushering transformations
In the first strategy of “rehabilitation and return,” the vendor (or an external consultant) who has the required expertise in the relevant business processes would assist the client in reforming its business processes at the client site. Here the presumptions are that (1) the client’s business processes are in bad shape and need restoration, (2) the client does not want to outsource its business processes, and (3) the client wants to “learn” directly from the experts. This is not strictly “outsourcing” since no business process is really transferred over to the vendor. However, the vendor uses its own expertise to help the client gain operational effectiveness in its business processes by actively suggesting and implementing various changes. Forexample, if the client feels that it is not performing a certain business process (such as data management) efficiently, and at the same time does not want to outsource it (probably because of its strategic nature, security issues, core competence related nature, etc.), then the client can engage a specialist vendor (for data management) that would send over its personnel to the client site on a temporary basis. The vendor personnel would go to the client site, assess the relevant business processes of the client, suggest
changes, possibly oversee or actually implement the suggested changes, gauge if the changes are actually leading to desired improvements, and then return. The risk is that the client may not be able to actually replicate the efficiency and effectiveness of vendors in running the business processes. The relevant business process is, in all probability, the core competence of the vendor in which it has developed expertise and tacit knowledge that cannot easily be replicated elsewhere. Additionally, vendors rely on economies of scale and economies of scope to derive cost and quality advantages in the relevant business processes. Many of these factors that help a vendor run certain business processes efficiently cannot be easily replicated on the client site. Of course, the vendor can possibly bring about a greater efficiency in the client’s business processes by making suitable recommendations and even implementing them, but it may not match the vendor’s own efficiency levels. In the second strategy of “transition assistance,” the client attempts to transition to a newer set of business processes, and uses the assistance of a vendor in various ways during this transition. Here, the client’s existing business processes are
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in good enough shape, but a decision might have been made to changeover to a newer set of business processes. For example, business processes with newer technologies are continually adopted in response to the changing market dynamics. Such a situation demands that while the newer processes are being adopted by the client personnel, the current processes cannot be completely discarded, and need to be kept running during the transition period. Hence, while the client personnel adopt, learn, and transition to the new business processes, the vendor personnel would take the responsibility of keeping the current processes running. Once the client successfully transitions to the newer businesses processes, both the current business processes and the vendor’s services would be discontinued. There are two major risks here: (1) the vendor fails to successfully carry out the client’s current business processes and hence hurts the client’s prospects in the market, and (2) the client fails to transition to the newer system successfully or decides to fall back on the current system. Similar to the “transition assistance” concept, Sparrow (2003, p. 10) speaks about transformational outsourcing, where certain activities are outsourced to the vendor while the client transforms by comprehensive reorganization and optimization of its business processes, and Millar (1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5) speaks about transitional outsourcing, where clients usher in a major transition or changeover involving three phases: (a) the outsourcing of legacy processes, (b) the transition to the new processes, and (c) the management of the new processes. In the third strategy, of “capability development,” the focus of the vendor is to build on its core capabilities (and related business processes) that maximize its competitiveness in the marketplace. This implies that the client keeps its focus on its “core” capabilities, and at the same time attempts to add newer capabilities to strengthen this “core” with the aim of making itself more competitive in the marketplace. Additionally, the business
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processes that are not strictly related to their core capabilities are then candidates for temporary or permanent outsourcing. In other words, the client can focus and build on its strengths (core capabilities) by: (1) handing over some noncore activities to a vendor, and/or (2) making use of a vendor’s help to further develop its own core capabilities. After the client has confidently consolidated and built on its core capabilities, the client will have the option of discontinuing or renegotiating the extent of its engagement with the vendor. The risk lies in getting blinded by the urge to focus on the core capabilities and forgetting the importance of monitoring the vendor’s activities during that period.
strategies based on required Expertise and Quantity of workers When business processes are outsourced to a vendor and/or offshored to another country, important human-resource-related concerns arise. The salaries of personnel vary from organization to organization, and country to country. At the same time, the availability of skilled personnel would vary from location to location. Hence, various factors need to be taken into consideration before business processes are outsourced or offshored (Iyengar, 2005; Karamouzis and Young, 2004). A location with high density of academic institutions would increase the availability and talent pool of skilled professionals in that location, and provide the firms with greater options of hiring fresh talent. Additionally, a location that is a hub for particular businesses or industries would have a greater availability of experienced personnel in those particular businesses. The cost of personnel would vary depending on the supply-demand characteristics, cost of living, and various other economic characteristics of the particular location. India and China, for example, are currently attractive destinations for firms searching for high-quality skills, at low costs, and with high
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availability (Chakrabarty, 2006d). Aron and Singh (n.d.) provided an interesting classification on the expertise and the number of the workers required for business process outsourcing. They suggest that the various business process tasks can be classified in decreasing order of “worker expertise required” and increasing order of the “number of workers required” as: (a) expert intervention, (b) problem resolution, (c) customer interface services, and (d) data transformation (see Figure 6). Tasks that require high expertise, such as expert intervention or problem resolution, require greater business process understanding from the involved personnel (attained through academic pursuits, training, or work experience), and hence involve greater costs per worker. Alternatively, tasks like data transformation and customer interface services involve greater volumes of work that need to be handled by a larger number of workers. Hence, it is important to consider the following three factors before outsourcing or offshoring business processes: (a) the tasks involved in the business process, (b) the expertise required for the tasks, and (c) the number of workers required. After these three factors have been considered,
a decision on the viability of outsourcing to vendors and/or offshoring to another country must be made, based on (1) the availability of workers with the required expertise, (2) the cost of workers with the required expertise, and (3) various other outsourcing and offshoring related considerations discussed in this chapter.
ThE iT sTraTEgy IT (information technology) applications or software are often very tightly integrated into business processes, and personnel access and use these IT applications to execute or manage the business processes effectively. For example, the personnel managing the payroll or accounting-related business processes would certainly make use of IT applications, such as spreadsheets and other software, that allow entry, manipulation, and storage of data and also generation of reports of various kinds. The IT applications are commonly off-the-shelf products or are custom developed by software service providers, and need to be purchased. Of course, the software can also be
Figure 6. Business process tasks, expertise, and quantity (Source: Aron & Singh, n.d.)
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custom developed in-house, which is equivalent to purchasing software from one’s own IT department. However, after the purchase, both the off-the-shelf and the custom-developed software need to be hosted on servers and maintained, and for this purpose, the company is forced to hire additional IT staff. This chapter will not go into the aspect of purchasing software products or custom development, since a huge number of books and academic literature is already available on off-the-shelf products and custom development of software, inclusive of insourcing/outsourcing of custom software development (Chakrabarty, 2006a; Nelson et al., 1996; Poppo & Zenger, 1998). However, this chapter will touch the issue of “renting” software, which is a relatively newer and possibly path-breaking concept in the usage of IT in business process management.
strategy of renting remotely hosted iT applications for business processes What does an organization do when it does want to take the responsibility of hosting, managing, and maintaining software applications related to its business processes? In other words, what if the organization concerned does not want to have anything to do with the management and technology overhead that goes into “owning” certain software applications that help it run its business processes (which are purchased as a product or custom developed)? IT is, after all, not the core competence of many businesses, and many businesses might find having an in-house IT department as an overhead or cost-center. An answer to this dilemma is the concept of what is traditionally known as application service providing (ASP), and has been more recently termed in various flavors such as ”on Demand” service, “software-as-a-service” (SAAS), “real-time delivery,” “application utilities” (Pring & Ambrose, 2004), or “net-sourcing” (Kern, Lacity, & Will-
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cocks, 2002). It has gained greater significance and prominence in recent times due to broadband and other technologies that have made Internet access faster. This strategy would involve contracting with an application service provider (ASP) whereby the client organization would have access to IT applications hosted by the ASP over a wide area network (WAN), a virtual private network (VPN), or over the Internet (Susarla, Barua, & Whinston, 2003, p. 103). In other words, the client organization would be adopting a strategy of selectively “renting” IS applications rather than “owning” IT software for its business processes (Bennett & Timbrell, 2000, p. 196). Technologically, the difference lies in where the application is hosted (Dewire, 2000, p. 14). Normally, IT applications for any business process would be hosted on the employee’s/user’s personal computer, or in the organization’s own local area network (LAN) or data center (see Figure 7). However, when the application is “rented,” it would be hosted in a server or data center managed by the ASP (see Figure 7). IDC (International Data Corp., as cited in Dewire, 2000, p. 14) explains that an organization would rent the IT applications from the ASP “on a subscription basis and can bundle a full range of hosted application services” which can range from “low-end, productivity programs (e.g., word processing) to high-end ERP modules” A major advantage of this strategy is that the ASP would purchase, customize, and manage IS applications at remote locations and host them for clients over the Internet (or maybe over a WAN, VPN, or extranet), and hence the related overheads and responsibilities would lie entirely with the ASP. Moreover, in the fast-changing software marketplace, the onus of getting the latest software upgrades, keeping the software defect free, securing the software application and data (against hackers and other threats), and ensuring 24×7 operations would be the ASP’s responsibility. The client organization just has to make sure that the network connectivity between
Strategies for Business Process Outsourcing
Figure 7. ASPs and on-demand software services ASP (Application Service Provider) Remote Servers hosting data & IT applications needed for Business Process Servers
( WAN / VPN / Internet / extranet / Dedicated line ) REMOTE ACCESS
LAN (Local Area Network )
Servers
Business Process
Local Servers hosting data & IT applications (purchased products or custom developed) needed for Business Process
...at client site – if insourced …at vendor site – if outsourced
the organization and ASP is secure and active, and that proper budgeting is done for the software services that are being rented. The major risks would be “loss of control” and “reliability” issues. The ASP would be in complete control of the software application, and the client would be dependent on the ASP for reliable access to the software application. ASPs often host software on a centrally managed facility, and provide access to the software application to multiple-client organizations (Dewire, 2000, p. 14). Now, multiple-client organizations might have divergent needs or customization requirements with regard to the software being rented. If it is a simple word processing application, then there would be low chances of divergent needs, but if it is an ERP or some complex application, then the clients might have divergent interests in terms of the software features, upgrades, or customization. In case of conflicting interests among clients, the ASPs may be inclined to give greater importance to larger clients, or arrive at some sort of compromise that does not ensure
100% satisfaction to all clients but is just “good enough.” Furthermore, the client organization is completely dependent on the ASP for 24×7 reliable accesses to the software application. Clients should make sure that the contract has clauses that safeguard the client organization from risks resulting from the ASPs unsatisfactory behavior. When IS applications are tightly integrated into business processes, any failure to reliably access an IS application can affect the entire gamut of associated business processes (see Figure 7).
cOnclusiOn Though BPO has many advantages, it is also fraught with many risks. Effective strategies need to be adopted for successful BPO, along with suitable assessment of risks and maximum utilization of the opportunities. This chapter attempted to provide a comprehensive overview of several BPO strategies, along with an analysis of the associated opportunities and risks, which
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would be of help both to the practitioners and the academicians.
nOTE The author acknowledges the kind guidance and support from the editors of this book. The author may be contacted at [email protected] or [email protected].
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Sobol, M. G., & Apte, U. M. (1995). Domestic and global outsourcing practices of America’s most effective IS users. Journal of Information Technology, 10, 269-280. Sparrow, E., (2003). Successful IT outsourcing. London: Springer-Verlag.
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This work was previously published in E-Business Process Management: Technologies and Solutions, edited by J. Sounderpandan & T. Sinha, pp. 204-229, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.12
Business Process Reengineering and ERP: Weapons for the Global Organization Marianne Bradford North Carolina State University, USA Robert Gingras Business Process and Technology Advisor, USA Jonathan Hornby SAS Institute, USA
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This chapter suggests that reengineering is an analysis of existing processes you wish to change to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed. There are two distinct methods of reengineering, technology-enabled and clean-slate, with most global companies choosing somewhere in between. There are also a number of principles any reengineering project team should understand before embarking on a reengineering effort, and these are discussed from a global perspective. The chapter concludes with how to select processes to reengineer, lessons learned from global reengineering, benefits of global reengineering, and future implications.
One of the primary tasks facing global organizations today is the analysis of business processes in order to make them more efficient as well as to have a flexible process framework for continuous improvement. Global competition has forced organizations to look beyond their traditional processing methods to implement major changes to their work processes. As opposed to incrementally improving processes (i.e., total quality management, or TQM), the changes global companies must make these days in order to become or remain competitive must be dramatic. Changes like this are known as business process reengineering (BPR)the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, speed, and service (Hammer & Champy, 1993).
Reengineering is an essential component of any enterprise resource planning (ERP) system implementation. As noted by Michael Hammer, the “father of reengineering”: “[ERP] implementation equals forced reengineering” (Hammer, 1997). ERP systems make organizations consider how different functional areas interact with each other and how the process of doing business is accomplished in the firm. Understanding business processes is crucial to selecting and implementing ERP systems (O’Leary, 2000). Through requirements analysis and a study of industry best practices, organizations choose an ERP system that meets their needs, while hopefully providing them with competitive advantage. Since often the current processes of an organization are different from the process flows in the ERP system(s) the organization chooses, implementing an ERP system will most likely involve changing business processes (i.e., reengineering) to match the best practices in the software (O’Leary, 2000; Sumner, 2005).This reengineering of processes takes place during the design stage of the ERP lifecycle and generally requires strong change management skills in order to make these modifications successful (Sumner, 2005). There are several objectives of this chapter. We first provide a background to reengineering from a practitioner and academic viewpoint. We also discuss the two distinct methods of reengineering, technology-enabled and clean-slate, as well as the principal tenets any reengineering project team should understand before embarking on a reengineering effort. These tenets are discussed from a global perspective. We continue by discussing factors to consider when selecting business processes to reengineer and the use of process mapping to visualize “as is” and “to be” process states. Next, we discuss lessons learned from global reengineering as well as benefits that can accrue. Finally, we end with future research directions and a discussion/conclusion section.
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backgrOund The development of reengineering as a tool to company-wide excellence began in the 1980s when Michael Hammer began to notice that a few high-profile global companies, such as IBM and John Deere, had drastically improved their performance (Hammer, 1990). With further research it was found that these companies were not making changes to their core competencies, but were making radical changes to their business processes and even removing entire processes completely (Hammer & Champy, 1993). These organizations had scrutinized their employee tasks and cut out many (if not all) tasks that did not have as their primary purpose satisfying customer needs. Tasks that were put into place only to satisfy the internal demands of the organization were eliminated (Hammer & Champy, 1993). As a result of his research, Hammer coined the term “reengineering” and has espoused his vision in numerous books over the last two decades (e.g., Hammer, 1990; Hammer & Champy, 1993; Hammer & Stanton, 1995). Business processes, which are defined as a collection of activities that take one or more kinds of input and create output that is of value to the customer, are at the heart of reengineering (Hammer & Champy, 1993). Distinguished from TQM, which focuses on continuous, incremental change, reengineering is radical and dramatic“big bang” change with the goal of vast improvements from the status quo. What Hammer preached was the purest form of reengineeringthat of “clean-slate” reengineering. This type of reengineering involves starting from scratch, improving a process design with a blank (clean) slate. The processes are reengineered with the customer in mind foremost, and the reengineering team is allowed to design with no bounds or constraints. A free flow of ideas is encouraged in order to make the focus of the reengineering as streamlined, efficient, and effective as possible. Since the early 1990s, many organizations around the world, inspired by the
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legendary exploits of Ford’s accounts payable department, IBM Credit Corporation, and Mutual Benefit Life, have instigated reengineering projects (Davenport & Stoddard, 1994). Most of what we have learned about the applicability of clean-slate global BPR has been derived from case studies. In a study of 79 case studies, it was found that there is widespread geographical acceptance of reengineering (Jarrar & Aspinwall, 1999). Of the 79 cases analyzed, 59% were from the U.S., 22% from the UK, 8% from the rest of Europe, 5.5% from the Far East, and 5.5% from the rest of the world. Since the U.S. is the birthplace of the subject matter, it is not surprising that the majority of reengineering cases originated there. The data reveals, however, that although in the early 1990s when BPR was viewed mostly as an American concept, the ideas have been embraced in other parts of the world (Jarrar & Aspinwall, 1999). Indeed, it was seen that after BPR’s huge successes in the U.S., “people from Europe, Latin America, and Asia began to reengineer their processes” (Hammer & Stanton, 1995). Many scholars agree that reengineering will continue to spread more and more internationally (Harmon, 1996; Hammer & Stanton, 1995). Table 1 presents examples of recent global reengineering efforts. BPR is not applicable to only certain organizations. According to the aforementioned study, BPR has been applied in all types of organizationsmanufacturing, service, nonprofit, private, and public. The study revealed that manufacturing and service sectors had almost equal contributions (45.9% and 52.4%, respectively), while the public sector accounted for 1.7% (Jarrar & Aspinwall, 1999). One of the primary concepts of reengineering (in addition to radical, dramatic, clean-slate, etc.) is that information technology is an enabler of change in how work is done (Hammer, 1990). When ERP systems experienced wide-scale acceptance in the late 1990s, organizations had finally found a way in which to improve their processes without 100% “clean-slating.” This
was because these systems incorporate proven best practices. Thus, a new type of reengineering term was coined, that of technology-enabled (or constrained) reengineering (O’Leary, 2000). This involves the use of technology (i.e., ERP systems) to facilitate the reengineering process (i.e., the company’s processes are reengineered to match the best practices in the software). In short, the ERP system drives the reengineering and gives companies the roadmap to get there. Advantages afforded to companies by using technologyenabled reengineering include (O’Leary, 2000): 1.
2.
3. 4.
The process design is bounded by the software chosen and can be implemented in a more timely manner than a clean-slate design. There is evidence that the design will work since other organizations have likely adopted the software as well. Process designs are likely more cost effective than clean-slate designs. Processes included in the software are proven best practices.
Every organization that implements an ERP system is, in effect, reengineering. However, the type of reengineering is a variation from the original meaningwhen implementing ERP, organizations are using technology to reengineer. However, practice has found that while many global organizations use ERP as the roadmap for reengineering, few ERP implementations will be exclusively technology-enabled or clean-slate (O’Leary, 2000). Companies should decide which approach to use based on their size, available resources, time pressure, strategic gain, and the uniqueness of the ERP solution (O’Leary, 2000). The key is having a grasp on the current processes and the processes embedded in an ERP package before selecting a particular ERP system and undergoing reengineering.
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Table 1. Examples of recent global reengineering projects
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Project
What Happened
Toray Industries, Inc. Redesign marketing and production operations
The company, whose primary business is in the apparel and textiles industries, has begun a global reengineering project to streamline its polyester film operations. In order to remain competitive in the polyester film market and to meet the growing global demand, Toray believes reengineering its production and marketing systems to be highly efficient is crucial. By reengineering these processes the company will be able to respond to changes in the marketplace more quickly and expand its market share in the magnetic recording media applications, where polyester film is used. Toray plans to restructure production systems in Japan, the United States, Europe, and South Korea.
Deutsche Bank Implement a new solution for check processing
The global investment bank, working with NetDeposit Incorporated, reengineered its payment platforms to include a remote deposit capture (RDC) solution. RDC eliminates manual check handling by converting paper-based checks into electronic transactions. The solution gives Deutsche Bank a competitive advantage opportunity by improving customer service and eliminating geographical boundaries.
Cisco Systems Integrate foreign exchange process
With the help of FXall, a currency transaction platform, Cisco reengineered its treasury operations. Due to a substantial increase in foreign currency exchange transactions, including hedging activities, the company saw a need to completely integrate its systems. Before the reengineering project, five unconnected systems in various locations completed the process. The lack of integration caused several communication issues and data to be re-entered multiple times. FXall worked with Cisco to seamlessly integrate its systems, suppliers, and partners involved in the entire foreign exchange process. With the new technology, the process is completely automated, re-keying is eliminated, and real-time information is available at any location.
Kamaz Reengineer several business processes
The heavy-duty truck manufacturer currently undertook a large reengineering project that will improve logistics, free useless production space, and fully renovate a range of products. Once the project is completed, the company expects labor productivity to increase six-fold, while a significant reduction in production facilities and the amount of power inputs is expected.
VISA Upgrade authorization system and processing center
This upgrade was the largest reengineering initiative ever undertaken by Visa. The new authorization system can handle all of Visa’s debit, credit, and prepaid transactions, and will process 12,000 to 14,000 transactions a second. The old authorization systems only processed 6,400 transactions per second. The new processing center includes redundant connectivity systems that will allow Visa to bring down any processing function for maintenance and enhancements while continuing to process all transactions.
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businEss prOcEss rEEnginEEring TEnETs Reengineering uses several methods to examine processes from a holistic perspective, transcending the narrow borders of specific functions. Through case studies, interviews, and observations, certain BPR principles (or tenets) began to emerge (Hammer & Champy, 1993). As can be seen, these principles, developed without ERP in mind (Hammer, 1990), are also fundamental to best practices in ERP.
have Those who use the Output of the process perform the process Many employees within a global organization do not realize the impact that changes in their jobs have on other functions in the enterprise. An example of this would be centralized product development creating product(s) to be manufactured in multiple international locations with various material substitutions, different suppliers, and costs associated with the products. It is very important that the users of the output of a process understand the integrated process from within and outside the company that drive that result. This will create a cross-functional alignment for process renewal.
Organize around Outcomes, not Tasks This is incumbent in large over-arching processes that drive change across the global enterprise. Inclusion of team members, from various countries and disciplines, will begin the sharing of distinct local requirements that link together what could become a common process or function. “Order to Cash,” “Design to Sell,” and “Procure to Pay” are examples of such processes that are driven by outcomes from tasks that are oftentimes embedded in functional silos (individual departments).
Working with outcomes also minimizes the need for costly software code customizations that will bubble up later on in the design phase of the ERP lifecycle after the functional requirements and processes have been designed and documented.
subsume information processing work into the real work that produces the information It is important to make the cleansing, validation, and quality assurance of data and information part of processes. The care and maintenance of the quality of data that drives decision making is the single most important task-based advantage to an organization. The lack of such discipline is a major reason why functional areas do not trust shared information and instead maintain isolated sources of information to do their work. In a global company, there are usually common customers with regional divisions and locations. The customer information will usually be required to be stored in the language of the company (e.g., English) and in the language of the country that is being serviced which requires shipping and financial documents. The matrixed global enterprise must link these like functions together in order to have a consistent process of maintaining the customer information as well as keeping the “parent/child” relationships of the customer intact for reporting purposes.
Treat geographically dispersed resources as Though They were centralized If all data and applications are accessible by all, then geography means less. This is especially important to global organizations, which must eliminate personal versions/isolated sources of data and make company-wide information ubiquitous. All users of the processes or systems are then virtually centralized, whether they are in Europe, Asia, or the U.S.
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link parallel activities instead of integrating Their results Reducing and consolidating parallel work through process streamlining will drive a new set of measurable results. A common error of global companies is not defining common measurements and measurement rules across the enterprise. This usually results in local manipulation of information. It is more important to decide on what the enterprise needs to measure and then create process flows and information to support the consistently applied performance metrics.
put the decision point where the work is performed, and build control into the process From a global perspective, information visibility and transparency, resulting in both operational and strategic decision making, are the main drivers involved in BPR. Process change and information availability will push decision making to the point where the true benefits lie. The key here is the definition of where the work is being performed and what roles/level of the organization need the training to understand the impact that their decisions will have on other functions. In most global companies, the organizations are shaped differently for the same function. The common processes and controls may only be achieved if the organization is aligned either through reorganization or a common process owner at an executive level.
capture information Once and at its source Enterprises that have multiple or redundant systems have multiple sources of the truth (even multiple versions of the same software in various locations). Having an ERP system that maintains one definition of the truth drives consistent mea-
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surable results as well as feeds any data warehousing/business intelligence initiative that may follow. The capturing of this information at one point, with a common set of controls, creates an indisputable source of business value.
sElEcTing a prOcEss TO rEEnginEEr The key issue organizations should consider when selecting a process to reengineer is how it will influence customer-perceived value (Hammer & Champy, 1993). To determine value to the customer, global companies should compare current levels of performance to customer perceptions and expectations of the current “as is” process. For example, a manager over programmers could require that the programmers add customer satisfaction surveys to their existing applications. By gathering customer satisfaction data on all of the customers, not just the “squeaky wheel” customers, the manager can make a more informed decision on which applications or processes to redesign. It is imperative to have everyone in the organization think for the customer, rather than in terms of their own functional silo. When selecting a process to reengineer, the organization must remember the three Cs which remain indisputable: customers, competition, and change (Hammer & Champy, 1993). Further conditions that should be considered when selecting a process to reengineer are listed below.
process as part of a core competency Core competencies vary by industry and geography, but customer service and quality management are usually targets due to their impact on customer retention and continued value. Benchmarking these processes inside and outside a company’s respective industry will allow companies to make
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a more strategic decision on how and where to reengineer processes.
high-cost, low-margin activities This is a symptom of operating in a highly competitive market where a company is regularly facing pricing wars. It means that there is little differentiation between suppliers, or the high cost of the process is associated with errors and rework. Typically, this activity, product, or service is seen as a “cash cow”something that generates a lot of revenue. As such, it attracts a large investment of resourcesspecifically people. These activities, products, or services are perceived as “needed” because of the volume required to meet market demand. The challenge with these processes, however, is two fold:
could be deployed on other revenue-generating activities. The challenge is balancing the cost of reengineering or implementing controls with the value saved. Any company could potentially eliminate all errors, but the cost of doing so could far outweigh the original cost of error. As a part of a total process BPR effort, one of the more pervasive processes that are instilled across the enterprise is “quality.” The impact of quality processes includes the following: 1.
2. 3.
Reduced defects during manufacturing and packaging, and the processes to drive continuous improvements in these areas Reduction of outbound shipping errors Reduction of inbound material flaws and receiving
Time intensive •
•
Identification of “true cost”: Many companies are blinded by revenue without realizing that a product, service, or activity could actually be running at a loss. Reevaluation of strategy: If margins are low, it tends to mean that a company has many competitors. Unless companies are able to differentiate the product or service significantly, they will continually be at the mercy of pricing wars. The more resources companies add at this point, the harder it will become to invest in innovation. Existing profits get eaten up by the resources that attract “low margins.” Not only does this reduce the amount of funds available for research, innovation, and new profitable, differentiated offerings, but it locks more and more resources into a downward pricing spiral. Organizations need to recognize that all products and services have a lifecycle.
Time is money! There are two focus areas here: •
•
Activities that consume highly paid workers: Companies should either reengineer to allow the same people to perform the job faster, or reengineer to allow lower paid workers to perform the activity. Activities that make it harder for your customers to do business with you: In organizations there could be unnecessary processes a customer has to follow to get or use a product or service. The classic example is a customer applying for a mortgage. Historically, approval could have taken over a week. After many reengineering attempts, this process can now typically be done the same day, or even within minutes.
high-complexity, specialized-resource activities
high-defect/rework activities This is the realm of Six Sigma. Each error or piece of rework consumes cost, time, and resources that
Everyone has heard the adages, “keep it simple” and “less is more.” In the beginning in reengineering, this is harder done than said. Inventors tend
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to love complexity. It is almost a way of saying, “I am very clever and can dream up solutions to the most complex challenges man has ever seen.” The challenge is that inventors find it difficult to design something for people that do not have their level of intelligence. They also tend to be “perfectionists”building in many features and components because they can (or because they feel that without them, the end result could potentially be compromised). The result is complex products or services that require highly paid specialists to implement, which in turn erodes profit margins. It also means there are a limited number of people that can help. This makes recruitment, training, and succession planning difficult and expensive. It also restricts a company’s capability for growing a market. The solution is to reengineer the product or service to remove complexity, simplify deployment, and allow lesser paid employees to perform the activity.
Obsolete or changing Technology, Especially information Technology Oftentimes legacy systems are built, designed, and implemented for a different and older business model. Companies need to evaluate their current business model and define where they want to be in the future. Most likely, their legacy systems will not be efficient in supporting a new business model. Companies should look to architecting a new business process model around the customer and then automating those processes onto the new service-oriented architecture through systems development or implementation. The technologies that have evolved over the past few years have been focused on process flexibility while maintaining a standard set of software features to create common integrations and security. Some of these innovations have been implemented as “business rule engines,” managed by something as simple as user-friendly flowcharts that mask the underlying business process. Change the flowchart, change the process. However, this re-
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quires a governance process, as well as a change management process, in order to manage process complexity and the drive to the “common,” while being mindful of the localizations needed to operate in various countries. Older technologies do not have the flexibility due to their code-based state. Change the code, use IT, test, integrate, test, deploy, and potentially lose the advantage that the change would have achieved due to the time that it takes from cradle to grave. When process change eventually becomes part of a company’s culture, it will enable a quicker benefit of an acquisition or a competitive advantage that is enabled with the newer process modeling technologies pervasive in the latest ERP architectures.
visualizing ThE prOcEss TO rEEnginEEr Recent research indicates that process modeling techniques are successfully used by leading global organizations during reengineering (Bandara, Gable, & Rosemann, 2005). One technique used to model processes is known as process mapping, a system-diagramming technique developed by General Electric in the 1980s and used by many organizations to document, analyze, streamline, and redesign their business activities (Hunt, 1996). Since General Electric’s successful use of process maps, this documentation tool has gained widespread acceptance in manufacturing, systems consulting, and internal and external auditing environments (Adams, 2000). Process maps facilitate the understanding of how processes interact in an organization’s business system, help locate process flaws, evaluate which activities add value to customers, streamline and improve work flows, and identify processes that need to be reengineered (Bradford, Roberts, & Stroupe, 2001). Organizations may first choose to map out their existing “as is” business processes (see Exhibit 1 for example), which can then be used as a springboard to recommend the future
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“to be” state (see Exhibit 2 for example). Sometimes organizations will clean-slate this “to be” process, thinking “outside the box” on new and better ways to accomplish work in their organization. In other situations, the “as is” map will be compared to the processes in ERP systems being considered for implementation to see how business processes will need to be changed to mirror the best practices in the software “to be.” Learning to use process-mapping techniques is an invaluable skill for any person involved with analysis of business processes, criteria necessary when reengineering and/or implementing ERP systems. Poorly designed processes, redundant workflow, and inadequate controls can be easily identified in a properly documented process map, and a redesigned process can be developed and presented next to the ill-conceived process for comparison. The following are benefits of using process mapping in reengineering efforts (Damelio, 1996): •
Make work visible (the “as is”) in order to improve (the “to be”)
• • • •
Orient new employees and clarify roles Get up to speed on what your group/team provides to the rest of organization Evaluate, establish, or strengthen performance measures Determine better ways to get work done
lEssOns lEarnEd in glObal rEEnginEEring Despite the sound theoretical background and striking results of reengineering, in many cases, initiatives have not always led to success. Earlier research suggests that approximately 70% of BPR projects fail (Bashein, Markus, & Riley, 1994). Of course in the early 1990s, BPR projects were, for the most part, clean-slate, which carries an enormous amount of risk due to the uniqueness of the solutions. Prior studies have found that these failures were due to lack of sustained management commitment and leadership, unrealistic scope and expectations, resistance to change, and
Exhibit 1. As is forecasting process flow
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Exhibit 2. To be forecast process
non-alignment of rewards and recognition with the new business processes (Bashein et al., 1994; Klein, 1994). Not surprisingly, these factors are similar to factors leading to ERP implementation failures (Sumner, 2005). Global companies embarking upon reengineering have learned lessons not inherent in similar projects undertaken by purely national companies. Reengineering lessons learned by both global and national companies include: •
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Labor: It is oftentimes cheaper to put low-cost labor on a problem in lieu of implementing a system, based on where a process is being performed or sourced. As BPR outsourcing becomes more prevalent in commodity-based processes, the reliance on an internal system to provide functionality becomes less. Another lesson learned is that scalability means both large and small; in particular, global companies need to be cognizant of processes which cannot scale to a larger organization’s needs and can thus
•
create a burden to a smaller division or geography. For instance, if a company has a small division in Thailand and is implementing a system that supports its largest division, it may indeed burden the small division with license and operational support costs that it cannot sustain. In addition, local regulatory requirements must be planned for, sometimes on a country-by-country basis. Common processes across an enterprise must be made part of the “gold” build of the software, with local process customizations only being applied as part of a regional install. Vanilla ERP does not usually apply to global companies; the challenge is prioritizing the customization emphasis on what truly makes the organization competitive, while retaining the ability to keep current on a technology investment. Look outside the box: If a company reengineers in silos, it risks problems up or downstream. Companies must know who touches or relies on every aspect of a process,
Business Process Reengineering and ERP
•
•
but they must also question the value of those touch points. For global companies, it is even more important to have global representation within a business function (a company never knows where its best practices are hiding) as well as having cross-functional representation between processes. Look at other industries to see if they have attempted something similar: Prior research has found that organizations do not consider benchmarking a major critical success factor in BPR programs (Jarrar & Aspinwall, 1999). However, it is our contention that while it may not be a perfect industry match, lessons learned from another company’s roll out could save time and money to a company considering the same. This information can also help with setting budgets, plans, and expectations. Companies should not expect they can copy another company’s process and get identical results. Many have tried to copy Dell and Toyota, but none have succeeded in getting the same results. Recognize that a process is just one aspect of success. There are many other things that influence: culture (both corporate and geographical), internal politics, incentives, people (capabilities, experience, adaptability, motivation, and values), and market perceptions. Deliver sooner rather than later (for three important reasons): First is market changes. Too many reengineering teams have attempted massive BPR implementations that have taken years to complete. Despite delivering on time and within budget, people have lost their jobs because the market had changed and made the enhancements irrelevant. Second is internal support, which speaks to a key part of change management. It is rare to get 100% support for any project. There will be fence sitterspeople who wait to see how things turn out before giving their support. Then
•
there are those who will object and will try to undermine the project’s credibility and success. In order to overcome this behavior, it is important that the reengineering project plan builds in many short-term deliverables throughout the life of the project. Indeed, from 79 case studies, Jarrar and Aspinwall (1999) found that practitioners place great emphasis on the need to achieve “quick hits” and maintain a commitment to rapid results. Each deliverable should show valuebe it monetary, efficiency, effectiveness, new learning, or recognition either internally or externally. Each delivery builds credibility and momentum, converting “fence sitters” and making it harder for those who oppose to undermine success. Third is test acceptance. Delivering segments of work early provides a great opportunity for feedback. It is confirmation that the plan works and is still on track vs. market direction, confidence that the user community can and will use/ benefit from the project, and gives new ideas for refinement. Think through the cascade of consequences: The three main constituents for reengineering are: employees, interested parties, and competitors. Some employees fill a day no matter how much or how little they have to do. If that free time does not translate into value-added activity, then companies will still have the same “fixed” employee cost. This will reduce margins and thus profitability. Some people are “self-starters” that will invent and create new things to do. This can add value both financially and strategically. When given more time to think, some people will perform at higher levels. Others will get wrapped up in “pet projects” that add little or no value. In fact some of these projects could detract value. If the reengineering frees up time for employees, what will be the response?
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If the reengineering project was designed as part of a cost-cutting exercise, there is a high probability that excess human resources will be asked to leave the company. According to prior research, the area perceived to have a common deficiency in BPR implementations was the failure to pay sufficient attention to the “people” or “human factors” (Tonnessen, 2000). Many companies have done this and later have regretted it. Few BPR projects are perfect. Many reduce complexity. If there is a flaw or error, what is the fall back position? If staff must be let go, will there still be the experience and capacity to deal with those potential errors or flaws? If employees must be hired back, will they be available? Will they want to come back? Will they come back for the same money, or expect a pay raise? Will they be loyal and put their heart and soul into the work again, or will they do the minimum to get by? Experience can be pricelessso can loyalty. If there is excess staff, companies should do everything in their power to reallocate them to other parts of the organization. This is where understanding employee capabilities, experience, adaptability, motivation, and values becomes so important. Failure to handle this right can negatively impact morale, support, and performance across an entire organization. For instance, in Norway, BPR is very often associated with dismissals and lessthan-human working conditions. This has caused much frustration, insecurity, lack of motivation, and generally affects the success of the BPR effort (Tonnessen, 2000). All these issues are risks a company must explore and quantify at the outset. Saving $1 million per year does not look good if a consequence means losing top employees because of the way excess employee capacity was handled. This is more of an issue for companies that have not historically let go of large numbers of people before. Employees will question whether they are next and begin to explore other options to protect their finances and their families. This will reduce performance in the short term, but will also put a black mark
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on future BPR projects. Employees could resist change and potentially try to undermine the success of future reengineering projects. Interested parties include partners in a company’s supply chain, other divisions, or departments that either input or consume elements of work being reengineered, local communities, political lobbyists or governing bodies, and shareholders and investors. All of these could positively or negatively influence success. It is better to think through the scenarios in advance and ensure plans are established to help mitigate any negative consequences quickly and effectively. If a company does not do this, it could lose valuable time, support, and money fast, and potentially reputationthe hardest thing to win back. Companies should ask the following questions regarding their competitors: Will they follow? Can they follow? How fast will they follow? Will they be able to do it better? Ideally, companies want to choose a vector that distances them so much that competitors cannot or will not follow. Achieve this, and they will achieve competitive differentiationwhich means higher potential profit margins. However, as Geoffrey Moore states in Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution, there will come a time when competitors do catch up. It is not a question of “if” but “when.” Companies should factor this into their project and business plans (Moore, 2005).
bEnEFiTs OF glObal rEEnginEEring Research lacks large-scale studies on the benefits of reengineering. One study (Jarrar & Aspinwall, 1999) analyzed 79 case studies and grouped reengineering-related improvements in organizational performance into radical (69%), major (28%), and incremental (3%). The study’s authors defined radical in excess of 60% improvement over the old way of working, major 30-60%, and
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incremental as less than 30%. Their conclusion was that “reengineering lives up to its name and if an organization successfully applies the concept, it is most likely to achieve dramatic results or at least major improvements in its set goals.” Some specific benefits of BPR from our experience include: •
•
•
Cost reductions: Done well, reengineering should enable more to be achieved with fewer resources (e.g., people, money, equipment). This reduces the overall cost of products and services. Improved customer satisfaction: After cost reduction, improved customer satisfaction is the most common goal of BPR projects. In this respect BPR can provide very visible and therefore fast differentiation, which in turn makes it easier to protect margins and avoid pricing wars. It also provides “high gearing” as word of mouth spreads recommendations, which in turn attracts new business. Improved agility: Reengineering begins with standardizing wherever and whenever possible. Standardization makes it easier for new employees to learn and adapt to specific environments and tasks. In the case of technology, using common standards makes it easier for companies to integrate, leverage, and extend prior investments. It also reduces learning time as employees switch from one role to another and begin using different applications (based on the same standards). Standards also reduce risk of error in new activities, making it faster and easier for companies to adopt new practices. With this being said, an additional benefit for a global enterprise is that standards provide a foundation. This foundation is built upon common processes that are transparent to organizations and geographies. Through the common process lens, localizations can be managed more effectively and leveraged until they become a standard themselves. The
•
effective management of this change element provides process agility to the enterprise. Increased profitability and reputation: Handled effectively, increased profitability and reputation becomes the “net” of the other three benefits. However, there is a word of caution. Cascading consequences could mean a temporary improvement that is totally wiped away in the medium to long term. Many CEOs have been hired in to “transform” a company. The fastest way of improving profit (in the short term) is to reduce headcount. Reengineering exercises, for this sole purpose, have given the discipline a bad name and made it harder to gain acceptance and support for those projects that will truly transform an organization well into the future.
FuTurE TrEnds As we look ahead to future reengineering projects, a few trends are already evident. 1.
2.
There will be a greater emphasis on data management, data quality, and depth of information regarding customers, suppliers, and products. As applications become more flexible, it will be the level of decisionmaking processes within the organization that will drive a greater understanding of the customer, as well as speed-to-market and supply chain management optimizations. Organizations will change to support horizontal and diagonal processes, and implement metrics to measure the performance of the processes. Cross-functional teams will be more widely used with “cradle to grave” responsibilities. The integrated processes will create an internal collaboration requirement to service customers and work with suppliers that will not be able to be avoided.
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3.
4.
5.
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The implementation of process-based, business-rule-flexible business systems will drive enterprises to organize around global process owners of cross-functional processes like product development and supply chain management in order to support “process change management.” Companies organized around process ownership will stand the best chance of reacting to market conditions and assessing the best processes to implement to maintain a leadership position. One of the key questions is whether companies in the global economy are seeing more and more customization of ERP code and less reengineering. If companies focus on what the results need to be instead of dictating how tasks are completed, they can minimize the customizations of the ERP code or reduce the need for bolt-on solutions. If companies develop a “gold build” of the common requirements and deal with localizations through a governance process, they can keep the customizations to a minimum. With the newer ERP systems containing business rule engines and workflow tools, the need for customization of code will be greatly reduced as change management processes provide global governance for process and business alignment. This will also enable localization within international borders for regulatory or cultural differences without customization and maintenance costs. As internal processes become more standardized and maintained, companies will negotiate these processes into their customer base as well as extend into their supply chains. This will tie customers and strategic suppliers more closely using the company as the conduit for transactions and information. These tightly coupled processes combined with stable, predictable internal processes and systems will drive the operational efficiencies promised by both BPR and the resulting business systems that enable them.
6.
The use of common bolt-ons that satisfy business requirements and are integrated into the ERP system keeps the common process reengineering in focus. With the increased use of ERP systems that contain a process modeling/business rule architecture, ERP process configuration becomes the rule of the day. Customizations are made to change the code-based business processes in the software. If the software enables process change, then configuration and maintenance of business processes becomes the work, and custom code becomes minimized. If none of the above happens, then customization requirements need to go through a governance board to prioritize only the modifications that have a financial business benefit, and take the remainder through a secondary reengineering effort to get them to fit the software model. The list of companies that have customized ERP systems and can no longer reap the benefit of commercial upgrades to commercial software will wish they had spent more time redefining their processes with future impacts in mind.
cOnclusiOn Reengineering focuses on doing the necessary and doing everything not to do the unnecessary. The process is rigorous, and employee direction must come from the top of the organization. Reengineering, if successful, will benefit customers through significantly reduced transaction time, flexibility in servicing, and improved value chain of service. The focus of reengineering is always the customer, and the focus on tasks is always does this add value to the customer. BPR and ERP derive from a similar philosophy. Both aim to reduce costs, improve satisfaction, and deliver increased profit and reputation. Both require a change to the way people work or execute against our business goals. One of the goals of
Business Process Reengineering and ERP
reengineering with ERP (technology-enabled) or without (clean-slate) is to take the focus out of the functional silos of an organization and place the spotlight on organizational goals and shared processes. These organizational goals must be agreed upon across the company, and the sharing of cross-functional processes must be at the forefront of management’s strategy. Focusing on functional silos will only hamper efficiency, communications, customer service, and overall profitability (Hammer, 1990). The main benefactor of an ERP system (and technology-enabled reengineering) is a company that follows (i.e., one that does not invent the game or set the rules). After all, ERP is designed to implement best practices in a technology-driven environmentprocesses that have been proven for accuracy, repeatability, and quality. Adopt and you become best in class almost immediately; there is no differentiationyou are the same as anyone else that buys the ERP system. In contrast, true BPR starts out with a clean slate and encourages its followers to invent or create a perfect world or future statewith no constraints. This approach will be of most benefit for those that wish to differentiate and lead the pack. The driver for this approach is increased profit potentialif no one else can match, you get to charge an increased premium. In reality, it is not an either/or choice. ERP systems can provide a solid foundation for all. BPR activities need not start from scratch, merely where the ERP left off. This, of course, introduces another risk: you could be on your own. As ERP systems evolve, they encapsulate best practices, ironically from those who applied BPR to their ERP. If the ERP vendor adopts your insights, you are “ok.” If not, you are stuck. Any upgrade could introduce major disruption and additional cost for tweaking. Each company must assess the merits in light of its strategic direction and aspiration. Regardless of approach, we hope this chapter has opened your mind to some of the issues and chal-
lenges you need to think aboutbe it the change management aspect or the strategic approach of thinking through future consequences so that you are prepared.
FuTurE rEsEarch dirEcTiOns Since Michael Hammer espoused the term “reengineering” in the 1980s, managers, CEOs, CFOs, and business process owners have seen the benefit of putting the principles to work in their companies. There are a plethora of books and articles on this subject, oftentimes telling grandiose tales of the extreme benefits of reengineering. The other side of the story, the reengineering projects that have failed, is less focused on. Using surveys or in-depth interviews with key players in reengineering initiatives that have failed would be of interest to academics as well as practitioners. The reasons for these BPR initiatives failing could point toward the scope of the project, the process being reengineered, global issues that arose because of language barriers, long-standing cultural biases, processes that were so ingrained that it was impossible to create the synergy to make a major change, and so forth. Another research item could involve the amount of real clean-slate reengineering taking place in organizations. Are most companies just using ERP and other enterprise software to dramatically and radically move them ahead, or are they actually taking the time to design processes without constraint? Research exploring these questions using surveys or interviews could explore what types of companies are undertaking clean-slate reengineering, what differentiates these companies from other companies, what processes are likely candidates for clean-slate, and what has been the impact on companies. Finally, customization of code is an alternative to reengineering with ERP. Most of the literature on ERP cautions against customization due to the complexity, added cost to implementation,
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potential for new versions to write over the customization, and lack of adhering to the built-in best practices of ERP. However, anecdotal evidence based on the authors’ experiences is that many companies are still customizing ERP code. Is customization increased among organizations or has the extent stayed fairly consistent with past findings (Sumner, 2005)? What are the main process candidates for customization? Are companies satisfied with the outcomes of their customizations of ERP code vs. reengineering? How has this affected overall budgets and satisfaction of the ERP implementation process? This field is still ripe for study. Along with advances in technology and globalization, ERP theory continues to evolve. What we have learned about ERP and reengineering thus far is good theory, but the paradigm could shift. It is our duty as researchers to both study and predict the ever-evolving landscape of world-class business processes and the technology that enables them.
rEFErEncEs Adams, L. (2000). Mapping yields manufacturing insights. Quality Magazine, 39(5), 62-66. Bandara, W., Gable, G., & Rosemann, M. (2005). Factors and measures of business process modeling: Model building through a multiple case study. European Journal of Information Systems, 14(4), 347-360. Bashein, B., Markus, M., & Riley, P. (1994). Preconditions for BPR success. Information Systems Management, 11(2), 7-13. Bradford, M., Roberts, D., & Stroupe, G. (2001). Integrating process mapping into the AIS student toolset. Review of Business Information Systems, 5(4), 61-67. Damelio, R. (1996). The basics of process mapping. New York: Quality Resources.
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Davenport, T.H., & Stoddard, D.B. (1994). Reengineering: Business change of mythic proportions? MIS Quarterly, 18(2), 121-127. Hammer, M. (1990). Reengineering work: Don’t automate, obliterate. Harvard Business Review, 68(4), 104-112. Hammer, M. (1997). Reengineering, SAP and business processes. In Proceedings of SAPphire, Orlando, FL. Hammer, M., & Champy. J. (1993). Reengineering the corporation: A manifesto for business revolution. New York: HarperCollins. Hammer, M., & Stanton, S. (1995). The reengineering revolution: The handbook. London: HarperCollins. Ha r mon , R . (1996 ). Re i n ve n t i ng th e businessPreparing today’s enterprise for tomorrow’s technology. New York: The Free Press. Hunt, D.V. (1996). Process mapping: How to reengineer your business processes. New York: John Wiley & Sons. Jarrar, Y.F., & Aspinwall, E.M. (1999). Business process re-engineering: Learning from organizational experience. Total Quality Management, 10(2), 173-186. Klein, M. (1994). The most fatal reengineering mistakes. Information Strategy: The Executive Journal, 10(4), 21-26. Moore, G.A. (2005). Dealing with Darwin: How great companies innovate at every phase of their evolution. London: Penguin Books. O’Leary, D. (2000). Enterprise resource planning systems. New York: Cambridge University Press. Sumner, M. (2005). Enterprise resource planning. Hoboken, NJ: Prentice Hall.
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Tonnessen, T. (2000). Process improvement and the human factor. Total Quality Management, 11(4/5/6), 773-778.
addiTiOnal rEading Bingi, P., Sharma, M., & Godla, J. (1999). Critical issues affecting an ERP implementation. Information Systems Management, 16(3), 7-14. Bradford, M., & Roberts, D. (2001). Does your ERP system measure up? Strategic Finance, 83(3), 30-35. Bradford, M., & Florin, J. (2003). Examining the role of innovation diffusion factors on the implementation success of enterprise resource planning systems. International Journal of Accounting Information Systems, 4(3), 205-225. Bradford, M. (2004). Reengineering a process: A group project using Hammer’s reengineering principles and process mapping techniques. Compendium of Classroom Cases and Tools for AIS Applications (C3), 2(1). Bradford, M., Richtermeyer, S., & Roberts, D. (2007). System diagramming techniques: An analysis of methods used in accounting education and practice. Journal of Information Systems, 21(1), 173-212. Bradford, M., & Richtermeyer, S. (2002). Realizing value in ERP. Journal of Cost Management, 16(2), 13-19. Champy, J. (1996). Reengineering management: Mandate for new leadership. New York: HarperCollins.
excellence. Milwaukee, WI: Quality Press. Collins, J. (2001). Good to great: Why some companies make the leap…and others don’t. New York: HarperCollins. Davenport, T.H. (2000). Mission critical: Realizing the promise of enterprise systems. Boston: Harvard Business School Press. Florin, J., Bradford, M., & Pagach, D. (2005). Information technology outsourcing and organizational restructuring: An explanation of their independent and combined effects on firm value. Journal of High Technology Management Research, 16(2), 241-253. Galloway, D. (1994). Mapping work processes. Milwaukee, WI: ASQ Quality Press. Graham, B.B. (2004). Detail process charting: Speaking the language of process. Hoboken, NJ: John Wiley & Sons. Lowenthal, J.N. (2002). Defining and analyzing a business process: A Six Sigma pocket guide. Milwaukee, WI: Quality Press. Hammer, M. (1997). Beyond reengineering: How the process-centered organization is changing our work and our lives. New York: HarperCollins. Harrington, H.J., Esseling, K.C., & Nimwegen, V. (1997). Business process improvement workbook: Documentation, analysis, design, and management of business process improvement. New York: McGraw-Hill. Jacka, M., & Keller, P.J. (2001). Business process mapping: Improving customer satisfaction. Hoboken, NJ: John Wiley & Sons.
Childress, J.R., & Senn, L.E. (2005). In the eye of the storm: Reengineering corporate culture. Provo, UT: Executive Excellence.
Keyte, B., & Locher, D. (2004). The complete lean enterprise: Value stream mapping for administrative and office processes. New York: Productivity Press.
Cobb, C. G. (2005). Enterprise process mapping: Integrating systems for compliance and business
Madison, D. (2005). Process mapping, process improvement and process management. Chico,
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CA: Paton Press. Manganelli, R.L., & Klein, M.M. (1996). The reengineering handbook: A step-by-step guide to business transformation. New York: Amacom. Monk, E., & Wagner, B. (2005). Concepts in enterprise resource planning. Boston: Course Technology.
Moore, G.A. (2002). Crossing the chasm. New York: HarperCollins. Sharp, A., & McDermott, P. (2001). Workflow modeling: Tools for process improvement and application development. Norwood, MA: Artech House. Spencer, L.M. (2001). Reengineering human resources. Hoboken, NJ: John Wiley & Sons.
This work was previously published in Enterprise Resource Planning for Global Economies: Managerial Issues and Challenges, edited by C. Ferran & R. Salim, pp. 108-125, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.13
Global IT Outsourcing: Current Trends, Risks, and Cultural Issues Subhankar Dhar San Jose State University, USA
absTracT Enterprises inside and outside the IT industry have long used offshore developments and outsourcing methods to reduce information system development and maintenance costs and as a source of specialized, low-wage workers. In the last decade, there has been a spur of activities in offshore outsourcing, which is driven by the e-business revolution and a worldwide demand for IT skills. This contributed to the growth of IT-related industries in countries such as Ireland and India. Meanwhile, vendors from the Philippines, Russia, Hungary, China, Taiwan, Mexico, and other countries entered the market; and in some cases, adapted business models established by Indian firms that have dominated the services sector in the past decade. The emergence of new offshore centers has been marked by new approaches and skill sets, adding to the services and value propositions that define the offshore
sector today. In this paper, we will identify the main risk factors and best practices in global IT outsourcing. In addition, we will delve into some important issues on IT outsourcing, particularly the challenges as well as the benefits. Finally, we will present case studies of two Global 200 organizations and validate some of the claims made by previous researchers on IT outsourcing. This study will help management to identify risk factors and take the necessary remedial steps.
inTrOducTiOn In today’s global economy, outsourcing has become a very common phenomenon. Many large organizations have outsourced some or all of their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, time to market, and ability to focus on core areas are some of the benefits of outsourcing. However, there are many
challenges and risks associated with IT outsourcing (Alvares et al., 1995; Beamish et al., 1995; Feeny et al., 1995; Lacity and Willcocks; 1995, Cross, 1995; Nam et al., 1996; Bahli and Rivard, 2003; Lee et al., 2003; Rothman, 2003; Sabherwal, 2003; Adeleye et al., 2004; Dibbern and Goles, 2004). IT outsourcing is as an act of delegating or transferring some or all of the IT related decision making rights, business processes, internal activities, and services to external providers, who develop, manage, and administer these activities in accordance with agreed upon deliverables, performance standards and outputs, as set forth in the contractual agreement (Dhar et al., 2004). Whenever there is an outsourcing decision, there is an inherent risk associated with it. In addition, in any outsourcing deal, there are some hidden costs, unexpected outcomes, diminishing service levels, to name a few (Earl 1996; Lacity & Hirschheim, 1993; Antonucci et al., 1998; Aubert et al., 2001; Clark et al., 1995; King et al., 2000). There are four major aspects of the proposed research that are summarized by the following questions: 1. 2.
3. 4.
What are the objectives of outsourcing? What are the major factors that contribute to risk in global offshore IT outsourcing? How do we minimize the risk in IT outsourcing projects? What are best practices for outsourcing? How do we validate some of the assumptions made by prior research?
Although there are quite a number of studies that address the risk factors and hidden costs in outsourcing, we found out that there is no single study that takes a comprehensive approach to analyzing the issues like risks, benefits, challenges, and best practices in the context of global outsourcing. In addition, many of the important risk factors that are quite important to global out-
230
sourcing are not properly analyzed. Of particular interest to us are the effects of risk assessment factors like geographical location, political, cultural, quality standards, legal contracts and intellectual property, as many of these were not well studied or well documented before. These are some of the motivating factors behind this study, where we address not only the risks and benefits, but also the challenges and best practices, two case studies, and to validate some of the claims made by previous researchers on IT outsourcing. Hence, this research fills the gap in the current literature with regards to risk assessment factors in offshore outsourcing in a global context. This paper discusses current trends in IS outsourcing, cross cultural issues and presents case studies of two Global 200 organizations and validates some of the claims made by previous research on IT outsourcing. Our main contribution in this paper is to identify sixteen different risk assessment factors that are quite sensitive to global IT outsourcing. In addition, we also analyzed two large organizations (FIRM-1 and FIRM-2) that are currently outsourcing their IT functions and identify the objectives, key benefits, important risk factors, challenges and best practices. We also found how transaction cost theory has played an important factor in the decision making process for outsourcing. This research is unique in the sense that it analyzes two multinational organizations FIRM -1 and FIRM-2 that have been involved in outsourcing for quite sometime. The outsourcing work is done on remote offshore locations in India, China and some other countries in Asia. Hence, this study is truly global in nature as both the organizations conduct business in various parts of the world including the Americas, Europe, Asia, and Australia and in some parts of Africa. In addition, FIRM-1 is one of the suppliers of FIRM-2. Thus both organizations have common goals of making their global supply chain successful, and maximizing the overall profitability. Finally, we do a comparison of each of these factors for both
Global IT Outsourcing
the organizations. Hence, this study is timely and relevant from both an academic and a practitioner’s perspective.
currEnT TrEnds in glObal iT OuTsOurcing In recent years, with globalization and improved communication infrastructure, there has been a spur of activities in global outsourcing also known as offshore outsourcing. Offshore outsourcing had been considered as an irreversible mega trend, in view of such factors as lower domestic economic growths during the years 2001-2003, increased domestic wage rates during the years 1998-2000, and ability of the offshore vendor to offer lower wage rates. Also, in view of the domestic economic recovery (Chabrow, 2003) almost competitive lower rates offered by domestic IT services companies, and increasing feedback on outsourced offshore software projects in year 2002-2003 (Overby, 2003; Koch, 2003), as being made available, will throw some light on the earlier assumptions of offshore outsourcing being considered as an irreversible mega trend. Further, some state governments are taking steps to reduce offshore IT outsourcing under domestic and political pressures. The current trends in global IT outsourcing, as per Drew Robb (2002) and Gartner (Morello, 2003) can be summarized as follows: a.
b.
More software related work will be outsourced overseas in the coming years. According to Forrester Research, the demand for offshore outsourcing will account for 28% of IT budgets in Europe and the U.S. within two years. Further, the number of offshore IT workers worldwide (software developers working overseas on projects for Western firms) will go from 360,000 today to more than 1 million by the end of the decade. Some of the major corporations are opening dedicated offshore development cen-
c.
d.
e.
ters. While many small and medium-sized enterprises started offshore outsourcing with small projects, larger enterprises started to invest large amounts of money by setting up huge dedicated development centers in their countries of choice. For example, several years ago, Microsoft, Oracle, Intel, Hewlett-Packard and GE had already built campuses in India. Over the past couple of years, though, Intel, Boeing and Motorola have preferred Russia as the best place for dedicated centers. Intel has 400 workers at one Russian center working on wireless LAN and modem projects. It plans to ramp this up to more than 1,000 staff over the next couple of years. The standardization and protection of intellectual property (IP). One of the biggest challenges the enterprises are facing today is protection of the intellectual property. Some enterprises are quite reluctant to outsource information systems development in countries where piracy is abundant and IP protection law is still in its infancy. Enterprises are particularly concerned about these issues with countries like China and Russia where governments are receptive to changes in the law that will protect IP. But with leading global corporations now heavily involved in Russia and India, the legislative picture is changing. Global outsourcing moves up the value chain. In the early stages of outsourcing, low-end jobs, back office operations, and call centers were outsourced. Once the vendors delivered services successfully and gained high confidence level from the enterprises, they began to outsource high-end jobs like design and development. This trend is going to continue in the coming years. Stratification of offshore countries based on cost and skill sets. Countries like India and Ireland offer a very attractive destination for outsourcing because of lower cost and an available skilled talent pool. However, the
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f.
g.
232
wages are also rising in these countries as more and more enterprises are outsourcing their work there. In addition, there are also some hidden costs associated with outsourcing that diminishes the cost advantage factor. Ireland, for example, can no longer compete on price with most countries. And India now finds itself sub-contracting work to China and Malaysia in an effort to stay competitive. To survive, these countries must move up the value chain while others take their place as the place to go to find an abundance of highly skilled programmers at low rates. Outsourcer and the vendor are forming long-term strategic partnerships. The outsourcing vendors are becoming strategic partners of the enterprises for whom they are doing the outsourcing job. This partnership is based on long-term commitments and mutual trust from both the parties. After all, trust is one of the most significant successes in an outsourcing deal. Application on demand enabled by application service provider (ASP) is becoming popular (Lee et al., 2002). One of the most promising business models that have emerged is the application service provider (ASP), which is based on the utility computing model and is enabled by the Internet (Lee et al., 2003). The ASP model offers the deployment and management of various IT functions over the World Wide Web or private network. The revenue model is based per-user fee or monthly fee. ASP offers low cost alternatives to huge IT investments, access to highly complex packaged software products, and faster deployment of IT solutions managed by a third party. Although there are some tangible benefits of ASP, there are some potential drawbacks. Since ASP’s provide packaged software solutions, sometimes they may not be able to provide customizations that are required for each individual business processes.
culTural issuEs in OFFshOrE OuTsOurcing a.
b.
c.
Cultural awareness: Cultural issues have significant impact on the success or failure of global IT outsourcing. There are many challenges that arise from offshore outsourcing when people from two (or more) different cultures work on a project. Managers need to understand that cultural barriers and resistance to change have adverse effects, which have to be dealt with an exceptional ability to blend the culture of the partnering organization and corporate departments. Executives should review their own company’s culture and that of the outsourcing organization and understand them both. This will provide valuable insights during the process of outsourcing. Cross-cultural communications: Problems can arise between the outsourcing partners where native languages of the people involved are different. There is evidence that Norwegian companies who outsource their work prefer Russian counterparts for an outsourcing partner to Asian partners because of physical proximity, cultural affinity towards a European mindset, and the relative ease with which the Russians learn the Norwegian language (Krishna et al., 2004). Relationship management: Relationship management is another important aspect related to cultural issues in outsourcing. When selecting a provider, companies must set up a worst-case scenario and use the best people to manage the deal. Some believe that with the onset of ASPs and globalization, outsourcing will become a critical strategy placing a burden on the formation of a successful partnership. Executives generally believe that retaining and developing employees is critical for success. They also contend that culture is the heart of the com-
Global IT Outsourcing
pany and management must retain the best people and focus on the basics. People development is an essential management skill and never more needed than in the context of the changes required during the process of outsourcing. It is worth remembering that technical changes concerning systems and processes can be made relatively rapidly with the right kind of technical expertise. But the changes in attitudes and behaviors that are essential to sustain the new culture in any outsourcing arrangement can only be achieved at a human pace. One approach to alleviate cultural barriers is to work with teams of compatible cultural background and form strategic partnerships for long term relationship.
incurred to make the product or to provide the service. It includes the cost of labor, material, and capital. Coordination costs include monitoring, controlling and managing the work internally. If the job is handed over to an external vendor, the coordination costs are called transaction costs. As per (author’s first name needed) Williamson (1985), transaction cost theory depends on the following parameters: •
ThEOrETical cOncEpTs bEhind OuTsOurcing There are various theoretical justifications for outsourcing. The most popular ones are transaction cost theory (TCT) (Williamson, 1995; Ang & Straub, 1998), agency theory (Bahli & Rivert, 2003), and coordination theory (Sabherwal, 2003) to name a few. We have chosen TCT over the other theories in this research because a careful analysis of the two cases revealed that TCT was the basis for their outsourcing decision.
Transactional cost Theory A goal of the organization is to reduce cost and to achieve cost efficiency (Aubert et al., 2001; Diromualdo et al., 1998). Keeping that in mind, Williamson developed the transactional cost theory (TCT). Transaction costs are related to the effort, time, and costs associated with searching, creating, negotiating, monitoring, and enforcing a service contract between buyers and suppliers. As per Williamson, there are two types of costs involved for any service—production costs, and coordination cost. Production cost is the cost
•
•
Cost: There are two types of costs associated with any service or product: (1) production cost and (2) transaction cost. Williamson argues externally outsourcing of work results in lower production costs than doing it internally due to economies of scale. But in such a case the transaction cost is high because vendors need to be managed and monitored. In an in-house arrangement, production cost is high because it is difficult to achieve economies of scale. But at the same time, the transaction cost is low because of low coordination costs. Asset specificity: It is defined as the degree of customization of the transaction. It could be site specificity, physical asset specificity, or human asset specificity. High asset specificity results in high transaction. Also the production cost goes up with high asset specificity because specific assets have limited utility in other markets (Hirschheim & Lacity, 1993). Opportunism threat: When the work is given to an external vendor, coordination costs increase because quite possibly the vendor may be opportunistic. Hence, managing and monitoring the vendor becomes more difficult. But when the work is done internally coordination costs are low because the workers may be less opportunistic. Vendors also become opportunistic when there is competition in the market, and when there are a less number of vendors (Hirschheim & Lacity, 1993). When there are only a
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•
few vendors in the market, organizations looking for such vendors cannot bargain much. Organization may not save much by outsourcing because the vendor may charge excess or may not perform as promised. All these lead to a high transaction cost. Uncertainty: Williamson outlines that uncertainty increases the transaction cost. Transaction cost goes up especially for asset-specific investments, under uncertain conditions (Hirschheim & Lacity, 1993).
Thus, all these parameters should be weighed well to make a decision. A detailed analysis and trade-off study should be carried out before making an outsourcing decision.
risks dEFinEd Risk and risk management have been widely studied in various contexts, such as finance, economics, insurance, healthcare, operations research, and engineering. Each discipline has its own way of analyzing and interpreting risks. This section elaborates the main issues of risks and presents our perspectives on issues related to risks. Risk as an undesirable event. According to Levine and Schneider (1997, pg. 38), risk is “… events that, if they occur, represent a material threat to an entity’s fortune.” Using this approach, risk can be interpreted as an occurrence of undesirable events. a.
b.
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Risk as a probability function: In some disciplines, risk is defined as the probability of an event. It is the chance of a serious, adverse outcome (Bahli & Rivard, 2003). Risk as a variance: In finance, risk is calculated as the variance of the distribution of outcomes.
c.
Risk as expected loss: In some disciplines such as casualty insurance, risk is interpreted as expected loss, which is the product of a loss function and a probability function (Bowers et al., 1986).
risk FacTOrs Many researchers have studied the risk factors that are common in IT outsourcing (Jurison, 1995; Earl, 1996; Overby, 2003; Dhar et al., 2004). We summarize their work on risk factors: We found that some studies have addressed many risks factors associated with IT outsourcing. We decided to focus specifically on risk factors that are quite common, important and sensitive to global IT outsourcing, and later validate those using case studies. Of particular interest to us are the effects of risk factors like geographical location, political, cultural, quality standards, legal contracts and intellectual property, security, etc. In the past, information security is often not properly handled in outsourcing arrangements. Recent studies have addressed security concerns in the context of IT outsourcing (Khalfan, 2004). Information security is a combination of three things: integrity, availability and confidentiality. Integrity refers to gathering and maintaining accurate information and discarding outdated information. Availability means making the data available whenever needed. Confidentiality means taking appropriate measures (both software- and hardware-wise) so that unauthorized disclosure of data do not take place. Security services have also been outsourced as noted by Vijayan (2001) and (Schneier 2002). The potential risks are significant and choosing a wrong outsourcer will lead to undesirable consequences. The important risk factors for our study are summarized as follows, (see Table 2).
Global IT Outsourcing
Table 1. IT outsourcing risk exposure Undesirable outcomes
Factors leading to outcome
Unexpected transition and management costs (Cross, 1995; Earl, 1996; Nelson et al, 1996)
• • •
Lack of experience and expertise to the client with the activity (Earl, 1996; Lacity et al., 1995) Lack of experience of the client with outsourcing (Earl, 1996) Uncertainty about the legal environment
Switching costs (including lockin, and repatriation and transfer to another supplier) (O’Leary, 1990)
• • • •
Asset specificity (Williamson, 1985) Small number of suppliers (Nam et al., 1996) Scope Interdependence of activities
Disputes and litigation (Aubert et al., 1997; Lacity & Hirschheim, 1993)
• • • •
Measurement problems (Alchian & Demsetz, 1972; Barzel, 1982) Lack of experience and expertise of the client and/or of the supplier with outsourcing contracts (Earl, 1996; Lacity et al., 1995) Uncertainty about the legal environment Poor cultural fit
Service debasement (Lacity & Hirschheim, 1993)
• • • • • •
Interdependence of activities (Aubert et al., 1997; Langonis &Robertson, 1992) Lack of experience and expertise of the supplier with activity (Earl, 1996) Supplier size (Earl, 1996) Supplier financial stability (Earl, 1996) Measurement problems (Alchian & Demsetz, 1972; Barzel, 1982) Task complexity
Cost escalation (Lacity & Hirschheim, 1993; Lacity et al., 1995)
• • •
Lack of experience and expertise of the client with contract management (Earl, 1996; Lacity et al., 1995) Measurement problems (Alchian &Demsetz, 1972; Barzel, 1982) Lack of experience and expertise of the supplier with activity (Earl, 1996)
Undesirable outcomes
Factors leading to outcome
Loss of organizational competencies (Earl, 1996; Lacity et al., 1995)
• • •
Scope Proximity of the core competencies (Hamel & Prahalad, 1990) Interdependence of activities
Hidden service costs (Lacity & Hirschheim, 1993)
• • •
Complexity of the activities Measurement problems (Alchian & Demsetz, 1972) Uncertainty (Barzel, 1982)
Cost of delayed delivery / nondelivery
• •
Vendor fails to deliver as per contract (Bahli & Rivard, 2003) Delayed delivery due to unexpected change in the requirements
Poor quality and reliability
• •
Inability to control vendor’s technical quality (Sabherwal, 2003) Loss of control over vendor’s technical quality
The people risk emerges from the experience level, training, and human resource deployment policies of the vendor. In addition, redeployment of existing IT staff of the customer is also a risk assessment factor (Gilbert, 2001).
Globally distributed teams with different skills and experience contribute to risk
Knowledge (Functional, Technological, Managerial)
Functional knowledge is the expertise, understanding, and experience in the given functional area of the activity. Technological knowledge is associated with the expertise in the areas of technology selection, analysis, architecture, design, development, integration, and maintenance support. Managerial knowledge is associated with the project management, risk management, resource management, and developing and administrating management processes to carry out the activities.
The level of functional, technological, and managerial knowledge contributes to risk in offshore outsourcing. Managerial knowledge is extremely important in a global context.
Cultural
Cultural risks arise from the dominant culture prevalent with the vendor, such as the attitudes, communication skills, language, selection policies, performance motivation, team spirit, level of cohesiveness, autonomy, participatory decision making, work ethics, management style, customer-orientation, and related organizational behavioral factors that shape the culture.
Country specific cultures can add risk in global outsourcing. Language and work ethics vary from country to country and that may contribute to risk.
Political
Political risks arise out of trading restrictions imposed by the sovereign, permissible ownership rights, nationalistic aspirations, type of government, and political and economical stability.
Political instability is a major concern for global outsourcing as the government rules and regulations may have adverse effects on outsourcing.
Financial
Financial risks arise out of project accounting standards, cash flow, asset base, and currency stability.
Accounting standards and variation in currency exchange rate contribute to risk.
Quality Standards
The software capability maturity model (CMM) and ISO 9000 compliance are hallmarks of quality standards. The ability to prepare test plans and performance standards are seen favorably while assessing the risks due to quality standards.
Quality standards vary from one country to another and contribute to risk.
Measurement
Performance measurement standards, benchmarking, and assurance of the performance are key elements in evaluating measurement risks.
Performance measurement standards vary from country to country which contributes to risk.
Scope, Cost, and Time Estimates
Ability to formulate the scope of the project, accurate cost and time estimation poses the risk.
It is quite difficult to accurately determine scope, cost, and time estimates in global outsourcing. This contributes to risk.
Company Specific Risks
Company specific risks are largely due to the outsourcer’s financial strength, area of core competence, management, relationships and alliances with other major organizations, and (potential) acquisitions and mergers activities.
Different companies in foreign countries have different management and core competencies. These contribute to risk.
Legal Contracts and Intellectual Property
Intellectual property rights and their legal status in the country, brand protection, contractual bindings, and arbitration policies of the outsourcer constitute risk.
IP standards and law vary from one country to another and contribute to risk.
Security
Access control, authentication, usage of secure protocols, encryption, and security policies adopted by the outsourcer constitute risk.
Security is also a major concern in global outsourcing as protection and control of data pose a problem.
Disaster Recovery
Ability to protect software code, and related data, level of replication, redundancy, and back-up and recovery policies are the main factors in deciding the risks due to disasters.
Loss of control over disaster recovery contributes to risk.
Contract Management
Contract management involves formulating contracts, schedule planning, activity planning, sending and accepting deliveries, disputing resolution, and signing off. Inability to properly formulate or execute the contracts constitutes risk.
Contract management in global outsourcing is a risky business as monitoring the project activities becomes a challenge.
Relationships and Alliances
Ability to formulate customer-vendor interface at executive and working levels, customer relationship management, and developing long term alliances offers synergy at an organizational level.
Inability to manage relationships and alliances constitutes the risk in global outsourcing.
Continued on following page
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Table 2. continued Risk assessment factor
Description
Implications for Global Outsourcing
Geographic Location
The country, province, and city may be in different time zones, which require working at odd hours for the customer or outsourcer. The communication infrastructure, distance, industrial peace and stability in the region, availability of supporting infrastructure, social-economical-political stability constitutes the risk.
Vendor’s geographic location poses some risks. Communication infrastructure failure in offshore projects incurs significant loss.
Multi-vendor Arrangements
Synchronization of development efforts, data format exchange standardizations, complexities due to multi-layer architecture dependencies or non-contagious independent parts constitute the risk with ability to work with multi-vendor arrangements.
In global outsourcing with multi-vendor arrangements, coordination has to be efficient. Otherwise execution becomes a problem and contributes to risk.
rEsEarch mEThOd In order to investigate our research problems, we did a thorough analysis of two large organizations that are involved in outsourcing. We have chosen these two organizations for various reasons. Both organizations have been doing IT outsourcing globally for several years. In fact, outsourcing has become a part of their business strategy. Their experience in dealing with offshore vendors coupled with efficient project management expertise helped them coordinate business processes over globally distributed teams. In addition, they had already dealt with multi-cultural teams, diverse geographic and political environments, and varying quality and intellectual property standards in different countries, to name a few. Hence, we came to the conclusion that these two organizations are good candidates for our research studies. We conducted in-depth interviews with key personnel, who were carefully chosen based on their roles, responsibilities and experience in dealing with outsourcing projects. Although we interviewed a handful of people, they represent large divisions within their organizations and are actively involved in the outsourcing strategies for their respective organizations. Hence, the data we collected is reliable and truly represents the outsourcing process of their organizations. Our approach is based on positivist case research as proposed in the case research literature (Dube &
Pare, 2003), where we focus on qualitative analysis of the results rather than rigorous quantitative and analytical methods. The data was collected during the year 2003. In order to gain insightful information and perspectives on offshore outsourcing, respondents were given a detailed questionnaire to collect data and outsourcing related information. The participants were assured confidentiality of their personal and organizational information. We analyzed the data by summarizing the interviews and questionnaire completed by each participant from each case. After analyzing the responses from each participant, we again contacted them if necessary for further clarification and explanation. This process of analysis clarified lots of complex issues that they had to deal with and helped us gain further insights in outsourcing. These case studies also reflect the global nature of outsourcing as some of the projects were done offshore. Hence, we tried to capture the global perspective and practices of outsourcing when we developed the cases. In addition, we tried to understand the theoretical perspectives and arguments that each participant put forward in the decision making process. In order to provide deeper insight into our qualitative analysis, we also included some comments from participants. We also did a comparison of the objectives, key benefits, major risk factors, challenges and best practices for the two cases and explained their implications from the Transaction Cost Theory.
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casE sTudy FOrmaT In order to understand the objectives, benefits, risks, challenges and best practices of outsourcing, case studies were done for two Global 200 organizations. All the participants joining discussions were involved in outsourcing projects and helped develop the case studies. We conducted a focus group survey of information technology executives and managers from both organizations who were involved in outsourcing information technology projects. Survey participants answered a detailed questionnaire, followed by an interview. The participants were offered choice to mention any other objectives, benefits, best practices, and any risk assessment factors not listed in the questionnaire. The participants were assured confidentiality of their personal, organizational, and professional role information. The participant also shared their own experience in dealing with outsourcing projects and gave us valuable information about some of the best practices and challenges. Each case has the following five sections: I.
Background: The background section provides a brief description of the organization studied. II. Introduction: The purpose of the introduction section is to introduce the individuals, from each organization, that participated in the study. These individuals were actively involved in the outsourcing decisions of the firms. III. Outsourcing decision: This section outlines the motivations, challenges, risks, and benefits associated with outsourcing decisions that each of these organizations faced. IV. Case conclusion: The purpose of the case study conclusion is to summarize the interview results. It also highlights some deviations in the ratings by the participants of both of the firms.
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V.
Anonymity: Anonymity was deemed necessary to protect the identities of all the participants as well as the name of the organization. Both organizations are referred to as ‘FIRM-1’ and ‘FIRM-2’. As per the requests of the participants, the names of the outsourcing partners are also kept confidential.
casE sTudy: Firm-1 background FIRM-1 is a large multi-national organization with more than 20,000 employees and 100 offices worldwide. It wants to be the leading provider of semiconductor-based solutions for consumer and communications applications and medical systems. Its annual revenue of approximately US$5-10 billion. It is one of the world’s top semiconductor suppliers, with manufacturing facilities and partners in diverse geographic areas. It has 14 manufacturing and assembly sites, 20 design centers, four system labs, and more than 100 offices. The manufacturing facilities are located in the USA, the Far East and Europe serving customers worldwide. It also participates in its customers’ business-to-business supply chain extranet. This enables FIRM-1 to get a visibility of demand for the customer’s products, which in turn drives FIRM-1’s production plan. FIRM-1 believes that delivering these services and applications depends on the right business model, the right partners, and the right technologies. FIRM-1 is dedicated to semiconductor and related technologies and is customer focused. FIRM-1 provides its partners with scalable, versatile technologies and a world-wide manufacturing base.
introduction Three individuals from FIRM-1 were interviewed. Due to anonymity reasons, their names are not disclosed; they are referred to as ‘Person 1,’ ‘Person
Global IT Outsourcing
2,’ and ‘Person 3.’ The names of the outsourcing partners are also kept confidential.
Outsourcing decision FIRM-1’s management believes that if a business function is not its core competency, and better value is found externally, it is an ideal candidate for outsourcing. The core competency of FIRM-1 is semiconductor technology, and related R&D activities, which are kept in-house. Also it believes that the knowledge of knowing the customers’ needs and providing those solutions faster to customers is another key to their success. Many enterprise resource planning (ERP) and supply chain functions like manufacturing, fabrication, packaging, warehousing, and shipping and handling are outsourced. For more than 10 years, FIRM-1 has also outsourced some of its IT functions, which have changed over time. FIRM-1 is in the process of changing its strategy on IT outsourcing. It is a global organization and has looked at its IT outsourcing globally. It used to have a more distributed outsourcing strategy, but now it is more centralized from a division standpoint. The top management outlined the IT outsourcing strategy first. It then evaluated the approach not just from the overall organization’s standpoint but also from a division standpoint. They picked potential suppliers by type of service, or technology that was required and divided those suppliers by divisions. Divisions then ran pilot projects with these outsourcing vendors for years. The results from these pilot projects were collected, which helped FIRM-1 to decide major outsourcing partners commonly for all divisions. So it took FIRM-1 almost twelve months of activity to get organized for IT outsourcing. But the strategy was always to keep a part of all these functions, especially controlling them, in-house. When asked about how IT outsourcing decision has helped to reduce the supply chain costs (namely, core costs, non-coordination costs and
transactional costs), one manager replied: We are able to treat each application and its development as a variable cost and make very quick decisions based on ROI if we should even build it. Because the development costs are external, we incur no cost unless the initial business case justification (BCJ) process dictates that positive ROI will result. We always build contingency over-run costs into each project as a part of the BCJ process. FIRM-1 has primarily two IT outsourcing vendors and also some niche players. It has divided the work between the two vendors in order to leverage their strengths. It describes the relationship with the vendors as strategic partners. When asked about their relationship with their outsourcing partner, one of the managers told us: It is very positive. Our outsourcing partner has program management personnel in the US and act as members of our team. They understand how our company works and as such, this helps with the software applications that they build for us. The outsourcing partners have their program management personnel on-site, i.e., personnel from the outsourcing partner are located within FIRM-1’s campus and understand the business processes of FIRM-1. As such, this helps with the software applications and other services they provide to FIRM-1. It has a dedicated staff to manage the vendor relationship. In the past, FIRM-1 had some failures in terms of managing vendor relationships because of inadequate staffing and a poor contractual agreement. After they realized their mistakes, well-defined contracts were framed and signed by both parties. Also, weekly status meetings and monthly progress meetings were held to monitor the performance of the vendors. Based on the responses of the participants, an effort is made to analyze and understand the
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focus areas like objectives, benefits, risks, and challenges involved in the IT outsourcing decisions in FIRM-1. IT outsourcing practices: FIRM-1 keeps the project management functions in-house. It does not outsource project management responsibilities and complete project management control to its vendors. That was mainly a reaction of a bad experience from one of its earlier outsourced projects. However, there are multiple projects in which the roles and responsibilities are generally shared but control of the responsibilities of the projects themselves are never delegated. User acceptance and timelines are always controlled in-house, and never outsourced. There has been a participative association with vendors in formulating design specifications. FIRM-1 partners with some key vendors to develop design specifications. These vendors are more key suppliers of software solutions and not pure ‘IT outsourcing partners.’ FIRM-1 also evaluates their vendors from time-to-time and if there are any value-added services or products that the IT outsourcing vendors have to offer, and if that product or service is beneficial, they definitely take a close look at it. Another strong driver for FIRM-1 to outsource some portions of its IT is to focus on its core competency. In order to rapidly deploy their breakthrough projects, it takes its best and brightest resources to put on these projects. Therefore, these resources cannot do more repetitive and stable jobs. FIRM-1 tries to free up these core competent people to focus on its core processes, and to improve its competitive advantage. FIRM-1 tries to outsource its ‘non-critical’ jobs to vendors. With the help of pilot projects, FIRM-1 has identified a couple of IT competencies, which it has in-house. The demand for these competencies is quite variable. So instead of maintaining it in-house, FIRM-1 decided to acquire those competencies through outsourcing
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partners. Moreover, these jobs are non-critical and are not related to FIRM-1’s core business, its business creation initiatives or its ERP and supply chain management initiatives. Objectives: For FIRM-1, cost reduction, focus on core activities, and professional services are the main objectives for outsourcing its IT to an external vendor. Building a competitive advantage, quality and reliability, access to state-of-the-art technology, and customer satisfaction are also some important objectives for IT outsourcing in FIRM-1. Knowledge about consumers’ needs and providing solutions for those needs are very important to FIRM-1. So participants said that increased flexibility to meet the changing demands and market environment, and reduced time to market are other key objectives for outsourcing IT activities to their vendors. Based on the participants’ responses, a histogram is plotted, which is shown in Figure 1. While two respondents think that new technology can be an advantage, one respondent thinks that unproven/untested new technology can pose a risk to outsourcing and hence disagrees with the others. Benefits: Participants from FIRM-1 emphasized that the main benefits achieved by outsourcing IT are reduction in costs, and optimal allocation and utilization of internal resources. FIRM-1 outsourced its IT function to low-cost and competent vendors in different countries, thus saving money. By outsourcing some functions of its IT, the management could identify and allocate its key resources, and utilize them efficiently to build a competitive advantage. Reduced time to market and reduced delays, improved flexibility to respond to the changing demand and business environment, predictable outcomes, and a higher degree of success are some other benefits that FIRM-1 realized by IT outsourcing projects. Quality and reliability was also one of the benefits achieved by FIRM-1.
Global IT Outsourcing
Figure 1. Histogram for objectives for IT outsourcing (FIRM-1) ratings (0-10)
10 8
Person 1
6
Person 2
4
Person 3
2
os C ts or e us ac to t iv m iti er es C Sa om ti s pe fa ct tit io iv e n ad va Q ua nt a l i ge ty N Pr ew & of re te es lia ch si b on no il it y al lo gy se rv as i c an es ad C va ap nt Le i ta ag g ac le e y xp s en ys St di te tu at m re s eof av -th oi eda ar nc tt e ec hn ol og y
er C
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go al s
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Objectives (Alw ays = 10, Very often = 8, Often = 6, Sometimes = 4, Rarely = 2, Never = 0)
Each of the benefits was rated on a scale of 0-10. Based on the participants’ responses a histogram is plotted, which is shown in Figure 2.
When asked what risks their customers and suppliers may have faced from their decision of outsourcing, one of the managers told us:
Risk factors: Knowledge being the core competency for FIRM-1, is the main risk factor for the firm. A careful planning of what knowledge to keep in-house and what to outsource is required. FIRM-1 wants to protect the core knowledge because it is afraid that outsourcing core knowledge will make them very much dependant on the vendors. This will put the vendors in an advantageous position in the outsourcing deal. Formulating scope and deciding the budget and schedule estimates is another critical risk factor. In the past FIRM-1 missed some schedules and the cost exceeded the budget. Also, the vendor did not provide the optimal service, because the scope was not clear. FIRM-1 learnt from its failures. And because ultimately it is FIRM-1 who is answerable to the consumers, a clear understanding of the requirements, finalizing the scope, and an agreement of both parties are very important to FIRM-1, along with budget and schedule. Apart from these, quality standards, financial stability of the vendor, its disaster recovery plans, and security are some of the important risk factors to FIRM-1.
We have had very difficult and costly outsourcing. We outsourced not only applications development and management of applications but also outsourced most of the staff. We outsourced too much of our core knowledge. And also under estimated what it takes to manage a vendor relationship at that price, and we didn’t manage it well. As a result it became very advantageous to suppliers and disadvantageous to our customers. Very high costs and high stakes are involved here. People, contract management, and performance measurement are some other important risk factors for FIRM-1. Legal contract and intellectual property protection is another risk factor for FIRM-1. Though FIRM-1 has a very efficient legal department to take care of the penalties and other legal issues of the contract, it believes that brand protection and intellectual property rights protection are key risk factors. Figure 3 shows a histogram based on the responses of FIRM-1 participants. Challenges: The main challenges for FIRM-1 in outsourcing IT projects are: (a) deciding what
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Figure 2. Histogram for benefits of IT outsourcing (FIRM-1) 12
ratings (0-10)
10
Person 1
8 6
Person 2
4
Person 3
2
St at eof -th ear t
te ch no lo Fl gy ex Lo ib Pr i w ed er li ty ic co ta b s H le ts ig he Red out co rd u eg c ed me re de e la of s u ys Lo cc w es e Q ua r fa s i lu li t re Be Lo y & t te w re s lia r m er r an is k bil it y ag pr of e R O ed me i les pt n u i m t Id ce co a en n t if l re d c om trol s y bu ou pl rc si e e x ne s s allo i ty ca op tio po rtu n ni ti e s
0
benefits (Alwa ys = 1 0 , Very often = 8 , O ften = 6, So m etim es = 4 , Rarely = 2, Never = 0)
12 10 8 6 4 2 0
Person 1 Person 2 Person 3
P Kn eo p o w le le dg C e ul tu ra Po l l it Q i ua Fi cal na li t y Sc S n ci a ta op nd l M e, c o eas ard C s ur om st , e pa and me ny s c nt Le s pe he. .. ga c l a i fic nd ris I P ks is su D is es S a C on s te ec u r R trac Re rity el at t M cov io ns ana ery G hip ge m e M ul ogr & A en tit l ve aph li an c nd ic Lo e s or ar c a t ra ng io n em ...
ratings (0 - 10)
Figure 3. Histogram for risk factors of IT outsourcing IT (FIRM-1)
risk Factor (Always = 10, Very Often = 8, Often = 6, Sometimes = 4, Rarely = 2, Never = 0)
jobs to keep in-house and what to outsource, (b) ongoing vendor relationship management, and (c) setting up a governance model. Selecting the right vendor is very challenging for FIRM-1. But since it has a cross divisional strategy, it has the option of partnering with alternative vendors. And that makes the ongoing management of vendor relationships one of their biggest challenges. Another challenge for FIRM1 is the continuous commitment to the spirit of partnership. Cultural barriers and designing a contract do not pose a challenge for FIRM-1. Since FIRM1 has a global presence, and has operations in many countries world wide, one of its strategies
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is to provide training, from time-to-time, to all its employees to deal with various cultures. Also designing a contract, especially the legal issues, is well taken care of by its legal department. Figure 4 shows a histogram based on the responses of FIRM-1 participants. Best practices: One of top best practices for FIRM-1 is the stakeholders’ buy-in. This has helped FIRM-1 to deal with internal resistance and to carry out change management effectively. It also holds frequent informal meetings to review the progress of their projects. FIRM-1 has the policy of ‘First Things First.’ It prioritizes the action items as per their priority.
Global IT Outsourcing
Ratings (0 - 3)
Figure 4. Histogram for challenges of IT outsourcing (FIRM-1) 4 3 2 1 0
Person 1 Person 2
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Person 3
Challenges (Critical = 3, Moderate = 2, Can deal with = 1, Not important / NA = 0)
Ratings (0 - 3)
Figure 5. Histogram for best practices in IT outsourcing (FIRM-1) 4 3 2 1 0
Person 1 Person 2 Person 3
ion ships tions ntity gers tems view ttees uy-in tions la t a E mi Re nI ic a ca ic a rB al an ion Es lat mun peci al M Actio sues Com olde mun nt/ r Re e om h a S ition itize ic Is ring akeh Com m e r C e t e d r l g P ma S lis we rp. Ad Prio trate Ste po tab Co or S Es Em Inf
Best Practices (High Importance = 3, Medium importance = 2, Low importance = 1, Not important = 0)
Other practices like empowerment and formation of steering committees and joint review boards are also important in FIRM-1’s opinion and it practices them on a regular basis. Based on the responses of FIRM-1 participants, a histogram, as shown in Figure 5, was plotted.
case conclusion By outsourcing some portion of IT, FIRM-1 is able to efficiently manage its information systems. Some other measures that FIRM-1 has taken to tightly integrate its supply chain management with information systems are partnering with multiple vendors, penalties for non-performance, and well defined and dedicated management roles. The management has explained the firm’s strategy to all its employees, and it has tied this strategy to the current business environment. The employees are trained in newer technology,
and from time-to-time they are also sent to such educational seminars and training programs. From an organizational standpoint, most of the organizations go in search of low-cost and competent services. And that’s what FIRM-1 has been doing. FIRM-1 believes that there will be 50% cost reduction if all but management and control are outsourced; 25% if only part of the activity is outsourced. From the analysis, it is observed that cost reduction along with competent services is the main driving factor behind IT outsourcing decision. Costs are mainly related to development of a service or an IT application. By lowering costs, FIRM-1 was able to save money in a stringent budget situation, which is a driving factor for outsourcing. Focus on core activities, professional services, and reduced time to market are some other motivations and benefits.
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Cost and loss of critical skills are the most important risks associated with IT outsourcing decision for FIRM-1. Deciding what jobs to outsource, ongoing vendor relationship management, and continuous commitment to the spirit of partnership pose challenges for FIRM-1 in making IT outsourcing decisions. Apart from these, some other observations are noted in each of the focus areas. The participants said that it is a good strategy to outsource legacy systems, and that has been the trend for most of the organizations. FIRM-1 did outsource legacy systems in the past but are not doing it currently as it experienced some unsatisfactory outcomes in the past. So currently it is in the process of removing a bunch of legacy systems and has decided not to outsource them at the end of their life cycle. FIRM-1 believes that letting an external vendor replace the internal staff or anything in-house is definitely very complex. In the past, it had some failures. It had to continuously coordinate and monitor the outsourcing partner, which was not simple. So for FIRM-1, reduced complexity is not a benefit at all. In the risk category, geographical location is not a big risk factor for FIRM-1 to outsource their projects. Currently, the trend is to move to the Asia-Pacific region, especially India, for outsourcing jobs. This is mainly because of low cost and competent service. But participants were of the opinion that in another 5-7 years, China may also become one of the choices; it may also offer similar services. So the trend would again change. Hence, FIRM-1 does not have any preference for any geographical location. It is also worth mentioning that FIRM-1 does not worry about contractual amendment costs, as those are well taken care of by its very efficient legal department. It has never experienced loss due to outsourcer’s opportunism because of the type of business it is in. It believes such risks are mostly applicable to smaller organizations, start-ups, and software organizations. Since FIRM-1 does not market its software, it does not have this risk. They did face the risk of lack of trust but as soon as they real-
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ized it, they got ended their relationship with that particular outsourcing vendor. The participants stated if the partnering relationship is not ‘winwin’ or satisfactory to both parties, FIRM-1 won’t plan to continue with the relationship. Hence, FIRM-1 evaluates its vendors quite meticulously because primarily if there is no trust between them, FIRM-1 does not want to do business with those vendors. To summarize, high competency, low cost, and non-core business functions are the key drivers of the outsourcing deals. Applying transaction cost theory in our analysis, it is apparent that reducing transaction costs played an important role in the decision making process. Also, threat from opportunism and uncertainty is a risk for outsourcing.
casE sTudy: Firm-2 background FIRM-2 is a major, multi-national networking organization with annual revenues over US$20 billion. It provides the broadest line of networking solutions to most of the corporate, education, and government centers. Their hardware, software, and service offerings are used to create Internet solutions that allow individuals and enterprises to increase productivity, improve customer satisfaction and strengthen competitive advantage. It conducts most of its business over the Internet, and is recognized as the leader in this area. FIRM-2 outsources much of its production. Customers visit the website to configure, price, route and place orders directly to FIRM-2. More than half of the orders are directly transmitted to the suppliers. Once the product is manufactured, it is shipped directly to the customer. As a result the order to delivery cycle time is reduced from approximately eight weeks to less than three weeks. Moreover, this helped FIRM-2 and its suppliers to manufacture based on actual orders and not on projection, lowering inventory costs
Global IT Outsourcing
for both FIRM-2 and its suppliers, while making customers happy with the speed of fulfillment of the orders. Additionally, 85% of customer queries are handled through FIRM-2’s website. It has established a business-to-business supply chain extranet for its manufacturers and suppliers. This online exchange is used to purchase supplies, make reports, and submit forecast and inventory information. With the help of this common platform, it has been possible for both FIRM-2 and its suppliers to reduce inventories by 45%. FIRM-2 uses Internet extensively in every department of the organization. It also makes extensive use of intranet for its employees. Its employees use it to enroll in organizational benefits, and file expenses. More than 50 percent of technical training is provided online, saving the organization employee time and travel money while enabling employees to receive more training. Even peer reviews, collection of market information, and monitoring sales are all done online. It has also established a business-to-business supply chain extranet for its manufacturing partners and suppliers. With their Internet-based financial applications, they are able to continuously monitor their sales data and are able to close their books within a short period of time.
introduction Five individuals, from various divisions at FIRM2, were interviewed. Table 3 below shows their role and responsibilities.
FIRM-2 has outsourced its IT functions for the last 5 years. It has outsourced only portions of IT such as design, development, bug fixes, enhancements and customer support. FIRM-2 first identified those activities, which could be sent outside to finish faster. The core activities were kept in-house and the context activities were given out. Overall for FIRM-2, there is a central program office, which manages the relationship with the vendors and all the rates are negotiated centrally. FIRM-2 outsources its IT activities with five outsourcing vendors. It describes its relation with the vendors as very collaborative, focused on the success of the business client. During the outsourcing operations, the IT managers meet with Offshore Development Center (ODC) managers on regular basis. On site account managers ensure that critical issues are handled appropriately and provide oversight for the entire operation.
Outsourcing decision FIRM-2 is recognized as an innovator in conducting business over the Internet. It says that partnership is one of the pillars for the growth of the organization and such strategic partnerships have helped and contributed significantly to the customer’s, partner’s and FIRM-2’s bottom line. These strategic partnerships help FIRM-2 to focus on its core activities, and have helped FIRM-2 to reduce time to market. With these strategic alliances, it is possible for FIRM-2 to render quality services, and solutions to its customers. FIRM-2 tries to strike a partnership with such organizations that are leaders in their respective markets.
Table 3. FIRM-1 participants PARTICIPANTS
JOB TITLE
RESPONSIBILITY
Person 1
Senior manager, IT
Responsible for identification of outsourcing opportunities
Person 2
E-business director
Responsible for vendor selection, budget management, and monitoring the delivery of applications to requirements
Person 3
Project manager
Vendor management, execution and delivery of the projects
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FIRM-2 outsources many supply chain activities like manufacturing, product design, product development, engineering, and shipping and handling activities to various partners. Since Internet plays a significant role in optimizing the supply chain of FIRM-2, information technology plays a very important role in the supply chain of FIRM-2. With the growth in information technology, enabled by the Internet, it is possible for all the partners in the value chain to work together more closely and effectively than before, making the whole supply chain more effective. Based on the responses of the participants, an effort is made to analyze and understand the focus areas of IT outsourcing decisions in FIRM-2. IT outsourcing practices: FIRM-2 keeps complete project management control within, when the vendor supplies project expertise, technical knowledge, and manpower. FIRM-2 also encourages participative association of vendor in formulating design specifications. But FIRM-2 does not enjoy any access to attractive financing options from the vendor. Some other IT outsourcing practices that are followed by FIRM-2 are as follows: a.
Management of outsourcing vendors has become a core competency. So a centrally managed ODC project management office (PMO) is established that ensures common
b.
standards, governance policies and operating procedures across all vendors. Quarterly reviews are conducted to evaluate performance and to optimize business processes. By optimizing the business processes, FIRM-2 is able to optimize its overall supply chain. It also reviews areas of improvements, changes, and defects periodically.
When asked about how they manage the relationship with their vendors, one manager told us: IT managers meet with Offshore Development Center (ODC) managers on a regular basis. On site account managers ensure that critical issues are handled appropriately and provide oversight of the entire operation. Objectives: For FIRM-2, cost reduction, and focus on core activities are the main objectives for outsourcing its IT to external vendors. Building a competitive advantage, the organization’s strategic goals, quality and reliability, professional services, and customer satisfaction are also some important objectives for IT outsourcing in FIRM-2. Apart from the options mentioned in the questionnaire, maximum coverage for support related activities (context activities), decreased IT costs for non-critical projects, tap into wider talent pool,
Table 4. FIRM-2 participants PARTICIPANTS
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JOB TITLE / ROLE
RESPONSIBILITY
Person 4
Lower management
Manage day-to-day IT activities with the regression facility at the outsourcing partner’s facility in India; ensure that process is followed and reset / redesign process, if needed.
Person 5
IT manager (Middle management)
Responsible for managing team of IT professionals.
Person 6
Manager
Part of the group responsible for setting up the relationship with offshore outsourcing organizations.
Person 7
Senior manager
Responsible for outsourcing order-to-cash processes and systems, and for making outsourcing decisions.
Person 8
Senior manager
Responsible for defining business requirements, and prioritizing the outsourced tasks.
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and reduced time to market are some other primary objectives for FIRM-2 to outsource its IT. Based on the responses from the participants of FIRM-2, a histogram is plotted, which is shown in Figure 6. Benefits: The major benefits for FIRM-2 in outsourcing its IT are lower costs, optimal allocation and utilization of internal resources, and flexibility to respond quickly to changing demands and business environments. Predictable outcome, a higher degree of success, and higher quality and reliability are some other benefits that FIRM-2 realized by IT outsourcing projects.
Based on the FIRM-2 participants’ responses, a histogram is plotted, which is shown in Figure 7. Risk factors: Most important risk factors for FIRM-2 are: a. b. c. d.
Knowledge/expertise Quality standards Scope, cost and time estimates Measurement of performance
Participants from FIRM-2 believe that scope and requirements of the outsourced projects must be finalized, properly documented and stick to
Ratings (0 - 10)
Figure 6. Histogram for objectives for IT outsourcing (FIRM-2) 12 10 8 6 4 2 0
Person 4 Person 5
e s n y s ls g e bil ity ce s a ge nc ms og oa Cos t tiv iti e ac tio anta t vi ia ste v oida hnol v c sf r ic g re l l ser dvan sy c a eg owe or e a Sati e ad ty & y e a a t t e c n a r t n r L r ti v uali tu ga C si o a s a Str me e ti Le endi the -a Q fes y s to omp p -o f Pro ol og Cu ex C e l t n a h Sta pi t ec Ca wt Ne
Person 6 Person 7 Person 8
Objectives (Always = 10, Very Often = 8, Often = 6, Sometimes = 4, Rarely = 2, Never = 0)
Ratings (0 - 10)
Figure 7. Histogram for benefits of IT outsourcing (FIRM-2) 12 10 8 6 4 2 0 e ys ss res bility files ntrol xity tion ities gy lity sts a le o n olo ibi co com ela ce ilu hn Flex wer out ed d f suc er fa relia k pr nt co omp alloc ortu c e Lo table duc ee o Low and er ris eme ed c rce opp rt t a e r u s c y g c t R deg di ali Low ana edu reso sines the r R al bu Pre o fQu rm he tet im f y tte Hig Sta Be Op enti Id
Person 4 Person 5 Person 6 Person 7 Person 8
Benefits (Always = 10, Very Often = 8, Often = 6, Sometimes = 4, Rarely = 2, Never = 0)
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the specifications. Otherwise, if the requirements change continuously it would be difficult for both FIRM-2 and its vendors to do the job. This would then result in budget over run, and schedule slip, along with performance. A multi-vendor arrangement is another risk factor, as it involves more coordination efforts and demands a closely-knit governance model. People are another risk factor faced by FIRM-2. Cultural factors added to this risk. We also noticed that FIRM-2 takes a qualitative approach to measure the risks. When asked about how risk is measured, one manager told us: We assess the loss of business or lack of customer satisfaction with late delivery of projects. We assess this quarterly via surveys and business-balanced scorecards. We also assess risks associated with projects coming in over budget due to lack of clarity in requirements and scope.
having local IT counterparts in the loop, this will result into IT losing its core competence. Based on the responses from the participants of FIRM-2, a histogram is plotted, which is shown in Figure 8. Challenges: All the challenges asked in the questionnaire are important for FIRM-2. But cultural barriers and selecting the right vendor are the most critical challenges for FIRM-2 in outsourcing IT projects. Deciding what jobs to keep in-house and what to outsource, setting up a governance model, ongoing vendor relationship management, and continuous commitment to the spirit of partnership are also some important challenges for FIRM-2. Designing a contract was well taken care by the PMO of FIRM-2. Based on the responses from the participants of FIRM-2, a histogram is plotted, which is shown in Figure 9.
When asked what risks their customers and suppliers may have faced from their decision of outsourcing, one of the managers commented: Heavily outsourced operations where vendors have significant knowledge of business process have significant risk to customers. If customers are directly dealing with outsourced vendors without
Best Practices: 1. 2. 3.
Empowerment and escalation Frequent informal communications Key strategic issues review meetings are the most important best practices in FIRM-2
Figure 8. Histogram for risk assessment factors in IT outsourcing (FIRM-2) Ratings (0 - 10)
12 10 8 6 4 2 0
of teSta
e-a -th
ec rt t
e ys ss res bility files ntrol xity tion ities gy lity sts a le o n olo ibi co com ela ce ilu hn Flex wer out ed d f suc er fa relia k pr nt co omp alloc ortu e o o c l L tab u ee Low and er ris eme ed c rce opp d u s c g ty Re degr dic ali Low ana edu reso sines r R al bu Pre m Qu he m if y er g i t i t t H Be Op ent Id
Benefits (Always = 10, Very Often = 8, Often = 6, Sometimes = 4, Rarely = 2, Never = 0)
248
Person 4 Person 5 Person 6 Person 7 Person 8
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Figure 9. Histogram for challenges of IT outsourcing (FIRM-2) Ratings (0 - 3)
4
Person 4
3
Person 5
2
Person 6
1
Person 7 Person 8
0 t t n n rs en ce ce en si g ti o rie ur an i tm em ar De le c rn m g b ts o t e e l a u m S o ac ra ov an Co or ntr l tu t to pg rm nd Co Cu ha tu do Ve e n W S Ve
Challenges (Critical = 3, M oderate = 2, Can deal with = 1, Not important / NA = 0)
Ratings (0 - 3)
Figure 10. Histogram for best practices in IT outsourcing (FIRM-2) 4 3 2 1 0
Person 4
s ity ns w ttees y -i n tion s rs on ps i lati shi atio Ent age Item v ie u a sc a l atio n un ic ec ia l M an c tion es Re omm l der B u nic E nt / e r Re Comm a Sp ti onal tiz e A Iss u ri ng C keho omm e C i c erm Pe rmal bl is h Add rio ri teg i Ste e Sta orp. P tr a a C pow S Info Es t Em
Person 5 Person 6 Person 7 Person 8
Best Practices (High importance = 3, Medium importance = 2, Low importance = 1, Not important = 0)
Peer relationships and stakeholder buy-in are also important practices that FIRM-2 follows. Prioritizing the action items is also another best practice followed there. Another practice that is followed in FIRM-2 is the creation of Program Management Office (PMO). A central program management office is created to manage the outsourcing relationships. However, establishing a special entity, like a joint review board or corporate media communications are not very popular practices in FIRM-2. Figure 10 shows the histogram for the best practices followed in FIRM-2.
case conclusion By outsourcing, FIRM-2 is able to better manage the available resources to focus on core activities. Some other measures that FIRM-2 has taken to ensure its supply chain success are the following: •
• •
Establish standards, governance, and guidelines for working with offshore outsource vendors. Manage projects locally, but distribute the work globally. Measure the performance and optimize the process.
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The management is making all efforts to educate the employees in the concept of core and support activities. Building the ‘one team’ atmosphere is very helpful in this area. Both the onsite and offshore teams work collaboratively as a single team to help achieve the overall success. Also providing training, job rotation, and new career opportunities are some important steps towards dealing with the backlash against outsourcing. FIRM-2 did not disclose its actual costs savings. However, an approximate estimate projected by the participants of FIRM-2 is slightly more than 50% cost savings on a per person basis. From the analysis, it is observed that cost reduction is one of the main motivations behind IT outsourcing decisions in FIRM-2. Focus on core activities, and professional services are some other motivations and benefits. Cost and loss of critical skills are the most important risks associated with IT outsourcing decisions for FIRM-2. Cultural barriers and selecting the right vendors are most challenging for FIRM-2 in making their IT outsourcing decisions. Apart from these, some observations are noted in each of the focus areas, which are described here. Some participants rated major capital expenditure avoidance and access to state-of-the-art technology as very low. They reasoned that IT outsourcing had actually caused their divisions a major capital expenditure, mostly in capital equipments, to set up their offshore development centers. Moreover, they were of the opinion that they certainly do not go offshore to access state-of-the-art technology. The outsourcing partners are providing FIRM-2 skilled resources, or state-of-the-art programmers, and not state-of-the-art technology. One of the persons had the opinion that IT outsourcing did not have much impact on the organization’s strategic goals and competitive advantage, and his team did not have anything to do with reducing the burden of legacy systems. As far as benefits are concerned, access to state-of-the-art technology is rated very low. This
250
is because by outsourcing IT, FIRM-2 gets access to state-of-the-art programmers and resources. ‘Better ability to identify possible business opportunities and threats so as to evaluate and manage them in the strategic perspective’ is not an important factor for FIRM-2. It believes that going offshore does not decrease management’s attention to the outsourced tasks. It still takes a lot of management overhead to run those outsourced tasks right. Though financial, political factors and geographical locations are some other risk factors, FIRM-2 deals with five vendors, which are well established, competent and financially stable. Also these vendors are located in countries where the political situation is quite stable. So those risk factors are not very alarming. FIRM-2 has rarely faced risks like contractual amendment costs, disputes and litigation costs, vendor subcontracting the job, and loss due to outsourcer’s opportunism. All these are well taken care of and explicitly mentioned in the contract. Penalties for such unhealthy situations and non-performance are also clearly spelt out in the contract. This saves FIRM-2 from these risks, but makes the job of designing a contract very challenging. Applying transaction cost theory in our analysis, it is apparent that reducing transaction costs played an important role in the decision making process. Also, threat from opportunism and uncertainty is a risk for outsourcing.
analysis OF ThE casEs After conducting the case analyses, it was clear that transaction cost theory was the theoretical foundation behind IT outsourcing decisions for both firms. As proposed by Williamson in the transaction cost theory, outsourcing work results in lower production or service costs than doing it internally due to economies of scale. The same argument is also true in the two cases that we analyzed. Another interesting point noticed from
Global IT Outsourcing
the analysis is that FIRM-1 is one of the suppliers for FIRM-2. Thus they both have common goals of making their supply chain successful and maximizing the overall profitability. Both the firms described their relation with the IT outsourcing partners as very collaborative and healthy. The outsourcing relationship is managed using a combination of performance metrics, periodic discussions regarding timely delivery, budget and schedule. From the focused group interviews of participants from the firms, the following results and conclusions for each key area were drawn. Objectives: It is observed that the top three important reasons for IT outsourcing, in both the firms, are lower costs, focus on core activities, and professional services. Almost 75% of the respondents were of the opinion that lower costs, professional services, quality and reliability are most often the motivations for IT outsourcing projects. 63% of the respondents said that focus on core activities is another motivation for IT outsourcing. Benefits: It is clear that for both the firms, the main benefit of IT outsourcing is reduction in costs. Also management is able to allocate and utilize the resources optimally. Flexibility to respond to changing demands is the third ranked benefits, which both the firms achieved by IT outsourcing. Almost 63% of the respondents said that reduction in costs is always the benefit of IT outsourcing. Seventy-five percent of the participants said that predictable outcome is another key benefit of IT outsourcing. Sixty-three percent of the respondents said that a higher degree of success and optimal allocation and utilization of resources are most often achieved benefits of IT outsourcing. And 50% of the participants said that increased flexibility is also a key benefit of IT outsourcing. Risk factors: The main risk factor observed for both the firms is knowledge. Both organizations
felt that knowledge transfer needs to be carried out meticulously. The organizations as well as their outsourcing partners should follow proper methodology for knowledge transfer and information sharing. Secondly, both firms felt that there should be project scope, cost, and time estimates for such outsourcing projects. It is observed that 75% of the respondents said that knowledge is the most critical and always a risk factor in IT outsourcing. Fifty percent of the participants said that scope, cost and time estimates is another critical risk factor. Sixty-three percent of the participants said that monitoring and measurement of performance is a most often a risk factor. And more than 50% of the participants were of the opinion that quality standards are another risk factor in IT outsourcing. Challenges: The biggest challenge for both firms is selecting the right vendor and deciding what to outsource and what to keep in-house. Since both firms have a good legal department and a program management office, they have not faced the challenge of designing a contract very often. Setting up a governance model, ongoing management of the vendor relationship, and continuous commitment to the spirit of partnership are some very important challenges for both the firms. It is clear that 50% of the participants said that selecting the right vendor, and deciding what to outsource and what to keep in-house are the most critical challenges while 63% said that continuous commitment to the spirit of partnership is a moderate challenge faced in IT outsourcing projects. Fifty percent of the participants said that setting up a governance model, ongoing management of the vendor, and designing a contract were some of the challenges. Other factors contributing to risk: Apart from the risk factors described earlier, there are other factors that also directly or indirectly contribute to risks in outsourcing. Transition and
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management cost is one of the top priority risk, followed by cost escalation risks. There are also some hidden costs involved in outsourcing like cost of retention/lay-offs, and the cost of ramping up. In addition, loss of critical skills, switching costs, and poor quality and reliability are the other very important risks involved in outsourcing. From the interviews, we found that 63% of the respondents said that the most critical risks are unexpected transition and management costs, and other hidden costs. Almost 50% said that cost escalation, and poor quality and reliability are another critical or moderate risk. Seventyfive percent said that switching costs is another moderate risk. Best practices: Empowerment and escalation are the top priorities for the two firms. Also both organizations hold informal communication sessions frequently to update the management and the employees about the outsourced projects. Stakeholder buy-in was the next important practice that both firms followed. It is observed that more than 87% of the respondents said empowerment and escalation, and frequent informal communications are the most important practices followed in their firms. Seventy-five percent said that stakeholder buy-in is another best practice followed in their organization. Apart from the results observed in each key area, the following observations were noticed for both firms: Both firms felt that there are other risks involved in outsourcing. Transition and management cost is the top priority risk, followed by cost escalation risk. Hidden costs, like the cost of retention and lay-offs and the cost of ramping up, is the third import risk. Loss of critical skills, switching costs, and poor quality and reliability are the other very important risks involved in outsourcing. It is seen that 63% of the respondents said that most critical risks are unexpected
252
transition and management costs, and other hidden costs. Almost 50% said that cost escalation, and poor quality and reliability are another critical or moderate risk. 75% said that switching costs is another moderate risk. For risk reduction, there are several methods that both organizations follow. We combined all the responses from all of the persons interviewed from both organizations and listed them in Table 5. Let us also mention here that the first three responses (Person 1, Person 2 and Person 3) are from FIRM-1 and that rest of the responses (Person 4 through Person 8) are from FIRM-2.
cOnclusiOn and FuTurE rEsEarch dirEcTiOns In many large organizations, IT outsourcing is being considered as a viable cost reduction alternative. Other than cost reduction, a shortterm requirement of highly skilled resources is another objective for firms to outsource IT. The top management of both firms are convinced of the benefits of outsourcing and supports outsourcing decisions. More than anything, support of the top management is key towards the success of IT outsourcing for both firms. Risks in outsourcing can be managed through proper contractual agreement and quality standards. This has also been described in the work of McFarlan and others (McFarlan et al., 1995). In addition, continuous monitoring of projects can also reduce risks. Both organizations have risk contingency plans. Broadly, risk is measured on performance metrics over time. Risk factors are weighed to reflect financial implications as well. The metrics to measure the effectiveness of an outsourcing arrangement are checked frequently, and are brought up during the quarterly review meetings. If a risk is time bound, risk mitigation plans are created and executed. If there are repeated and multiple failures to meet the service level agreements (SLA) goals, then alternative vendors
Global IT Outsourcing
Table 5. Summary of the case studies Category
FIRM-1
FIRM-2
Implications from Transaction Cost Theory
Objectives
Cost reduction, focus on core activities, professional services, building a competitive advantage, quality and reliability, access to state-of-the-art technology, and higher customer satisfaction.
Cost reduction, focus on core activities building a competitive advantage to enable the organization’s strategic goals, quality and reliability, professional services, higher customer satisfaction, maximum coverage for support related activities (context activities), decreased IT costs for non-critical projects, tap into wider talent pool, and reduced time to market
Reduce overall transaction cost
Key Benefits
Cost reduction, optimal allocation and utilization of internal resources. Reduced time to market, improved flexibility to respond to the changing demand and business environment, predictable outcomes, higher degrees of success, and higher quality and reliability.
Lower costs, optimal allocation and utilization of internal resources, flexibility to respond quickly to changing demands and business environments. Predictable outcomes, higher degrees of success, and higher quality and reliability.
Reduce overall transaction cost
Important Risk Factors
Knowledge, people, contract management, performance measurement, formulating scope and deciding the budget and schedule estimates.
Knowledge/expertise, quality standards, scope, cost and time estimates, measurement of performance, multi-vendor arrangements, cross culture.
Threat from opportunism and uncertainty
Challenges
Deciding what jobs to keep in-house and what to outsource, ongoing vendor-relation management, setting up a governance model, selecting the right outsourcing partner.
Cultural barriers, selecting the right vendor, deciding what jobs to keep in-house and what to outsource, setting up a governance model, ongoing vendor management, and continuous commitment to the spirit of partnership.
Threat from opportunism
Best Practices
Stakeholders’ buy-in, frequent informal meetings, prioritizes the action items as per their importance.
Empowerment and escalation, frequent informal communications, key strategic issues review meetings, peer relationships and stakeholder buyin, prioritizing the action items, creation of PMO.
Reduce overall transaction cost
may be identified for part or rest to complete the rest of the work. If the business processes and QA methodology are very robust, well thought and the project management is done properly, risks will be reduced in global outsourcing. Other than effective project management, and participative association of vendors in formulating design specifications, it is very important to have planned and periodic reviews to improve the communication with the team members. The concept of ‘one-team’ should be strengthened. Also quality management programs and metrics should be followed. It is again a good practice to have an out-clause and penalty for not meeting the SLAs. Selecting the right outsourcing partner is an important factor in a successful outsourcing project. Another interesting observation is that the organization and the outsourcing vendor are forming partnerships, which is based on mutual trust and long-term commitment. This trend has
also been observed in the work of Lee and other researchers (Lee et al., 2003).
FuTurE rEsEarch dirEcTiOns As IT outsourcing matures, its implications, issues and challenges are also evolving. We discuss a number of issues and future directions of research, which appear to be important. Further research will be necessary to determine the potential benefits and impact. •
Focus on core competencies: In order to gain efficiency and time to market products and services rapidly, many enterprises are outsourcing certain parts of their IT to free up management and IT personnel and valuable resources (Halvey et al., 1996). As global outsourcing moves up the value chain, management needs to focus on their
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Table 6. Summary of risk reduction practices Person 1
Person 2
Person 3
Person 4
Person 5
Person 6
Person 7
Person 8
Round the clock project management over globally distributed teams
N/A
Complete project management control with the vendor, over project initiation, planning, and execution for the outsourced project
Complete project management control with the organization, where the vendor supplies project expert technical knowledge, manpower, and other intellectual resources
Participative association of vendor in formulating design specifications
Complete outsourcing of projects, except design specifications, to vendors located at offshore locations inside and outside the country
Access to value added products from the vendor
Access to attractive financing options for the outsourcing deal from the vendor
N/A
Risk Reduction Practices in IT Outsourcing
•
•
•
254
core competencies and outsource some highend work for high quality and a reduction in development time. However, there are some hidden costs associated with outsourcing that need to be studied in detail. The growth in alliances and partnerships: New strategic partnerships and alliances are being formed between multiple companies, which offer synergistic skills with a focus on target markets. However, the long term merits and success of these partnerships are yet to be determined. Equity holding deals: As new partnerships are forming, equity-holding deals are also on the rise. Many vendors are taking stake in the outsourcing client and clients taking stake in their outsourcing vendors. Further research is necessary to see if the new wave of outsourcing arrangements and deals offer value to both the vendor and client that were not present earlier. Offshoring: Due to the high-skilled labor shortages in the U.S. and in many developed nations, offshore outsourcing is growing as
•
many companies look offshore for better quality IT services in shorter turn-around times and at lower costs. Future research can potentially address some of the important characteristics related to the cultural differences, work ethics and best practices of both the vendor and the client in trying to develop good working relationships as they engage in long term costly and often risky projects of offshore outsourcing. These issues become quite important and challenging particularly in multi-vendor arrangements. Insourcing: With rising, hidden costs of outsourcing coupled with growing concerns about job loss in developed nations, many are in favor of insourcing. Many organizations that made large scale outsourcing operations hoping for a better return on investments found out later that the tangible benefits were not fully attained through the outsourcing arrangements as planned (Hirschheim & Lacity, 2000). They also hoped for better service levels and superior customer satisfaction. However, in some cases it was just
Global IT Outsourcing
•
•
the opposite and some outsourcing contracts were terminated due to this. More studies are required in this area to explore the pitfalls of outsourcing. The rise of ASP: Application on demand enabled by ASP is becoming popular (Lee et al., 2002). Although there are some tangible benefits of ASP, there are some potential drawbacks. Since ASP’s provide packaged software solutions, sometimes they may not be able to provide customizations that are required for each individual business process. Further research is required to prove the merits and ROI of ASP. Security and protection of intellectual property (IP): Security is one of the biggest concerns today for outsourcing deals, as the sensitive data needs to be protected from fraudulent practices. In addition, intellectual property laws vary from country to country. Because of varying IP standards are not properly implemented in various countries, we anticipate many disputes and lawsuits in the future.
nOTE This research is funded by the Lucas Fellowship award.
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Overby, S. (2003). The hidden costs of offshore outsourcing. CIO, 60-66. Robb, D. (2002). 5 top trends in offshore outsourcing. Datamation, December. Rothman, J. (2003). 11 Steps to successful outsourcing: A contrarian’s view. Computerworld, September. Sabherwal, R. (2003). The evolution of coordination in outsourced software development projects: A comparison of client and vendor perspectives. Information and Organization, 13, 153-202. Schneier, B. (2002). The case for outsourcing security. Computer, 35(4), 20-26. Vijayan, J. (2001). Outsourcers rush to meet security demand. Computerworld, 35(9), 34. Wang, E.T.G. (2002). Transaction attributes and software outsourcing success: An empirical investigation of transaction costs theory. Information Systems Journal, 12, 121-152. Williamson, O.E. (1985). The economic institutions of capitalism. New York: Free Press.
addiTiOnal rEading Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka (2004). Information systems outsourcing: A survey and analysis of the literature. The Data Base for Advances in Information Systems, 35(4), 6-102. Hall, J. A., & Liedtka, S. L. (2007). The SarbanesOxley Act: Implications for large-scale IT outsourcing. Communications of the ACM, 50(3). Goo, J., & Nam, K. (2007, January). Contract as a source of trust—Commitment in successful IT
outsourcing relationship: An empirical study. In Proceedings of the 40th Annual Hawaii International Conference on System Sciences (HICSS). Kinnula, M., Seppanen, Y., Warsta, J., & Vilminko, S. (2007, January). The formation and management of a software outsourcing partnership process, In Proceedings of the 40th Annual Hawaii International Conference on System Sciences (HICSS). Nyrhinen, M., & Dahlberg, T. (2007, January). Is transaction cost economics theory able to explain contracts used for and success of firm-wide itinfrastructure outsourcing? In Proceedings of the 40th Annual Hawaii International Conference on System Sciences (HICSS). Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM 50(4), 69-75. Sargent, A. Jr. (2006). Outsourcing relationship literature: An examination and implications for future research. In Proceedings of the 2006 ACM SIGMIS CPR conference on computer personnel research: Forty- four years of computer personnel research: achievements, challenges & the future SIGMIS CPR ‘06. Shao, B., & David, J. S. (2007). The impact of offshore outsourcing on IT workers in developed countries. Communications of the ACM, 50(2). Taylor, H. (2006). Critical risks in outsourced IT projects: The intractable and the unforeseen. Communications of the ACM, 49(11). Wu, F., Liu, C., & Li, P. P. (2006, June). Management system of outsourcing: Protection of core competence perspective. In SOLI ‘06. IEEE International Conference on Service Operations and Logistics, and Informatics (pp. 740-745).
This work was previously published in Handbook of Research on Global Information Technology Management in the Digital Economy, edited by M. Raisinghani, pp. 281-311, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Outsourcing and Strategic Outsourcing Sonia Dahab Universidade Nova de Lisboa, Portugal Filipe Amaral Grupo Sumol, Portugal
The production of a good or service frequently requires that the supplier performs a wide range of activities. The coordination between those activities implies that the firm must determine its boundaries, which means that it must define the supply chain activities that will be performed internally, and those that will be trusted to external suppliers. The process of obtaining goods and services from outside suppliers, instead of developing them within the organization, is called outsourcing (Anderson & Naurus, 1991). Broadly speaking, outsourcing presents advantages insofar as external suppliers are able to attain economies of scale that an internal department, producing exclusively to meet the firm’s needs, cannot. Moreover, an external supplier is subject to the discipline of the market, which creates a greater incentive to efficiency and innovation than is the case in an integrated firm, where overall success may disguise inefficiencies in certain areas. However, the decision to give away a link
of the value chain to an external supplier presents challenges when it comes to coordinating the production flows and managing a relationship with an independent entity. In addition, close cooperation with another firm increases the risk of privileged information leakage (Baldwin & Clark, 2002). Regarding the difficulties of coordinating production flows between a firm and its outsourcing suppliers, Novak and Eppinger (2001) analyze the relationship between the design complexity of components (which are potential targets for outsourcing) and the degree of vertical integration. They conclude, based on an empirical analysis of the automobile industry, that complexity is decisive in explaining the proportion of components that is manufactured in-house. The potential impact of an outsourcing decision justifies an adequate analysis, and an approach that places this option within the context of the strategic orientation of the firm. According to Quinn and Hilmer (1994), a firm can leverage
the use of its resources if it chooses to follow a combination of two strategic approaches. On the one hand, it should develop a small set of carefully selected core competencies, on which investment and management time must be concentrated. On the other hand, the firm should outsource all other activities, even if these include areas that were traditionally considered too fundamental to the firm’s business to be performed externally. The importance of a differentiated treatment of core competencies is evident in Quinn’s (1999) statement, according to which a firm loses a competitive edge when it performs an activity internally without having a world-class performance at it. It would be better off by handing over that activity to an outside supplier. Core competencies are the activities that allow a firm to maintain a competitive edge in the long run. They generally include two or three steps of the value chain and have to do with areas such as product (or service) design, technology creation, customer service and logistics, in which the firm can achieve a performance that is superior to that of any competitor. Core competencies must concern matters that are important for client satisfaction in the long run, and not only for the needs of today’s customer. It is fundamental that they be embedded in the organization, and not merely present among a subset of individuals within the organization. To Nieminen and Nummela (2004), core competencies possess four fundamental characteristics: they are valuable, in the sense that they allow the firm to provide satisfaction to its customers; rare, distinguishing the firm from its competitors; hard to replicate, contributing to the sustainability of the competitive advantage; and last, they must be embedded in the functioning of the organization, so that its potential benefits can be totally realized. By following the strategy of concentrating the firm’s attention in core competencies and outsourcing all other activities, it is possible to improve competitive advantage and profitability. Committing to the development of core compe-
tencies concentrates the firm’s activity on areas in which it has better performance, in that way maximizing the profitability of resources, and building effective barriers to the entry of present and future competitors. Trusting production to external suppliers allows simultaneous access to investments, innovations and specific competencies of one or several firms, which would be very expensive, or even impossible to duplicate internally; moreover, the risk associated with the development of components and technology is now shared between various suppliers, instead of being concentrated in the firm. This sort of relationship also introduces flexibility and a greater ability to respond to changing customer needs. According to Quinn (1999), the emphasis is currently shifting from outsourcing relationships that are limited to well defined production activities (e.g., the production of parts and components), toward knowledge-based activities, with higher value added. This occurs because specialized service firms are becoming larger and more sophisticated relative to the scale that a single division within an integrated firm can achieve. This trend leads inevitably to the need to redefine the relationship between a firm and its suppliers, in the direction of greater proximity; as Anderson and Naurus (1991) state, the relationship of a firm with its suppliers is increasingly one that can be characterized as a partnership, instead of a simple buyer-supplier agreement. These authors point out the tendency for firms to outsource activities that are increasingly close to the final consumer, like sales or customer support. Thomke and von Hippel (2002) present an approach focusing on innovation, where firms outsource the design of new products, handing over to their customers a significant part of the responsibility for drawing and developing products with the desired characteristics, through computerized tools that are made available to them. Kopczak and Johnson (2003) also refer to the shift toward the increasing participation of “collaborators” that do not belong to the firm, in the design of products, processes and the supply chain. 259
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sTraTEgic/inTEgraTEd OuTsOurcing The range of possible relationships between two firms that are doing business with each other can be adequately represented as a straight line, in which we have at one extreme the purely transactional relationships and, at the opposite end, the totally collaborative relationships or partnerships (Anderson & Narus, 1991). In the first kind of relationship, the attention of buyers and suppliers is focused on competitive prices and timely deliveries. In collaborative relationships, buyer and supplier develop close ties through time, with the goal of reducing total costs and/or increasing the value that can be obtained from the relationship, reaching mutual benefits as the partnership develops. Strategic, or integrated, outsourcing develops along the existing trend to widen the traditional notion of outsourcing, from peripheral activities to higher value added activities of vital strategic importance, such as marketing and sales. This trend to externalize activities, and entrust them to external suppliers with a high degree of specialization, is in accordance with the movement of value migration that is referred to by Swhney and Parikh (2001). These authors claim that in a world of business networks, there is value in modularity, which means the ability to integrate equipment, software, organizational abilities or business processes in several networks or, put differently, in several value chains. Strategic outsourcing can also be analyzed in the context of recent shifts in business thinking regarding supply chain management, as Kopczak and Johnson (2003) point out. One of them is the shift from cross functional integration to cross enterprise. According to these authors, enhanced coordination can lower supply-chain-related costs and improve responsiveness within a chain of companies. Another shift is the one from the pursuit of physical efficiency (cost minimization in production and distribution) toward market mediation, which
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concerns the matching of the quantity and variety of products supplied through the chain to those demanded. Significant progress can be made in market mediation, through closer relationships— like integrated outsourcing—between suppliers and buyers. A third shift concerns the evolution of mass-market supply into tailored offerings, serving each customer or segment uniquely. Quélin and Duhamel (2003) define strategic outsourcing as the transfer of a transaction that was previously an internal responsibility, to an external supplier through a long-term contract (often without a pre-defined date for its termination). This contract may involve the transfer of some of the firm’s human resources to the supplier. In the same article, the authors point out five characteristics of strategic outsourcing: 1.
2.
3.
4. 5.
Close connection between outsourcing processes and the key success factors in an industry; Transfer of the ownership of a business function that was previously internalized, often including the transfer of personnel and physical assets to the supplier of the product or service; Overarching contract, wider and more detailed than a classic subcontracting agreement; Long run compromise between buyer and supplier; and Contractually defined service levels and partner obligations.
The fundamental idea is therefore integration: the supplier is no longer fully separated from the buyer, and the resulting interaction will allow him to supply higher value added services, and not just well-defined tasks. This sort of relationship will let the supplier know the needs of the contractor in greater depth, and in that way give him the ability to create a more complete offer, which in many cases means attaching a set of services to the original product, or delivering a high degree
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of customization. The degree of integration can assume physical characteristics, as stated by von Corswant and Fredriksson (2002), in an empirical study of the automobile industry. These authors found that in this industry the suppliers of components and subsystems frequently place productive units next to the car manufacturers’ assembly line. Robinson, Clarke-Hill, and Clarkson (2002) report identical findings in the commodity chemicals industry.
prOblEms and risks We can therefore see that strategic outsourcing is a way for firms to develop from a product oriented business into the services market. This transition presents important risks to the firm since, as Nambisan (2001) observes, managers often limit themselves to approaches that they already know, and that may not be adequate for the new business. In fact, this author points out a number of cases of software firms that tried to develop from the service market to the product market, and failed to do so because they did not understand the fundamental differences between corresponding business models. Nambisan presents five key factors that establish the difference between the product market and the service market. The first one is the importance of intellectual property rights, which are crucial in maintaining a product’s competitive advantage, but lose most of their importance in a service business, where suppliers rarely own the rights to the services they develop or to the knowledge generated. The second factor has to do with the importance of compatibility and complementarity in products, contrasting with customized services. A third concerns the importance of fixed costs (and, hence, of economies of scale) in product firms, whereas service costs are mostly variable. The fourth issue refers to knowledge: product firms benefit from abstracting knowledge (by removing context-specific elements) while service firms seek
total customization, making context-specific elements essential. Lastly, the author points out that the relationship with customers is a critical source of innovation for product vendors, who commit considerable resources to long-term relationships, instead of following a shorter-term approach, as service firms do. Although this article’s goal is to explain the opposite movement to the one that we analyze here, it will be useful to consider these differences throughout the text. Anderson and Naurus (1991) argue that unsuccessful cases of outsourcing are generally a result of an incorrect use of this sort of relationship. In order to make an appropriate use of outsourcing, Mahnke (2001) points out a number of necessary conditions: 1.
2.
3.
4.
5.
Top management involvement: Outsourcing increasingly demands a strategic framework and, therefore, it deserves attention identical to that which is given to other aspects of the firm’s strategy; additionally, outsourcing may require delicate decisions to be made (eliminating departments or reallocating workers) and these will only be made when adequately backed up. Outsourcing should not be used to free managers from a department or activity that is considered too problematic, since this attitude will lead to sudden decisions, where the limits of externalization will not be adequately defined. The buyer should proactively try to gain good knowledge of the supplier and its limitations, avoiding the tendency of suppliers to overrepresent their capabilities. Maintain performance measures and specific objectives for each outsourced activity, and make frequent contact to review performance up to the moment, and undertake adjustments as necessary. Link performance standards to results sharing.
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6.
Assure close communication between buyer and supplier, so that they can share information and draw mutually beneficial strategies.
These conditions support the idea that it is fundamental to integrate buyer and supplier; the ideal relationship is that of two partners acting together, in order to attain certain objectives. Another drawback to outsourcing is that it is possible for the buyer to be placed in a vulnerable situation, namely when suppliers have a significant market power, or when there are asymmetries of information between buyer and supplier. These risks are particularly significant when there are relationship-specific assets (assets that are developed in the context of a particular relationship between firms, and that lose most of their value when used outside that context). When choosing to outsource activities, the firm may be losing the ability to perform them with a minimum acceptable efficiency, making itself dependent upon suppliers that may not abide by the agreedupon quality patterns, or suppliers that have similar relationships with the firm’s competitors. Furthermore, when a supplier’s priorities do not coincide with the buyer’s, conflicts of interest are bound to occur. These can be prevented, however, through a series of control mechanisms that range from a close contact between both parties, to joint ownership of fundamental equipment.
appliEd characTErisTics OF inTEgraTEd OuTsOurcing in TwO indusTriEs The automobile industry is the one most mentioned in the literature, and is frequently characterized by relationships of high proximity between firms and their outsourcing suppliers of components. Broadly speaking, this sort of relationship appears when a traditional outsourcing contract is insufficient to guarantee the level of coordination and
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stability that the industry characteristics demand. Industry demands are visible with respect to technological requisites (e.g., the need for flawless integration of various suppliers’ components with the base product), and also concerning the need to develop relationship-specific assets that increase the value of the relationship, but at the same time create the risk of opportunistic behavior. With respect to relationship-specific assets, economic theory calls our attention to the fact that it is frequently impossible to write complete contracts, especially when relationships between firms are concerned, since it is hard to specify every possible contingency and negotiate the corresponding responsibilities of each party. Again, the automobile industry provides good examples—this time, of incomplete contracts. The investment in the qualifications necessary to coordinate product development occurs during the design phase, but the benefits are only appropriated at the manufacturing stage. Before prototypes are tested, it is not possible to enumerate the number and importance of the changes to the original design that will be necessary. After the test, it is the firm that owns the productive assets and that has the power to determine necessary changes. This may explain the increase of integrated outsourcing relationships in the automobile industry. There are important trends in the automobile industry concerning the relationship with suppliers; according to von Corwant and Fredriksson (2002), there is a growing reliance on outsourcing in the industry, with the corresponding focus of automakers on those areas where they possess a competitive advantage. Moreover, automakers tend to increase the purchases of complete subsystems for their vehicles, instead of isolated components. Despite this, the supplier base is contracting, as a consequence of the automakers’ efforts to establish closer relationships with them. The fact that automobile manufacturers are externalizing more sensitive activities has created the need for an increased cooperation with their suppliers, in order to guarantee an effective coor-
Outsourcing and Strategic Outsourcing
dination of the productive process. The integration between suppliers and automakers in some cases reaches a physical dimension, in which suppliers install productive units next to car assembly lines, allowing for immediate adjustments in their products, and also just-in-time delivery. Another aspect that is worthy of attention has to do with the growing importance that these suppliers have in the development of new products, showing the added value that these relationships can bring to the automakers. Von Corswant and Fredriksson (2002) point out that the suppliers’ involvement in product development allows automakers to benefit from their accumulated knowledge as well as they call attention to the example of Japanese automakers, whose significant integration with suppliers allows them to obtain lower costs, higher quality and more innovation. They also note that Japanese firms operating in the U.S. (and relying on U.S. suppliers) have obtained a significant advantage through working closely with their suppliers, namely in the development of lean production capabilities and the coordination of production. Quinn et al. (1990) restates the importance of accessing external suppliers’ experience and ability, pointing out at the same time the improvement in innovation capabilities resulting from the connection to knowledge sources outside the firm. In the commodity chemicals industry as well, there is evidence of value creation through closer relationships between customers and suppliers. This is an industry with a strong tendency for competition to be based on low cost / low price, because of the infeasibility of differentiation through modifications in product characteristics. As Robinson, Clarke-Hill, and Clarkson (2002) note (while studying this sort of relationship from the point of view of the supplier), some firms have sought differentiation by associating a set of services with their base product. The services that customers value the most include regular contact with suppliers, coordination of order procedures (including just-in-time systems),
technical assistance and quick response when unforeseen events take place. This kind of service level can only be achieved within the context of a very close relationship between firms and their customers; this proximity can evolve to a physical dimension, with direct links between the buyer and the supplier’s productive process. At this stage of integration, the base product and the associated services are no longer easily distinguishable, forming an overall offer. An interesting parallel can be noticed between these two perspectives: in the same way that in the automobile industry manufacturers select a limited set of suppliers with whom they seek to develop long term relationships, in the commodity chemicals industry the suppliers select a set of key customers for whom they develop a more complete offer, with a significant degree of value added service. This phenomenon is a direct consequence of the customization of the service dimensions of supply: due to their non-compatibility and non-transferability, solutions can only be developed for a selected set of customers. If they were to be applicable to most customers, it would deprive them of their unique (and valuable) characteristics.
rEQuirEmEnT FOr ThE suppliEr The uniqueness of an outsourcing relationship places demands on the firm that supplies the goods or services, especially when the relationship is characterized by a high degree of proximity. Ratten (2004) developed a conceptual model to explain the process of learning in the context of collaborative relationships, and advanced a few propositions about the necessary competencies for participants to benefit from cooperation, in terms of increased knowledge. The author suggests that the participants’ previous experience in other collaborative relationships and the existence of alliance-based norms (rules that define limits
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of behavior, discouraging opportunistic actions) favors the participants’ learning orientation; the greater the learning orientation, the greater the benefits for the parties involved, in terms of knowledge acquisition. Quélin and Duhamel (2003) explore the issue of initial agreements, and discuss the need for the supplier to develop strong competencies in contract management, involving aspects such as measuring relationship performance and maintaining adequate levels of information exchange that guarantee transparency in every action (from cost accounting to knowledge development and sharing). The supplier must also possess the ability to keep his offer constantly up to date, an idea that is backed by Anderson and Narus (1991). A fundamental feature of an outsourcing relationship is the supplier’s ability to innovate in order to meet the customers’ expected results. Ulwick (2002) points out the risk that suppliers might limit themselves to the implementation of solutions that were previously conceived by the clients, instead of investigating their real needs, and start the innovation process from there. In the context of international strategic alliances, Pan (2004) suggests a set of propositions that can be transferred to the context of integrated outsourcing, since these two kinds of relationship present some common characteristics. According to Pan, the departure point for a successful strategic alliance should be the perceived value creation for the customer, and the ability to meet his expectations; the author argues that customerrelated factors are often overlooked, because most of the attention is focused on the mutual fit of the partners. So, he claims that a partner that possesses a deeper knowledge of the alliance’s target market, and a stronger ability to serve its customers will contribute to a better performance of the alliance; identically, the process of learning from local partners that have accumulated relevant knowledge about target customers will produce higher efficiency.
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advanTagE OF inTEgraTEd OuTsOurcing FOr cusTOmErs As briefly pointed out in the introduction, outsourcing has a number of advantages for the firms that contract these services. However, in the context of this document, it is important to point out that some potential benefits can only be obtained through an increased integration between supplier and customer. In Quélin and Duhamel (2003), we find a survey of the main motivations for outsourcing that are referred to in the existing literature. The authors point out that outsourcing makes the costs of activities more transparent and easier to measure, besides allowing for efficiency gains, with the corresponding reduction in operational costs. Abandoning the internalization of a given activity has the added benefit of turning fixed costs into variable costs, by reducing fixed investments and, in turn, business risk. Additionally, and according to what Quinn and Hilmer (1994) argue—as mentioned in the introduction—outsourcing is a fundamental component of a strategy of focusing on core competencies. Some advantages are specific to a certain type of relationship, as in the case studied by Thomke and von Hippel (2002), where firms hand over product design to their customers. In this situation, the main benefits for both parties are the speed and low cost of product development. The supplier avoids the complex and error-prone process of detecting customer needs: trial and error cycles are now performed exclusively by the customer, instead of between supplier and customer. An important matter to consider is the degree to which these benefits for the customer depend on the industry’s characteristics. Celly, Spekman, and Kamauff (1999) address this subject, stating that empirical evidence establishes a positive relationship between uncertainty and vertical integration, but in the cases where uncertainty is derived from competition and technological development, the effect could be the exact opposite. When the risk of
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technical obsolescence is high, flexibility and the possession of few physical assets is fundamental. In these specific circumstances, collaborative relationships with suppliers in order to mediate technological uncertainty allows firms to attain the efficiency objectives of vertical integration, without the corresponding fixed investment and risk exposure.
rEFErEncEs Anderson, J. C., & Narus, J. A. (1991). Partnering as a focused market strategy. California Management Review, 33(3), 95-113. Celly, K. S., Spekman, R. E., & Kamauff, J. W. (1999). Technological uncertainty, buyer preferences and supplier assurances: An examination of Pacific Rim purchasing agreements. Journal of International Business Studies, 30(2), 297-316. Corbett, C. J., Blackburn, J. D., & van Wassenhove, L. N. (1999). Partnerships to improve supply chains. Sloan Management Review, 40(4), 71-82. Kopczak, L. R., & Johnson, M. E. (2003). The supply-chain management effect. Sloan Management Review, 44(3), 27-34. Mahnke, V. (2001). The process of vertical disintegration: An evolutionary perspective of outsourcing. Journal of Management and Governance, (l5), 353-379. McCord, K. R., & Eppinger, S. D. (1993). Managing the integration problem in concurrent engineering. (Working Paper 3594). Cambridge: M.I.T. Sloan School of Management. Nambisan, S. (2001). Why service businesses are not product businesses. Sloan Management Review, 42(4), 72-80. Nieminen, H., & Nummela, N. (2004, June). Developing core competencies through knowledge
transfer in interfirm co-operation. Paper presented in the 10th International Product Development Management Congress, Dublin, Ireland. Novak, S., & Eppinger, S. D. (2001). Sourcing By design: Product complexity and the supply chain. Management Science, 47(1), 189-204. Pan, F. C. (2004). Selecting consumer oriented alliance partner to assure customer satisfaction in international markets. The Journal of American Academy of Business, 4(1/2), 278-284. Quélin, B., & Duhamel, F. (2003). Bringing together strategic outsourcing and corporate strategy: Outsourcing motives and risks. European Management Journal, 21(5), 647-661. Quinn, J. B. (1999). Strategic outsourcing: Leveraging knowledge capabilities. Sloan Management Review, 40(4), 9-21. Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-59. Ratten, V. (2004, June). The role of alliance-based learning: A conceptual model. Paper presented in the 10th International Product Development Management Congress, Dublin, Ireland. Robinson, T., Clarke-Hill, C. M., & Clarkson, R. (2002). Differentiation through service: A perspective from the commodity chemicals sector. The Service Industries Journal, 22(3), 149-166. Sawhney, M., & Parikh, D. (2001). Where value lives in a networked world. Harvard Business Review, 79(1),79-86. Thomke, S., & von Hippel, E. (2002). Customers as innovators: A new way to create value. Harvard Business Review, 80(4),74-81. Ulwick, A. W. (2002). Turn customer input into innovation. Harvard Business Review, 80(1), 91-97.
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von Corswant, F., & Fredriksson, P. (2002). Sourcing trends in the car industry: A survey of car manufacturers’ and suppliers’ strategies and relations. International Journal of Operations & Production Management, 22(7/8), 741-758. Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.
Partnership: The act of creating a process of cooperation between agents of the value chain (supplier-suppliers; supplier-customer). Strategic Outsourcing: The strategic decision of planning the organization based on partnerships with external suppliers of goods and services, instead of developing them within the organization.
kEy TErms
Supplier: The part that provides inputs (material, products, and services) to feed the value chain of the enterprise.
Customer: The direct beneficiary of the activities developed by the value delivered by the chain of activities of the enterprise. Customers can be internal to the enterprise or external when directly related to the market.
Value Chain: The whole set of productive activities of an enterprise, including its relation to third parties.
Outsourcing: The process of obtaining goods and services from external suppliers, instead of developing them within the organization.
Vertical Integration: The strategic decision of planning the organization based on having all supply of goods and services developed within the organization.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik; M. Cunha, pp. 1164-1170, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.15
Strategic Decision Making in Global Supply Networks Ozlem Arisoy University of Pittsburgh, USA Bopaya Bidanda University of Pittsburgh, USA
inTrOducTiOn Globalization has inexorably affected the economies of many nations in both the developed and developing world. As a consequence, national boundaries are becoming less important to the large, multinational corporations who now operate on a global scale. Corporate global networks range from short term outsourcing contracts to long term investments in developing countries that offer low cost operations and/or the promise of future market expansion. Today the Internet and high-speed data networks enable knowledge tasks to be completed practically anywhere in the world, allowing companies in the developed world to achieve cost savings or simply stay competitive enough to survive by shifting work offshore (Saunders, 2003; Schultz, 2004). As a result, an increasing shift of work to low-cost countries will continue for the foreseeable future.
Global supply networks decisions such as supplier selection and distribution assignments are strategic decisions that involve medium to long term commitment. These decisions in turn affect the organization’s future business structure, competitiveness and market value. In the literature there are numerous studies dealing with global supply network decisions in the context of mathematical modeling, risk assessment and conceptual strategic evaluations. The literature can be divided into two categories with respect to the application of tools that are used to analyze and model the corporate decision making processes. One stream of literature extensively utilizes operations research techniques to model the supply networks and assess the profitability of production (or service) operations on the basis of quantitative variables. The other stream of literature concentrates on intangible determinants and evaluates the drivers and consequences of global operations by examining the business
Strategic Decision Making in Global Supply Networks
conditions, risk factors, opportunities and many other qualitative as well as quantitative variables. In the next sections, a conceptual framework will be developed to examine the structure, determinants, and outcomes of global operations. A broad review of the literature will be presented, and novel modeling approaches will be summarized while discussing the complexity of global supply network decisions and the necessity for integrated methodologies.
glObal supply nETwOrks and OuTsOurcing
towards improving the focus of core competences such as R&D and market research also plays an important role. According to Ferrell (2003), and more than 800 executives in the United States and Europe think that cost savings are still a key outsourcing benefit, but the additional business controls generated by outsourcing are driving the trend to external providers. The determinants of global supply network decisions can be divided into two interrelated classes in terms of the elements of competitiveness: cost competitiveness and organizational competitiveness.
cost competitiveness The ever-increasing pace of information and communication technology allowed corporations to distribute their operations all over the world. Today the global supply network refers to a complex set of business relationships that consist of not only the distinct elements of the supply chain (i.e., supplier, distributor, and retailer) but also the operational divisions within a company, including accounting operations, human resources and customer service among others. The intense competition among many industries imposes pressure on corporations to elevate productivity and reduce costs by transferring activities to more efficient vendors that can add a competitive edge with their specialization. Offshore outsourcing (or simply “outsourcing”) especially is a growing trend leading to further transnational distribution of corporate activities. Research indicates that, when well designed and well managed, outsourcing reduces operating costs, enhances competitive strategy, and enlarges shareholder value (Bryce & Useem, 1998). There are many reasons for companies to distribute their operations either in the form of outsourcing to different parties or by investments in different regions of the world. The primary objective is to reduce the costs of services and products by utilizing the low labor-rates in developing countries such as China and India. The initiative
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Cost is usually the initial major determinant in global supply network decisions. The selection of supplier location, logistic structure, distribution network and many other components of decisions are based on the objective of minimizing the total cost. For a global supply network, the total cost accounts for the aggregation of product/ service costs along with the costs of relocation, documentation and communication. Although in many cases, supply networks are designed based on calculations of projected variable and fixed costs, the actual practice of operations involves the hidden costs that are frequently overlooked. The cost of selecting a vendor, contracting costs, transfer costs and many other costs associated with organizational change and management are incurred over the lifetime of global operations. Vining and Globerman (1999) describe the cost of outsourcing as a function of three variables: Production costs, bargaining costs and opportunism costs, with the latter two being costs of governance. Bargaining costs include the costs arising from negotiating contract details, costs of negotiation changes to the contract in the post contract stage, the cost of monitoring whether performance is being adhered to by the other party, and the cost of disputes. Opportunism is defined as any behavior by a party to a transac-
Strategic Decision Making in Global Supply Networks
tion that endeavors to change the agreed terms of a transaction in its favor. Therefore, the cost of a global supply chain should be perceived as the sum of foreseeable financial values as well as the possible fees and expenditures that can emerge as a result of segmentation of business processes. To facilitate an increase in cost competitiveness, the strategic decisions on global supply networks should be based on a projection of complete cost values.
dEcisiOn mOdEls Researchers and practitioners have investigated the performance, design and analysis of global supply networks and provided numerous decision models based on a diversity of methodologies. While incorporating the entire dynamics of the problem into one method is difficult, the majority of the work presented in the literature delineates promising schemes for superior strategic decisions in global supply networks.
Organizational competitiveness Competitive advantage is the ability of a firm to outperform rivals on the primary performance goal: profitability (Grant, 2004). By this definition, an organization inevitably elevates its profitability, and therefore gains competitive advantage if the costs of products/services are lowered in comparison to the other existing players in the market. In addition to the cost advantage, in order to maintain competitiveness in the long run, an organization needs to differentiate itself relatively to its rivals. For many organizations, research and development activities are of the utmost importance in maintaining the core competence. Even in mature markets where there is little room for innovation, it is important to create new marketing ideas and achieve quality improvement to preserve market share. Organizations are able to focus on these core functions by transferring custom business processes, such as accounting and information systems, to specialized vendors around the world. On the other hand, other factors of competitiveness such as responsiveness, customer service, and flexibility may be adversely affected by the decentralization of operations and authority. The risk of intellectual property theft due to the multiplicity of vendors and the irregularity of protection laws is another area that underscores the importance of indefinable elements of supply chain decisions.
mathematical Formulation based approaches The mathematical formulation based literature on decision models in global supply networks mostly includes tools from decision sciences, operations research and economics. These models typically include financial parameters and solve global supply network problems to provide solutions to production quantities, production locations, distribution routes, etc. The following gives examples from various disciplines that model the global supply network decisions utilizing different techniques. Arnzten et al. (1995) represent a global supply chain model (GSCM) that minimizes a weighted combination of total cost and activity days where the total cost includes production costs, inventory costs, taxes, facility fixed charges, production line fixed costs, transportation costs, fixed costs associated with a particular method of manufacturing, and duty avoidance. The MIP model is solved for a digital equipment corporation that is in a decision making process to determine plant charters and allocation of production loads. The model is then utilized to analyze the supply chain for new products as well as the supply bases for existing commodities. The decision model is applicable to multi-stage, multi-product manufacturing environment.
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Huchzermeier and Cohen (1996) develop a stochastic dynamic programming formulation for the valuation of global manufacturing options. These options are delineated by distinct time periods that are defined by the available sources of supply, plant capacities, product allocations to market regions, and open supply linkages within the global supply chain. There is a cost associated with switching between options over the time horizon of the strategic decision. The model maximizes the global after-tax profits and incorporates option valuation and exchange rates. Nagurney et al. (2003) develop a framework for the modeling, analysis, and computation of solutions to global supply networks. The authors build extensive mathematical models that include dynamics of price and behaviors of supply chain partners. The model maximizes the total profit by deciding on the amount of product shipments based on the costs as well as the equilibrium prices of products in different currencies at the demand markets in different countries. It allows for the analysis and solution of the equilibrium product flows and prices by considering the behavior of multiple parties (customers, retailers, etc.) at the supply network. The authors apply discrete-time algorithm to compute solutions to several numerical examples. Grossman and Helpman (2005) study the determinants of outsourcing and model outsourcing activities as the equilibrium of production and trade between parties. The authors present an economic model of location selection with respect to market conditions, supplies and demands. The authors first study how the labor supplies, country sizes and technological investments affect the pattern of outsourcing and location equilibrium. Then they investigate the role of the contracting environment by incorporating the legal setting of countries. Based on macroeconomic and product cost data, authors draw conclusions on how an organization should proceed in choosing specific locations to transfer activities.
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Kouvelis and Munson (2004) develop a mixed integer programming (MIP) model to represent the cost of global facility networks that incorporates government subsidies, tariffs and taxations. The MIP model maximizes the net present value of profit subject to demand and capacity constraints. The model incorporates the time value of money by including the interest rates on loans and discount rate of after tax cash flows at each country. Based on the MIP formulation, the authors provided a structural equation modeling approach. Goetschalckx et al. (2002) present two global logistics system models. The first one is a nonconvex optimization problem that focuses on the transfer prices in a global supply chain with an objective of maximizing the after tax profit of an international corporation. The second one focuses on the production and distribution allocation of a single country system when customers have seasonal demands. Steenhuis and De Burijn (2004) follow a different approach and compare manufacturing location alternatives in a global supply network by using productivity measures as a basis for analyzing the international location/industry combination options. Gross domestic product (GDP) values and dependencies of industries are used to calculate the productivity levels in each country (or region) and a decision process that can be utilized by both corporations and governments is suggested.
Qualitative reasoning based approaches Decisions in global supply networks incorporate multidimensional variables that cannot always be expressed in terms of monetary values. In the literature, there are also studies that concentrate primarily on the qualitative determinants of global operations such as risks, knowledge bases and market opportunities. Researchers in both academia and industry have generated various studies that emphasize the value of intangible attributes in global supply network decision making.
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MacCormack et al. (1994) examine the impact of qualitative factors on the performance and efficiency of global supply networks. They call attention to the importance of incorporating parameters such as exchange rates, tax systems, government regulations and technological capabilities. The authors present an overview of the macroeconomic and business level trends while summarizing the technological advances in production systems and related trends in management philosophies. After highlighting the insufficiency of cost based decision models, the authors propose a new framework for assisting in site location decisions and a model of the future global manufacturing firm. The global management consulting firm A.T. Kearney (2004) has developed a scheme for offshore decisions based on the offshore location attractiveness indices of countries. Their report also highlights the issues that corporations must balance in their strategic offshore decisions. Countries are evaluated based on corporate surveys, current offshore IT and business process outsourcing activities, people skill levels and availabilities, business environment, infrastructure, culture adaptability, security of intellectual property, and financial structure. The Global Outsourcing Report 2005 (Minevich & Richter, 2005) assesses countries in terms of two indices: the global outsourcing index (GOI) and the future outsourcing rank (FOR). According to this report, India and China are the two distinct low-cost labor countries that emerge as leaders for organizations considering outsourcing. China is mostly known for low cost manufacturing labor, whereas India has the advantage of an English speaking population and thus attracts a large amount of business process outsourcing (BPO) contracts. Alternatively, Taiwan and Korea are known as the centers of the semi-conductor industry. Besides these big players, countries such as Indonesia, Philippines and Malaysia also can also effectively compete for the outsourcing business.
Multi-attribute modeling approaches are also exploited in order to integrate intangible decision variables into supply network decisions. Udo (2000) employs the analytic hierarchy process (AHP) technique to analyze information system outsourcing decisions. The vendor of choice is selected based on the five criteria: strategic importance, stakeholder’s interest, vendor’s issues, cost of operations and industry environment. The vendor alternatives are assessed by pairwise comparisons and the decision is made based on the overall synthesized ranking values associated with each vendor. In another application, Badri (1999) combines AHP with goal programming for a global facility location allocation problem. The author first defines seven quantitative goals, including minimizing the total cost and maximizing the environmental quality. Then, AHP is used to determine weight factors for each goal, and goal programming is used to solve the aggregate model. A majority of work done on evaluating the non-cost related determinants of global supply network decisions relies on empirical studies. Many consulting firms have separate departments that specialize in decisions related to transfer of operations overseas and relocation of corporate divisions. Their reviews mostly include extensive evaluations of risks, benefits, hidden costs, and stakeholder incentives.
integrated models and Future Trends The major objective in global supply network decisions is to maximize profit (or minimize cost). For instance, initial cost differentials of approximately 40% are often cited as a major factor in relocating business processes offshore (Hickey, 2005). However, these decisions engage dimensions other than financial variables. Moreover the decision making process involves many stakeholders who often have conflicting interests, and it is difficult to satisfy all of these interests.
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Global supply network decisions are, in large part, based on organizational strategies. A small shift from the optimal decision can have disastrous effects on organizational competitiveness. Therefore, these decision processes should ideally occur within a structured and constrained discipline rather than with a model from a single perspective considering a single element of measurement such as cost. Multidimensionality necessitates the integration of different stakeholder views while taking into account all of the qualitative and quantitative variables. Mathematical modeling is a reliable technique to solve complex decision problems that involve variables of numerical values such as cost, size and quantity. It is a common technique used to solve global supply network problems. On the other hand, the intangible elements cannot be exactly expressed as functions of numerical variables. In literature, the intangible values are either quantified by using techniques such as multi-attribute utility functions or are heuristically interpreted by empirical studies. Although these approaches are valuable in their wide scope for incorporating many factors, they are not sufficient to generate effective multidimensional decisions. The list below presents some of the research initiatives for integrating intangible and tangible variables for a variety of problems. Many of these research initiatives are not directly geared towards global supply networks but can be utilized as a direction towards composite models. Cook et al. (1997) present the application of the Cook and Kress (CK) model for evaluating alternatives in multiple criteria decision modeling. This approach has the strength of applicability even when some alternatives do not share the same criteria. The authors propose lemmas for the relation of proportions, and the paper concludes with a performance evaluation. Yang (2001) proposes two methods for transforming qualitative and quantitative attributes (rule based and utility based). The author presents an evidential reasoning (ER) based approach that
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integrates qualitative and quantitative data. This approach is also applicable for problems with partial information. Certain monetary equivalent (CME) is used to estimate utilities of quantitative variables, whereas a Probability Assignment approach is used to estimate utilities of qualitative variables. Yeh et al. (2001) formulate dredger dispatching (a complex decision making process) as a fuzzy multi-criteria analysis model. The authors present an empirical study based on a fuzzy multi-attribute algorithm. They are able to integrate quantitative and qualitative factors and make conclusions accordingly. A similar study is performed by Prodanovic and Simonovic (2003). The authors combine a multi-criteria technique (fuzzy compromise programming) with group decision making by means of multiple criteria and multiple participants. Both quantitative and qualitative criteria are modeled via fuzzy sets. The strategic problem of designing the optimal global supply networks is also a research area at the University of Pittsburgh, where the authors develop novel integrated methods to assist corporate decision makers in global supply networks. The integration of continuous and discrete decision spaces under qualitative and quantitative criteria is established by utilizing mathematical modeling (i.e., mixed integer programming) and qualitative data analyses (i.e., analytic network process), and integrating them under the multi-objective optimization (MOP) techniques. The multi-criteria feature is structured by MOP where the continuous decision spaces can be treated with a mathematical programming approach. Quantification methods enable the input of multiple experts and provide a theoretical basis for the preference reasoning. As in the case for most of the decision problems in real life, global supply network decisions consist of several objectives, such as maximization of opportunities and minimization of costs. For an integrated global supply network decision model, intangible and tangible variables are formulated within different objectives and constraints. The
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optimization of mathematical objectives with quantitative variables can be achieved by means of operations research (OR) tools. Moreover, if the intangible variables are quantified by a qualitative data analysis, the objective functions associated with these intangible variables can also be combined with the quantitative objectives in a multi-objective optimization problem. In multi-objective optimization problems an optimum solution that optimizes all of the conflicting objectives does not exist. Formulation of a multi-objective optimization problem (Sawaragi, 1985) is given as: Minimize f(x) = ( f1(x), f2(x), ..., fp(x) over x ∈ X
where f i is an objective function Instead of a single optimum value, there is a set of best solutions in multi-objective problems. When one or more objective functions are conflicting, the concept of “optimality” does not apply directly in the multi-objective setting. A useful replacement is the notion of Pareto optimality. Definition 1. A point x* ∈ X is said to be Pareto optimal solution to the problem if there is no x ∈ X such that f(x) < f(x*). Once the multi-objective problem is formed by combining the quantitative objectives with quantified intangible variables, the Pareto optimal space is generated. The Pareto optimal space represents the set of alternatives which are most favorable for the global supply network decision in consideration. Consequently, the preferences of the decision makers are determined by using utility theory and the final structure of the global supply network is established by selecting the Pareto solution that maximizes the total utility.
cOnclusiOn In today’s environment of ever-increasing globalization, a major challenge for organizations is to implement an efficient strategy that can provide a cost advantageous global supply network. Over the years, scientists have established quantitative and qualitative models to support decisions that range from long-term to short-term and from those that are broad in scope to micro-decisions. Uncertainty and diversity of multiple objectives are the greatest challenges for these decision models. Quantitative methods deliver solutions by means of simulation, probabilistic models, and mathematical models, whereas qualitative decision methods imitate the functions of the human brain by transforming intangibles to numbers in order to compare and assess their magnitude. Most of these methods are supported by a strong theoretical framework and their relevance is accepted by researchers and scientists, yet many do not fulfill the specific needs for decision making in complex global environments. A common and reliable approach in supply network decisions is to structure the decisions from a cost/benefit perspective and formulate mathematical models by numerical equations that reflect the utilities and monetary values of the related decision variables. However a major challenge here is the lack of intangible variables that cannot be expressed in terms of equations. On the other hand, other decision analysis techniques may lack the rationality and sensitivity of mathematical modeling approaches. An ideal decision model should combine the strengths of mathematical and qualitative models. Research clearly shows that integrated decision making models specific to global supply networks is a necessity simulated by the complexity and multidimensionality of the problem.
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rEFErEncEs Arnzten, B. C., Brown, G. G., Harrsion, T. P., & Trafton, L. L. (1995). Global supply chain management at Digital Equipment Corporation. Interfaces, 25, 69-93. A.T. Kearney. (2004). A.T. Kearney’s 2004 Offshore Location Attractiveness Index. Making Offshore Decisions. Retrieved from www. atkearney.com Badri, M. A. (1999). Combining the analytic hierarchy process and goal programming for global facility location-allocation problem. International Journal of Production Economics, 62, 237-248. Bryce, D. J., & Useem, M. (1998). The impact of corporate outsourcing on company value. European Management Journal, 16(6), 435-643. Cook, W. D., Doyle, J., Green, R., & Kress, M. (1997). Multiple criteria modeling and ordinal data: Evaluation in terms of subsets of criteria. European Journal of Operational Research, 98, 602-609. Ferrell, K. (2003). Outsourcing’s benefits may be more than monetary. InformationWeek, September 25. Goetschalckx, M., Vidal, C. J., & Dogan, K. (2002). Modeling and design of global logistics systems: A review of integrated strategic and tactical models and design algorithms. European Journal of Operational Research, 143, 1-18. Grant, R. M. (2004). Contemporary strategy analysis: Concepts, techniques, applications (4th ed.). Blackwell Publishing. Grossman, G. M., & Helpman, E. (2005). Outsourcing in a global economy. Review of Economic Studies, 72(250), 135-159. Hickey, T. (2005). Outsourcing decisions: They’re strategic. Computer World, January 31.
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Huchzermeier, A., & Cohen, M. A. (1996). Valuing operational flexibility under exchange rate risk. Operations Research, 44(1), 100-113. Kouvelis, P., & Munson, C. L. (2004). Using a structural equations modeling approach to design and monitor strategic international facility networks. In D. Simchi-Levi, D. W. Wu, & Z.-J. Shen (Eds.), Handbook of quantitative supply chain analysis. MacCormack, A. D., Newman, L. J., & Rosenfield, D. (1994). The new dynamics of global manufacturing site location. Sloan Management Review, 35(4), 69-80. Minevich, M. D., & Richter, F.-J. (2005). The global outsourcing report. The CIO Insight Whiteboard, 55. Nagurney, A., Cruz, J., & Matsypura, D. (2003). Dynamics of global supply chain supernetworks. Mathematical and Computer Modeling, 37, 963983. Prodanovic, P., & Simonovic, S. P. (2003). Fuzzy compromise programming for group decision making. IEEE Transactions on Systems, Man, and Cybernetics- Part A: Systems and Humans, 33(3), 358-365. Saunders, J. (2003, October 14). IT jobs contracted from far and wide. Retrieved from www.globeandmail.com Sawaragi, Y., Nakayama, H., & Tanino, T. (1985). Theory of multi-objective optimization. Academic Press. Schultz, C. L. (2004). Offshoring, import competition and the jobless recovery. Brookings Institute Policy Brief, 136. Steenhuis, H.-J., & De Bruijin, E. J. (2004). Assessing manufacturing location. Production Planning and Control, 15(8), 786-795.
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Udo, G. G. (2000). Using analytic hierarchy process to analyze the information technology outsourcing decision. Industrial Management and Data Systems, 100(9), 421-429. Vining, A., & Globerman, S. (1999). A conceptual framework for understanding the outsourcing decision. European Management Journal, 17(6), 645-654. Yang, J. (2001). Rule and utility based evidential reasoning approach for multiattribute decision analysis under uncertainties. European Journal of Operational Research, 131, 31-61. Yeh, C.-H., Deng, H., & Pan, H. (1999). Multicriteria analysis for Dredger dispatching under uncertainty. The Journal of Operational Research Society, 50(1), 35-43.
kEy TErms Decision Analysis: Formulation of models and interpretation of systems to generate the optimum set of choices that will lead to the best consequences. Global Supply Network: Transnational network of retailers, distributors, transporters, suppliers, and manufacturers that participate in the process of production and/or service. The term “global supply chain” is used interchangeably. Multi-Criteria Decision Making (MCDM): Methods that are designed to solve decision problems incorporating multiple-criteria whose solutions often result in conflicting objective values. Multi-Objective Optimization: Optimization of mathematical models that share the same decision variables but differ in their objectives and constraints. Outsourcing: Transferring an operation or operations to an outside vendor. Offshore outsourcing (offshoring) refers to the transfer of operations to a vendor overseas.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik; M. Cunha, pp. 1509-1515, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.16
An Overview of IT Outsourcing in Public-Sector Agencies Anne C. Rouse Deakin University, Australia
inTrOducTiOn For the past 15 years, governments in the developed, Western world have been contracting out, or outsourcing, services as a key part of publicsector reforms. Outsourcing has been argued to lead to cost savings, improved discipline, better services, access to scarce skills, and the capacity for managers to focus more time on the core business of their organizations (Domberger, 1998). Government outsourcing initiatives have encompassed a range of services, but given the large sums of money invested in IT assets, the outsourcing of IT services (IT outsourcing, or ITO) has been a major initiative for many agencies. Lacity and Willcocks (1998, p. 3) defined ITO as “handing over to a third party [the] management of IS/IT assets, resources and/or activities for required results.” For public-sector outsourcing, this handover is usually made by way of a competitive tender. Case studies have reported ITO
successes and failures (e.g., Currie & Willcocks, 1998; Rouse & Corbitt, 2003; Willcocks & Currie, 1997; Lacity and Willcocks, 2001; Willcocks & Kern, 1998), but much of the evidence presented to public-sector decision makers to justify this reform is anecdotal and unsystematic, and when investigated in depth, does not necessarily support widespread conclusions.
backgrOund The policy promises associated with contracting out government services are part of a broader movement toward the privatization of publicsector services. Osborne and Gaebler (1993) in their influential book Reinventing Government argued that governments should “steer, not row the boat” (p. 25); in other words, they should ensure that services are provided to the public, not necessarily provide the services themselves. This
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suggestion resonated with governments around the globe that were anxious to reduce public expenditure and risks. The move to outsource was also a response to arguments that through economies of scale, scope, and specialization, private-sector vendors could deliver outsourced services at a lower cost than governments themselves (Domberger, 1998). Initial forays into public-sector outsourcing involved relatively simple and straightforward services (like garbage collection or hospital cleaning), which were easy to specify and to measure. However, a growing vendor market, improvements in communications technologies, and emerging skills shortages that raised the cost of IT labor (and threatened salary relativities within public-sector agencies) were drivers for the move to outsource IT (Hodge & Rouse, 2006). Both project-based services (like the development of a new system) and routine support services (such as desktop and mainframe support, and the maintenance of legacy systems) became candidates for outsourcing. It is important to distinguish outsourcing from another key public-sector reform: privatization. While both may involve handing over public assets to the private sector, privatization is a once-off, irreversible sale of a state-owned asset. Governments generally retain some regulatory control over the provision of the privatized service, but retain no governance control and no operating risk (Jensen & Stonecash, 2005). In contrast, outsourcing is contracted for a specific period, after which governments might select an alternative vendor, or even return to providing the service inhouse. The latter is theoretically possible, though in practice it is rarely contemplated because of the financial costs and organizational disruption associated with re-insourcing. With outsourcing, governments retain responsibility for governance of the outsourced function and for specifying what is required while allowing the vendor to decide how to provide this. This means that, in practice, governments largely retain most of the risk associated with the outsourced function.
Empirical EvidEncE abOuT gOvErnmEnT OuTsOurcing OuTcOmEs It is not yet clear whether the outsourcing of government services (including ITO) has delivered on the theoretical promise. Anecdotal case studies of success are reported (e.g., Savas, 2000), but many of these considered only preliminary experiences. They may also be atypical. Before the success of outsourcing can be established, the nature of success needs to be defined. This depends on what was expected from the strategy in the first place (Parasuraman & Grewal, 2000). Expectations for complex services with substantial impact on organizational performance are multifaceted and go beyond simple cost comparisons. Because of the multifaceted nature of expectations, outsourcing usually results in mixed outcomes as is illustrated by the cases cited in the first paragraph. Rouse’s (2006) survey of 240 public- and private-sector purchasers found that while IT outsourcing provided access to scarce skills and high levels of technical service quality, it failed to provide substantial cost savings, leading to generally low levels of overall satisfaction, the result of failure to meet stated or unstated expectations, according to marketing theory (e.g., Parasuraman & Grewal, 2000). Another problem with determining success is that while outsourcing is known to be risky (Aubert, Patry, & Rivard, 2002; Gewald, Wüllenweber, & Weitzel, 2006), until potential downsides are encountered, decision makers may fail to recognize the level of risk. They may then perceive the arrangement to be more successful than it really is. According to Lacity and Willcocks (1998), perceptions of outsourcing success diminish the longer the arrangement lasts as many costs do not become apparent for some time. Purchasers risk vendor lock in (Wikipedia, 2006), where they find that they have no choice but to continue with an existing vendor because
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of high switching costs, or because few (or no) alternative bidders can be found. Another important risk, heightened for public-sector outsourcing because of public expectations, involves threats to the privacy and confidentiality of citizens’ records that are handed over to vendors. Increasingly in Europe, Australasia, and some U.S. states, privacy legislation is raising the stakes in relation to such records, and recent data protection failures by outsourced vendors (such as CardSystems in the United States) have increased community concerns about this issue. Outsourcing success is often defined in terms of whether or not costs have been saved compared to those of in-house delivery. Lacity and Willcocks (1998) reported that this reason for outsourcing IT appeared in 80% of the cases they studied. However, establishing whether costs are reduced when complex services (like IT) are outsourced is a technically complex and expensive exercise (Rouse & Corbitt, 2003). Transaction cost theory (Williamson, 1979) notes that two forms of costs are involved: production and transaction costs. Production costs (sometimes labeled transformation costs) are the direct costs of production, that is, of transforming inputs into outputs. Transaction costs are the costs of dealing with the marketplace, and include the costs of finding, contracting with, monitoring, and controlling the activities of the supplier. In general, with outsourcing, production costs are reduced because of competition, while transaction costs are often increased (Ang & Straub, 1998) as are the notional costs associated with the risks associated with the strategy: risk exposure costs. Very few of the studies on outsourcing have considered transaction costs as well as production costs when exploring savings (Hodge, 2000). Added to these costs must be the costs of absorbing risks (risk exposure), which are normally calculated as the probability of the downsides occurring, multiplied by the costs of these downsides (Aubert, Dussault, Patry, & Rivard, 1999). According to Rouse and Corbitt (2003), the risk exposures for complex outsourc-
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ing (like ITO) are much higher than generally recognized.
Empirical EvidEncE FOr OuTsOurcing succEss public-sector Outsourcing Even when only production costs savings are considered, there are mixed findings about government outsourcing (of IT and other services). The Australian Industry Commission (1996) reviewed 203 international studies of government outsourcing and concluded that the extent of savings varied widely, and that there was evidence of cost increases following outsourcing in some cases. When reviewing quantitative studies of government outsourcing using the technique of meta-analysis, Hodge (2000) established that some types of services achieved much better cost savings than others. He calculated that average savings of between 6 and 12% were obtained (this contrasts strongly with the 20% to 30% anecdotally quoted by outsourcing proponents). Hodge found evidence for substantial production cost savings (of between 19% and 30%) in the areas of garbage collection, and cleaning and maintenance services. Such simple services are easy to define and measure, and involve relatively unskilled staff with little bargaining power. However, Hodge found limited research into the cost outcomes for complex services (like IT), and in the few he found, average cost savings estimates ranged from an 8% saving to a 24% increase.
iT Outsourcing Despite the rapid growth of ITO in the public and private sectors, there is still no consensus in the academic literature on the extent of cost savings from contracting out IT services. There is also limited literature on whether government IT outsourcing achieves better or worse outcomes than
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those achieved by the private sector. In contrast to the relatively easy-to-measure services reported above, for IT services, the technical complexity of the tasks carried out by staff is high, the professional language of solutions is obscure, and the rate of change in development is substantial. Establishing cost savings in these circumstances is difficult. Possibly because of these difficulties, most research into ITO has involved singular cases studied at one point of time, which may not be representative of wider experiences. There are few survey-based studies of ITO outcomes, and of these, even fewer have targeted public-sector agencies. Little research has differentiated between the once-off, bespoke development of a new system on the one hand, and the ongoing delivery of IT services, on the other. The notion of savings in the former case is fuzzy because, since the move to post-Internet systems architectures, few publicsector agencies have the in-house skills to develop applications at the level of complexity required for government administration. Thus, comparisons of in-house vs. outsourced delivery become impossible. Furthermore, the bespoke nature of systems development means that each system’s costs are unique. When the costs of ongoing IT services are compared, the rate of technological changes in IT means it is rare to be able to compare in-house and external delivery costs with any precision, even when only production costs are considered. Rouse and Corbitt’s (2003) longitudinal study of the Australian government’s IT outsourcing established that it is relatively easy to get the business-case cost projections wrong; they reported that inaccurate cost projections (particularly the costs of risks) were a key reason the Australian government was forced to abandon its IT outsourcing initiative. As with other forms of outsourcing, case study research into ITO has revealed widely varying outcomes. Willcocks, Lacity, and Fitzgerald (1997) reported that for 41 cases of outsourcing, there were 23 instances where some cost savings were
achieved (i.e., 56%), with savings being mixed in five instances (12%) and savings not being achieved in 13 cases (31%). Savings could not be determined in eight further cases. In a study of 7,500 government outsourcing contracts published by CTC Consultants (1999), Simon Domberger, a strong proponent of government outsourcing, reported an average increase in costs of 8.6% when IT services were outsourced. Aubert, Patry, and Rivard (1999) in their longitudinal study of Canadian IT outsourcing found that in 49% of firms costs rose. Willcocks and Currie (1997) also noted that in some cases, government outsourcing costs rose, in part because the private sector often paid higher salaries than the public sector. This was an explanation given by Domberger (as cited in CTC Consultants), too, for the generally poor outcomes for ITO outsourcing that he observed. The study by Rouse and Hodge (in press) statistically contrasted public-sector and privatesector agencies’ ITO experiences. These authors analyzed a survey of 240 IT directors and CIOs (chief information officer) for Australia’s largest public- and private-sector firms. Just over a third of respondents reported unequivocal satisfaction, however, only a minority reported cost savings, and only a small minority (7%) reported substantial cost savings. A sizeable minority (22%) reported cost increases from ITO. Rouse and Hodge investigated 27 individual outcome measures in that survey (including cost savings) and found that for the large majority of outsourcing outcomes, no statistical difference existed in perceived levels of performance between public- and private-sector firms. There were no statistically significant differences for the key success measures: technical benefits, strategic benefits, technical service quality, cost savings, business flexibility, economies of scale, and access to skilled personnel. Nor were there statistical differences in outsourcing satisfaction or perceptions of overall value: Government respondents reported the same relatively poor outcomes as did those in nongovernment organizations.
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FuTurE TrEnds
FuTurE rEsEarch dirEcTiOns
In view of the relatively dismal outcomes of large-scale outsourcing of IT by governments, many large, single-vendor contracts have not been renewed. Typically, governments now break apart the contract and deal with different suppliers for different IT services, and so the prevailing outsourcing arrangement involves a series of selective or best-of-breed contracts. This strategy appears to be a reaction to academic advice that selective outsourcing is less risky (e.g., Lacity & Willcocks, 2001), though empirical studies have failed to confirm this proposition. A larger number of selective contracts are argued to increase transaction costs (Currie & Willcocks, 1998), and in future research such costs should be included in cost analyses. Future research should also explore the comparisons that can be used to evaluate cost savings because once an agency has outsourced, it soon becomes impossible to compare in-house and outsourced costs. Research should also continue to explore reasons for the failures of many agencies to reap the theoretical benefits of outsourcing. There is an increasing trend in the literature to consider the risks of IT outsourcing (e.g., Aubert et al, 2002; Gewald et al., 2006; Rouse & Corbitt, 2003) and to look at the way perceptions of risk are related to whether decision makers are proponents of outsourcing or not. At this stage, discussions are largely theoretical, but in the future, more quantitative evaluation of risks should be carried out. Evidence from Ang and Straub (1998) suggests that when organizations choose to outsource, they tend to de-emphasize transaction costs, while those that consider but reject outsourcing tend to focus on transaction costs. A similar effect may occur with the perceptions of risk, and this too provides a fruitful avenue for future research.
In the 15 years or so since IT outsourcing emerged as an academic topic, new variations have been taken up by the private sector. Two important variations are business process outsourcing (BPO) and offshore outsourcing (offshoring). In practice, because of problems achieving substantial cost savings with onshore outsourcing, there is pressure on firms to consider offshore delivery of both IT and business processes. While growth in the IT outsourcing market had, by 2004, slowed (Gartner, 2005), the growth in new outsourcing forms (offshoring and BPO) is reportedly strong. Consequently, public-sector agencies, too, will be encouraged to explore these options in the continued search for reduced business costs. Offshore outsourcing, in particular, while benefiting developing countries and offering the promise of substantial savings, involves significant additional risks for purchasers, so it is likely to be of particular interest to researchers in the future. For public-sector purchasers, the issue of managing the privacy of citizens records sent to other legal and cultural jurisdictions will be particularly critical. Future studies of outsourcing risk will need to establish typical risk exposures for on- and offshore outsourcing, and the effectiveness of risk minimizing strategies. It is also important that research into offshore outsourcing be undertaken by independent academic researchers as well as vendors. A detailed review by Dibbern, Goles, Hirschheim, and Jayatilaka (2004) of the academic outsourcing literature to 2001 illustrated how little systematic quantitative research into outsourcing had been undertaken, and how much of this had concentrated on the reasons behind sourcing decisions rather than the outcomes. The predominant research methodology continues to be case studies, and there have been few theorytesting studies in the literature and hardly any studies that have statistically tested propositions related to outsourcing practices. At the same time,
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a large number of trade-based books have now been published on how to successfully outsource. These are based on the personal experience of the author rather than on any empirical research. Given the emphasis on individual and largely exploratory case studies and on practitioner opinion, there are substantial opportunities for future outsourcing research that shifts the emphasis to theory testing. There is a need for research that uses outsourcing outcomes as the dependent variables, and uses alternative research methods (including quantitative methods). Such research will allow for disconfirming propositions. In particular, future research should begin to explore which of the many prescriptions offered by researchers and consultants for ensuring successful outsourcing do generalize widely to public- and privatesector firms in the community. Researchers are also encouraged to investigate the measurable effects managerial decisions and behaviors have on outsourcing outcomes. There is opportunity for research that systematically examines differences in outcomes and management practices across different types of outsourcing (e.g., BPO and ITO; offshore and onshore outsourcing). There is also opportunity for research that explores experiences in both the private and public sectors, as the latter sector has not received the same level of attention, despite its widespread use of outsourcing.
cOnclusiOn IT costs form a large component of government expenditure, and governments around the world have sought to rein in these costs by outsourcing. From the evidence to date, though, achieving costs savings by outsourcing IT is relatively unlikely. Some of the other strategic benefits of outsourcing (such as being able to redirect attention to core business) also appear difficult to achieve in real life (Rouse & Corbitt, 2003). Earlier researchers (e.g., Lacity & Hirschheim, 1995) argued that
it is substantially more challenging to manage outsourcing arrangements than is generally recognized, and this observation is supported by the research cited above. It seems that rapidly changing business requirements resulting from dynamic community demands, together with unexpectedly high transaction costs and risks, substantially reduce the theoretical likelihood of success. Given the evidence to date, public-sector agencies need to proceed more cautiously down the road of IT outsourcing, ensuring that their cost projections include both transaction and production costs, and making financial provisions for the high levels of risks that appear to be involved in contracting out complex services.
rEFErEncEs Ang, S., & Straub, D. W. (1998). Production and transaction economies and IS outsourcing: A study of the US banking industry. MIS Quarterly, 22(4), 535-552. Aubert, B., Dussault, S., Patry, M., & Rivard, M. (1999). Managing the risks of IT outsourcing. Proceedings of the 32nd Hawaii International Conference on System Sciences, HI. Aubert, B., Patry, M., & Rivard, S. (1999). L’impartation des services informatique au Canada: Une comparaison 1993-1997. In M. Poitevin (Ed.), Impartition: Fondements et analyses (pp. 202-220). Montreal, Canada: University of Laval Press. Aubert, B., Patry, M., & Rivard, S. (2002). Managing IT outsourcing risk: Lessons learned. In R. Hirschheim, A. Heinzl, & J. Dibbern (Eds.), Information systems outsourcing: Enduring themes, emergent patterns and future directions (pp. 155-176). Berlin, Germany: Springer. Australian Industry Commission. (1996). Competitive tendering and contracting by public sector agencies: Report No. 48. Melbourne, Australia: AGPS. 281
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CTC Consultants. (1999). Government outsourcing: What has been learnt? Sydney, Australia: CTC Consultants. Currie, W., & Willcocks, L. (1998). Analysing four types of IT sourcing decisions in the context of scale, client/supplier interdependency and risk mitigation. Information Systems Journal, 8(2), 119-144. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Domberger, S. (1998). The contracting organization: A strategic guide to outsourcing. Oxford: Oxford University Press. Gartner. (2005). Outsourcing drives IT services growth. Retrieved from http://www.gartner. com/5_about/press_releases/pr2004.jsp Gewald, H., Wüllenweber, K., & Weitzel, T. (2006). The influence of perceived risks on banking managers’ intention to outsource business processes: A study of the German banking and finance industry. Journal of Electronic Commerce Research, 7(2), 78-96. Hodge, G. A. (2000). Privatization: An international review of performance. Boulder, CO: Westview Press. Hodge, G. A., & Rouse, A. C. (2006). Outsourcing government information technology services: An Australian case study. In G. Boyne, K. Meier, L. O’Toole, Jr., & R. Walker (Eds.), Public service performance: Perspectives on measurement and management. London: Palgrave McMillan. Jensen, P. H., & Stonecash, R. E. (2005). Incentives and the efficiency of public sector outsourcing contracts. Journal of Economic Surveys, 19(5), 767-787. Lacity, M. C., & Hirschheim, R. (1995). Beyond the information systems outsourcing bandwagon: The insourcing response. New York: Wiley. 282
Lacity, M. C., & Willcocks, L. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363-408. Lacity, M., & Willcocks, L. (2001). Inside mega contracts: South Australian and Dupont. In M. Lacity & L. Willcocks (Eds.), Global IT outsourcing: In search of business advantage (pp. 40-88). New York: Wiley. Osborne, D., & Gaebler, T. (1993). Reinventing government: How the entrepreneurial spirit is transforming the public sector. Reading, MA: Addison-Wesley Publishing. Parasuraman, A., & Grewal, D. (2000). Serving customers and consumers effectively in the 21st century: A conceptual framework and overview. Journal of the Academy of Marketing Science, 28(1), 9-16. Rouse, A. C. (2006). Explaining I.T. outsourcing purchasers’ dissatisfaction. Proceedings of 10th Pacific Asia Conference on Information Systems (PACIS), Kuala Lumpur, Malaysia. Rouse, A. C., & Corbitt, B. (2003). The Australian government’s abandoned infrastructure outsourcing program: What can be learned? Australian Journal of Information Systems, 10(2), 81-90. Savas, E. S. (2000). Privatization and public-private partnerships. NJ: Chatham House Press. Wikipedia. (2006). Vendor lock in. Retrieved from http://en.wikipedia.org/wiki/Lock_in Willcocks, L., & Currie, W. L. (1997). Information technology in the public services: Towards the contractual organization? British Journal of Management, 107-120. Willcocks, L., & Lacity, M. C. (1998). Strategic sourcing of information systems: Perspectives and practices. Chichester, United Kingdom: Wiley. Willcocks, L., Lacity, M. C., & Fitzgerald, G. (1995). Information technology outsourcing in
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Europe and the USA: Assessment issues. International Journal of Information Management, 15(5), 333-351. Willcocks, L., Lacity, M., & Fitzgerald, D. (1997). IT outsourcing in Europe and the USA: Assessment issues. In L. Willcocks, D. Feeny, & G. Islei (Eds.), Managaing IT as a strategic resource (pp. 306-358). New York: McGraw Hill. Willcocks, L. P. & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK Inland Revenue. European Journal of Information Systems, 7(1), 29-45. Williamson, O. E. (1979). Transaction cost economics: The governance of contractual relationships. Journal of Law and Economics, 22, 233-261.
FurThEr rEading Bahli, B., & Rivard, S. (2005). Validating measures of information technology outsourcing risk factors. Omega, 33(2), 175-187. Carmel, E., & Tjia, P. (2005). Offshoring information technology: Sourcing and outsourcing to a global workforce. New York: Cambridge University Press. Earl, M. J. (1996). The risks of outsourcing. Sloan Management Review, 37(3), 26-32.
Hirschheim, R., Heinzl, A., & Dibbern, J. (2002). Information systems outsourcing in the new economy: Enduring themes, emergent patterns and global challenges. Berlin, Germany: Springer-Verlag. Hirschheim, R., Heinzl, A., & Dibbern, J. (2006). Information systems outsourcing: Enduring themes, new perspectives and global challenges (2nd ed.). Berlin, Germany: Springer-Verlag. Kern, T., & Willcocks, L. P. (2000). Contract, control and presentiation in IT outsourcing: Research in thirteen UK organizations. Journal of Global Information Management, 8(4), 15-29. Kern, T., & Willcocks, L. P. (2002). The relationship advantage: Information technologies, sourcing, and management. Oxford: Oxford University Press. Lacity, M. C., & Hirschheim, R. (1993). Information systems outsourcing: Myths, metaphors and realities. Chichester, England: Wiley. Lacity, M. C., Willcocks, L., & Feeny, D. F. (1995). Information technology outsourcing: Maximising flexibility and control. Harvard Business Review, 84-93. Lacity, M., Feeny, D., & Willcocks, L. (2004). Commercializing the back office at Lloyd’s of London: Outsourcing and strategic partnerships revisited. European Management Journal, 22(2), 127-140.
Grover, V., Cheon, M. J., & Teng, J. T. C. (1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89-116.
Lee, J. N., Huynh, M. A., Kwok, R. C., &, Pi, S. M. (2003). IT outsourcing evolution: Past, present, and future. Communications of the ACM, 46(5), 84-89.
Halvey, J. K., & Melby, B. M. (2000). Business process outsourcing: Processes, strategies and risks. Hoboken, NJ: Wiley.
Lee, J.-N., & Kim, Y.-G. (1999). Effect of partnership quality on IS outsourcing: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29-61.
Halvey, J. K., & Melby, B. M. (2005). Information technology outsourcing transactions: Process, strategies, and contracts. Hoboken, NJ: Wiley.
Lee, J.-N., Miranda, S. M., & Kim, Y.-M. (2004). IT outsourcing strategies: Universalistic, contin-
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gency and configurational explanations of success. Information Systems Research, 15(2), 110-131. Looney, J. A. (1998). Outsourcing state and local government services: Decision-making strategies and management methods. Westport, CT: Quorum Books. Rouse, A. C., & Corbitt, B. J. (2003). Minimising risks in IT outsourcing: Choosing target services. Proceedings of the Seventh Pacific Asia Conference on Information Systems, Adelaide, South Australia. Rouse, A. C., & Corbitt, B. J. (2006a). Analysis of a large-scale IT outsourcing failure: What lessons can we learn? In M. Khosrow-Pour (Ed.), Outsourcing and offshoring in the 21st century: A socio-economic perspective. Idea Group Publishing. Rouse, A. C., & Corbitt, B. J. (2006b). Business process outsourcing. In R. Hirschheim, A. Heinzl, & J. Dibbern (Eds.), Information systems outsourcing: Enduring themes, emergent patterns and global challenges (2nd ed.). Berlin, Germany: Springer-Verlag. Rouse, A. C., & Hodge, G. A. (2006). Rethinking risk: A strategy for improving public sector sourcing performance. Paper presented at the Determinants of Performance in Public Organization International Conference, Hong Kong, China. Saunders, C., Gebelt, M., & Hu, Q. A. (1997). Achieving success in information systems outsourcing. California Management Review, 39(2), 63-79. Timbrell, G., Hirschheim, R., Gable, G. G., & Underwood, A. (1998). Government IT and T insourcing/outsourcing: A model and guidelines. Proceedings of the 9th Australasian Conference on Information Systems. Retrieved from http:// eprints.qut.edu.au/archive/00004491/01/4491. pdf
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Walker, B., & Walker, B. C. (2000). Privatisation: Sell off or sell out? Sydney, Australia: ABC Books. Williamson, O. E., & Masten, S. E. (1999). The economics of transaction costs: Elgar critical writings reader. London: Edward Elgar Publishing.
kEy TErms and dEFiniTiOns Business Process: A business process is a set of interrelated organizational activities performed by a number of individuals with the goal of generating customer value. Business Process Outsourcing (BPO): BPO is the outsourcing of relatively complex business processes or activities that are supported by information technologies. IT Outsourcing (ITO): ITO is the outsourcing of IT services. The term is usually used in contrast to business process outsourcing, where the business function or process (including the IT that supports it) is outsourced. ITO includes the outsourcing of unique, once-off systems development projects, as well as the outsourcing of ongoing IT services, such as mainframe hosting, desktop support, telecommunications installation and maintenance, or maintenance and support of legacy systems. Offshoring: This is offshore outsourcing or cross-national outsourcing, where the vendor and client operate in different countries. Outsourcing: Outsourcing is the provision, at an agreed price, of specified services by an external vendor that is contracted to manage the day-to-day activities (and related assets and resources) so as to meet agreed performance and quality standards. Outsourcing involves specifying what will be done rather than how it will be done.
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Privatization: Privatization is the conversion of a government-owned enterprise to private ownership and operation. The theory behind privatization is that private enterprises run more effectively and offer better service. Production Costs: The costs of the processes involved in creating and distributing goods or services Risk: Risk is the potential harmful or undesirable consequences (downsides) that might arise in the future from a decision or course of action. Examples in the context of ITO include the release of confidential data, loss of organizational knowledge, and reduced business flexibility.
Risk Exposure: Risk exposure is the likelihood or probability of an undesirable future event, multiplied by the magnitude (e.g., costs) of the consequences of the event. RE = Probability(event) x Consequences(event) Transaction Costs: Transaction costs are the costs of contracting with a vendor through the marketplace in contrast to coordinating and managing service provision in-house (i.e., through the hierarchy). Key costs include finding, choosing, contracting with, monitoring, and controlling the work of the vendor, as well as coordinating the vendor’s activities with others being carried out by the purchaser.
This work was previously published in Handbook of Research on Public Information Technology, edited by G. Garson; M. Khosrow-Pour, pp. 662-671, copyright 2008 by Information Science Reference (an imprint of IGI Global)
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Chapter 1.17
Evolving Relationship between Law, Offshoring of Professional Services, Intellectual Property, and International Organizations Amar Gupta University of Arizona, USA David A. Gantz University of Arizona, USA Devin Sreecharana University of Arizona, USA Jeremy Kreyling University of Arizona, USA
absTracT This article covers four issues. First, it examines evolving international conventions to determine whether countries, especially developed countries, can take any steps to inhibit offshoring with the objective of protecting jobs in their respective countries. Second, it looks at statistics from independent sources to see if outsourcing exceeds insourcing, or vice versa, in the case of the U.S. Third, it looks at trends in outsourcing in the legal arena. Fourth, it looks at the intellectual property aspects of outsourcing and presents a long-term
vision on how this ticklish issue is likely to be addressed in the long-term.
inTrOducTiOn “Outsourcing” is a relatively new term for something that has been happening in the United States for at least 40 years, namely, the shifting of production of goods (and, more recently, services) to nations where wages are lower than in the United States. The most obvious example is textiles and apparel, in which factories located in
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New England moved to the southeast beginning shortly after World War II, in search of lowerwage, non-unionized labor and low cost electric power. Beginning in the 1960s or earlier, some producers and consumers shifted their sourcing to Asia and to Latin America, particularly to Mexico, Japan, and later South Korea, Taiwan, and Hong Kong. More recently, China, Pakistan, India, Bangladesh, Sri Lanka, and Vietnam have become popular locations, among others, for textile and apparel production. The outsourcing of service industry jobs from the United States (and Canada, the EU, and Japan, among others) is somewhat more recent, as it is only viable with very low-priced telephone and Internet communications worldwide, a feature of the fiber optic cable construction in the 1990s. Shifting of low-wage telephone service positions (for computer technical support, airline reservations, etc.) did not seem to raise a good deal of controversy in the United States, except perhaps in the communities which lost the service centers (including Tucson), and among the labor unions. Even the outsourcing, particularly from Silicon Valley, of routine computer software work seemingly raised relatively few alarms. However, the newest outsourcing phenomenon—mostly to India—is far more troubling both economically and politically to U.S. policymakers. The prospect of widespread outsourcing of relatively high wage professional services positions—software development, banking and brokerage, medical, and legal services—is creating a good deal of concern, and there have been various proposals to curb such trends, by legislation or otherwise. The first question this article addresses is what the United States can do under international trading rules to discourage outsourcing. There may be some tax laws and policies that could be modified, primarily to reduce tax incentives for production abroad and to encourage the investments supporting outsourcing to stay home. Some in Congress have suggested trying to prevent U.S. firms from
investing abroad, but in most cases this would be questionable under investment treaties in the unlikely event the Congress tried to impose such restrictions, and would in any event be impossible to enforce against multinational enterprises. There is relatively little action the U.S. could take to reduce the outsourcing process that would not run afoul of international trading rules, which are designed first of all to make it possible for any consumer of goods or services to purchase the best available at the lowest prices, without interference from tariff or non-tariff barriers. The second question this article addresses is whether the United States is a net beneficiary or net loser when outsourcing occurs. This analysis has been done by others at various levels: at the national level, at the company level, and at the individual level. Companies adopt outsourcing practices because they of lower costs and other benefits. At an individual level, if a person loses a job, he or she is a loser. However, at the national level, the analysis needs more careful attention: outsourcing leads to jobs moving from the U.S. to other countries, and jobs moving from other countries to the U.S. The third question this article addresses is how outsourcing will impact the legal community in the short-run and in the long-run. Specific examples are considered. The fourth and final question is how intellectual property can be equitably protected in an economy that involves growing levels of offshoring.
OuTsOurcing undEr inTErnaTiOnal Trading rulEs Virtually any nation that accedes to the World Trade Organization (WTO) agreements is required to take a number of specific steps toward facilitating freer trade. Most of these involve the reduction or elimination of trade barriers and opening of domestic markets and trading opportunities to foreign-owned firms. Acceding members in
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recent accessions have made such commitments for almost all product sectors and many service sectors as well. Again, for most nations, agreeing to take these steps through an international treaty necessarily requires a variety of modifications to domestic law and the domestic legal system.
imports, has become a very complex and oftencontroversial process, the subject of numerous disputes among the GATT contracting parties and, now, the WTO member states. •
core gaTT principles Although it is an over-simplification, it is nevertheless helpful to visualize the generalized agreement on trade and tariffs (GATT)—the original 1947 version and the version adopted as part of the “Uruguay Round” negotiations in 1994, primarily as a mechanism for reducing trade barriers and increasing market access. The GATT does not prevent the use of import duties (taxes on imports), but provides a mechanism (used for eight negotiating “rounds” since 1947) for reducing such duties among member nations. One of the more unusual aspects of the GATT/ WTO system—virtually unique in the international law arena—is that the WTO provides for binding third party dispute resolution of trade disputes, with sanctions for members that fail to comply with the rulings of the WTO’s dispute settlement body (DSB). More than 365 disputes have been referred to the DSB in the first nearly 13 years of the WTO’s existence. Probably the most important GATT/WTO principle is the principle of nondiscrimination, both as among members of the WTO and between foreign and domestic producers of goods and providers of services. The core principles of GATT 1994 are unconditional ‘most-favorednation’ (MFN) treatment among members (Art. I), non-discrimination and national treatment (Art. III), and a prohibition against most quantitative restraints (Art. XI). Most trade restrictions, other than tariffs, particularly quantitative restraints and non-tariff barriers, are essentially prohibited, although there are many important exceptions. Of course, the proper implementation of these principles, and the use of the exceptions to restrict
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MFN treatment: Under MFN treatment (“NTR” or “normal trade relations” only under United States law), each member country automatically extends the benefits afforded to any other member country to all WTO members: With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges. ..any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. (Art. I)
For example, if the United States were to negotiate with Japan a tariff reduction from 10% to 5% on television receivers from Japan, presumably as part of a package in which Japan made other tariff concessions of importance to the United States, under the MFN principle the 5% rate would be applicable to televisions imported into the United States from other GATT/WTO member nations as well, without those nations having to make any further concessions in return. •
Tariff bindings: GATT Article II provides a framework for multilateral negotiations for the reduction of import tariffs and assurance that once tariffs are reduced they will not be raised again in the future. When a member agrees to specific tariff com-
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•
mitments or reductions, either as part of a WTO negotiation or upon accession, they are incorporated in a country-specific schedule or annex, which is part of the legal agreement. Bound duties average about 3-5% for developed countries like the U.S. and Japan, but may exceed 30% for some poorer countries. Even among developed nations, some duties are much higher; U.S. duties on some apparel are in excess of 20%, and on some “plastic” footwear, over 70%. Once tariffs are reduced and “bound” at a given level, they normally cannot be increased, although there are certain exceptions. National treatment and non-discrimination: The national treatment and nondiscrimination principles embodied in Article III are designed to assure that imported goods are treated in the same manner as domestic goods, particularly with regard to a country’s internal taxation and regulation: The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1 [so as to avoid protection for domestic production].
For example, if the United States imposes a 5% excise tax on imported petroleum, it must impose the same tax on domestically produced petroleum. The GATT/WTO is designed to reduce tariffs and non-tariff barriers, recognizing that tariff reductions become ineffective if they are merely replaced with quantitative restrictions or other non-tariff barriers. •
Ban on quantitative restrictions: In most instances, quotas, embargoes, and other quantitative restraints are prohibited. Even where quantitative restrictions may otherwise be permitted, they must be applied on a non-discriminatory basis under Articles XI and XIII: No prohibitions or restrictions other than duties, taxes, or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.
This means that quotas (whether applicable to imports or exports) are prohibited unless they are authorized by a specified exception to Article XI, as with safeguards measures under GATT Article XIX.
gaTT Exceptions The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations, and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution, or use…
There are, of course, many exceptions to these principles in GATT 1994. The most important include articles VI and XVI (antidumping and countervailing duties), XII and XVIII (balance of payments) XIX (emergency action), XII (restrictions to safeguard the balance of payments), XX (general exceptions), XXI (national security), and XXIV (free trade areas and customs unions).
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These exceptions reflect recognition that in certain hopefully limited circumstances nations must preserve the right to depart from the principle of nondiscrimination against foreign goods. However, even where departures are permitted, they are narrowly drawn and have been interpreted narrowly by GATT and WTO panels. •
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Balance of payments: Article XII provides that “Notwithstanding the provisions of paragraph 1 of Article XI, any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported, subject to the provisions of the following paragraphs of this Article.” This provision recognizes that under some emergency situations—where, for example, a country’s foreign exchange reserves become dangerously low—special consideration in the form of temporary exceptions to tariff level obligations must be recognized. However, Article XII has been interpreted narrowly to prevent abuses. Article XVIII: 2 provides developing countries with greater leeway in protecting their balance of payments. Developing nations: The GATT itself provides only limited “special and differential” treatment for developing nations. Under the WTO agreements, special treatment is provided with regard to subsidies, intellectual property rights, investment, and safeguards, among others. In most instances, developing countries were given additional time to comply with the specific obligations of the WTO agreements, or are exempted from trade remedy proceedings if the volume of their exports of the affected product to the importing state are small. For example, India and other least developed countries were given 10 years from 1995 to comply with the requirements of the agreement on traderelated intellectual property (TRIPs).
•
General exceptions: Other so-called “general exceptions” to the core GATT applications are provided, in Article XX: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: a. necessary to protect public morals; b. necessary to protect human, animal or plant life or health; c. relating to the importations or exportations of gold or silver; d. necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices; e. relating to the products of prison labor; j. mposed for the protection of national treasures of artistic, historic or archaeological value; g. relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; h. undertaken in pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the CONTRACTING PARTIES and not disapproved by them or which is itself so submitted and not so disapproved.
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These provisions permit a GATT member to deviate from certain GATT obligations under the circumstances listed but only consistently with the “Chapeau” requiring that the exceptions not be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade . . . .” For example, on occasion the United States has barred the importation of certain products from China, because it was demonstrated that they had been made with prison labor. The WTO’s Appellate Body has interpreted Article XX exceptions narrowly. •
National security: There is also an exception for certain actions taken by GATT members on the grounds of national security (Art. XXI). These include preserving confidential information; “taking any action which it considers necessary for the protection of its essential security interests;” actions relating to nuclear materials; measures relating to the prevention of “traffic in arms, ammunition and implements of war...;” actions “taken in time of war or other emergency in international relations; and those relating to compliance with obligations under the U.N. Charter.” These exceptions have been used rarely.
GATT also provides an exception from MFN and the non-discrimination principle for free trade areas such as NAFTA and AFTA and ChinaAFTA, and customs unions such as Mercosur and the European Union (Art. XXIV) (a free trade agreement liberalizes trade among its members, but leaves its members free to set their own tariffs on trade with the rest of the world. A customs union not only liberalizes intra-regional trade, but provides for a common external tariff on members’ trade with the rest of the world). Under Article XXIV, only FTAs and customs unions that meet GATT Article XXIV standards are permitted, but
WTO oversight and enforcement of FTAs is weak. There is more lenient treatment of regional trade agreements among developing countries under the 1979 GATT “Enabling Clause,” which also permits developed country members to offer nonreciprocal trade benefits, such as those provided under the generalized system of preferences.
limits on the use of subsidies and Other Trade-restrictive measures The WTO agreement on subsidies and countervailing measures (“SCM Agreement”) imposes significant limitations on the use by governments of subsidies. It a subsidy as a financial contribution by a government or public body involving (1) a direct transfer of funds, (2) the foregoing of government revenue, (3) the provision of goods or services other than general infrastructure, or (4) payments made to a funding mechanism— including a private body—to undertake actions within (1), (2), or (3), provided in each of the four instances that a benefit is conferred on the recipient company (Art. 1.1; “yellow light” subsidies). In general, a subsidy is not actionable under a member country’s countervailing duty laws unless it is “specific,” in that it is provided to a specific industry or industry group, rather than generally. The subsidies agreement explicitly prohibits export subsidies and subsidies conditioned on use of domestic rather than imported materials (often termed “red light” subsidies), except for the least developed countries (Art. 3). Certain types of otherwise actionable subsidies—research and development grants, regional development programs, and environmental cleanup programs (termed “green light” subsidies)—were for 5 years after 1995 specifically exempt (Art. 8). Regional development subsidies are used by many developing nations to encourage industrialization in regions with high unemployment or limited infrastructure. The WTO exception for such subsidies—when generally available to
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industries within the disadvantaged regions— protects these nations from countervailing duty actions against such exports. The exemption has not been renewed, but presumably will be continued in some form at the conclusion of the Doha Round negotiations. The subsidies agreement contemplates two often-parallel means for dealing with illegal subsidies. First, as noted, private parties in a member nation may bring administrative countervailing duty actions under domestic law, resulting in the imposition of offsetting or countervailing duties if all the procedural and legal requirements discussed in detail in this section are met (SCM Agreement, Part V). However, a member government may also seek redress through the WTO dispute settlement body. If the action is against prohibited export subsidies, it is sufficient to show the existence of the subsidy (SCM Agreement, Part II). Where the action is against actionable when it believes that another member’s use of subsidies is causing (1) injury to one of its domestic industries, (2) “nullification or impairment” of its rights under the subsidies agreement, or (3) “serious prejudice” to any industry in its territory (Part III, Arts. 5, 6). Should the complaining member prevail, the subsidizing country would have the usual choice of complying with the decision by eliminating the subsidy or accepting trade sanctions. There are other trade remedies available to WTO Members. Most significantly, the WTO agreement on implementation of Article VI of the GATT 1994 (anti-dumping agreement or “AD agreement”) permits members to impose antidumping duties (additional import taxes) on foreign goods that are sold in the export market at “less than fair value” and as a result cause or threaten material injury to a domestic industry. Effectively, the rules punish international price discrimination when the product at issue is sold at a lower ex factory price in the export market than in the home market. The agreement on safeguards (“safeguards agreement”) allows the “temporary” re-imposition of customs duties or
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quantitative restraints when increasing imports are shown to cause or threaten “serious injury” to domestic producers. The agreement on trade-related investment measures (TRIMS) effectively precludes most types of performance requirements. For example, it is generally illegal for a country to require a local manufacturer to use local parts and materials rather than parts and materials imported from another country, or to provide government benefits conditioned on exporting a certain volume of production.
applicability to Outsourcing of goods How can a nation such as the United States counter the use of imported goods over domestically produced goods? This is very difficult prospect. In most cases, raising tariff above agreed (MFN) levels is prohibited. Tariffs bound under GATT Article II at, say, 4%, cannot be raised to 10%. Quantitative restraints (quotas) as noted cannot normally be imposed. Most other non-tariff barriers, such as bogus health and safety standards, can be challenged in the WTO’s dispute settlement body. If excise taxes are assessed on foreign goods, taxes at the same rate must be assessed on domestic goods under GATT Article III. If foreign goods are dumped—sold at lower adjusted prices in the U.S. than in the exporting countries—dumping duties can be assessed to offset the difference; this may occur much more, since national administering authorities have broad discretion. The U.S., for example, routinely applies high anti-dumping duties on steel, orange juice, softwood lumber, cement, anti-friction bearings, and other products, including many from China. Imposition of dumping duties has become the remedy of choice for the U.S. and more than 100 other WTO member nations, including China and India, since most other protectionists actions are foreclosed or require compensation (as with safeguards). This is of course one way of discour-
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aging outsourcing, although it tends to be used most often against unrelated foreign producers rather than against U.S. subsidiaries abroad. If foreign goods are recipients of government subsidies, similar penalty duties may be imposed. Safeguards in theory may be imposed where there is serious injury, usually for no more than 4 years. However, U.S. or other WTO member actions are subject to legal review under WTO procedures, and many such actions are overturned by the dispute settlement body. For example, safeguards have been challenged at the WTO in at least five instances, and in each of these cases, the protection afforded to the domestic industries was ruled illegal. Should the United States decide to subsidize certain industries in an effect to make production in the United States more attractive financially by reducing manufacturing costs, such subsidies could be subject to challenge by other WTO members as a violation of WTO rules. Nor, under TRIMS, could the U.S. government require U.S. producers to use domestic parts and components rather than foreign ones. This would be counterproductive anyway, as it would encourage the domestic manufacturer to move its entire production abroad.
except as noted, are defined largely by members’ individual schedules of commitments. Services obligations are largely divided into three types: •
•
• •
GATS provides coverage of all services other than those afforded in the exercise of governmental authority, national treatment (barring discrimination in favor of domestic suppliers), and most favored nation treatment. However, these obligations, unlike parallel ones in GATT, incorporate important exceptions: •
Trade in services The objective of the general agreement on trade in services (“GATS”) is simple: over time, to assure that the basic disciplines that have applied to international trade in non-agricultural products for more than half a century—MFN treatment, national treatment, subsidies, transparency, and so forth—are applied to services, with a minimum of exceptions. GATS provides a series of legal rules governing market access and national treatment restrictions. GATS rules apply to regional and local as well as national governments. Members of the WTO agree through a “positive list” approach to restrict use of market access and national treatment restrictions; obligations under GATS,
Mode 1: cross-border services, such as when a Tucson, Arizona, lawyer sends a legal opinion by e-mail or courier to Bombay Mode 2: consumption abroad, as when an Indian lawyer or engineer travels to the University of Arizona to attend a graduate degree program Mode 3: commercial presence, as when a U.S. bank opens a branch in Shanghai Mode 4: presence of a natural person, as when an Australian attorney travels to Vietnam to open up a travel agency
•
•
National treatment commitments are not universal, but are limited by each government to the services specifically designated by that government; this contrasts with the GATT 1994, where national treatment is binding once the goods have entered the national market. The degree of market access and national treatment can be limited, for example, by permitting foreign banks to own only 49% of a subsidiary. EvenMFNtreatmentwassubjecttoexceptions for up to 10 years, with an initial review of the exceptions after 5 years, or beginning in 2000.
GATS also has other important provisions: transparency; reasonable regulations subject to judicial review; absence or restrictions on interna-
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tional payments for services may not be restricted except for balance of payments difficulties; built in schedule for further negotiations. •
•
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Financial services: By December 1997, GATS members were able to agree on a broader and much improved series of financial services commitments, totaling 56 schedules representing 70 member governments. A total of 104 GATS members made commitments under the Fifth Protocol. Nations representing over 95% of trade in financial services participated in the agreement. Specific commitments for banks, securities firms, and insurance firms incorporate dozens of pages. However, in general they include: fewer regulatory requirements for foreign commercial presence; “Grand fathering” existing operations that are currently majority owned, even if subsequent limitations have been tightened; broad coverage of insurance, reinsurance, brokerage, agency services, actuarial services, and all banking and stock brokerage functions. Telecommunications services: Telecommunications is another key services sector where negotiations could not be completed in 1994. Negotiations continued until February 1997, at which time 69 governments made market-opening commitments as part of the “Fourth Protocol” to the GATS or Basic Telecommunications Agreement. More than 95% of the global telecommunications market was covered. While commitments in the sector are generally offered on an MFN basis, several countries took MFN reservations (e.g., U.S., one-way satellite transmission; Brazil, distribution of radio/TV programming to consumers; Turkey, transit land connections and satellite ground station use by neighboring countries; Bangladesh, Pakistan, India, Sri Lanka, Turkey, application of differential measures by governments in setting rates; Antigua, Barbuda, national treatment only for other CARICOM members, etc.).
The coverage of GATS, unlike GATT rules relating to trade in goods, is still incomplete, and is under further negotiation in the now-stalled “Doha Development Round” of WTO negotiations taking place in Geneva from November 2001 to mid-2006, and sporadically thereafter. The focus of these negotiations, like those relating to telecommunications and financial services earlier, has been to eliminate market access restrictions, not to create such restrictions. Among the other gaps is very limited coverage of subsidies of services activities. GATS contemplates provisions for emergency safeguards and to restrict subsidies of services providers by host governments, but they were to be negotiated after 1995, and those negotiations have not yet succeeded. A provision exists to guard against balance of payments problems, but it has seldom if ever been used, in part because U.S. services providers are the ones which are effectively importing the benefits of the services into the United States.
implications of gaTs for services Outsourcing The implementation of GATS has effectively made it easier for developed members such as the United States to outsource services jobs, since it becomes very easy, for example, for a United States firm to open a subsidiary abroad to provide brokerage back office services (often, perhaps most frequently, the U.S. firm contracts with the service provider in India or elsewhere, rather than owning and controlling the foreign operation). Market access provided by India and other countries in the GATS schedules or in through national legislation fostering foreign investment and business activity generally has also been a significant driving force for outsourcing in the last decade or so. Also, the GATS contains no effective provisions on dumping or subsidization of services. Moreover, the “product” resulting from a foreign service provider—answering
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your telephone query about a Microsoft computer program or receiving electronically the draft of a legal document or code for a software program—is generally not subject to any kind of effective border controls or other restriction in the importing country. The entire thrust of the development of freer trade worldwide in goods (since 1947) and in services (since 1995) has been to remove restrictions that would otherwise prevent market forces for determining sourcing decisions. The members of the GATT/WTO have achieved a high level of success in this endeavor, even though many trade restrictions and unfinished business remain. Thus, efforts to restrict such trade in the name of outsourcing are likely to violate binding WTO obligations. Should the U.S. Congress enact WTO — illegal restrictions on outsourcing or imports from certain nations (e.g., India or China) based on exchange rates, they would likely be declared illegal by the WTO’s dispute settlement body within a relatively short period of time. Probably the only solution for U.S. outsourcing is for the government to maintain a favorable investment climate and a climate for sophisticated basic and applied research, and tax policies that encourage innovation and investment in technologies that increase productivity and competitiveness, so that outsourced manufacturing or services jobs can be replaced by other jobs requiring special technical skills and knowledge, as has in fact happened repeatedly in the United States since World War II.
strategy adopted by state governments and local governments in the u.s. State governments in the U.S. have used massive subsidies in recent years to attract major foreign manufacturing facilities; examples include the deals made by South Carolina and Alabama to
attract BMW and Mercedes respectively. There are also examples of situations where the state government has provided a subsidy to new industries or to existing industries as an incentive to get them not to outsource, and some companies leave the state soon after the contractually mandated period is over. In the area of outsourcing of professional services, the case most cited in literature is that of the conflicting decisions made by successive governors in Indiana. In September 2003, Governor Frank O’Bannon approved a contract of $ 15.2 million in favor of Tata American International Corp., a New York-based subsidiary of Tata Consultancy Services; this was the lowest bid, between $8.1 million to $23.3 million less than other bids. In November 2003, Governor Joe Kernan canceled the bid, not on the basis of any flaw in the execution of the project by the contractor. Additional details of this decision and other noteworthy decisions by state and local governments are presented in (Gupta et al., 2007). State and local governments have to grapple between two constraints: on one side, they need to procure services at the lowest possible price; and on the other, they want to maintain the highest possible levels of employment. In the Indiana case, the additional cost of retaining jobs in Indiana was calculated to be $162,500 per job; this is the incremental cost that the taxpayer must bear in order to keep the job in the state (Gupta et al., 2007). The U.S. constitution specifies that the federal government possesses exclusive authority over all matters pertaining to foreign affairs. Accordingly, it is questionable whether state governments possess the authority to bar procurement of services from abroad. So apart from the international conventions delineated in earlier subsections, the ability to influence outsourcing decisions appears to be further limited by the US constitution.
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OuTsOurcing vErsus insOurcing in ThE uniTEd sTaTEs There is a perception of IT jobs losses due to outsourcing. However, much of the job loses experienced have been due to the downturn of the economy in 2001, the IT bubble bursting and the tech-laden NASDAQ losing three-quarters of its value during the ensuing 3 years, and to productivity increases in the IT industry as elsewhere. That mistake is compounded when current output and employment levels are compared with levels at the frenzied peak of the boom in 2000 rather than with more normal levels from the late 1990s (Griswold, 2004). The job market is like most other markets, a dynamic and fluid environment that operates in a cyclic manner. Jobs are created and lost, similar to other markets where goods and services are bought and sold. U.S. private-sector employment rose by 17.8 million during the decade from 1993 to 2002. To produce that healthy net increase, a breathtaking total of 327.7 million jobs were added, while 309.9 million jobs were lost. In other words, for every one new net private-sector job
Table 1. Job turnover (thousands) (Source: Bureau of Labor Statistics) Year
Job Gains
Job Losses
Net Change
1993
29,665
27,032
2,633
1994
30,783
27,621
3,162
1995
31,459
29,079
2,380
1996
32,504
30,061
2,443
1997
33,725
30,757
2,968
1998
34,637
31,805
2,832
1999
35,614
32,924
2,690
2000
35,104
33,143
1,961
2001
32,491
35,442
-2,951
2002
31,691
32,047
-356
Total
327,673
309,911
17,762
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created during that period, 18.4 gross job additions had to offset 17.4 gross job losses (Lindsey, 2004). Table 1 provides a visual representation of the trends of job turnover during 1993-2002 to illustrate this point. Economic analysts and critics might argue that the jobs created are lower paying jobs that replace the more skilled or white-collar jobs that are being lost, and presumably sent abroad. However, management and professional specialty jobs have grown rapidly during the recent era of globalization. Between 1983 and 2002, the total number of such positions climbed from 23.6 million to 42.5 million—an 80% increase. In other words, these challenging, high-paying positions have jumped from 23.4% of total employment to 31.1%. Such high-quality jobs are likely to continue growing in the years to come. According to projections for years 2002–2012 prepared by the Bureau of Labor Statistics, management, business, financial, and professional positions will grow from 43.2 million to 52.0 million—a 20% increase that will lift these jobs from 30% of total employment to 31.5% (Lindsey, 2004). As the U.S. economy continues its shift to one that is more focused on performing services than on manufacturing, there is a concern that the U.S. is falling behind in this arena. This feeling is partially due to a shift of some high profile service positions, customer service representatives, and telemarketing sales, being sent offshore. Yet the fact is that the United States runs a trade surplus in the IT services most directly affected by offshoring. In the categories of “computer and data processing services” and “data base and other information services,” U.S. exports rose from $2.4 billion in 1995 to $5.4 billion in 2002, while imports increased from $0.3 billion to $1.2 billion over the same period. Thus, the U.S. trade surplus in these services has expanded from $2.1billion to $4.2 billion (Lindsey, 2004).
Evolving Relationship between Law, Offshoring of Professional Services
OuTsOurcing OF lEgal Tasks acrOss naTiOnal bOrdErs Technology has progressed to the stage that corporations can select providers of legal services in other countries, even other continents, who offer greater value and faster turnaround times. In some cases, they possess superior domain knowledge too. Limits do exist, however, mostly through state bar associations, which regulate the practice of law to members of the bar. To the extent outsourced services are made the responsibility of a member of the bar, for example, an Indian-American who is a member of the New York Bar and is responsible for supervising paralegals working in Mumbai, the state restrictions are likely not controlling. Issues of client confidentiality and protecting the lawyer-client privilege also arise. Further expansion of legal outsourcing will depend, inter alia, on maintaining a significant cost differential between the United States and Indian salaries for legal support professionals, and availability of such professionals for expansion.
case Examples of Outsourcing of legal activities The first law firm to expand overseas was Dallas based Bickel & Brewer (Brook, 2005). They opened an office in Hyderabad, India. The founders explained initially this was a solution to “handling the millions of pieces of information that confront us in each case” (Brook, 2005). This office has since spun off to a separate entity (Imaging & Abstract International) that handles work for Bickel and Brewer in addition to several other American clients. While some American companies are reluctant to have their legal work performed by a company that is not located within the United States because of possible negative press (Jain, 2006), other corporations are setting up captive centers, or locating part of their organizations’ legal department to locations such as India (Fla-
hardy, 2005), where labor is often 15-20% of what their U.S. counterparts charge (Rowthorn, 2005). The first U.S. corporation to do this was GE Plastics in 2001. GE had their U.S. staff interview and supervise these new employees who were located in Gurgaon, India. These employees were mainly drafting outsourcing agreements and confidentially contracts. In a 2 year period, GE reported saving “nearly $2 million in legal fees that otherwise would have gone to outside counsel” (Flahardy, 2005). This encouraged other corporations to follow G.E.’s lead, triggering the start of the legal outsourcing industry. DuPont has hired lawyers in the Philippines (Engardio, 2006) to work 24 hours a day (in three shifts), seven days a week, to prepare documents and code potential evidence for upcoming court cases, a process known as first level document review. As the amount of data that needs to be managed increases, so does the incentives for sending work, electronically, to a facility that can rapidly review and catalog this growing mass of information. DuPont is looking to shorten this process from 18 months to 3 months. The expected savings for this document work is 40% to 60%, a savings of $6 million from their annual budget. When Paris-based Rhodia, a leading producer of specialty chemicals felt pressure to remain competitive, it entered into a 6 year contract with Accenture to transfer the bulk of its law and accounting functions to a service center in Prague, Czech Republic (Stein, 2003). Accenture moved Rhodia’s 15 existing systems to Prague, and then began the process of standardizing their processes. This model, a shared service center, resulted in cost reductions over 35% in less than 2 years (Cooper, 2003). While most of the work so far has been low level tasks including transcriptions, document conversions, and legal data entry, there is a shift towards higher value services such as patent law being perform by Indian firms (Sandburg, 2005). Recently, an Indian law firm specializing in patent law, Pangea3, received $4 million from private
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equity firms (Kannan, 2006). This funding reinforces the belief of industry analysts that legal process outsourcing market will increase to $11.5 billion per annum by 2010 (Jain, 2006).
legal Tasks and Opinions The law industry, regardless of the type of practice, is composed largely of three components: research, writing, and litigation or negotiation (the vast majority of civil legal actions in the United States—over 90%—never reach the courtroom. They are settled or mediated). Most lawyers are not litigators. Rather, they are engaged in negotiation of complex legal agreements with private parties or government entities, and assisting clients with regulatory requirements or such documents as wills, trusts, corporate charters, contracts, and so forth. Lawyers often have a heavy work load handling the research and writing as well as the negotiation, litigation, and interaction with clients. The negative effects of this hectic work schedule for the employer are worker burnout and fatigue (Waldmeir, 2003). During the trial phase of a case, lawyers often need to adjust their case in response to the day’s events. After they leave the courtroom, they conduct many hours of research to file a motion, or in response to a motion filed. Similarly, a time-sensitive negotiation or Securities and Exchange Commission filing may require almost round-the-clock work by dozens of legal professionals. The fatigue such professionals experience has negative effects on their performance. In addition to trial attorneys, mergers, and acquisitions, SEC and patent law and contract law among others require extensive research and revisions, and attorneys and paralegals practicing in those areas experience similar workloads. The legal tasks required for litigation support bear significant similarity to financial functions: they both share aspects that predispose them to the benefits of outsourcing. Each consists of vast amounts of information, in printed and electronic form, and requires that the data be tagged and
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indexed for retrieval upon demand. So, if financial functions can be outsourced at lower costs, one should be able to do the same for allied tasks. Ethics opinions issued in New York and California proclaim lawyers may ethically outsource legal support services overseas to a non-lawyer as long as the lawyer rigorously supervises the non-lawyer, obtains advance client consent to outsourcing, and bills for outsourcing appropriately (New York City Bar, 2006; San Diego County Bar, 2006). Note, however, that patent filing presents a unique set of constraints due to technology export laws. To mitigate this problem, the U.S. Commerce Department grants export waivers for technology, including blanket export waivers. Many multinational companies have blanket export licenses covering all of their operations (Harris, 2005).
Trends in legal industry Unbundling is a new trend in the legal industry; clients can identify services they want law firms to perform and then select different law firms for different services based on considerations of cost or quality. In essence, legal tasks become a set of commodities. When DuPont needed outside help to manage documentary evidence for product liability cases, it determined that this work, although requiring some judgment, was not difficult or too technical in nature. Instead of opting for a vendor that focused on legal services, DuPont opted for a company with more experience in judgment based work, specializing in back office services. It selected Office Tiger, a large business process outsourcing provider, with the stipulation that the workers assigned by the latter to DuPont cases will work exclusively on DuPont related matters (The Metropolitan Corporate Counsel, 2006). The decision-making process took nearly 2 years with several factors that needed to be examined. A common concern is U.S. export control laws restricting the amount of information on new technologies that can be sent overseas. This was a
Evolving Relationship between Law, Offshoring of Professional Services
concern for DuPont, being a technological-driven company. This caused DuPont to use a U.S. law firm for such projects that could not be done overseas. For projects that could be conducted overseas, DuPont conducted onsite interviews of potential vendors before making their selection. Once security and quality concerns were addressed, DuPont utilized its own staff to personally train the foreign workers. In the future, such trips like this will not be necessary, as global standards for the legal outsourcing industry are put into place. A particular project in the Philippines was conducted by trained local persons, under the direct supervision of three persons who possessed law degrees from the U.S. and had been admitted to practice law in the U.S. In India, the new Global Legal Professional Certification test has been announced recently, in order to help identify the most talented subset of the nearly 200,000 individuals who graduate with degrees in law each year. Legal outsourcing is not simply a means to lower legal costs. After Andrew Corporation, a manufacturer of communications equipment, acquired a division of Deltec Telesystems, a New Zealand manufacturer, Andrew Corp. opted to use the local IP firm that Deltec had used for filing patents (Fried, 2004). This IP firm had acquired a solid reputation for filing radio frequency patents in the U.S. and other markets. Andrew Corporation decided to send all of their U.S. radio frequency patent work to this firm, located in New Zealand, based on this reputation. Further, because of the time difference between the U.S. and New Zealand, work can be conducted on a cyclic basis, with drafts from the IP firm being reviewed and sent back by the client before the firm begins work the following day. This decreases the overall time involved in the patent filing process and offers major strategic advantages and the possibility of true 24-hour knowledge factory operations (Gupta et al., 2007; Gupta & Seshasai, 2007) as illustrated by the scenario in the following paragraph.
There are three legal teams: Group A, B, and C; each located 8 hours (in meridian time difference, not travel time) from each other. When Group A is leaving the courtroom, at the close of the business day, Group B is entering its office. In this example, the opposing legal team is trying to get last minute evidence entered into the trial. Group A sends the case information, along with the results they would like their counter argument (motion) to produce. Group B is now responsible for acquiring all the necessary research to produce the desired result. Group B conducts the research, until the end of its working day. At this point, Group C starts its day. Group C is presented with the information from group A and the research that group B has performed. Group C is now charged with compiling this information into a written motion that will be submitted to the court, or an oral argument that Group A will present to the court. After 8 hours have elapsed, group C is now preparing to go home, and group A is now starting its day. Group C now forwards all information to Group A, who is preparing to return to court. Group A receives: (i) Group A’s summary of events and the intended results, (ii) Group B’s research, and (iii) Group C’s written motion and draft oral argument (could be in written form, or as an audio transcript, or both). Presumably, Group A has had sufficient rest, and was able to utilize the time for other aspects of the case. The results for using this model have been translated into a strategic advantage. Such mode of operations will allow three teams of workers to perform professional work on a round-the-clock basis (Gupta et al., 2007; Seshasai & Gupta, 2007).
inTEllEcTual prOpErTy (ip) issuEs The performance of tasks in an outsourced or collaborative fashion, by individuals located across state and national boundaries, raises new
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issues. Who owns the intellectual property such as patents on new medical or drug inventions; who can be sued for malpractice and under which set of laws and regulations; how the charges for services should be apportioned; and what are the mechanisms for seeking redress if and when it becomes necessary? Besides these, there are also other related social and policy-related concerns such as quality control of services and intensity of workflow across boundaries. In the case of patents and intellectual property, there is a common feeling among intellectual property holders around the world that others may find a way to exploit one’s patents or other technology, particularly trade secrets that are not subject to patent protection. In the U.S., there is a feeling that some companies in foreign countries are exploiting U.S. inventions and patents without authorization and payment of royalties. On the other side, there are people in other counties that feel the same way; there are also instances of patents issued by the U.S. patent office on items of indigenous nature that have existed for thousands of years. This section looks at these issues and proposes an approach that can surmount the current problems and hurdles related to intellectual property.
quality, reputation, or other characteristic of the good is essentially attributable to its geographic origin” (Field, 2006). Since intellectual property shares many of the characteristics of real and personal property, associated rights permit intellectual property to be treated as an asset that can be bought, sold, licensed, or even given away at no cost. IP laws enable owners, inventors, and creators to protect their property from unauthorized uses (Field, 2006). On a macro scale, the importance of IP to social and global development is three fold: •
•
Foundations of intellectual property Intellectual property (IP) rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time (World Trade Organization, 2007b). The key forms of intellectual property are patents, copyrights, trademarks, and trade secrets. In addition, there are variations to the common forms of intellectual property. For the purpose of this article, an example in the category of geographical indicators (GI) is focused on. A GI identifies “a good as originating in a locality where a given
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•
Convenience: The most obvious reason is that these creations translate into making some of life’s most common and enduring activities more convenient. For example, communication between people became easier when the postal system was created. As time progressed, the telephone was developed, which allowed for direct communication across greater distances. Later, the cellular phone was developed to allow talkers to have direct communication with each other outside of their homes—in fact, anywhere. Economic growth: The World Bank’s Global Economic Prospects Report for 2002 confirmed the growing importance of intellectual property for today’s globalized economies, finding that “across the range of income levels, intellectual property rights (IPR) are associated with greater trade and foreign direct investment flows, which in turn translate into faster rates of economic growth.” Innovation: Effective IP enforcement encourages creation and invention.
The World Intellectual Property Organization estimates that copyright industries alone contributed $791 million, or 7.75%, to the U.S. economy in 2001 (Wayne, 2004). Estimates of U.S. companies’ worldwide losses to counterfeit-
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ing and piracy range from $200 to $250 billion per year (Wayne, 2004).
intellectual property and role of international Organizations One of the major governing bodies related to protection of IP on an international basis is the World Trade Organization (WTO). The current policy evolved during the 1986-1994 Uruguay round of multilateral trade negotiations (World Trade Organization, 2007a). The TRIPS (agreement on trade related aspects of intellectual property rights) was an attempt to bring IP rights under the protection of shared international rules governing related trade issues. TRIPS establishes minimum levels of protection that each member has to give to the intellectual property of fellow members. Governments are allowed to reduce any short term costs through various exceptions. For example, this maneuver could be executed in order to tackle public health problems. The agreement covers five broad areas (World Trade Organization, 2007a): •
• • •
how basic principles of the trading system and other international intellectual property agreements should be applied how to give adequate protection to intellectual property rights how countries should enforce those rights adequately in their own territories how to settle disputes over intellectual property between members of the WTO now that the provisions of TRIPS apply to all WTO Member states
The second part of the TRIPS agreement looks at different kinds of intellectual property rights and how to protect them. Its main goal is to make certain that member countries have an understanding of its provisions for IP protection. The basis of the TRIPS agreement can be traced back to the late 19th century. More specifically, its basis
was founded around the Paris Convention for the Protection of Industrial Property of 1883 (World Intellectual Property Organization, 2007b). Topics that were addressed in this agreement included, but were not limited to, patents, industrial designs, and so forth (World Trade Organization, 2007a). Later, the Berne Convention for the Protection of Literary and Artistic Works in 1886 established international copyright laws (World Intellectual Property Organization, 2007a). Evidently, some areas concerning IP were not discussed—for example, geographical indicators. Or, those protection standards that were discussed were later found to be insufficient. The WTO evaluated the proceedings of the earlier two conventions, and determined that higher standards were needed today, especially with respect to the enforcement aspect. Part 3 of the TRIPS agreement was written specifically to address this issue. Yet, before going into the weak points of this section, an understanding of what Part 3 attempts to enforce must be made known. According to the WTO: The agreement says governments have to ensure that intellectual property rights can be enforced under their laws, and that the penalties for infringement are tough enough to deter further violations. The procedures must be fair and equitable, and not unnecessarily complicated or costly. They should not entail unreasonable time-limits or unwarranted delays. People involved should be able to ask a court to review an administrative decision or to appeal a lower court’s ruling. The agreement describes in some detail how enforcement should be handled, including rules for obtaining evidence, provisional measures, injunctions, damages and other penalties. (World Trade Organization, 2007a). More specifically, a major difficulty that member countries face is how to enforce efficiently what the WTO has set out to be a stringent set of rules. It is thought that this problem stems from
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the fact that the TRIPS agreement does not require all member countries to have uniform rules on protection of intellectual property. According to the WTO, the TRIPS Agreement only:
Generally, the wordings of the GATS guidelines are vague and it has rarely been tested in legal disputes; more specifically, members question its:
… requires members to comply with certain minimum standards for the protection of intellectual property rights covered in it; however, members may choose to implement laws which give more extensive protection than is required in the agreement, so long as the additional protection does not contravene the provisions of the agreement. (World Trade Organization, 2007a)
…market access rules and subsidies and the unwillingness or incapability of the proponents… to give guarantees that the feared negative consequences can be excluded or ruled out” (Bienefeld, 2003). This could greatly expose any IP being shared and raises the possibility of infringement. In essence, “…is still largely a terra incognita for most trading nations (Horn & Mavroidis, 2006).
This implies that member countries need only to adhere to the minimum standards of the agreement. When the member countries adhere to the minimum requirements of the agreement, they have: …the freedom to determine the appropriate method of implementing the provisions of the agreement within their own legal system and practice— taking into account the diversity of members’legal frameworks (for instance between common law and civil law traditions). (World Trade Organization, 2007a) Two issues arise as a result of this line of thought: While some countries believe heavily in the protection of IP and strict laws to enforce that protection, there are other countries that settle for the bare minimum requirements of TRIPS. Although there is a clear disparity, this is acceptable, and both countries are considered to be in compliance with the requirements of the TRIPS agreement. Further, the protection of IP outlined by TRIPS remains unstable due to lack of clarity surrounding the legal rules governing market access and national treatment restrictions as outlined in the GATS—which essentially bolsters IP protection.
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international property arguments at international level According to Friedman (2005), the 2001 Chinese accession into the WTO was largely based on the goal of destroying internal bureaucracy as it negatively affected international trade and encouraged political and economic corruption. Friedman (2005) suggests that a more “codified law” would aid in the control of such problems. It should be noted that lack of local IP enforcement can definitely cause a lack of support for expanding trade between two countries. Such was the case in 2003 when the U.S. was apprehensive in trading with China; since then, China has strengthened the enforcement of its protection policy (Wayne, 2004), but not to the satisfaction of the United States, which has challenged the failure of China to meet its TRIPS obligations (China—Measures Affecting the Protection and Enforcement of Intellectual Property Rights (Complainant: United States), DS 232, April 10, 2007). Consider a specific example from the U.S. according to The New York Times article “U.S. Permits 3 Cancer Drugs from Cuba” (from July 15, 2004 issue) the U.S. federal government allowed biotechnology company CancerVex to license three experimental cancer drugs from Cuba. This was surprising because this allowance was
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essentially an exception to the highly restrictive trade policy of the U.S. with Cuba. Historically, the U.S. has imposed a series of embargos on Cuba. Most notably, the Cuban Liberty and Democracy Solidarity Act (1996) penalizes foreign companies that have done business in Cuba by preventing them from doing business in the U.S. The European Union vehemently voiced its disdain of this act because it felt the U.S. was dictating how other nations conducted their trade—which was essentially what it was doing—until negotiations were conducted. Such disputes could be better resolved if there was a good mechanism to handle them. Consider another example. Basmati rice serves as the traditional staple diet of tens of millions of people in South Asia. Based on research conducted on the total export of basmati rice, it was concluded that exports worth $350 million from India and $250 million from Pakistan were at stake at the time of the award of patent (Chandola, 2006). On September 02, 1997, Texas-based company RiceTec was awarded a patent by the U.S. Patent and Trademarks Office in regards to basmati rice. The patent was vague, allowing RiceTec the rights to exclusive use of the term ‘‘basmati,” a monopoly on farm-bred Indian/ Pakistani basmati varieties with any other varieties in the Western Hemisphere, as well proprietary rights on the seeds and grains from any crosses (Uzma, 1998). The allowance of this patent caused uproar among the concerned parties of the South Asian subcontinent, as they feared bio-piracy by the West (Vandana, 2001). There were three main issues that concerned this patent: a theft of collective intellectual and biodiversity heritage of Indian farmers; a theft from Indian traders and exporters, whose markets are being stolen by RiceTec Inc.; and finally, deception of consumers since RiceTec is using a stolen name, basmati, for rice that is derived from a variation of Indian rice but not grown in India, and hence of a different quality. (Ray, 1998)
India’s concerns, in fact, were supported by international law and RiceTec was not given new rights or any right given to market their varieties as equivalent to or superior to basmati (Chandola, 2006). According to the TRIPS agreement itself, Article 22 defines a GI as: …indications which identify a good as originating in the territory of a member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin. Basically, in order to be protected, the GI is not required to have the same name of a geographical place, but must be an indication of that place. In this case, “basmati” is taken to be an indication of rice coming from the Indian subcontinent. Interestingly enough, RiceTec had been selling and marketing basmati rice by the brand Texamati and Kasmati for over 20 years in 30,000 stores in North America (Chandola, 2006). So why did India not challenge the registration of this brand in the USA? Article 24.5 of the TRIPS agreement provides that: …where a trademark identical or similar to a GI has been applied for or registered or used in good faith before the application of these provisions of TRIPS in the member state or before the protection of the geographical indication in the country of origin, such a registration is valid and cannot be challenged. (“TRIPS”) Based on this proviso, India could have challenged both the trademarks because the violated the provision of “good faith.” The problem, however, is that India, would have had to challenge the dispute in American courts. Historically, American courts have in some instances appeared to favor their national companies and this is a serious disadvantage to an overseas defendant [see Mother’s Restaurants v. Mother’s Other Kitchen, Inc. 218 U.S.P.Q. 1046 (TTAB1983);
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Person’s Co., Ltd. V. Christman 900 F.2d 1565 (Fed. Cir. 1990), 14 U.S.P.Q 2d, 1477 for correlating evidence] (Chandola, 2006). However, there are other prominent cases that culminated in a result that favors the foreign party over the U.S. firm. For example, in Bremen v. Zapata Offshore Oil, 407 U.S. 1 (1972), the Supreme Court deferred to a contractual choice of law case and forced an American party to bring its court action in England rather than the U.S. In Mitsubishi v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), the Supreme Court enforced an arbitration clause against a U.S. auto dealer in favor of the Japanese auto manufacturer. Nevertheless, if the dispute had been tried in India, RiceTec would, most likely, have been held accountable for the infringement, and the costs to the plaintiffs would have been significantly lower too. The international IP area provides enormous challenges for companies and other holders of IP rights that wish to enforce those rights in national courts. TRIPS provides a basis for governmentto-government action where, for example, a local patent office may discriminate against foreign patent holders on a systematic basis, but is not useful for dealing effectively with individual company infringements. Under the best of circumstances, IP litigation in national courts is expensive and time-consuming, with the results often difficult to predict..
long-Term solution for addressing issues at global level Apart from the problems mentioned, the lack of global consensus on intellectual property issues is increasing the net cost to the customer in unforeseen ways. Consider this example from the healthcare arena. In the U.S., the FDA plays the pivotal role on issues related to drugs. But, each state is responsible for handling all medical professional credentialing and registration issues. The radiologist can render an initial opinion from outside the particular state or country, but the final
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opinion must usually be signed by another radiologist who resides within the particular state and is licensed to practice there. The use of two radiologists, though providing quicker action, tends to increase overall costs (Gupta et al., 2008). As mentioned earlier in this section, a widespread feeling exists among holders of intellectual property, both in the U.S.and abroad, that others are exploiting their work. Courts in different countries give conflicting judgments, with some evidence of bias in favor of companies domiciled in their respective countries. This is similar to situations where judges in different states in the U.S. would render conflicting decisions on the same case, creating confusion need for reconciling these decisions at the inter-state level; now the issue is at a nation-to-nation level. Consider a specific situation. Until fairly recently, child custody cases were handled entirely at the state level in the U.S. In divorce cases involving parents residing in two different states, the first state could grant the custody of the child to the mother (who resided in that state), and the second state could grant custody of the same child to the father (who resided in the latter state). In order to mitigate this problem of conflicting judgments, the Uniform Interstate Family Support Act (UIFSA) was drafted in 1992. According to this act, which has now been adopted in all of the U.S., states have been provided with the power to reach beyond their borders for the establishment and enforcement of support orders. A similar type of action is obviously desirable in the arena of intellectual property, at the international, nation-to-nation level, but agreement has proven elusive. Even the members of the European Union, after more than 40 years of trying, have not been able to agree on a uniform patent statute to be applied in the same manner by all member states. Let us step back from the specific aspect of intellectual property to analyze the broader subject of how laws, regulations, and norms have evolved over history. In 1000 BC, all rules were maintained and enforced at the village level. The
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Figure 1. International Legal Infrastructure
National Infrastructure
State Infrastructure
County/District Infrastructure
Local/City Infrastructure
village constituted the unit of economy. If a person engaged in inappropriate behavior, he or she could be denied the ability to draw water from the village well. The concerned person then had to plead with his or her peers in order to survive. This was a mechanism to enforce norms and mores of that village-based society. Over time and with the advent of better means of transportation, the legal unit increased in geographic size, first to a collection of a dozen villages, then to principalities, and ultimately to nation states. The lawmaking and enforcement mechanisms evolved too, frequently with overlapping jurisdictions. For example, a person residing in Boston today may be governed by up to five sets of regulations, of the City of Boston, Suffolk County, the State of Massachusetts, and the United States of America, respectively. Being governed by laws of the U.S.
Frequently, these two infrastructures are combined into a single infrastructure or only one infrastructure is applicable.
does not imply having to go to Washington D.C. to seek redress; benches of U.S. federal courts exist in most large and medium-sized cities in the United States. Why was one layer of legal infrastructure adequate 3000 years ago, but multiple layers of infrastructure (see Figure 1) needed today? The answer lies in the growing sophistication of society and the widening circle of influence for each individual and organization. If one drives too fast, then the legal system at the local level is adequate to address the situation. If one manufactures goods in one state of the U.S. and sells in another state, then the guidelines of interstate commerce, established at the federal level, apply to safeguard the interests of the sellers and the buyers. As global trade becomes more prevalent, new legal mechanisms have to evolve. Such trends
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are being witnessed. For example, in some areas, such as intellectual property, there may be a supranational layer as well, that is, the WTO’s trade related intellectual property agreement, which although not applied directly in the United States, affects U.S. intellectual property law. In the case of intellectual property, the ultimate solution may be an international regulatory system that maintains offices in large cities around the world. This organization could deal with issues that transcend national boundaries. The organization that performs this role could be a new one or an existing one such as WIPO or the WTO. Further, it is possible that different organizations would be appropriate for different areas of expertise. For example, the agency that could address issues of medical credentialing, registration, malpractice, accounting, and reimbursement could be operated under the aegis of the World Health Organization (WHO). Issues of intellectual property and trade are currently coordinated at the international level by the World Intellectual Property Organization (WIPO) the World Trade Organization (WTO), respectively. These organizations could serve as the nucleus for establishing streamlined mechanisms that would enable better coordination of emerging types of practices, in various disciplines, perhaps under the aegis of the WTO’s general agreement on trade in services. Professional services of diverse types will increasingly transcend national boundaries as efforts are made to perform them with speed, efficiency, and in the most cost-effective manner. The availability of the proposed mechanism for global coordination of intellectual property and allied issues will be of major benefit to large constituencies of individuals and organizations around the world. In order to convert the idea into reality, a critical mass of countries would need to subscribe to the proposed approach, and to the duties and the responsibilities that are inherent in it. Under current political realities, particularly in the United States and other major trading nations
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(EU, India, China, Brazil, etc.), broad agreement on such a mechanism seems extremely unlikely in the foreseeable future. Note, however, that it is not necessary for all the countries to agree to the idea; further, it is not necessary that the dominant countries subscribe to the concept at the initial stage. When one of the authors of this article was leading the effort to establish the Internet Telephony Consortium at MIT during the nineties, the strongest opposition came from the largest telecommunications company that existed at that time. The representative of this company raised objections at each stage. Finally, this particular author told the concerned repre¬sentative that his company did not need to join this consortium if it had so many reservations about the concept of the proposed consortium. Immediately, the representative said that if the consortium was formed, his company would definitely be a member of it. Usually, the company or country that is the strongest is the one who resists the consortium approach more than others. Of course, an international/ supranational IP system that did not include the United States, the EU, and Japan would not have much practical utility. Historically, matters involving multiple countries have evolved at a slow pace. For example, the law of seas “…developed in the 10th to the beginning of the 11th century where the city-state of Amalfi…had a code of maritime law, which served as the model for laws on the Mediterranean Sea (UN Atlas of the Oceans, 2007)”. As time progressed these laws were expanded and redefined to satisfy the desires of the dominant world power of the time. It was not until the early 1980s, during the finalization of the United Nations Convention on the Law of the Sea (also known as UNCLOS III), that a final set of regulations was developed (The Peace Palace Library Centennial Exhibition, 2004), and the United States, the world’s largest sea power, has not acceded. There are other examples where matters have progressed very fast.
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Note also that despite the predictions of many experts, the European Union did become a reality, and its member governments opted to surrender some of their traditional powers for broader good. Further, even though the United Kingdom, Sweden, and Denmark opted to retain their own currencies, the notion of a common currency was widely accepted. In fact, nations moved from their respective currencies that were centuries old and moved to the euro in an unprecedented short period of time. The notion of countries agreeing to closely cooperate in other parts of the world is exemplified by Mercosur, NAFTA, and other regional trade agreements. So, there are several good precedents where nations have relinquished at least some of their customs, traditions, and procedures rapidly, and have accepted oversight authority that is outside national control. A more likely-to-be obtainable approach, at least in the short to medium term, would be to expand TRIPS to provide not only minimum standards for protection but uniform standards for the registration of patents, trademarks, copyrights, and so forth, which would then be incorporated into domestic law in all of the WTO member states, and enforced by existing national IP entities. This uniform law approach, which has been used successfully in other areas (e.g., Convention on the International Sale of Goods), raises far fewer “sovereignty” concerns than the designation of an international entity with offices in member countries, and would achieve most of the same objectives. However, as noted earlier, there is resistance to such IP uniformity even within major regional trading groups such as the EU. Finally, if some countries opt against joining a common approach to coordinate intellectual property enforcement and allied matters, such countries are likely to suffer over time in terms of their level of trade with other countries.
cOnclusiOn Despite the public rhetoric of politicians and others, governments of developed countries can do little to inhibit the global trend towards outsourcing without violating the commitments they have made at the international level. Overall, more jobs come to the U.S. than go out, because of outsourcing. The U.S. is the net beneficiary in terms of net number of jobs and especially in terms of net dollar amounts as the job coming in carries higher remuneration than the job performed abroad. The trend towards outsourcing of legal services, among others, may accelerate over time, assuming adequate supplies of low priced, welltrained professionals in such countries as India. Finally, there is an urgent need to adopt a new mechanism for handling of intellectual property rights and allied issues at the international level, even if the first step is harmonizing national IP laws and procedures through amendments to the TRIPS or WIPO agreements.
rEFErEncEs Bienefeld, S. (2003). Higher education is a human right-Not a commodity!: Student views on access, equity and student related issues. Retrieved May 18, 2007, from http://www.aic.lv/ace/ace_disk/ Bologna/Bol_semin/Oth_conf/UNESCO_Oslo/ Stefan%20Bienefe ld%20Speech.pdf Brook, D. (2005). Made in India: Are your lawyers in New York or New Delhi? Legal Affairs. Retrieved May 15, 2007, from http:// www.legalaffairs.org/issues/May-June-2005/ scene_brook_mayjun05.msp Chandola, H. V. (2006). Basmati rice: Geographical indication or mis-indication. The Journal of World Intellectual Property, 9(2), 166–188.
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Cooper, W. (2003). Rhodia makes its move. Outlook Journal. Retrieved May 11, 2007, from http:// www.accenture.com/Global/Research_and_Insights/Outlook/By_Alphabet/RhodiaMakesIts Move.htm Engardio, P., & Shameen, A. (2006, September 18). Let’s offshore the lawyers: DuPont is farming out legal services to Asia—and saving a bundle. Business Week, p. 42. Field, T. G., Jr. (2006). What is intellectual property? Retrieved February 14, 2007, from http:// usinfo.state.gov/products/pubs/intelprp/ Flahardy, C. (2005). Overhyped, underused, overrated: The truth about legal offshoring. Corporate Legal Times. Retrieved August 28, 2007, from http://www.mindcrest.com/July%20 2005%20Corporate%20Legal%20Times%20 -%20Overhyped,%20Underused,%20Overrated,%20The%20Truth%20About%20Legal%20 Outsourcing.pdf
Gupta, A. et al. (2008). Outsourcing in the healthcare industry: Information technology, intellectual property, and allied aspects. Information Resources Management Journal, 21(1). Harris, S. C. (2005). Patent outsourcing and offshoring: A summary of the issues. San Diego: Fish and Richardson P.C. Horn, H., & Mavroidis, P. C. (2006). The WTO dispute settlement system 1995-2004: Some descriptive statistics. Retrieved May 18, 2007, from http://siteresources.worldbank.org/ INTRES/Resources/469232 1107449512766/ HornMavroidisWTODSUDatabaseOverview. pdf Jain, A. (2006). The emerging Indian legal offshoring opportunity. The Financial Times. Kannan, S. (2006). Legal outsourcing firm gets funding. The Hindu.
Fried, J. (2004). Offshore outsourcing hits the legal marketplace. Delaware Law Weekly.
Lindsey, B. (2004). Job losses and trade: A reality check. CATO Institute. Retrieved August 23, 2007, from http://www.freetrade.org/node/65
Friedman, T. L. (2005). The world is flat: A brief history of the twenty-first century-updated and expanded. New York: Farrar, Straus and Giroux.
The Metropolitan Corporate Counsel. (2006). DuPont legal again sets the pace—outsourcing judgment based tasks. 14(11), 59.
Griswold, D. (2004). Why we have nothing to fear from foreign outsourcing. CATO Institute. Retrieved August 23, 2007, from http://www. freetrade.org/node/104
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Gupta, A. et al. (2007). Offshoring: The transition from economic drivers toward strategic global partnership and 24-hour knowledge factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. Gupta, A., & Seshasai, S. (2007). 24-hour knowledge factory: Using internet technology to leverage spatial and temporal separations. ACM Transactions on Internet Technology, 7(3).
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The Peace Palace Library Centennial Exhibition (2004). Collection as a mirror of the historical development of international law: The law of the sea. Retrieved March1, 2007, from http://www. ppl.nl/100years/topics/sealaw/ Ray, S. G. (1998). The stealing of basmati. Retrieved March 1, 2007, from http://www.rediff. com/business/1998/mar/12rice.htm
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Rowthorn, R. (2005). The impact on advanced economies of north-south trade in manufacturing and services. The Social Science Research Council. Retrieved May 10, 2007, from http:// www.ssrc.org/programs/ifd/publications/DevImperative/Rowthorn.pdf Sandburg, B. (2005). India inked: Local law firms and their clients save money with Indian patent shops. Retrieved August 28, 2007, from http:// www.law.com/jsp/article.jsp?id=1105364113219 San Diego County Bar Association. (2006). Ethics opinion. Retrieved May 1, 2006, from http://www. sdcba.org/ethics/ethicsopinion07-1.htm Seshasai, S., & Gupta, A. (2007). The role of information resources in enabling the 24-hour knowledge factory. Information Resources Management Journal, 20(4), 105-127. Stein, T. (2003). Inside out: Businesses look to outsourcing for more and more business processes. Optimize. Retrieved March 17, 2007, from http://www.optimizemag.com/issue/020/ execreport.htm UN Atlas of the Oceans. (2007). History of Maritime Law. Retrieved March 1, 2007, from http:// www.oceansatlas.org/servlet/CDSServlet?status =ND0xMjg2OC4xNDUwNSY2PWVuJjzPXdlYi1zaXRlcyYzNz1pbmZv Uzma, J. (1998). Biopiracy: The patenting of basmati by RiceTec. Paper presented at the Commission on Environmental, Economic and Social Policy—South Asia & Sustainable Development Policy Institute.
Vandana, S. (2001). The Basmati battle and its implication for biopiracy & TRIPS. Retrieved March, 7, 2007, from http://www.globalresearch. ca/articles/SHI109A.html Waldmeir, P. (2003). Lawyers argue the case for a lifestyle revolution. Financial Times, 15. Wayne, E. A. (2004). Address to Senate Judiciary Committee. Retrieved March 1, 2007, from http:// usinfo.state.gov/ei/Archive/2004/Mar/24-488795. html World Intellectual Property Organization. (2007). Berne Convention for the protection of literary and artistic works. Retrieved March, 1, 2007, from http://www.wipo.int/treaties/en/ip/berne/ trtdocs_wo001.html World Intellectual Property Organization. (2007). Paris Convention for the protection of industrial property. Retrieved March 1, 2007, from, http://www.wipo.int/treaties/en/ip/paris/ trtdocs_wo020.html World Trade Organization. (2007a). Frequently asked questions about TRIPS. Retrieved February 20, 2007, from http://www.wto.org/english/ tratop_e/trips_e/tripfq_e.htm World Trade Organization. (2007b). What are IPRS? Retrieved February 20, 2007, from http:// www.wto.org/english/tratop_e/trips_e/intel1_e. htm
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 2 , edited by M. KhosrowPour, pp. 103-126, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 1.18
Offshoring in the ICT Sector in Europe:
Trends and Scenario Analysis Esther Ruiz Ben Technische Universtät Berlin, Germany Michaela Wieandt Technische Universtät Berlin, Germany Martina Maletzky Technische Universtät Berlin, Germany
absTracT In the context of globalization and internationalization, offshoring processes in the ICT Industry have increased considerably in the software and service sector in recent years due to the cost saving strategies and market entry policies of ICT organizations. Through the heterogeneity of the European ICT sector a regionalization trend regarding host country selection for ICT offshore is, nevertheless, observable. Historical and cultural ties between host and home countries as well as related national stereotypes play an important role in the regionalization process. Moreover, due to favorable EU policies and regulations, off- and nearshoring within the European Union acquire an additional attractive character for some
major European producers, such as, for example, Germany. Thus the Eastern European Member States, which already build out certain sectoral specialization in regard to ICT service provision, have benefited from direct foreign investments. Off- and nearshoring also imply risks and hidden costs linked to structural aspects in host countries as well as to the overestimation of cultural and historical nearness. In our chapter we discuss the trends of the internationalization process in the European ICT sector taking into account related risks in off- and nearshore processes. We argue, furthermore, that long-term cooperation and intercultural training, with the support of local and European institutions, should be considered to confrontin a better way the challenges of the internationalization of ICT in Europe.
inTrOducTiOn During recent years and particularly in the period following the dot.com crisis, offshoring processes in the ICT sector experienced a very important increment primarily due to the pressure to cut costs. The acute labor shortage in the sector prior to the crisis decreased and the maturity of the technological and organizational developments of the late nineties facilitated the increasing standardization of some working processes permitting the delegation of tasks to foreign countries with cheaper labor costs. Thus, the perspective of many ICT organizations changed from attracting foreign workers to a relocation of tasks to foreign destinations. Focusing on the situation in Europe, since 1995 there has been a rapid growth of foreign workers in the ICT sector in western European countries. According to Kolb et al. (2004): In the UK the numbers of foreign workers in the ICT sector rose by 64.3% (from 55,501 to 91,184), the increase in Switzerland was 59.6% (from 6,986 to 11,149) and in Germany 54% (from 10,725 to 16,514). Also, The Netherlands display a 21.4% increase (from 28,000 to 34,000) in that period. There are, however, a number of differences in the occupational categories used in data collection, so that the validity of this data should not be exaggerated. The indicated trend, however, is unmistakable.1 (p. 157) Until 2003 this growth trend in the international immigration of high-qualified workers in EU countries focused especially on the ICT sector remained. Due to the labor shortage prior to the dot.com crisis foreign workers already working in Europe or in the USA played an important role in the earlyphases of ICT offshoring (Aspray, Mayadas, & Vardi, 2006, p. 17), so we can consider the policies of acquiring ICT foreign specialists since the late 90s the basis for an early development of the IT offshoring processes and for the long term internationalization of the ICT industry.
Educational policies play an important role in this process in the European Union not only at the tertiary level, but also regarding official training programs for continuous education mostly conceived within the framework of the information society concept of the EU. Because the EU cannot be viewed as a unified, homogeneous market, in the following pages we focus on ICT near- and offshore processes in the following European countries: United Kingdom, France and Germany as home countries sending work and Ireland, Poland, Czech Republic and Hungary as host countries acquiring work. Furthermore, we look closely at the importance of particularly large ICT organizations as major players in the professionalization processes within the ICT sector. First, we will show the main features of internationalization of the European ICT sector defining the meaning of ICT near- and offshoring in the following section. The main thrust of our paper focuses on the situation of near- and offshore processes in the EU with special attention to the new Eastern European Member States. Then we will explain the hidden costs as well as the risks involved in near- and offshore projects. This will lead us to possible solutions and recommendations and, finally, to the scope of future trends and further research directions.
backgrOund: ThE EvOluTiOn and inTErnaTiOnalizaTiOn OF ThE EurOpEan icT sEcTOr The European ICT sector includes a broad variety of products and activities. Due to unclear production areas because many companies are engaged in different segments of the sector and due to country-specific measurements and data collection, a consistent and overall definition is still missing.2 In its definition of the ICT sector, EITO (2006, p. 251) distinguishes between, first, information technology (IT), including hardware production (office machines, data processing
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equipment and data communication equipment), software, and services (including IT consulting); and second, telecommunications (TLC), referring to carrier service, communication devices, and network equipment. However, the growth of ICT services as well as innovation in hardware production indicates the important role of the software sector. In a German study based on 920 interviews, the software sector is broken into two segments (GfK, IESE, ISI, 2000): the primary segment of the sector includes data processing services and computer producers while the secondary segment includes enterprises for machine production, electronics, automobile production, telecommunications and financial services. While in the primary segment software is a separate product, in the secondary it is embedded in other products or represents a service product. In the secondary segment of the software sector within the ICT branch the demand for innovative software products and services is specially important. Examples of the demand for services demand in the secondary segment in the case of Germany are especially the automobile, chemical or finance industry. They represent the main source of innovation for the software sector since the software boom of the late nineties. In keeping with the emergence of the Internet and the dot.com-economy the European ICT industry boomed at the end of the 1990s providing high growth rates in IT production and services as well as high rates of employment. Due to the high demand of skilled workers during the boom phase and the related labor shortage in the ICT sector, particularly at the end of the nineties, European countries developed several strategies to attract highly skilled foreign IT workers (López-Basolls, 2002). An example is the Green-card- initiative in Germany enhancing immigration of highly skilled workers (Dostal, 2004). The UK, Ireland, France, The Netherlands, and Italy developed policies easing the inward flow of foreign ICT workers using specific work permits. In the Nordic countries, tax incentives should attract a foreign work force
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(Mc Laughlan & Salt, 2002). Another common strategy was that of reducing the length of time taken for work permit approval, although the time efficiency differed from one country to another. As an example, work permit provisions in the UK had a faster response rate than anywhere else. At the beginning of the new millennium the sector was hit by the burst of the Internet bubble leading to a sharp decline in demand, prices and employment. Thus, since 2001 the inflow of foreign workers has decreased (OECD, 2004) and at the EU political level, long-term strategies have been designed to increase the competitiveness of Member States. In the following years, European ICT companies sought new possibilities for cost reduction, access to specialists and technology when needed, and for economies in scales by standardization and the formalization of working processes. Offshoring and nearshoring seemed to provide a beneficial solution, offering international expansion, access to new markets and growth (OECD, 2004, 2005). While manufacturers of ICT started to outsource in cheaper locations many years ago, providing business support and IT related services has been enabled recently by rapid development in IT systems and broadband communication as well as by the liberalization in trading services (OECD, 2005). The evolution of off- and nearshoring is closely related to the industrialization of the ICT sector. Boes and Trinks (2006) interpret offshoring as a new phase of industrialization in the ICT sector fostered by the emergence of an international, highly flexible and qualified ICT labor force as well as by an increasingly developing globalized collective economic area. Moreover, offshoring is enhanced through increased competition, trade de-regulation and the liberalization of services. Due to recent regulations in the EU, where the exchange of services and goods is free, ICT companies may develop a self-reinforcing dynamic to gain cost or quality advantages through offshoring (OECD, 2004, 2005; Aspray, Mayadas, & Vardi,
Offshoring in the ICT Sector in Europe
2006). Thus, we assume that driving factors for offshoring must be understood in the framework of globalization and of the industrialization trend in the software sector. Both the financial and the dot. com crisis at the beginning of the new millenium acted as a catalyst in cost reduction in the ICT branch and led to a new phase in internationalization as a way to confront costs pressure while expanding in the new markets. EU policies and regulations play an important role in the internationalization of the ICT branch because they influence offshoring plans in ICT networks and contribute to shaping institutional configurations and trajectories of the ICT branch. Labor and employment rights as well as issues related to privacy and data transfer have a special relevance for ICT offshoring. Data privacy laws, the European Union Data Privacy Directive adopted in 1995, apply to companies collecting or processing data within the EU or receiving data from the EU. They are implemented by the respective EU countries through national legislation (Eisner, 2005). Eisner (2005) points out that EU-approved transfer contract clauses are the most efficient way to handle data transfer in ICT offshoring processes in the EU. These clauses consist of an agreement between the transferring parties about a set of contract provisions consistent with data privacy laws. Once these clauses are effected by the transferring parties enforcement by the EU authorities is allowed. Another important issue related to EU regulations in ICT offshoring is the EU Acquired Rights Directive approved in 1977 giving employees protection in the event of a business transfer.3 This means employees must be transferred under the same working conditions they had before the transfer took place. In the case of replacement, employees must be informed and advised about related measures and are sometimes awarded a particular payment (Eisner, 2005). In the implementation of working policies in organizations, particularly regarding employees´ representation in companies’ decision making processes, there
are many differences among the European Member States, the most significant between the former EU15 and the new European Member States. These differences are particularly important for those European companies focusing on nearshoring in Eastern Europe, as do many German firms. In contrast, other European players, such as many UK enterprises, have concentrated on offshore destinations, e.g., the well researched case of India. Thus, the internationalization of the European ICT sector does not show an homogeneous picture emerging in a clear direction. The specific focuses of different countries are related to historical and cultural ties as well as to the influence of particular national industrial specialization and the particular regional presence and interest of the major producers in the European ICT sector (UK, Germany, France, and Ireland). To understand the regional orientation of the delivering and host countries of ICT work in Europe properly we will explain in the next section the meaning of both offshore and nearshore in their several variations.
The meaning of icT Off- and nearshoring As we explain elsewhere (Ruiz Ben & Wieandt, 2006), the terms off- and nearshoring refer to outsourcing practices, or the founding of subsidiary firms, in lower-wage countries (Aspray, Mayadas, & Vardi, 2006). The main motivation for ICT offshoring is to cut costs. Additionally, the expansion of market scope represents an important factor in offshore ICT production areas. Offshoring refers to the outsourcing to, or the founding of, a subsidiary in a lower-wage country s far4 from the home country. From the European point of view this could be China or India. The term nearshoring is used for activities closer to the homeland.5 From a Western European point of view this could be Eastern Europe or Russia. To characterize the direction of sourcing, the country sending work is called the home country; the
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Offshoring in the ICT Sector in Europe
country receiving work, the host country (Aspray, Mayadas, & Vardi, 2006). Off- and nearshoring appear in various forms: The term, “external offshore-outsourcing,” refers to the partial or total transfer of functions to external enterprises in lower-wagecountries. This form applies best to back-officeprocesses without customer contact (?) and handled via the Internet. The term, “internal offshore-outsourcing,” is used for the founding of a subsidiary or a joint venture6 characterizing by partial or total transfer of functions to dependent enterprises in lower-wagecountries (OECD 2005; Riedl & Kepler, 2003; Boes & Schwemmle, 2004). According to Amberg and Wiener (2004c), subsidiaries and joint ventures are the prefered form of offshore-outsourcing because they may still be controlled via capital shares and, therefore, risks are considerably low. Because of the need for high investments in the foundingphase they are of interesting mainly to big companies (Boes & Schwemmle, 2004; OECD, 2005). If offshoring is a substitute for a company’s domestic capacity it usually implies a cutback of production and, therefore, job loss in the homeland although expanding offshoring may increase a company’s performance in building up capacities abroad while keeping production output at home stable (Boes & Schwemmle, 2004). Expansive offshoring usually takes place through building international teams able to perform complex activities requiring adjustment or customer contact, minimizing coordination costs (Boes & Schwemmle, 2004). Staff members at home need to qualify in regard to co-ordination, project management and intercultural competences. The shifting abroad of performances in the ICTsector may refer basically to all sub-sectors, all phases of the production process or overall activities of an enterprise (Amberg & Wiener, 2004b; Boes & Schwemmle, 2004). a.
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On the level of a company’s infrastructure, off- or nearshoring apply to the outsourcing
b.
c.
of the physical production of hardware components, such as semiconductors, computer components and computers. Here, we find external offshoring to service providers as well as shared service centers in the form of joint ventures to keep control (Amberg & Wiener, 2004c). On the level of applications and development, they affect the development of individual software or applications with tasks requiring lower qualifications, such as programming, software-testing and software maintainance (applications management), but also high-end services, such as IT research, software-architecture, product design, project management, IT consulting and business strategy.7 Offshoring of applications and development in particular refers to a company’s expansion through providing access to cheap specialists and production capacities. Due to close collaboration with the customer in software production and applications management, the home company’s workforce is still required. On the process level, offshoring is designed as business process outsourcing, i.e., accounting, bookkeeping, digitalization of engineering drawings or desktop publishing implemented to substitute capacities (Amberg & Wiener, 2005; Aspray, Mayadas, & Vardi, 2006). That often leads to classical offshoring-outsourcing to external providers.
Figure 1 summarizes forms of offshoring used for such business activities. In many cases, ICT companies combine or alternate forms of offshoring which may occur as either internal or external offshore-outsourcing. For example, a broadly adopted strategy is to start a small pilot project as expansion,later widened if the results are positive, while capacities in the home organizations may be cut down. On the other hand, an offshore project conceptualized
(applications management), but also high-end services, such as IT research, software-architecture, product design, project management, IT consulting and business strategy.7 Offshoring in the ICT Sector in Europe Offshoring of applications and development in particular refers to a company’s expansion
useful. Looking at the internal and external forms of offshoring we observe that companies start with an external provider which, with further development, is bought and integrated into the home organization. Thus, external offshoring may become internal expansion. In some casest a subsidiary turns into
Figure 1. Business activities, forms of offshoring and control Internal offshoreoutsourcing
External offshoreoutsourcing
Expansive offshoring
Application management and software development
Application management and software development
Substitutive offshoring
IT Infrastructure, hardware production, business processes
IT Infrastructure, hardware production, business processes
Level of control by home Comparatively high company
as substitution may lead to the enhancement of the home organizations’ overall performance. In that case so downsizing doesn’t make sense; an expansion of the home organization may even be useful. Looking at the internal and external forms of offshoring we observe that companies start with an external provider which, with further development, is bought and integrated into the home organization. Thus, external offshoring may become internal expansion. In some casest a subsidiary turns into a buy-out or spin-off that still collaborates with the former motherorganization transforming internal to external offshoreoutsourcing. Saving costs primarily motivate off- and nearshoring. In this regard, a widely held view is that the profitability of offshoring is linked to certain budget, personnel, and time. According to our own research (Ruiz Ben, Wieandt, & Maletzky, 2007), offshoring is financially rewarding if projects encompass more than ten ICT workers abroad, a budget of a minimum of one million Euros, and a project duration of at least one year. Considering the offshoring activities of large companies, a long-term conceptualizaion is usually intended, leading to the funding of subsidiary software programming, development centres, or joint ventures. Looking at European nearshore destinations, salaries in the new European Member States are still low and represent a clear advantage for ICT companies. Moreover, the qualification level in
Comparatively low
these new Member States and the high unemployment in some of them, especially Eastern European countries, represent additional advantages linked to the employees´ motivation and willingness to work, engagement and readiness for continuous learning, both indispensable in the ICT sector. Thus, they are attractive nearshore destinations for Western European companies, as we will show in the next section. In the main thrust of our chapter we will show first an overview of the situation in the major home and host countries of ICT off- and nearshore projects in the EU to understand the regional orientation of the involved countries better. We will thenclassify the factors influencing the relationship between home and host countries as well as those affecting the performance of near- and offshore projects. This classification will lead to an explanation of transactions and hidden costs as well as the risks involved in near- and offshore projects.
main ThrusT: cOunTry spEciFic analysis Looking at the European countries in particular, the size and structure of ICT sectors differ among them. As Table 1 shows, Germany and the UK have the largest sectors with a collective market share of 41.6% in 2005 (EITO, 2006).
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Offshoring in the ICT Sector in Europe: Trends and Scenario Analysis Offshoring in the ICT Sector in Europe
a buy-out or spin-off still collaborates with the The historical andthat political divisions of Europe former motherorganization transforming before 1989 led to the establishment of a internal highly to externaland offshore-outsourcing. developed well performing western section Saving costs primarily motivate off- and near(the Europe-15 Member States, Norway, and shoring. In this regard, a widely held view is that Switzerland) and a transforming but well qualithe profitability of offshoring is linked to certain fied, andpersonnel, less regulated eastern section to (the budget, and time. According ourNew own Member States, Bulgaria, and Romania). research (Ruiz Ben, Wieandt, & Maletzky, 2007), Germanys’ ICT sector,rewarding the third largest in offshoring is financially if projects the world (Friedewald, 2004), in 2005 held encompass more than ten ICT workers abroad,a a market of 21.2% of in one Europe followed byand the a budget share of a minimum million Euros, UK (20.4%) and of France (16.9%). In the ICT secproject duration at least one year. Considering the offshoring activities of large companies, a longtors of the three countries, software and service term conceptualizaion is usually intended, leading were the largest sections (Bitkom, 2006; OECD, to the funding of subsidiary software programming, 2002c). Considering off- and nearshore expendidevelopment centres, or joint ventures. tures, Great Britain and Ireland have the highest Looking at European nearshore among the European Member States,destinations, amounting salaries in the new European Member States are to 72%, followed by German-speaking countries still low and represent a clear advantage for ICT (Germany, Austria, and Switzerland), accountcompanies. Moreover, the qualification level in ing fornew 9%Member and France with share 8% (DB these States andathe highofunemployResearch, 2006). ment in some of them, especially Eastern European Within the new additional European advantages Member States, countries, represent linked the largest ICT markets are those the Czechto to the employees´ motivation and of willingness Republic, Poland, and Hungary, with high growth work, engagement and readiness for continuous rates in the ICTindispensable area (EITO, 2006) ICT learning, both in the and ICTinsector. Thus, they attractive nearshore destinations exports (DBare Research, 2006). Moreover, the infor Western European companies, we will show creasing globalization of the ICT as sector implies in the next section. among ICT organizations interdependencies thedevelopment main thrust of our chapter we sector will show withInthe trends of the ICT in first an overview of the situation in the major home the EU approximating those in North America and host countries of ICT off- and nearshore projects (EITO, 2006). in the EU to understand the regional orientation of In Europe, both home and host countries of the involved countries better. We will thenclassify offand nearshoring compete in one market area the factors influencing the relationship between
home and host countries as Union. well as Analyzing those affecting regulated by the European offthe performance of nearand offshore projects. and nearshore strategies of the European market This classification will lead toappear, an explanation of leaders, some ambivalences leading to transactions and hidden costs as well as the risks the conclusion that the enhancement of off- and involved in near- and offshore projects. nearshore strategies by hard factors such as tax incentives, a highly skilled workforce or a good technological infrastructure are impeded by soft mAin thrust: country specific factors, such as historical relationships and/or AnAlysis cultural pecularities, whichmay be considered critical. To analyze off- and nearshore strategies Looking at the European countries in particular, we distinguish hard and soft factors, as in the size and structure of ICT sectors differused among the literature i.e.,Germany AT Kearney, 2004; DB them. As Table 1(see, shows, and the UK have Research, 2006). the largest sectors with a collective market share of 41.6% 2005include (EITO,direct 2006). Hardin factors measurable categohistorical andapolitical of Europe riesThe used to evaluate country’sdivisions performance as an before 1989 led to the establishment of a highly investment location, such as cost levelss (wages, developed and well performing section (the compensation costs for relevantwestern positions, tax rate, Europe-15 Member States, Norway, and Switzercosts of corruption and fluctuating exchange rates); land) andskills a transforming but well qualified, and peoples’ (including language skills); availless regulated eastern section (the New Member ability of personnel, and business environment States, Bulgaria, and Romania). (infrastructure, government support, security of Germanys’ ICT sector, the third largest in the intellectual property and in country environment world (Friedewald, 2004), 2005 held a market (AT Kearney, 2004, p. 5); and geographical closeshare of 21.2% in Europe followed by the UK ness. Another factor enhancing investment in (20.4%) and France (16.9%). In the ICT sectorsthe of New European Member States is the were funding the three countries, software and service the policy sections of the EU(Bitkom, that provides broad array of largest 2006;aOECD, 2002c). Considering and investment nearshore and expenditures, programs to offenhance economic Great Britain and Irelandcountries have the (DIHK, highest among relationships of member 2004). the States, amounting to 72%, TheEuropean influenceMember of these programs for the establishfollowed German-speaking countries ment of by nearshore relationships has not(Germany, yet been Austria, and Switzerland), accounting analyzed, but is considered important.for 9% and France with a share of 8% (DB Research, 2006).
Table 1. 1. European European ICT ICT market market leaders leaders and and offshore offshore expenditures. expenditures. (Source: (Source: Eito Eito 2006, 2006, DB DB Research Research Table 2006). 2006). Country
Maket share of the European ICT market in percent, 2005
Share of Offshore expenditures in Europe in percent, 2005
Germany
21.2
91
United Kingdom
20.43
722
France
16.9
8
Notes: 1This 1This number number contains contains offshore offshore expenditures expenditures of of the the German German speaking speaking countries countries (Germany, (Germany, Austria, Austria, Switzerland). Switzerland). 22 This This Notes: number contains contains offshore offshore expenditures expenditures of of Great Great Britain Britain and and Ireland. Ireland. 33 This This number number does does not not include include Ireland. Ireland. number
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Offshoring in the ICT Sector in Europe
Soft factors may be defined as factors influencing the success of ICT near- and offshore projects8 not quantifiable in an objective way. Soft factors include historical relationships between home and host countries as well as cultural pecularities, with individuals socialized, e.g., the individual’s sense-making attitudes and interpretationpatterns as linked, for example, to certain stereotypes. Thus, communication and working styles may differ among collaborators of different countries provoking friction, misinterpretations or misunderstandings (Hall, 1990; Hofstede, 1980; Hui, 1990; Thomas, 1999). Additionally the working climate may be influenced subliminally9with either negative or positive impact on commitment and team cohesion—important factors for effective work (Maletzky, 2006). However, literature on off- and nearshoring (see DB Research, 2006; AT Kearney, 2004), produced mostly by consulting firms, tends to evaluate soft factors in a predominantly positive way,assuming they enhance cross-national collaboration. Thus, for example, it is assumed that cultural nearness is a criterion for German companies in choosing Poland or the Czech Republic as a nearshore location. However, there is still discussion on the way historical relationships between Germany and Eastern European countries such as Poland or the Czech Republic, influenced not only by the former iron curtain but also by World War II’s displacement processes9 and border disputes,10 remain as stereotypes and even build prejudices that negatively influence intercultural working teams. In the case of English and French companies, that prefer offshoring to former colonies, the colonial past has to be taken into account, because it strongly impacts relationships between countries. For example, the UK and India have close relationships in regard to an array of political issues and areas (British High Commission, 2006). Considering individuals, a colonial past might have egative impact because feelings of superiority and inferiority may be part of the game. Thus, soft factors must be viewed very
carefully and their impact (estimated on the basis of cultural pecularities and historical relationships) considered negative rather than positive. In order to analyze off- and nearshoring strategies in Europe, we will take soft and hard factors into account while looking more closely at European ICT market leaders with Germany, the UK, and France representing home countries.11 Ireland, as both home and host country, is introduced as well. We will also provide an overview of the New Member States characterized as host countries. The nearshore market leaders, Poland, Czech Republic, and Hungary, are described more intensively.
Offshoring Trends of companies representing selected European countries The English companies opted mainly for offshoring in India, principally due to India’s economical attractiveness as well as language advantages. India is associated with the UK especially through its colonial past and through the usage of English as its official language. Thus, UK companies shore off software and service work to India12 in particular because it offers some advantages: India provides an attractive regulatory environment with low infrastructure costs and taxes, and a cheap, large and highly qualified workforce with technological and mathematical skills,combined with cultural experiences resulting from Indian information technlogy workers having worked or studied in the UK. According to the long tradition of offshoring services in India,13 Indian enterprises are experienced in discovering new market demands, contracting, and trust building (Aspray, Mayadas, & Vardi, 2006). Another reason for English companies’ activities in India is their comparatively long offshore tradition: they started offshoring activities before 1989 when the opening of Eastern European markets started. Now, relationships are institutionalized (Aspray, Mayadas, & Vardi, 2006). The common
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Offshoring in the ICT Sector in Europe
history of India and the UK is assumed to have a positive impact because members of one culture may know those of the other. Despite the advantages of offshoring to Indi, most German ICT companies prefer Eastern European nearshore destinations for a couple of reasons: a sizeable number of highly qualified ICT workers have German language skills because they studied in Germany or chose German as their second language. Moreover, cultural closeness is assumed by the companies, although its impact is not analysed in detail yet. The short distance to Eastern European countries—Poland and the Czech Republic are neighboring countries of Germany—also permits personal contact between the nearshore provider and home organizations so more complex processes might be outsourced (Ruiz Ben & Wieandt, 2006; DB Research, 2006; AT Kearney, 2004). Moreover, Poland and the Czech republic offer labor cost and tax advantages. Large German firms with global practices, such as Siemens or SAP, are moving rapidly to build their offshore capabilities in Eastern Europe as well as in China and India, where they also look for market entry possibilities. They also have a global production network which they expand while middle- and small-size enterprises hesitate before starting nearshore production (Aspray, Mayadas, & Vardi, 2006). Similar to the UK, some offshoring-strategies of French ICT companies are linked to the country’s colonial history. Preferred offshore destinations are, therefore, former colonies such as Morrocco and Tunisia where French is spoken as the official language and which are geographically close to France. Moreover, these counties also offer highly qualified IT workers, low wages, and low taxes (Kleinhans, 2005). It could be assumed that Morroccan and Tunisian workers may also have experienced working or studying in France and have cultural knowlegde. French companies are also active in nearshoring business to Romania, considered a nearshore destination because of a well-qualified work force with French language
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skills (DB Research, 2006; Amberg & Wiener, 2004a). Ireland has a special position as an offshore destination and home country at the same time (Carmel & Abott, 2006). The Irish ICT sector is fairly developed and experienced economic growth because it attracted US-based firms particularly, providing outsourcing services and software development. Ireland was one of the first countries to develop software industries primarly for export rather than for domestic purposes (Aspray, Mayadas, & Vardi, 2006). It has significantly increased its share of the export of computer and information services (OECD, 2004, p. 6) and offers shared service centres for large companies, including IBM, Microsoft and Intel (AT Kearney, 2004). Offering a secure business environment and a highly educated work force as advantages, negative factors are high compensation costs and a small work force. All in all, Ireland provides a “secure business environment, leadership in software industry and educated workforce.” (AT Kearney, 2004, p. 21). Looking at the home country perspective, Irish ICT companies started offshoring to India because of costs, the highly qualified and experienced labor force, and language advantages (DB Research, 2006). Another factor might be that Irish ICT companies set up relationships with Indian subsidiaries of their U.S.- or UK-based customers. An Indian presence would then ease the processes of adjustment in more complex IT projects. Among the new European Member States, Poland, Hungary, and the Czech Republic can be characterized as nearshore host countries. Providing the largest IT markets in Eastern Europe (EITO, 2006; Ruiz Ben &Wieandt, 2006), the Czech Republic, Poland, and Hungary offer low costs, good language skills, solid technical capabilities and infrastructre, and minimal regulatory problems for all western European firms (AT Kearney 2004, p. 8). However, because of the high share of workers with German language skills and to geographical closeness, they are
Offshoring in the ICT Sector in Europe
particularly attractive for German companies (DB Research, 2006). The Czech Republic attracts international companies by providing a well developed infrastructure, a stable business environment, and a particularly strong educational system. The Czech ICT sector is dominated by foreign companies and high FDIs (financial direct investment) that stimulate the growth of its ICT market (Ruiz Ben & Wieandt, 2006). In contrast, Poland and Hungary have similar educational systems, offer cost advantages, but “are perceived to have slightly inferior business environments, infrastructure and IP security” (At Kearney, 2004a, p. 10). Poland’s ICT sector made a small contribution to the country´s GDP in 2003 (Gaspar 2004), but, due to growth in hardware production and software service delivery, the sector provided high growth rates in 2005 (EITO, 2006). While the majority of the main players in the Polish software market are domestic, Poland is seen as a location for business process outsourcing, delivering to global players such as PP, IBM or Capgemini (Ruiz Ben & Wieandt, 2006). In Hungary the situation in the ICT sector is rather different. The Hungarian ICT sector, similar to the Czech Republic, was dominated by foreign firms in all sections exept the software sector (Ruiz Ben & Wieandt, 2006) and accounted for 7% of the Hungarian GDP in 2003 (Gaspar, 2004). Offering low costs and and an average business environment, Hungary is an attractive destination county, attracting mainly German companies (AT Kearney, 2004; Auswaertiges Amt, 2006). With small ICT sectors contributing from 1.2% to 2.4% to the national GDP, the Baltic countries are associated mainly with their neighbors. Estonia attracts foreign direct investment mainly from Sweden and Finland (Püss et al., 2004) while Lithuania is oriented towards the former Soviet Union (FSu), Russia (Lithuanian Free Market Institute, 2004), and Latvia towards the Baltic markets (Karnite, Kalva, & Karnitis, 2004). Slovenia and Slovakia offer stable business
environments, attractive tax rates and a highly qualified work force, attracting German companies in particular (Stare, Kmet, & Bučar, 2004; Sirak, Salner, & Druga, 2004). Slovenia’s ICT sector amounts to 7.5% of the GPD, quite large compared to Slovakia’s share of 2% (Gaspar, 2004). Slovenia’s software sector is dominated by a large number of small domestic firms seeking to serve to niche markets in banking, wholesaling and geographic information systems (Stare, Kmet, & Bučar, 2004). However, in Slovakia foreign global companies rule the market for IT services, operating substantial services to support their European customers. Regarding the accession countries, Bulgaria and Romania, that will join the EU, presumably in 2007, their ICT sectors are comparatively small, but developing quickly (EITO, 2006). The Bulgarian software market is dominated by domestic firms that export mainly their services, seeking to strenghten their position abroad while focusing on serving small and medium enterprises as customers, particularly in Germany (Yonkova-Hristova, 2004). Dominated by foreign investors from China, East Asia, and Europe, the Romanian ICT sector experienced significant growth throughout the nineties but still has little relevance for the economy (Gaspar 2004). French ICT companies in particular seek to exploit low labor cost advantages. Recently the situation has started to change in regard to the utilization of the skilled labor force in the production of software and Internet-based IT services (Carageea, Gheorghiu, & Turlea, 2003). Summing up, hard factors have higher impact than soft factors determining which off- or nearshorelocation will be chosen. Soft factors often play an unconscious role. Costs, skilled labor force, stable business environments, and language advantages seem to have high positive influence on off- and nearshoring. Nevertheless, supposed cultural similarity is often related to the hope of minimizing hidden costs. The focus of the main players of the European ICT market on certain offshore- or nearshore destinations may
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Offshoring in the ICT Sector in Europe Offshoring in the ICT Sector in Europe: Trends and Scenario Analysis
be characterized a “regional” orientation based throughout nineties but still has little ongrowth hard factors. Thisthe trend is observable in all relevance for the economy (Gaspar 2004). French countries with large ICT markets. In the case ICT companies in particular seek to exploit low of nearshoring, lower geographical and cultural labor cost advantages. Recently the situation has distances facilitate personal contact as well as started to change in regard to the utilization of the communication and, mayof faciliate theand skilled labor force in therefore, the production software sourcing of more complex tasks and processes Internet-based IT services (Carageea, Gheorghiu, with higher2003). value. & Turlea, Considering country we observe tenSumming up, hard reports, factors have higheraimpact dency specialization beginning than toward soft factors determining whichwith off-regard or neartoshorelocation the secondarywill segment of the Soft software sector be chosen. factors often play an unconscious Costs, labor (definition above). This role. means ICT skilled companies force, stable business environments, and language focus particularly on demand from companies that advantages seem to haveproducers high positive influence are not primarily software themselves, on offand nearshoring. Nevertheless, supposed but require the integration of software products cultural similarity is often related toICT the firms hope of and services. In the case of Slovenian minimizing hidden costs. The focus of the main are, for instance, specialized in adapting standard players of the European ICT market on certain software products for the banking and insurance offshore- or nearshore destinations may be charsector as well as for the health sector. acterized a “regional” orientation based on hard Nevertheless, although specialization related factors. This trend is observable in all countries towith ICTlarge offshoring may contribute to establishing ICT markets. In the case of nearshoring, working processes and transfer,facilitate in an lower geographical andknowledge cultural distances increasingly globalized ICT sector, offshoring
also involves costs and riskssometimes not prepersonal In contact as section well aswe communication and, dictable. the next give an overview therefore, may faciliate the sourcing of more comof hidden costs and risks involved in offshoring plex tasks and processes with higher value. processes in Europe,that may be transferable to Considering country reports, we observe a tenother regions. dency toward specialization beginning with regard to the secondary segment of the software sector hidden (definitioncosts above).and Thisrisks meansofICT companies Offshoring focus particularly on demand from companies that are not primarily software producers themselves, One of the main organizations’ but require themotivations integrationfor ofICT software products and services. In the case of Slovenian ICT firms offshoring is cutting costs. Other related factors are,access for instance, specialized in adapting standard are to knowledge, availability of labor force, software products for the banking and insurance and corporate restructuring, including concentrasector well as for the sector. tion onas core business andhealth activities (Huws et al., Nevertheless, although specialization related 2004, 16). Experiences in recent years, particularly to ICT offshoring may contribute to establishing after the first years of 2000, when offshoring in working processes and knowledge transfer, in an ICT contexts in Europe expanded, show that ICT increasingly globalized ICT sector, offshoring also offshore involve many hidden costs as involves processes costs and riskssometimes not predictable. well risks that managers not previously In theasnext section we give andid overview of hidden consider. Thus, hidden costs and risksprocesses linked toin costs and risks involved in offshoring offshoring experiencesto indicate that Europe,thatprocesses may be transferable other regions. a situation may emerge in which total offshore costs, for instance, are higher than those before its
Figure 2. Transaction and hidden costs and risks in ICT off- and nearshore projects Figure 2. Transaction and hidden costs and risks in ICT off- and nearshore projects Transaction and Hidden costs
Risks
Dimensions
Related costs´ factors
Dimensions
Related costs´ factors
Selection of Providers (Related to the country specific socio-cultural, historical and institutional factors of off- and nearshoring)
Research Consulting Legal and contracting issues Traveling Benchmarking. Coordination and synchronisation policies
Cultural distance (Related to the country specific socio-cultural, historical and institutional factors of off- and nearshoring)
Technological supporting tools Intercultural training Traveling
Restructuration
Qualification and Experience of the potential working force. Quality and project management
Intellectual Property
Loss of property knowledge Contractual costs
Knowledge Transfer
Controlling systems and processes. Continous training Traveling
Governance and risk mitigation
Monitoring Recovery in case of project failure
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implementation. For analytical reasons, following Carmel and Tjia (2005, 36), a distinction is made between ICT offshoring risks as to predictable implications of ICT offshoring, and transaction and hidden costs related to transactional practices.. ICT organizations find most transaction costs for offshoring at the process level. The following table shows the main dimensions and factors related to transaction and hidden costs as well as to risks in off- and nearshore projects. Figure 2 shows the classification of transaction and hidden costs and of risks in off- and nearshore projects with their respective dimensions and related costs factors. As mentioned in the previous section, soft (cultural and historical) factors and hard (institutional and location) factors influence the delivering country’s orientation as well as the performance of near- and offshore projects. Regarding transaction and hidden costs, these factors especially affect the selection of providers, while in relation to the risks in off- and nearshore projects, soft and hard factors are linked to cultural dimensions of near- and offshore projects. Transaction costs in ICT offshoring are those related to the identification of suppliers in foreign countries, and negotiation and contracting with those suppliers. Once a supplier repertoire exists, concrete policies for coordination and synchronization oriented towards particular quality standards must be established. The establishment of coordination and synchronization policies represents possible costs as well. Coordination and synchronization policies must also be negotiated and implemented in cooperating organizations, often causing conflict with existing rules and norms the employees use in day-to-day practices. Regarding hidden costs, the selection of providers in host offshore countries is considered before the initation of the ICT offshore process. Selection costs include research, consulting costs, legal and contracting issue costs, as well as related traveling for contract negotiations (Morales, 2005). When organizations do not have experience with ICT offshoring, they usually work with benchmark-
ing companies that provide an overview and an evaluation on specific chances and risks. Benchmarking represents, thus, another cost related to ICT offshoring. Regardingrestructuring, two major factors related to the human capital of the organizations and to their social environment must be taken into account: qualification and experience of the personnel available in the home country as well as in the host offshore country. In some EU countries, past strategies to hire high skilled foreign personnel, such as the “green-card” measure in Germany, represent an advantage to integrating off- and nearshore teams into the organizational culture, because employees with experience in German ICT companies help bridge qualification gaps. In home countries with strong cultural differences, personnel selection strategies, e.g., assessment contents, are not transferable (Lonner, 1990) and may cause additional costs for hiring local agencies specializing in this. Also there may be time loss due to a greater need to control personnel selection offshore (Matloff, 2005), and also onshore (Kealey, 1996). The qualifications and experience of the personnel are basic dimensions for the success of ICT offshore where national and international educational development play a crucial role. At the national level in the EU, the problem of synchronization between official qualification standards and the demands of knowledge and skills development in ICT organizations persist (regarding Germany s. Dostal, 2006). The increasing globalization of knowledge transfer and qualification differences in international arenas represent additional challenges confronting Europe in recent years through increasing standardization of qualifications (see Bologna process), the development of standard corporate certifications by ICT multinationals, sometimes in co-operation with local universities, and the increasing enrolment for consulting firms in the evaluation of qualifications and skills needs. However, regarding the situation in the New European Member and Candidate States in
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Eastern Europe the rapid restructuring of their educational systems shows some limitations in convergence with the qualification demands of the global ICT labor market. This is, for instance, the case in Bulgaria, where, although universities emphasize computer science education, specialization in programming skills without training in ICT networks has led to a shortage of personnel with knowledge in the area (Mroczkowski et al., 2001, 49). Important at this point is also the employees’ awareness of quality standards and of integrating management systems with international scope. Meeting internationally recognized quality standards represents one of the crucial factors in deciding on restructuring measures in ICT organizations because it constitutes the basis for competing with other companies and establishing long-term customer relationships. Organizational knowledge transfer, however, is managed internally within ICT networks and must be established and controlled. Both the establishment of a controlling system for knowledge management in ICT offshore projects and the controlling process itself bring additional hidden costs. Carmel and Tjia (2005, p. 38) point out that redundancy built into an offshore project in its early phases may represent the largest costs. These authors illustrate this assessment in the following terms: A typical scenario takes place when several offshore developers need to travel to the client site for KT (knowledge transfer) early in the project life cycle (...). At these early stages the client firm is paying for double staffing for the same work, for its current and the offshore employees. (Carmel/ Tjia, 2005, p. 38) Travel costs for offshore developers have to be considered (Ruiz Ben & Claus, 2005). Furthermore, in addition to the hidden costs involved in knowledge transfer, translation costs related to collaboration with offshore partners without a common language background may
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also emerge. Confrontation with these kinds of hidden costs in the EU differs according to historical and cultural factors in the various countries and regions. Thus, for example, the orientation of Germany is focused a great deal on Eastern Europe while the UK shows a longer offshore tradition in India. In Germany particularly, the recent enrolment of the most developed Eastern European countries, Hungary, Poland, and the Czech Republic, brings important impulses for offshore development for both. Other hidden costs of ICT offshoring are related to governance and risk mitigation factors. Consulting groups report costs between 5% and10% of an offshoring contract related to governance practices (Forrester, 2003; Koch, 2004). Such costs include new positions to communicate with providers and to monitor the providers’ work. Regarding the mitigation of offshoring risks, ICT organizations must also consider costs related to possible recovery in case of project failure. According to estimations by Forrester (2004), the total amount of hidden costs for ICT offshore projects can vary between 12% and 52% of an overall offshore contract. Nonetheless, such hidden costs represent those that are now, after past offshore experiences, relatively foreseeable. ICT offshoring also involves risks, or surprises, previously very difficult to identify and calculate. Risks of ICT offshoring are, for example, related to cultural differences among teammembers (Maletzky, 2006; Ruiz Ben, 2006; Ruiz Ben & Wieandt, 2006). Thus, according to Edwards and Sidhar (2002, p. 2), problems of collaboration with offshore organization are mainly due to linguistic and cultural differences, different working and leadership styles (Hui,1990), understandings of role-taking and national stereotypes, all influencing collaboration (Stumpf, 2003). Different communication patterns, e.g., low and high context communication, may also lead to misunderstandings (Hall, 1990). In high context cultures communication takes place in an indirect way. In some Asiatic cultures, “yes,” is
Offshoring in the ICT Sector in Europe
the answer to a question even if, “no,” is meant. The interpretation of the answer must take into account contextual information, for example, the time until the, “yes,” was expressed. If the word, “yes”, is hesitateda “no” must be understood. If the, “yes,” was expressed immediately it represents an affirmation. Persons with a low contextual cultural background verbalize all the information. Contextual information is not necessary for understanding the message. Between persons of different cultural backgrounds different communication styles may provoke an unfruitful working atmosphere. Persons with high context communication style may be perceived by those with low context communication style as deceitful or dishonest, while the way around persons with low context communication may be perceived as aggressive and rude. In the EU, with the differences in regional orientation of home countries mentioned above and the cultural and language diversity, coordinating different cultural backgrounds and languages represents another risk. Thus, for instance, according to Huws et al. (2004, 11), Germany is losing 0.20 of each Euro of corporate spending by moving to India or Eastern Europe, while the U.S. gains in contrast US$1.12-1.14. This losis due to differences in language and culture, according to these authors. Research on virtual teamwork provides some indications of the challenges of teamwork over long distances which apply to these costs as well (Hynsell, 2000; Edwards & Sidhar, 2002). Team cohesion and trust are hard to acquire, but important factors for productivity. Communication between the teams onshore and offshore, via technical communication tools like e-mail, telephone, video conference or instant messaging, does not substitute for, and often does not even sustain, personal contact (Sharpe, 2001). Social integration and cohesion in virtual teams are produced only by the use of technological communication tools, if the tools are used constantly to support informal communication, maintenance of social
relations, and discussions on working issues (see Edwards & Sridhar, 2002; Hysell, 2000; Joisten, 2005). Thus, employees have to support offshoring by actively changing their work habits. According to Hynsell (2002), to avoid misunderstandings a kick-offmeeting at the beginning of the project is indispensable to plan the project, to specify terminology, and to establish contact. Additional traveling costs must be considered in that case. Moreover, onshore as well as offshore organization should use the same project documents (Hynsell, 2000). Standardization of processes in the onshore organization eases the integration of the results of outsourced processes finished abroad (Boes & Schwemmle, 2004; Krcmar et al., 2005). Summarizing, collaboration with the offshore organization changes working processes and resuluts in some challenges to the project teams. Additional risks regarding ICT offshoring are concerned with intellectual property (Campoy, 2004) or with loss of property knowledgeThe long-term risk related to the uncontrolled migration of information from one organization to another may even involve data security risks (Carmel/ Tjia, 2005, p. 47). According to DB research, the poorer the country, the higher the institutional risks (DB Research 2006). These issues are dependent on the situation in both the home and the host. Contractual or infrastructure risks in different countries may also be related effects. In Europe new regulations, related to the integration of the new East European Member States, represent a solid basis for the development of infrastructure demands for ICT offshore. Because of Germany’s geographical and supposed cultural nearness to the new European Member States, the development of infrastructures in these countries is very important for its ICT market expansion and as a complement to direct investment in the region (see, i.e., Brynda et al., 2003; Garamvolgyi et al., 2004; Piatkowski, 2004). But it should be taken into account that apparent cultural nearness may also lead to underestimations and misunderstandings. Thus, the lack of closer consideration of cultural differ-
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Offshoring in the ICT Sector in Europe Offshoring in the ICT Sector in Europe: Trends and Scenario Analysis
ences also holds hidden for ICT offshoring of possible solutions andrisks recommendations to the (see Barmeyer, above discussed1999). risks of ICT offshore is given. Nonetheless, infrastructure development is not the only solution needed for success in ICT Solutions and Recommendations offshore projects in Europea. In the next section Figure 3 shows three main factorsand that,recomin our an overview of possible solutions opinion, should considered to overcome the mendations to thebeabove discussed risks of ICT above-mentioned transaction and hidden costs, as offshore is given. well as ,risks, related to the practice of near- and offshoring. solutions and recommendations Time (in other words, long-term organizational plans) represents a crucial factor in reducing costs Figure 3 shows risks three because main factors that, in our and controlling organizations can opinion, should be considered to overcome the learn from their experiences how to manage knowlabove-mentioned transaction and hidden costs, edge transfer and how to organize structural and as well as ,risks,learning. related to the practice of nearorganizational Internal benchmarking andessential offshoring. is in this process. Sometimes counselother words, long-term ingTime from(inexternal firms may beorganizational necessary to learn the ICTaoffshore of other plans)from represents crucial experiences factor in reducing organizations. Time is also needed to establish costs and controlling risks because organizations cross-cultural teamwork environments with can learn from their experiences how to manage long-term multinational firms with knowledgescope. transferLarge and how to organize structural experience in globalized arenas have advantages and organizational learning. Internal benchmarkrelated to the special availability of central bases ing is essential in this process. Sometimes counin offshore host countries. Thus, the co-operation seling from external firms may be necessary to of medium-sized enterprises with larger companies learn from the ICT offshore experiences other is often a strategy used to develop ICT of offshore organizations. Time is also needed to establish bythe former. Initial face-to-face contacts among cross-culturaldispersed teamwork geographical teamenvironments workers in thewith early long-term scope. Large multinational firms with phases help to establish team cohesion and to experience in globalized arenasbased have advantages reach a common work culture on personal related to the special availability of centraladequate bases in trust (Davidson & Tay, 2002). Previous intercultural personnel selection and development offshore host countries. Thus, the co-operation of 14 Furtherstrategies are essential in with this context. medium-sized enterprises larger companies more standardization plays an important regulatis often a strategy used to develop ICT offshore ing role at this point that, however, should not be bythe former. Initial face-to-face contacts among overemphasized, to maintain a positive climate for geographical dispersed team workers in the early creativity and to enable innovation commitment.
help to with establish cohesion andlow to Inphases order to cope risks team evolving from the reach a common work culture based on personal commitment of employees in the implementation (Wieandt, 2006) & of Tay, offshoring may be aided by a trust (Davidson 2002). Previous adequate change manager who considers and intercultural personnel selectionpsychological and development emotional strategies factors. are essential in this context.14 FurtherAt standardization the governanceplays levelanofimportant ICT offshoring, more regulatseveral direct and indirect measures to manage ing role at this point that, however, should not be service quality may be considered to control overemphasized, to maintain a positive climateICT for offshoring risks. A service quality measuring creativity and to enable innovation commitment. system frequently used is the service level agreeIn order to cope with risks evolving from the low ment (SLA). It includes the definition of service commitment of employees in the levels as standard aspects such asimplementation quality, speed, (Wieandt, 2006) offshoring be aided by timeliness, etc. toofmeasure the may performance of a change manager who considers psychological providers. Specific measures are defined by the and emotional factors. contracting parties. Moreover, customer rights and At the governance of ofICT offshoring, solutions in case of the level failure objectives are several direct Regarding and indirect measures to manage also provided. governance, time plays aservice crucial quality role in solutions, because all methods may be considered tothe control ICT (i.e., CMM, ISO) and supporting tools (i.e., ITIL, offshoring risks. A service quality measuring Six Sigma, BS 7799, balance scorecard) system frequently used is the service levelrelated agreetoment SLAs or similar governance systems focus on (SLA). It includes the definition of service the completion of deliverables on time (Carmel & levels as standard aspects such as quality, speed, Beulen, p. 142). Thus, in the race for innovation timeliness, etc. to measure the performance of in ICT offshoring, those enterprises with flexible providers. Specific measures are defined by the timing and stability in knowledge development and contracting parties. customer transfer and with betterMoreover, work cooperation willrights have and solutions in case of the failure of objectives an adavantage in managing the internationalization are alsoofprovided. process in Europe.Regarding governance, time plays a crucial solutions, because all the Centralizationrole andinstandardization of working methods needed (i.e., CMM, ISO) and supporting processes for offshore production are tools seen ITIL, Six Sigma,inBS balance scorecard) as(i.e., signs of maturity the7799, ICT-industry (Boes & Trinks, Thus, and nearshoring interrelated2006). to SLAs or offsimilar governanceare systems preted to fosterof internationalization by focus as onattempts the completion deliverables on time building a global production network. As strategy (Carmel & Beulen, p. 142). Thus, in the race for they serve toin optimise the value-chain through innovation ICT offshoring, those enterprises standardization and formalization (Boes, 2005; with flexible timing and stability in knowledge Ruiz Ben & Claus, 2004; Slama & Kaefer, 2005). development and transfer and with better work In this discussion countries are represented as lo-
Long term cooperation with ICT organisations in host countries. Long term exchange with local universities and educational institutions in host countries. Avoiding overemphasizing of standard methods
Offshoring in the ICT Sector in Europe
cooperation will have an adavantage in managing the internationalization process of in Europe. Centralization and standardization of working processes needed for offshore production are seen as signs of maturity in the ICT-industry (Boes & Trinks, 2006). Thus, off- and nearshoring are interpreted as attempts to foster internationalization by building a global production network. As strategy they serve to optimise the valuechain through standardization and formalization (Boes, 2005; Ruiz Ben & Claus, 2004; Slama & Kaefer, 2005). In this discussion countries are represented as locations for the ICT industry, serving as resources for production and seeking to attract industry to creatie work and wealth for their people: “Driven by the global rationalization of production, countries have specialised in smaller ranges of products and services, and in the 2001-02 downturn, countries specialised in the ICTs became more specialised, while those that were not became less so” (OECD, 2004, p. 6). So, at the country level, strategies of specialization developed by the collaboration of companies and governments are observed. To overcome synchronization problems and the early need for highly skilled workers within the EU, national policies were designed to acquire foreign ICT workers (OECD, 2001), focusing primarily on facilitating the immigration processes. Thus, some EU Member States, Germany, UK, The Netherlands, and Italy, developed special policies, such as specific work permits. A common strategy was that of reducing the length of time taken for work permit approval, although the efficiency differed from one country to another. For example, work permit provisions in the UK provided a faster response rate than anywhere else. Nevertheless, these measures represent concrete short-term solutions with no guarantee about their adaptation to future developments and no consideration of the transformation of the ICT labor market15. Thus, since 2001 the inflow of foreign workers has decreased (OECD, 2004)
and, at the EU political level, long-term strategies have been designed to increase the competitiveness of the Member States. These policies have contributed to facilitating the incorporation of new offshore workers from outside the EU because work permit approvals now take less time and are less complicated. Inside the EU these exchanges are no problem. Moreover, in the framework of the Lissabon agenda, in the plan of action of the year 2001 the European Commission demanded easier acceptance of professional qualifications and as well as those acquired on the job, lifelong learning, and improvement of educational systems. One of the concrete measures included in the Lissabon framework is the Bologna process of European educational standards. The goal is to unify the European university educational system along the lines of the American model of bachelors and masters degrees. Standardization of the sequencing of degree programs is sought. Additionally, the Bologna initiative has stimulated new interdisciplinary and specialized studies in computing within European Universities, such as bioinformatics, media-informatics and so on (Aspray, Mayadas, & Vardi, 2006). As an answer to the challenges of work force shortage at the organizational level, companies are working more closely with the educational system. This may be in terms of agreements with Universities offering internships to university students, campus recruiting, and so on. More and more public-private partnerships are arising, as observed in Germany, for instance, where ICT companies like SAP or the Telekom co-operate with Universities in joint education programs.
FuTurE TrEnds As mentioned, the combination of hard and soft factors, and the consideration of risks related to offshoring determine the decision about the selection of host countries for ICT projects. There is a
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trend towards regional preference of German ICT nearshore projects for the area of the new European Member States, Poland, Czech Republic, or Hungary. On the other hand, the UK tends to deliver ICT offshore projects mostly to India because of the closer relationship between the countries and language advantages. A similar trend occurs in France with their past colonial areas of northern Africa. Currently, the main players in the European ICT sector have made several experiments in different locations with off- and nearshore partners helping to develop a basis for establishing certain regional specialization. From the perspective of the host countries, specialization in certain working areas involves long-term risks in development, but also provides the chance for developing one’s own strong ICT industry, as is the case in India or in Ireland. Focusing on the situation in Europe, further integration of the New Member States will be most advantageous to the German ICT sector, because the basis for futur expansion already exists in those countries. Within the European nearshore host countries, governments support this expansion particularly by improving ICT educational programs, but also indirectly by maintaining financial incentives for the entry of foreign capital. Moreover, due to high competition, companies specialize in regard to a certain group of customers as, for example, the case of Bulgarian software firms seeking to acquire German SME customers (Yonkova-Hristova et al., 2003). Another example of increasing specialization in a regional area of the New European Member States is the Slovakian SME specialization in medical software, banking and insurance, and customs and government support of multinationals. The trend towards specialization is deeply linked to qualification policies in the different countries, and they are connected to broader EU educational policies and constitute a crucial factor in establishing long-term near- and offshore links among countries (Aspray, Mayadas, & Vardi, 2006, p. 29). 326
Intensive cooperation between universities and corporations in Western and in Eastern Europe based upon their trend to specialization in the different New European Member States may cause a strong dependency on the development of the home ICT companies and that, in turn, might result in a downturn of both ICT qualifications and the ICT industry in European nearshore host countries in coming innovation and internationalization phases. Particularly if salaries rise in the new European Member States and a new crisis situation emerges in the ICT sector, home companies will move further away, seeking cheaper offshore target countries. Unemployment risks for the work force and the closing down of many dependent companies might be consequences. Another trend in regard to specialization is the focus on branches. We observe ICT companies founding subsidiaries in nearshore countries, imitating their own customers who outsource their production. Examples are provided by the automobile industry where production is outsourced out for example to Slovakia and followed by firms like T-systems. The specialization of ICT companies to serve industries of the above defined secondary sector may be characterized as a motor of innovation for the primary ICT producing branch which seek to develop targeted solutions for individual customers but at the same time have to rely on economies of scale in order to increase their competitiveness. A solution to this problem is to focus on clients of the same industry. Therefore, the secondary sector bridges the innovation-gap creating the need for innovation. Due to the above mentioned increasing differentiation and specialization of the ICT sector in regard to certain industries, branches, working areas, coordination and control are increasingly demanded in the branch. These tasks are in the particular competence area of specialized IT consultants, who are gaining influence in the internationalization process of the ICT branch. Moreover, tasks in the ICT service segment of the branch such as accounting, call center
Offshoring in the ICT Sector in Europe
tasks or those related to help desks emerge also in the near- and offshore countries (EITO, 2006). Encompassing knowledge on business and information technology, IT consultants are assigned to advice in regard to IT strategy as well as to process implementation. Therefore, they are important promoter of IT offshoring and nearshoring and on the process level often seen as facilitators. The growth of IT consulting is also due to the increasing standardization in the software sector, which is needed to perform off- and nearshoring. With their expertise and experience, consultants assist the implementation of process standards and management systems which is for them a new niche in the consulting market.16 Large ICT companies who can afford the costs basically assign IT counsultants. The chambers of foreign trade particularly advise small and medium sized enterprises. They have a key function in the process of internationalization as well, since they provide information about market entries, market information and juridical particularities. The national chambers of commerce also organize advanced training and help to establish business relations among companies and support intercultural exchanges. Thus, ICT consultancy, as well as the national chambers of commerce, plays a very important role in the development of specialization, regionalization and internationalization of the ICT industry while consultants influence future paths in the sector. Taking into account that the ICT sector in Europe is mostly composed of small and medium enterprises (EITO, 2006; Fraunhofer 2001), the role of the national chambers of commerce is to stabalize and equilibrate to some extent the competence of the multinationals in the European Union is very important and will be crucial to palliate possible future crisis situations through the support of network relations among small and medium ICT enterprises or for example by supporting international training exchanges. Nevertheless, the transformation of tasks and qualification demands in the ICT sector are
very difficult to forecast. Particularly the speed difference between knowledge development in the ICT branch at the organization level and in the official educational institutions. As a result, professionalization of expertise areas in the ICT sector are hindered (Ruiz Ben, 2006). Moreover, it is difficult to predict which tasks will remain stable in the sector and which will disappear in the next innovation cycle. The growth of IT services in nearshore countries that provide services like accounting, call center or help desks are very important and the related demand of skilled workforce is also growing. However, it is difficult to predict how long this trend will remain and how effective and rapidly the qualification of new personnel will occur. On the one hand, according to DB research, the pool of formal well qualified workers in the off- and nearshore destinations is large. But, not all of the workers are well prepared for the work in an international company, because not all universities fulfill the standards required in Western Europe (DB Research, 2006). In the Czech Republic, Hungary, and Poland the percentage of well qualified workforce is only about 50%, which relativises the absolute numbers of workforce. On the other hand, the percentage of graduates in ICT relevant studies is decreasing. In Western Europe and the U.S., the rate is below average. In the Middle Eastern European countries, which have traditionally had high percentages of highly skilled graduates in technical, mathematical programs of studies and in natural sciences, the interest in those studies is also slowing down. In 2003, less than 2% of graduates in the new EU Member States have studied computer science. In India, the percentage was estimated at about 5.7%. A shortage of specialists is feared to slow down the boom in the Indian IT industry (DB Research, 2006). Due to this workforce shortage and taking into account the predicted demographic development in Europe, ICT multinationals began to develop programs to retain their older workers. At the same time, several EU policies aim to attract young people
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to technical studies. How these measures will develop and which effect they will have is still yet to be determined. However, due to the future retention of older workers with lower salaries in these organizations, a stagnation of offshore practices could occur and may create a backward trend against project decentralization. Considering the forcasted growth and further establishment of offshoring as a part of the companies’ IT service delivery strategy (EITO, 2006), offshoring may be interpreted as a way into the global market and international production networks (Powell, 2001). In the long run, which is the goal of the Lissbon contract, the salaries in the Middle Eastern European countries will grow as transformation and unification in the European economic area. EU subventions enforcing the goal of unification will attract many less developed countries as off- and nearshore locations, but many European Member States will become too expensive as nearshore destinations, as will soon be the case in Spain. If these countries develop their own capacities in the ICT sector and establish a solid and dynamic education system rapidly enough and in line with the innovation rhythm, they could follow the example of Ireland and play a dual role as offshore destination and home country for off- and nearshoring. Here, the question arises, which model will the New European Member States adopt as orientation for their curricula, particularly in technical areas? On the one hand, an intensive cooperation between universities and the industry would bring advantages for the adaptation in innovation cycles. On the other hand, it involves dependency risks that might be extended to a certain orientation of the universities towards a particular country with the aim of enabling market entrance for home enterprises, since highly qualified work force could serve as marked openers of the eastern european market in general. However, the initial concept of the extended workbench seems to be the subject of an transformation process itself, which doesn’t work as easy if highly skilled young staff
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is highered to do low skilled jobs at the bottom of the value chain. The aim to create a unified European Union has also been highlighted from a cultural perpective, stimulating youth exchanges, university cooperations, country cooperations. This requires a high sensibility, however, especially if the historically grown relationships are not as positive as the case in the German-Polish relationship, which was complicated by displacements, borderline conflicts and negative stereotypes. This historical background may influence the working athmosphere and the success of collaboration in a subtle way. An open question at this point is how the increasing interaction among European countries will contribute to new ties and a consolidated European ICT sector.
cOnclusiOn In this chapter, we have shown the current and future trends of offshoring projects in the European ICT sector with a special focus on the New European Member States. We have contextualized off- and nearshoring in the European Union, assuming that they are a part of the globalilization process and the onward going industrialization of the ICT sector. Particularly the fast development in IT systems and the broadband communication as well as the increasing liberalization of trade in services stimulated by high cost pressures, especially after the sharp decline of demand, prices and employment as result of the burst of the internet bubble facilitated the ongoing industrialization and internationalization of the ICT sector. In our chapter we have also shown that a homogeneous picture emerging through a clear development direction is not visible in the process of internalizing the European ICT sector. The main producers within the European Union, UK, Germany, France, and Ireland show different country-specific focuses related to historical and cultural ties. Also, the respective national
Offshoring in the ICT Sector in Europe
industrial specialization influences the particular regional presence and interest focus of each country. While UK and France mainly shore off in their former colonies, improving language advantages, historical grown relationships and the economic attractiveness, German companies seem to prefer doing nearshoring in the Eastern European countries because of language, cultural, geographic, economic and strategic reasons. Ireland follows up the matter of established relationships while it has been offshore destination of U.S. companies and shores itself off in India, now. Thus, we have argumented that a trend towards a regionalization of the ICT sector in the EU is currently taking place and it is supported by particular EU policies and measures. As we have mentioned, EU policies and regulations such as labor and employment rights and issues related to privacy and data transfer play an important role in the decision to do off- or nearshoring within the EU. Especially some of the new Member States, such as the Czech Republic, Poland, and Hungary, which show high growth rates, low costs, good language skills, solid technical capabilities and infrastructre and minimal regulatory problems in the internationalization process of the European ICT sector. However, they are not free from risks such as dependence of off- and nearshore home enterprises or a too extreme qualification and production specialization (OECD, 2004, p. 6). Additionally, Slovakia, Slovenia, Romania, and Bulgaria are off- and nearshore destinations, which try to establish market niches in accordance to the relationships with ICT home countries. Particularly the combination of soft and hard factors in the decisions to off- and/or nearshore ICT tasks and work processes influence the specialization trend in the European host countries. As we have shown in our paper, since cost saving is the main motive for doing near- or offshoring, hard factors such as tax incentives, a highly skilled workforce or a good technological infrastructure play a crucial rule in the selection process of
near- and offshore host countries. Nevertheless, soft factors such as cultural ties among countries have also had an impact on the success of off- and nearshoreprojects, even if they are often understimated or ignored. Such factors constitute hidden costs and constitute risks in ICT off- and nearshore projects that could even lead to a repatriation of delegated tasks. We have shown that a previous period of cooperation with local firms and contacts with local universities are important to prevent transaction and hidden costs related to the selection of providers, but also to reduce risks related to knowledge transfers and governance. Moreover, the establishment of training exchanges workers in both home and host ICT off- or nearshore countries can serve as a basis to reduce fluctuation risks. These exchanges should also include intercultural training in order to reduce risks that are related to the cultural distance between the host and home countries and their implications for successful collaboration and a fruitfull working athmosphere. Time constitutes at this point a crucial ressource for the success of off- and nearshore projects, but also regarding innovation, qualification and skills adaptation as well as knowledge transfer. Thus, organizations have to decide between short or long time benefits related to their internationalization plans. In order to reduce qualification mismatch and especialization risks, cooperation with educational institutions at both home and host countries is important. In our opinion, it is more important for EU education policies to take into account the risks of qualification mismatches related to the internationalization of the ICT sector from a long-term perspective and trying to prevent specialization risks for the working force.
FurThEr rEsEarch dirEcTiOns International curricula in engineering and ICTrelated studies, as well as continuous training programs, should be designed in cooperation with
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ICT enterprises and universitites promoting international exchanges. Nonetheless, it is difficult to define the scope of cooperation and international exchanges beyond the EU context. Further research should be done to analyze the impact of off- and nearshoring on professionalization processes in the ICT branch in order to support an adaptation to the market needs by the universities and educational institutions, trying to avoid new skill mismatches. This article is limited to the European ICT market and has only shown impacts on the European main producers and their off—and nearshore destinations. In this context, we have focused on the new European Member States as emerging countries in the European internationalization process. India and other offshore destinations haven’t been highlighted in detail, because they are not in Europe or are, in the case of the relationship between the UK and India, have already been well researched. Nonetheless, although many investigations about offshoring have been conducted, especially by consulting companies, the results of this kind of research should be carefully considered, since the main interest of consulting companies focuses on producing resemblance between their own and their clients’ interests (Bloomfield & Danieli, 1995). In order to win clients, consulting firms promote certain trends and offer the related consulting services at the same time (see, i.e., Ernst & Kieser, 2003). This ambigous double role is also reflected in the consultants’ literature on offshoring, which highlights cost advantages as well as risks, which will require the consultants’ support. Depending on their assignment, consultants may have an important role in offshoring processes since they provide knowlegde on the implementation of standardization and quality management procedures, knowledge on off- and nearshore-countries and contacts. In the implementation process, they may have a legitimating and persuading function (see Wieandt, in this volume). To shed more light on
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their role in different organizational and cultural contexts, further investigation is also required. Taking into account the increasing rate of virtual teams, a particular focus of research should be on intercultural cross-border activities within ICT off- and nearshore projects, which have yet to be sufficiently investigated sufficiently. Also, the impact of soft factors on the working conditions in off- and nearshore projects to which we have referred are not yet well studied. The historical relationships among countries and their cultural distances seem to be influencing factors. But to what degree are the contextual factors favoring and slowing down successful collaborations in this sector have yet to be investigated. Therefore, qualitative studies will need to consider both perspectives: those of the collaborators in the offshore home and host countries, taking into account the dimensions of time, and the frequency of contacts and their impacts on stereotypes, fruitful collaborations and changeability, as well as (collective) emotions.
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Kolb, H., Murteira, S., Peixoto, J., & Sabino, C. (2004). Recruitment and migration in the ICT sector. In M. Bommes, K. Hoesch, U. Hunger, & H. Kolb (Eds.), Organizational recruitment and patterns of migration interdependencies in an integrating Europe (pp. 147-179). Osnabrück: IMIS. For a broad discussion see OECD (2002b) The following example illustrates the use of the EU Acquired Rights Directive for ICT offshoring: “When multinational companies are applying ‘global sourcing’ strategies, suppliers can be played off against one another and as a result they can either win or lose a contract. In case of long-term contracts for service delivery, staff can be transferred together with the jobs to
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do the same work for the new boss. This is necessary to ensure the continuity and the quality of the service delivery. Such transfer of employees from one service provider to another requires special attention for the maintaining of the acquired working conditions. Recently, Siemens Business Services (SBS) has taken over a contract of Electronic Data Systems (EDS) to supply business services to the Coca-Cola Company. SBS has agreed with EDS on the transfer of a number of dedicated employees from the latter to the former in certain countries. These transfers are carried out within the EU Acquired Rights Directive that regulates the transfer of working conditions.” Retrieved August 29, 2006, from http://www.union-network. org/Uniindep.nsf/f73728e0eb1f5ca5c1257 00e003ccdbb/$FILE/MOOSNewsletter3. pdf#search=%22acquired%20rights%20 directive%20eu%20offshoring%22 The distance is not specific. Scherf, Schütt, and Partner (2005) set the limit of 1000Km (ca. 621miles) to define it. To use a broader definition independent of the location of the outsourcing company OECD (2004, p. 6) one may refer to the term, “international sourcing.” Aspray, Mayadas, and Vardi (2006, p.16) define “offshoring” geographically and link it to the existence of water between home and host country. According to a manager of an IT consulting firm conducted in our own research project, off- and nearshoring are defined on the basis of a mixture of costs and distance (Interview UNB 3) For example as a shared-servicesenter (SSC) serving other companies and thus increasing sales volume (Amberg & Wiener, 2004c: 15). As we know from our own research project on IT offshoring, this is true for big outsourcing companies such as Accenture and Capgemini who habe Indian consultants
Offshoring in the ICT Sector in Europe
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working on projects with their European colleagues. A.T. Kearney’s location attractiveness index also encompasses “cultural adaptabilty” (AT Kearney, 2004, p. 5) but does not take into account cultural differences or historically grown relationships as we do here. Another model to analyse soft factors is provided by McKinsey and includes shared values, strategy, structure, systems, staff, style and skills (12Manage, 2006) measured by questionnaires. Issues of displacement are still discussed in the involved countries (see, i.e., Süddeutsche Zeitung 04.09. 2006) For a broad overview on the influence of displacement on GermanPolish relantions see Bingen (2001). Despite officially co-operative relations between the former eastern part of Germany, the German Democratic Republic (GDR), and Poland and the Czech Republic, relationships were impeded by mistrust and differences due to the relationships between Poland and the Czech Republic to Western Germany as well as due to ideological reasons (Borowsky, 1998; Bingen, 2001; Kucera & Segert, 2002) ICT sectors and markets of the Nordic Countries Sweden, Finland, Norway, and Denmark as well as of the southern countries, like Spain, Italy, or Greece, are rather small (EITO, 2006) Market presence in Eastern Europe and the New Member States is due to customers’demands and market entry strategies rather than to low cost production.
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According to the country reports, large English companies such as Vodafon have their settlements in Eastern European Countries (see, i.e., Sirak, Salner & Druga, 2004; Stare, Kmet, & Bučar, 2004, or Gaspar, 2004), but this is mainly due to the safeguarding of market entry and to customer care strategies. Particularly in Malta, UK firms dominate the domestic telecommunications, software, and IT-related service market (Xuereb, 2004). According to Aspray, Mayadas, and Vardi (2006), the first US-based offshore activities with a destination of India started in 1972. See chapter “Intercultural Collaboration in the ICT Sector” in this book. Nonetheless, as we mentioned before regarding the case of Germnay, the green card programme to hire foreign highly qualified ICT workers at the beginning of the new millenium, represented a first platform to make offshore practices available. At the same time, they are main promoters of management systems and standardization issues seeking to prove their importance in rising debate on offshoring-maturity, see, i.e., Kearney (2004) what to move offshore http://www.atkearney.com/shared_ res/pdf/What_To_Move_Offshore_S. pdf#search=%22offshoring%20%2B%20 maturity%22, Sourcing Interests group (2003). Offshore-outsourcing Part 2: Implementation, retrieved October 5, 2006 from http://www.neoit.com/pdfs/whitepapers/Oct-03-OffshoreOutsourcingPart-2. pdf#search=%22%22offshoring%20maturity%22%22
This work was previously published in Handbook of Research on Global Information Technology Management in the Digital Economy, edited by M. Raisinghani , pp. 328-355, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.19
Scales and Dynamics in Outsourcing Iva Miranda Pires Faculdade Ciências Sociais e Humanas, Portugal Torunn Kvinge Fafo Institute for Labour and Social Research, Norway
inTrOducTiOn Outsourcing is used to describe the situation where a firm decides to subcontract assembly and/or service functions to an external supplier, either locally or abroad. When activities are subcontracted abroad, the term offshore outsourcing often applies. While offshore assembling activities have taken place for some time, the phenomenon of outsourcing services abroad is quite new. Several factors have contributed to these altered circumstances. First, the development of information and communication technologies (ICT) implies that services can, to a great degree, also be located at arm’s length or elsewhere in the flat world (Friedman, 2005). Second, institutional changes have opened access to new markets for goods and services as well as skilled labor, for instance in Eastern Europe and China. Third, the increased competition through globalization pushes firms to adapt quickly to new contexts and to achieve efficiency in order to maintain competitiveness.
Recent trends show that companies in all sectors outsource a growing number of assembling and other services abroad to exploit the wage gap between developed and less-developed countries (and regions). This is especially the case for large transnational companies (TNCs) but also applies increasingly to smaller companies. Improvements in transportation and lower tariffs reduce the trade costs of intermediate products and services. At the same time, the potential impact on job losses in developed countries has unchained a heated debate on the advantages and disadvantages of offshore outsourcing. As firms are reconstructed to take advantage of outsourcing and offshore outsourcing as a means of improving flexibility and concentrating on information and knowledge-intensive core functions, they create or become involved in networks of relationships. In these increasingly complex and multilevel networks, the nodes are other firms to whom functions are externalized or inputs of goods and services are subcontracted.
These networked organizations, which vary in size and geographical scope, may be very flexible, as the network could easily be rearranged by releasing some nodes while integrating new ones. The chosen solution again depends on the economic and market context.
outsourcing, international sourcing, cosourcing, backsourcing, multisourcing) are frequent (Millar, 2002). Nevertheless, international regulatory institutions are attempting to homogenize the data collection process to facilitate international comparison studies. Several typologies on the transfer of some of a company’s activities exist (Table 1). Of these, the Organization for Economic Co-operation and Development (OECD) and United Nations Conference on Trade and Development (UNCTAD) typologies are the most well known. Basically, the location of the transferred business activities (in the home country or abroad) and the organizational forms (outsourced to third parties or kept under own management) are used to define the different typologies. The typologies embrace a wide range of situations, as assembling activities and services can be contracted within national borders (domestic outsourcing), can involve foreign affili-
dEFiniTiOns Outsourcing involves the transfer of specific activities that have usually been undertaken inhouse, to another company (Greaver, 1999) . This means that a company decides to contract out some, normally noncore, activities to concentrate on core activities as a means of lowering production costs and optimizing the use of available resources. Variations in terminology (offshore outsourcing, business process outsourcing, ICT
Table 1. Typologies on the transfer of a company’s activities (Sources: WTO, World Trade Report, 2005; UNCTAD, World Investment Report, 2004; Kirkegaard, 2004; OECD, 2005) Internal to the enterprise Kirkegaard
OECD
Outsourcing
X
Offshore outsourcing
X
Domestic supply
X
Domestic outsourcing International insourcing
Captive onshore outsourcing
Intrafirm (captive) offshoring Outsourcing
X X
X
X X
X
X X
X X
Noncaptive offshoring UNCTAD
Across borders
X X
Noncaptive onshore outsourcing Captive offshoring
Within the home country
X
International outsourcing WTO (adapted from OECD)
External to the enterprise
X X
X X
X X
X
X
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ates (captive offshoring) or can be contracted out to other companies abroad (offshore outsourcing) 1 (Table 1). The term offshoring applies to offshore outsourcing as well as to captive offshoring.
OuTsOurcing: drivErs and dETErminanTs Outsourcing is the result of a decision process undertaken at the management level to substitute a service previously developed inside the company by another acquired outside the company. After deciding which particular function or functions to delegate, a further decision is required so as to choose between a subsidiary and a third-party supplier. A range of factors influences the makeor-buy decision. Grossman and Helpman (2002) emphasize the trade-off between the costs of running a larger and less specialized organization and the costs that arise from search frictions and imperfect contracting. In choosing between a domestic and a foreign supplier, the company considers the trade-off between variable and fixed organizational costs (supervision, quality control,
accounting, and marketing) (i.e., the benefits of lower variable costs in less-developed countries against the benefits of lower fixed organizational costs in more-developed countries) (Antràs & Helpman, 2004). A final decision results from the balance between the adequacy of the dimensions and the variable and fixed costs. This will vary across sectors and firms (Figure 1). Outsourcing is not a recent phenomenon. The development of the automobile industry at the beginning of the 20th century and the increasing complexity involved in production was one of the driving forces behind outsourcing. More demanding consumers and the exigencies of comfort and security increased the number of tasks to be performed and the variety of skills. As cars became more complex, it was not possible to combine mass production and specialization within a single plant. The tendency of outsourcing resulted in an increasingly fragmented process of production and interdependencies of firms within a global context. Cars are now a product made throughout the world with compounds created in dozen of facilities in several countries (WTO, 2005). As a result, early uses of the term outsourc-
Figure 1. Decision to transfer some of the company’s activities core functions
Business activities
non-core functions and standardized tasks “make-or-buy” decisions
Typologies Organizational form location
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internalized
trade-off between the cost of running a larger and less specialized organization and costs that arise from search frictions and imperfect contracting
Offshore outsourcing where?
externalized
home coutry
Kept in-home in the company
Outsourced t o a third-party provider domestic outsourcing
abroad
Moved to a foreign affiliate of the company Captive offshoring
Outsourced t o a third-party provider abroad Offshore outsourcing
The quality of institutions – particularly legal framework The quality of infrastructures – particularly telecommunications Skills – particularly language and computer skills Labor cost Trade cost
Scales and Dynamics in Outsourcing
ing tended to be related to the automobile industry (Amiti & Wei, 2004). Another relevant driver for outsourcing was the increasing competition in a borderless world. Companies must constantly adapt, including by restructuring, otherwise they could be forced to exit. Tasks that can be performed more efficiently elsewhere will be externalized to subcontractors—companies that specialize in these tasks or products—or to affiliates, thus involving foreign direct investment. Other factors contributing to the further development of offshore activities include the tendency to imitate companies that successfully offshored and benefited from efficiency gains. This will affect more and smaller TNCs facing the necessity of improving competitiveness as they perceive that they have much to gain from offshoring, creating a self-reinforcement dynamic. Outsourcing services were made possible because of the deep transformations that the technological revolution is imprinting on the way that services are produced, distributed and consumed. Traditionally, services had to be produced and consumed instantaneously, implying a geographic proximity between supplier and consumer. New information and communication technologies are dramatically changing this situation. ICT is the main factor responsible for the increased tradability in services and the push for deeper restructuring and relocation processes. Technical advances allow services to be broken down into their constituent parts, and the digitalization and integration of data, texts, images and sounds allows them to be sent worldwide, while accessibility and connectivity are made possible through faster and cheaper electronic broadband connections. People, governments and other institutions are enabled to consume services that are available around the clock through electronic access, while companies explore new ways to apply ICT innovations to foster their businesses. Electronic outsourcing allows companies to look at the world labor market in a more creative way, searching for windows of opportunity related
to local advantages and independent of distance. When a shortage of ICT and related skills was felt in the USA and Europe during the late 90s, managers saw outsourcing to Indian-based firms as one solution to the problem. Technological innovations, free trade and market deregulation, increased competition, access to a large pool of skilled English-speaking labor in less-developed countries, cost savings, skills shortages in developed economies, and the search for economies of scale and market expansion are then the key drivers that explain the recent development of offshore outsourcing. Because of international time zones, different people can be employed around the clock on the same projects. When employees in the Eastern part of the world finish their day, employees in the Western part continue. In this way, it is possible to make projects more time saving. As noted by Grossman et al. (2002), the ICT revolution leads to an increase in outsourcing activities by improving the matching of the buyers and suppliers of specialized inputs. However, outsourcing of activities with higher complexity levels will probably be less attractive because of the lack of control (Bjerring Olsen, 2006) or the fear of knowledge dissemination to competitors. Also, because activities with higher complexity levels are probably based on a high degree of tacit knowledge, and because the transfer of tacit knowledge requires face-to-face contact, it is assumed that such activities are less easily transferred than activities with a high degree of codifiable knowledge.
ExTEnT and implicaTiOns Outsourcing presently affects a wide range of activities in all sectors of an economy, although some activities are more suitable for subcontracting than others. Activities that do not necessitate face-to-face interaction, that require little management attention, and that experience high wage
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differentials across countries are the most suitable for outsourcing. Frequently, but not exclusively, outsourced services are those that require lowskilled workers but they are already affecting some of the more sophisticated and qualified functions undertaken by white-collar workers. The early and widespread incidence of subcontracted call centers shows that simple functions like answering phone calls, data entry, routine data analysis and processing services can be outsourced, but more complex tasks such as business processes, financial analysis, drawing, software development, standardized programming work and, increasingly, research and development activities, are also being outsourced. In developed countries, the debate on outsourcing has tended to concentrate on the potential job impact and on the types of jobs most affected, as well as the productivity gains. Nevertheless, studies of the potential impact on job loss are not conclusive (Huws, Dahlmann, & Flecker, 2004; Millar, 2002; OECD, 2006; OECD, 2005, & Vickery, 2005). Besides, in developed countries, outsourcing companies may improve competitiveness while focusing on core functions, reduce operational costs, and move to higher value activities. There is also the expected potential job creation in the same sector to offset the jobs lost from outsourcing (Amiti et al., 2004). First, by benefiting from improved competitiveness, firms in developed countries may continue to create new (more qualified) jobs, and second, they will be able to benefit from economic growth in less-developed countries with the enlarged consumption and demand of equipment goods. Nevertheless, the fear that unemployment will increase through labor displacement to less-developed countries dominates the agenda when it comes to discussing the impact of offshore outsourcing on employment. The impact of employment could also be even larger as it may be expected that at least some of the major suppliers in less-developed countries will continue to upgrade production,
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increasing competition for more qualified goods and services. Furthermore, offshoring has implications for the trade balance. According to Bhagwati, Panagariya, and Srinivasan (2004), offshoring is primarily a trade phenomenon. Offshoring from country A to country B implies that more goods and services are produced in country B and imported back to country A (larger imports) or that production in country B replaces former exports from country A. As a result, country A’s trade balance toward country B may worsen. One outcome of outsourcing may be that production methods are disseminated to subcontractors, who will experience productivity growth as a result. Such developments are assumed to depend on adequate infrastructures and the quality of institutional factors. For learning to occur, subcontractors must, for instance, have sufficient absorptive capacities (Cohen & Levinthal, 1989)2. When different parts of the production process are located in different regions, and although ICT simplifies communication, the lack of face-to-face contact may mean that potential innovations on the shop floor level of the subcontractor are not easily brought forward to the construction or planning department of the ordering firm. This may again disfavor productivity growth.
hOw TO capTurE ThE rEal signiFicancE OF OuTsOurcing? Presently, national and international official statistics are unable to measure directly the extent of outsourcing and offshore activities, partly because of the lack of a consensual definition and because of data collection constraints (Kirkegaard, 2004; OECD, 2005). Nevertheless, indirect data on trade and employment and on (national) balance of payments (WTO, 2005; Amiti & Wei, 2004, 2006) have been used to produce estimates with diverse results.
Scales and Dynamics in Outsourcing
In spite of the fact that the production of services abroad must eventually become a standard strategy for enterprises in Europe (Gartner, 2003), and given media attention and public concerns about job losses, so far the magnitude of offshore outsourcing to developing countries appears to be fairly small, albeit fast growing (WIR, 2004). The main recipients of global service outsourcing tend to be rich industrialized countries rather than poor developing countries (Amiti et al., 2004). In the early 90s, Ireland—through government intervention aimed at attracting foreign direct investment—became an e-hub attracting call centers and back-office activities, especially from American transnational companies operating in Europe (Ohmae, 2005). Although some competitiveness has now been lost, Ireland maintains a positive trade balance in computer and business services (WTO, 2005). Other major suppliers of offshored activities are India and China. Eastern European countries are also emerging as nearshore suppliers, in particular those who joined the European Union (EU) in 2004, which contributed to a reduction in the risk associated with doing business from having the same legal framework. Moreover, these countries have lower labor costs than their counterparts. According to Gartner (2004), the ICT market in Eastern Europe will grow faster than in Western Europe, driven by the need to push their economies forward, while benefiting from the EU’s financial transfers to finance technology projects. Job displacements and earning losses—because of offshoring—are not easy or straightforward to measure, and there is a lack of empirical evidence, especially for the service sector. Some research shows that close to 20 percent of employment may be potentially offshored. This includes employment in industries characterized by a high degree of geographically footloose production3 (intensive use of ICT, outputs transmitted by ICT, high codifiable knowledge content, no face-to-face contact requirements); for an overview, see OECD (2006). According to an investigation undertaken
by the OECD, the offshoring of ICT-enabled services in the OECD countries covered by the analysis “… has not yet led to a relative decline in the occupational share of location independent ICT-using occupations. Overall, this implies that in the long-run the positive benefits of services offshoring outweigh the costs, even though the adjustment process may occasionally be difficult in the short run.” OECD (2006, p. 25). Nevertheless, the eventual negative impacts of offshoring are expected to be more severe for European than for American workers as the institutional framework of the European labor market is often assumed to be less flexible. Amiti et al. (2006) find empirical evidence of a significant positive effect on productivity in manufacturing industries in the U.S. between 1992 and 2000, mainly because of service offshoring and, to a smaller extent, material offshoring. Bjerring Olsen (2006, p. 3), who surveys the empirical literature on offshore outsourcing and its productivity effects, states that “[t]he most apparent conclusion drawn from the review is that there appears to be no clear patterns as to how offshore outsourcing affects productivity, and that much depends on both sector and firm-specific characteristics. There are some indications, however, that positive productivity effects from foreign material sourcing depends on the degree to which firms are already globally engaged, but also that such engagements generally could be close to their optimum level in developed countries. There is little existing research on offshoring of services, but it appears that its productivity enhancing effects generally are small in manufacturing plants while being of a somewhat greater magnitude for firms in the service sector.”4
cOnclusiOn Outsourcing is not a new phenomenon, but previously it was mainly used by manufacturing as a way to take advantage of lower cost locations
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and took place primarily in the company’s home country. Outsourcing has attained greater importance recently because services have also become tradables from the use of ICT and because offshore outsourcing has become more widespread from institutional changes in large parts of the world. Initially, only labor-intensive and low-qualified tasks were outsourced or offshore outsourced, but high-quality service jobs have increasingly been outsourced as some of the new service providers have qualified their workforces or invested in the qualification of their human resources. If the growth in outsourcing is likely to continue and even accelerate, the geographic, sector, and labor impacts are still difficult to assess. Nevertheless, the increase in the offshore outsourcing of manufacturing and services will produce impacts on sending as well as receiving countries. The receiving countries may gain jobs, skills and access to foreign markets, as long as the necessary conditions (such as infrastructure, regulatory frameworks, property rights protection, investment climate, an English-speaking labor pool and basic computer skills) are fulfilled, while in developed countries, companies may improve competitiveness and benefit from cost reduction. As long as more qualified tasks are outsourced and offshore outsourced, this will open the discussion in developed countries regarding the impact on highly qualified tasks and on the need to move toward more creative and information intensive jobs. In the future, outsourcing and offshore outsourcing will remain relevant issues for academics, European governments and policy makers because of the potential impact on the number of jobs that may be shifted to lower-wage countries: a key problem as the European economy shows a lack of capacity for creating more and higherqualified jobs. Moreover, more organizations are experiencing reorganization and becoming networked structures for the purpose of being more competitive in a global market. This again opens additional research opportunities for the future. 346
rEFErEncEs Amiti, M., & Wei, S. J. (2006). Service offshoring and productivity: Evidence from the United States. NBER Working Paper Series, Working Paper 11926. Amiti, M., & Wei, S. J. (2004). Fear of service outsourcing: Is it justified? NBER Working Paper Series, Working Paper 10808. Antràs, P., & Helpman, E. (2004). Global sourcing. Journal of Political Economy, 112(3), 552-580. Bhagwati, J., Panagariya, A., & Srinivasan, T. N. (2004). The muddles over outsourcing. Journal of Economic Perspectives, 18(2), 93-114. Bjerring Olsen, K. (2006). Productivity impacts of offshoring and outsourcing: A review. OECD Statistical Analysis of Science, Technology and Industry. STI Working Paper 2006/1. Coase, R. H. (1937). The nature of the firm. Economica (New Series), 4(16), 386-405. Cohen, W. M., & Levinthal, D. A. (1989). Innovation and learning: The two faces of R&D. The Economic Journal, 99, 569-596. Friedman, T. (2005). The world is flat: A brief history of the twenty-first century. New York: Farrar, Stratus and Giroux. Gartner Press Release. (2003). “Gartner Says Offshore Outsourcing Market in Europe Will Grow More than 40 Percent In 2003”, 11 April. Gartner Press Release (2004). “Gartner Says EU Expansion Will Contribute to Eastern European IT Market Growing Three Times Faster than Western Europe”, 4 March. Gertler, M. S. (2004). Manufacturing culture: The institutional geography of industrial practice. Oxford: Oxford University Press. Grossman, G., & Helpman, E. (2002). Integration versus outsourcing in industry equilibrium.
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The Quarterly Journal of Economics, February, 85-120.
Polanyi, M. (1966). The tacit dimension. New York: Doubleday.
Huws, U., Dahlmann, S., & Flecker, J. (2004). Status report on outsourcing of ICT and related services in the EU. Retrieved from www.mosproject.be/documents.htm
Polanyi, M. (1958). Personal knowledge: Towards a post-critical philosophy. London: Routledge & Kegan Paul.
Kirkegaard, J. (2004). Offshore outsourcing. CESifo Forum, 2, 22-29. Kvinge, T. (2004). Knowledge diffusion through FDI—established wisdom or wishful thinking? Oslo: TIK Center for Technology, Innovation and Culture. Working Paper No 31/2004. Millar, J. (2002). Outsourcing practices in Europe. STAR project socio-economic trends assessment of the digital revolution, Issue Report no. 27. Science and Technology Policy Research. Retrieved from http://www.csmb.unimo.it/index/other/ Oursourcing_Practices.pdflable Nelson, R. R., & Winther, S. G. (1982). An evolutionary theory of economic change. Cambridge, MA: Harvard University Press. OECD. (2005). Potential offshoring of ICTintensive using occupations. Working Party on the Information Economy. OECD Directorate for Science, Technology and Industry. Committee for Information, Computer and Communications Policy. Report prepared by van Welsem, D., & Vickery, G. DSTI/ICCP/IE (2004)19/FINAL. Paris: OECD. OECD. (2006). The share of employment potentially affected by offshoring--An empirical investigation. Working Party on the Information Economy. OECD Directorate for Science, Technology and Industry. Committee for Information, Computer and Communications Policy. DSTI/ ICCP/IE (2005)8/FINAL. Paris: OECD. Ohmae, K. (2005). The next global stage, challenges, and opportunities in our borderless world. New Jersey: Wharton School Publishing.
UNCTAD. (2005). Transnational corporations and the internationalization of R&D. World Investment Report. New York and Geneva: United Nations. UNCTAD. (2004). The shift to services. World Investment Report. New York and Geneva: United Nations. UNCTAD and Roland Berger Strategy Consultants. (2004). Services offshoring takes off in Europe. Retrieved from http://www.unctadxi. org/templates/Press____609.aspx van Welsem, D., & Vickery, G. (2005). Potential offshoring of ICT-intensive using occupations. Working Party on the Information Economy. OECD Directorate for Science, Technology and Industry. Committee for Information, Computer and Communications Policy. DSTI/ICCP/IE (2004)19/FINAL. Paris: OECD. Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press. WTO (2005). Offshoring services: Recent developments and prospects. World Trade Report, III Thematic Essays.
kEy TErms Firm’s Competitiveness: Competitiveness is the ability of a firm to produce goods and services that successfully match the market’s needs. Firms compete with one another over their share of domestic and global markets. A firm’s competitiveness depends on its ability to innovate and upgrade, to adapt quickly to market changes
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and to improve quality by expanding its market share at the expense of less-efficient firms. To improve efficiency, firms focus on core competencies and reduce costs by frequently reducing employment and outsourcing noncore functions to less-developed countries. Although less precise and more difficult to define, competitiveness is also used to evaluate the economic performance of cities, regions and countries. Foreign Direct Investment (FDI): According to UNCTAD (2005, p. 297), foreign direct investment is “an investment involving a longterm relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).” The long-run relationship, the lasting interest and the control aspect are assumed to create distinctive consequences (positive as well as negative) for the host economy. Free Trade: Trade between nations unrestricted by government interference or regulations, including tariffs or quotas. Information Technology Revolution: The expression “information technology revolution” is commonly used to refer to a far-reaching phenomenon related to innovations that are occurring at a phenomenal rate in the information and communication technologies (ICTs). A convergence is happening in technical aspects between computing and telecommunication, in contents between text, images, voice and sound, and in the ways in which information is delivered as PCs, TVs and mobile phones become multifunctional. Technical innovations associated with the ongoing process of liberalization and deregulation of markets and world backbone networks are resulting in cheaper, faster and easier internet access. These innovations are substantially transforming the ways in which goods and services are produced,
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distributed and consumed, and are improving our mobility and increasing the diffusion of ideas and innovations. International Competition: Because of globalization and technological innovations, firms are confronted with increasing competition pressures that are affecting all sectors of an economy. Competition arriving from newly industrializing countries with lower wage costs has had a significant impact on the manufacturing restructuring process in more developed countries. Unable to compete with costs, they have turned to more technology-intensive industries and to more innovative and sophisticated products. Services, until the present, have not been involved in international competition as they have been produced and consumed locally. ICTs have changed this situation, and less-developed countries, notably India and China, have emerged as global suppliers offering standardized and increasingly also more sophisticated services. Relocation: The movement of production of goods or services partly or entirety to locations abroad while importing the goods or services back home or serving the foreign market through local production rather than through exports from the home country. The term is wider than offshoring as it may embrace a situation where former production is closed down and the firms import goods from abroad without specific contracts with the foreign producers or without own production in a foreign country. Tacit Knowledge: Gertler (2004, p. 133)— with references to Polanyi (1958, 1966) and Nelson and Winther (1982) among others—offers the following description of tacit knowledge.“[T]he tacit component of the knowledge required for successful performance of a skill is that which defies codification or articulation—either because the performer herself is not fully conscious of all the ‘secrets’ of successful performance or because the codes of language are not well enough developed to permit clear explication.”
Scales and Dynamics in Outsourcing
Theory of the Firm: The theory of the firm (represented, for example, by Coase, 1937; Williamson, 1975) suggests that transactions take place within an enterprise because of market imperfections. Imperfections may be because of a lack of appropriate markets, asymmetric information between supplier and customer, tariffs, and costs connected with coordination, communication and control. In accordance with this theory, activities being outsourced should be easy to define, and the enforcement of contracts should be straightforward. Furthermore, the outsourcing enterprise must have the specific competences needed to subcontract specific parts of the production process (including services). Tradability of Services: Because of service specificities, a face-to-face interaction between the consumer and the provider was required. However, the use of new information technologies eliminates the location constrain. Information can be standardized and stored through digitalization, and ICTs turn them into transportable services, thereby opening up the possibility of trade in some business and computing services. The fragmentation of services is a trend similar to that which happened in manufacturing, but it is proceeding much further and faster by affecting a wide range of service activities.
EndnOTEs 1
2
3
4
Alternative notions to offshore outsourcing are global outsourcing, international outsourcing and cross-border outsourcing (see Bjerring Olsen, 2006). Empirical evidence on knowledge diffusion through captive offshoring (FDI) is mixed (for an overview, see Kvinge, 2004). Business services (accounting, consulting), financial services and research and development have a fairly high share of potential footloose employment. Low- as well as high-skill white collar occupations may be affected by ICT-enabled offshoring of services. There are several challenges when it comes to evaluating the productivity effects of outsourcing. First, lower input costs because of outsourcing may improve the profitability of the core business, but this does not automatically imply enhanced productivity. Second, the most productive firms may also be the most likely to outsource. Third, although outsourcing may improve productivity in individual firms, regional productivity may worsen if those laid off have problems finding work.
Transnational Company (TNC): A company that operates in more than one country.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik and M. Cunha, pp. 1399-1406, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.20
Sourcing and Outsourcing Arithmetic Tapen Sinha Instituto Technológico Autónomo de México, Mexico & University of Nottingham, UK K. Subhadra ICICI Bank, India
absTracT This chapter studies outsourcing from the United States to India. First, we show that outsourcing is not taking most jobs out of the United States. Second, we argue that outsourcing does not contradict trade theory. Third, we analyze how India has come to occupy a preeminent position in outsourcing. Fourth, we show that the Indian dominance is likely to continue well into the next decade. Finally, we discuss some risks associated with outsourcing.
inTrOducTiOn The Greek philosopher Seneca said over 2 millennia ago, “There is nothing new under the sun.” Outsourcing is nothing new either. It is well
known that the Roman Empire had outsourced tax collection in far-flung places. As a result, a recurrent theme in Edward Gibbon’s historical treatise, The History of The Decline and Fall of the Roman Empire, is that the decline is attributable, to some extent, to outsourcing. In the eighteenth and the nineteenth century, England outsourced, to private contractors, the maintenance and operation of streetlights, the management of prisons, and the repair of public highways. However, historically, most outsourcing has been associated with “non-essential” services. PriceWaterhouseCoopers defines outsourcing as “the long-term contracting out of non-core business processes to an outside provider to help achieve increased shareholder value” (http:// www.pwcglobal.com). On the other hand, Gartner Group defines it as “the delegation of one or more IT-intensive business processes to an external
provider that, in turn, owns, administrates and manages the selected processes based on defined and measurable performance metrics.” Unlike PriceWaterhouseCoopers, Gartner avoids any reference to noncore business, it focuses instead on information technology (IT). Outsourcing of strategic business services is relatively new. It started with Eastman Kodak outsourcing information technology (IT) to three external partners in 1989. During the 2004 presidential election in the United States, it riled the political world so much that the Coalition for Economic Growth and American Jobs suggested that instead of calling the phenomenon “outsourcing,” we should use a more neutral term, “worldwide sourcing” (Koffler, 2004). The loss of white-collar jobs due to outsourcing has prompted many U.S. state governments to ban foreign contractors from bidding altogether. In a telling example, the governor of Indiana canceled a $15 million contract with an Indian company to process state unemployment claims. The next-lowest bidder, an American firm, was eventually given the same job for $23 million (Maranjian, 2004). In this chapter, we focus on outsourcing from the United States to India because the United States has become the largest outsourcing country whereas India has become the largest host country. In that context, we first put outsourcing in proper perspective in terms of job losses. Second, we discuss outsourcing in the context of trade theory. Third, we discuss the reasons and the types of outsourcing. India has become the focus of the entire outsourcing debate because a substantial number of outsourcing contracts in the past 10 years between developed and developing countries have gone to India. Therefore, we discuss how and why India has become such an important source of outsourcing. Finally, we discuss outsourcing risks.
OuTsOurcing in pErspEcTivE In 2002, John C. McCarthy of Forrester Research estimated that over a period of 15 years, some 3.3 million jobs would go offshore as a result of outsourcing (McCarthy, 2002). Of this 3.3 million, 2.3 million jobs are going to go to India. That is, over 60% of these jobs are going to migrate to India. These figures created a political uproar. To take one example, in 2003, Delta Air Lines outsourced some of its reservation functions to two Indian companies. It saved about $12 million in costs by the end of 2005. The service providers handled simple reservations, while complex ones were taken care of by agents based in the United States. There were protests, leading some states in the United States to legislate against such outsourcing for government contracts. What was little noticed was the fact that the job losses would happen over a period of 15 years. We need these figures in perspective. The Bureau of Labor Statistics estimates show that seasonally adjusted job losses every quarter during 1995-2003 were in the range of 7 and 8 million jobs. Thus, outsourcing is and will stay small potatoes in terms of job losses and creation in the United States. Of course, when trade in services causes job losses domestically, a similar number of jobs are created at the same time. By the same token, it does not make sense to concentrate job losses due to import of services alone. We need to examine the corresponding figures for export of services. The total value of export of private services amounted to $131.01 billion in 2003, whereas the import of private services was worth $77.38 billion in 2003. Thus, the U.S. had a $53.64 billion surplus in the trade of services. Farrell (2003) estimates that 1 dollar spent on outsourcing will result in 58 cents of company cost savings, 5 cents of additional U.S. goods and services bought, 4 cents for repatriated earnings (when the outsourcing is to the subsidiary of a U.S. company), and 45 to 47 cents from new jobs
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created by the outsourcing company. Therefore, at the global level, $1 on outsourcing produces $1.12-$1.14 worth of benefits (Phillips, 2004).
dOEs OuTsOurcing OF sErvicEs cOnTradicT TradE ThEOry? Many laypeople seem to think that outsourcing of high-tech jobs from the United States to India ( from a developed to a developing country) contradicts trade theory. We argue that trade theory is not contradicted. Economists have developed models to answer the question of why countries trade. The first classic answer came from David Ricardo in 1821. His explanation was based on comparative advantage. A country with comparative advantage in producing wine would export wine. This does not sound like a profound idea until one considers the essence of comparative advantage. One key insight of Ricardo was that a country may have absolute advantage in producing everything, but it cannot have comparative advantage in producing everything. Thus, it is logically impossible for a country to be importing or exporting everything. Heckscher (1919) and Ohlin (1928) proposed a different theory. The theory of Heckscher and Ohlin states the following. In the absence of trade barriers and without any cost of transportation, a country would export only those goods that use its more abundant factors of production. A logical extension is “factor price equalization.” Under the conditions of Heckscher and Ohlin, if all markets are perfectly competitive, the price of each factor of production will be equalized across countries. Free trade will equalize not only commodity prices but also factor prices, so that all workers earn the same wage rate and all units of capital will earn the same rental return in all countries regardless of the factor supplies or the demand patterns in the countries. Thus, Heckscher-Ohlin theory says that a country will
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export products that use its abundant factors of production intensively. In our context, we could translate that theory saying that the United States should export skilledlabor abundant products. This is contradicted by the outsourcing of skilled labor tasks to India (assuming India is not skilled-labor abundant). However, if we go back to Ricardian theory, it says that a country will export goods in which it has a comparative advantage, that is, in which it has the best among its (possibly bad) technologies. Why? Poor productivity in a developing country like India leads to low wages. Therefore, in a product where the productivity is not as bad, the country’s low wages allow for exports. This alone can explain service exports from India to the United States (Feenstra, 2005). Trade between developed and developing countries arises due to traditional comparative advantage, largely determined by differences in endowment patterns.
rEasOns FOr OuTsOurcing Kakabadse and Kakabadse (2000) conducted the first large-scale survey of views about outsourcing by companies. They studied outsourcing practice and its strategic importance among 700 companies in the U.S. and Europe. They discovered that even though most companies were either actively outsourcing or thinking about it, they are doing it for different reasons. Some viewed outsourcing relationships as potential strategic alliances and others saw outsourcing primarily as a way of reducing operating costs, whether in their core business or not. Thus, the first group viewed it as a strategic response of a company whereas the second group saw it as a tactical response to business conditions. There was also a difference in the response of the American companies and the European companies. The American companies took a wider strategic view of outsourcing: pursuing added value through best practice, improvements in
Sourcing and Outsourcing Arithmetic
service quality, focus on core competencies, and the use of technology in addition to cost reduction. European companies viewed the practice of outsourcing primarily as a way to cut costs (see also Odindo et al., 2004).
kinds OF OuTsOurcing The most natural types of outsourcing take place in the services sector. Of course, not all types of services can be outsourced. An estimated 70% of U.S. service jobs (e.g., retail, restaurant, hotel, and personal-care services) are geographically fixed and not in danger of being outsourced (Farrell, 2003, p. 5). Banking and insurance are the most natural candidates for outsourcing most of their work. In retail banking, many business processes, such as account maintenance, opening accounts, check processing, can be outsourced, as well as administration of funds. For insurance companies, claims processing can easily be outsourced. Similarly, business processes, such as benefits administration, and payroll processing of any company, can be outsourced. There are some other services that do not require face-to-face interaction that also can be outsourced for most businesses. Services that have been successfully outsourced for the past 5 years include telesales, customer service, technical support help desk, e-mail support, fax responses, live but not face-to-face interaction (such as chat room customer service), general telemarketing, and collection of receivables. The form of outsourcing can be quite different. The multinational company could set up a wholly owned subsidiary (called a captive). The first companies to outsource to India such as American Express, GE, or IBM did it by setting up captives. A more symbiotic relation is set up through a joint venture. Many companies that came later into the market offer services in a joint venture setup. Nowadays, outsourcing is being offered through a third party. The third-party operation is
much cheaper to run as it is not required to have people working in the operation that are on the payroll of the company. Operating a third-party deal requires a high degree of trust between the company that is contracting out and the company that is doing the operation. Outsourcing can also be done through classic build-operate-transfer (BOT) method.
india calling How did India become the major outsourcing partner? There were three sequential events in the U.S. that drove it, and another sequence of events in India that made it possible. First, starting in 1995-1996 and culminating in December 1999, there was the so-called millennium bug problem (also called the Y2K problem). It required fixing the codes of hundreds of thousands of mission critical computer programs before the arrival of the Year 2000. The fear was that critical computer programs being used by banks, power plants, airline controllers, and other critical systems will reset their internal clocks playing havoc in the international financial markets, not to mention accidents caused by misdirected airline controllers, and nuclear power plants, among others. A vast portion of the work fixing these programs was outsourced to India. Second, in the late 1990s, the market for software boomed in the U.S. Many companies outsourced their software needs to India. Some were done with captives in India (such as American Express, IBM, or GE). Others were contracted out to external providers. Third, with the recession of 2000-2001 in the U.S., companies were looking for ways to cut cost. One solution was to farm out back-office paperwork to other countries with cheaper but qualified labor. India became the natural choice. In all three counts stated, India became the most sought after complement.
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advanTagE india
comes to mind?” The results are reported in Table 1. India is the only country in that group that is associated with the phrase “innovation” and “English Language.” Democracy is another feature that prominently appeared whereas China was noted for its lack of democracy. However, economic growth and population size did not seem to feature in the commentary on India, though the phrase “Good Business Environment” did, but the same is the case for all the other countries in the survey. Innovation and the use of English bode well for conducting business in IT, in particular in outsourcing. This perception of the media about the English language advantage of India is no accident; neither is the perception of innovation. For the Y2K problem, India had a ready source of English-speaking computer programmers who could deliver the requisite modification reliably. In the U.S., such programmers were not there at the time in sufficient numbers. This fact has not escaped the attention of the newsmakers.
Business Climate One way to measure how attractive India is compared with other countries is to see how India stacks up. Recent studies have put India against Brazil, China, and Russia to highlight the growth areas around the world (Wilson & Purushothaman, 2003). In Figure 1, we compare total number of business articles published in The New York Times, Wall Street Journal, Washington Post, Los Angeles Times, Chicago Tribune, Forbes, Fortune, BusinessWeek, Time, Newsweek, and US News & World Report during the year 2004. It shows that the number of business news items on India is well below that of its main competitor, China. Even Mexico and Russia had more media coverage in business news. However, when we compare the news items that talked about outsourcing, India dwarfed every other country by a big margin. Western Media Perceptions In 2004, Edelman (http://www.edelman.com) published a media audit. In that study, a survey was conducted among the media news leaders with the following question: “When you think of these countries as an emerging market, what
Human Resource The available pool of university graduates is an important element in the search for qualified workers to do the job reliably. There too, India
Figure 1. Business news items in influential newspapers and magazines (Source: The New York Times, Wall Street Journal, Washington Post, Los Angeles Times, Chicago Tribute, Forbes, Fortune, BusinessWeek, Time, Newsweek, and U.S. News & World Report, 2004) 1800 1555
1600 1400 1200 1000
Total
800 600
483
462
400 200
Outsourcing
614
121
216 0
63
70
0
5
7
0 india
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brazil
china
poland
russia
mexico
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Table 1. When you think of these countries as an emerging market, what comes to mind? (Source: Edelman’s India Audit Report, 2004) India
China
Mexico
Democracy
Lack of Democracy
English
Good Business
Language
Environment
Innovation
Growth
Good Business Environment
Brazil
Good Business Environment
Economy Good Business
Economy
Environment
Russia Trade
Economy
Poland Democracy Good Business Environment
Democracy
Huge Population
has a big advantage over China, its nearest rival in terms of size. Figure 2 shows us that India produces twice as many college graduates as China. Moreover, graduates in India have a better command of the English language than their Chinese counterparts. Pioneering outsourcing companies like American Express, IBM, or GE found that moving the back office to India created value. The human resources are far cheaper than their western counterparts (see Table 2). Depending on the type of service, the cost in the U.S. was 5 to 10 times as high as in India. It should be emphasized that these estimates do not reflect the cost to the companies for getting specific projects done. However, proj-
ects that require large input from human resources (for example, debugging programs or reconciling accounts), the difference in cost leads to 50% to 75% cost saving while not sacrificing any quality of the jobs done. The level of Internet development had already reached a stage so that the delivery of such services became possible in real time. There had also been a dramatic reduction in data transmission cost between 1979 and 2000 by a factor of 10 (http:// www.neweconomyindex.org/section1_page13. html). In addition, the infrastructure in India to handle increased Internet traffic was in place. Upgrading of telephony made it possible to stay connected
Figure 2. Number of university graduates in 2001 India
2,000,000
China
950,000
Philippines
380,000
Mexico
137,600
Ireland
43,200
Malaysia
30,000
Singapore
12,500
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
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Table 2. Cost comparison between India and the U.S. (Source: McKinsey Quarterly and Asia/Pacific Research Center [quoted in Miller, 2003) Job Category Software Developer
U.S.
$6/hour
$60/hour
CPA
$15,000/year
$75,000/year
Claims Adjuster
$300/month
$1,500/month
Call Center
$1.50/hour
$10/hour
to the international telephone network 100% of the time. Upgrading of physical infrastructure was accompanied by a general opening up of the Indian economy since 1991. This meant that it became possible for large multinationals to form captive companies in India or pursue long-term contracts with their Indian partners.
TEam india In the past few years, most of the business process outsourcing (BPO) contracts won by Indian players are in IT-enabled services (ITeS). Some of the Indian companies initially started as lowcost services such as call centers. But with time, large companies have started focusing on the high-end services due to high margins in those areas, and are climbing up the value chain. The Indian BPO industry has been mainly dominated by call centers until recently. The players in the Indian BPO industry can be classified into five categories on the basis of their ownership structure: captive players, third-party service providers, BPO operations by Indian IT companies, U.S. BPO majors, and BPO units by other companies (see Table 3). The captive players are the companies that are wholly owned subsidiaries of the foreign companies that transferred their processes to India to take advantage of low costs in India. The initial entrants into Indian BPO industry are British Airways, American Express, and GE.
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India
The success of these companies with outsourcing has prompted many western companies to outsource their processes to India. The processes that are outsourced to India include accounting, customer service, data entry, and medical transcription. From the voice-based customer queries, Indian companies have moved up the value chain and started offering services such as payroll management, accounts, and human resource management. Though many companies were keen to shift their operations to India, they were not keen on establishing their wholly owned subsidiaries in India. For this reason, the Indian BPO industry saw the emergence of third-party vendors, who entered into contracts with the western companies to provide outsourced processes to them at lower costs. Indian IT companies also entered the business process outsourcing (BPO) business. The Indian IT players, such as Infosys, Wipro, TCS, and Satyam, have entered into BPO industry through their subsidiaries. These companies could easily get outsourcing contracts as they already had established their credentials through their IT work. To get a foothold in the IT industry in the United States for outsourcing, it was critical for the Indian companies to have worldwide recognition. A readily available yardstick became available in the form of capacity maturity model (CMM) by the Software Engineering Institute (SEI) of the Carnegie Mellon University. There are five different levels of the capacity maturity model; the highest
Sourcing and Outsourcing Arithmetic
Table 3. Types of outsourcing companies Ownership Structure
Description
Captive Players
The BPO centers are started and managed by the foreign companies. The captive centers usually process only parent company’s work. Example: GE operating machine design centers in India.
Third-Party Service Providers
These are the companies started by the group of individuals with funding from venture capitalists. These players generally have to compete with others for every contract. Mostly they compete on the basis of cost. Most companies in India are of this type.
BPO units of Indian IT companies
These are the units started by established Indian IT companies to take advantage of the BPO wave. These companies have advantage of well-established brand name and management of the IT companies. Wipro Spectramind, Nipuna fall into this category.
Subsidiaries of U.S. BPO companies
With many western companies outsourcing their work to India, some of the U.S. BPO companies have started their subsidiaries in India to retain their clients. Examples are EDS, Accenture, Deloitte.
BPO units of Indian companies
Not only IT companies, many companies from other streams also entered BPO industry through their subsidiaries. Examples are HLL, Reliance, ICICI Bank.
is the Level 5 Certification. It was important for the Indian companies to demonstrate world-class quality. Quality accreditations from international agencies helped them to garner more contracts. Indian companies excelled in getting higher-level capacity maturity model certifications. In 2003, SEI published a list of companies with capacity maturity model certifications. Most companies in that list with capacity maturity model levels of 4 or 5 were Indian.
Recognition of India Inc. The software business in India is booming. Figure 3 shows that between 1996-1997 and 2003-2004, the Indian software industry has grown at an average compound rate of 30%. While the growth of the domestic market has been excellent, the growth of the export market has been spectacular. This trend is set to continue. In 2002, the NASSCOM McKinsey report on Indian software industry predicted that in 2008: (1) The overall IT industry revenues will be worth $140 billion. (2) The IT
Figure 3. Size and growth of Indian software industry indian software industry 1996-2004 25000
us $ millions
20000
15000 10000
5000 0 1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
2002-2003
2003-2004
year domestic software market
software Export
Total
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software and services market capitalization will exceed $225 billion. (3) IT software and services will contribute to over 7.5% of the overall GDP. (4) The software products market will amount to around $18 billion. (5) The software and services sector will create employment for over 2.2 million professionals.
pErcEpTiOns OF FOrTunE 500 cOmpaniEs What is the source of such phenomenal optimism of the NASSCOM-McKinsey Report? A survey was conducted about the perceptions of the Fortune 500 companies about software business in various countries. The results are reported in the following figures. Figure 4 shows that in vendor sophistication and people sophistication, India stands well above the rest of the countries that are competing with India. When we add the cost element to this optimistic view about India, it shows that not only does India have high quality of available resources (the only country higher in that count is Israel), but it also has a tremendous cost advantage. It is far cheaper than other countries in its category of quality (see Figure 5).
Figure 4. CEO survey of Fortune 500 companies
OuTsOurcing as a sEcuriTizaTiOn OF sErvicEs Securitization is the process of converting apparently indivisible goods into divisible goods, thereby changing the cost structure of a company. What does outsourcing do to the company? It turns a fixed cost into a variable cost. Just 20 years ago, janitors and the directors used to be fixed costs for a company. Whether there were any sales or not, janitors and directors had to be paid. In the twenty-first century, there has been a change in the business model. The software industry has shown that it is possible to attract managerial talent without a high salary by relocating to countries with cheaper but equally well-qualified employees. Performance based bonuses have become a standard practice not just in IT, but also in all types of business. Similarly, janitorial service is also being contracted out of companies. Just the way companies have been able to securitize assets and liabilities, they can “securitize” services whether they are part of the core business or not. In the example with janitors and directors, the use of janitors is not a core business. It can be contracted out. Large insurance companies like AXA and Prudential have contracted out (in a phased
Figure 5. India has low cost and high quality Cost
Outsourcing: Survey of CEOs of Fortune 500
Vendor Sophistication (Number, Quality)
Outsourcing: Survey of CEOs of Fortune 500
Israel
Philippines
Mexico Hungary
Malaysia
China
Philippines
Russia
China Mexico
People Sophistication (Number, Cost, Language Skills)
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Ireland Singapore
India
India Russia
Quality of available resources: CMM level, resource availability, cultural fit
Sourcing and Outsourcing Arithmetic
manner) the following activities of the company: (1) accounts payable, (2) payroll, (3) benefits administration, (4) employee data management, (5) employee call center, (6) some staffing, (7) training and compensation functions, (8) thirdparty human resource vendor management, and (9) IT functions that support human resources. Outsourcing such processes was unthinkable just a decade ago. This is exactly what we termed as securitization of services. Some aspects of the insurance business naturally lend themselves to outsourcing. Consider an insurance company that wants to leave a certain line of business (called a run-off). The company has to earmark certain funds and wait for a number of years before all claims are settled in that line of business. Since human resources have to be tied up for run-off, it has always been a fiscal drag on a company. With outsourcing, an insurance company can leave its run-off business with an outsourced company and immediately redeploy their staff for new core business. Reinsurance companies require extreme nimbleness to run their business. Since they are less bound by regulation than an insurance company, they can quickly redeploy resources. Not surprisingly, a majority of the top 10 reinsurers have outsourced to India either their entire backoffice operation or a substantial part of it. A recent survey showed that the top concerns of the buyers of outsourcing are the following: (1) on-time delivery, (2) cost effectiveness, (3) end-user satisfaction, (4) timely, quality staffing (of the provider) and (5) service availability of the provider (Diamond Cluster, 2004).
example, Kansas has adopted a bill seeking to bar outsourcing telephone enquiries about its foodstamp program to India and other countries in May 2004. Arizona, California, Colorado, New Jersey, South Carolina, and Washington are considering banning outsourcing related to medical, financial, or personal information. A survey conducted by the UK-based research agency, Mori, on behalf of the unions of Lloyds TSB Group, has concluded that half of the bank’s customers would consider moving their accounts to a different one if they discovered the calls were being managed from India. These are short-term isolated issues.
pEEring inTO ThE FuTurE
Long-Term Trends Business process outsourcing services worldwide reached US$405 billion in 2003. Forecasts based on client survey by the International Data Corporation shows it will grow 11% through 2008, reaching $682 billion. A. T. Kearney released a study on March 30, 2004, ranking various offshore locations for backoffice work. India emerges on top by a wide margin among the 25 countries in Kearney’s “Offshore Location Attractiveness Index,” which employs 39 criteria to rank the locations. China is ranked second, followed by Malaysia and the Czech Republic. This result is consistent with other surveys by other consulting companies. For India, BPO employs 0.1% of the labor force, but it contributes 2% of GDP and a substantial 20% of its exports in 2004. There are a number of growth areas: banking (back office work such as accounting work), financial services and insurance (such as claims processing), telecom, healthcare (billing, claims management, accounting), human resources (payroll processing), retail (managing payables and receivables).
Short-Term Backlash There has been a backlash among the main exporters of BPO: the United States and the United Kingdom. In the U.S., it has taken the form of banning outsourcing of state government jobs. For
How much of it will come to India? A study released by McKinsey-NASSCOM showed some 140 billion dollars could be coming to India by 2008. The result of their survey is reproduced in Table 3.
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Table 3. Estimate of outsourcing market size in India by 2008 (Source: McKinsey NASSCOM Survey, 2002) Type of service
Value
Customer interaction services
15.0
Finance & Accounting services
15.0
Animation
2.0
Translation, Transcription & Localization
1.2
Engineering & Design
5.0
HR Services
44.0
Data search, Integration and Management
18.0
Remote education
15.0
Total
140.0
Note: Figures in billions of U.S. dollars
Black Clouds in the Long Run Legislative changes in the United States/United Kingdom pose the biggest threat to this growth of BPO. These changes could take the form of banning transfer of confidential information to a foreign country. This would mean payroll or medical bills cannot be processed outside the country.
centers to India. Clearly, these companies did not value the risk properly. The cost due to the loss of unhappy customers can outweigh the benefits of cutting the cost of delivering the service. Similarly, future possible backlash through legislative changes that prohibit “exporting” confidential client information need to be fully evaluated. Therefore, Aron (2003) suggests that instead of outsourcing, business should emphasize on “right sourcing.” By outsourcing, companies can lose control of their own processes and the people (both customers and employees). Thus, outsourcing may lead to higher risk and therefore loss of future revenue. Microlevel risks taken by a company are the following: (1) exposure of sensitive and critical information of a company; (2) exposure of customer information; (3) exposure of a company’s intellectual property such as source code, patented processes; (4) relocation of IT equipment from a known, safe environment to an unknown environment; (5) no direct control over business continuity of the outsourced processes (Twing, 2005). Like any other risk management process, the risks are to be identified, measured, and steps for mitigation are to be taken.
risks OF OuTsOurcing cOnclusiOn Outsourcing is not without its risks. When Eastman Kodak decided to outsource many of its core businesses, it did not realize that it lost key skills and capabilities. Short-term advantage was their prime concern at the time. Similarly, IBM outsourced PC-related business too early. It did not recognize that the market was not mature enough. Many innovations were to come. Modern business is all about “knitting together people, processes and platforms” (Aron, 2003). If the risks of the processes are not properly evaluated and priced, outsourcing will simply not be the right solution. Consider the backlash some companies suffered when they moved their call
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Outsourcing of any service requires trust. Indian companies, over the past decade, have worked at earning that trust. It requires a high volume of sophisticated human resources. India has provided such a workforce. The Indian IT industry has been moving from low-end simple tasks to high-end complicated tasks in outsourcing in the form of BPO. Could Indian experience be duplicated in other countries? Many elements in India were present at the right place at the right time. Thus, it would be unlikely that some other country will be able to emulate India’s experience. India has already made inroads into core business in
Sourcing and Outsourcing Arithmetic
Box 1. Terminologies BPO
Business process outsourcing. An entire line of business such as automobile design or insurance claims management process is farmed out.
IT
Information technology.
ITeS
Information technology enabled services. Services that use information technology intensively.
CMM
Capability maturity model articulated by the Software Engineering Institute (SEI) at the Carnegie Mellon University. The CMM/SEI framework aims to distinguish mature processes from immature processes. Level 5 is the highest grade.
Box 2. List of outsourced services (Adapted from the United Nations Conference on Trade and Development E-Commerce and Development Report, 2003) Banking Services
Asset Management Services
Account opening services
Account creation
Account information capture
Account maintenance
Customer queries
Transfers and additions
Check clearing
Dividend payments
Check payment reconciliation
Brokerage payment
Statement processing
MIS reporting
ATM reconciliation
Customer service
Investment account management
Customer Care
Management reporting
Customer service
Loan administration
Customer analysis
Credit debits card services
Call centers
Check processing
Consumer information services
Collections
Customer relationship management
Customer account management Mortgage Services Application verification and processing Disbursals and collections
Human Resources Services Payroll and benefits processing Training and development Retirement investment and benefits management
Payment reconciliation
Hiring and staffing
Account information updates
Recruitment screening
Mortgage loan servicing
Administration and relocation services
Financial Services
Payroll processing
Document management
Compensation administration
Billing
Benefits planning
Shareholder services Claims processing Accounts receivable Accounts payable General ledger
Administration and regulating compliance Sales and Marketing Services Telemarketing services Direct marketing and sales campaigns Web-Related Services
Accounting services
Web site designing
Treasury operations management
Web site management
Credit Card Services Applications screening and card issuance
Site personalization Site marketing
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Box 2. continued Customer account management
Search engine, directory optimization and positioning services
Web security services and integration with CRM Back-office systems for inventory management Web enablement of legacy applications Electronic bill presentment and payment services
Statutory reporting
Graphics/animation
Annuities processing
Web-based e-mail processing
Benefit administration
Web-based help desk
Customer information capture
Web-based chat support
Risk assessment and premium computation Policy processing and account monitoring
Claims management Payment reconciliation Health Care Medical transcription services Diagnostics
some industries especially in financial services. All indicators point to more consolidation in the future.
acknOwlEdgmEnTs We thank Bradly J. Condon and Rebecca Benedict for their comments. Our thanks to the many participants from the Indian IT Industry, who generously gave their time to discuss various issues. We thank the Asociación Mexican de Cultura AC for supporting this research. Comments from anonymous referees have allowed us to refocus the chapter. However, we alone are responsible for the opinions expressed. They do not represent the views of the institutions with which we are affiliated.
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rEFErEncEs Aron, R. (2003, June 1-14). Sourcing in the right light. Optimize. Retrieved January 11, 2005 from http://www.optimizemag.com/issue/020/management.htm?_loopback=1 Condon, B. J., & Sinha, T. (2003). Drawing lines in sand and snow: Border security and North American economic integration. M. E. Sharpe. Diamond Cluster. (2004). 2004 Global IT Outsourcing Study. Retrieved January 11, 2005 from http://www.diamondcluster.com Farrell, D. (2003). Offshoring: Is it a win-win game? McKinsey Global Institute. Feenstra, R. (2005, January 16-18). The future of business outsourcing, Sixth Annual NBERNCAER Neemrana Conference.
Sourcing and Outsourcing Arithmetic
Heckscher, E. F. (1919). Utrikeshandelns verkan pa inkomstfordelningen (The effect of foreign trade on the distribution of income) Ekonomisk Tidskrift, 21, 497-512. Kakabadse, N., & Kakabadse, A. (2000). Outsourcing: A paradigm shift. Journal of Management Development, 19(4), 670-728. Koffler, K. (2004, March 2). Business coalition rewrites lexicon for jobs outsourcing. Congress Daily. Retrieved January 11, 2005 from http:// nationaljournal.com Leavy, B. (2004). Outsourcing strategies: Opportunities and risks. Strategy and Leadership, 32, 20-25. Maranjian, S. (2004, March 11). Thoughts on offshoring and outsourcing. Motley Fool’s News and Commentary. Retrieved January 11, 2005 from http://www.fool.com/news/commentary/2004/ commentary040311SM.htm McCarthy, J. C. (2002, November 11). 3.3 million US service jobs to go offshore. Whole View Tech Strategy. Forrester Research. Retrieved January 11, 2005 from www.forrester.com
Odindo, C. et al. (2004). Outsourcing in the UK financial services industry: The Asian offshore market. University of Nottingham School of Business, CRIS Discussion Paper Series—2004.I. Retrieved January 11, 2005 from www.nottingham. ac.uk/business/cris/discussionpapers.html Ohlin, B. (1928, April). The reparations problem. Svenska Handelsbanken, 28, 2-23. Phillips, M. M. (2004, March 15). More work is outsourced to U.S. than away from it, data show. Wall Street Journal. Retrieved January 11, 2005 from http://www.wsj.com Twing, D. (2005, September). Reviewing the security aspect of outsourcing. Network World, 22-31. Retrieved September 30, 2005 from http://www.networkworld.com/newsletters/ asp/2005/0905out1.html Wilson, D., & Purushothaman, R. (2003, October). Dreaming with BRICs: The path to 2050. Goldman and Sachs, Global Economics Paper No. 99. Retrieved September 30, 2005 from http:// www2.goldmansachs.com/insight/research/reports/report6.html
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This work was previously published in E-Business Process Management: Technologies and Solutions, edited by J. Sounderpandan and T. Sinha, pp. 186-203, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Classes of Collaborative Networks Luis M. Camarinha-Matos New University of Lisbon, Portugal Hamideh Afsarmanesh University of Amsterdam, The Netherlands
inTrOducTiOn A collaborative network (CN) is an alliance constituted by a variety of entities (e.g., organizations and people) that are largely autonomous, geographically distributed, and heterogeneous in terms of their operating environment, culture, social capital, and goals but that collaborate to better achieve common or compatible goals, and whose interactions are supported by computer network. Some authors see the roots of this paradigm in early works of economists like Oliver Williamson in the 1970s. Along his vast work, Williamson established the study of transaction cost economics (Williamson, 1975) and defended that manufacturing firms should make much greater use of externally purchased goods and services, rather than those internally supplied. These ideas had a more evident impact with the booming of the “outsourcing” wave in the 1980s. Outsourcing
became very attractive when managers had to reduce the organization overheads and eliminate the internal inefficient services, the so called lean organization, as it transfers the problem to the outside, namely to other efficient service providers. In this line of developments, the idea of virtual enterprise/virtual organization was not “invented” by a single researcher but rather it is a concept that has matured through a long evolution process. Some of the early references first introducing the terms like virtual company, virtual enterprise, or virtual corporation go back to the early 1990s, including the work of Jan Hopland, Nagel and Dove, and Davidow and Malone (Davidow & Malone, 1992; Introna, More, & Cushman, 1999; Walton & Whicker, 1996). Since then, a large but disjoint body of literature has been produced mainly in two communities: the information and communications technology (ICT) community and the management community.
individual citizens contributions in case of a natural disaster, in which people or organizations may volunteer and come together hoping to improve the general aim, but there is no plan and/or organization how their activities should go.
In today’s society, collaborative networks manifest in a large variety of forms, including virtual organizations, virtual enterprises, dynamic supply chains, professional associations, industry clusters, professional virtual communities, collaborative virtual laboratories, and so forth. Several examples can be found in a synthesis work elaborated by the VOSTER project (CamarinhaMatos, Afsarmanesh, & Ollus, 2005). Although not all, most forms of collaborative networks imply some kind of organization over the activities of their constituents, identifying roles for the participants, and some governance rules. Therefore, these can be called manifestations of collaborative networked organizations (CNOs) (Figure 1) (Camarinha-Matos & Afsarmanesh, 2005, 2006). Other more spontaneous forms of collaboration in networks can also be foreseen. For instance, various ad-hoc collaboration processes (Figure 1) can take place in virtual communities, namely those that are not business oriented—for example,
cOllabOraTivE nETwOrkEd OrganizaTiOns Among the CNOs, some networks are goaloriented where intense collaboration (towards a common goal) is practiced among their partners, as opposed to long term strategic alliances described below, where cooperation is practiced among their members. Goal-oriented networks can be driven by continuous production/service provision activities or driven by the aim of grasping a single (collaboration) opportunity. The first case includes those networks that have a long-term duration and remain relatively stable for that duration with a clear definition of members’ roles along the value chain. Typical examples are:
Figure 1. Examples of classes of collaborative networks Collaborative Network
Collaborative Networked Organization
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Supply chains: A stable long-term network of enterprises, each having clear roles in the manufacturing value chain, covering all steps from initial product design and the procurement of raw materials, through production, shipping, distribution, and warehousing until a finished product is delivered to a customer. Virtual government: An alliance of governmental organizations (e.g., city hall, tax office, cadastre office, and civil infrastructures office) that combine their services through the use of computer networks to provide integrated services to the citizen through a common front-end.
Grasping-opportunity driven CNOs are dynamically formed to answer a specific collaboration opportunity and will dissolve once their mission is accomplished. Examples (Figure 2) include (Camarinha-Matos & Afsarmanesh, 1999; Goranson, 1999; Walton & Whicker, 1996): •
•
Virtual enterprise (VE): Represents a temporary alliance of enterprises that come together to share skills or core competencies and resources in order to better respond to business opportunities, and whose cooperation is supported by computer networks. Virtual organization (VO): Represents a concept similar to a virtual enterprise,
Figure 2. Examples of single-opportunity based collaborative networks virtual Organization (vO) virtual Enterprise (vE) Extended Enterprise (EE)
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virtual Team (vT)
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•
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comprising a set of (legally) independent organizations that share resources and skills to achieve its mission/goal, but that is not limited to an alliance of for profit enterprises. A virtual enterprise is therefore, a particular case of virtual organization. Dynamic virtual organization: Typically refers to a VO that is established in a short time to respond to a competitive market opportunity, and has a short life cycle, dissolving when the short-term purpose of the VO is accomplished Extended enterprise (EE): Represents a concept typically applied to an organization in which a dominant enterprise “extends” its boundaries to all or some of its suppliers. An extended enterprise can be seen as a particular case of a virtual enterprise. Virtual team (VT): Similar to a VE but formed by humans, not organizations, a virtual team is a temporary group of professionals that work together towards a common goal such as realizing a consultancy job, a joint project, and so forth, and that use computer networks as their main interaction environment.
The term “virtual” in all these organizations comes from the fact that these networks act or appear to act as a single entity, thanks to their organized communication and coordination mechanisms enabled by computer networks; although they are (usually) not a single legal entity, they do not have physical headquarters and are typically geographically distributed. Another kind of network is the longer term strategic establishment, aimed at offering the conditions and environment for rapid and fluid configuration of collaboration networks when opportunities arise. VO breeding environments (Afsarmanesh & Camarinha-Matos, 2005) and professional virtual communities (Bifuclo & Santoro, 2005) exemplify these kinds of networks:
Classes of Collaborative Networks
•
•
VO Breeding environment (VBE): Represents an association of organizations and their related supporting institutions, adhering to a base long-term cooperation agreement and adoption of common operating principles and infrastructures with the main goal of increasing their preparedness towards rapid configuration of temporary alliances for collaboration in potential virtual organizations. Namely, when a business opportunity is identified by one member (acting as a broker), a subset of VBE organizations can be selected to form a VE/VO. Some earlier cases of VBEs were mostly focused on a regional basis (Figure 3): Industry cluster: One of the earliest forms of VO breeding environments, consisting of a group of companies, typically located in the same geographic region and operating in a common business sector, that keep some “binds” with each other in order to increase their general competitiveness in the larger area (Paytas, Gradeck, & Andrews, 2004). These binds may include sharing some buyer-supplier relationships, common technologies and tools, common buyers, distribution channels or common labor pools, all contributing to some form of cooperation or collaboration when business
opportunities arise. Earlier forms of clusters did not require a strong ICT infrastructure, but more and more collaborations resort to such support. Industrial district: A term mostly used in Italy that represents a concept quite similar to an industry cluster (Dezi & Schiavone, 2004). It can be focused on one single sector or cover a number of sectors in a given region. Business ecosystems: Inspired by the mechanisms of the biological ecosystems, these networks try to preserve local specificities, tradition, and culture, and they frequently benefit from (local) government incentives (Moore, 1996). A business ecosystem, also sometimes called digital ecosystem, is similar to a cluster or industry district, although it is not limited to one sector but rather tends to cover the key sectors within the geographical region. In most aspects, business ecosystems simply represent a renaming of the industrial district concept. Namely, differences are subtle and can perhaps be found only in a clearer emphasis on the involvement of a diversity of their actors—the living forces of a region—in addition to companies, and a more intense use of advanced ICT tools to support collaboration. Virtual laboratory (VL) networks: Represent the alliance of autonomous research organizations, each having their own resources (equipments, tools, data, and information related to their past experiments, etc.), enabling their researchers, located in different geographically-spread centers to be recognized and considered for taking part in potential opportunity based problemsolving collaborations (forming a kind of VO for each problem solving) (Kaletas, Afsarmanesh, & Hertzberger, 2004). During a problem-solving collaboration process, it is typical that some expensive lab equipments owned by one or more organizations is made
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•
available for (remote) use by the other collaboration partners. Disaster rescue networks: A strategic alliance of governmental/nongovernmental organizations specialized in rescue operations in case of disasters is another recent form of VBE aimed at facilitating a rapid and well-coordinated response in case of a disaster. This VBE could have a local/ regional coverage or a global geographic span.
VBE is thus the more recent term that was coined to cover these cases and clearly extends their scope to both regional/global coverage, single/multi-sector, and for-profit/nonprofit organizations. Complementary views of these organizational forms are shown in Figure 4. Figure 5 puts various views in perspective. •
Professional virtual community (PVC): Represents an association combining the concepts of virtual community and professional community. Virtual communities are defined as social systems of networks of individuals who use computer technologies to mediate their relationships. Professional communities provide environments for professionals to share the body of knowledge
of their professions such as similar working cultures, problem perceptions, problemsolving techniques, professional values, and behavior. Similar to facilitation of VO configuration in VBEs, PVCs facilitate the configuration of opportunity-based virtual teams (VTs).
FuTurE TrEnds and cOnclusiOn Several other forms of collaborative networks are emerging as a result of both the progress on the information and communication technologies and the progress on the understanding and definition of collaboration mechanisms and supporting frameworks. For instance, the term disperse manufacturing network is being used to represent networks of manufacturing entities that can be seen as partly supply chain and partly VBE, depending on the particular instantiation. With these developments, it is becoming more relevant to make an effort to systematize and structure the existing knowledge, first in order to facilitate mutual understanding among the members of this community; second as a step towards the elaboration of a sound theoretical foundation to boost the developments of collaborative net-
single area
industry district
virtual lab
disaster rescue network
industry cluster
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virtual organizations breeding Environment (vbE)
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business Ecosystem
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Figure 4. Other views of the strategic alliances
non-profit
virtual organizations breeding Environment (vbE)
virtual lab
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business Ecosystem
industry district industry cluster For profit
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Classes of Collaborative Networks
Figure 5. Long-term strategic alliances: putting the views in perspective
Multi area
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of i pr or-
it rof n-p
t
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works and better support their management and operation. A number of European projects such as THINKcreative, VOSTER, and ECOLEAD have been contributing towards this aim. The taxonomy presented in this article is a partial result of these efforts.
rEFErEncEs Afsarmanesh, H., & Camarinha-Matos, L.M. (2005). A framework for management of virtual organizations breeding environments. In L.M. Camarinha-Matos, H. Afsarmanesh, & A. Ortiz (Eds.), Collaborative networks and their breeding environments. Boston: Springer. Bifulco, A., & Santoro, R. (2005). A conceptual framework for professional virtual communities. In L.M. Camarinha-Matos, H. Afsarmanesh, & A. Ortiz (Eds.), Collaborative networks and their breeding environments. Boston: Springer. Camarinha-Matos, L.M., & Afsarmanesh, H. (1999). The virtual enterprise concept. In L.M. Camarinha-Matos & H. Afsarmanesh (Eds.), Infrastructures for virtual enterprises: Networking industrial enterprises. Boston: Kluwer Academic Publishers.
Camarinha-Matos, L.M., & Afsarmanesh, H. (2005). Collaborative networks: A new scientific discipline. Journal of Intelligent Manufacturing, 16, 439-452. Camarinha-Matos, L.M., & Afsarmanesh, H. (2006). Collaborative networks: Value creation in a knowledge society. In K. Wang, G. Kovacs, M.J. Wozny, & M. Fang (Eds.), Knowledge enterprise: Proceedings of Prolamat 2006. Boston: Springer. Camarinha-Matos, L.M., Afsarmanesh, H., & Ollus, M. (Eds.). (2005). Virtual organizations: Systems and practices. Boston: Springer. Davidow, W., & Malone, T. (1992). The virtual corporation. New York: Harper Business. Dezi, L., & Schiavone, F. (2004, May 4-5). Managerial styles within an Italian industrial district: Two different successful stories. In Proceedings of EURAM St. Andrews 2004 Conference, Scotland. Goranson, H.T. (1999). The agile virtual enterprise: Cases, metrics, tools. Westport, CT: Quorum Books. Introna, L.D., More, H., & Cushman, M. (1999). The virtual organization: Technical or social innovation? Lessons from the film industry (Working paper No. 72). London School of Economics, Department of Information Systems. Retrieved October 31, 2007, from http://is.lse.ac.uk/wp/ pdf/wp72.pdf Kaletas, E., Afsarmanesh, H., & Hertzberger, L.O. (2004, April 14-17). A methodology for integrating new scientific domains and applications in a virtual laboratory environment. In Proceedings of ICEIS 2004, 6th International Conference on Enterprise Information Systems, Porto, Portugal. Kurumluoglu, M., & Nostdal, R. (2005). Base concepts. In L.M. Camarinha-Matos, H. Afsarmanesh, & M. Olus (Eds.), Virtual organizations: Systems and practices. Boston: Springer.
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Moore, J. (1996). The death of competition: Leadership and strategy in the age of business ecosystems. New York: Harper Business. Paytas, J., Gradeck, R., & Andrews, L. (2004). The universities and development of industry clusters (Report for the U.S. Department of Commerce). Carnegie Mellon University. Walton, J., & Whicker, L. (1996, October). Virtual enterprise: Myth & reality. Journal of Control. Williamson, O. (1975). Markets and hierarchies. New York: Free Press.
kEy TErms Collaborative Network: An alliance of entities (e.g., organizations and people) that are autonomous, geographically distributed, and heterogeneous in terms of their operating environment, culture, social capital, and goals but that collaborate to better achieve common or compatible goals, and whose interactions are supported by computer network. Collaborative Networked Organization: A collaborative network subject to some kind of organization over the activities of its constituents, identifying roles for the participants, and having some governance rules.
Grasping-Opportunity Driven CNO: A CNO that is formed dynamically in order to answer a specific collaboration opportunity and will dissolve once their mission is accomplished. Virtual Organization: A temporary alliance of (legally) independent organizations that share resources and skills to achieve its mission/goal and whose cooperation is supported by computer networks. Virtual Team: A temporary group of professionals that work together towards a common goal such as realizing a consultancy job, a joint project, and so forth, and that use computer networks as their main interaction environment. VO Breeding Environment: An association of organizations and their related supporting institutions, adhering to a base long-term cooperation agreement, and adoption of common operating principles and infrastructures, with the main goal of increasing their preparedness towards rapid configuration of temporary alliances for collaboration in potential virtual organizations. Professional Virtual Community: A concept similar to VO Breeding Environment but formed by human professionals, not organizations. It is a long-term strategic alliance that aims at facilitating the preparedness of its members to rapidly engage in temporary virtual teams to address a business opportunity.
Goal-Oriented Network: A collaborative network that is driven by continuous production/ service provision activities or driven by the aim of grasping a single (collaboration) opportunity.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik and M. Cunha, pp. 193-198, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.22
IT-Enabled Reengineering: Productivity Impacts Yasin Ozcelik Fairfield University, USA
inTrOducTiOn IT-enabled business process reengineering (BPR) is defined as the redesign of business processes by leveraging potential benefits of information technology (IT) and the Internet to gain significant improvements in key areas of firm performance such as service, quality, cost, and speed. In general, IT-enabled BPR comprises replacing manual labor with computer-based automation systems, adopting innovative workflow management systems, streamlining existing operations with the new systems, and digitizing inter-firm communications through the use of emerging exchange standards such as extensible markup language (XML). Firms have been reengineering various business functions for years, ranging from customer relationship management to order fulfillment, and from assembly lines to research and development. Although the very definition of
BPR has not changed much, its nature has evolved over time, expanding both the range and depth of services being reengineered. In this article, we first discuss the effects of IT-enabled BPR on firm productivity by providing both empirical and theoretical evidence from the literature. We then highlight past experiences of several major firms in the United States with the IT-enabled BPR implementations. Finally, we comment on expected future trends in this area.
backgrOund In this section, we provide a detailed survey on two main streams of related research from the literature: the work on the business value of IT and the more specialized literature on the value of IT-enabled BPR implementations.
business value of information Technology The roots of the literature on the business value of IT can be traced back to 1990’s when available data from 1980’s failed to show evidence of improved firm productivity from investments in IT in the manufacturing sector (Morrison & Berndt, 1990). This result, later called the “productivity paradox of IT,” was found to be even more pronounced in the service sector which had used over 80% of IT products during 1980’s (Roach, 1991). Researchers attempted to resolve the paradox by pointing out that the inability to show significant returns may be because of (1) measurement errors of outputs and inputs due to rapid price and quality changes in IT equipment, (2) the time necessary for learning and adjustment, and (3) mismanagement of IT resources by firms due to insufficient expertise to take advantage of using IT in traditional business environments. Most researchers rejected this paradox by presenting empirical evidence that shows a positive relationship between IT investments and firm productivity (Bharadwaj, Bharadwaj & Konsynski, 1999; Brynjolfsson & Hitt, 1996; Kudyba & Diwan, 2002). Brynjolfsson, Malone, Gurbaxani, and Kambil (1994) showed that the effects of IT on firm productivity are substantially larger when measured over long time periods. This is because long-term returns represent the combined effects of related investments in organizational change. Not all studies were able to show a clear payoff from IT investments. For example, Barua, Kriebel, and Mukhopadhyay (1995) found that even though IT spending improves intermediate variables of firm performance such as capacity utilization, inventory turnover, or relative price, it does not necessarily lead to improvements in higher-level productivity variables such as Return on Assets (RoA) or market share. Devaraj and Kohli (2003) emphasized the importance of actual usage in driving the impact of IT on firm performance. Consequently, researchers still debate on
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how the relationship between IT investment and firm productivity can be measured and analyzed (Anderson, Banker, & Ravindran, 2003). Compared to the general effects of IT investments on productivity, however, much less is known about how value is actually created within the firm. In search for an answer, Kohli and Devaraj (2003) recommend that academic studies explicitly report which complementary changes in business practices have accompanied IT investments, including IT-enabled BPR and Enterprise Resource Planning (ERP). Such analyses are believed to isolate and identify the effectiveness of complementary changes leading to IT payoffs.
payoff from iT-Enabled business process reengineering The literature on the impact of IT-enabled BPR on productivity is small but growing. Brynjolfsson and Hitt (2000) argued that a significant component of the value of an IT investment is its ability to enable complementary changes in business processes and work practices of firms, which may eventually lead to productivity increases by reducing costs or improving intangible aspects of existing products, such as timeliness, quality, and variety. Researchers using historical data from banking industry found that the impact of IT investment on bank performance was realized after a certain time lag, and the level of impact depended on the extent to which firms supported their IT investments with organizational redesign (Murnane, Levy, & Autor, 1999). Additionally, Devaraj and Kohli (2000) showed that IT investment contributes to higher revenue after certain time lags, and the effect is more pronounced when combined with Business Process Reengineering initiatives. Bresnahan, Brynjolfsson, and Hitt (2002) studied the effect of three related innovations (information technology, workplace reorganization, and new products and services) on demand for skilled labor.
IT-Enabled Reengineering
They found firm-level evidence that the demand for skilled labor is positively correlated with all the three innovations. Bertschek and Kaiser (2004) analyzed a cross-sectional data set to investigate the possible relationship between investment in IT, non-IT investment, labor productivity, and workplace reorganization. They found that workplace reorganization induces an increase in labor productivity that is attributable to complementarities between various input factors, including IT and workplace reorganization. In outlining future research directions in this field, Devaraj and Kohli (2000) commented: …the literature in BPR implementation is rife with anecdotal evidence and short on rigorous empirical evidence of performance impacts of BPR. There is a definite need to better measure BPR implementations through objective measures, and to relate BPR to organizational performance … All of the studies briefly surveyed in this section collectively suggest that there are substantial benefits for firms if they can successfully manage the associated structural transformations during Business Process Reengineering implementations. In order to achieve this, firms can employ several established methodologies, including but not limited to, change management, risk management, and knowledge management.
nOTablE ExpEriEncEs wiTh iT-EnablEd rEEnginEEring Firms have been implementing numerous ITenabled reengineering projects since the use of mainframes and personal computers became popular in many industries. While some of these projects are enterprise-wide (e.g., reorganization or focusing on core competencies), others are more restricted in their scope and directed toward a specific business function (e.g., accounting or manufacturing).
Anecdotal business experience shows that the benefits of investments in IT may be more than outweighed by negative interactions with existing organizational practices. Moreover, investments in IT and reengineering cannot succeed in isolation. As a result, the main driver of the most of IT-enabled BPR projects during the 1990’s was the belief that firms needed to adopt IT in their business units as part of an organizational change. Therefore, earlier applications of IT-enabled BPR were directed toward significant process changes accompanied by a reduction of personnel costs in labor-intensive operations of firms including accounting, purchasing, and payroll. Such organizational changes cost firms nearly $1.6 trillion in IT-related intangible assets during the 1990s as opposed to a total of $167 billion spending in IT equipment (Brynjolfsson & Yang, 1997). Since then, the use of IT as a supporting tool for BPR projects has affected all functions of firms, gradually displacing traditional labor and capital inputs because of the superior price and performance improvements in IT equipment relative to these inputs. Most firms have indeed realized benefits from IT-enabled BPR projects, ranging from tangible financial benefits to intangible customer satisfaction and growth sustenance. The CIGNA Corporation, for example, has successfully completed a number of IT-enabled BPR projects and realized savings of $100 million by improving customer service and quality while reducing operating expenses (Caron, Jarvenpaa, & Stoddard, 1994). Similarly, a famous reengineering of the accounts payable process at the Ford Motor Company has increased the speed and accuracy of payments, and certainly improved company relations with its long-term suppliers (Hammer & Champy, 1993). Nevertheless, not all of the BPR projects are reported to finish successfully. Given the scale of BPR projects, the major organizational changes they entail, and the potential of internal instability, it is fairly reasonable to expect failures in BPR projects. Anecdotal evidence suggests that the pay-
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off from reengineering efforts and IT investments in the United States is mixed at best (Barua, Lee, & Winston, 1996). Bashein, Markus, and Riley (1994) estimated a failure rate of up to 70 percent. Based on interviews with 350 executives from 14 industries, a survey study conducted by the Arthur D. Little consulting company found that 85% of the executives surveyed were dissatisfied to some extent with their reengineering activities (Rock & Yu, 1994). Reengineering experts argue that such poor outcomes are due to (1) expecting too much too soon, (2) a lack of partnership between IT and business, (3) undertaking projects without a complete understanding of costs and benefits, and (4) not exactly knowing how to redesign a set of related business processes.
FuTurE TrEnds Proliferation of the Internet and diffusion of IT promises a bright future for IT-enabled BPR initiatives. Continuous advances made in these technologies may not only decrease the cost of executing IT-enabled BPR projects, but also increase their success rates. Furthermore, as firms become more digitized and fully connected with the rest of the world, outsourcing may ease the execution of most IT-enabled BPR projects, especially those related with the non-core operations of firms. In this regard, countries including Canada, India, Ireland, and Israel may emerge as the new outsourcing service providers for IT-enabled BPR projects, and contribute to overall productivity increases in the world.
rEFErEncEs Anderson, M. C., Banker, R. D., & Ravindran, S. (2003). The new productivity paradox. Communications of the ACM, 46(3), 91-94.
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Barua, A., Kriebel, C., & Mukhopadhyay, T. (1995). Information technologies and business value: An analytic and empirical investigation. Information Systems Research, 6(1), 3-23. Barua, A., Lee, B., & Winston, A. (1996). The calculus of reengineering. Information Systems Research, 7(4), 409-428. Bashein, B., Markus, L., & Riley, P. (1994). Preconditions for BPR success. Information Systems Management, 11(2), 27-38. Bertschek, I. & Kaiser, U. (2004). Productivity effects of organizational change: Microeconometric evidence. Management Science, 50(3), 394-404. Bharadwaj, A. S., Bharadwaj, S. G., & Konsynski, B. R. (1999). Information technology effects on firm performance as measured by Tobin’s q. Management Science, 45(6), 1008-1024. Bresnahan, T. F., Brynjolfsson, E., & Hitt, L. M. (2002). Information technology, workplace reorganization, and the demand for skilled labor: Firm-level evidence. The Quarterly Journal of Economics, 117(1), 339-376. Brynjolfsson, E. & Hitt, L. M. (1996). Paradox lost? Firm-level evidence on the returns to information systems spending. Management Science, 42(4), 541-558. Brynjolfsson, E. & Hitt, L. M. (2000). Beyond computation: Information technology, organizational transformation and business performance. Journal of Economic Perspectives, 14(4), 2348. Brynjolfsson, E., Malone, T. W., Gurbaxani, V., & Kambil, A. (1994). Does information technology lead to smaller firms? Management Science, 40(12), 1628-1644. Brynjolfsson, E. & Yang, S. (1997). The intangible benefits and costs of computer investments: Evidence from financial markets. In Proceedings
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of the International Conference on Information Systems, Atlanta, GA. Caron, J. R., Jarvenpaa, S. L., & Stoddard, D. B. (1994). Business reengineering at Cigna Corporation: Experiences and lessons learned from the first five years. MIS Quarterly, 18, 233-250. Devaraj, S. & Kohli, R. (2000). Information technology payoff in health-care industry: A longitudinal study. Journal of Management Information Systems, 16(4), 41-67. Devaraj, S. & Kohli, R. (2003). Performance impacts of information technology: Is actual usage the missing link? Management Science, 49(3), 273-289. Hammer, M. & Champy, J. (1993). Reengineering the corporation: A manifesto for business revolution. New York: Harper Business Press. Kohli, R. & Devaraj, S. (2003). Measuring information technology payoff: A meta-analysis of structural variables in firm-level empirical research. Information Systems Research, 14(2), 127-145. Kudyba, S. & Diwan, R. (2002). Research report: Increasing returns to information technology. Information Systems Research, 13(1), 104-111. Morrison, C. J. & Berndt, E. R. (1990). Assessing the productivity of information technology equipment in the U.S. manufacturing industries. National Bureau of Economic Research, Working Paper #3582. Murnane, R. J., Levy, F., & Autor, D. (1999). Technological change, computers and skill demands: Evidence from the back office operations of a large bank. NBER Economic Research Labor Workshop. Roach, S. S. (1991). Services under siege-The restructuring imperative. Harvard Business Review, (Sep.-Oct.), 82-92.
Rock, D. & Yu, D. (1994). Improving business process reengineering. AI Expert, 26(10), 27-34.
kEy TErms Change Management: A structured managerial approach to guide individuals, teams, and organizations in evolving from a current state to a desired state. Change management processes usually emerge from the needs caused by other enterprise-wide initiatives such as reengineering, mergers, or restructuring. The field of change management inherits many tools and methodologies from psychology, sociology, business, and engineering. Enterprise Resource Planning (ERP): A complex information system that allows for organization-wide coordination and integration of key business processes. Essentially, ERP systems provide a single comprehensive information repository to collect operational data from various business processes in manufacturing, finance, accounting, human resources, sales, and marketing. Through the use of ERP systems, managers can access more precise and timely information for coordinating the operations of their organizations. Currently, SAP and Oracle are the biggest ERP software vendors in the world. Extensible Markup Language (XML): A simple yet powerful computer communication language developed in 1996 by the World Wide Web Consortium (W3C) as a more flexible markup language than Hypertext Markup Language (HTML) for creating Web pages. While HTML is limited to describing how data should be presented in the form of Web pages, XML can perform presentation, communication, and storage of data easily. Information Technology (IT): A very broad term that refers to the products, services, methods, inventions, and standards that are collectively
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used for producing, storing, and disseminating information. Most of the time, the term is used in its more restrictive form to describe only the tangible infrastructure comprising hardware and software. Outsourcing: In its most succinct form, outsourcing is defined as the process of hiring another person or organization to perform a service. In the Information Systems field, it refers to the practice of contracting computer center operations, telecommunications networks, or software applications development to external vendors. Goals of outsourcing are to decrease costs and free up management time by focusing on core competencies. Productivity: A measure of a firm’s efficiency in converting inputs into outputs. Essentially, it refers to the rate at which outputs are produced
per unit of input (labor and capital). Productivity can be considered as either minimizing the use of inputs for a given output level (e.g., reflecting efficient production processes that minimize waste) or maximizing output for a given input level (e.g., reflecting the use of resources in the production of goods and services that add the most value). Risk Management: Refers to a continuous process of identifying, assessing, and reducing a risk factor to an acceptable level, and implementing the right mechanisms to maintain that level of risk. Established risk management strategies include avoiding the risk, reducing the negative effect of the risk, accepting some or all of the consequences of the risk, or transferring the risk to another party through insurance.
This work was previously published in Encyclopedia of Information Communication Technology, edited by A. Cartelli and M. Palma, pp. 498-502, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 1.23
The New Process of Work Maria do Rosário Alves de Almeida Open University of Lisbon, Portugal
INTRODUCTION Toward the end of the twentieth century, more specifically in the 1990s, many organizations initiated changes in the way they used space and time. New methods of working emerged that gave some organizations the possibility of integrating the physical work environment into their business processes, increasing the occupation density of any given space while simultaneously creating more effective working spaces that promoted interactivity and communication (Comisión Europea, 2002). This new, multidisciplinary milestone is leading to designs that enable distributed organizations to embrace advances in distributed computing (Conselho da União Europeia e Comissão das Comunidades Europeias, 2000) and virtual networks, bringing together architects, town planners, designers of interiors, experts in information systems, and management of technology, inno-
vation, and quality in linguistics and computer mediated communication. Special attention should be dedicated to studying the interaction between physical spaces and those facilitated by technology, with emphasis on different levels of privacy in different types of space1. The characteristic of e-Work, whereby the work is given to the workers without displacements, may constitute a factor that will enable countries to retain their intellectual and highly qualified or skilled workers, who in principal will be more prepared to perform tasks connected with information and communication technologies (ICT). In the age of information, it is possible to be connected while physically decentralized, to keep minds united while people remain apart (Nilles, 1994). It has been shown that worksite and remote work, more than replacing each other, are complementary, leading to a greater division of workload and more outsourcing, transforming monolithic
organizations into less dependent, collaborative networks. Within the strategy of sustained development and environmental protection defined by the European Council in Lisbon, and extended in Stockholm, Göteborg and Laeken, e-Work appears as a specific aspect sanctioned of the new means proposed by the European Commission for regional planning and for inverting trends that are less and less sustainable, such as traffic congestion, emission of greenhouse gases, and intolerable environmental degradation (Comisión Europea, 2002). The i20102 initiative is part of the renewed Lisbon strategy (Commission of the European Communities, 2006). The new strategic framework established by i2010—European Information Society 2010—promotes an open and competitive digital economy and emphasises the role of ICT for innovation in the workplace (European Commission et al., 2006).
ANALYSIS OF E-Work CONCEPTS In terms of conceptualization, the origin of eWork seems to be a 1969 article by Alain Kiron in the Washington Post that introduced the term “dominetics.” Around 1971, Schiff began talking about “flexiplace” (Olson, 1985). In 1973, Nilles, together with a team of investigators from the areas of engineering, management, and communications, undertook the first telework project entitled “Development of policy on the telecommunications-transportation tradeoff,” partially financed by the National Science Foundation. The final report was published in 1974, followed, in 1976 by the book “The telecommunications-transportation tradeoff: Options for tomorrow.” In his book, Nilles expounded the concepts of “telecommuting” and “telework,” referring to the replacement of displacements to the workplace by work done using telecommunications (Padilla, 1998).
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According to Torres (2004), telecommuting and telework signify working at a distance and avoidance the displacement to the workplace. Nilles pursued his investigation, creating designations and publishing articles and books. One of his best-known definitions of telework is “Telework is sending the work to the worker instead of sending the worker to work” (Nilles, cited in Torres, 2004). In 1979, Schiff coined the term “flexiplace” and published one of the first major media telework articles in the Washington Post: “Working at home can save gasoline” (Joice, 1999). Obviously, the new forms of working are related with remote work. For Olson (1983), remote work is done outside the organization in terms of space and time, being related to the “computerized office” and to the designation of “telecommuting.” According to the investigator, technologies that are interlinked with office informatics such as computer and other types of communication, give workers the possibility of teleworking. In the early 80s, Gordon (Gil Gordon Associates)3 hosted the first national conference on telecommuting in the United States of America and established the first nationally recognized newsletter on telework issues (Joice, 1999). In 1987, based on research, planning, and design work by Fleming, California state government official, and Nilles, the State of California launched the first comprehensive public-sector telecommuting pilot program (Joice, 1999). For Huws, Korte, and Robinson (1990, cited in Urze, Barroso, & Gomes, 2002), a precondition of remote work, especially telework, is the “computerization of the office.” As well as this, “elusive offices” (ones that do not actually exist) are also mentioned, referring to organizations that control activities indirectly, via network of contracts with suppliers, with direct control over marketing, distribution and sales operations. For these researchers, these three aspects, office computerization, telecommuting and remote work are the core of the telework concept.
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Other authors have considered telework as home-based works (i.e., work done at home with ICT support). However, there is a problem with defining the term “at home” as it is normal that some workers occasionally work at home, as well as those who work at home and visit clients or employers, being able to carry out their company activities during broad time periods. However, according to Huws et al. (1990, cited in Urze et al., 2002), the fact that certain individuals work from home using ICT does not necessarily mean they should be classed as teleworkers. Employees of decentralized organizations that are linked by electronic communication systems may also not be considered as teleworkers. Furthermore, they believe that telework should be based on a contractual relationship, whether by subcontract, self-employment, employed by another, or on temporary contract. In the view of these authors, the concept of telework centers on three essential elements: where the work takes place, use of electronic equipment and the communication between teleworker and contractor or employer, and it consists of the following: We define telework as work the location of which is independent of the location of the employer or contractor and can be changed according to the wishes of the individual teleworker and/or the organisation for which he or she is working. It is work relies primarily or to large extent on the use of electronic equipment, the results of which work are communicated remotely to the employer or contractor. The remote communications link need not be a direct telecommunications link but could include the use of mail or courier services (Huws et al., 1990). According to Martino and Wirth (1990, cited in Silva, 2000), telework is “work undertaken in a place where, separated from central offices or production centers, the worker does not maintain personal contact with his colleagues, but is in a position to communicate with them by means of technologies.”
For Rubinstein (1993, cited in Baptista, 2003), telework consists of “a professional activity carried out at distance, owing to interactive use of new information and communication technologies, which applies to working for someone else or independently, and includes all tasks that involve the use, treatment, analysis or production of information.” In 1997, the Livro Verde para a Sociedade de Informação (Green Book of the Information Society), written by the Missão para a Sociedade da Informação/Ministério da Ciência e Tecnologia (Mission for the Information Society/Ministry of Science and Tecnology), published in Portugal4, defined telework as “a flexible mode of working, covering various areas of activity, in which workers can carry out their functions from home or from a workplace (telecenter) for a predetermined percentage of their working hours.” Based on the investigations that have been undertaken, and attempting to schematize the theories of researchers such as Nilles, Huws, Olson, Gordon, Mullner, and Maciejewski, Korte, and Wynne (1996, cited in Urze et al., 2002), defined a concept of telework has been constructed around three factors: location of telework, use of ICT and types of organization. In the Eurobarometer survey carried out by the European Commission for 1999-2000, the following definition was used: “Telework occurs when paid workers perform all or part of their work away from their normal places of activity, usually from home, using information and communication technologies” (Comisión Europea, 2002). Grantham (2001, cited in Eiras, 2001) believes that the concept of telework is becoming obsolete, as it is evolving into distributed work. For this author, the teleworker was the equivalent of a company employee who worked from home one or two days a week. With the use of the Internet, this concept was widened to include work anywhere, at any time. Thus, he asserts that a new form of working—in terms of distance, time and collaboration—and that work has become more complex, more creative, and more collaborative. 379
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For Nilles (2001, cited in Eiras, 2001), telework allows new forms of organization with greater capacity for future development. The most significant characteristics come from the flattening of the organizational structure brought about by information technology, by telework, and by the capacity of global interconnectivity, which make possible the activity of virtual teams. Furthermore, this author considers telework the antithesis of Taylorization as it focuses fundamentally on the efficacy of results, with telework being best adapted to environments susceptible to change, where the processes have to be reinvented for each new job. Bearing in mind that the previously mentioned concepts are relatively recent and encompass diverse situations, they are still not in what could be considered the mature or sedimentary phase. Generally, the terms telecommuting, telework, e-Work, and cyberwork arise in reports, scientific papers, journal articles, and on the Internet in an almost random manner, all being used to describe the same phenomenon. According to the Asociación Española de Teletrabajo (Spanish Telework Association, 2001)5, e-Work consists of “a means of performing work activity using Information and Communication Technologies (ICT).” In fact, it is difficult to define e-Work given the different modes of distance working that have stimulated the labor market, with the inherent contradiction that exists between a significantly complex phenomenon and an overly simplistic definition. Combined with this is the apparent inability of the term telework to adequately define the diverse facets of distance working using ICT. The term e-Work does seem more appropriate for these different possible forms of working. The use of the “e” prefix fits in perfectly with the current general usage of that designation for phenomena related with ICT. The EMERGENCE project (2000, 2003)6, under the scope of the European Commission Information Society Technologies (IST) Pro-
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gramme, understands e-Work as the phenomenon in which ITC makes possible a range of activities that incorporate the processing of information and its transmission by means of telecommunications, which can take place in any part of the world where there is an adequate infrastructure and where there are workers with the necessary skills (Comisión Europea, 2002). In the information produced by the TERRA2000 (2001, 2003) project7, part of the European Community Fifth Framework Programme (FP5), the concept of e-Work is defined as the “designation used to describe the transformation of labor markets into a Networked Society.” The European Commission report e-Trabajo (e-Work) 2001 proposes a broad definition of telework as “a method of organizing and/or performing work for which a considerable proportion of the time the employee is: at a distance from the firm or from where the result of the work is to be delivered; and when the work is done using information technologies and technologies for transmitting data, particularly via Internet.” Furthermore, according to e-Trabajo (e-Work) 2001, the true transformation of the designations telework and e-Work (i.e. the evolution of telework into e-Work) is based essentially in the organization and supervision of work and the possibility of teamwork. Various concepts of telework and e-Work were analyzed, that are considered as an important theoretical base from which to advance toward new forms of working and, consequently, to new concepts, whose scope can include the dynamics of e-Work, as according to Martino (2001, cited in Urze et al., 2002), we are facing a phenomenon in a state of constant movement and evolution. For example e-Work is the capacity to undertake any business function independent of location using modern communications and information technologies8. The changes and new opportunities in ways of working and doing business, together with the development of new technologies, methods,
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and services--for the workplace and for support of teamwork, within and across the boundaries of organisations (European Commission et al., 2006). The developments of mobile communication technology, the research on telework and e-Work got extensive to mobile work environments. Location mobility, related to the possibilities of increased connectivity anytime, anywhere, has been the first focus of emerging research. The growing technological capabilities steered a discussion on further aspects of mobility, including virtual mobility, operational and interactional mobility (European Commission et al., 2006).
THE ELEMENTS OF E-WORK Concerning the elements that make up e-Work we can consider: the form in which work is organized, the location in which it takes place and the technologies used.
Organization E-Work is an emergent form of organizing work. It implies flexibility of existing, traditional, centralized structures, and therefore it is linked with the deconstruction of the classic job. From the bureaucratic/mechanical model of the industrial production system has evolved an organic/flexible model that tries to invert the basic relationship in which the “organization determines the task” into a situation where “the nature of the task and the participants’ needs may determine the organizational form to use adopted.” The evolution toward “intelligent” organizations will imply a growth in new business opportunities and new forms of doing business. Thus, organizations should evolve more quickly, adopting flexible organizational models, transforming from distributed organizations into intelligent organizations. In these intelligent organizations, ICT utilization and knowledge sharing are optimized,
greatly increasing the capacity to adapt to the rapid, unforeseen changes of the Risk Society9. Collaborative working presupposes the existence of a team, also commonly referred to as a virtual team, which aims to achieve the same objectives, with common procedures, actions and interactions, with the goal of reaching defined results that would be impossible to do individually (i.e., e-work is carried out together, via network, and with less time spent on attending meetings in person). A virtual team is usually made up of e-Workers from different geographical areas, countries, institutions, all working on a common project. The AMI@Work10 communities have facilitated the insertion in the European policy initiative i2010 of a European network of Living Labs. A European network of Living Labs can create a win-win-win Citizens-Private-Public partnership. The Living Lab is where the user meets the product and service provider in a co-designer partnership. This co-creation sets users, citizens, in the centre of new innovation and societal experimentation, to create new systems, services, products, business models and societal models (European Commission et al., 2006).
Location The flexibility in location associated with e-Work is practically translated into a lowering of physical and geographical borders, related with the externalization of production that companies see themselves obliged to pursue in order to ensure they are competitive. However, the appropriate location for a eWorker to successfully carry out his work should be carefully chosen. This will depend on the choice of the e-Worker to be self employee or employee. In the second case, he will have to comply with the practices of the employing company. Transnational e-Work has been showing growth, particularly in the case of assistance/ support centers, online marketing, call centers, and virtual teams in large companies. 381
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The potential increased mobility (so-called nomadic telework) of tasks or production segments is essentially based on transfer of information11. In the context of location, the following situations can be considered: at home, in satellite centers or satellite offices, in telecenters, in telecottages, mobile call centers, hoteling, and offshore.
Technology It is obvious that the rapid development of more accessible technology and ever cheaper and more powerful means of telecommunication are determining elements in the implementation of e-Work. Technological development enables flexible ways to distribute work irrespective of the location of the team members or the nature of their tasks12. ICT means e-Work can be done from home or any other place and it facilitates conferencing, collaborative work, and virtual teams. The capability and performance of ICT platforms have increased and their prices fallen. The multimedia home platforms, delivering the “triple play” of digital television, voice telephony, and internet connectivity. Devices have become more portable with a wider range of functions: electronic news gathering no longer needs bulky specialist equipment—today’s mobile phones can capture and distribute images around the world (European Commission et al., 2006). With new Internet-based networked applications and services, together with a multitude of novel mobile devices, sensory and display technologies changing the “office” concept, equipment and design, to new working environments, which have brought new work paradigms with more diverse, context-sensitive forms of work collaboration in an ambient intelligence (AmI) technology landscape. This AmI landscape together with its connectivity is the critical innovation enabler that brings previously atypical work and collaboration forms into the mainstream (European Commission et al., 2006). 382
CONCLUSION Within the universe of the new economy, work at a distance, generally known as telework or eWork, permits a reduction in daily displacements and in unnecessary loss of time, reduction in costs, the rise in modern concepts linked to ideas of real estate, transport, regional planning, and environmental conservation. Despite the European Union trying to bet on maintaining and improving the society of well being, there is still a dichotomy, which has been exacerbated between job security vs. insecurity. There have been rapid major changes that have brought about the genuine demise of the fixed and secure job. Trends point toward e-Work being understood in the perspective of new methods for organizing work that could play an important role in the countries of the EU to minimize the prevailing asymmetries and inequalities. E-Work could be an important tool for regional planning, contributing to the decongestion of roads through reducing the necessity of displacements and making it possible to operate more flexible hours. In the medium and long term, it could provide a solution to rural depopulation and to the concentration of populations in waistlines and metropolitan areas around large cities. Regarding defense of the environment, switching to e-Work could lead to reductions in pollution levels caused by road traffic and energy consumption, which should in turn have a positive impact in terms in air quality and oil production crises. More innovative organizations that generally adopt objectives-based management by network approach, that have a more horizontal organizational structure, that are technologically more advanced, and that work by project and in teams, will be naturally more open and with better conditions for implementing new work processes (i.e., there is a greater probability of e-Work being successful). Finally, one of the purposes of i2010 is new ways of flexible and mobile teamwork as well as
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dynamic and agile communities giving rise to new collaborative environments over the Internet (Commission of the European Communities, 2006).
REFERENCES Baptista, F. (2003). Gestão de Teletrabalho. Retrieved November 24, 2004, from http://www. elearning-pt.com/formacao/teletrabalho/index. php Bates, P., & Huws U. (2001). Modelling e-Work in Europe. EMERGENCE Project, report 388. Retrieved November 18, 2004, from http://www. emergence.nu Comisión Europea. (2002). e-Trabajo 2001, Informe de Situación de Nuevos Métodos de Trabajo en la Economía del Conocimiento. Translation: Asociación Española de Teletrabajo. Commission of the European Communities. (2006). Communication from the commission to the council, the European Parliament, the European Economic and Social Committee, and the Committee of the Regions, i2010. The 1st Annual Report on the European Information Society. Commission of the European Communities. (2006). Commission Staff Working Paper, i2010. The 1st Annual Report on the European Information Society. Conselho da União Europeia e Comissão das Comunidades Europeias. (2000). eEurope 2002, Uma Sociedade da Informação para Todos. Plano de Acção. Bruxelas. Eiras, R. (2001). Gurus do teletrabalho em confronto. Revista Digital. Retrieved January 4, 2004, from http://www.revistadigital.com.br European Commission, Research unit “New Working Environments” of the Directorate General INFORMATION SOCIETY AND MEDIA,
and Advisory Group on New Working Environments (2006). New Working Environments, A Decade of Achievement, A Strategy for the Next Decada (pp. 1995-2005, 2015). Huws, U., Korte, W., & Robinson, S. (1990). Telework--Toward the elusive office. Chichester, Wiley, cited in Urze, P., Barroso, S., & Gomes, C. (2002). Contributos Técnico-culturais para a Discussão do Conceito de Teletrabalho. Natureza, Técnica e Cultura, 5, 51-68. Joice, W. (1999). Getting educated. International Telework Association & Council. Retrieved December 15, 2004, from http://www.workingfromanywhere.org Korte, W., & Wynne, R. (1996). Telework—Penetration, potential, and practice in Europe. Amsterdam: IOS Press, cited in Urze, P., Barroso, S., & Gomes, C. (2002). Contributos Técnico-culturais para a Discussão do Conceito de Teletrabalho. Natureza, Técnica e Cultura, 5, 51-68. Martino, V., & Wirth, L. (1990). Teletrabajo: un Nuevo Modo de Trabajo y de Vida. Revista Internacional de Teletrabajo, 109(4). In A. Silva (Ed.), O Teletrabalho, uma Forma de Transformação do Emprego. Scripta Nova Revista Electrónica de Geografía y Ciencias Sociale, 69. Retrieved January 5, 2006, from http://www.ub.es Martino, V. (2001). The high road to teleworking. Geneva: ILO, cited in Urze, P., Barroso, S., & Gomes, C. (2002). Contributos Técnico-culturais para a Discussão do Conceito de Teletrabalho. Natureza, Técnica e Cultura, 5, 51-68. Nilles, J. (1994). Making telecommuting happen-A guide for telemanagers and telecommuters. New York: Van Nostrand Reinhold. Nilles, J. (1976). Telecommunications-transportation tradeoff: Options for tomorrow. New York: John Wiley & Sons. Olson, M. (1985). Office workstations in the home. Open Book: Commission on Engineering and
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Technical Systems. Retrieved March 27, 2006, from http://fermat.nap.edu/books/0309034833/ html/1.html Olson, M. (1983). Remote office work: Changing work patterns in space and time. Communications of the ACM. Retrieved February 9, 2006, from http://www.acm.org/pubs/citations/journals/ cacm/1983-26-3/p182-olson/ Padilla, A. (1998). Teletrabajo. Dirección y Organización. Madrid: RAMA. Rubinstein, M. (1993). L’impact de la domotique sur les fonctions urbaines. Dublin: Fondation Européenne pour l’amélioration des conditions de vie et de travail, cited in Baptista, F. (2003). Gestão de Teletrabalho. Retrieved November 24, 2004, from http://www.elearning-pt.com/formacao/teletrabalho/index.php Silva, A. (2000). O Teletrabalho, uma Forma de Transformação do Emprego. Scripta Nova Revista Electrónica de Geografía y Ciencias Sociale, 69. Retrieved January 5, 2006, from http:// www.ub.es Torres, M. (2004). Municipio y Teletrabajo. Retrieved January 19, 2006, from http://www.isel. org/cuadernos_E/Articulos/f_montiel.htm Urze, P., Barroso, S., & Gomes, C. (2002). Contributos Técnico-culturais para a Discussão do Conceito de Teletrabalho. Natureza, Técnica e Cultura, 5, 51-68.
Key Terms AMI@Work: Family communities links people in all 25 EU member states and beyond for a European Research and Innovation Area (ERA) at work. e-Work: Term extensively used in Europe, an amplification the original 1980s and 90s concepts of telework or telecommuting: working at a
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distance using information and communications technology. Hoteling or Office Hoteling: Practice of providing office space to employees on an as-needed rather than on the traditional, constantly reserved basis. This reduces the amount of physical space that an enterprise needs, lowering overhead cost while (ideally) ensuring that every worker can access office resources when necessary. Living Lab: A public private partnership addressing the needs and requirements from the industry in close collaboration with the public sector. It facilitates co-creation and innovation in real-life contexts in a systemic way, combining the technological and societal drivers. Multilocational Employee: Person who uses a computer and telecommunications link to conduct their work and involves an alternation of work between the home and the employer’s office, or mobile working from a home base. Offshoring or Offshore Outsourcing: Describes the practice of hiring employees, usually through an outsourcing service, in another country. Companies seeking to reduce their labour costs use offshoring to employ workers at costs substantially less than at home. Outsourcing: Describes an arrangement in which one company provides services for another company that could also be or historically have been provided in house. Work done for a company by people other than the company’s full-time employees. Telecenter (U.S. spelling) or Telecentre (UK spelling): Work location usually in a different place than the organization’s main office that provides convenient occasional access for telecommuting to work equipment that they don’t have at home or on the road. It provides workplace for people who may well have full time jobs but want to work away from their employer’s “functional office” but who don’t want to work in their homes.
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Telecottage: Teleworker’s physical workplace. The telecottage can be in the individual’s home or, as is becoming increasingly the case, on a communal site within a short walking distance of the teleworker’s home. Tend to emphasize “social support” for their users.
Endnotes
1 2
http://www.sane-project.org “i2010” (European Information society in 2010) is an initiative which will provide an integrated approach to information society and audio-visual policies in the EU, covering regulation, research, and deployment and promoting cultural diversity.
5 6 7 8 9 3 4
12 10 11
http://www.gilgordon.com http://www.missao-si.mct.pt http://www.aet-es.org http://www.emergence.nu http://www.terra-2000.org http://www.ework.ie “New Ways of Working in Remote Regions” project—FlexWork (2001-2003), http:// www.flexwork.eu.com http://www.ami-communities.eu http://www.telework2001.fi\ http://www.telework2001.fi
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik and M. Cunha, pp. 1080-1086, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Section II
Development and Design Methodologies This section provides in-depth coverage of conceptual architectures, frameworks and methodologies related to the design and implementation of outsourcing projects. Throughout these contributions, research fundamentals in the discipline are presented and discussed. From broad examinations to specific discussions on particular frameworks and infrastructures, the research found within this section spans the discipline while also offering detailed, specific discussions. Basic designs, as well as abstract developments, are explained within these chapters, and frameworks for designing and planning for successful outsourcing systems, structures, and architectures are presented in these chapters.
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Chapter 2.1
Managing the Dynamic Reconfiguration of Enterprises Ben Clegg Aston University, UK Mario Binder Aston University, UK
inTrOducTiOn Due to environmental changes and business trends such as globalisation, outsourcing and virtualisation, more and more companies get involved in business activities that are outside their direct control. This typically occurs by entering into collaborative relationships and joint ventures with specialised companies in order to fulfil the demands of customers quickly (DiMaggio, 2001). Organisational structures that results from such collaborative relationships and joint ventures are referred to in this paper as enterprises and the management of them known as enterprise management. The authors use the definition of the European Commission (2003) that defines an enterprise as “… an entity, regardless of its legal form … including partnerships or associations regularly engaged in economic activities.” Therefore in its most simple form an enterprise could be a single integrated company. However,
findings from this research show that enterprises can also be made up of parts of different companies and the structure of the enterprise is contingent upon a variety of different factors. The success of the enterprise as a collaborative venture depends on the ability of companies to intermediate their internal core competencies into other participating companies’ value streams and simultaneously outsource their own peripheral activities to companies that can perform them quicker, cheaper, and more effectively (Lal et al., 1995). In other words, the peripheral activities of one member-company must be complemented by a core competence of another member-company within an overall enterprise. This article describes a conceptual contingency framework that can help enterprise managers to make better strategic decisions for the whole enterprise; it specifically aims to investigate suitable enterprise structures for different collaborative settings based on the causality between the pre-
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vailing type of core competence and the emergent enterprise structure. An enterprise management perspective has been taken in order to elucidate current developments in operations and supply chain change management from a relatively new and novel point of view. It uses novel analytical units (the enterprise and its sub-units known as enterprise modules) to give a fresh perspective to emerging issues and provide practical guidance for industrialists who must build and manage enterprises. The methodology, findings and conceptual framework are discussed. The study has been based on empirical evidence from the German automotive industry.
backgrOund A growing body of knowledge in the literature focuses on enterprises rather than on the traditional operation and its supply chain. For instance, Hamel and Prahalad (1994) acknowledged that: “many industries move away from vertical integration towards virtual integration” (p. 210). As a result, inter-organisational structures such as enterprises are becoming more significant (Fine, 1998). Some recent works discussing enterprises include Browne and Zhang (1999) and Boardman and Clegg (2001). Other scholars discuss the strategically influential members within them, such as the “hub firm” (Dyer & Hatch, 2004), “orchestrator” (Brown et al., 2002) and the “navigator” (Karlsson, 2003). This emerging work recognises enterprises to be new inter-organisational types that combine traditional operations and their supply chains. They result from alliances, partnerships and joint ventures. This work also recognises that these collaborative ventures can be between either whole or partial companies, and often have a strategically dominant member. Strategists need to understand the significance of these new developments to be able to construct an appropriate enterprise structure that contains
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the most useful parts of the most suitable companies. To address this crucial issue the enterprise management perspective deliberately builds upon both exogenous and endogenous theories. Exogenous theories are based on competitive rivalry (Porter, 1980) and transaction cost economics (TCE) (Williamson, 1975). Endogenous theories include competence theory (CT) and competencebased competition (CBC) (Hamel & Prahalad, 1994). Endogenous-based approaches should be used to complement exogenous factors. However, excessive focus on either approach is wrong and a simple conceptual framework combining them is required from an enterprise management perspective. This debate leads to an increasing emphasis on enterprises rather than on traditional companies and their supply chains (Surana et al., 2005). The authors of this article argue that an enterprise engagement usually occurs partially at a modular level with many different companies simultaneously. To date, there has been little if no explicit identification of such partial multiple enterprise structures and their evolution. This article reduces the deficiency in knowledge about enterprise behaviour by proposing a conceptual contingency framework. A unique data collection tool was derived from the literature to capture further knowledge about this; it is given in Figure 1. Structures that can be explored using this generic matrix as a data capture tool include the virtual enterprise and the extended enterprise, because it does not assume that relationships have to exist between whole companies (Binder & Clegg, 2006). Davis and Spekman (2003, pp. 20-21) define the extended enterprise as: the entire set of collaborating companies both upstream and downstream, from raw material to end-use consumption, that work together to bring value to the market place … Members’ view that their destinies are interdependent. This serves to separate the extended enterprise from other loose confederations of buyers and suppliers.”
Managing the Dynamic Reconfiguration of Enterprises
Figure 1. The generic “enterprise matrix”: A mapping tool collaborative activity: ___________________ enterprise environment: ___________________ high involvement
member 1
value stream Process start stage 1
Process end stage 2
•••
Stage ‘n’
an enterprise module delivered by a critical member ‘member 1’ in ‘stage 1’ of the value stream
member 2 value members •• •
low involvement
member ‘n’
Byrne and Brandt (1993) define a virtual enterprise as: a temporary network of independent companies … linked by information to share skills, costs, and access to one another’s markets … they have an evolving corporate model that will be flexible enough to exploit a specific opportunity (p. 38). Browne and Zhang (1999) stress that extended enterprise and virtual enterprise structures are complementary; where the purpose of the relatively stable extended enterprise is to set up future speculative virtual enterprises. It is therefore critical that the structure of the enterprise is appropriate for the evolutionary stage of the enterprise.
mEThOdOlOgy The contemporary nature of the subject meant that an exploratory and qualitative approach was appropriate. This was based on inductive grounded theory (Glaser & Strauss, 1967). Three distinct empirical phases were used: design; collection and analysis; and validation.
The design phase derived the empirical investigation from the above theoretical debate. It was scoped through industrial consultation using the generic enterprise matrix (Figure 1). Sample sites and interview guides were designed. Industrial partners nominated prime concerns as: (1) strategic relationship building between value members in the enterprise; (2) development and deployment of core competencies within the enterprise; and (3) management of operational transactions between different parts (i.e., enterprise modules) of the enterprise. The data collection and analysis phase included 28 semi-structured interviews with 31 experienced managers in the German automotive industry covering 16 companies (4 car manufacturers and 12 supplier firms). The research followed the recommendations of Eisenhardt (1989) by choosing cases that would potentially reflect extreme situations to be observed. Interviews were therefore conducted in value members that reflected different roles in the enterprise (e.g., car manufacturers (OEMs), system suppliers, module suppliers, parts or components suppliers, and engineering service providers). Topics explored in the interviews were derived from the literature debate and formed into a semi-structured interview guide. Topics
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included exogenous aspects (such as the nature of the competitive environment), endogenous aspects (such as development and deployment of core competencies), and collaborative issues (such as strategic relationship building and the management of operational transactions). Codification of the data was done leading to the formation of
five core categories of themes (see Table 1 “core category” column). The data validation phase summarised the findings by developing a set of 35 tentative propositions based on the codifications of the empirical narratives. The tentative propositions were validated using a questionnaire survey. This strengthened
Table 1. Propositions and their validation Core Category
No.
Industrial Impact
1
Enterprise Design
Enterprise Management
Competence as main contingency factor
Enterprise Competitiveness
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Proposition
Mean A
Mean I
Change in the automotive industry is driven by a combination of internal company issues and general industrial forces
1.24
4.01
2
Increasing complexity, cost pressue and shorter development lead times have led to more product modularation
1.15
4.21
3
Car manufacturers are changing their adversarial pricing policies in supplier selection towards more collaborative strategice sourcing policies
-0.38
4.10
4
Different relationships and collaborative practices exist for different intercompany (car manufacturer and supplier) projects in the supply network
1.21
3.47
5
Relationships between companies in the supply network change over time
1.18
3.68
6
An individual company can collaborate in more than one project within the supply network at the same time
1.37
3.54
7
The role of an organisation in the supply network is determined by what competencies are offered by it
1.23
4.21
8
Product modularisation effects how a supply network is structured
1.18
3.94
9
An inter-firm collaboration in the supply network is formed on the basis of technical competences and mutual exchange of knowledge
0.87
3.76
10
Strategic and long term thinking for the whole supply network increases the chance of successful inter-firm collaboration
1.42
4.19
11
The boundaries of responsibilities between collaborating parties need to be clearly defined to deliver a successful inter-firm project within the supply network
1.69
4.51
12
Early and intense integration of strategic collaborators facilitates the successful delivery of project
1.64
4.28
13
At early stages of the collaboration process competencies rather than prices have to be measured and compared
1.06
4.13
14
There is a need for a coordinator and leader within the supply network that has the competence to evaluate and manage the interfaces
1.30
4.13
15
The coordinator of the supply network should have its own core competencies and encourage those of other organisations to participate
1.37
4.08
16
The more advanced and unique a competence is the more potential value it can create for the supply network
1.17
3.90
17
Competencies can be deployed through collaboration with other companies
1.06
3.73
18
The short term motivation for inter-firm collaboration in the supply network is to reduce cost and lead time
1.09
4.01
19
The long term motivation for inter-firm collaboration in the supply network is to improve quality and innovation
0.93
4.10
20
Establishing inter-firm collaboration is an effective way of reducing lead-times and cost
1.05
4.04
Managing the Dynamic Reconfiguration of Enterprises
the transferability, dependability and conformity of the data. Each respondent was asked to assess the tentative propositions on a 5-point Likert scale to indicate their: • •
Agreement with it (A)—strongly agree =2, agree =1, neutral = 0, disagree = -1, strongly disagree = -2 Perception of importance (I)—the importance of the proposition for daily business activities (very high = 5, high = 4, medium = 3, low = 2, very low = 1)
The central tendencies of responses for each tentative proposition were calculated based on the numerical codification of the scales. The 20 highest rated propositions (as rated by the respondents) are given in Table 1. Demographic data was also collected (e.g., working experience, company type, functional experience, responsibility level, etc.) to establish credibility of the respondent and facilitate comparability of the data. 110 valid responses were received from 52 different companies. In general the respondents agreed with the majority of the propositions and considered them to be important. This provides supporting evidence that the academic debate framed above has practical implications, and needs to be researched further in order to offer guidance to practitioners. Analysis showed that enterprise management is generally regarded as an effective instrument to maintain and achieve competitiveness for the whole enterprise (cf., proposition #20) that is affected by a variety of exogenous and endogenous forces (cf., propositions #1, #2, and #8). Managing core competencies is considered a principle factor for achieving this successfully as the competencies determine the role of the individual partners in the collaborative venture (cf., proposition #7) via the value they are creating for the enterprise (cf., proposition #16). Ratings for proposition #13 showed that in the early stages of collaboration within an enterprise,
competence development rather than transactional cost optimisation should be the primary focus as competence exchange (technical and knowledge based) is a precursor to establishing effective operational transactions (cf., proposition #9). In the opinion of the interviewees, this is best achieved by taking a long-term strategic perspective (cf., proposition #10) and an intense integration of partners at early stages of a project (cf., proposition #12). Furthermore, the existence of a multiplicity of dynamic relationships within an enterprise (cf., propositions #4, #5 and #6) requires a leader or coordinator who is able to define boundaries and manage interfaces between the partners (cf., propositions #11, #14 and #15). This helps to facilitate effective collaboration (cf., proposition #17). However, despite all good intentions, analysis also shows that current practice does not apply the necessary mechanisms for enterprise management to become a reality. This is probably due to an adversarial approach to sourcing still prevailing (cf., proposition #3).
a cOncEpTual cOnTingEncy planning FramEwOrk To explain these results the authors propose a novel contingency framework and used the enterprise (emphasising joint collaborations) and its modular parts (allowing part-to-part relationships to be expressed) as units of analysis. This was to give an insightful perspective. The conceptual framework proposed assumes that each enterprise module is built upon a particular highly specific core competence that belongs to an individual company that gives part of that company a unique and valued proposition (e.g., an in-house design and engineering specialism). The core competence should be combined with other less specific resources (e.g., communication technology, co-operative contracts, and shared
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processes) that are shareable across the enterprise to form a structure with economically acceptable transaction costs. This requires industrialists to overcome traditionally thinking about internal sub-units being functions and departments and think radically differently in terms of enterprise structures and enterprise modules (its sub units) (Binder & Clegg, 2007). This means connecting enterprise modules (parts of a company) with enterprise modules owned by other companies (parts of other companies). This is in order to create an enterprise structure that can meet the demands of a rapidly changing industrial environment whilst still operating within acceptable cost limits. This research indicates that inter-organisational structures are indeed constantly changing. Cyclical shifts from traditionally vertically integrated enterprises towards virtual and extended enterprises have been observed. This change is constantly reiterating and evolving, and tends to occur partially. Figure 2 shows the cyclical evolution that enterprise structures tend to go through. This research suggests that an individual part of a single company (i.e., an enterprise module) can be part of many different enterprises that operate quite independently. For instance, if an Figure 2. Evolutionary enterprise structures extended enterprise
vertically integrated enterprise
392
virtual enterprise
organisation has three separate products, one may be produced within a vertically integrated enterprise structure, one in an extended enterprise structure, and one in a virtual enterprise structure whilst drawing upon the same core competence. It is therefore useful to perceive enterprises as consisting of a collection of semi-autonomous enterprise modules where each enterprise module is able to contribute value to a number of co-existing enterprises structures simultaneously. The results also suggest that these configurations may be linked to the prevailing type of core competence present within the enterprise modules (perceived in terms of factors explored by the 20 propositions in Table 1). For instance if there is a prevalence of enterprise modules with low maturity and high risk (which are endogenous factors) and untested market value (an exogenous factor) then companies will be very reluctant to make long term plans and investments, and so arrangements will be temporary and spread risk over many different companies—these are characteristics of a virtual enterprise. As the core competencies of the modules employed become more mature, and the marketability of them becomes better proven, the number of member companies interested in engaging with them will increase. Member companies will seek medium-to-long-term co-developmental strategies—these are characteristics of an extended enterprise. If the strategy becomes an operational and financial success, there is often a more permanent consolidation between the value members in the enterprise. These are characteristics of a vertically integrated enterprise (or what most closely approximates a traditional company or an autonomous single legal entity). The results suggest that vertically integrated enterprises (VIEs), virtual enterprises (VEs) and extended enterprises (EEs) are not, as some would believe, structures resulting from completely different strategies. This research shows that they
Managing the Dynamic Reconfiguration of Enterprises
are better thought of as a closed loop continuum of the same strategy (as shown in Figure 2), and the emergent structure of the enterprise at any one time is contingent upon the prevailing mix of endogenous and exogenous factors. It suggests that a prudent balance of different types of enterprise structures, each at different stages of evolution should be present at all times. This ensures that the strategy is both minimizing commercial risk (by having mature, established products made in low cost enterprise structures) whilst simultaneously encouraging innovation (with new products being developed in relatively high cost newly formed enterprises). The results suggest that the number of different types of enterprise engagements for any one company is closely aligned with the number and sophistication level of their core competencies embedded in enterprise modules (known as engageability). This research assumes that core competencies are the most highly specific asset and strategically significant component within an enterprise
module and forms the basis of its unique value proposition to the enterprise (e.g., an in-house design and engineering specialism). It also assumes that a core competence alone is useless unless it is supported by other less specific assets that are easily shared (e.g., communication technology, co-operative contracts, and shared processes). These less specific resources help to intermediate the enterprise module into a viable value stream within an enterprise structure. The conceptual framework considers core competencies as an enterprise-wide resource rather than just an individual company’s resource. Enterprise management discusses, amongst other things, how core competencies are designed and delivered to an enterprise. The enterprise integrator then designs and manages appropriate structures from these enterprise-wide resources based on the engageability of the prevailing core competencies. Enterprise management therefore differs from traditional supply chain management as it concentrates on simultaneous
Figure 3. The reference grid for enterprise management Current ‘engage-ability’ of a core competence in an enterprise
Future potential ‘engage-ability’ of a core competence in an area of enterprise
High High
Low
Quadrant 2 enterprise–extended (EE) • quasi-permanent • lean and agile resource base • medium transaction costs • medium asset specificity • medium ability to integrate
Quadrant 1 enterprise–virtual (VE) • temporary and exploratory • fragmented resource base • high transaction costs • high asset specificity • low ability to integrate
Quadarant 3 enterprise–vertically integrated (VIE) • potentially permanent • extensive resource base • low transaction costs • low asset specificity • high ability to integrate
Quadarant 4 enterprise–defunct • no active engagement • either premature or dormant • negligible amount of trading
Low
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inter-organisational design of product, process and organisation rather than concentrating on the flow of products and services per se. Figure 3 represents these observations in a reference grid, which shows the prevailing current and future type of core competencies and their engageability (ranked simply as “high” or “low”). In each of the quadrants the best-suited enterprise structure (extended, virtual or vertically integrated) is given with some of its key characteristics. Structural appropriateness varies over time depending on prevailing contingency factors. Based on Macbeth (2002), each of these enterprise structures (extended, virtual and vertically integrated) is considered to be a “dynamic equilibrium” (i.e., a period of stability around which the activities cluster before flipping over to another structure). The reference grid is intended to show a picture of how one enterprise structure may change into another as a result of a changed predominance in the type of core competence that it is built upon. This is a two-way relationship, as the enterprise structure will affect the development of future potential core competencies just as the development and deployment of core competencies will influence
the emergence of enterprise structures. Figures 1, 2, and 3 combine to form the new conceptual framework for designing enterprises. This predominantly focuses on the causality between the prevailing core competencies and the emergent enterprise structure. Figure 4 puts the cyclical change in enterprise structures (from Figure 2) and their contingency on the prevailing type of core competencies (from Figure 3) together, this gives a simple unified view of planning strategies for enterprise design and management. The planned changes to enterprise structures are summarised in Figure 4a as it shows the most appropriate structure for the prevailing type of core competence. Such actions are largely due to controllable endogenous factors. Unplanned reactive actions are depicted in Figure 4(b). These contrast to those shown in Figure 4(a) as they are predominantly caused by adverse and uncontrollable exogenous factors.
FuTurE TrEnds As pressures in the automotive marketplace demand an ever-increasing array of product variants
Figure 4. Reference grid: (a) proactive planning (b) reactive planning Current ‘engage-ability’ of a core competence in an enterprise High
Low
Q4
High
Low
High
Q2
Low
High
virtual enterprise
vertically integrated enterprise
Q3
394
Q1 extended enterprise
Low
Future potential ‘engage-ability’ of a core competence in an area of enterprise
Q2
(b) Future potential ‘engage-ability’ of a core competence in an area of enterprise
(a)
Current ‘engage-ability’ of a core competence in an enterprise
Q3
Q1 extended enterprise
virtual enterprise
vertically integrated enterprise
dis-engaged enterprise
Q4
Managing the Dynamic Reconfiguration of Enterprises
with reduced time to market, and process and information technology becomes more effective at managing high volumes of data in increasingly seamless integrated enterprise architectures, the need for understanding the causal relationships between core competencies and enterprise structures will become more significant. This has led organisational theorists to discuss trends such as virtualisation and extension of organisations with growing frequency. Unfortunately in parallel, information technology professionals have long talked about “virtual organisations” to mean something quite different; they refer to “virtual organisations” to mean those that have a high reliance on information technology (especially when using Internetbased technologies). In particular, systems such as enterprise resource planning (ERP) systems have long been used in the industry. However, these ERP systems were not originally designed for “enterprises” as defined at the beginning of this paper but actually just for single autonomous organisations. The current trend that will surely become more pronounced in the future will be to re-engineer these systems so that they are true enterprise support systems, linking parts of one company to parts of another company in a seamless fashion, rather than just supporting the internal operations of a single company. Technologists refer to the next generation of ERP systems as extended ERP systems (or X-ERP). In the future as both these developments become more commonplace and understood more widely it is believed that support systems will have to be reconfigurable in a modular approach to reflect the organisation. The core competencies will continue to be the highly specific asset component of the enterprise module, whilst the supporting information and processing technology will have to increase connectivity and re-configurability. This is in order to reduce transaction costs and ease the deployment of core competencies.
cOnclusiOn This research has proposed a conceptual framework for design and contingency planning from an enterprise perspective (not the traditional operations and its supply chain perspective). The conceptual framework characterises different types of enterprise structures assumed to be built from enterprise modules originating from a variety of different companies, this emphasises modular organisational thinking. At the heart of each of these enterprise modules is a highly specific core competence asset (e.g., new proprietary technology or superior knowledge) that is complemented by other less specific assets (e.g., shared information or process technology) that enables the core competence to be used effectively within the enterprise. Four different types of enterprise structures and four different types of core competencies have been parsimoniously characterised and a two-way causality proposed between each respective pairing (see Figure 4). Core competencies with: •
•
•
•
Low current but high future engage-ability are associated with virtual enterprise structures High current and high future engage-ability are associated with extended enterprise structures High current but decreasing future engageability are associated with vertically integrated enterprise structures Low current and low future engage-ability are associated with defunct enterprise structures
The authors do not claim that all companies follow this behaviour. Neither is it claimed that a deterministic relationship exists between enterprise structure and the prevailing type of core competence. However, it is claimed that a probabilistic causality exists and that this behaviour is driven by a combination of exogenous and endogenous factors.
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rEFErEncEs Binder, M., & Clegg, B.T. (2006). A conceptual framework for enterprise management. International Journal of Production Research, 44(18-19), 3813-3829. Binder, M., & Clegg, B.T. (2007).‘ Enterprise management: A new frontier for organisations. International Journal of Production Economics, Special Issue on Organisation, Structure and Culture on Operations Management, 106(2), 409-430 Boardman, J.T., & Clegg, B.T. (2001). Structured engagement in the extended enterprise. International Journal of Operations & Production Management, 21(5), 795-811. Brown, J.S., Durchslag, S., & Hagel III, J. (2002). Loosening up: How process networks unlock the power of specialization. The McKinsey Quarterly (Special edition: Risk and Resilience), pp. 59-69. Browne, J., & Zhang, J. (1999). Extended and virtual enterprises—Similarities and differences. International Journal of Agile Management Systems, 1, 30-36. Byrne, J.A., & Brandt, R. (1993, February 8). The virtual corporation. Business Week, pp. 36-41. Davis, E.W., & Spekman R.E. (2003). The extended enterprise: Gaining competitive advantage through collaborative supply chains. London: Financial Times Prentice Hall. DiMaggio, P. (2001). Making sense of the contemporary firm and prefiguring its future. In P. DiMaggio (Ed.), The Twenty-First-Century Firm (pp. 3-30). Princeton, NJ: Princeton University Press. Dyer, J.H., & Hatch, N.W. (2004, Spring). Using supplier networks to learn faster. MIT Sloan Management Review, 57-63.
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Eisenhardt, K.M. (1989). Building theories from case study research. Academy of Management Review, 14, 532-550. European Commission. (2003). Commission recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises. Official Journal of the European Union, C(2003) 1422, L124/36-41. Fine, C.H. (1998). Clockspeed: Inning industry control in the age of temporary advantage. MA: Perseus Books. Glaser, B.G., & Strauss, A.L. (1967). The discovery of grounded theory: Strategies for qualitative research. New York: Aldine. Hamel, G., & Prahalad, C.K. (1994). Competing for the future. Boston: Harvard Business School Press. Karlsson, C. (2003). The development of industrial networks: Challenges to operations management in an extraprise. International Journal of Operations & Production Management, 23, 44-61. Lal, S., van Laarhoven P., & Sharman, G. (1995). Making logistics alliances work. The McKinsey Quarterly, 3, 188-190. Macbeth, D.K. (2002). Emergent strategy in managing cooperative supply chain change. International Journal of Operations & Production Management, 22, 728- 740. Porter, M.E. (1980). Competitive strategies: Techniques for analysing industries and competitors. New York: Free Press. Surana, A., Kumara, S., Greaves, M., & Raghavan, U.N. (2005). Supply-chain networks: A complex adaptive systems perspective. International Journal of Production Research, 43, 4235-4265. Williamson, O.E. (1975). Market and hierarchies: Analysis and antitrust implications. New York: Free Press.
Managing the Dynamic Reconfiguration of Enterprises
kEy TErms Asset Specificity: The degree to which an asset can be used for different purposes. High specificity means that there is little opportunity to use an asset for anything other than its initial intended purpose. Low specificity means that an asset has many possible different uses. Enterprise: An entity, regardless of its legal form, that includes partnerships or associations, which regularly engage in economic activities. Enterprise Module: An interdependent semi autonomous part of an individual company with a highly specific core competence asset (e.g., new proprietary technology or superior knowledge) complemented by other less specific assets (e.g., shared information or process technology) that enables the core competence to be deployed.
Extended Enterprise: The entire set of companies (or their parts) that work together to bring value to the marketplace. Members view their destinies to be interdependent which distinguishes the extended enterprise from other loose confederations of buyers and suppliers. Vertically Integrated Enterprise: The enterprise structure formed when permanent consolidation occurs between the value members. This most closely approximates the single large autonomous organisation. Virtual Enterprise: A temporary confederation of independent companies linked by shared information, skills, costs, and access to one another’s markets. They have an evolving corporate model that will be flexible enough to exploit a specific opportunity.
Enterprise Management: The management activities involved in designing and managing an enterprise.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik & M. Cunha, pp. 882-890, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.2
Strategic Approach to Globalization with Mobile Business Walied Askarzai Melbourne Institute of Technology, Australia Bhuvan Unhelkar MethodScience.com & University of Western Sydney, Australia
absTracT
inTrOducTiOn
This chapter discusses the importance of strategic approach to the phenomenon of globalization with mobile business. Globalization is the exclusion of geographical boundaries when conducting business, considering that, in today’s business world the concept of the dynamic aspect of the globalization is inevitable. Advances in information and communications technologies have helped globalization to evolve rapidly, providing the opportunity for local businesses to operate internationally. A mobile business also can exploit the opportunity of globalization. This chapter also examines how a mobile business can approach globalization strategically. Further more this chapter explains that a semi-mobilized business can become fully mobilized in order to operate more efficiently and effectively.
Globalization is playing an important role in the business world today. The effects of globalization upon businesses are mounting and most unlikely that any business will be immune from the influence of globalization. Globalization has been growing at a rapid rate, particularly in recent years. The businesses should welcome the globalization as an opportunity to expand their global operation. Approaching globalization requires strategic plan in order to acquire sustainable competitive advantage in short term as well as long term. Mobile businesses also need to be a part of strategic global market. This chapter consists of three sections. In the first section the concept of globalization is defined from a general perspective since there are different perspectives formed on the notion of globalization. The key element in the second
Strategic Approach to Globalization with Mobile Business
section is strategy and the importance of strategic approach. Section three examines the position of mobile businesses in the context of globalization. This section also addresses the transition of semi mobilized business to fully mobile business as part of global strategy. Semi mobilized Business is a business that its operation is in some measure mobilized and partially traditional.
technological enthusiasts, Marxian pessimists, pluralists, skeptic internationalists, and a political approach. These perspectives can fall into two categories pessimistic view and optimistic view.
an OvErviEw OF glObalizaTiOn
Optimistic spectators argue that globalization is an opportunity for any type of business any where around the world. As an example a mobile business can expand its operation globally acquiring new customers increasing its global market share. The pessimistic viewers perceive globalization as a threat to small business survival due to intense competition forces as an example a small mobile business has to fight the forces of globalization in order to retrieve its operation. Hibbert (2005) suggests that the driving forces for globalization are global economy, global politics, global work, global culture, global trade, global loan, global investment, global bodies, global business, global language, global communication, and global competition. Figure1 below portrays these driving forces. Globalization is a result of the following causes. Each cause is briefly explained here.
Globalization is the exclusion of geographical boundaries when conducting business and, in today’s business world, it is dynamic and inescapable. Globalization gathers the world economies for the purpose of trade and culture removing the trade barriers such as language and cultural barriers (Roll, 2001). Based on the World Bank (1995) report on world development, globalization is unavoidable. The phenomenon of globalization is the dominant and the most controversial concept. Businesses have no alternative but to face this phenomenon nevertheless they have to approach it strategically and secure a place for themselves in the global market. There are many literatures on the concept of globalization delineating different perspectives of globalization. George and Wilding (2002) argue that there are five perspectives on globalization,
“Globalization itself is neither good nor bad. It has the power to do enormous good-but for many, it seems closer to unmitigated disaster.” (Stiglitz (2002) the economic noble price winner)
Figure 1. The driving forces of globalization
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Strategic Approach to Globalization with Mobile Business
•
•
•
•
•
•
•
400
Labor movements across the borders. Post World War II there has been major labor movement across the globe for the purpose of better employment opportunities, higher income, job flexibility, and shortages of labour in more developed countries. Increase in traveling technology with lower costs. The rapid increase in speed of traveling around the globe with lower cost encouraged people to travel more and discover more places. Transition of international companies to multinational operation. Most of the world known companies recently transformed to multinational and recently to global companies such as giant food chain restaurant of McDonalds and KFC. Migration, most of the countries around the world are facing the political instability which resulted in intense migration for the purpose of a secure life. Advances in technology, the advance in the technology post World War II facilitated advances in telecommunication, trade (i.e. increase in export and import), increase in production, and increase in world GDP. Developing economies increased their share of global output from $42.4 trillion in 1995 to $61.3 trillion in 2005, an increase of 39% to 46%. ( World Bank, 2007) The internet, the internet is a bank of information, a marketing tool, and a communication device that over the past decade served as a main connectivity device for global village. There is perhaps no longer expression of the development of the information economy that the advent of the Internet-a technology that has undergone rapid growth since the mid 1990s (Turner, 2000) Free trade policies resulted in increase in export an import. World exports increased from 295,621 in 1950 to 5,817,080 in1998. (Hibbert, 2005).
•
•
•
The IT revolution. Globalization has been growing at a rapid rate, particularly in recent years as a result of intense revolution in information technology. Mobile technology is the next wave of IT revolution, extending IT into wireless medium, there for providing 24/7 flexibility in communication, collaboration of a business functions and facilitating information sharing. Increase in foreign investment. Foreign direct investment in 1990 was under $50 billion in 2005 it was over $250 billion. (World Bank 2007). International bodies. The international bodies such as UN, IMF, World Bank, and WTO came into existence post World War II for the purpose of a better world and harmony.
mObilE businEssEs in glObalizaTiOn cOnTExT Mobile businesses have a profound place in global era. Global business can be defined as all the economic activities that are global in scope and operation, and structured that is similar to the structure of a mobile business. The operation is flexible, collaborative, anywhere, at anytime, Mobile business aligns the operation of a global business with its objectives and it can be used as a strategy to reach the objectives of a global business. Post World War II businesses around the world evolved from operating in domestic market to international market to multinational market, and now global market, therefore there are four phase into the evolution of businesses. Figure 2 below portrays this evolution processes. More importantly is to note that Mobility is the future operation of global business because the structure of a mobile business aligns with the operation of a global business. Mobility facilitates freedom to collaborate the functions of a business across the borders regardless of the time zone dif-
Strategic Approach to Globalization with Mobile Business
ferences. Location and time are no longer hurdles to the operation of businesses whishing to expand its operation globally. It is also clear that Mobility suits the operation of international businesses and multinational businesses. Mobility is the driven force for virtual business and global business. It facilitates virtual interaction. Phase 1: Operating in domestic market. The operation of a business is limited to only one country or one local area. The operation is limited in geographical aspect. This type of business can also benefit by encompassing its operation to mobility. Phase 2: Operating in international market. An international business is a business that operates more that one country. The international businesses also can utilize mobility in their operation to create values and reduce the cost of operation. Phase 3: Operating in multinational market. A multinational business is a business that is operating in at least more than 10 countries. Multinational businesses can integrate mobility into their operation creating efficiency, speedy operation and adding value to their business. Phase 4: Operating in global market. A global business is a business that virtually operates in every corner of the world. Global businesses can integrate mobility into their operation creating efficiency, speedy operation and adding value to their business by becoming fully mobilized. Turner (2000) argues that information technology is the fundamental reason for change in global business. The evolution of business is the result of evolution in information technology and globalization. Arguably, there is correlation between information technology and globalization. The internet with its information superhighway is a good example of this correlation. Global market is relied on the function of internet because the transition from a physical market place to a no-physical market place is only possible by the use of internet and other information technology applications such as mobility. Mobile business is a holistic set of tools that can be used in the
Figure 2. The evolution of a business
operation of a global business. Mobility is the necessity attribute of a global business having the intention to compete globally.
impOrTancE OF sTraTEgic apprOach and an OvErviEw OF sTraTEgic apprOach Strategy is a set of plan(s) subject to objectives, competitors, and customers. According to Harvard Business Review (1991), the need for the strategic sound is no longer a luxury but a necessity. A company’s strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully, and achieve organizational objectives (Thompson and Strickland, 2003). The choice of the strategy is subject to the objectives of the business and the nature of the mobile business. Mobile businesses have to have specific strategies to reach sustainable competitive advantage. In order to develop an edge over competitors, companies in general need to create a sustainable competitive advantage based on increased operational effectiveness and adequate strategic positioning (Porter 1996). As the 21st century unfolds, many companies throughout the world are intent on transforming
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Strategic Approach to Globalization with Mobile Business
theme selves into global business powerhouses via major investments in global e-business, ecommerce, and other IT initiatives. Adler (1990) argues that, in today’s business world, international experience has become critically important. Companies can no longer get away with operating loosely connected groups of businesses that happen to be located around the world, but must strategically integrate their activities. Porter suggests that strategy is all about competition and how to compete with business rivals. He argues that competitive strategy can support a business to differentiate itself from rivals in term of production process, marketing and customer’s perspective (Porter, 1996). The differentiation of a mobile business must deliberately chose strategy(s) in order to acquire competitive advantage. Living in globalization era businesses must implement transitional strategies to combat the global competition. According to Adler (1990), Global competition has forced executives to recognize that they must think differently about management. As a global company, the only way to succeed is to develop an effective global human resource management system with personnel capable of designing and implementing translational business strategies.
hOw TO apprOach glObalizaTiOn sTraTEgically Roll (2001) suggests the following methods (strategies) to expand internationally, the methodologies can be useful for expanding multinational and global. •
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Skim strategy: the aim is low investment cost by importing the product through foreign agents to distribute the product. For example a mobile business operating in Australia aiming low investment can export
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its product to other countries and sell there via distributing agencies. The production process takes place within Australia. Penetration strategy: the aim is to build plants and building in the host countries which requires high investment cost. For example a mobile business can open plants in countries other than country of origin. Dump strategy: when a company for some reason is unable to sell its surplus therefore it has no option but to sell the product at a lower cost in a host country. Explore strategy: starts with a small quantity of product been exported to host countries and then continue exporting based on the outcome of the export.
Thompson and Strickland (2003) suggest the following strategies for entering and competing in foreign markets depending on the nature of the business. •
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Export strategy: the production takes place in country of origin and then exported to host countries. This strategy is initial step in expanding into sales into foreign markets. This strategy is most suitable for those businesses intending to expand their market share internationally, since the cost of investment is low compare to other strategies such as opining a plant in foreign country. Licensing Strategies: this strategy supports a business that has a valuable technology (comparative advantage technology) and wants to license other business(s) to use the particular technology and generate income. Franchising Strategies: franchising works the same way as licensing however it is more suitable to service and retailing enterprises. Global strategy: A combination of export, licensing and franchising strategies aiming to expand market share into global market.
Strategic Approach to Globalization with Mobile Business
A mobile business can chose numerous strategies based on its nature, country of origin, and its objectives. The correct strategy facilitates the organization to find the most suitable approach to mobile business in global market. The positive view of strategy is concerned with the firm’s actual strategy and how it comes to be. The normative view, on the other hand, is concerned with what the firm’s strategy should be (Burgelman, Maidique and Wheelwright, 1996). The systematic approach can add value to a mobile business. Mobile business need to enter the global market strategically and systematically. This strategic and systematic approach consists of five stages. Figure 3 below portrays the five stages involved in strategic and systematic approach. Applying these five stages in strategic and systematic formulation is crucial for a mobile business desiring to be global business. The task of analyzing, setting objectives, formulating strategy, implementing strategy and evaluating strategy are the important and interrelated elements of strategic approach. The following strategic application tool and the above strategies are no prescription to a mobile business. A mobile business intends to approach globalization strategically can use the above strategies as menus, and the strategic application tool as an enabler to approach globalization.
The advantages of strategic approach to globalization consist of:
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Analyse environmental factor. Analyse environmental factor includes analyzing internal and external environment. The information from this analysis will enable the business to set objectives according to the environmental requirement. Setting objectives and the success criteria. Objectives can be a dependent variable to success criteria. For any particular mobile business going global there is always a cost involves which can be an investment. The most important criterion therefore is return on that investment. Objectives are subject to
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the nature of mobile business, its strategy, and time availability. Formulating strategy (s). During this stage the mobile business requires to set up its vision that is what the business wants to achieve in future. A mobile business should utilize a specific strategy which is suitable to its operation and supports the process of fulfilling its objectives. Next the mobile business has to have a mission statementthat is the reason for the existence of the business. Taking the vision and mission into consideration a mobile business would be able to formulate a strategy that is subject to its objectives. Implementing strategy (s). This stage is the translation of the formulated strategy from last stage into action. Evaluating the strategy (s) against the success criteria. Evaluation is vital in any plan to determine whether the plan achieved the objectives of the project. It is the evaluation of the project against the selected criteria that really examines the success of the project. The evaluation allows room for any necessary amends that may be required.
Encompass a guideline on how to reach the objectives. The process of strategic approach consists of five stages that will enable a mobile business to fulfil its objectives. Becoming aware of the opportunities and threats facing the business. Stage one of strategic approach facilitates the opportunity for a mobile business to outline the opportunities and threats in context of globalization. Promoting increase in market share. For a mobile business having the objective to operate globally-strategic approach will support the process of increase in market share both in domestic market and global market. 403
Strategic Approach to Globalization with Mobile Business
Figure 3. Strategic approach application tool
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Increase in productivity. Strategic approach aims lower cost, cost effectiveness, and in long term economies of scale. Therefore eventually a mobile business will be enabling to increase its production. Economies of scale. To cope with dynamic and volatile global economy economies of scale is the survival mechanism for a mobile business. The term economies of scale refer to decrease in cost of production when production is increased as a result of advancement in technology or any other production element. Combating the forces of globalization. A mobile business approaching globalization strategically will be enabling to combat the forces of globalization such as intense competition. Sustainable competitive advantage. Economies of scale are an enabler for a mobile business to reach sustainable competitive advantage in long term. A mobile business experiencing competitive advantage will add value to its product.
TransiTiOn OF sEmi mObilizEd businEss TO Fully mObilizEd businEss as parT OF glObal sTraTEgy Mobile technology is the next wave of information technology, extending information technology into a wireless medium. Mobile technology extends computing and the |Internet into wireless medium, and provides greater flexibility in communication, collaboration, and information sharing. (Hong Sheng, Fiona Fui-Hoon Nah, Keng Siau, 2005). Mobile technology is the crucial element of a business’s future operation based on two reasons. First reason is that a business in the future needs to be wireless in order to survive in global market as well as be part of global market. The second reason is that mobile technology is the next wave of information technology hence it is an indicator that a business’s future is mobile technology. A semi mobile business is a type of business that operates partially mobile and partially traditional. A semi mobile business can approach globalization strategically by becoming fully mobilized. Mobile technology can be used as a strategic tool for a semi mobile business to operate internationally, multinational, and globally. A semi mobile business incorporating mobile technology fully in its operation can manage to enhance its production, be part of a global market, and improve sales and marketing strategies. Kalakota and Robinson (2001), suggest that the mobile business industry is a very promising industry which is emerging thanks to the appearance of wireless data networks enabling the convergence of the Internet, e-business and the wireless world. Camponovo, Debetaz, and Pigneur (2004), argue that Mobility enhances productivity by adding flexibility to traditional work routines so that they can be done at the right time regardless of location. Essentially, mobility makes it easier to Manage a business.
Strategic Approach to Globalization with Mobile Business
Figure 4. Advantages of a mobile business
Mobility can be the next step in the natural evolution of doing business. The role of mobility will become stronger in the next decade or so. Taking into consideration that wireless technology is emerging in many businesses, then there is hypnotises that the world is transiting to the mobile world. A semi mobile business focusing on becoming fully mobile business can take the advantage to position itself in a better place in m-world. Figure 4 below portrays some of the advantages of mobile business. These advantages highlights how a semi mobile business can be benefited by operating fully mobile as part of its strategic approach to globalization. Supports People Management: A fully mobile business supports the management of people. For example a manager can be in touch with his/her staff at any time-any where hence mobility makes it simple for the management to manage people. Supports production process: Managing staff any where-at any time speeds the process of production leading to increase in production, hence mobility provides support for the production process. Provides flexibility: Mobility increases flexibility. For example an employee does not have to worry about the imbalance in between work and life. Mobility can help the employees to build a balance between life and work. Provides collaboration: Mobility provides collaboration between different elements of a business. For example a sales person on the field can order the stock directly from suppliers.
Non-physical structure: The most elegant advantage of mobility is that a business can operate from anywhere at any time. The physical element of a business is no longer a hurdle to the operation of an international, multinational and global business. Suits a global business: A global business can be defined as all the economic activities that are global in scope and operation. Mobility best suits the operation of a global business because mobility razes obstruct to global business such as time, place, and space.
cOnclusiOn This chapter highlighted that globalization is dynamic and unavoidable. Globalization is caused by many factors the most important factor of all is revolution in information technology in the past two decade. The operation of a mobile business is flexible, collaborative, anywhere, at anytime, Mobile business aligns the operation of a global business with its objectives and it can be used as a strategy to reach the objectives of a global business. Therefore mobile business has a profound place in the era of globalization. Businesses worldwide are under intense forces of globalization such as increase in competition. A Mobile business is also under threat from forces of globalization. A mobile business has to combat forces of globalization strategically. Approaching globalization strategically will support the process
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Strategic Approach to Globalization with Mobile Business
of combating the dynamic and volatile forces of globalization. Strategy is a set of plan(s) subject to objectives, competitors, and customers. Today as never before, the need for sound strategies is no longer a luxury but a necessity for a mobile business. The strategic approach consists of four stages, setting objectives, formulating strategies, implementation, and evaluation. Mobility facilitates freedom to collaborate the functions of a business across the borders regardless of the time zone differences. A semi mobilized business should become fully mobilized in order to approach globalization strategically. The benefits of mobility for a semi mobile business are flexibility, increase in production, speed, collaboration, and be a part of global market.
rEFErEncEs Adler, N. J. (1990). Globalization and Human Resource Management: Strategic International Human Resource Development. Simon Fraser University.
Haig, M. (2002). How Come You Don’t Have An E-Strategy. London: Kogan Page Limited. Hartel, C. E. J., Fujimoto, Y., Strybosch, V. E., & Fitzpatrick, K. (2007). Human Resource Management. Sydney: Pearson. Hibbert, A. (2005). Globalization. Oxford: Heinemann Library. Kalakota, R., & Robinson, M. (2001). M-Business: The race to mobility. NewYork: McGraw Hill. Mobile Technology. Linclon: Department of Management, University of Nebraska. Montgomery, C. A., & Porter, M. E. (1991). Strategy-Seeking and Securing Competitive Advantage. Boston: Harvard Business Review. Morath, P. (2001). Survival at E-Speed. London: McGraw Hill. Nickols, F. (2000). Strategy: Definitions and Meaning. Distance Consulting. O’Brien, J. A. (2004). Management Information Systems, 6th edition. New York: McGraw Hill.
Birch, C. (2001). Successful E-Business strategy. Sydney: Pearson Education.
Porter, M. E. (1986). Competitive Strategy. New York: Harvard Business Review.
Burgelman, R. A., Maidique, M. A., & Wheelwright, S. C. (1996). Strategic Management of Technology and Innovation, 2nd edition. Boston: Irwin.
Porter, M. E. (1996). What is strategy? New York: Harvard Business Review.
Camponovo, G., Debetaz, S., & Pigneur, Y. (2004). A comparative analysis of published scenarios for M-Business. Lausanne: The University of Lausanne. Downing, D. (2007). Global Business. Oxford: Heinemann Library. Garrett, G. (2000). The Causes of Globalization. New York: Yale University George, V., & Wilding, P. (2002). Globalization and Human Welfare. London: Palgrave.
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Roll, G. (2001). Global Business. Victoria: Warringal Publication. Sheng, H., Fui-Hoon Nah, F., & Siau, K. (2005). Strategic Implications of Mobile Technology. Lincoln: University of Nebraska. Siegel, D. (1999). Business strategies in the Age of the E-Customer. USA: John Wiley & Sons, Inc. Stiglitz, J. E. (2002). Globalization and its Discontents. London: Hardcover. Thompson Jr., A. A., & Strickland III, A. J. (2003). Strategic Management, 13th edition. New York: McGraw Hill.
Strategic Approach to Globalization with Mobile Business
Turner, C. (2002). The information E-Conomy, 2nd edition. London: Kogan Page Limited. World Bank. (1995). World Development Report 1995, (New York, Oxford University Press). World Bank. (2007). World Development Indicators. World Bank Publication. This work was previously published in Handbook of Research in Mobile Business: Technical, Methodological and Social Perspectives, Second Edition, edited by B. Unhelkar, pp. 206-213, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.3
Exploratory Study on Effective Control Structure in Global Business Process Sourcing1 Gyeung-min Kim Ewha Womans University, Korea Saem-Yi Kim Ewha Womans University, Korea
absTracT In an IT-intensive global business process sourcing (global BPS) project, the structure chosen to control knowledge transfer is critical. The objective of this study is to explore the effective control structure for knowledge transfer in IT-intensive global BPS project. The research methods used in this study are a case study and survey. First, a generic framework on the control structure for knowledge transfer is derived from extant literature. This framework is applied to a case analysis of a service provider in Mauritius. As a result of the case analysis, a model for control structure facilitating knowledge transfer in global BPS is derived. The model includes a social control mechanism, communication mechanism, project control mechanism as independent variables, and governance mechanism as a moderator variable.
The degree of knowledge transfer and success of global BPS are used as dependent variables. The propositions describing the relationships between the variables are formulated. A total of 19 survey items were generated for these variables. As results of the survey, the model is revised and a set of more refined propositions are generated in the conclusion. Both service providers and clients can benefit from this study by focusing on control mechanisms that affect the knowledge transfer and BPS success.
inTrOducTiOn European and US corporations have been outsourcing non-core business processes as wells as supporting IT (Information Technology) to offshore vendors. This is referred to as offshore
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
BPO (Business Process Outsourcing). The major reason for the offshore BPO is to reduce costs associated with the business process as well as access to quality services. In France, companies send their processes to French speaking offshore locations, such as Mauritius, Tunisia, and Romania. The processes usually outsourced is ranged from Sales/Marketing, Accounting/Finance, Human Resource, Information Technology, to Call Centers (UN, 2003). Recently, setting up offshore subsidiaries rather than outsourcing from offshore vendors is increasing because of better communication and control. Therefore, the term global business process “sourcing” is more appropriate than “outsourcing.” Global business process sourcing (BPS) includes market-based vendors as well as hierarchical subsidiaries or joint ventures (JV). The growth of global BPS is attributed to a combination of various factors, including advances in network technology and high-speed data networks. In an IT-intensive global BPS project, knowledge transfer is critical for success (Kobitzsch et al., 2001). Defining user requirements and system architecture require communication and learning between users and the analyst and among team members (Ko et al., 2005; Sarker et al., 2005; Karlsen and Gttschalk, 2003; Curtis et al.,1988). Communication and learning involve information and knowledge transfer among the parties. The knowledge transfer in a Global BPS project cuts across between countries and involves the following type of knowledge (Kobitzsch et al., 2001): application knowledge, quality management knowledge, development (standards) knowledge and company culture knowledge. While effective control mechanisms promote the acquisition, interpretation, and dissemination of the knowledge, ineffective control mechanisms distort and suppress knowledge transfer (Makhija and Ganesh, 1997). According to the type of knowledge, different control mechanisms could be appropriate (Turner and Makhija, 2006;
Makhija and Ganesh, 1997; Fiol and Lyles 1985; Shrivastava, 1983; Tushman and Nadler 1978). As opposed to anecdotal reports emphasizing the importance of knowledge transfer and project management in global sourcing, this study explores effective control structures for knowledge transfer in Global BPS. The overall approach of this study is qualitative, inductive and exploratory. Both service providers and clients can benefit from this study by focusing on control mechanisms that affect the knowledge transfer and BPS success. In this study, knowledge and information are used interchangeably due to their close relationships. Knowledge transfer in this study is defined as a systematically organized exchange of information and knowledge between entities (May et al, 2005).
rEsEarch mEThOdOlOgy The research methods used in this study are a case study and survey. After reviewing the literature on control mechanisms, knowledge transfer and IS outsourcing, it was determined that no current theory is directly applicable to fulfill the objective. Therefore, ‘ground theory building’ methodology that builds theory in a grounded and inductive fashion is used for this study (Yin, 1984; Eisenhardt, 1989). First, a generic framework on the control structure for knowledge transfer is derived from extant literature. The framework consists of potentially important constructs to study the control mechanism for knowledge transfer. For the control mechanism, this study focused on hierarchy/subsidiaries structure, formal/informal control mechanisms and information systems. For knowledge type, the study derived the following types of knowledge—sensitive knowledge, codifiable knowledge and no-codifiable knowledge. This framework is applied to a case analysis of a service provider in Mauritius to explore effectives control mechanism for transfer of each type of knowledge in Global BPS. As results of
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Exploratory Study on Effective Control Structure in Global Business Process Sourcing
the case study, a model for “control structure facilitating knowledge transfer in Global BPS” is derived. The model includes a social control mechanism, communication mechanism, project control mechanism as independent variables, and a governance mechanism as a moderator variable. The degree of knowledge transfer and success of Global BPS are used as dependent variables. The propositions describing (1) the relationships between the identified control mechanisms and the level of the knowledge transfer, and (2) the relationship between knowledge transfer and the success of Global BPS are derived. To refine the model, the survey method is used. A total of 19 questionnaire items were generated for the constructs in the research model. A sample of the service providers in the Global BPS industry in Mauritius was asked to rate each item on a five-point scale anchored on strongly disagree (1) and strongly agree (5). Convenience sampling was adopted, i.e. companies were selected on the basis of easy access. The findings can not be extrapolated to all GBPS business but merely provide an indication of the correlation in the sample frame. There is a need for more detailed interviews and survey research in the future. Bias could exist in this study because it is based a small sample – a major limitation of this research. The model is revised based on indications from the collected data. Finally, a set of more refined propositions are generated in the conclusion. The research method was designed, not without constraints, to explore control structures used in GPBS. The constraints are associated with the fact that the research data can be only obtained from outside of Korea. It is the location of the prime investigator of this study and the only Korean speaking country in the world. For this reason, it is hard to find Global BPS data in Korea either from service provider perspective or a client perspective. This is major obstacle in the progress of this study.
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knOwlEdgE TransFEr and cOnTrOl sTrucTurE hierarchical vs. market control Control mechanisms in IOR (Inter-Organizational Relationships) are associated with transaction costs for monitoring opportunistic behavior of the partner (Williamson, 1979; Williamson, 1991). As the concern for the opportunistic behavior of the partner is high that is transaction costs are high, then the hierarchical control mechanism (i.e. insourcing) is appropriate. When the firm can protect its contract from the opportunistic behavior of the partner by specifying all the contingencies on the contract, the market mechanism (i.e. outsourcing) is appropriate (Hart, 1989). In the middle of the continuum, the hybrid control mechanism can be used (Gulati and Singh, 1998; Decker, 2003). Opportunistic behavior of the vendor is also a concern in inter-organizational knowledge transfer. According to Kobitzsch (2001), sensitive technologies such as encryption are difficult to transfer to independent partners. The newest technologies are transferred overseas through subsidiaries rather than licensing (Mansfield and Romeo, 1980). As technological intensity increases, organizations adopt hierarchically organized work mode to effectively utilize the exclusive patent of the new technology (Jones, 1987). Hierarchical mechanisms involve explicit rules and procedures to tightly monitor the task completion (Ouchi, 1979). In similar way, the control structure of BPS could be influenced by sensitivity of knowledge transferred in BPS. For outsourcing the commodity type of process where the sensitivity of the knowledge transferred is low, market mechanisms would be appropriate. Hierarchy mechanisms such as subsidiaries would be more appropriate when the knowledge transferred is sensitive, and thus the possibility of vendor’s opportunistic behavior is a concern.
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Formal vs. social control Compared to TCE, organizational scholars are of the view that the control structures in IOR are influenced by knowledge characteristics associated with the task (Eisenhardt, 1985). The more predictable the knowledge to be transferred in IOR is, the formal and structural controls (such as standard operating procedures/rules and clearly established routines) are likely to be (Makhija and Ganesh, 1997). The rules include both the rules concerning processes and rules specifying standards of output or quality. In the global BPS arrangement, when knowledge transferred can be defined in advance, the formal and structural controls can be used. On the other end, when the knowledge transferred in IOR is implicit and can not be specified in advance, informal and social control is better due to its flexibility (Makhija and Ganesh, 1997). Trust is the principal mode of social control (Adler, 2001). Trust is considered to foster knowledge transfer and learning because trust increases interactions between individuals and helps to learn tacit knowledge (Kale et al., 2000). According to Davenport and Prusak (2000), trust reduces the fear of opportunistic behavior of the other in terms of taking advantage of the knowledge gain. Thus, mutual trust in the relationship is a prerequisite for the acquisition of the embedded implicit knowledge of the individuals. According to Hewett and Bearden (2001), mutual trust is a basis of the commitment defined as the pledge of relationship continuity between partners. Commitment on prescribed agreements could also facilitate communication and knowledge transfer to achieve mutual goals (Das and Teng, 1998; Liefer and Mills, 1996). Socialization is another form of social control, which facilitates transfer of sticky knowledge embedded in individuals, contexts or locations (Szulanski, 2000). Other types of social control include meetings, visits to parent company facilities in JV and parent company interaction, training
engineers of parent company by engineers of JV, and transfer and rotation of personnel (Inkpen and Dinur, 1998). Heeks et al. (2001) assert that knowledge transferred in global software outsourcing is tacit and informal. To facilitate the knowledge transfer between outsourcer and the service provider in BPS, social control may be important.
information Technologies Social control can not be used as much as possible due to the geographical distance I Global BPS. In this case, socialization can be complemented with technologies that mitigate temporal and spatial barriers and allow flexible and frequent communication and coordination between partners (Applegate and Gogan, 1995). Depending on the task, the extent of coordination between partners can vary substantially. At one extreme, the partners may have minimal coordination requirements to achieve their goals. At the other extreme, knowledge transfer can be extensive, and thus continuing mutual adjustments between partners are required. For a simple coordination, a simple messaging system can be used. For a richer communication, videoconference technology can be used. Videoconference technology allows virtual teams to access and share the knowledge of remotely located members (Davenport and Prusak 2000). Control structure for each type of knowledge discussed above is summarized below (Table 1).
Table 1. Knowledge type and control structure [Adapted from Kim (2007)] Knowledge Type
Control Structure
Sensitive Knowledge
Hierarchy
Codifiable Knowledge
Formal and Structural Control
Less Codifiable Knowledge
Social Control /Information Technology based Control
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casE sTudy dEscripTiOn Data sources for the INFO case include interviews with general manager and programming team leader, and relevant publications regarding the firms. General managers and team leaders of the programming team were interviewed for a twoday period to obtain the case data. Each interview took about one hour and was conducted face-toface. At the onset of each interview, the goal of this study was briefly explained. The interviewee was then asked unstructured and semi-structured questions. During the unstructured interview, the interviewee was asked to tell their sourcing story. Then, semi-structured questions regarding the goal of knowledge transfer, transferred knowledge, the mode of knowledge transfer and the effectiveness of the knowledge transfer. Relevant publications, such as company and industry publications, were utilized as well. Established in 1994, INFO (France) is a software development company for developing frontand back-end software for hypermarket (INFO, 2006). INFO (France) is a subsidiary of the French Retailing Group. INFO (France) has more than 450 customers, mainly supermarkets and hypermarkets in France and the south of Europe. INFO has provided the highest quality service through the collaboration with 150 companies (INFO, 2006). Since 1997, numbers of French competitors, like Auchan and Carrefour, focused on reducing costs through outsourcing, which creates fierce competition. Since the retail industry is intensively competitive with slow growth and low margins, as a part of LCL, INFO knew that effective cost control is vital to achieve low pricing. In June, 2005, INFO (Mauritius) was set up for software development and test as well as IT help desk for INFO (France). The French Retailing Group intends to cut costs, and thus to strengthen their competitiveness in European market. While INFO (Mauritius) is denoted as INFO (M), INFO (France) is denoted as INFO (F). INFO (M) has a staff of 16. The organizational structure
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of INFO (M) consists of a general manager and team leaders leading a group of programmers. The following shows how their work is done: 1. 2.
3.
The project manager (PM) in France sends project specifications. The team leader studies the project description and estimates the number of developers and the time. Project management tools developed by INFO (F) are used for planning. The team of programmers develops and tests the program.
In INFO (M), all work done in INFO is automatically saved in France. This is how they monitor the process using Inter-Organizational Systems. According to the general manager, quality is the most important in BPO. According to the team leader, quality implies the followings: (1) once the team leader submits the program to PM in France, the PM should not send the program back to Mauritius for correction; and (2) keep the code of ethics that are ‘instructions’ about writing sufficient codes.
communication, Training and socialization of Team leader According to the team leader, sufficient quality products are ensured by sufficient communication with the project leader in France. Their communications start as the PM in France sends project specification. During this process, teams in Mauritius and the project leader in France share knowledge. 80% of their communications is done via IP phone. The team leader communicates with the project leader 5-10 times per day using IP phone. The rest of the communications are done via mail or video conference. During this process, two-way communication occurs. According to the team leader, “Sometimes, developers in
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Mauritius suggest better ways of doing things. So this is two-way communication.” According to the team leader, due to IP phone, videoconference and teleconference, she senses no communication barrier. The only barrier she senses is 2-3 hours of time difference. The team of programmers had a lot of training regarding “Dos and Don’ts”, ethics of the codes, and ways of programming. The training program deals with how we think so that we communicate better with the PM in France. As results, we produce better products. Once per week the team gets trained via videoconference. Frequent trainings are done via telephone or teleconference. In January 2006, the team leader went to France to have technical courses on a visual studio .net. She learned the rules and procedures about how to use .net. IT engineers from France are staying in Mauritius for two years. To make the knowledge transfer easier, the programmers had twoday intercultural training. The cultural training helped the programmers know what INFO (F) is expecting from us. According to the team leader, “personally, I do not feel cultural difficulties.” During her visit to France, the team leader had a chance to associate with the French team through social gathering. She said, “trust is important to ensure a sufficient team work.”
communication, Training and socialization of general manager According to the general manager, programmers in INFO (M) had to test the ‘limits’, which means they had to do the maximum test. According to the manager, “the programmer has capability (competency) but they need to be aware of quality.” The team of programmers that produces higher quality programs gets better projects (more challenging projects and risky projects). According to the general manager, “Mauritius people like to learn.” Therefore, monetary compensation is less important. The team leader that I interviewed said
the same thing. When I asked, “what is reward for writing sufficient codes?” she replied, “reward for sufficient quality is personal satisfaction and getting assigned to a sufficient project. Sufficient projects means challenging and risky projects”, according to her. In summary, General Manager’s main focus is HR: Motivating programmers Following up project quality, evaluating personnel, and compensating. The general manager went to France twice (each visit lasts one week). In turn, the France manager came to Mauritius once. They communicate everyday by e-mail, video-conference, and telephone. The knowledge transferred between managers is “do’s and don’ts”. This is always reciprocal knowledge transfer. For example, while the manager in Mauritius communicates regarding labor law in Mauritius, the French manger transfers the code of ethics. At the beginning, the meetings were not structured. The meetings were Q&A-type. The meetings with the manager in France were held bi-weekly. Another bi-weekly meeting was held for project follow-up. According to the general manager in Mauritius, she can have a meeting when needed. The manager in Mauritius did not feel that this process was difficult. According to her, intercultural training for two days helped this process go easy. Social gatherings in France and Mauritius after work and during weekend helped the transfer of tacit knowledge such as cultural knowledge. Visits and frequent communications helped to build strong credibility.
Findings FrOm casE The key features of knowledge type and control structures are examined in Table 2.
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Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Table 2.Control Structure Used in INFO (M) Knowledge Type
Control Structure • Subsidiaries
Governance Mechanism Social Control Mechanism
Less codifiable Process Knowledge
• Socialization • Two-way communication via video conferencing, teleconferencing, IP phone, e-mail. • Technical Training • Cultural Training • Liaison Engineer deployment
Codifiable Process Knowledge
• Programming guideline such as code of ethics and quality standard • Manual for Project Management Tool
Sensitive Knowledge
Finding 1: governace and social control mechanisms •
•
Setting up subsidiaries might reduce concerns for provider’s opportunistic behavior in relation to sensitive knowledge. Social gatherings facilitate transfer of embedded knowledge such as cultural knowledge.
This case indicates that setting up subsidiaries could have more control over the operations and better communication. To ensure code writing is sufficient without bugs, programmers in Mauritius and the project leader in France needed sufficient communication. Setting up subsidiaries facilitated this communication process. The Mauritius and France teams met through training events and regular job rotations. Social gatherings helped the transfer of tacit knowledge, such as cultural knowledge.
Finding 2: iT-based communication mechanism •
Due to geographical distances between the provider and the client, IT-based communication mechanism plays a critical role in the transfer of less codifiable knowledge.
As the PM in France sends the project specification, the communication among project team
414
Communication System
Project Control Mechanism
starts. Sufficient communication regarding the system requirements ensures the quality of the program. Non-codifiable knowledge regarding requirements was exchanged using various twoway communication mechanisms, such as IP phone, e-mail, and video conference.
Finding 3: project control mechanism •
•
Technical training, inter-cultural training, liaison engineer facilitates transfer of less codifiable process knowledge. Formal and structural control mechanisms, such as operating rules and program guidelines were used to transfer the codifiable process knowledge.
Technical training regarding “Dos and Don’ts”, code of ethics, and methods of programming helped the programmers understand the technical expectation of INFO, France. The technical training as well as inter-cultural training helped communication and knowledge transfer through understanding of mutual expectation. As a result of better communication, better products were produced. A liaison engineer from France also facilitated knowledge transfer between INFO, France and Mauritius. Process knowledge was codified as much as possible via programming guidelines, such as code of ethics and manual for using project management tool. This relates to the standardization issue of the
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
project management. Standardization of methods, diagrams and tools facilitate communication among project members (Valacich et al., 2001). INFO case also indicates that the general manager made sure that proper project team is composed for the project. Composing project team with the employees who have the capability to absorb new knowledge is another way to facilitate the knowledge transfer. This is referred as “effective human resource allocation” or “organizing effective project team.” In summary, this case indicates that relationships between the project control mechanism and knowledge transfer is worthy of an investigation. The project control mechanism in relation to knowledge transfer is to be discussed in the subsequent section.
While governance mechanism is used for contractual structuring for the institution to align the partner’s incentives, social, communication, project control mechanisms are used for the procedural structuring to align their joint processes (Sobrero and Schrader, 1998). While a governance mechanism is set as the inter-organizational relationship is initiated, social mechanisms are instituted afterwards. Due to these differences, the governance mechanism in this study is used as a moderator variable rather than an independent variable. In this study, the governance mechanism as a moderator variable is assumed to reduce or enhance the influence of the independent variables on knowledge transfer. The following propositions were derived.
Finding 4: Outsourcing success •
Socialization, frequent communication and project control mechanism facilitate knowledge transfer, which in turn leads to high quality outcome.
This case indicates that socialization, frequent communication and a project control mechanism facilitate knowledge transfer and eventually lead to the success of BPS: •
•
• •
Socialization -> Transfer of cultural knowledge-> Better Communication -> Sufficient outcome Socialization -> Trust building -> Promotion of knowledge transfer-> Sufficient outcome Communication -> Knowledge transfer -> Sufficient outcome Training -> Knowledge transfer -> Sufficient outcome
Finding 5: research model for control mechanism that Facilitates knowledge Transfer in global bps The following research model is derived as results of the case findings:
Propostion1: The use of social control is positively associated with the level of knowledge transfer in Global BPS. Propostion2: Properly designed and reliable communication mechanism is positively associated with the level of knowledge transfer in Global BPS. Propostion3: The use of project control mechanism is positively associated with the level of knowledge transfer in Global BPS. Propostion4: Control mechanism with higher level of hierarchy governance contributes to higher level of knowledge transfer. Propostion5: The level of knowledge transfer is positively associated with the success of Global BPS.
survEy dEsign and daTa cOllEcTiOn In the prior portions of the paper, (1) literatures on control mechanisms and knowledge transfer were described and integrated, (2) an exploratory case 415
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Figure 1. Research model of effective control structure in global BPS
Social Control Mechanism
Communication Mechanism
Degree of
Success of Global
Knowledge Transfer
BPS
Project Control Mechanism
Governance Mechanism
study was performed, and (3) research model for control mechanisms in Global BPS was derived. In the next portion of the paper, we confirm and refine the research model using survey method. This section discusses how the questionnaire items were derived to measure each construct in the model. The questionnaire items were either adapted from the previous studies or developed in this study. Before distribution of the survey, the contents validity of the survey was rechecked by two academic colleagues who are experts in organizational strategy and project management. In summary, this checking process is a two-stage process. The first stage was involved with deriving the survey instruments based on previous research. The second stage involves rechecking the instru-
ment by domain experts. This two-stage process ensured that the instrument covers the range of meanings included in the construct (Pitt et al., 1995). The items of Table 3-6 were included as part of a larger survey. Each item was anchored by five-point scale ranging from 1 = strongly disagree to 5 = strongly agree.
social control mechanism Trust and commitment of the social control mechanism were asked to measure the level of the social control mechanism. Trust and commitment were measured by modifying the instrument in Lee and Kim (1999) and Lee and Cavusgil (2006) (Table 3).
Table 3. Measure of social control Question Posed (TR: Trust, CT: Commitment) In our relationships... TR1. We make beneficial decisions under any circumstance. TR2. We are willing to provide assistance to our counterpart without exception TR3. We are sincere at all time. CT1. We perform prespecified agreements. CT2. We faithfully provide prespecified support in a contract. CT3. We always try to keep each other’s promises.
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Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Table 4. Measure of IT-based communication mechanism Question Posed (CM: Communication) CM1. We and our counterparts have properly designed an interorgazniational communication interface. CM2. There is no error when we communicate with our counterparts using the IT-based communication infra.
iT-based communication mechanism
3. 4.
Having properly designed and reliable communication mechanism were asked to measure the level of IT-based communication mechanism. A properly designed communication mechanism is associated with providing a variety of media, such as phone, video-conferencing, and e-mail. Reliability of the system represents the user’s sense of assurance or certainty about the communication mechanism (DeLone and McLean, 1992).
project control mechanism The control in IS project management is associated with defining the followings (Valacich et al., 2006; Murray and Crandall, 2006; Beise, 2004; Dvir et al., 2003): 1. 2.
project goals and requirements, activities to be performed for each phase of system development,
5. 6.
deliverables to be produced for each phase, resources and time requirements for each phase, tools and standards used for each phase, responsibilities of the project members.
Sharing the project goal among members, having a clear project plan, allocating adequate resources are critical to making knowledge flow smoothly among project members (Karlsen and Gottschalk, 2004). Based on common and shared goals and plans, the teams generate a high degree of focus and goal accomplishment (Goffee and Jones, 1996). In addition, composing project team with the employees who have capability to absorb knowledge is another way to facilitate the knowledge transfer. Efficient management of organizational knowledge deals with having individual members interact and collaborate (Goffee and Jones, 1996; Grant, 1996; Nonaka and Konno, 1998). Participative culture is essential to share knowledge among individual project members.
Table 5. Measure of project management Question Posed (PP: Project Planning, OSC: Organizational Structure and Culture, SD: Standardization) PP1. We have realistic project goals. PP2. We have adequate overall project plan. PP3. We adequately allocate our project resource. OSC1. We have effective project team. OSC2. We and our counterpart have an understanding about knowledge sharing needs. OSC3. We have an adequate culture for knowledge transfer. SD1. We have adequate standardized documentation for project management. (e.g. Project Workbook, Gantt Chart) SD2. We share project management method with our counterpart.
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Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Table 6. Measure of knowledge transfer and success of global BPS Question Posed (KT:Knowledge Transfer, SG: Success of Global BPS) KT. During this project, my interactions with counterpart have increased my ability to ask penetrating questions about this project. SG. Through this project, our client can approach excellent world-wide technical human infra.
The standardized project management method as well as project documentation, such as Project Workbook and Gantt Chart, allow project members to communicate effectively (Valacich et al., 2001). The following categories of questionnaire items—(1) project planning, (2) organizational structure and culture, and (3) standardization— were used to measure the level of project control mechanism.
governance mechanism In this study, a governance mechanism is used as a moderator variable to moderate the influence of the independent variables on knowledge transfer. A sample of service providers were asked to indicate their governance structure among three categories of the governance mechanism is used in this study: vendor, subsidiaries and jv mechanisms.
knowledge Transfer and success of global bps The questionnaire item to measure the degree of knowledge transfer was adopted from Ko et Al. (2005). The original items to measure the degree of knowledge transfer between clients and consultants in the outsourced IS project were modified to be relevant in Global BPS. Outsourcing success can be measured from either a client or vendor perspective. While Lee and Kim (1999) measurements were from the client perspective, Karlsen and Gottschalk (2004) measurement were from the vendor perspective. These measurements were modified to be relevant in the context of Global BPS. In this study, the
418
success of Global BPS is measured by the degree of realization of the client’s benefits perceived by the service provider; that is, the approach to excellent world-wide technical human infra. The survey was distributed to 17 service providers in Mauritius. Mauritius is a French and English speaking country where the majority of the population is of Indian descendant. Viewing their dual language speaking manpower as competitive advantages, the government aspires to capture a share of English and French speaking BPS market. The government has been “investing massively to assemble the pre-requisites in terms of modern infrastructure, appropriate policy, legal framework and fiscal incentives” (Board of Investment, 2003). Recently, the government set up Cyber City in Ebene, which is 15 Km from the capital city, Port Louis, to attract BPS industry. The respondents of the survey must be able to describe a control structure and degree of knowledge transfer. Those individuals who were considered to be ideal for this study are directors and managers. The profiles of the respondents are summarized in Table 7 in the following section. Convenience sampling was adopted. That is, sample companies were selected on the basis of easy access due to acquaintance. First, the sample companies were contacted via telephone. If company agreed with the survey, then the survey was distributed via e-mail. To ensure return of the survey, the sample companies were then contacted for a second time via telephone.
survEy analysis Of 17 surveys, 15 were used for analysis. The remaining questionnaires were removed because
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Table 7. Descriptive statistics for sample companies
Company Age
Industry (BPO)
Position
Department
Frequency
Percentage
Less than 2 years
3
20%
2~4 years
8
53%
4~6 years
2
13%
Over 6 years
2
13%
ICT
8
53%
Call Center
2
13%
Accounting
2
13%
Finance
1
6%
Not Answered
2
13%
Manager
9
60%
Director
5
33%
Engineer
1
6%
Management
6
40%
IT
4
26%
Finance
1
6%
Software Development
1
6%
Etc
3
20%
they were considered as outliers. Table 7 shows descriptive statistics of the surveyed firms. 53% of the sample companies were 2-4 years old. 73% of them are less than or equal to 4 years old. 100% of the sample businesses are in the BPO industry. 53% of the sample companies are considered themselves to be in ICT (Information and Communication Technology) sector of BPO. The respondent’s description of ICT sector included batch Information processing, data capture, e-business and ERP (Enterprise Resource Planning). 95% of the respondents are either a director or manager. 40% of respondents are a general manager and 26% of them are an IT manager. For governance structure question, 75% of the sample answered that the governance structure of its firm is either subsidiaries or JV. Most of these subsidiaries and JVs also have separate businesses from the mother company as the vendor. Therefore, most of them have the governance structure of subsidiaries/vendor or JV/vendor.
Due to a small sample size, KolmogorovSmirnov Goodness-of-Fit Test for each variable was performed to test the sample distribution against a normal distribution. Except TR2, TR3, CT3 and OSC1, none of variables had normal distribution (p < .05). Due to the fact that most of the variables do not have a normal distribution and the sample size is less than 30, interpretation of the results is limited and done cautiously. The sample companies seem to agree that they have trust and commitment in the Global BPS relationships. This is based on the consensus measures and means of the social control variables in Table 8. All social control variables except TR1 have consensus measure (i.e. Cns) greater than or equal to 0.67 and mean over 4.0. The consensus measure ranges from 1 to 0 (Tastle and Wierman, 2006, Tastle et al., 2005). While the complete agreement is defined as 1, complete disagreement is defined as 0. Consensus denoted as Cns and dissention denoted as Dnt are related
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Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Table 8. Consensus and dissent measures Variables
SA
A
N
D
SD
Mean
Cns
Cns%
Dnt
Dnt%
TR1
4
4
6
1
0
3.73
0.66
66%
0.34
34%
TR2
10
1
4
0
0
4.40
0.67
67%
0.33
33%
TR3
12
3
5
0
0
4.60
0.82
82%
0.18
18%
CT1
7
3
5
0
0
4.13
0.67
67%
0.33
33%
CT2
8
4
3
0
0
4.33
0.71
71%
0.29
29%
CT3
12
2
1
0
0
4.73
0.83
83%
0.17
17%
CM1
5
4
2
4
0
3.67
0.53
53%
0.47
47%
CM2
5
5
4
1
0
3.93
0.68
68%
0.32
32%
PP1
7
6
2
0
0
4.33
0.75
75%
0.25
25%
PP2
5
5
4
1
0
3.93
0.68
68%
0.32
32%
PP3
4
8
3
0
0
4.07
0.80
80%
0.20
20%
OCS1
3
9
2
1
0
3.93
0.78
78%
0.22
22%
OSC2
5
5
5
0
0
4.00
0.72
72%
0.28
28%
OSC3
5
6
1
3
0
3.87
0.62
62%
0.38
38%
SD1
2
7
3
2
1
3.47
0.59
59%
0.41
41%
SD2
3
8
2
2
0
3.80
0.70
70%
0.30
30%
SA – Strongly Agree / A – Agree / N – Normal / D – Disagree / SD – Strongly Disagree / Cns – Consensus / Cns% – Consensus as a percentage / Dnt – Dissent / Dnt% – Dissent as a percentage
and given one, the other is easily calculated by Cns= 1- Dnt. The first five columns of Table 8 show how many of the sample companies chose each response in the survey. The sixth column provides the mean of each variable with SA=5, A=4, N=3, D=2 and SD=1. While Cns and Cns% are the consensus values in decimal and rounded percent, Dnt and Dnt% are the dissention values in decimal and rounded percent. The surveyed firms less agree that they have proper IT-based communication interface (Cns 0.53, mean 3.67). But they seem to more agree that communication is fairly reliable (Cns 0.68, mean 3.93). This is attributed to their choice of communication media. The firms were asked to rate the frequency of the media choice using a five-point scale anchored on very infrequently (1) and very frequently (5). The most frequently used media are E-mail (4.87) and Telephone (4.33) while the least frequently used media is Video Conferencing (2.20). E-mail plays a key role to
420
motivate knowledge sharing between knowledge workers by mitigating temporal and special barriers (Hendricks 1999). However, e-mail has limitation to deliver cues of the communicator thus less effective to transfer knowledge than video conferencing (Sapsed, et al., 2005). This is also the case with telephone communication. In contrast, videoconference technology is effective to access and share the knowledge of remotely located virtual team (Davenport and Prusak 2000; DeSanctis and Moge, 1999). The companies agree that they have realistic project goal (PP1), overall project plan (PP2), adequate project resource (PP3), effective project team (OSC1), appropriate knowledge sharing culture (OSC2, OSC3) and project management method (SD1). Compared to other aspects of the project management control, they less agree that they use standardized project document (SD1) with Cns 0.59 and mean 3. 47.
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Table 9. The results of correlation analysis Knowledge Transfer
Success of Global BPS
Success of Global BPS
0.005**
TR1
0.303
0.454
TR2
0.282
0.043*
TR3
0.273
0.463
CT1
0.246
0.371
CT2
0.028*
0.078
Social Control Mechanism
Communication Mechanism
CT3
0.050*
0.277
CM1
0.126
0.014*
CM2
0.034*
0.018*
PP1
0.460
0.107
PP2
0.405
0.107
PP3
0.260
0.350
OSC1
0.493
0.030*
OSC2
0.092
0.015*
OSC3
0.413
0.041*
SD1
0.246
0.020*
SD2
0.257
0.038*
Governance Mechanism
0.258
0.182
Project Control Mechanism
** significant parameter at p=0.01 *significant parameter at p=0.05
The correlations between variables were checked and the results are presented in Table 9. The following is notable: while project control variables have a correlation with only Success of Global BPS, social control variables and communication variables have a correlation with both Knowledge Transfer and Success of Global BPS. This indicates that the Project Control Mechanism is a determinant of Success of Global BPS rather than Knowledge Transfer. Not all the variables in Social Control Mechanism have a correlation with knowledge transfer. The construct validity and content validity of the social control mechanism were already proven because the instrument was validated in the previous research. In the future, with more sample data, the construct validity of the Communication Mechanism and Project Control Mechanism needs to be per-
formed. Success of Global BPS and Knowledge Transfer show a correlation. The governance mechanism does not have a correlation with Knowledge Transfer or Success of Global BPS. Most of the samples had a hierarchical governance structure of either subsidiaries or JV; that is, there was not much variation in governance mechanism. In the future, with larger samples, the effect of governance mechanism as moderator variable should be tested. The findings can not be extrapolated to all service providers but merely provide an indication of the correlation in the sample frame. A margin of error also exists in this study because this study is based on a small sample. This is the major limitation of this research. More rigorous survey including a more diverse sample from major offshoring countries like India, China,
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Exploratory Study on Effective Control Structure in Global Business Process Sourcing
Figure 2. Revised research model of effective control structure in global BPS
Project Control Mechanism Social Control Mechanism Degree of
Success of Global
Knowledge Transfer
BPS
Communication Mechanism
Governance Mechanism
Philippines or Ireland remains as future research. Nonetheless, the findings still provide some fairly significant insights in exploratory research. As a result of this study, the initial research model could be revised, as shown in Figure 2. The difference with the initial model is that the revised model incorporates the analysis results— project control variables have a correlation with Success of Global BPS rather than Knowledge Transfer. The creation of this model was driven by a process understanding of knowledge transfer and their impacts, Global BPS success. The process model has three components: the control of knowledge flow, the degree of knowledge transfer, and the consequences of the knowledge transfer (i.e. Success of Global BPS). Each of these steps is a necessary, but not sufficient, condition for the resultant outcome. The following propositions are derived as results of this study: 1.
2.
3.
422
Commitment as social control mechanism is positively associated with the level of knowledge transfer in Global BPS. A properly designed and reliable communication mechanism is positively associated with the level of knowledge transfer. Structural, cultural and standardization
4.
5.
aspects of a project control mechanism are positively associated with the level of success in Global BPS. The level of knowledge transfer is positively associated with the level of success in Global BPS. A control mechanism with more hierarchical governance contributes to a higher level of knowledge transfer.
discussiOn and cOnclusiOn Despite the limitation of this research stated in the previous section, this study made a contribution. This study found the research model and propositions that would help both academics and practitioners to understand the effective control structure in Global BPS. It was widespread notion that Global BPS is governed by a market mechanism. Unlike early offshore BPO, this study showed that business process is increasingly sourced under hierarchy governance in a form of overseas subsidiaries or JV. Under this trend, this study also showed that the success of Global BPS is influenced by (1) a commitment and proper communication systems facilitating knowledge transfer and (2) a project control mechanism.
Exploratory Study on Effective Control Structure in Global Business Process Sourcing
These results have some implications for countries like Korea. The recent decrease in IT exports, especially in the area of hardware, such as wireless communication equipments prompts Korea to rethink about the structure of IT exports—more balanced mix of exports in hardware and IT services (ICA 2004). The IT service industry in Korea has the best infrastructure in the world in terms of technology as well as human resources. However, language is a major barrier for providing IT services to other countries. The language barrier makes knowledge transfer difficult. The results of this study can be noted to build control structure facilitating knowledge transfer.
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EndnOTE 1
This study is conducted with the support of Korea Research Foundation
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 3, edited by M. KhosrowPour, pp. 101-118, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.4
Understanding Global Information Technology and Outsourcing Dynamics: A Multi-Lens Model Robert C. Yoder Siena College, USA Vera Eccarius-Kelly Siena College, USA Suvarna Cherukuri Siena College, USA
absTracT This chapter provides information technology (IT) project leaders, call center management, researchers, and educators with an analytical tool to examine current concerns and anticipate future trends related to globalization and information technology. The authors propose to use a multi-lens analysis as a framework for evaluating outsourcing opportunities. This approach offers a valuable and effective full-circle methodology for assessing technological, political, organizational, economic, legal, educational, and cultural considerations that encourage a fuller understanding
of the issues, problems, and opportunities that globalization and technological innovation creates. An understanding of these factors related to outsourcing and other technical collaborative projects can avoid costly miscalculations, reduce misunderstandings, and promote mutually beneficial results. Outsourcing is part of a larger socio-political and cultural process, and extends beyond the narrow parameters of economic and technological considerations. The discussion of the various lenses is supported by relevant material from case studies and qualitative interview data collected by the authors in Germany and India from IT experts, call center managers, and call center agents.
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inTrOducTiOn In this chapter, the authors propose the multi-lens model as an analytical tool offering a systematic view of the forces and trends that influence outsourcing decisions. This tool provides a framework that encourages a multi-pronged assessment of the outsourcing phenomenon. Recognizing that the rapid development and diffusion of information and communications technologies is a major driver of globalization, the authors present a group of factors that we believe impact the outsourcing process. It is simplistic to look at outsourcing as purely an economic or technical decision–it is important to recognize that outsourcing contains social, legal, and political aspects as well, and to understand their interrelationships. This model is presented in the context of outsourcing and offshoring—pertinent and pervasive issues that many organizations confront in order to continue their success in today’s global, interdependent business environment. The authors believe that a broad understanding of globalization and its effects upon knowledge-based professions will benefit call center supervisors, their team leaders, and information and communication technology (ICT) managers by encouraging them to innovate and adapt continually to new opportu-
nities created by globalization. Thus, companies will need to train and deploy their staff in new ways to maintain flexibility and competitiveness. This includes effective use of technology for supporting the collaboration of work processes and increasing cultural awareness to enhance team building across geographic and organizational boundaries. Using lenses is not a new idea. Andersen and Dawes (1991) presented four lenses, or perspectives, to explore the political, organizational, economic, and technological aspects of information management. Here the authors have enlarged the scope of these perspectives and added additional legal, cultural, and educational lenses (Figure 1) to reflect categories immanent in recent globalization literature, such as The Lexus and the Olive Tree (Friedman, 1999), In Defense of Globalization (Bhagwati, 2004) and Globalization and Its Discontents (Stiglitz, 2003). Globalization is a force that significantly influences all lenses of the model. Note that there is flexibility in which lenses to use for a specific situation, and the relative importance of each lens will vary. Our goal is not to present a detailed discussion of every possible lens, but to show that understanding globalization issues is naturally multidisciplinary. As Manfred Steger writes, “The greatest challenge facing
Figure 1. Multi-lens model
TECHNOLOGICAL
ORGANIZATIONAL
LEGAL LENSES
CULTURAL
ECONOMIC
EDUCATIONAL
POLITICAL
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today’s globalization researcher lies, therefore, in connecting and synthesizing the various strands of knowledge in a way that does justice to the increasingly fluid and interdependent nature of our postmodern world” (Steger, 2003).
Outsourcing, Offshoring, and nearsourcing Often located in industrialized countries, many corporate IT and call center managers consider the practice of outsourcing as a panacea to rising operating costs and at-risk revenue in expensive North American and Western European facilities. It is common for managers to argue that additional financial benefits arise from aggressive international direct marketing and sales strategies. However, outsourcing IT departments and call center services often creates a host of multi-faceted problems. This chapter encourages corporate leaders and decision-makers to think beyond the immediate financial benefits and to consider key factors that determine success or failure following an outsourcing decision. Commonly ignored predicaments include sudden political instability in emerging democracies or repressive regimes, and inadequate employee training that leads to stress, absenteeism, and poor customer service. Excessive centralization of organizational operations also undermines teamwork and empowerment of employees. Managers must think creatively about how they can build a successful relationship with facilities abroad. To ensure that an outsourcing decision leads to reduced operating costs and improved customer satisfaction, it is imperative that managers first engage in the research necessary to achieve clearly defined and articulated goals. The Multi-Lens model assists managers in creating successful business plans and execution strategies that involve outsourcing. The authors use the more general term outsourcing to indicate any task or business processes performed by another company, regardless of where that company is based. Traditionally this
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process most strongly affected the manufacturing sector (cars, furniture, textiles, etc.). Historically, most U.S. manufacturing has taken place in lowcost assembly operations in countries like China, Taiwan, and Mexico, where “over a million Mexican citizens work in more than 3000 maquiladora plants, carrying out assembly operations for U.S. companies” (NASSCOM, 2004, p. 78). In the 1980s, it became commonplace for U.S. businesses to outsource professional information technology support tasks to other U.S. companies like Electronic Data Systems (EDS) and IBM with large multi-year contracts. For example, “Dow has systematically outsourced its information technology needs over the past decade. In 1994, it outsourced a 10-year IT contract to EDS. In 1997, it outsourced help-desk operations to Compaq under a 3-year deal. In 2000, it signed a 7-year $1.4 billion contract with EDS for building and maintaining a converged voice-data network. In 2001, it entered into a five-year agreement with IBM for an end-to-end Web hosting service” (NASSCOM, 2004, p. 79). As the demand for IT workers outstripped supply, companies increasingly imported talented, yet lower-cost foreign workers. The term offshoring (offshore outsourcing) refers to discrete business components that typically are performed in a lower-wage country to take advantage of reduced cost structures for labor expenditures, building rents, tax rates, etc. Foreign workers in the IT sector tend to be highly educated and motivated individuals who provide sophisticated services to U.S. customers in such sectors as finance, banking, pharmaceuticals, and healthcare. Network and data center management tasks also are increasingly outsourced. Such tasks are handled by separate companies abroad that specialize in particular and often narrowly focused services, and are located in societies that are perceived as future power-houses of innovation, including India and China. U.S. corporations became early adopters of the business process
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outsourcing (BPO) and call center industry in the early 1980s, however, less than a decade later most large corporations headquartered in other industrialized countries also began offshoring jobs related to call center services, payroll, and software application development. Some multinational companies including General Electric, Hewlett Packard, and Deutsche Bank created their own “captive” organizations in developing countries. Thus, some offshore work is not necessarily outsourced. In another significant development, Hindustan Computers Limited (HCL), previously owned by Deutsche Bank and now one of India’s leading IT and technology companies, initiated a process now called reverse-outsourcing by establishing call centers in Northern Ireland to obtain language skills and infrastructure advantages. Nearsourcing is a relatively new term indicating a tendency to re-assess the original enthusiasm for outsourcing business components to developing countries far away from corporate headquarters. Some European and U.S. corporate leaders find it easier to employ teams with closer “cultural proximity” and ideally reach their sub-contracted facilities within a short 3-4 hour flight. European Union (EU) member states have developed a strong interest in highly capable Eastern European IT and call center operations, specifically those located in Poland, Slovakia, or Hungary since they are now an integral part of the enlarged EU. Their universities have a tradition for excellence in the technical sciences, producing graduates strong in mathematics and computer science while salaries are only about half of those in Western Europe (Woodard, 2007). Leveraging language skills can play a significant role in such choices as many Polish and Hungarian employees speak German, English, and other languages. But Western European businesses also go beyond E.U. borders by seeking out IT experts in Ukraine and Russia. U.S. businesses nearsource to Canada and also throughout Latin America, where there appears to be a particular interest in Central American Free
Trade Agreement (CAFTA) countries, including the Dominican Republic. High-speed Internet connections make outsourcing, offshoring, and nearsourcing a reality anywhere in the world, yet companies prefer to set up in politically stable (and not necessarily democratic) environments to establish sub-contracting partnerships. Clearly, this allows companies to compete more easily with businesses on a global level by collaborating with foreign companies or opening subsidiaries abroad. Recently, outsourcing structures have become more complex as offshore companies in places such as India and Eastern Europe accept sophisticated design tasks, and, in turn, outsource to companies located in even lower-wage countries, such as Indonesia or Vietnam. This “ladder” effect for comparative advantage encourages industrialized countries to specialize in “high-end” capital- and knowledgeintensive activities to attract “inshoring” foreign investment that utilizes a skilled workforce (Neuhaus & Kunze, 2006). As the offshoring market matures and becomes more sophisticated, cost alone will not be the determining factor for selecting business partners. Offshoring has evolved from shifting commodity work to low-wage countries to a web of “complex, multishore arrangements with more nuanced and strategic goals” to create a synergistic relationship between skill sets, location and cost (Brandel, 2007).
ThE basics OF glObalizaTiOn Outsourcing should be understood in the context of the larger globalization debate because of its impact on societies. According to the World Bank: … globalization—the growing integration of economies and societies around the world—has been one of the most hotly-debated topics in international economics over the past few years.
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Rapid growth and poverty reduction in China, India, and other countries that were poor 20 years ago, has been a positive aspect of globalization. But globalization has also generated significant international opposition over concerns that it has increased inequality and environmental degradation. (The World Bank, 2007) Technology has been driving the globalization process throughout history. Warfare, the most primitive form of globalization, has spread technological inventions, caused cultural diffusion, and forced the migration of millions of people. While the perspective of economists on the nature and timing of globalization tends to represent a more short-term (post-1970s) emphasis on corporations and technology, political scientists and sociologists analyze globalization trends from the perspective of the rise of modern capitalism as it emerged in the 16th century (Pieterse, 2004, p. 17). Historians and anthropologists, in contrast, take a much more long-term approach to examining social forms of interactions (Pieterse, 2004). Pointing to the Middle Ages when people traded with each other, historians suggest that global trade crossed great geographic distances. The famous Silk Route provides a convincing example to illustrate the long-standing exchange of goods between European and Asian traders. The Economic and Social Research Council (2007), an independent British research institution, proposed a categorization of the globalization phenomenon into four sub-categories including (a) economic globalization (the expansion of financial capital and markets), (b) political and military globalization (the increase of global interdependence and of political actors), (c) social and cultural globalization (the movement of ideas, values and people), and (d) environmental globalization (the long-distance transport of often harmful substances, etc.). For the purpose of this chapter, the authors broadly define globalization as an economic, political, and social process that fundamen-
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tally changes the way in which the international economy is organized. Globalization means that instant telecommunications and modern forms of transportation now prevail over economic barriers and political boundaries that once tended to insulate countries from each other’s influence and economic pressures in the past (Mittelman, 1997). The effect has been powerful. People and organizations around the globe now interact in ways that challenge the established post-war order within the economic, social, political, cultural, and ideological realms. Social scientists disagree about how governments should respond to the displacement of workers as a consequence of globalization, and to what extent the middle class in high-wage countries will shrink in the coming decades. In the highly industrialized, technologically advanced world, workers who are currently excluded from the workforce will require specialized job training programs if they hope to re-enter the job market. New and young entrants into the global job market require entirely different preparation to be able to compete in the future. As a result, the European Union re-launched its Lisbon Plan in 2005 for sustained growth and new employment opportunities, hoping to position its member states as knowledge-based economies rather than competing with inexpensive labor or exploiting natural resources. In the developing world, the discussions are less lofty but have focused on the need to increase educational opportunities for young people who may otherwise become permanently excluded from entering the global workforce. Cognizant of this reality, knowledge workers and managers alike require a clear understanding of the political, socio-economic, and ideological discord that exists as a result of the impact of globalization on different societies. A lack of attention to such issues will lead to poor decision making—causing long-term damage to corporate interests abroad.
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discussiOn OF lEnsEs Global IT is taking us into uncharted territory, which is transforming our cultures, politics, legal systems, and economic systems. Any discussion on offshore outsourcing will be incomplete without taking into consideration various factors that influence decision-making processes. When technology relocates, it does not do so in a vacuum. It relocates along with capital and labor in multiple contexts of culture, economy, and politics. Therefore, we provide the multi-lens model, which we hope will enable a holistic understanding of offshore outsourcing. The multi-lens model diagram (Figure 1) incorporates a variety of perspectives and ideas that researchers and corporate decision-makers might not consider in order to gain insight into the complexities of the globalization debate today. The proposed set of lenses (technological, political, organizational, economic, legal, educational, and cultural) encourages analytical thinking about how a variety of countries, corporations, social groups, and individuals perceive both threats and opportunities presented by the outsourcing phenomena. Within each lens, the unit of analysis can be at the international, national, or organizational level. The reader will encounter many examples of crossconnections between the lenses, where topics could just as easily be presented in other lenses. This is a natural result of using our approach— recognizing interrelationships reinforces a holistic understanding of globalization in general and outsourcing in particular.
The Technological lens In Strategic Outsourcing, Benn and Pearcy (2002) highlight technology as the leading catalyst in the present wave of outsourcing. The emergence of global communications systems has driven globalization to new levels. Internet bandwidth is plentiful and inexpensive due to an over-investment
during the dot-com boom in the U.S. The Internet, as an interoperable “network of networks,” provides seamless global communication regardless of the computer system used or the geographic location of the user. Since the Internet reduces transaction costs to almost zero, newly industrialized countries can quickly become producers of information products, using the Internet as a delivery mechanism. This increases competition since geographic distance can be overcome with a simple click of a mouse. Decision-making power becomes diffused because consumers can now search for the lowest available price. Although the Internet facilitates entry into global markets to challenge established and large companies, continuous innovation, personal contacts, and cultural understanding will be required to maintain a competitive advantage. The Internet permits instantaneous interconnectedness and an easy way to disseminate information and products. New “time-compression” forces have been unleashed to speed up product development cycles. Products become obsolete or commoditized quickly, and trends happen quicker. Information gathering and distribution happens at little cost to individuals enabled by cell phones/cameras, Web sites, and blogs. The Internet tends to break up information monopolies leading to state agencies and companies to lose absolute control of the flow of information. Organizations are adopting e-commerce and other sophisticated global information systems to integrate with suppliers, customers, distributors, and other stakeholders to cut costs and provide the best value for their customers. The open-source movement uses global collaboration to create excellent software at no cost, giving individuals and companies in newly industrialized countries the basic and necessary software components such as operating systems [Linux] and Web servers [Apache] to launch their own e-commerce sites. The cost dynamic between Linux and Windows may change due to
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the emerging pool of low-cost Linux developers and system administrators in India, China, and elsewhere (Fishman, 2005). Workflow technology that automates and monitors complex business processes has been instrumental in increasing the efficiency of call centers and other BPO organizations. Companies like the American National Insurance Company use workflow software to provide their call center agents with instant access to customer information and to enforce business rules (Worthen, 2004). Similarly, European call centers have invested in automatic call distributor (ACD) devices to handle heavy flows of incoming calls. ACD systems route incoming calls based on a set of instructions that determine the best available employee for a specific type of incoming call. The routing instructions are often linked to regional language specializations, accents, or other variables that are taken into account to determine why the customer contacted a call center. ACD systems consist of hardware for terminals and software for the routing strategy. An additional function for these external routing applications relates to computer telephone integration (CTI) technology. CTI allows call center agents to be highly efficient as the routed customer call pulls up data that informs the agent on the PC about the customer’s prior history of calls, the number of complaints filed, or purchases completed. The agent can then quickly assess how to deal with the customer and even decide to re-route him/her to someone better prepared to respond to a specific inquiry based on available data. Management can easily monitor calls and track workflow statistics. Workflow extends to manufacturing as well. Some companies, like Dell computer, have moved from mass production to mass customization, a demand-pull rather than supply-push model, which means that a Dell computer is not assembled until a customer configures and orders it over the Internet. Sophisticated supply chains like Wal-Mart will order a replacement item as
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soon as it is scanned at the checkout register. The use of extranets (secured access into an information database) as a way to link a company with suppliers, distributors, and other stakeholders is becoming commonplace. Similarly, supply chain management offers a strategic advantage for many companies, and represents the manifestation of globalization as the physical Internet of products flowing from country to country. However, some flexibility may be required for maintaining continuous operation in politically sensitive or disaster-prone areas of the world. Companies are discovering that different supply chains may be needed for different products, and instant communication is required to keep “just in time” inventory costs down and to avoid the whiplash effect of variances in demand being amplified within the supply chain (The Economist, 2006). The worldwide sourcing of components is evolving into a supply web that is constantly changing. The use of radio frequency identification (RFID) tags to continually track the location of goods throughout the supply chain is becoming commonplace. These tags, along with tag readers and software allow an unprecedented level of real-time visibility into the supply chain. Sophisticated RFID tags can detect temperature changes or the impact of dropped goods. An emerging global concern is that the radio frequencies assigned to such devices has not yet been standardized among countries. Videoconferencing, voice over IP (VoIP), and the availability of other computer-mediated communication between workers at any location increases collaboration and productivity, and makes offshoring of complex projects possible. While occasional face-to-face meetings contribute to building trust among team members and can be critical for promoting understanding, most projects can be kept on track through the complementary use of e-mail, videoconferencing, source code version control software, and other technological innovations such as wiki that enables the creation of collaborative Web content and project
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documentation. The “Wikipedia” is an example of this technology. Sophisticated Internet-based multiplayer computer games such as World of WarCraft utilizing 3D-simulated worlds are being developed around the world. Some companies are using this game technology for training and team building (Jana, 2007). All of these collaborative technologies depend on a robust and secure Internet; the global supply of customers and potential partners also includes a global supply of hackers. Providing secure network connections continues to be a challenge. The rapid global adoption of the Internet and creation of new products that communicate using the Internet protocol (IP) is leading to a shortfall of unique network addresses. In a way, the Internet is a victim of its own success. The version of IP commonly in use (version 4) was not designed for such expansion and uses a 32-bit network address mechanism that does not efficiently allocate all 32 bits. Many countries already use a technical work-around called network address translation to share IP addresses. A global transition to IP version 6 that provides 128-bit network addresses and improved security features will be necessary in the near future (Hain et al.). China already has embarked on the China Next Generation Internet (CNGI) project to use IP version 6 to support its computer infrastructure and its burgeoning population of mobile data networking users, who access Internet services. Cell phone technology allows emerging countries to leapfrog the traditional wired telephone network and go directly to advanced communications services. Competition among cell phone manufacturers is increasing as China enters the market. The potential for cell phone games and as a mechanism for mobile commerce—the buying and selling of goods and services through wireless devices—is driving innovative, high-end applications. The use of cell phones for commerce is still in the experimental stages, but prototypes for vending machines that dispense soda in response
to a customer calling a number posted on the machine already exist in South Korea, Japan, and Europe. The charge shows up on the customer’s phone bill. Other approaches include using the cell phone as a charge card. Purchases are captured by a radio transmitter in the cell phone and a special receiver at the point-of-sale terminal (Baltzan & Phillips, 2008). It is clear that, in the past, technology was merely a business tool. Today it drives the direction of businesses as one of the most powerful competitive advantages outsourcing firms can have over their rivals in the fast moving economic landscape.
The political lens The political lens is an important one because understanding the nature of politics in the globalized world lessens the risks of conducting international business and better prepares outsourcing managers for political events that may hinder business process outsourcing opportunities. Yahoo’s travails are a striking reminder that even if the Internet reduces the distance between two points, politics will always matter. The study on human organ selling in China was self-censored by Yahoo on its China Web site, because Chinese officials had been implicated in the scandal, though the article received substantial attention on its U.S. Web site. Yahoo decided it was better to censor itself rather than risk offending Chinese authorities (Wild, Wild, and Han, 2005). The political lens may be understood at multiple levels: a. b. c. d. e.
Political risk. Situations of insurgency, terrorism, and regional instability. Immigration laws, anti-immigration sentiments, and movement of labor. Acceptance of foreign capital. Governmental intervention.
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Managers must be aware of how political risk can affect their companies. In a broad sense, macro political risk threatens all companies regardless of industry. Among political factors that concern U.S. corporate management during a decision to outsource to a particular location will include foreign governments’ attempts to control the flow of information, the potential for corporate espionage, sudden regional instability, and terrorism. The growing practice of abducting engineering and IT staff for ransom in Nigeria and Mexico now worries U.S. and European managers, as regionally based violence and the potential for acts of terrorism deter investment. In the Philippines, a preferred location for offshore IT operations, a militant Muslim group called Abu Sayyaf engaged in a series of bombings, abductions, and murders. The group currently operates in the southern part of the country (Mindanao) and is accused of past collaboration with Ramzi Youssef, who was involved in the 1993 World Trade Center bombings. Unanticipated political events can cause sudden and severe interruptions to regular business operations. The recent military coup targeting the elected prime minister of Thailand, or the violent protests in Hungary as a response to the ruling government’s misleading information about the state of the economy, are typical examples. It is impossible to prepare for all contingencies, but business managers must be aware of potentially disruptive political developments, and implement plans that position the corporation with flexible and possibly redundant business capabilities. Immigration policies and movement of labor across countries has been critical to the outsourcing debate. In the U.S., outsourcing became an issue in the 2004 U.S. presidential election. From 2001-2003, 180,000 new foreign IT workers had been contracted in the U.S. Growing political pressure from displaced technology workers culminated in Congress lowering the number of H1-B visas to 65,000. This level was reached very quickly, even though Congress approved 20,000
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extra visas in 2004 (Francis, 2004). H-1B visas allow workers to reside in the U.S. for up to six years and require paying comparable U.S. wages. Although companies must certify that bringing in these “specialty” workers won’t eliminate U.S. jobs, some U.S. labor unions claim that H1-B visas were designed for short-term niche labor shortages and are being misused for long-term IT positions that have the effect of driving down wages in the U.S. for the benefit of businesses by substantially increasing the size of the labor pool. However, the growth of offshoring tends to reduce the immigration of technology experts, since they can now find jobs that allow them to enjoy a high standard of living in their own countries. In reaction to an intensification of the antiimmigration mood in the U.S., some politicians proposed stricter tax policies on companies that relied substantially on offshoring, while others criticized state agencies, including Indiana’s department of labor, for outsourcing IT work (Ribeiro, 2003). Following the dot-com bust in 2001 with immense pressure on companies to reduce expenditures, the number of outsourcing contracts increased and employees of multinational companies were transferred to the U.S. on L-1 visas that do not require salaries comparable to standard U.S. wages. The L-1 visa, which is an intra-company transfer of employees from a foreign company to a U.S. company, has no ceiling. During the last few years the U.S. issued approximately 320,000 L-1 entry visas each year (NASSCOM, 2004). In addition to the introduction of antioutsourcing bills in the U.S., there is a rising political awareness of the effects of outsourcing and immigration in the European parliament and other related institutions. According to Kabayashi-Hillary (2002), the European Trade Union Congress has started to take the view that corporate restructuring related to outsourced services may be for short–term profit at the cost of long-term sustainable development. An issue
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of concern is the fact that IT experts from Eastern Europe, Ukraine, and Russia temporarily work in Western European facilities. They receive training for particular projects prior to their return to their respective home countries where they lead specialized software development teams. Germany, in particular, pursues this nearsourcing approach since many of the foreign IT workers speak both German and English fluently. German IT experts interviewed for this chapter complained that such arrangements lead to a reduction of overall wages, lower traditional benefits packages, and weaken both development and control over software development projects. On the global level, lower-wage countries are spurring investment by fostering transparent government with less corruption, free markets, and convertible currency. Other factors include having an autonomous legal system, tax laws that protect foreign investment, and a sound transportation and information infrastructure. Equitable privacy and intellectual property policies also are critical success factors. A recent A.T. Kearney report in Foreign Policy (2005) ranked countries by their “globalization index.” The index based on four general areas includes: Economic Integration (trade and foreign investment), Technological Connectivity (number of internet users and hosts, network infrastructure), Personal Contact (travel and tourism, telephone traffic, compensation and other transfers), and Political Engagement (membership in international organizations, treaties signed, UN presence). The highest ranked countries in the report were Singapore, Ireland, Switzerland, the United States, and the Netherlands. The report also found a “strong relationship between globalization and political freedom” and that “globalized countries have lower levels of perceived corruption” (p. 59). Positive political will toward foreign capital is another factor of which companies should be well aware. Governments can hinder smooth business operations through tariffs, quotas, embargoes, lo-
cal content requirements, administrative delays, and currency controls. Managers of companies that intend to outsource should do a thorough analysis of political and governmental policies. A clear example of positive political engagement relates to China’s decision to join the World Trade Organization (WTO) in 2001. All WTO members comply with the same tariff regulations and must allow arbitration for trade disputes. Although some Chinese companies are subject to foreign competition, a number of industries in China remain protected, forcing foreign companies to form alliances with Chinese manufacturing and distribution firms. Political tensions between mainland China and Taiwan, and growing trade disputes continue to present the main threats to developing more efficient U.S.-China relations. For example, the China Currency Act of 2005 (HR 1498) specifically targets the undervaluation of the Yuan as “both a subsidy for exports from the People’s Republic of China and a non-tariff barrier against imports into China, to the serious detriment of the United States manufacturing industry.” China also has been criticized for maintaining import tariffs in some industries and shutting out foreign firms from government contracts (Magnusson, 2004). The future of world organizations setting global standards for trade agreements, the management of financial markets, and concerns related to social justice is uncertain. The 2006 WTO Doha round failed to consider the specific needs of poor and less-developed countries as trade ministers from highly industrialized nations protected their own interests. The U.S. called for liberalization of markets while protecting its agricultural subsidies for cotton, rice, and soybeans. The EU and India criticized farm subsidies but were unwilling to cut their own farm and industrial tariffs (The Economist, 2006a). Although multilateral trade agreements reduce the complexity and level the playing field for smaller, impoverished, and less technologically
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advanced countries, most successful trade agreements now occur on a bilateral level or take place between politically aligned trading blocs. Stiglitz (2003) heaps criticism on the International Monetary Fund because the IMF did not take into account how people would be affected by its cookie cutter solutions to economic crises. Some of the IMF’s policies for developing countries included implementing strict budgetary controls and preferred payback to creditor banks. This resulted in massive unemployment, artificially high exchange rates, and rapid privatization of industries and natural resources, often at bargain prices for buyers linked to corrupt governments. In addition, ensuing one-sided trade liberalization policies opened up developing countries’ markets to goods from developed countries without granting similar access to markets in Europe and the United States.
The Organizational (management) lens The most immediate and obvious implication of outsourcing for U.S. and Western European companies relates to the replacement of internal jobs with hires abroad. The advantages of lower labor costs, cheaper real estate, and related support staff expenses must be weighed against the loss of valuable employee knowledge and experience. In addition, negative effects on company morale can increase turnover, create inefficiencies among insecure teams, and even encourage acts of sabotage. Other concerns include loss of control of IT projects, especially if subcontracting occurs, and the need to acquire expertise in negotiating outsourcing contracts. Effective management of remote teams becomes more complex and can create a feeling of disconnect between the corporate mission and the teams abroad. Scheduling work becomes more complicated because of different (and more frequent) holidays in Europe and by weekends that start on Thursdays in Israel. High
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turnover rates in India and elsewhere among programmers and call center technicians lead to project delays, quality concerns, and uncontrolled dissemination of proprietary information. The potential advantages of outsourcing are considerable. Companies can quickly acquire technology expertise utilizing best practices, gain increased flexibility for variable demand for IT services, and free up internal staff for highervalue, strategic projects. Many companies take advantage of time zone differences to operate 24x7. Off-hours call centers and IBM’s “Java Around the Clock” programming teams are examples. Sometimes, mainframe and other computing resources can be used more effectively by staggering the workload over the entire day. Outsourcing and offshoring can be thought of as organizational innovations in response to the availability of a large pool of talented and inexpensive labor along with an abundance of network bandwidth and networking infrastructure in developing countries. This is different from internal process improvements, such as total quality management and continuous improvement that were developed in Japan and other countries in the 1980s that mostly targeted manufacturing jobs. Today, outsourcing primarily affects professional, knowledge-based jobs. Businesses outsource “any activity where we can digitize and decompose the value chain” (Friedman, 2005a), and “activities comprising a job that does not require physical proximity, local knowledge, and complex interactions” (Magnusson, 2004). Software development, IT services, banking, and insurance sectors are particularly susceptible to outsourcing, while customer-facing service jobs are less amenable to outsourcing (McKinsey, 2005). Globalization exerts pressure on businesses to compete in the global market and take advantage of offshore talent through innovative ways to “fragment complex management processes and reintegrate them into the whole” (Pralahad, 2005). Companies are learning how to outsource
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and how to determine what level of outsourcing works for them. Many begin this transition by “transaction outsourcing” that outsources only “well-defined processes that have clear business rules” (Overby, 2005). Transaction outsourcing does not require protracted contract negotiations or extensive hands-on management. This work is readily extractible from the value chain, and non-core as it does not have significant strategic value. Most companies choose to retain control over strategic, proprietary processes and methodologies, so that they can distinguish their brand in order to charge a premium. Successful companies adapt quickly to new market conditions and seek competitive advantage through technology. These “virtual firms” use networks to create and link dynamic workgroups without being limited by traditional organizational structures or geography. IBM has implemented this idea globally by creating a human supply chain that tracks the skill set of its technical staff and optimizes the creation of teams worldwide to work on specific tasks. Engineers track world news events and weather patterns in command centers to anticipate problems. IBM has increased its presence in India from about 9,000 employees in 2003 to over 43,000 in 2006. Other staffing increases took place in China, Brazil, and Eastern Europe to give IBM flexibility to perform work at many locations using the most appropriate people for the job (Hamm, 2006). A related organizational innovation, virtual integration (also known as insourcing), combines separate organizations to operate as a single entity as far as the customer is concerned. An example of this is Toshiba and UPS. Broken Toshiba laptop computers are sent via UPS to their repair center staffed by specially trained UPS employees (Bowman, 2005). Innovation is becoming the most important strategic advantage. Former outsourcing companies are now developing their own electronic designs and software to compete with their former
trade partners. Businesses focus on controlling leading-edge technologies and products to attain the best profit margin, otherwise they risk becoming a low-profit commodity supplier. Another approach for fostering innovation in organizations is deploying Business Intelligence technology so that employees at all levels and all departments can make better and faster decisions. This is done by loading information from a variety of organizational and external databases into an enterprise data warehouse, and providing users with intuitive reporting and analytic tools to mine the warehouse for patterns and trends so that the company can quickly respond to changing business conditions and opportunities. Some organizations have been able to sell information from their data warehouse as a value-added product, turning a former cost center into a revenue stream. Increased competition from efficient firms around the world increases the importance of becoming a “learning organization” by “creating new business knowledge, disseminating it widely throughout the company, and quickly building the new knowledge into their products and services” while encouraging new ideas and calculated risktaking (O’Brien & Marakas, 2006). A successful business strategy emphasizes creating value for the consumer. That, however, can only be achieved once human resources—and not just financial capital—are categorized as essential. Training, coaching, and ongoing performance evaluations encourage staff to feel valued and appreciated by the company. In particular, it is essential for IT teams abroad and call center supervisors and their team managers to perceive themselves as empowered decision-makers within the organizational structures. Effective team building takes place in less rigidly organized environments that encourage staff members to feel empowered to pursue solutions that satisfy customer needs. Organizational structures that encourage continuous learning, team-oriented attitudes, and independent decision-making capacities on all levels of the
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company succeed at satisfying customer needs at a much higher level.
The Economic lens The economic lens reveals a very important dynamic that continues to drive the outsourcing movement. An increase in trade opportunities along with greater access to information has allowed millions of consumers in newly industrializing countries to consider global goods and services. At the same time, access to new markets also has created large cohorts of knowledge workers ready to compete for jobs in finance, information technology, insurance, and many other service areas. By 2004, the effects of globalization were swift and stunning—the market research company, “International Data Corporation (IDC) valued the annual global business process outsourcing (BPO) market at $382.5 billion, a 10.8% jump over 2003. IDC estimates that by 2009, the market will hit $641.2 billion. GE has gained significantly by offshoring of business services to India over the last 6 years. It has invested close to $400 million in India. Annual revenues are at about $1 billion and the company saves $300 million every year” (Couto & Divakaran, 2006, p. 2). Also, estimates exist that in the areas of application development, integration, and maintenance, offshore IT services providers have already reached a 17% market share, increasing to a 24% share by 2008 (Gens, 2004) and that finance and accounting outsourcing will exceed $47 billion by 2008. A study by Forrester Research indicates that over 3 million professional and service jobs will move out of the U.S. by 2015 (McCarthy, 2002). Economic theory predicts that work and production of goods will move to regions that permit cost-structure efficiency. Outsourcing work not only frees up capital, it also allows employees to do different, more sophisticated work, resulting in a cheaper and better final product. However,
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the expanding labor market exerts tremendous downward pressure on labor costs. Overseas firms offer high-quality work at much lower costs in comparison with Western European and U.S.-based companies, often by paying workers 75% less. Attendant support costs, such as health benefits, taxes, and workplace and environmental regulatory requirements also can be much lower offshore. The lack of unions and organized labor in developing countries contributes to this trend, although that will be changing in a number of newly industrialized countries including Mexico, China, and India. The emerging middle class in India is pushing up wages and benefits, prompting Indian companies to outsource work to even lower-wage countries. Call centers, once known for driving the Indian high-tech revolution, are becoming a commodity. The Indian trade organization NASSCOM estimates that call centers account for only 35% of the business process outsourcing industry as compared to 85% in 2000 (Kripalani, 2006). Indian companies are taking on call center tasks only in conjunction with high-margin software development and data center management contracts, prompting some companies to consider building call centers in lower-cost areas in the U.S. or Canada. More and more frequently now, European companies are opening up call centers closer to their own operations, preferring Eastern Europe and Ireland at the moment. Although offshoring drains jobs from highwage countries, workers and companies in newly industrialized countries can now afford to buy products from highly industrialized countries, resulting in a much larger market for goods and services. The growth of the middle class in India and China has raised literacy rates and the standard of living while enabling more women to enter the workforce, resulting in reduced birth rates and child mortality (Friedman, 2005a).
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The legal lens The legal lens allows for an examination of corporate preparedness on the international, national, and local organizational levels. It is important for organizations to understand the legal environment in which they operate. Some countries have enacted laws that restrict transborder flow of data or require the data to reside on a server within the country of origin. In addition, negotiating outsourcing contracts to ensure that proper safeguards are included is a complex process and requires expert advice. Successful contracts require the outsourcing company to perform background screening of their employees and to hold them responsible for any actions that break contract agreements (non-compete agreements and intellectual property clauses, for example). It also is important to build flexibility into the contract to allow for changing business conditions. In addition, the contracting company needs to verify network security and to ensure that test data does not identify actual customers (Fitzgerald, 2003). In countries where the legal framework provides for portable health care insurance, pension benefits, and continued training, displaced workers have the opportunity to move to new jobs in a new industry (Friedman, 2005c). Increasing numbers of labor activists in the U.S. push for the creation of legislation that provides government benefits for retraining, healthcare, and relocation expenses for displaced IT workers by expanding the Trade Adjustment Assistance act (Thibodeau, 2006). In Western Europe, such rights have been guaranteed through the Lisbon Accords. Since offshoring jobs are predominantly knowledge-based today, the enforcement of intellectual property laws abroad has become crucial to protect patents and copyrights. Several high-profile cases have alerted corporate managers to this growing problem. The lack of a police response to a stolen source code in India (Vijayan,
2004), and Indian call-center staff members who used passwords from banking customers to transfer funds to their own accounts are just two examples (Puliyenthuruthel, 2005). In June 2006, an HSBC employee was charged with stealing confidential data of the bank’s customers in the UK to illegally transfer their money. Working for HSBC in Bangalore, India, the employee accessed personal security information leading to an estimated loss of 233,000 British pounds. A similar case was reported from MphasiS BFL, New Delhi. Several employees of this firm were involved in a scam that targeted Citibank trying to steal approximately $350,000. Such instances are common in the corporate world. However, it is complicated when fraudulent cases involve cross-border legalities. Similarly, China’s lax enforcement of software, music, and movie piracy are a major concern as well. It is estimated that over 90% of Chinese computers run on pirated or unlicensed software, contributing to the ability of Chinese companies to underbid U.S. rivals (Magnusson, 2004). A related issue is the lack of environmental and labor/workplace regulations that allow countries to create below-market prices for goods and services. This so-called “China price” reflects exploitation that ultimately damages both trading partners in the long run. Trade agreements must deal with this unfair arrangement to address the treatment and living conditions of labor. It should be noted, however, that an increasing number of countries recognize offshoring as a strategic imperative for their economic well-being and have taken dramatic steps to rectify some of these problems. Of interest to corporate managers are the Global Sullivan Principles, developed by the Leon H. Sullivan Foundation, that promote a holistic approach to economic, social, and political justice for corporate relationships with local communities. The principles support human rights, equal opportunity, racial and gender diversity on decision-making committees, and serve to improve the quality of
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life in communities important to the economic success of corporations. Collaborative agreements and economic partnerships between companies that outsource projects and communities abroad can lead to more profitable outcomes and reduced legal costs. With knowledge as an evermore valuable asset and increasing access to instantaneous global communication, it is important to ensure that the legal contract defines how knowledge related to an outsourcing relationship should be treated. Kobayashi-Hillary (2002) remarks that: International clients, particularly U.S. companies, tend to throw in their standard intellectual property clause and assume that U.S. law would govern. That is not the case if another country’s laws apply; special requirements for assignment need to be fulfilled for the client to own the intellectual property. International clients also need to ensure that the dispute resolution mechanism specified in the contract can be enforced, for example, a U.S. court judgment cannot be enforced in all countries. (p. 202) The U.S. Department of Commerce recommends that businesses create contracts containing very clear terms for payment and performance standards when dealing with Chinese firms. It is important to be specific about when events happen and which currencies will be used. The mechanism for contract disputes should be stipulated in the contract. Usually the first approach to invoke is simple negotiation; Chinese government-recognized arbitrators may be used if negotiations fail. Furthermore, all agreements should be in compliance with WTO rules (U.S. Department of Commerce, 2003).
The Educational lens Outsourcing has exacerbated the global competition for brain power or intellectual capital. In the
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past, the best and brightest students dreamed of going to the U.S. for graduate school or to obtain a professional job. That has changed, however. Today, offshoring can provide high quality jobs in newly industrialized countries and does not require extended stays in either the U.S. or in Europe. Excellent universities in China and India (University of Science and Technology of China, Indian Institute of Technology, and Indian Institute for Management) are attracting top-quality students. The United States attempts to attract students by creating 20,000 visas for foreign workers who hold graduate degrees from U.S. universities. A National Academy of Science report recommends “granting automatic 1-year visa extensions to foreign students in the U.S. who receive doctorates in science, engineering, or math so they can seek employment here” (Friedman, 2005b). Although post-9/11 immigration restrictions remain a barrier for some foreign students wishing to study in the U.S., many American universities have established partnerships with foreign institutions to expand research collaboration, increase their international stature, and to facilitate student and faculty exchanges. The sheer number of foreign graduates is staggering. Some 70,000 new accounting grads emerge from Indian universities each year and many start their careers at a pay rate of about $100/ month. India has some 22 million graduates (6 million science graduates, 1.2 million engineering graduates, and 600,000 doctors). China had more than 2 million students graduating from its universities in 2003 (600,000 engineering degrees, 200,000 science degrees, and 100,000 medical degrees) (Wharton School, 2005). However, companies should ensure that the degree-granting institutions represent the quality education they officially claim. The percentage of students that graduate with engineering, math, or science degrees in Asia (Japan: 66%, China: 59%) is substantially higher than in the U.S. (32%) (Friedman, 2005a).
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Meanwhile, the number of U.S. college freshmen planning to major in computer science dropped to 1.4% in 2004, down from 3.4% in 1998 (Denning, 2005). In the U.S. 12th graders scored below the national average of 21 other countries in math and science, identifying a growing weakness within the educational system (Friedman, 2005b). Requiring sciences and mathematics in every year in high school and substantial efforts to encourage women and minorities to study engineering could increase U.S. competitiveness in the coming decades. An article published in the New York Times (2005) outlined the economic risks linked to faltering governmental and private support that at one time could be counted on to spur invention and scientific research. Now the long-term outlook required for breakthrough research results, often gives way to short-term commercial interests because immediate returns on incremental improvements have been preferred in the U.S. The need for increased funding for basic scientific research is becoming a more and more serious issue as the U.S. trails many Asian countries in research and development funding as well as the number of doctoral degrees awarded in science and engineering. An interesting indicator for this shift is that the number of U.S. patents awarded to foreign residents has grown to about 50 percent of the total (O’Brien, 2005). To address this issue, two important shifts need to be taken into consideration with regard to education. There is an alarming lack of new U.S. scientists, especially among women and minorities, and there is woefully insufficient funding for basic research in engineering and the physical sciences. If these developments are not reversed, the U.S. will lose both its technological and innovative edge within the coming generation. Recent calls for educational reform are reminiscent of the United States’ response to the Soviet Union’s launching of the Sputnik satellite in 1957. By 1958, the U.S. had passed
the National Defense Education Act in response to the challenge. In effect, this nationalized the education system to meet the needs of Cold War competition by adopting more formal methods of instruction, and providing economic and other incentives for private and state universities to perform federally supported research. While the U.S. government expressed a willingness to invest heavily in education, innovation, and research at that time, that is no longer the case today. It also is interesting to note that both Russia and Japan have backed away from state-mandated curricula and exam-driven assessments as the U.S. continues to broaden the use of standardized examinations as exemplified by the No Child Left Behind Act. The downturn in the Japanese economy in the 1990s fueled educational changes to respond more effectively to the pressures of globalization. Japan determined that its educational system needed to de-emphasize uniformity and promote innovation by decentralizing control of schools, to allow more parental involvement, and increase intellectual diversity. A Japanese educational report stated that “people in the world are linked directly, information is instantly shared, and the globalization of the economy is progressing. The structure and aspects of society have been changing on a global scale, and complexities have emerged which are difficult to cope with given existing organizations and systems. … The traditional education system is lagging behind the current of the times” (Spring, 2006, p. 217). Clearly, the U.S. Department of Education ought to take studies and trends in the international educational arena into account to prepare future generations of U.S. students for an increasingly globalized market. Businesses need to take increased interest in training their knowledge workers to maintain their competitive edge. EDS is a leading example by “providing 20,000 of its 87,000 technical workers with updated business and technology skills... by enrolling in one or more of the 718 training
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courses it has set up for 2005” (Hoffman, 2005). Some analysts stress that people skills and verbal communication skills are equally important as technical skills to develop future leaders with the ability to synthesize and integrate knowledge across many disciplines. The E.U.’s educational policy uses regionalism to cope with global economic competition by encouraging students to learn two additional languages beside their own, while emphasizing sciences and mathematics. The “Lisbon strategy” includes improving education and teacher training, and developing skills for a knowledge-based society by improving access to IT, increasing recruitment in scientific and technical studies, and an emphasis on lifelong training. Several European countries have initiated apprenticeship programs to train call center operators able to respond effectively to customer needs in multiple languages. Their training consists of effective e-mail responses to customer inquiries, problem-solving, and technical training. One company, Techovate, has hired young, adventurous European workers for their call centers in India. These workers receive the prevailing Indian pay, live quite well locally, and gain valuable international experience that often leads to management positions after several years abroad (Overdorf, 2005). The U.S. faces a politically charged problem with regard to language studies. Cultural conservatives support English-only instruction to enhance national unity and economic strength, which also is enforced by the No Child Left Behind Act. Some politicians believe that it is unnecessary to learn other languages since the U.S. dominates the world economic scene, but others are realizing that “gaps in our national language capabilities have undermined cross-cultural communication and understanding at home and abroad” (Spring, 2006, p. 249). An article in Education Week reports that “national-security experts have warned that U.S. foreign-language capabilities are insufficient to meet the demands for translators, analysts, and
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other critical positions in government and business” (cited in Spring, 2006, p. 249). This shortage has prompted the U.S. Department of Defense to open foreign language centers.
The cultural lens Cultural understanding and cross-cultural communication is a significant driver for offshore outsourcing. It is also one of the most neglected issues often causing consternation among corporate managers. At the outset, culture does not seem to be a factor in the cost-cutting equation of outsourcing, but it is important for enhancing communication and for the development of strong client-vendor relationships. Prahalad and Lieberthal (1998) raise some pertinent questions: “How many of today’s multinationals are prepared to accommodate 30 % or 40 % of their top team of 200 coming from China, India and Brazil? How will that cultural mix influence decision making, risk taking, and team building? Diversity will put an enormous burden on top-level managers to articulate clearly the values and behaviors expected of senior managers, and it will demand large investments in training and socialization…” (cited in Deal, 2000). Cultural sensitivity or rather the lack of ethnocentrism plays a pivotal role in international business. Inter-cultural communication between clients and vendors across the globe will require cultural literacy in terms of understanding the other culture to function effectively within it. Managers in the outsourcing business should be aware that different cultures have different attitudes towards work and time. People in Latin America, Mediterranean and South Asian cultures are casual about their use of time, while Americans and Japanese are typically punctual. Notable cultural differences exist in leadership styles, too. Large American firms developed leadership in terms of professional management and its capital is obtained from the capital mar-
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kets rather than from private family fortunes. Therefore, their leadership styles are responsive to boards of directors and to Wall Street (Quinn, 2005). Other cultures may have a high prevalence of family based leadership styles. Quinn (2005) notes that European and Japanese chief executives are the most consensus-oriented, and Chinese and American top executives are more likely to make decisions based on their own sense of accountability. When a company is hiring a vendor for outsourced work, it should acquaint itself with local leadership styles and work ethic. Organizations hoping to operate successfully on a global level must be cognizant of both language and cultural traditions in order to promote their goods effectively in the global marketplace, particularly when collaborating with offshore companies. In addition, social pressures among workers in newly-industrialized countries, who earn a higher than average income in comparison with workers in other sectors, can quickly reject traditional arrangements of communally-oriented decision making, which often creates intergenerational or communal conflict. A host of cultural challenges for new and established business ventures can be found in every country, and even in specific regions within each country. Corporate managers interested in serving the best interest of their company, and keen on satisfying both the needs of their customers and employees, need to display clear signs of cultural competency and sensitivity. Managers must now be astute observers of political and social conditions, and attain the ability to acquire superb local support networks, including language experts. Operating a supply chain in China, for example, can create obstacles that are unfamiliar to many U.S. and European managers. The Chinese government regularly interferes with international trade regulations complicated by the fact that laws are not uniformly enforced. The practice of bribing, although officially classified
as a crime in China as in the U.S. and Europe, is a reality in China and can become necessary to accomplish specific transactions. Personal relationships—guanxi—play an important role in Chinese business, leading many Western companies to hire Chinese import/export companies to utilize their regional contacts in order to expedite customs clearances and facilitate other transportation issues (Koch, 2005). A collaborative relationship with local experts, not just expatriates who have long-standing experience in a country, creates a network that allows for rapid assessments of emerging cultural conflicts and can reduce disputes over the interpretation of contractual terms. The Internet and other commercial forces have spread pop culture through music, movies, and fashion, but the underlying ideas and values expressed through pop culture often cause the most intense cultural disagreements around the world. The Internet as a medium for cultural exchange has prompted some to protect their regions from perceived threats of Western influence. Negative public reactions to the dissemination of Western commercial and media images, and the availability of certain products have caused disruptions, particularly in countries where cultural taboos, religious beliefs, and social conservatism are in direct conflict with more liberal traditions in the West. This leads to restrictive import laws in several Islamic countries such as Pakistan, Iran, and the Gulf States including Saudi Arabia where sexuality and women’s roles in society are formalized, controlled, and restricted. The Wahhabi reform movement, which originally emerged within Saudi Arabia, introduced limits on the use of alcohol and tobacco, and imposed a far stricter enforcement of rules related to the segregation of the sexes. Over the past decades Saudi Arabia spent substantial amounts of money on religious and social projects in other Muslim countries that are dependent on financial support from wealthy oil countries in the Gulf region. As a consequence,
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a growing number of religious institutions have made a reactionary shift towards conservative ideas and values. Managers must be fully aware that the impact of globalization, including the spread of ideas, customs, and commercial ventures, has been highly controversial in many countries. While an increasing amount of web pages in languages other than English will eventually cause a backfeed of ideas and practices from East to West and from South to North, the current dominance of English and Western concepts of commercialism often threaten local cultures. Supporters of globalization argue that the spread of ideas such as democracy and capitalism will lead to eventual improvements in standards of living worldwide. They propose that free markets will allow people in less developed countries to gain economic opportunities that they did not enjoy before. Opponents of globalization, however, assert that free markets provide multinational corporations with the ability to ignore labor, cultural, human rights, and environmental standards to increase their profits. In turn, those profits are utilized, critics suggest, to continue to marginalize or exclude local enterprises and cultural peculiarities. This translates into a growing gap between the wealthy and the poor, some of whom remain permanently excluded from the benefits of globalization. Stiglitz (2003) warns that rapid globalization can have a devastating impact on the environment, and also inhibits cultural adaptation to market changes, resulting in increased crime, migration, and other effects of social dissolution. The widespread use of English in business and media is driving a process of cultural homogenization, albeit to varying degrees. International aid organizations, such as the World Bank, the Asian Development Bank, the Association of Southeast Asian Nations (ASEAN), the International Monetary Fund (IMF), the United Nations (UN) and other non-governmental organizations use English as one of their predominant working
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languages. English has become a vehicle for participation in the global economy and has taken on a utilitarian, commercial purpose. English, however, also represents a different legacy. It is one of the languages of colonization, used to train the native elite to implement repressive laws on behalf of the colonizers and to protect colonial structures. The dominance of English today creates new global boundaries based on emerging post-modern social and economic class structures. The lack of specific language skills can create insurmountable barriers, prohibiting people from contributing their knowledge and experience to conversations about their own country’s future, and its political, economic, and socio-cultural direction. Elite schools that teach English in developing countries often exacerbate economic inequalities that contribute to strong anti-western feelings. After several devastating terror attacks in Africa, Europe, Australia, and the U.S. it has become quite obvious that studying English and having a sense of familiarity with Western education and culture may not necessarily lead to the adoption or acceptance of those value systems, but instead can contribute to a process of extreme alienation and rejection. In the case of India, it is clear that the country enjoys a language advantage in comparison with other newly industrialized nations such as Mexico. India’s English-speaking workforce, its strong cultural bias towards education and selfimprovement opens up vast opportunities for the current generation of young and educated workers. But some language difficulties continue to persist. For example, Dell closed a customer support center in India because customer satisfaction plummeted after callers failed to understand accents or terminology used by call center staff (Castro, 2003). However, there are many successful help desk operations and call centers in India who provide their employees with specific language training in American, British, and Canadian accents to facilitate communication and improve customer
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service. Most call center respondents interviewed for this chapter in Bangalore have gone through “accent neutralization” courses. Call center agents are expected to speak without a heavy accent. It is interesting to find “call center colleges” and training institutes that initiate the young workforce into the outsourcing culture. In India, English language skills can raise an individual’s income from about $80/month to over $200/month within a call center environment and in data entry related employment. This represents a dramatic rise in social status. Call center work is much more respected in emerging countries than in highly developed countries. A call center college principal in Bangalore interviewed for this study remarks: “The training program goes on for 4-5 weeks. We assure them placement on the successful completion of the training. The idea is to get into an international call center because of the higher pay-scale…Some companies have higher demands. For example, IBM wants royally excellent people.” Some Asian countries, including Japan and China, maintain their strong national identity while focusing on English language instruction. Japan promotes English at all levels of school, and encourages overseas study. China highlighted its growing competency in English by competing for and winning the bid to host the 2008 Olympics. Many countries emphasize the utility of English as the common commercial language yet support regional and national languages in schools and at home. Local dialects and expressions are often helpful for creating effective advertising campaigns although the pervasiveness of international consumer brand names regularly contributes to the adoption of foreign phrases, symbols, and terminology. Many transnational corporations have successfully adapted to local tastes while maintaining their brand identity.
FuTurE rEsEarch dirEcTiOns: gEndEr, hEalTh, and EnvirOnmEnT We propose gender, health, and environment as three additional areas that merit attention for future research directions. The increasing and evolving role of women in IT and outsourcing makes it imperative for future research agendas to do a systematic analysis of gender issues. In addition, health and environment directly impact employees’ levels of stress, absenteeism, and customer service. Managers will need to assess the conditions under which employees work prior to undertaking outsourcing initiatives. The BPO industry is witnessing an overwhelming entry of women into the hi-tech workforce in countries like India, Israel, and Turkey. However, in developing countries, “women are concentrated in routine jobs at lower levels and lower salaries than men. For example, women constitute a disproportionately high number of employees in call center services, data entry, and programming, but there are very few women at the managerial levels” (World Bank, 2006). This reality must be taken into consideration. Hafkin and Taggart (2001) argue that, in order to retain and build upon the employment gains associated with globalization and information technology, women also need to have the opportunity to move into more technical, higher-level, and better-paying jobs. It is essential to note that global information technology and offshore outsourcing does not simply have an impact on technical aspects of a society, but also influences social aspects. This is nowhere more evident than in the discussion of gender. When women enter technological spaces, they are also promoting social and cultural changes. Increased employment opportunities allow women to control their earnings and strengthen their status within the household. Over time women become empowered as wage earners and eventually gain a political voice in countries where they have not mobilized traditionally. Just as technology is often
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accompanied with social change—Jansen (1989) aptly remarks “technological designs are social designs” (p. 196)—gender has a similar impact. Many outsourcing stakeholders are increasingly realizing the importance of gender issues and capability building among women (Brennan, 2004). In countries like India, where women would have ordinarily worked in a typical 9-5 job or stayed at home, they are breaking conventional barriers by working at odd hours, usually the night shift. They are making use of multiple domain expertise like banking, insurance, investment, and information technology. The ratio of Indian women software professionals in information technology is rising steadily and is likely to be 65 (men):35 (women) by the end of 2007 (Padmanabhan, 2006). In contrast to the Indian scenario, a recent study conducted by the Information Technology Association of America shows a large decline in women’s workforce in IT (it was 41% in 1996 and fell to 32.5% in 2004). This reduction in the percentage of women in the IT workforce primarily targeted women holding administrative positions (Bakshi, 2005). Besides India and China, Israel is another big player in the BPO space. Additional countries where a growing number of women work in call centers include South Africa, Northern Ireland, Ireland, the Philippines, the Czech Republic, Poland, Hungary, and Russia. In 2004, the proportion of male versus female workers in IT services was 76:24, while in contrast, the ratio stood at 31:69 in the BPO industry. Such developments make it obvious that an understanding of gender issues becomes imperative for managers who lead BPO and call center operations in countries where growing numbers of women are employed. Successful managers are expected to be sensitive to gender-specific concerns and to take appropriate action to protect female employees from sexual harassment, a hostile work environment, and outright violence.
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One issue that often intersects with gender is that of safety of women employees—an issue not to be ignored by managers developing an outsourcing blueprint. The most pressing issues regarding women who work in BPO firms in India deals with their physical safety following the end of their shifts. With close to 40% of women in BPO’s working during the night shift, the possibility of physical assaults and violence against them is high. In a particularly notorious case, a young woman working for HCL’s call center in Bangalore was brutally raped and murdered in 2005. As a result of public pressure, companies increased security and offered female employees guarded transportation that drops them at home. The ability and willingness of corporations to protect their female employees from violence will determine the future role women play in the BPO industry in many markets. Mainstream research on offshore outsourcing has often ignored the issues of employee wellness and health. It is interesting to note that employee health and wellness have been incorporated in western organizational philosophies. However, when such companies outsource their work to some of the cost-effective locations these issue are often compromised. In a post-modern organizational culture, wherein capital and labor are witnessing cross-border travel, so should the philosophies of health and wellness. Considerations related to the working environment ought to be of particular interest to managers keen on working with a highly motivated and energetic workforce. Managers must be concerned with social and ethical implications of outsourcing. Workers who experience inhumane working conditions such as poor air quality, a lack of air circulation and excessive heat, the absence of proper sanitary facilities and potable water will eventually commit acts of sabotage or direct their anger at someone within call center operations. As Weincek (2004) remarks, “one current ethical question with which managers must deal with is determining what
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should be the company’s responsibility for outside workers, their work environment, and their community? …Should the outsourcing company ensure that the workers are treated fairly by the company’s standards? Should the outsourcing company be responsible for employee safety and working conditions?” (p. 149) Qualitative data collected for this research— primarily in the form of interviews from callcenter employees—brought the health issue to the forefront of the outsourcing debate. The criticality of health as an emerging consideration was one of the central themes generated by our respondents. One of the respondents for this study rightly remarks: Surely health problems. Your biological system is changed. You are awake at a time when your system is used to sleep. I have acidity problems and problems related to digestion. We skip many meals or eat them at odd times. That does not go well with the body clock. Managers need to ponder such employee concerns since motivated and loyal employees who work in a healthy atmosphere are crucial to maintain a long-term sustainable advantage. Several factors contribute to the lack of attention to environmental and labor issues in IT outsourcing. The first is a narrow understanding of IT outsourcing in developing countries, with a specific focus on core capabilities. Mitchell (2004) argues that outsourcing brokers, client representatives and third party project managers in the IT and BPO outsourcing arena do not wish to risk alienating their clients, colleagues and counterparts by raising issues of environmental responsibility and fair labor practices offshore. Industrial companies in India have opened software development and call center divisions to take advantage of the tax holidays provided to firms with export-oriented IT divisions. These tax holidays are being used to declare income from polluting industrial activities as having been de-
rived from IT operations. An industrial firm with an IT division can avoid high Indian tax rates on non-IT income by routing that income through a firm’s IT division. (Mitchell, 2004: 1) In response to such developments, social justice non-profit organizations propose ongoing training and education seminars for employees as a vehicle to empower workers to become leaders within their own societies. The aim is to protect not only labor standards, but also to improve environmental standards and conserve land and resources for future generations. Global environmental issues are very real and growing: a study released by environmental groups in China found that nearly two hundred of China’s largest cities had dangerously high pollution levels (Fishman, 2005). In countries with a high percentage of indigenous populations such as Guatemala for example, it is important to establish a flow of communication with local community leaders and activists to support the preservation of indigenous peoples’ traditional knowledge and to show respect for their relationship to their region’s natural resources (Spring, 2006).
cOnclusiOn Assessing political, organizational, economic, technological, educational, legal, and cultural considerations can turn a disappointing outsourcing experience into a successful partnership. Companies need to encourage their project managers to become intellectually curious about issues beyond the immediate technological and bottom-line questions at hand in order to maintain a high level of competitiveness in a globalized market. Many aspects of programming and accounting work are becoming a commodity. Flexibility and continued innovation are needed to “create value through leadership, relationships, and creativity.” Special attention should be paid to the dynamic of adding value with higher-end customer services such as systems analysis or financial services
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rather than routine tasks (Kearney, 2005). In this era of globalization, BPO managers and executives need to prepare employees to develop skills that encourage team-building, cultural sensitivity, and political literacy. To be competitive in the modern workplace, decisionmakers need to develop a holistic approach to analyzing future opportunities, or they will find themselves ill-prepared to deal with unanticipated or surprising events. The multi-lens model provides managers with a tool that helps them anticipate potential obstacles to a successful outsourcing experience in newly industrialized countries. Decision-makers can utilize the lenses to gain valuable perspectives and insights into a world less familiar to them, and develop a holistic appreciation for the confluence of different, but tangential global dynamics that shape our lives and, inevitably, our future.
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Brennan, L., & Johnson, V. (2004). Social, ethical, and policy implications of information technology. London: Information Science Publishing. Castro, A. (2003, November 24). Amid complaints, Dell closes overseas call centers, USA Today. Retrieved April 27, 2007, from http:// www.usatoday.com/tech/news/2003-11-24-dellsupport-home_x.htm Couto, V., & Divakaran, A. (2006). How to be an outsourcing virtuoso. Strategy + Business. Retrieved September 10, 2006, from http://www. Strategy-business.com/resilience/rr00036 Deal, T., & Kennedy, A. (2000). The new corporate culture. Cambridge, MA: Perseus Books. Denning, P. J., & McGettrick, A. (2005, November). Recentering computer science. Communications of the ACM, 48, 15. ESRC (Economic and Social Research Council). Retrieved April 12, 2007, from http://www.esrc. ac.uk/ESRCInfoCentre/about/CI/CP/Our_Society_Today/globalisation/GloExp.aspx?Compon entId=15223&SourcePageId=16965 Fishman, T. (2005). China, Inc. New York: Scribner. Fitzgerald, M. (2003, November). At risk offshore. CIO Magazine, 17(4). Francis, D. (2004, October 14). Endangered species: US programmers. Christian Science Monitor, 17. Friedman, T. (2000). The Lexus and the olive tree: Understanding globalization. New York, NY: Anchor. Friedman, T. (2005a). The world is flat. New York: Farrar, Straus and Giroux. Friedman, T. (2005b, October 14). Science needs to top national conversation. The Times Union.
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Friedman, T. (2005c, May 31), Globalization 3.0. Blueprint Magazine. Retrieved May 10, 2006, from http://www.dlc.org Gens, F. (2004, October). Offshoring U.S. IT services: It’s less and more than you may think. Retrieved July 10, 2006, from http://www.idc. com Hain, T., et al. (n.d.). e-Nations, The Internet for all. Retrieved April 10, 2007, from http://www.nav6tf. org/documents/e-Nations-Internet-For-All.pdf Hamm, S. (2006, June 5). IBM wakes ip to India’s skills. Business Week. Hoffman, T. (2005, March 7). EDS pushing massive IT retraining effort. Computerworld. Jana, R. (2007, March 12, p. 2). Inside innovation: Custom corporate games. BusinessWeek. Kearney, A. T. (2005, May/June). Measuring globalization, Foreign Policy, 52-59. Kobayashi-Hillary, M. (2005). Outsourcing to India: The offshore advantage. New York: Springer. Koch, C. (2005, October). Making it in China. CIO Magazine, 19(2).
Mitchell, A. (2004). Offshore environment, labor practices challenged. In E-Commerce Times, Retrieved April 12, 2007, from http://www.technewsworld.com/story/37586.html Mitchell, A. (2004). Environmental impacts of outsourcing. In E-Commerce Times. Retrieved April 12, 2007, from the World Wide Web http:// www.technewsworld.com/story/37421.html Neuhaus, M., & Kunze, F. (2006). Inshoring to Germany: Global networking is not a one-way street. Deutsche Bank Research. Retrieved on April 5, 2007, from http://www.dbresearch.com O’Brien, J., & Marakas, G. (2006). Management information systems. Columbus, OH: McGrawHill. O’Brien, T. (2005, November 13). Not invented here. New York Times, p. 21. Overby, S. (2005, October). Secrets of the outsourcing masters. CIO Magazine, 19(1). Overdorf, J. (January-February, 2005). Outsourcing jobs to … Europeans? Business 2.0, 6(1), 32.
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Padmanabhan, P. (2006, March). Women and IT: Perfectly matched. CIOL. Retrieved September 10, 2006, from http://www.ciol.com/content/ search/showarticle1.asp?artid=81488
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Spring, J. (2006). The rise of the educational security state. Mahwah, NJ: Lawrence Erlbaum. Steger, M. (2003). Globalization: A very short introduction. New York: Oxford University Press. Stiglitz, J. (2003). Globalization and its discontents. New York: W.W. Norton and Company. Strategic Review 2004. The IT industry in India. New Delhi: NASSCOM. The Economist. (2006, June 17). The physical Internet: A survey of logistics, pp. 1-20. The Economist. (2006a, July 29). The future of globalization, p. 11. Thibodeau, P. (2006, April 24). IT inion head opposes H-1B increase, seeks aid for workers hit by offshoring. Computerworld, p. 20. U.S. Department of Commerce. (2003). Dispute avoidance and dispute resolution. Retrieved April 29, 2007, from http://www.export.gov/china/ exporting_to_china/disputeavoidanceandresolution.pdf Vijayan, J. (2004, August 30). A painfully slow process. Computerworld. Wharton School. What’s driving India’s rise as an R & D hub? Knowledge @ Wharton. Retrieved September 10, 2006, from http://knowledge.wharton.upenn. edu/index.cfm?fa=viewArticle&id=1274&spec ialId=40 Wiencek, D. (2004). Ethical challenges of information systems: The carnage of outsourcing and other technology–Enabled organizational imperatives. In L. Brennan & V. Johnson (Eds.), Social, ethical, and policy implications of information technology. London: Information Science Publishing. Wild, J., Wild, K., & Han, J. (2005). International business-The challenges of globalization. Upper Saddle River, NJ: Prentice Hall.
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addiTiOnal rEadings Castells, M. (1996-1998). The information age: Economy, society, and culture. Oxford: Blackwell. Crothers, L. (2007). Globalization and American pop culture. New York: Rowman and Littlefield Publishers. Giddens, A. (1999). Runaway world: How globalization is reshaping our lives. London: Profile Books. Hafkin, N., & Taggart, N. (2001). Gender, information technology, and developing countries: An analytic study, for the Office of Women in Development Bureau for Global Programs, Field Support and Research, United States Agency for International Development (USAID). Retrieved April 12, 2007, from http://www.usaid.gov/wid/ pubs/hafnoph.pdf Hall, E. T., & Hall, M. R. (1990) Understanding cultural differences. Yarmouth, ME: Intercultural Press. Hawkesworth, M. E. (2006). Globalization and feminist activism. New York: Rowman and Littlefield Publishers.
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Krieger, J. (Ed.) (2006). Globalization and state power. New York: Pearson Longman Publishers. Lechner, F., & Boli, J. (Eds.). (2000). The globalization reader. Malden, MA: Blackwell Publishing.
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This work was previously published in Handbook of Research on Global Information Technology Management in the Digital Economy, edited by M. Raisinghani, pp. 257-280, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.5
Offshoring:
The Transition from Economic Drivers Toward Strategic Global Partnership and 24-Hour Knowledge Factory Amar Gupta University of Arizona , USA Satwik Seshasai International Business Machines (IBM) Corp., and Massachusetts Institute of Technology, USA Sourav Mukherji IIM Bangalore, India Auroop Ganguly Oak Ridge National Laboratory, USA
absTracT The changing economic and labor conditions have motivated firms to outsource professional services activities to skilled personnel in less expensive labor markets. This offshoring phenomenon is studied from a political, economic, technological and strategic perspective. Next, an analytical model is developed for achieving strategic advantage from offshoring based on global partnerships. The model studies the impact
of offshoring with respect to the complexity and strategic nature of the tasks and presents a decision strategy for obtaining value through offshoring of increasingly complex tasks. The result is an integrated “24-hour knowledge factory” that is based on a sustainable global model rather than a short term fiscal model. This 24-hour paradigm embodies the shift-style workforce that evolved for the manufacturing sector during the Industrial Revolution and relies on a set of critical success factors in the current environment. A case example
is provided from IBM to illustrate these underlying critical success factors.
prOlOguE The idea of Citibank developing software in India makes no sense at all. Software needs to be developed by people who can meet frequently with the persons who will use the software, so that frequent interaction can occur among the concerned persons at all stages: prior to development, during development, and after development. Even if we assume that such interaction could occur without frequent face-to-face meetings (and I don’t agree with this at all), the time difference between India and the U.S. will make it impossible for the concerned persons to talk by phone. Further, Citibank has virtually no presence in India, and doing business in India is very difficult; so if computer software has to be developed in Asia, we would probably do it in the Philippines where we have significant business presence and there are trained programmers who can interact well in India. In the context of our banking business, the cost on computers is very small. We are not looking for reductions in cost; we are looking for ways to expand our banking business. The previous opinion was conveyed by the then vice president of Citibank, Korea, in a meeting at the corporate headquarters of Citibank in early 1980s to one of the authors (Gupta) of this article. At that time, the latter was completing his MBA at MIT Sloan School and his doctorate in computer science. Based on his prior experience of working in India, he was trying to convince multinational companies about establishing new business endeavors in non-traditional host environments. If U.S. is the ideal place to produce certain kinds of goods and Japan is the right place for others, then India should be a good place to develop software on the basis of its core competency of having inexpensive, highly educated, English-speaking
programmers. After the previous interaction with Citibank in New York, the concerned author met with the top executives of Citibank in India and the idea progressed further. While the particular author opted not to join Citibank as an employee, the idea eventually blossomed into Citibank Overseas Software Limited.
currEnT siTuaTiOn With a growing labor market abroad and a challenging economic situation in U.S. and several other developed countries, large and small firms are making the push to outsource professional services to highly skilled personnel in less expensive labor markets abroad. A Nasscom-McKinsey study cited a 34% increase in Indian software and services export from 2004 to 2005, from $12.8 billion to $17.2 billion (Nasscom-McKinsey, 2005). This study states that by 2010, the U.S. IT and BPO offshoring market will be $55 billion. The current situation of reduction in costs vs. loss of jobs, at least in the short-run, bears some similarity to the dilemma faced by the automotive industry in the early eighties when some of the parts began to be manufactured in lower cost countries such as Mexico. At the time, some observers perceived that too many U.S. jobs were being sent offshore, and that the impact to the U.S. economy would certainly be negative. However, a detailed analysis of that situation highlighted the danger of adopting a restrictive policy. This analysis revealed that increasing global competition required the United States automobile companies to outsource manufacturing to a certain degree, or to risk losing the world market to other countries that could produce cars cheaper and better. As Lester Thurow puts it: “There were only two long-term viable alternatives: either half the car is produced in Detroit and the other half in Mexico, or the whole car is produced in Japan. By attempting to use legislative measures to tilt the balance in favor of Detroit over Mexico, one
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would in fact be tilting the balance in favor of Japan (Thurow, 2003).” The subsequent events have validated this assertion and the efficacy of the hybrid model. Professional services, especially IT services such as software development and technical support, are at a similar stage, with some constituencies of the society using cost and time considerations to encourage outsourcing while other segments of the society applying pressure to maintain jobs within the U.S. Reports from leading industry groups on offshoring contain a base assumption that offshoring is a cost-driven activity. A 2006 Association of Computing Machinery (ACM) report describes opportunities for nations to benefit from offshoring due to comparative advantage but does not discuss the potential of a global workforce (Asprey, Mayadas, & Vardi, 2006). The report does describe the opportunities for all nations to benefit due to economic theories of comparative advantage, however it does not discuss the opportunity to utilize a globally distributed workforce to transform the dynamic within which offshoring is conducted. Similar reports from the Institute of Electrical and Electronics Engineers (IEEE) and the National Society of Professional Engineers (NSPE) also describe offshoring in the context of cost-savings and advocate offshoring only when talent is not available in the U.S. as well as training programs to improve talent in the U.S. (IEEE, 2004). Of the approximately $1.45-$1.47 of value derived from every dollar spent offshore, U.S. firms receive $1.12-$1.14, while foreign firms receive only 33 cents of the value (McKinsey, 2003). Further, if income taxes paid by H1-B visa holders, and software and service imports by India are considered, outsourcing provides an aggregate benefit to the U.S. economy of $16.8 billion (Endleman, 2003). Another factor to be considered is that the average age of the U.S. working population is declining, and the U.S. Census figures indicate that the U.S. will require an additional 15.6 million workers to maintain the
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current working population in 2015 (Economic Times, 2003). The 24-hour knowledge factory concept described at the end of this article broadens the view of offshoring from a cost-savings exercise to a strategic optimization of globally distributed workforce. We describe a framework for transforming to a strategic global partnership and employing a 24-hour model of continuous work on knowledge-based deliverables.
pOliTical pErspEcTivE In November 2003, Governor Joe Kernan of Indiana canceled a $15.2 million contract with Tata America International Corp., a New Yorkbased subsidiary of Tata Consultancy Services (TCS). The Tata entity had won the contract over competing bids from Accenture LLP and Deloitte Consulting LP; its own proposal was $8.1 million to $23.3 million less than those of its competitors. The late Governor Frank O’Bannon had approved the contract before his death in September 2003. Up to 65 contract employees were stipulated to work alongside 18 state workers. All work was to be done at the Indiana Government Center, but the selected vendor was free to bring in additional workers from anywhere and pay them as it deemed fit. No Indiana-based companies had submitted proposals. Governor Kernan stressed that his decision to cancel the contract did not reflect on the ability of TCS to complete the job or any other shortcomings. Stuart Anderson of the National Foundation for American Policy and Cesar V. Conda, former domestic policy adviser for Vice President Cheney, highlight the fact that the impact of this reversal on Indiana taxpayers will be very significant (Anderson & Conda, 2003). In this case, the next lowest bidder was $8.1 million more than Tata’s bid. Since the contract involved about 65 employees and since TCS was obligated to retain
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the existing Indiana workers, choosing a U.S. firm would impact a maximum of about 50 jobs. Assuming the extreme scenario that all these 50 jobs would now go to residents of Indiana, this still implies that the taxpayers of Indiana will now bear a cost $162,500 per new employee-a cost that most taxpayers would probably be unwilling to pay. Furthermore, as Anderson and Conda point out, by limiting the bidding to instate contractors, policy-makers are ignoring the economic principle of comparative advantage, and increasing the cost of future contracts since there will be fewer competitors. Contrast this with a parallel development in the city of Springfield, Massachusetts. Its mayor decided that all drugs for city employees would henceforth be bought in Canada where the prevailing prices are between one-fifth to one-half of the comparable prices in the U.S. This would save the city millions of dollars each year. This aspect acquires special importance under the current economic conditions when many state and local governments are facing significant financial problems. Bills proposed over the recent years at the federal and state levels in the U.S. have attempted to use the government’s authority in granting H1-B and L1 visas to combat companies who had replaced American jobs with offshore workers (Nanda, 2003). These bills were considered even though a GAO report had stated that more study was required to determine the true effects of the H1-B visa program on the American workforce, and the impact cannot yet be fully understood (U.S. GAO, 2003). Several states in the U.S. have pending bills that would prevent the outsourcing of government IT jobs to abroad. Other bills would require call center employees to identify themselves by their real name and the location they are based in (thereby discouraging outsourcing of technical support and other types of customer support). Many of the pending bills seek to use the power of government contracts to curb outsourcing. The proposed
pieces of legislation usually fail to consider the long-term impact on citizens, shareholders, and taxpayers. For example, keeping IT jobs in the United States is likely to be more expensive, and these costs ultimately will be transferred to citizens, either in the form of increased taxes or reduced corporate dividends. The proposed legislative actions are gaining attention and are partially fueled by the desire to capture the attention of the unemployed persons. While these proposed laws might offer some shortterm benefits to some persons, they fail to consider the long-term impact on the broader population or present the full picture to the electorate. For example, if one asks the voters to choose between retaining 1000 jobs in a particular state or letting them go abroad, virtually all voters would opt for the former option. What happens if one asks a more relevant question—“Do you prefer that 1000 jobs stay in the state or do you prefer a tax reduction of $150 per year?”—the latter benefit would occur if these jobs are permitted to go outside the state.” In this case, many voters may opt for the reduction in their taxes, even if the two numbers were different from these hypothetical numbers for their respective states From a labor perspective, most professional service workers are not unionized, though several observers have cited this possibility as being a likely trend, especially in the software industry. Groups such as the IBM union and the Seattle union represent the rights of a subset of software workers and advocate leaving American jobs in America. If an increasing number of professional workers enroll in unions, the new labor unions may impact the larger political landscape and alter the existing balance between management and labor. In order to mitigate the types of pressures previously described, one needs to think of new hybrid work paradigms that yield the best cost performance ratios by having part of the work performed in the U.S. and other parts abroad.
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TEchnOlOgical pErspEcTivE A survey of over 50 software executives participating in offshoring concluded that “offshoring will live or die based on the ability of everyone involved to communicate with each other.” (Sand Hill, 2003) Richer collaboration technologies need to become available in order to enable simultaneous use of video, audio, and other messaging capabilities to link geographically and temporally separated personnel. The outsourcing of professional services requires firms to transfer knowledge via formal and informal channels within their organizations, as well as to establish and preserve knowledge repositories both for offshore teams to come up to speed on new tasks and for onshore teams to learn what is being done offshore. Such efforts require deep understanding of evolving technology and business needs. A Merrill Lynch report concludes that India is the most preferred destination for outsourcing (Subramanian, 2002). The key is to educate the concerned individuals both on the opportunities as well as on the process, and to use technology to develop an understanding of what is best done in the U.S. and what is best done offshore. The delineation of what components of jobs should be performed in developed vs. developing environments requires an intimate appreciation of the cultural and social issues such as language and education; this also involves understanding the technical requirements of each type of job. Certain jobs that are communications intensive, or have significant hardware or infrastructure requirements, may be more suited for one location vs. another. As countries begin to appreciate this aspect, they may make critical investments in nurturing new technologies to support emerging market needs. Plambeck and Taylor’s (2005) model of original equipment manufacturers (OEMs) pooling capacity with other OEMs, as opposed to using contract manufacturers (CMs), in an effort to invest in innovation, could be used to demonstrate the importance of integrating the
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various phases of the design and development process in industries such as software.
NATIONAL POLICY CHALLENGES in a glObal EcOnOmy The potential distribution of work across geographic and temporal boundaries requires careful delineation of the economic ramifications of alternative distribution models in order to elicit the optimal benefits from the outsourced model. While some lessons can be learned from the experiences of globalization in manufacturing industries, the inherent distributed nature of the new paradigm presents new challenges. In testimony before the U.S. House of Representatives Committee on Small Business, Assistant Secretary for Technology Policy Bruce Mehlman has cited the United States policy strategy to be based on an investment in education, infrastructure, innovation, and to highlight existing benefits such as intellectual property protection (Mehlman, 2003). Such a strategy suggests that the most sustainable model will be to prepare U.S. professional service workers to perform higher-level tasks and allow tasks, which require less education, training, and infrastructure to be performed abroad. Rather than use these strategies to build a legislative wall around the United States, tasks will be performed much more efficiently because the U.S. engineers will be equipped to handle the more specialized parts of the shared onshore-offshore projects. The benefits of onshore and offshore engagements, as reported by the U.S. Department of Commerce Office of Technology Policy after convening business, university, and government leaders, are summarized in Table 1(Mehlman, 2003). The report of the U.S. Department of Commerce entitled “Education and Training for the Information Technology Workforce” states that IT employers are looking for a specific blend of
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Table 1. Comparative benefits of onshore versus offshore scenarios Onshore Benefits
Offshore Benefits
People
Talent pool is unmatched
Untapped talent pool
Business climate
Entrepreneurial, market-based, Less burdensome taxation, regueasy access to capital lation, litigation
Infrastructure
Telecom, energy, transport
New global clusters created
Market access
Innovation in largest market
Untapped markets
Intellectual property
Commitment to patents
Government
Political stability
Quality of life
Freedom, health care, security, environment
Cost
Talent, facilities cost less
Proximity to manufacturing
Plants are already offshore
technical and business skills, and that they prioritize a minimal amount of training (Meares & Sargent, 2003). This notion of flexible training that will allow workers to succeed in a changing marketplace for professional services is useful in determining the strategic direction for both onshore and offshore firms. In outsourcing of professional services, the set of relevant stakeholders involves include parties from both developed and developing nations. Now, companies in developing nations themselves are beginning to outsource to other markets to spread their labor costs. Another emerging issue relates to the digital divide created by enclaves of digitally enabled citizens benefiting from the outsourced opportunities living in close proximity to much poorer fellow citizens. The disparity in living standards creates potential political, social, and organizational risks. This is a matter of concern for governments of developing nations hosting the outsourced contracts; it is also a matter of concern for governments of nations such as the U.S. that are witnessing increasing investing in regions over which they have little control. Based on the latter concern, it may be in the interest of the U.S. government and industry to invest in the educational and economic improvement of developing nations. But this is a tough politically sustainable strategy since the apparent goal of such invest-
ment would be to provide more opportunities for foreign workers to acquire U.S. jobs. The relationship between these stakeholders is complex. On one side, we have the workers and the need to retain professional service jobs remain within the United States; on the other, we have significant cost savings accruing to the firms who are hiring the foreign labor. Long-term solutions such as better education, better infrastructure, and better intellectual property protection, as suggested by Mehlman, are irrelevant in the short-term in terms of their ability to resolve the issues faced by these stakeholders.
crEaTing nEw sTraTEgic glObal parTnErships The sustainability of offshore outsourcing practices depends critically on their ability to satisfy the needs of the stakeholders, from the dual perspectives of the offshorer and the offshoree. Emotive debates apart, dispassionate academic studies focusing on this global phenomenon have been limited. This article focuses on organization-level profitability resulting from offshoring activities, with respect to the complexity of the tasks that are offshored. Based on insights from the literature and real-world experiences, an analytical model is
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Table 2. Summarizing the key stakeholders Outsourcing Nations
Host Nations
Professional service workers losing jobs Firms hiring foreign labor Legislators responsible for economy Regulators Government procurement Customers of professional services
Professional service workers being hired Firms providing outsourcing service Policy makers responsible for economy Citizens not being hired for professional services
created; the model demonstrates that offshoring of complex and strategic tasks can result in increased profitability and larger market share, compared to offshoring of simpler and more tactical tasks. The evolution of the business model and process capability is becoming of the mechanism for achieving strategic advantage in offshoring (Athreye, 2005). Indian firms especially are found to be moving up the value chain into strategic partnerships (Arora et al., 2001). These findings indicate that to reap the full benefits from offshoring and to develop sustainable models, one needs to treat offshore vendors as strategic partners rather than as mere low cost service providers.
building on the Foundation of Offshoring The global phenomenon of offshoring refers to “offshore in-sourcing” (where an organization moves parts of its operations to offshore locations) or “offshore outsourcing” (where an organization assigns specific jobs or projects to other offshore companies). Offshoring can be studied at three levels: micro or individual level, meso or organizational level, and macro or national and global level. While debates concerning micro and macro levels frequently garner significant visibility in the media, this section of the article focuses on the organization (meso) level and proposes an analytical model to understand how the complexity of the offshored tasks relates to the sustainability of the offshoring model. While there is a general understanding that organizations typically outsource non-core
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activities in order to gain from labor arbitrage, evidence from research suggests that it is often more profitable, from the client perspective, to outsource projects that are more complex and strategic in nature (Gopal, Sivaramakrishnan, Krishnan, & Mukhopadhyay, 2003). As such, there is need to develop a long-term partnership between the client and the vendor/service provider, instead of maintaining an arms length contractual relationship between them (Choudhury & Sabherwal, 2003; Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). The performance of more strategic services translates into greater revenue and greater “customer-stickiness” for the vendor (and hence, lesser associated risks); in addition, there is evidence that more strategic projects yield greater profitability for the client, and results in a win-win relationship that is sustainable on a long-run basis (Plambeck et al., 2005). Cachon and Harker (2002) argue that by leveraging scale economies, outsourcing contracts can create economic value, both for the client and the vendor, even in the absence of other cost benefits. Accordingly, the outsourcing argument seems to be transiting from pure “cost savings from labor arbitrage” to that of “value creation through leveraging of resources”—a more sustainable proposition, only if clients and vendors are prepared to get into a strategic, long-term relationship. Our real-world experiences seem to validate the previous. One of the authors (Ganguly) was employed with a couple of companies in the U.S. where he witnessed offshoring of simple and tactical tasks as well as complex and strategic tasks. The first company was a giant software vendor
Offshoring
specializing in database and enterprise-scale applications development, and the author oversaw offshoring of simple, tactical tasks in the area of demand planning software to the company’s Indian subsidiary; the offshoring of relatively simpler tasks led to nominal returns on investments, and the offshore unit was treated as mere low-cost service provider. The second company was a venture-backed niche software vendor in demand planning and related areas, and the author oversaw offshoring of strategic, complex tasks to the company’s unit in Israel; the strategic relationship facilitated disparate skills to be leveraged almost round the clock in an efficient and cost-effective manner, and the employees of the offshore unit to be treated at par in terms of benefits and remunerations, after allowing for currency and living cost differentials. Oracle Corporation’s Indian subsidiary initially performed “low-end” routine tasks like maintenance of legacy applications; gradually, it became an integral part of team involved in developing Universal Server —Oracle’s flagship database product. The migration paths of “foreign factories” to higher strategic roles have been documented in cases of Motorola’s Singapore pager unit, Alcatel Bell’s unit in Shanghai, 3M’s operations in Bangalore, India, and HP subsidiary in Guadalajara, Mexico (Ferdows, 1997).
analyTical mOdEl TO guidE TransiTiOn TO sTraTEgic parTnErships In this section, an analytical model is developed based on previous work of two of the authors (Mukherji & Ganguly, 2004), to study the impact of offshoring specifically with respect to the complexity and strategic nature of the tasks offshored. This is done in two steps. First, the impact of project complexity on profitability is considered by developing a “two-country model.” This is followed with a “decision model” that in-
corporates project complexity and time duration of relationship as determinants of cost savings and risk-perception. The underlying assumptions in the analytical formulations are illustrated in Figures 1 and 2, and described in the following paragraphs. The traditional wisdom in offshoring is that vendors prefer to execute complex projects while clients prefer to offshore outsource simpler projects. The preference of the vendors stem from a desire to “move up the value chain” and to facilitate retention of employees with higher levels of core competence. The perspective of the clients is dominated by factors like the minimization of downside losses, the perception that cost benefits are maximal from offshoring simple tasks, possible compromise on product quality, and the lack of “end user” interactions of the vendors. The two-country model explores the traditional wisdom based on a grossly simplified, but nonetheless interesting, analytical formulation. Real life outsourcing decisions can be modeled as a trade-off between cost savings and enhanced risks. Both of these are functions of the strategic nature of the project or the project complexity and the duration of relationship between client and the vendor. The simplified decision model presented here rests on four key hypotheses about the nature of the offshoring processes: (i) Marginal costs savings from outsourcing increase with the complexity of tasks; the saving from simple tasks is small, it increases linearly with complexity and approaches a limit; (ii) Marginal cost savings from outsourcing for a given task decrease with time; (iii) The perceived risks of outsourcing increase rapidly with the complexity or strategic nature of the tasks; and (iv) The perceived risks of outsourcing for a given task decrease rapidly with time. Figure 1 depicts the two-country model. It considers a single task, of which x% is offshored, and for which a complexity index (z) can be defined depending upon the complex and strategic nature of the task. The costs of production are assumed
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Figure 1. A two-country model
to be constantly proportional to an increasing function of complexity, f(z), with the constant of proportionality having a higher value in the country from where the project is offshored. The coordination task is assumed to be proportional to the percent of the task offshored. These lead to: η1=α1 f(z)
(1a)
η2=α2 f(z)
(1b)
C0=χχ
(1c)
η=α1 f(z)-αfx(z)+ χχ
(1d)
In (1d), η is the total unit production cost and α is the difference in the constants of proportionality, reflecting the currency and other cost differentials. An implicit assumption of the model is that the dependence of the coordination cost on the complexity of the tasks offshored is considerable weaker than the dependence of the production costs on complexity. For constant market size assumption, we obtain the following set of equations: Unit revenue ρ=γg(z)
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(2a)
Profit P= (m1+m2){γg(z)–(α1 f(z)– αfx(z)+ χχ)}
(2b)
The unit revenue is also assumed to be proportional to an increasing function of the complexity (or strategic nature) of the product. Note that we assume for simplicity that the unit revenue is identical for the same task in the two markets (even though the market sizes for the task might differ), and obtain an expression for profit of the organization. Profit is differentiated with respect to the percent offshored x to understand the unit gain from offshoring, and differentiated once more with respect to the complexity index z to obtain the change in the unit gain as a function of the complexity of the task. Thus, we obtain: Px =∂P/∂x=(m1+m2)(αf(z)–χ)
(3a)
∂Px/∂x= (m1+m2)[αf'(z)]
(3b)
The right-hand side of 3a is positive as long as the cost reduction due to offshoring of a portion of the task from country 1 to country 2 exceeds the cost of coordination a pre-requisite for the offshoring to be initiated. The simple model results in increasing profits with the percent offshored. The change in the profit with change in
Offshoring
unit offshored is itself an increasing function of the complexity, as seen from (3b). Since f (z) is an increasing function of z, f / (z) is positive. Similar calculations can be made for constant margin and linear price elastic market assumptions. There, the first differential yields market share as an increasing function of percentage outsourced x, and the second differential shows market share per unit increase in percentage offshored as an increasing function of complexity. Decision Model: In real life decision-making situations, the benefits of cost saving is likely to be deflated by perceptions of risks. Thus, we develop a decision model outlined in Figure 2 that incorporates potential cost savings, as well as the risk potential from offshoring activities as a function of time. The model comprises of the following assumptions: 1.
2.
3.
The marginal cost saving potential due to offshoring, as a function of the degree of complexity (or strategic nature) of the tasks for a single time period, can be represented in the form of a logistic, as shown in the top
left of Figure 1. This implies that the cost saving potential from tactical and simple tasks is small (asymptotically approaching zero); then as tasks get more complex or strategic, the cost saving potential increases linearly with the degree of complexity, and finally beyond a certain level of complexity, the cost saving asymptotically approaches a limit. The enhanced risk from offshoring, as a function of the degree of complexity of the task offshored for a single time period, can be represented as an exponential function, as shown in the bottom left of Figure 2. This implies that risks increase exponentially with the complexity or strategic nature of the tasks offshored. The cost saving potential from offshoring for a given task decreases with time in a near linear fashion with a small slope as shown in the top right portion of Figure 2. The functional form used there is the exponential asymptotic function, which starts from an asymptotic limit, decays almost linearly, and then asymptotically approaches a smaller limit.
Figure 2. A decision model
Simple Tactical
Large Cost Saving
Complex Strategic
Start Time
Small Cost Saving
Small Cost Saving
Enhanced Risk Due to Offshoring
Task Complexity Strategic Requirements
Time Index High Risk
High Risk
Simple Tactical
Complex Strategic
Low Risk
Elapsed Time
Marginal Cost Saving Potential from Offshoring
Large Cost Saving
Start Time
Elapsed Time
Enhanced Risk Due to Offshoring
Marginal Cost Saving Potential from Offshoring
COMBINING COST SAVINGS WITH RISK PERCEPTIONS: GRAPHICAL REPRESENTATION
Low Risk
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4.
The enhanced risk from offshoring, for a given task, decreases with time in an exponential fashion as shown in the bottom right portion of Figure 2.
The curves assumed in this formulation are based on dual considerations of intuitive business sense and ease of analytical manipulation. The basic shapes can be justified from the insights obtained earlier from the literature review section. However, the conclusions presented here are generalizable to more complex curves. Further,
the parameters of the curves can be changed to adjust the relative scales. The decision model considers two decision parameters that indicate the desirability, in terms of offshoring for the organization of any given type of task, as measured by the complexity index at any given time. The first decision parameter computes the decision function as a time-varying combination of the risk potential and the cost saving where the risk potential is weighed more heavily during initial stages (i.e., when the clientvendor experience is low, but getting less weight
Figure 3. Time-variant decision variable decision metric a Time-variant cost versus risk balance
optimal
More complex tasks gets low points since risks are high
Tactical points low since cost benefits are low
With time, more complex tasks become optimal
complexity of Tasks strategic for business
Time index
Figure 4. Time-invariant decision variable decision metric b Time-invariant cost versus risk balance
Even without weighing the risk dimensions more, the direction suggests better returns from more complex projects, over time
complexity of Tasks strategic for business
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Time index
Offshoring
with time). The second computes the decision function as a time-invariant function of the cost savings and risks. Figures 3 and 4 show the decision variables (higher values of these variables indicate desirability of offshoring) as a function of the complexity of the tasks and the time elapsed. The decision model considers two decision parameters to arrive at desirability of outsourcing of a given task. Additive formulations have been used for the simulations after normalization. Higher values of decision variables indicate desirability of offshoring. Here the decision metric corresponding to a time-varying function has been displayed. This function allows the risk potential to have higher weights initially caused by managerial perceptions. The decision metric shows that during the initiation of the offshoring process, complex tasks are low in the list of priorities to be offshored since the perceived or real risks are higher. The extremely simple or tactical tasks have low values initially as well caused by the lower cost benefits. The presence of an optimal task complexity is therefore a possibility even during the early phases of offshoring. This is demonstrated through the decision metric at low values of the time index. However, as the time index moves forward and the offshoring processes mature, the decision metric clearly demonstrates that the desirability of offshoring the more complex or strategic tasks increases. Figure 4 is similar to Figure 3 with the exception that the decision metric corresponding to a time-invariant function has been displayed here. This function keeps the risk potential constant over time to emphasize the influence of other variables. The decision metric demonstrates that even without weighing the risk dimension more over time, the desirability of offshoring the more complex or strategic tasks increases. The results from our analytical model, as seen from Figures 3 and 4, indicate that with elapsed time (i.e., more client-vendor experience), offshoring more complex and strategic projects
become more desirable. Initially, the decision variable does not appear to optimally favor either the most strategic or the most tactical task, but a balance that is dictated by the nature of the curves (and parameters) selected. However, with time and experience, strategic tasks are increasingly favored.
completion of Transition to strategic partnership The simulations suggest the possibility that, contrary to common wisdom in some quarters, but perhaps in line with what some experts/ academicians have said, one might be able to get significant value out of offshoring tasks that are not just tactical or “simple” in nature. The possibility of an “optimal” level of complexity that maximizes the return from offshoring, at any given time period or experience level, under given situations is also suggested, within the constraint of our assumptions. In addition, the simulations indicate that the offshoring of more strategic tasks leads to higher profitability and sustainability. Accordingly, both the client and the vendor need to reinforce their efforts to explore how tasks of strategic nature can be identified and selected for offshoring, and how closer ties can be established over time between the vendor and the client. We emphasize that the managerial insights from this study are dependent on the validity of the assumptions. An interesting line of future research would be to explore the offshoring strategies from a game theoretic perspective, where clients and vendors, as well as offshoring and offshoree nations with their respective legislative bodies, are the key players. We hypothesize, without proof, the possibility of Nash-like equilibria where the equilibrium points shift from tactical to strategic partnerships as the offshoring processes mature. The maturity of the offshoring process needs to be modeled and quantified both in terms of the tactical client-vendor relationships and in terms of strategic perceptions among the stakehold-
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ers. Advances in communication technologies and the ubiquity of the Internet, as well as the breaking of traditional cultural and linguistic barriers, are key issues influencing the maturity of the tactical client-vendor relationships. The maturity of strategic perceptions will depend on various geo-political, economic, cultural, and social considerations. The concept of the 24-hour knowledge factory has the potential of influencing both the tactical relationships and the strategic perceptions.
cOncEpT OF 24-hOur knOwlEdgE FacTOry The 24-hour knowledge factory attempts to establish a virtually seamless relationship between the vendor and the client; this may involve one organization in a developed country as one entity, and two or more organizational entities located in other continents. The paradigm includes situations where all the collaborating entities are part of one large organization, such as IBM or Oracle. In such a model, a global team is used to work on a project around the clock; each member of the team works the normal workday hours that pertain to his or her time zone and transfers work nightly
to others on the team. The 24-hour knowledge factory paradigm can be applied to a broad range of white-collar activities ranging from medical services to logistics planning, and from financial analysis to product design. The notion of the 24-hour knowledge factory builds on the shift-style factory model developed in the Industrial Revolution. Given limitations on equipment, shifts were used to optimize the productivity realized from a given set of machines. The advent of the Internet led to a similar notion that individuals working at different times could operate on the same work product--call centers are an early example. Now, it is possible to extend this model to any environment where work is primarily knowledge-based and can be passed among team members on a nightly basis. The 24-hour knowledge factory will involve “offshoring” of part of the endeavor. Today, offshoring is done mainly to reduce costs as discussed in preceding sections of this article. Over time, the growth in offshoring will be fueled more by the potential to achieve drastic reductions in turnaround times for major endeavors, as depicted in Figure 5. In a “24-hour development environment” that encompasses three or more development centers located around the world, the distributed team is
Figure 5. 24-hour global knowledge factory California
Singapore
17:00-01:00 GMT
01:00-09:00 GMT
London 09:00-17:00 GMT
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envisaged to concentrate on the same problem and to perform the same function (whether it be development of code or testing of subsystem) on a successive basis, with each collaborating center retaining ownership of the endeavor for 8-hour periods in every 24-hour cycle. A large number of industries, including the software industry, are characterized by a development cycle that relies heavily on sequential performance of specific functions such as development, testing, and verification. In a traditional software development environment where all parties are located in the same geographic area, a code developer typically waits until a fully functional portion of the product is available before passing it on to an engineer to test it. However, with the potential for receiving testing feedback overnight, the developer now has the unprecedented opportunity to build portions of the product on an incremental basis.
term factors must be assessed in their individual context, as well as in context of relationship to each other. Some of the key factors are discussed in the following paragraphs.
demand management A 24-hour knowledge factory model allows for better management of customer demand, faster time to market for products, and superior ability to adapt quickly to changing market conditions; this is because of the lower labor costs, the greater flexibility to reallocate and reassign resources, and the ability to provide customers with access to skills that they may not already have (Srinivasan, 2004). As offshore knowledge workers gain experience and move up the learning curve, their experience interacting with customers will allow them to broaden the scope in which they serve customer demand and provide for 24-hour availability of high value resources (Suh, 2004). One example of the latter phenomenon is a company that employs home-based workers in India to perform medical transcription. As these workers move up the value chain, their home-based work environment continues to allow them to be readily accessible. Accordingly, these workers
critical success Factors for the 24-hour knowledge Factory Based on discussions with experts in a number of relevant areas, a number of critical success factors (CSFs) were identified. These CSFs are depicted in Figure 6. The array of short- and long-
Figure 6. Critical success factors for 24-hour knowledge factory National education system
Labor Language
Onshore Labor skills
National Labor markets
Internal Buy-in
Cultural differences Organzational model
Labor costs Communication Technology Geopolitical stability
Long-term productivity
Demand Management Diversifying investments
Political barriers
Knowledge Product
Dynamic task re-allocation
Location Choice Offshore Labor skills
Location Time zone
Offshore value chain
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can work longer hours, as necessary, concurrently with family obligations at home, thereby serving as “agile” knowledge workers in the knowledge factory in real-time (Malhotra, 2004).
long-Term productivity The use of hybrid work models can provide access to higher skilled labor for tasks that previously only were done by lower skilled workers. For example, highly skilled radiologists in the United States are much less likely to prefer reading X-ray results while in India, a highly skilled radiologist will see employment by a U.S. hospital as a high-value position regardless of the task. When moving toward a 24-hour knowledge factory model, factors such as ability to grow in size, quality management, and the added communication and coordination costs must be incorporated into the calculation of the improved productivity (Shah, 2004).
integrated value chain The application of the 24-hour knowledge factory paradigm explicitly implies partial offshoring. While the initial effects of such offshoring will be an increase in productivity, the offshore workers will gradually move up the value-chain and provide a great deal of higher-value services. According to Accenture, for IT offshoring, 51.9% is in IT services such as maintaining computer networks, 36.7% is in solutions development such as building Web sites, and 11.4% is in leadership and managing projects (Christensen, 2001). The general progression can be characterized as a movement from efficiency to innovation to growth, with production moving from commodities to services to solutions, as vendors begin to do similar work for multiple customers (Barney, 1999). The movement up the value chain is not reserved simply for the offshore workers, as in the example of radiology, U.S. doctors can move to higher value tasks if X-Ray reading is done offshore.
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Organizational models In order to maintain flexibility, one needs dynamic models that can evolve as market conditions change and learning curves impact skill levels. In choosing a model, it is important to judge the complexity of the work required and determine the right locations for each particular skill required (Christensen, 2001). This may lead to a model where the same function or skill is located in multiple geographic locations; this may involve higher management overhead but may lead to greater returns especially when taken in the context of the 24-hour knowledge factory. Two matrices upon which the organizational models can be judged are coordination vs. effort, and complexity vs. project size (Barney, 1999).
barriers within Firm Significant barriers to employing the 24-hour knowledge factory concept exist within typical firms; several of them need to be addressed as part of the initial decision process rather than as a corrective measure at a subsequent stage. Internal resistance, especially due to a loss of control, may hinder a proposed project. Furthermore, cultural, language, and trust issues need to be approached in an upfront manner, recognizing the impact with respect to the interaction required between knowledge workers in the 24-hour knowledge factory. Even if the desire exists at all levels to pursue the globally collaborative engagement, the firm should plan on process changes such as longer project planning cycles, more explicit definition of requirements and communication methods and the effects of ill-informed hiring decisions.
location choice Different geopolitical locations possess their own characteristics that impact their current and future place on the value chain. For example, China has lagged behind India in knowledge-based
Offshoring
offshoring because of a lack of English speaking citizens, but as English becomes a more common language in China, the vast size of the labor pool will allow it to rapidly move up the value chain (Baxter, 2004). In Russia, highly skilled scientists and engineers saw a dramatic drop in high skill tasks after the Cold War; these domain experts are now making a dramatic transition into highvalue services such as optics design at a much lower cost to outsourcing firms (DiRomualdo, 1998). The hiring process is a major factor in moving firms up the value chain, as a constant reevaluation is required of whether the foreign employees are indeed the highest skilled in their area (Andre, 2004). Regardless of the locations being considered, factors to consider include the geopolitical stability of the country, the investment in education, labor and skill set of citizens, and the business environment in the country, including levels of corruption and ease of setting up businesses (Lacity, Willcocks, & Feeny 1995).
•
•
•
casE sTudy aT ibm invOlving TwO parallEl wOrk TEams Two teams of workers at IBM were studied to provide an example of the relative pros and cons of the 24-hour knowledge factory model. While the two teams were equal in all relevant structural and technical respects, one team was geographically separated between the U.S. and India while the other was collocated on the same hallway in the U.S. A one-year timeframe was used to cover the entire lifecycle of the teams’ software deliverable. Whereas the overall performance was found to be very similar in the two cases, there were interesting differences at the micro level. Specific forms of data were collected and analyzed, as follows: •
Personal interviews were conducted with each of the developers on each team, for
•
both qualitative and quantitative insight. Developers were asked about frequency of informal vs. formal interaction, percent time spent in various communication vehicles (phone, instant messaging, and face to face), the number of tactical vs. strategic decisions made informally, and which specific developers involved interactions. Software Problem Reports (SPR) were process forms used to track fixes or requests to change the code. Weekly analysis of these SPRs provided insight into the reliance on structured forms for knowledge tracking and daily communication, average time to resolution of issues, and the number of developers handling each issue. Weekly Meeting Minutes were analyzed with a coding system for strategic vs. tactical task assignments and status requests. This provided insight into formal knowledge sharing on a group-wide basis for each team. The Source Code Control System was used by each team to log the modifications made to each element of the source code for the team’s product. The source control system stores the date, the time, the name of the developer making the change, and a comment regarding the particular change. The data provide a representation of the technical dependencies between developers on the teams by looking at number of developers interacting with each code element, and the rate of technical collaboration within the teams by looking at the number of logged modifications. Group E-mail Exchanges were analyzed with a software tool that calculated statistics on individual messages and “threads” containing a set of messages written in response to an initial message. The data collected involved frequency of messages, number of messages per thread, and number of developers per thread.
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use of Electronic mail for asynchronous discussion The data revealed that the distributed team made much greater use of electronic mail (e-mail) as a forum for discussion. This usage peaked during the time periods following project deadlines and was relatively constant in the periods of steady work well before the milestone. The collocated team relied on e-mail as an announcement mechanism for broadcasting a message to the general set of developers, but relied on other means for back and forth discussion. The e-mails, which were tabulated for each week of the year, and only those e-mails which were sent to the entire group were tabulated. Overall, e-mail was used as a means for extended discussion on the distributed team, while it is primarily used for one-message announcements on the collocated team. A developer on the collocated team stated that many of the onemessage announcements from the collocated team are announcements that a particular individual is heading out of the office, even for a period of just an hour. This demonstrates a significant difference in team culture on both teams. On the collocated team, face-to-face discussion is so important that team members feel the need to inform each other if they are going to be unavailable for a short period of time. On the distributed team, long discussions are done over e-mail and often last days because of the time zone differences. A developer on the distributed team cited one of the benefits of having discussions done over e-mail is that team members can take the time to think about their responses and often provide more detailed input into the discussion. The members of the distributed team also stated that when discussions reach a significant length, they are moved to a discussion forum database where responses can be better tracked and archived. When reviewing the design of a feature to be included in a product release, it was common for the U.S. portion of the team to hold a meeting
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with a presentation to discuss the design. Later that day, after the U.S. workday was complete, the Indian portion of the team would review the slides from the presentation and provide feedback in an organized and written manner. Both forms of feedback--immediate face-to-face and asynchronous written--were useful in the end product and neither would have been achieved if operating in the other framework. The setting of ground rules was acknowledged by all team members as an important factor in both overcoming cultural differences and encouraging uses of the different technologies discussed in this study. The manager of both teams stated that the discussion forum database is common to both teams; however, the distributed team is more prone to use it. This is a likely result of the distributed team's familiarity with having to carry out discussions by typing their responses in e-mail format. The collocated team had more e-mail threads created, but many of these threads had just one contributor. The distributed team had less number of threads, but with a high degree of collaboration on each thread. This confirmed the anecdotal evidence from the interviews that the nature of e-mail use and the nature of knowledge based discussions on both teams is profoundly different.
Technical collaboration through shared source code Detailed analysis of the data showed that the two teams reacted differently to project deadlines; the level of activity in the collocated team was more controlled before the feature freeze date, but increased afterwards. The collocated team was found to have a higher degree of collaboration with respect to specific code elements; while the distributed team kept the code they modified separate from each other. The weekly averages for code changes for different time periods of the project were calculated to provide a picture of how each team reacted to different parts of the project. Both
Offshoring
teams handled the steady state before a deadline in the same manner. However, before a deadline, the collocated team was able to handle the collaboration in a steadier manner--the interviews with the collocated team speculated that this was due to questions being resolved face to face with individual developers consulting others before submitting a code modification. Multiple team members on the distributed team cited the fact that they had drawn clear lines between code elements and make an explicit attempt to only modify certain elements of the code. In contrast, when the collocated team assigned particular functional areas of the product to different developers, they often reassigned particular SPRs based on workload and felt comfortable with any developer modifying any part of the product. While the data suggested greater technical collaboration on the collocated team, there were code elements on the distributed team that involved more than one developer. Thus, even when distributed, the software developers did reach out to others for help when certain threshold barriers for requiring higher levels of collaboration were reached.
nature of Team meetings The team meetings held by the distributed team were found to be more tactical and task oriented than the collocated teams, further demonstrating that each team had adapted similar processes in different ways to their own geographic structure. The two team’s meeting minutes were controlled by many factors that allowed data collection to proceed with confidence. All meetings on both teams were held by the same project manager, who kept detailed minutes of each meeting in the same format. The categories for the agenda changed over the year to fit the stage of the project schedule, but were generally found to be consistent between the teams. The distributed team devoted a larger number of items in the meeting minutes to tactical issues.
Items were designated as tactical if they were short term in nature and all knowledge related to completion of the item was already acquired. The meeting minutes were analyzed by inspection, and all items in the meeting minutes were designated as strategic or tactical; no other categories were used. Examples of tactical items found in both teams’ meetings included issues related to the “build” (a compilation of source code into an intermediate internal product release to be sent for testing), issues related to a particular SPR, or issues related to scheduling. Examples of strategic items found in both teams’ meetings included discussion of feature plans for the next release, discussion of major customer issues, and discussion of cross-team collaboration with other teams in the company. The collocated team found ways of handling the tactical issues outside of the formal meeting structure, because opportunities for synchronous communication were available.
using Technology to update work item status Data from the software problem report database were useful in demonstrating how technology was used to update work item status. SPRs represent the core work items for these software development teams, outside of feature level work. When any work is required on the source code—either a bug found by the testing team, an enhancement requested by a customer, or a feature—an SPR is logged and is used to track the status of the work. Each team was found to use the SPR system in a unique manner. While e-mail data described the social network on both teams and source control data described the technical network on both teams, these SPR data acted as a bridge between the social and technical networks. Both teams shipped a final product release in the first quarter of the year, and thus this high period of activity in the early part of the year represents the SPR “clean-up” activity, which occurred for the distributed team as they were
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Offshoring
updating status on all of the work which had been done for the release. The outliers in the data highlighted that the collocated team required a major focused one-time cleanup immediately preceding the product release, and immediately preceding the feature freeze date. When team members were not available to consult with immediately, they added updates to SPRs in the context of the particular issue and waited for a reply in the form of another action taken on the SPR. With the collocated team, since answers were available immediately, it was not useful for them to take the time to update the formal SPR system when sharing knowledge around a particular SPR. This demonstration of adapting available technologies in different ways has positive and negative points. The positive aspects are that the team has naturally innovated and found new uses for an existing infrastructure. However, with this innovative use comes the caveat for managers that tracking results on a system such as the SPR system will not yield similar reports for teams, which use the system differently. The collocated team had more individuals modifying particular elements of the source control system while the distributed team had more individuals modifying particular elements of the SPR system. This suggests that there are certain thresholds for collaboration and different geographic structures can lead to different levels of social and technical collaboration.
24-hOur knOwlEdgE FacTOry: impacT assEssmEnT The variance in the data between the two teams encourages discussion of the impacts of geographic distribution of knowledge-based teams at various levels--individual, team, organizational, institutional, and national. •
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Individuals: Individuals who work in a knowledge-based industry have the power
•
•
to make choices about the global working environment. They possess the potential to use software tools similar to those used in this study to educate themselves on the work of their own teams and to become more capable in terms of the ability to work in a distributed work environment. Individuals in such environments may need to alter their work hours to spend a few minutes in their off-hours to use the telephone or instant messaging to communicate with colleagues working in a different time zone. A change in work styles may require more effort to be placed in explicit informal communication on a distributed team, or in more formal documentation of informal decisions on a collocated team. Teams: At the team level, an understanding of the socio-technical forces, which impact knowledge sharing on a software team can impact the success of both the project and the product. Software tools that continually collect and display information can be useful in attaining optimal productivity in a decentralized environments. Building and implementing such tools would provide access to data, which resides in distributed and heterogeneous sources and is not currently used by managers to guide decisions. One example of the utility of such a “dash board” is in assessing the technical dependencies between members of a team by looking at the SPR and source control data. Organizations: At the organizational level, the data collected in this study demonstrates the potential for organizations to assess the tacit knowledge capital that is not readily quantifiable. Organizations currently assess knowledge capital by counting the number of patents filed or tabulating features on existing products. With new data capture tools, organizations can assess knowledge capital at a much more granular level. One can now assess the dependency on one development
Offshoring
•
•
site or another, and on one developer or another. This is especially important in a domain such as software engineering where knowledge flows so dynamically between geographic locations. Institutions: A number of institutions are impacted by the introduction of granular knowledge sharing data analysis in globally dispersed teams. The laws and regulations that govern labor and trade are not yet built to handle redefinitions in work requirements and intellectual property sharing, which occur instantly and across geographic borders. Unions and professional associations, which represent one region of technical knowledge workers can act as both enabling and threatened institutions. They can enable the success of global software teams by training their members to build the capabilities necessary to operate in a geographically distributed environment, and also by expanding their regional scope so that their incentives are aligned with those of the multi-national firms which employ them. However they can also act as a threatened institution by deciding that the work models, regional job opportunities, and technical expertise requirements will be negatively impacted by the distribution of work. In all of these cases, the notion that knowledge sharing can be analyzed and leveraged is important in assuring that institutions impacted are able to adapt appropriately to the changing realities of the workplace. Nations: New national policies need to be developed for training and preparing workers for globally distributed work, and also for dealing with issues related to sharing of intellectual property. In the case of the 24-hour knowledge factory, intellectual property will be imported, leveraged, and exported on a daily basis. As public policy evolves to valuate and regulate exports at this level of granularity, the ability of nations to exploit
wage differences would be significantly limited. This reinforces our pivotal theme that future offshoring endeavors will be fueled, not by considerations of cost savings, but by strategic considerations.
cOnclusiOn From an analytic viewpoint, the authors believe that significant opportunity exists for developing theoretical and analytical models for offshoring practices. By rising above the emotive arguments based on anecdotal evidences that currently tend to dominate debates and discussions on IS outsourcing, we can take a more comprehensive view of the situation. So far, analytical models focusing on offshoring practices have been few in number. A new generation of comprehensive analytical model needs to be created to investigate the emergent phenomenon of offshoring at a global scale. From a business viewpoint, the concept of offshoring was originally fueled primarily by considerations of reduction of labor costs. Companies continue to proceed with plans to outsource with the benefits accruing primarily to their shareholders and their customers; however, government agencies have adopted diverse practices primarily because of concern for feelings of the voting population. Based on a variety of reasons, decisions made by companies on the issue of outsourcing of professional services will increasingly be driven by strategic considerations than by considerations of cost savings. This hypothesis has been validated in this article using a mathematical model. In practical terms, the need to bring new products and services earlier to the market may outweigh the considerations of cost and where the work will be performed. Over time, workers will be retrained and will acquire new jobs that are more suitable for their respective background and location, both in developed and developing countries. One now has the opportunity to move
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towards the “24-hour global knowledge factory” where outsourcing means active engagement on knowledge intensive tasks for 24 hours a day. Already, an increasing number of companies are using the notion of two geographically work centers to improve the pace and the quality of the work; these serve as harbingers of paradigms involving three work centers configured as a 24-hour knowledge factory. A detailed case study was conducted at IBM to study the relative performance of distributed and co-located work teams. The results of the case study reinforce the main points raised in this article. As firms, governments, and individual workers gradually embrace the growing realities of the marketplace, offshoring could become a “win-win” situation for all, leading to the globalized world of 24-hour knowledge factories.
rEFErEncEs Anderson, S., & Cesar, C. V. (2003, November). The cost of canceling a state contract. Indianapolis Star. Andre, D. (2004, April). Case study: Technology offshoring at upromise. Presentation to Massachusetts Software Council. Arora, A., Arunachalam, V. S., Asundi, J., & Fernandes, R. (2001). The Indian software industry. Research Policy, 30, 1267-1287. Asprey, W., Mayadas, F., & Vardi, M. (2006). Globalization and the offshoring of services: A report of the ACM job migration task force. Association of Computing Machinery. Athreye, S. (2005, March). The Indian software industry and its evolving service capability. Industrial and Corporate Change. Barney, J. (1999). How a firms capabilities affect boundary decisions. Sloan Management Review, 137-145.
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Baxter, S. P. (2004, April). A business primer: how to expand into China. Presentation to MIT Special Seminar on International Management— Offshoring. “Better Tracking Needed to Help Determine H1-B Program’s Effects on U.S. Workforce.” U.S. General Accounting Office, 2003. Cachon, G. P., & Harker, P. T. (2002). Competition and outsourcing with scale economies. Management Science, (48) 10. Christensen, C. (2001). The past and future of competitive advantage. Sloan Management Review, 105-109. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, (14) 3. DiRomualdo, A., & Gurbaxani, V. (1998). Strategic intent for IT outsourcing. Sloan Management Review, 67-80. Endleman, G. (2003, September). Fall guy: U.S. Immigration and the myth of offshoring. National Association of Software and Service Companies (NASSCOM) Media Room Retrieved from http:// www.nasscom.org Ferdows, K. (1997, March-April). Making the most of Foreign factories. Harvard Business Review. Gopal, A., Sivaramakrishnan, K., Krishnan, M. S., & Mukhopadhyay, T. (2003). Contracts in offshore software development: An empirical analysis. Management Science, (49) 12. “IEEE Position Statement on Offshore Outsourcing.” IEEE-USA Career and Workforce Policy Committee. Mar. 2004. Kishore, R., Rao, H. R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing: Insights from a longitudinal study. Communications of the ACM, (46) 12.
Offshoring
Lacity, M., Willcocks, D., & Feeny, D. (1995, MayJune). IT outsourcing: Maximize flexibility and control. Harvard Business Review, 84-93. Malhotra, R. (2004, April). Unique business model. Presentation to MIT Special Seminar on International Management. Meares, C. A., & Sargent, J. F. (2003, June). Education and training for the information technology workforce. Report to Congress from the Secretary of Commerce. Mehlman, B. C. (2003, June). Testimony before the U.S. House of Representatives Committee on Small Business. United States Department of Commerce. Mukherji, S., & Ganguly, A.R. (July 2004). Sustaining the offshore outsourcing boom for software development: Transitioning from low cost service provider to strategic partners for information systems. In Proceedings of the 9th International Symposium on Logistics, 559-564. Bangalore, India. Nanda, T. K. (2003, September). Bills galore to check outsourcing. India Abroad. Nanda, T. K. (2003, September). India top outsourcing destination for U.S. firms. India Abroad “Nasscom-McKinsey Study 2005”, McKinsey Associates and National Association of Software and Services Companies, Nov. 2005. “Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, San Francisco, August 2003. Orlikowski, W., & Yates, J. (2002, NovemberDecember). It’s about time: Temporal structuring in organizations. Organization Science, 13(6), 684-700.
Plambeck, E.P. & Taylor. T.A. (January 2005). Sell the Plant? The Impact of contract manufacturing on innovation, capacity and profitability. Management Science, 51(1), 133-150. Sambamurthy, V., Bharadwhaj, A., & Grover, V. (2003, June). Shaping Agility through digital options: Reconceptualizing the role of information technology in contemporary firms. MIS Quarterly, 27(2), 237-263. Shah, S. (2004, April). Offshore development. Presentation to Massachusetts Software Council. Srinivasan, V. (2004, February). Outsourcing and offshoring. Presentation to MIT Special Seminar on International Management—Offshoring. Subramanian, A. (2002, November). Outsourcing consultants have India bias: Merrill Lynch report. Business Standard. Suh, B. (2004, February). Perspectives on global delivery. Presentation to MIT Special Seminar on International Management—Offshoring. “The Roadmap to Offshore Success”. The Sand Hill Group, 2003. Thurow, L. (2003). Interview at Massachusetts Institute of Technology. Cambridge MA. “U.S. may be forced to get across age bar, outsource jobs.” Economic Times, September 17, 2003. Venkatraman, N., & Subramaniam, M. (2002). Theorizing the future of strategy: questions for shaping strategy research in the knowledge economy. The handbook of strategy and management (pp. 461-474), Sage Publications. Venkatraman, N. (2004). Offshoring without guilt. Sloan Management Review, 45(3), 14-16.
This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 1-23, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.6
Planning for Information Systems Outsourcing Vijay K. Agrawal University of Nebraska–Kearney, USA Donald A. Carpenter Mesa State College, USA
absTracT
inTrOducTiOn
This chapter presents an overview of the pertinent aspects of planning for the outsourcing of information systems projects. The first major section of the chapter presents a historical perspective on the evolution of information systems outsourcing practices so the reader can understand subsequent sections of the chapter in context. The next major portion of the chapter deals with the need to examine goals, strategies, core competencies, and critical success factors as well as presenting all the functional areas of information systems that are candidates to be outsourced. Also included are discussions of the need to perform cost/benefits analysis and to consider cultural and other factors. The concluding section deals with all the factors that should be examined in preparing and administering outsourcing contracts.
No industry has been affected more by outsourcing than the information sector! That has been both a boon and a challenge to information technology firms. For decades, as businesses in all industries have realized their lack of internal expertise to develop or manage their own information systems, they have outsourced portions or all of their IT departments to firms that specialize in that expertise. Yet, as salaries escalated for those with that needed IT expertise, general businesses as well as the IT firms themselves have turned to developing countries to provide the expertise at a lower cost. Thus, off shore outsourcing, or offshoring, is exploding. During the time of the amazing growth of the information sector of developed countries, there was an arrogant claim that is was natural to lose
manufacturing jobs to foreign countries because that job loss would be exceeded by information technology companies which were said to have some form of exclusive hold on IT expertise. Reality is expressed more appropriately as:
the chapter presents an extensive examination of IS functions that are logical choices to outsource. Last is a discussion of how to contract for outsourcing and how to manage such contracts.
Our labor force is not better trained, harder working or more innovative than our foreign competitors. The argument that we will create jobs in highly paying fields is simply not true. We have no comparative advantage or superiority in innovation. To assume that we are inherently more creative than our foreign competitors is both arrogant and naive. We are currently empowering our competition with the resources to innovate equally as well as we. (Warren, 2005, www. computerworld.com)
EvOluTiOn OF inFOrmaTiOn sysTEms OuTsOurcing paTTErns
Rather, leaders in the IT field now see outsourcing as a natural evolutionary step in IT (McNurlin & Sprague, 2006, p. 304). Global competition affected only 10% of the U.S. economy in the 1960s, but rose to 70% in the 1970s and is arguably 100% today, as no businesses escape the impact of the global economy. In order to compete in that global economy — especially when the gap in the costs of local vs. off-shore labor looms so large — a majority of businesses must turn over some business functions outsourcing and offshoring to be competitive. Due to their technical nature, IT functions are logical candidates for such outsourcing for a significant percentage of businesses. Consequently, outsourcing and offshoring of IT functions is not just an IT issue, it is a primary business issue. The purpose of this chapter is to provide a planning framework for the outsourcing of IT functions. First a brief historical perspective is presented in order for the reader to appreciate what has worked in the past as a predictor of what might work in the future. That is followed by a description of factors to consider prior to outsourcing information systems projects. Next
Outsourcing has been an important information systems practice since the beginning of the computer industry in 1951. When a firm purchases prewritten software, it in effect has outsourced the processes of design and construction of programs. When a company retains a consultant to help identify information requirements, it has outsourced. When an enterprise hires a company to maintain its computer systems, it has outsourced. When a user organization acquires services from a value added network provider, it has outsourced (Singhal, & Singhal, 2002, p. 290). The specific reasons for such outsourcing vary from one organization to the next. However, in general, the reasons boil down to one factor. It is less costly for the purchasing company to turn outside rather than do the work in-house (Niccolai, 2005). Perhaps it does not have the expertise and it is less costly to buy the expertise than build it. Perhaps it does not have the time to pull off a project. Perhaps it can take advantage of the economy of scale that the supplier has and which the purchasing company does not. Regardless of specific reasons, the host firm turns to outsourcing to save money. Gradually, that gave rise to the growth of huge outsourcing firms such as Electronic Data Systems (EDS), to software giants such as Microsoft, and to consulting divisions within other companies such as in all the major accounting firms. It spawned the growth of the computer communications portion of the telecommunication industry. Furthermore, it provided myriads
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Planning for Information Systems Outsourcing
of opportunities for smaller firms such as one can find in the business listings of telephone books in any small, medium or large city. The mid-1970s saw the beginning of outsourcing: … megadeals, which consisted of outsourcing all of a company’s data center operations for up to 10 years. These deals involved selling existing equipment to the outsourcer, transferring all software licenses, moving significant numbers of in-house IS personnel to the outsourcer’s payroll, negotiating how the outsourcer would help in the transition and which party would carry which costs, establishing desired service levels and ways to measure performance, and specifying every single service to be provided — because if it was not in the contract, it would be an added cost. (McNurlin & Sprague, 2006, p. 306) Again the motivation of the host companies was to save costs — which usually occurred right away — and to guard against unpredictable expenses, by shifting the expertise and expenses to the supplier. For the suppliers, the deals were often money losers in the first year or more, but yielded large profits as start-up costs ended, operations stabilized, and the price of technology dropped. The sweetness of such deals could be soured by disagreements in the ambiguous wording of contracts, which often could lead to additional charges, or by culture clashes between the companies. The latter often occurred when former employees of the host company were transferred to the payroll of the supplier, yet former coworkers and supervisors maintained conflicting expectations. Changes in information technology itself and changes in user organizations’ needs led to corresponding changes in the nature of IT outsourcing. The impact of such changes was most noticeable as companies began to adopt clientserver computing in the 1980s, then in the 1990s
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as industry began its efforts to solve their Y2K problems, to preadjust their information systems to accommodate the new euro currency, and to get on the dotcom bandwagon. In the latter three cases, the workload of IT departments in user enterprises increased beyond the level that could be handled in-house. Outsourcing was a logical solution as the Y2K and euro-conversion problems were both seen as temporary and the creation of corporate Web presences was seen as a new task that would require new investments whether it was outsourced or kept in-house. This gave rise to the concept of project-based outsourcing for specific, often short-term tasks. The client-server phenomenon was another story, however, as companies chose to move to that environment in order to save costs associated with their mainframe computer systems. Some companies felt the switch to client-server computing had the potential to end their use of outsourcing. However, the reality for other companies was the need to engage in outsourcing due to their lack of internal expertise with the new paradigm. In many instances, the host firm used project-based outsourcing to install and launch their new systems. But another variation on outsourcing was also created, that of the help-desk functions both for end users within the host company but also for the IT staff as they dealt with multiple vendors and ever-changing protocol and systems software. Such major shifts resulted in the availability of a smorgasbord of outsourcing services from which a host organization can choose. Termed “best-ofbreed outsourcing” (McNurlin & Sprague, 2006, p. 307), it allows a user organization to pick and choose which specific IT functions they would like to outsource. It also allows them to choose how they go about outsourcing. One company might choose to outsource all its data center operations to a single vendor, while another might chose to contract with multiple vendors each for a specific function such as software development or Web site hosting. Still another company might choose
Planning for Information Systems Outsourcing
to outsource specific IT processes or IT-based business processes such as order fulfillment or customer care, while another might choose to outsource functions that transcend functional areas, “such as e-mail, security, or redundancy” (Thickins, 2003). Other growing trends relate to the nature of the outsourcing arrangement. Today, there is a spectrum of possibilities when a company chooses not to insource business functions in general or information systems functions specifically. Whereas traditional outsourcing contracts are alive and well, there are growing fields of opportunities for joint-venture partnerships and strategic alliances (McNurlin & Sprague, 2006, p. 308). Traditional contracts specify a structured relationship with the vendor supplying services to the host company. Conversely, joint ventures and alliances are trustbased with each party sharing risks and responsibilities. The rapidly growing e-commerce sector provides incredible and previously unachievable opportunities for such arrangements. Hence the business-to-business (B2B) e-commerce sector is growing at an incredible rate. Another byproduct of project-based outsourcing that gained in popularity with the Y2K and euro-conversion projects is off-shore outsourcing, or off-shoring. White-collar off-shoring was most-likely inevitable as the service sector follows the footsteps of the U.S. manufacturing sector in which productivity grew by 330% in 50 years from the early 1950s largely due to taking advantage of lower labor costs in developing countries. In the same time, U.S. service sector productivity has only grown 47% (Altman, 2004, p. 39). Project-based outsourcing gave the service sector, which is largely centered on IT, the boost it needed to explode to the point it is today. The sheer cost of the Y2K and euro-conversion problems and the lack of sufficient manpower in the U.S., forced many outsourcing contracts off-shore, especially to India. Today, that has expanded to other countries, many in Asia, including China (McNurlin & Sprague, 2006, p. 307).
Off-shore outsourcing has become a favorite political discussion point. Loss of U.S. jobs is seen as a negative issue. Some argue that off-shoring might actually be good because the living standards in developed countries increase as products and services produced in developing countries can be purchased at lower prices. Regardless, the reality is that off-shoring of services is inevitable. Rather than focusing on loss of jobs, the bigger concern is the loss of competitiveness of service firms, which need to “industrialization” themselves by applying strategies such as off-shoring, automation, and self-service (Karmarkar, 2004).
idEnTiFying inFOrmaTiOn sysTEms prOcEssEs TO bE OuTsOurcEd consider goals and strategies As stated previously, the primary reason to outsource is to minimize costs (Niccolai, 2005). That is a worthy goal. There may be other reasons or goals. All goals should be formally stated and articulated with business strategies. Other criteria that might be included in goal statements for outsourcing projects are: • • • • • •
If the process has a large cost base If the process is labor intensive If it has interlinkages that would be violated by relocation If the skills to complete the process are available off-shore If a significant wage level differential can be created by off-shoring If the process is not a source of competitive advantage (Robinson & Kalakota, 2005, p. 214)
Beyond that, a company needs to determine and formally state the scope of its outsourcing intentions Of course, it order to do that, the
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company must identify what functions it intends to outsource. Prior to that, the company must understand what is possible to outsource. The remainder of this section intends to provide a method to follow in that process.
consider core competencies and critical success Factors Decisions as to what and whether to outsource should be tied to an identification and understanding of an organization’s core competencies and its critical success factors (Luftman, Bullen, Liao, Nash & Neumann, 2004, p. 320). Such an identification and understanding can be a lengthy process. However, it is the one true way to determine whether a project should be or should not be outsourced. While that recommendation was first applied to IT projects, it can be generalized to all business functions. If a task is a both a core competency and a critical success factor, it should not be considered for outsourcing. Such tasks are at the heart of the company. Success or failure of such functions is directly tied to success or failure of the company as a whole. In general, such functions are critical to an organization’s day-to-day operations, ability to competitively differentiate itself, ability to deliver value to customers and partners, and ability to innovate (Luftman et al., 2004, p. 322). Tasks that are core competencies but not a critical success should be reassessed. Why engage in such tasks if they are not critical? Often the answer to that is “because we can.” It is typically not a good business decision to continue to engage in such tasks. Those tasks which are not core competencies are the most likely candidates for outsourcing. The question is how to go about it. If such as task is a critical success factor, it might be wise to establish a strategic alliance; otherwise, a transaction partnership might suffice. The former is a more tightly-coupled arrangement than the latter. Strategic partnerships might even establish some
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form of mutual ownership or revenue sharing, whereas transaction partnerships are more typical outsourcing arrangements where a company simply contracts with a vendor to provide the service or product. There is another consideration that lies outside the core competency–critical success factor matrix. If an organization intends to bring an outsourced task back in-house at some future time, managers should be cautious. There is overwhelming evidence that certain outsourced activities cannot be reversed, particularly in the IT arena (Luftman et al., 2004, p. 323). Once expertise has been released to the outsourcer, it is difficult — if not impossible — to regain such expertise in-house.
consider Functional aspects of is and the Future of the is department As an organization considers outsourcing for its information systems functions, it should recognize that the IS department really performs four interrelated major functions (Cox, 1994): 1. 2. 3. 4.
Running computer and communications operations Developing and maintaining systems Developing the strategies and overall architecture for both IT and information Identifying business requirements in conjunction with users
Each of those four areas requires a different knowledge set, varying skills, and distinctly different tools. Each should be managed from its own appropriate strategy. As the company looks to outsource IS, it should consider that each of those four areas should be considered differently in terms of core competencies and critical success factors. As a result, it might make sense to outsource some of those four functions but not others.
Planning for Information Systems Outsourcing
The roles of running computer-communications systems and developing/maintaining systems tend to be those that are more logically outsourced than the more strategic roles of developing architecture plans and defining business requirements. To outsource the first two and not the latter two might lead to what is becoming known as “IS lite” (Woolfe, 2000) and reduce budgets for in-house IS functions by 90% (McNurlin & Sprague, 2006, p. 300). As a firm decides to make a major shift in the IS department that will result from extensive outsourcing, it should consider the long-term impact. Trends indicate two elements that cry out for consideration: (1) how IS will be coordinated in the future and (2) how corporate data and content will be controlled (Markus, 1996). The argument is strong that there still needs to be corporate coordination of IS functions. The argument is also strong that the organization should continue to control its own data and content rather than contract externally for another firm to control them (Hickey, 2005). For these, there is a continued need for an IS staff.
Consider Specific Information Systems processes The discussion immediately above identified four general information systems functional areas that might be subject to being outsourced. This section takes a different tack as it presents a listing of 38 information technology management processes (Luftman et al., 2004, p. 119), each of which is subject to being outsourced. The 38 processes are grouped according to a familiar scheme: the three levels of management decision making, long-term strategic, shorter-term tactical, and day-to-day operational. The descriptions of the 38 items are summarized below. For each of the functions, there is an indication as to whether the function should be kept in-house, be considered further for outsourcing, or be considered as a
joint responsibility shared between in-house and outsourcing staff.
consider Costs vs. Benefits Successful managers recognize that a cost/benefit analysis should be included as part of any major financial decision. Both tangible and intangible benefits, plus both direct and indirect costs should be included. The challenges for most information systems projects traditionally have been quantifying benefits and identifying all of the costs. For many outsourcing projects, especially off-shore outsourcing, the complexity of determining costs and benefits “will increase further because of off-shore arrangements where many variables may be unknown till the project is completed” (Robinson & Kalakota, 2005, p. 215). The temptation is to jump into an off-shoring project simply on the basis of cost savings as such projects can offer great reductions in capital requirements and long-term operating expenses. Initial cost differentials can be as much as 40% (Hickey, 2005). For example, a software application maintenance worker in India earns about $25 per hour, compared with $87 per hour in the U.S., according to Gartner (Wolfe, 2000). However, the potential cost saving can erode rapidly. There are costs associated with establishing and administering the outsourcing contract. There might be costs associated with receiving a lower-quality product or service than had been anticipated. This differential can be significantly eroded, however, as companies incur additional costs to manage and administer these outsourced functions. As wages in developing countries catch up with those in the country of origin of the host company, there might be less cost savings over the long run. Most businesses push work overseas in the hope of cutting labor costs. Furthermore, there might be hidden expenses for communications, travel, and cultural training. Off-shore deals that last a relatively short time might not pay off in as big a manner as anticipated (Niccolai, 2005).
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Table 1. Categorized IS functions to consider for outsourcing (Modified from Luftman, 2004, p. 119) Long Term, Strategic Planning and Control
Day-To-Day, Operational Planning and Control
1. Business strategic planning
In-house
2. IT architecture–data, apps, computer, network–planning/definition.
Outsource
3. IT strategic planning and control
Joint
Short Term, Tactical Planning and Control Developmental planning functions 4. Application portfolio planning and scheduling
Outsource
5. Data needs planning
Outsource
6. Network planning
Outsource
7. System planning
Joint
8. Project planning
Joint
Service planning functions 9. Service level planning and management
In-house
10. Recovery planning and management
Outsource
11. Security planning and management
Outsource
12. Audit planning and management
Outsource
Resource planning functions 13. Capacity planning and management
Joint
14. Skills planning and management.
Outsource
15. Budget planning and management
In-house
16. Vendor planning and management
In-house
18. Project assignment
Joint
19. Project scheduling
Joint
20. Project controlling
In-house
21. Project requirement control
Joint
22. Project evaluating
In-house
Resource control functions 23. Change control
Joint
24. Asset management
Outsource
Service control functions 25. Production and distribution scheduling
Outsource
26. Problem control
Joint
27. Service evaluating (keep in-house.
In-house
Development and maintenance functions 28. Software development and upgrade
Outsource
29. Software procurement and upgrade contracts
In-house
30. Hardware procurement and upgrade contracts
In-house
31. Systems maintenance
Outsource
32. Tuning and system balancing
Outsource
Administration services functions
Management planning functions 17. Management systems planning & management
Project management functions
Joint
33. Financial performance
In-house
34. Staff performance
In-house
35. Education and training
Outsource
36. Recruiting, hiring, and retention
Outsource
Information services functions
Such challenges emphasize the need to perform a thorough cost/benefits analysis. The details as to how to perform such a task go beyond the scope of this chapter, but can be found elsewhere.
consider cultural and Other Factors The cultural differences inherent in off-shore outsourcing can be overcome with cultural training. Such training has become more prevalent in recent years to familiarize employees of both client and
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37. Production
Outsource
38. Service marketing
Outsource
provider with information about both country and company cultures. Including an arbitrator who is familiar with both cultures is advisable. Languages differences might or might not exist. For example, a U.S. company dealing with an Indian outsourcer will benefit in that English is the official language of each. However, regional dialects and accents still can present a challenge, as can colloquialisms. Parties in such an outsourcing arrangement would be wise to avoid such nuances and potential conflicts. As rules of thumb, parties
Planning for Information Systems Outsourcing
should use short, concise terms and phraseology and should place all agreements in writing. Differences in legal, regulatory and ethical issues can also provide stumbling blocks in offshore arrangements. Particularly troublesome are laws pertaining to privacy and intellectual property rights. Retaining legal representation that is familiar with laws and requirements of both countries is costly but invaluable. One additional consideration bears noting. An outsourcing arrangement can result in atrophy of knowledge and skills in the client organization. To avoid that, the parties might enter into a “cosourcing” arrangement in which “the vendor and client collaborate so closely that the vendor can replace or augment the client’s IT competencies” (Kaiser, & Hawk, 2004). Usually that results in employees from each party working together on the same project team. Similar a mechanism can prove essential in communicating initial requirements as well.
managing OuTsOurcing Outsourcing adds complexity to already complex information systems projects and functions. As was discussed in the Evolution of Information Systems Outsourcing Practices section above, the issue of how to outsource can require managers to decide between creating software or buying a prewritten package, hiring a consultant for a short term or executing a long term contract for ongoing advice, farming out projects or forging a “megadeal,” entering into a joint venture partnership or a strategic alliance, outsourcing locally, or going off-shore. Furthermore, as was discussed in the previous section on Identifying Information Systems Processes to be outsourced, before an enterprise engages in outsourcing, managers should consider the firm’s goals and strategies, its core competencies and critical success factors, the present nature and future of its
information systems functions, the wide range of specific information systems functions that can be outsourced, costs vs. benefits of candidate outsourcing ventures, as well as cultural, language, political, and ethical factors. Once all that consideration has taken place and the decisions have been made as to what and how to outsource, there is still more work to do to insure the outsourcing adventure is managed properly. Managers have more decisions to make related to the management structure and control, the selection of the vendor, the nature of the outsourcing contract, the launching and implementation of the project, and the monitoring, evaluation and renegotiation of the contract. This section of the chapter discussed those additional topics in greater detail.
management structure and control Regardless of the management structure, management style and span of control within the companies that are party to an outsourcing contract, the contracted activities must be managed jointly. “Jointly” usually translates to “differently than the firm is accustomed to managing noncontracted activities.” For example, a manager, who might be used to making internal decisions individually and quickly, will encounter the need to make decisions relating to the outsourcing contract cooperatively and probably more slowly. Another manager might be challenged as he adjusts to managing expectations rather than staff. High quality communications between parties to an outsourcing project is the key to success of the outsourcing endeavor (Niccolai, 2005). However, the customary communications structure and procedures change from what managers usually experience within their respective organizations. Both formal and informal communications channels change when dealing with outside workers.
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Interestingly, adjusting to new communications channels can yield unexpected positive results. As managers and employees adjust to the new communication processes, they encounter more formality than what typically exists within their own company. Increased formality demands more rigorous planning and more thoroughness in execution. Those, in turn, can result in improved quality. To handle such decision-making, parties typically establish layers of joint teams (Robinson & Kalakota, 2005, p. 225). There should be a team of strategic managers from each contract party, a team of tactical managers, and a team of operational managers. The members of each team are responsible to their team but also responsible to the manager within their own company at the higher team level. Robinson and Kalakota (2005, p. 223) also advocate the use of service level agreements (SLA) as a means to govern outsourcing projects and to monitor performance. “For every contracted service, its SLA spells out responsibilities, performance requirements, penalties, bonuses, and so on. Completeness is an important attribute of good SLAs; generally everything should be detailed, perhaps even with times of deliveries, who will deliver what to whom, and so on.” An SLA should also include rules that parties follow when making decisions as well as metrics to be able to measure compliance and rules.
vendor selection criteria When selecting a vendor for outsourcing projects, managers in the client company should follow the same tried and true methods that are prescribed for all similarly complex purchases. After determining how and what to outsource, as discussed in the previous sections of this chapter, the firm needs to spell out in great detail all its expectations regarding the project. Those detailed explanations should be provided to vendors who have expressed
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an interest in the project. That should take the form of a formal request for proposal (RFP) to which the potential vendors should be required to respond with detailed formal proposals. In addition to detailed explanations about the project, the RFP should include extensive discussions as to the vendor’s required qualifications and how the project will be managed, monitored and evaluated. The information asked about the vendor should include topics of size, longevity, financial stability, management style and infrastructure, retention experience with its employees, training and educational levels of its employees, experience and procedures with security and privacy, experience and procedures with protecting data and intellectual property, quality management such as IS9000 and Six Sigma compliance, experience with reporting and meeting deadlines, and references from other clients (Robinson & Kalakota, 2005, pp. 230-242). Once vendors’ proposals have been received, the evaluation process begins. Of course, the client company should examine the proposals in depth to be certain that all its requirements can and will be met. Moreover, each vendor should be evaluated as to how well it fits with the client company in light of the future need for communications between the parties as they cooperatively manage the outsourced project. After narrowing the set of potential vendors to a short list, the client company should schedule reciprocal site visitations to verity capabilities. It should also require demonstrations of capabilities by means of visits to other clients of each vendor or even prototype projects. Performance guarantees should also be worked out prior to deciding on the final vendor. It might turn out that more than one vendor is required to fulfill all the requirements of the outsourcing project. The RFP should require prospective vendors to explain their plans for and experience with interfacing among multiple vendors. In a related vein, the client company might choose
Planning for Information Systems Outsourcing
to divide the project among multiple vendors and even among multiple countries in order to minimize risks. In that light, the RFP should include questions that relate to the prospective vendor’s location. Those include assessment of the current political climate and cultural differences, as well as disaster recovery and business continuity plans and experiences (Hickey, 2005). The complexity of the RPF process might seem overwhelming to managers in a client firm and especially if the managers have not been through such a process previously. However, failure to consider thoroughly all the details will predict problems later. Consequently, the client firm might choose to retain the services of an experienced consulting firm. Engaging such a neutral “informed buyer” (Feeny, 1998) might be costly but it most certainly will be worthwhile. Whether or not an external consultant is used, the final selection of outsourcing vendor(s) should be handled by a vendor selection committee. The magnitude of potential risk of an outsourcing project decision should dictate the managerial level of the members of such a committee. The decision should be reviewed prior to implementation by the client company’s top management team, legal advisors, and pertinent stakeholders (Luftman et al., 2004, p. 317). Additional approval should occur prior to, during, and following contract negotiations.
Outsourcing contracts Outsourcing contracts can be complex due to the level of detail that needs to be included to insure that all parties understand each others’ expectations. Robinson and Kalakota (2005, pp. 219-236) present a general framework for what should be included in outsourcing contracts. That framework is summarized in the following list: • •
Price structure Billing and payment arrangements
• • • • • • • • • • • • • • • • • • • • • • • •
Price stability Payment terms Treatment of hidden costs Flexibility and tolerances Change management Conflict resolution Term expiration and renewal Work to be accomplished Vendor’s responsibilities Define scope and objectives Time line and deadlines Deliverables Performance measurement criteria Service level agreements (SLA) Communications mechanisms Warranties, liabilities, confidentiality Protecting of intellectual property Security and privacy of data Ownership of data or source code Compliance with local regulations Failure to perform duties Terminating the relationship Enforcement of contract rights Recovery of damages
Many of the items in the above list have been discussed previously in this chapter. Most of the remaining items in the list are fairly straightforward and do not require elaboration. However, the concept of performance measurement does bear expansion. Measuring performance of information systems is always a challenge. Putting expectations for performance measurement in contractual terms for an outsourcing project can be a greater challenge. The following paragraphs are intended to shed some light on that. According to Bruton (2004, p. 179) the four main measurements for outsourcing projects are: quantity, performance, quality, and value. Measuring quantity is the easiest of the four — determine how much work was accomplished: how many invoices were processed, how many lines of program
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code were written, how many workstations were installed. Once quantity is known, performance can be determined by comparing quantity against preset targets or standards. Value of information systems is a little trickier to measure unless it is defined tightly as to whether the project made business sense, whether it advanced the company, or whether it saved the company from higher costs or other losses. The goals of quantity, performance, and value can be relatively easily be put into words in an outsourcing contract. Quality of information systems is the difficult one to measure and to put in contractual terms. Robinson and Kalakota (2005, p. 81) note that quality of information systems can be tied to customer satisfaction. Turney (1992) writes that “quality is doing it right the first time.” Both of those help the reader to understand the nature of quality, but there would be obvious challenges in writing either of those approaches into outsourcing terms. Parasuraman, Zeithaml, and Berry (1985) provide a little more help with their list of “determinants” of service quality, which are in essence: • • • • • • • • • •
Reliability (consistency/dependability) Responsiveness (timeliness/promptness) Competence Access (approachability/convenience) Courtesy Communications ease Credibility (trustworthiness/honesty) Security Understanding customers and their needs Tangible evidence of service (including facilities, personnel appearance, tools, and equipment)
While those are more definitive, and can be used as critical success factors (Luftman et al., 2004, p. 361), they do not necessarily lend themselves easily to contractual terminology. Myers, Kappelman, and Prybutok (1997) list eight IS suc-
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cess dimensions that can be more easily worded into an outsourcing contract: (1) service quality, (2) system quality, (3) information quality, (4) use, (5) user satisfaction, (6) individual impact, (7) work group impact, and (8) organizational impact. The contractual wording would depend on the specific nature of the outsourcing project.
implementing, monitoring, Evaluating, and renewing Outsourced projects Robinson and Kalakota (2005, pp. 224-229) strongly emphasize the need to develop plans to implement outsourced processes and encourages the early formation of teams to oversee (1) knowledge transfer between client and supplier organizations, (2) facilitation of initial and ongoing communications at all levels of the participating firms, (3) management of employees, especially those transferred from one firm to the other, and (4) management of the quality of the fulfillment of the project. Hayes (2003) agrees that setting up the management of outsourcing implementation needs to happen as quickly as possible. Luftman et al. (2004, pp. 319-320) reinforces the need to develop vendor relationships and partnerships and advocates use of steering committees to build those through frequent meetings with vendor councils. For long-term, complex engagements, Robinson and Kalakota (2005, p. 230) even go to the point of prescribing relationship managers for each of the parties to the outsourcing contract to serve as the folks that resolve conflicts at a high level. Regarding monitoring of outsourcing contracts, evaluating performance and conducting periodic reviews, Feeny (1998) writes that those should be considered critical success factors and should become core competencies of the IS staff. In other words, the success of the outsourcing project resides in the monitoring, evaluation, and reviewing of the parties’ performances. Service
Planning for Information Systems Outsourcing
level agreements (SLA), coupled with incentives and penalties, can be excellent tools to measure quality of the project against predetermined metrics (Luftman et al., 2004, p. 319) such as the vendor’s performance against the service level agreement and accepted industry benchmarks of quality. There might be an infinite number of questions that could be asked regarding whether SLAs are being adhered to, for example: Are SLA deadlines being met and adhered to? Is reporting timely and accurate? Is the quality of work consistent with the defined SLAs? Is the number of people on the projects accurate? Does the vendor have valid software licenses in place? (Robinson & Kalakota, 2005, p. 235). Other critical factors in contract management are assessment of risks and appropriate adjustments. Robinson and Kalakota (2005, p. 234) note that things change during the course of a contract and risks change as a result. Both parties in an outsourcing arrangement need to keep their fingers on the pulse of those factors that can produce risks. This is especially true in a global economy where factors change very rapidly and in a world of unstable political environments. “To insure business continuity, companies must engineer availability, security, and reliability into every offshore process” (Robinson & Kalakota, 2005, p. 234). Monitoring the activities of an outsourcing project helps to identify problem areas and opportunities to improve performance. There are times when contract monitoring can identify changes that result in a need to renegotiate the contract. Examples of such changes are: • Expiration of the contract at its logical and predetermined end • Material contract breach by vendor, for example, poor performance, security lapses, criminal activity • A major change in the organization’s management or industry, for example, bankruptcy, merger
• •
Significant change in price for the same service by the same or other vendor Advent of new technology that could improve the project (Luftman et al., 2004, p. 319)
Robinson and Kalakota (2005, pp. 232-233) point out a rule of thumb is that process designs become obsolete every five years. This can be due to any number of causes, but points to the potential need to renegotiate contracts.
summary This chapter has provided an overview of the processes and considerations for planning for outsourcing of information systems functions. It began by framing the present state of IS outsourcing processed in a historical context. The nature of IS outsourcing has evolved through the years for several reasons. Each of the evolutionary processes is available for use today. There are many factors that should be considered prior to outsourcing information systems functions. Managers should consider the firm’s goals and strategies, its core competencies and critical success factors, the present nature and future of its information systems functions, the wide range of specific information systems functions that can be outsourced, costs vs. benefits of candidate outsourcing ventures, as well as cultural, language, political, and ethical factors. Similarly there are many IS functions which might be candidates to be outsourced After deciding how and what to outsource, managers begin the process of restructuring the organization to accommodate outsourcing. Then there are the elaborate processes of selecting the right vendor and negotiating the outsourcing contract. The work does not end with the signing of the contract. Indeed some of the most critical tasks lie ahead with the monitoring, evaluation, and possible renegotiation of the contract.
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rEFErEncEs Altman, D. (2004, May 1). A more productive outsourcing debate. Business. Retrieved March 13, 2005, from http://money.cnn.com/magazines/ business2/business2_archive/2004/ 05/01/368257/ index.htm Bruton, N. (2004). Managing the IT ServicesPprocesses. Burlington, MA: Butterworth-Heinemann. Cox, G. (1994, June). Time to reshape the IS department? Wentworth Research Program (part of Gartner Executive Program). Retrieved March 13, 2005, from http://www.gartner.com Feeny, D. (1998, Spring). Core IS capabilities for exploiting information technology. Sloan Management Review, 39(3), 9-21. Hayes, M. (2003, August 4). Doing offshore right. InformationWeek, 77-78. Hickey, T. (2005, January 31). Outsourcing decisions: They’re strategic. Computerworld. Retrieved March 13, 2005, from http://www.computer world.com/printthis/2005/0,4814,99316,00. html Kaiser, K., & Hawk, S. (2004). Evolution of offshore software development: From outsourcing to cosourcing. MIS Quarterly Executive, 3(2), 69-81. Karmakar, U. (2004, June). Will you survive the services revolution? Harvard Business Review, 101-107. Luftman, J. N., Bullen, C. V., Liao, D., Nash, E., & Neumann, C. (2004). Managing the information technology resources: Leadership in the information age. Upper Saddle River, NJ: Pearson Education, Inc. Markus, M. L. (1996). The future of IT management. Database for Advances in Information Systems, 27(4), 68-84.
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McNurlin, B. C., & Sprague, R. H. Jr. (2006). Information systems management in practice. Upper Saddle River, NJ: Pearson Prentice Hall. Mearian, L. (2005, April 8). Feds force tighter oversight of outsourcers. Computerworld. Retrieved June 15, 2005, from http://www.computerwor ld.com/printthis/2005/ 0,4814,100962,00.html Myers, B. L., Kappelman, L. A., & Prybutok, V. R. (1997). Comprehensive model for assessing quality & productivity of information systems function: Toward theory for information systems assessment. Information Resource Management Journal, 10(1), 6-25. Niccolai, J. (2005, June 22). Gartner: Five reasons why offshore deals go bust. Computerworld. Retrieved July 13, 2005, from http://www.computerworld. com/printthis/2005/ 0,4814,102677,00. html Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implications for future research. Journal for Marketing, 49(4), 41-50. Robinson, M., & Kalakota, R. (2005). Offshore outsourcing: Business models, ROI and best practices. Alpharetta, GA: Mivar Press. Singhal, J., & Singhal, K. (2002). Supply chains and compatibility among components in product design. Journal of Operations Management, 20, 289-302. Thickins, G. (2003, April). Utility computing: The next new IT model. Darwin Magazine. Retrieved April 15, 2005, from www.darwinmag. com/read/040103/utility.html. Turney, P. B. B. (1992, January). Activity-based management. Management Accounting, 20-25. Warren, S. (2005, May 23). Eye on offshoring: Aligning IT strategy with the business strategy. Computerworld. Retrieved March 13, 2005,
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from http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,101896,00. html
Woolfe, R. (2000, July). IS lite. Gartner EXP. Retrieved March 14, 2006, from http://www. gartner.com.
This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans, D. Schniederjans, & M. Schniederjans, pp. 42-61, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.7
The Journey to New Lands: Utilizing the Global IT Workforce through Offshore-Insourcing Subrata Chakrabarty Texas A&M University, USA
absTracT
inTrOducTiOn
This chapter introduces a prescriptive conceptual framework from the practitioner’s perspective for the “offshore-insourcing” journey. In the decision phase of offshore-insourcing, we answer the questions “Why to insource from offshore?” “What to insource from offshore?,” and “Where to offshore?” In the implementation phase we answer the question “How to insource from offshore?” and describe the importance of evaluating outcomes. In the process of answering these questions, we discuss insourcing vs. outsourcing and the possible need for offshoring. We think of ways to select the IT functions that can be insourced from offshore, and also look at the popular offshore destinations. We discuss process of managing change, setting up the offshore center, recruiting IT professionals at offshore, and managing the IT professionals at onshore and offshore within the ambit of the global delivery model. Throughout the decision and implementation phases of offshoreinsourcing, the focus is on the challenges related to managing IT personnel.
The pressure to lower information technology (IT) costs is high on companies worldwide. The cost of IT, a major component of which is the cost of IT professionals, is sometimes a stumbling block in the decision to upgrade to newer and better technology alternatives. The internet provides new opportunities for offshoring of IT or IT enabled work. When a service is made available on-line, all the user knows is what they see on the screen. If they type in an internet address and access a service, they do not need to know about the nationality or race of the IT professionals that have actually developed the Web site. Companies in advanced economies are being driven to look across the horizon by the lure of low costs of IT professionals in other countries and the desire for high software quality. Dibbern, Goles, Hirschheim, and Jayatilaka (2004) note the following: Even the popular press (Business Week, 2003; USA Today, 2003) have reported on this issue
noting that as much as 50% of IT jobs will be offshored to India and other off- and near-shore destinations in the next 10 years. Such change it is argued is nothing more than the natural progression of first moving blue-collar work (manufacturing, textile production, etc.) overseas followed by white-collar work. By offshore-insourcing of IT work, a company sets up its own IT department or subsidiary in another country (that is, it insources IT work from its own IT department or subsidiary located in an offshore country). However, there are also some concerns regarding the larger impacts of offshoring by a nation on its job market and its knowledge centric competitiveness. Process and operations knowledge may get leaked to local entrepreneurs and competing companies at offshore locations (Karamouzis et al., 2004). The other major concern that is often highlighted by the popular media is that of job losses. Offshoring is sometimes regarded as a reason for the slackness in growth of employment opportunities in developed economies. However, Karamouzis et al. (2004) of Gartner Research interestingly note the following about job losses:
downturn or pressure on companies to improve productivity without new hires.” Karamouzis et al. (2004) go on to state that concern should not be the number of jobs displaced which is a cyclical trend, but rather the “potential loss of critical competencies and knowledge-centric roles.” Hence, offshore-insourcing is an option to gain access to low-cost & high-quality skills of offshore IT professionals, and also to retain critical competencies and knowledge centric roles within the company, but not necessarily within a nation. This chapter will explore the offshore-insourcing process by asking the questions “Why?,” “What?,” “Where?,” and “How?” in a prescriptive conceptual framework. It will analyze the forces that are driving offshoring in the internet age, and how various organizations can respond to this demand. The process of implementing a decision to insource from offshore is studied by discussing the process of recruiting IT professionals at offshore, understanding the need for change management, and discussing the management of IT professionals at onshore and offshore within the ambit of the global delivery model.
The Terminologies According to U.S. labor statistics and several academic studies, less than 5% of jobs lost in the United States are attributed to offshoring IT services. A study commissioned by the Information Technology Association of America and developed by Global Insight put the estimate at 2.8%. U.S. government statistics for the last 15 years show that most job losses have occurred due to automation, changes in industry dynamics and process re-engineering. Many proponents of the above logic face criticism that job growth at onshore may be slower due to offshoring of new projects. Karamouzis et al. (2004) however state that “new job creation has decelerated in the past three years, perhaps due to greater efficiencies, automation, the economic
Before we delve deep into this chapter, a quick brush up on the basic terminologies will help. We broadly define a “client” as anyone in need of services. The terms “client” “customer,” and “buyer” imply a firm (or even an individual) that is seeking services, from either internal service providers (like the client’s own internal IT department, or its subsidiary) or from external service providers (a vendor/supplier). The term “client-entity” implies any entity that is owned by the client, such as the client’s internal IT department or its subsidiary. In the same vein, the terms “vendor,” “supplier,” “third party,” and external “consultant” imply an “external service provider” or a “non-client entity” whose business is to provide services to the client.
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The two cross-organizational terminologies that deal with transfer of work within or across organizations are “insourcing” and “outsourcing.” A company “insources” work from its own IT personnel and “outsources” work to the IT personnel in an external company (vendor). In other words, insourcing implies that the service providers are client employees (who work for its subsidiary or internal IT department); whereas outsourcing implies that the service providers are external IT personnel (such as employees of vendor/supplier firms or external consultants). The two cross-border terminologies that deal with transfer of work within or across countries (or geographical borders) are “onshoring” and “offshoring.” A company “onshores” work to IT personnel residing in its own country, and “offshores” work to IT personnel some other country. In other words, onshoring implies that the service providers are IT personnel located in the same country as the client; this is also known as domestic-sourcing or onshore-sourcing. On the Figure 1. (In/out) sourcing from (on/off) shore
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other hand, offshoring implies that the service providers are IT personnel located in a country, which is different from the client’s country; this is also known as global-sourcing or offshoresourcing. For example, both China and India may be considered as “offshore” countries with respect to the United Kingdom or USA. As shown in Figure 1, these basic cross organizational and cross border terminologies can lead to four combinations: (1) onshore-insourcing (or domestic-insourcing) implies that both the client and its internal IT department (or subsidiary) that provides IT services is located in the same country, (2) offshore-insourcing (or global-insourcing) implies that the its IT department (or subsidiary) that provides IT services is located in a country that is different from the client’s country, (3) onshore-outsourcing (or domestic-outsourcing) implies that both the client and the vendor personnel are located in the same country, and (4) offshore-outsourcing (or global-outsourcing) implies that the vendor personnel are located in
The Journey to New Lands
a country that is different from the client’s country. In this chapter, we will be discussing about offshore-insourcing or (global-insourcing).
The conceptual Framework/model for Offshore-insourcing Figure 2 gives the proposed conceptual framework/model for offshore-insourcing that will be used in this chapter. Simon (1960, as cited in Dibbern et al., 2004, pp. 14-17) had proposed a fourstage model for decision making that comprised of the stages (1) intelligence, (2) design, (3) choice, and (4) implementation. Dibbern et al. (2004) had adapted Simon’s model in their literature survey of information systems outsourcing. Similarly, Simon’s model is adapted here for offshoreinsourcing, by modifying Simon’s intelligence, design and choice stages into the why, what, and Figure 2. Conceptual framework/model for offshore-insourcing
where stages respectively and clubbing these three stages into the decision phase. Furthermore, we break down the final implementation phase into the two stages of “how” and “outcomes.” Hence, the offshore-insourcing process has been assumed to have two distinct phases, namely the decision phase and the implementation phase. In the decision phase a company asks the following three questions: • • •
Why to insource from offshore What to insource from offshore Where to offshore
These three decision-phase questions (or stages) can be combined into the single decision question, that is: “‘Why’ to insource ‘what’ from ‘where’ in offshore?” Furthermore, the implementation phase comprises of two stages that asks the “how” question and finally evaluates the outcomes: • •
How to insource from offshore Evaluate outcomes
In the “Why to insource from offshore?” stage we ask the question of whether a company needs to insource from within or outsource to a vendor, and whether the company needs to go offshore to another country? If the company does decide go offshore to another country, then, should it look at an offshore-based vendor (for offshoreoutsourcing) or should it set up its own offshore subsidiary (for offshore-insourcing)? Moreover, given that there are so many concerns about offshoring in the media and in the public, how should the company filter out the realities from the myths and make a knowledgeable decision? In the “What to insource from offshore?” stage we ask the question on how a company can select the IT functions that it should insource from offshore? In the “Where to offshore?” stage we look at the criteria for choosing an offshore destination, and also survey some of the popular
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offshore countries and cities (see Appendix I of this chapter). In the “How to insource from offshore?” stage we discuss and prescribe the processes for creating the team that will be implementing the decision to offshore, managing change, getting the offshore office ready, analyzing options for recruiting at offshore, and the setting up onshore-offshore coordination for recruitment and induction training. We also discuss the global delivery model and the management of the IT professionals at onshore and offshore. Finally, we evaluate the outcome of the entire offshore-insourcing process, and use the feedback to further improve the decision making and implementation phases.
dEcisiOn: why TO insOurcE FrOm OFFshOrE? The decision question “why to insource from offshore?” can be broken down into the questions “why to insource?” and “why to offshore?”
why to insource? Hirschheim and Lacity (2000) conducted fourteen case studies that assess the experiences of companies with outsourcing. They provide evidence that companies need not necessarily turn to outsourcing to improve IT performance, and believe that IT managers can often times replicate a vendor’s cost reduction tactics, provided they get the much needed support from their upper management. In many of the case studies it was found that large scale outsourcing, often led to lower than expected flexibility and lower than expected service levels from the vendor’s IT personnel. Furthermore, a number of contracts are either being renegotiated or being terminated; and some companies are considering pulling their IT functions back in-house once an outsourcing contract is terminated. Outsourcing is not the panacea for all ills. At shown in Table 1, both insourcing and outsourcing have their pros and cons (Ang & Straub, 1998; Aubert, Rivard, & Patry, 1996; Currie &
Table 1. Insourcing vs. outsourcing Insourcing
Outsourcing
More suitable when it is difficult to define requirements (uncertainty)
Enables organization’s personnel to focus on its core business, by outsourcing the non-core activities
More control over strategic assets, resources and IT personnel
Assists in major reorganizations by making transitions smoother & quicker
In the absence of competent vendor personnel in the market, insourcing is the only option
Frees up in-house resources and IT personnel for new and innovative business/technology development, by turning over legacy systems to vendors
Lower risk of intellectual property rights violation by internal IT personnel (in comparison to difficulty in negotiating IP rights with external vendors)
Quality and service improvements from established service providers
Better when a very high degree of firm specific business knowledge is required by IT personnel (since knowledge transfer to external vendor personnel would be difficult)
Access to technical expertise of external IT personnel, when the same is not available internally.
No threat of opportunistic behavior by external vendor personnel
Financial advantages: • Cost reduction (possible reduction in IT personnel costs) • Costs are predictable (determined while negotiating outsourcing deal) • Reduction in Capital expenditure (for IT infrastructure) Flexibility and control in increase/decrease of IT manpower as needed
why to Offshore? Why is there such great excitement about offshoring work to IT personnel in the other countries? Is offshoring sustainable over the long-term or is it just a passing fancy? Literature suggests that offshoring of IT work will continue to grow for the following reasons: •
•
•
•
Access to large markets with high growth potential: The favorite locations for offshoring like China and India (see Appendix I) are also large and growing markets. It is strategically important to establish an early presence in such developing countries which have a higher growth potential than the relatively mature developed countries (Apte & Mason, 1995, p. 1252). Cost savings: The offshoring option offers lower cost advantages (primarily due to lower salary levels of offshore IT personnel) and is probably biggest driver behind the offshoring trend (Apte & Mason, 1995, p. 1252; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002; Sobol & Apte, 1995). Fastest time to market by working round the clock: Potentially all 24 hours of the day can be devoted to any task by globally distributing the work to IT personnel across multiple time zones. This for example can lead to a faster cycle time for software production (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002), and allow continuous 24x7 operations and monitoring of critical IT functions and infrastructure by IT personnel (needed for customer service, network management, production support, etc.). Latest technologies and the Internet: The latest technologies allow collaboration
•
•
•
among globally distributed IT professionals (Carmel & Agarwal, 2002, p. 66). The internet has greatly helped the phenomenon of IT sourcing by allowing personnel across the work to easily share information. Communication technologies such as e-mailing, teleconferencing, videoconferencing, and instant-messaging allow for better coordination in spite of the geographic distances. Modular design of IT tasks: Certain IT tasks (for e.g., in IT production or support) can be designed in a modular fashion (i.e., they can be broken down into smaller and relatively independent modules) that makes it easier to distribute the work globally among IT personnel with reduced transactions costs (cost of coordinating work activities among the personnel), and allows for easier synchronization, communication, supervision, and feedback mechanisms among the IT personnel (Carmel & Agarwal, 2002, p. 66). Skilled pool of IT professionals: There is large supply of qualified IT professionals in many offshore destinations like India (Apte & Mason, 1995, p. 1252; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002). Scalability and bench-strength: The sizable supplies of qualified low-cost IT personnel at offshore allows companies to have a certain number of IT personnel in the “waiting mode” i.e. waiting to be assigned to projects, and are used to quickly ramp-up projects with IT personnel when the need arises. Having a small number of low-cost but highly skilled personnel in the “waiting mode” for being assigned to projects is also known as “bench strength,” and allows the firm to respond rapidly to sudden requirements. Alternatively, companies can also hire IT personnel rapidly from the job market, thanks to the huge availability of qualified low-cost IT professionals in many of the offshore destinations (like China and India).
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Concerns About Offshoring However there are some valid concerns about offshoring work to IT personnel in other countries, which include: (1) problems of communication and coordination, (2) cultural differences, (3) lack of trust, (4) difficulties in arranging visas/workpermits, (5) offshore unit’s lack of company/ industry specific domain knowledge (both business & technical), (6) lack of control over quality and schedule, (7) possible violation of intellectual property rights, (8) unclear government attitude towards cross border data flow and trade-in services, (7) unsatisfactory infrastructure in the offshore destination, (8) possibility of an unstable economic, political, or social environment, (9) security of physical assets and intellectual capital, and privacy, (10) knowledge transfer, and (11) managing uncertainty in IT requirements and unanticipated changes in scope of offshored work (Apte & Mason, 1995, pp. 1252-1253; Carmel & Agarwal, 2002, p. 68; Sinha & Terdiman, 2002; Sobol & Apte, 1995, p. 271). Some of the reasons that motivate companies to insource their IT needs from their offshore subsidiary (or offshore IT department) rather than to outsource them to an offshore (external) vendor are: (1) greater information & data security, and intellectual property (IP) protection, (2) absence of some specific expertise in the offshore vendors, and (3) possibility of gaining greater low-cost benefits by running one’s own subsidiary, rather than pay high margins to vendors (Karamouzis et al., 2004). However, some of these offshore subsidiaries may be short-lived due to several factors that make it challenging to sustain it as a competitive option. We categorize the contributing factors as follows: •
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Difficulty in achieving economies of scale: “Economies of scale” will be difficult to
•
achieve since a company has a finite limit to its internal needs. An alternative is to convert the internal IT department (or subsidiary) to a “spin-off.” A spin-off is a company, which was originally an internal IT department (or subsidiary) of its parent company, but is now independently selling its services to the market. This would help in expanding the spin-off’s revenue base and number of IT personnel, and thereby achieve greater economies of scale, but this will also involve additional investments/costs. (Karamouzis et al., 2004; Willcocks and Lacity, 1998, p. 26, pp. 31-32) Costs of technology infrastructure and human resource management: The recurring investment costs required for staying updated with the latest technology and infrastructure can cause the offshore subsidiaries to be less cost-efficient. Also, costs for recruiting and managing IT personnel in a new and increasingly competitive labor market can grow. Additionally, management time and effort spent to manage one’s own offshore subsidiary or IT department would be higher than when the IT work is outsourced to vendor personnel (Karamouzis et al., 2004)
dEcisiOn: whaT TO insOurcE FrOm OFFshOrE? A two step approach might be helpful to answer the question “What to insource from offshore?” The first step would be to “look inside” and select the IT functions can be insourced from offshore IT personnel, starting with the “easiest first”. The second step would be to “look outside” and find out about the skills of the IT personnel available at offshore.
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step 1: look inside—select the iT Functions that can be insourced from Offshore, starting with the “Easiest First” How does a company decide what IT functions are suitable for insourcing from offshore? IT functions are easiest to offshore when a company is confident about the following (Apte et al., 1997; Hotle & Iyengar, 2003; Iyengar & Terdiman, 2003; Sobol & Apte, 1995): 1.
2.
3.
4.
5.
Maturity of associated processes is high; processes are well defined and documented • For example, a company with a higher CMM rating will be better at insourcing of software development from offshore, since its processes are of the higher quality and its IT personnel are educated about the best quality processes Project management skills of IT managers and professionals are good at both and onshore and offshore Requires lesser degree of interaction (communication and coordination) with onshore management or onshore users, and face-to-face interaction between onshore and offshore IT personnel is not necessary • Activities that require higher degree of user interaction should not be carried out at offshore. The extent of user interaction is inversely proportional to possibility of carrying out an activity remotely. Hence, initial requirements gathering, analysis and design phases are generally conducted at onshore by IT professionals High availability of offshore IT professionals who have high levels of skills required for the IT function Ease of knowledge transfer of both business domain knowledge and special technology skills to IT personnel at offshore
6.
Requirements can be well defined and documented by IT personnel, and there is less uncertainty • Documentation & prioritization: Requirements-gathering and management is best handled face-to-face. The gathered requirements must be well documented and prioritized by IT personnel at onshore, before sending them to offshore IT personnel • Requirements change management: Often users of IT systems don’t know what they want, or are unable to define them satisfactorily. Hence changes to requirements over time are common. If the frequency of these changes can be controlled, and brought down then the IT function can be more comfortably offshored
Based on the above considerations suitable IT functions should be chosen for insourcing from offshore IT personnel.
step 2: look Outside—Find Out about the skills available at Offshore A suitable investigation would be required to find out more about the skills of IT professionals at the prospective offshore destination. But how does one find out the skills of the IT professionals in a prospective offshore destination? One option may be to survey “what services the offshore based software service providers (vendors) have to offer?” For example, if India is a prospective offshore destination, and if some large India based software service providers can provide certain IT services for certain industries, then, there is a good probability that skilled IT professionals are available in India for those IT functions (Marriott & Wiggins, 2002). Though a company that is attempting offshore-insourcing of IT will not actually outsource to any of these vendors, these
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kinds of surveys can provide valuable information about the skills available in the offshore destination. As an example, we have listed the services offered and the industries targeted by a large India based software services provider named “Infosys” (http://www.infosys.com) in Appendix II at the end of this chapter, which would give an idea about the capabilities of the IT personnel at the respective offshore location (Infosys, 2005b, 2005c).
•
dEcisiOn: whErE TO OFFshOrE? Kempf, Scholl, and Sinha (2001) reported the evaluation of competitiveness of various countries as preferred destinations of offshoring, based on studying factors like infrastructure, IT personnel availability, capital and entrepreneurship. The characteristic of the labor pool of IT professionals was used to filter an initial list of 33 countries to a short list of 17 countries, namely: China, India, South Korea, Malaysia, Philippines, the three Baltic States, the Czech Republic, Hungary, Poland, Russia, South Africa, Argentina, Brazil, Chile, and Mexico. For further short listing, infrastructure, capital, and risk ratings of countries were then used by Kempf et al. (2001) to identify the following key regions for offshoring:
•
•
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Brazil is possibly the best suited for crossborder collaboration opportunities among the four countries short-listed from the Americas (Argentina, Brazil, Chile and Mexico). Though currently below a lot of radar screens, Brazil displays some strong fundamental characteristics that make it a potentially attractive country to consider. One of Brazil’s key attributes is the level of telecommunication and Internet infrastructure deployed. China has created an environment supportive of cross-border collaboration. The labor
•
force appears to be strong in high technology and data from other industry sources indicate that China offers very competitive charge rates in the IT sector. Measures of China’s infrastructure are also positive, though, like India, China does not seem to be spending as much on investments in telecommunications. In fact between 1995 and 1999, China spent a total of $5.9 billion—only slightly more than the Philippines’ $5.1 billion. The Baltic states of Estonia, Latvia and Lithuania offer some interesting opportunities for cross-border collaboration. While data on wages for these three countries is unavailable, each of these countries has some of the highest numbers of scientists and engineers in research and development per million people of all the countries studied. India continues to be the predominant offshore player with software and services. India has a large, technologically advanced labor pool. In fact, the U.S. Immigration and Naturalization Service (INS) reports that Indian nationals received 42.6% of the H1-B temporary skilled worker visas issued between October 1999 and February 2000. Also, government support of its tertiary education systems and private IT training institutions, along with a low-wage-rate environment, continues to make India attractive as a source of skilled technologists. However, the economic data collected in our research reflects a dichotomy between the growth of demand for IT services and the development of telecommunication and information technology infrastructure that may cause concern in the future.
Going by reports in the media and various other sources, as of now China and India are among the topmost players in offshore-insourcing arena (Cohen, 2005; Karamouzis & Young, 2004; Kempf et al., 2001; Wiggins, Datar, & Liu, 2002a; Wiggins, Datar, Leskela, & Kumar, 2002b).
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The offshore-insourcing scenarios of these two countries have been discussed in Appendix I of this chapter. However, it is important to note that these are not necessarily the only countries that can successfully offer the advantages of offshoreinsourcing. Though China and India seem to be among most “popular” destinations at present, this can change in the future. The countries that offer the optimum balance in terms of cost, infrastructure, accessibility, skilled IT personnel, political climate and social acceptability would be “right” destinations in the future, depending on the needs of relevant company. The following factors need to be considered while considering an offshoring location (Iyengar, 2005; Karamouzis & Young, 2004): 1. 2. 3. 4.
5. 6.
7.
8.
9.
Cost of IT personnel: Salaries for IT personnel vary from location to location Infrastructure: Telecommunications, roads, real estate, water, and power Access: International access and quality accommodation Talent pool/skills: Availability and diversity of skilled IT personnel, and academic institutions that can continuously generate such skilled IT personnel with diverse skills Cost of living Political climate and support: National and state/local governments, political ideology, and religious tolerance Quality of life: Housing rates, cosmopolitan feel, religious tolerance, transportation, crime rate, climate and public infrastructure Expatriate friendliness: A job posting at the chosen location should not be considered a hardship assignment by the expatriates Service-line capabilities: Some locations may be specialized hubs for particular types of industries and services
implEmEnTaTiOn: hOw TO insOurcE FrOm OFFshOrE? Various issues related to offshore-insourcing were discussed in the earlier sections (i.e., decision making phase), namely “why to insource from offshore?,” “what to insource from offshore?”, and “where to offshore?” We find that there is a scarcity of literature on “how” to insource from offshore. Therefore, a conceptual approach is adopted in this section where the author utilizes his experience of working in the Indian software industry to come up with a possible conceptual framework that attempts to answer the “how” question1.
how to create the Offshore implementation Team? An “Offshore Implementation Team,” which is the “core” team with the responsibility of overseeing the implementation of the offshoring operation, can be created. This core team may comprise of the company’s onshore employees and/or external consultants. The offshore implementation team can use the assistance of the onshore company’s high-level management and various external entities such as legal consultants, HR consultants, telecommunications/network consultants and facilities/infrastructure consultants. Visas/permits will need to be processed and issued for all offshore implementation team members and other people that will be traveling to offshore. For example as shown in Figure 3, the offshore implementation team may consist of a project manager, human resource coordinators, technology and infrastructure coordinators, and an offshore-insourcing process coordinator. The “project manager” (of this offshore implementation project) will have general managerial responsibilities towards setting the offshore
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Figure 3. Creating an offshore implementation team
facility, will interact with the company’s top level management, and will have the various coordinators reporting to him or her. The “HR coordinators” will take up responsibilities of organizing training, staffing and related scheduling and management activities. The “technology and infrastructure coordinators” will take up the responsibility of network/system infrastructure management, which involves procurement and setting up of equipment for the offshore facility, and related scheduling and management activities. The “offshore-insourcing process coordinators” should ideally be people with prior experience in setting up such offshore facilities, in advising and coordinating the offshoring process, in change management, in addressing challenges of the offshoring process, and in related risk mitigation activities. The offshore implementation team will interact with various other groups like the company’s top level management, the offshore telecommunica-
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tions and networking group, the offshore facilities infrastructure management group, the legal consultants, and the offshore HR consultancy firms. The company’s top level management will have the responsibilities of sanctioning funds for the offshore implementation project, monitoring the business value of the offshore implementation exercise, getting the go-ahead from the firm’s shareholders, championing change management, reviewing the status at identified milestones, and making relevant decisions and approvals for future phases (Kobyashi-Hillary, 2004, pp. 231-248). The offshore telecommunications and networking group will be responsible for designing the core network that will be required to set up offshore operations, shipping/installing/configuring of the core network infrastructure in the new offshore office, setting up connectivity (wide area network or WAN) among the onshore and offshore offices for secure data communication, and setting up of telecommunication networks such as phone lines and internet service (CMIS, 2004). The offshore facilities infrastructure management group can help, for example, in either setting up the offshore office in a previously established IT Park which houses other international companies, or actually hiring contractors to build a new offshore facility building. The facilities should include office furniture, power systems, cooling systems, and network cabling (CMIS, 2004). The legal consultants would provide counseling on labor laws, offshore telecom regulations, data privacy and cross-border information transfer, offshore intellectual property laws, taxation, software copyright and license laws, etc.… (Kobyashi-Hillary, 2004, pp. 177-190) The HR consultancy firms will be responsible for advertising, creating brand awareness in the offshore labor market, and assisting the offshore implementation team’s HR coordinators with staffing activities like executive search, recruitment, training and temporary staffing (Cerebrus Consultants, n.d.; Ma Foi, n.d.).
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By benchmarking against companies that have successfully set up offshore-insourcing operations (see Appendix I), the offshore implementation team must plan and then compare its offshore implementation performance. Appendix-I, which addresses the question “Where to offshore?” provides a list of the 15 biggest InfoTech companies in the world, most of which have an offshore presence in China or India. These companies may be used as benchmarks of successful offshoreinsourcing.
how to manage change among Onshore iT personnel? Iyengar and Morello (2004) suggest that the questions listed in Table 2 are asked by the onshore business unit staff and onshore IT professionals whenever they hear the dreaded “offshore” word in their organization. IT professionals at onshore share the concerns of the business unit, and also have additional concerns since they are the primary individuals affected by any offshoring decision. Staff members in the business/administrative units are primarily concerned about changes in work procedures, loss of expertise, personal benefits, and risks and the need for a cautious approach. IT professionals are additionally concerned about the possibility of loss of their own jobs and those of
their friends, their perpetually uncertain future, and their own capabilities to handle such a change. Companies may face non-cooperation and lack of initiative from unmotivated employees while offshoring. Iyengar and Morello (2004) further suggest three kinds of challenges that companies encounter in early stages of offshoring, namely: emotional, communications and execution challenges, which are explained in Table 3. Emotional challenges are often triggered by emotion rather than reason; communication challenges involve misinformation and distortion; and execution challenges represent practical concerns in performing successful offshoring. Hence, a communication strategy should be created to introduce the concept of an offshore IT team and to address the fears of the existing onshore IT professionals about offshoring. Communication can be affected through periodic staff briefings, weekly newsletters, increased notice board activity, etc. The company moving offshore might want to undertake awareness training sessions for the company’s onshore employees to familiarize them with their proposed offshoring plans and processes, and hence lead to better mutual understanding. Managers should communicate offshoring plans with maximum details and honesty to the onshore IT personnel. Failure
Table 2. Business unit and IT staff concerns on offshoring (Compiled from Gartner Research, Iyengar and Morello (2004)) Business Unit Staff concerns on offshoring
IT Staff concerns on offshoring (in addition to concerns shared by Business staff)
• “How will my business unit get the work done now?”
• “Will I lose my job?”
• “Won't we lose our subject matter expertise?”
• “Will my friends lose their jobs?”
• “Why should I support this effort? What's in it for me?”
• “Even if I make it through the first round of layoffs, what happens next?”
• “Isn't this initiative risky?”
• “They're only keeping me through the transition, so why should I help out?”
• “Shouldn’t we take things slowly--one step at a time?”
• “How can I possibly perform in my new role—one that I don't like and am not trained to handle” • “Will I need to work additional hours or shifts so that I will be able to communicate with my offshore counterparts?”
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Table 3. Change management challenges (Compiled from Gartner Research, Iyengar and Morello (2004)) Emotional challenges
Communications challenges
Execution challenges
• Emotions: disbelief, anxiety, fear, denial, shock, resentment, anger, stress, resistance, disengagement and a desire to leave the organization. As a result, productivity falls
• Information accuracy: Delays, secondhand information, distortion
• Tolerance: Lower initial tolerance for offshoring by normal employees
• Fear: employees wonder if they will lose their jobs next
• The Media: Misinformation from media stories causing panic and resentment
• Processes: IT process need to be redesigned for more complex global delivery
• Management communication: Conflicting information from managers
• Knowledge Transfer: Business & IT knowledge transfer to offshore • Control: Power & control of onshore management/staff over offshore • Transition: Long transition time and employee attrition during this time
to do so effectively might result in a backlash and lower productivity from onshore IT personnel, and can adversely affect the employer’s image in the job market (Morello & Terdiman, 2004). The communication strategy can include the following rules (Morello & Terdiman, 2004): 1.
2.
3.
4.
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Make a communication plan for onshore IT personnel, and communicate transparently all that is known and not known Convey the truth to onshore IT personnel about the intentions and reasons for offshore sourcing Analyze the strengths, weaknesses, opportunities, and threats for the departments/ projects and IT personnel most closely affected Clearly state the jobs to be retained at onshore, and state if the affected IT professionals would be retrained for other roles by identifying new opportunities, career options and transition periods for the affected IT professionals
How to Get the Offshore Office ready for iT personnel? The offshore implementation team will need to get certain important things in place (KobyashiHillary, 2004, pp. 123-248) before staffing the offshore office:
• • •
Getting the Facilities Infrastructure ready Getting the Technical Infrastructure ready Other tasks would include: ○ Establishing a banking relationship ○ Selecting legal representation ○ Setting up an accounting system ○ Obtaining required licenses/permits ○ Obtaining insurance and establishing a security plan
One of the major tasks for a company moving offshore is to get the Facilities Infrastructure ready (CMIS, 2004). The offshore office can be located in a previously established offshore development
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park with other international companies, or can be purchased or built in a suitable location. In case the facility is leased, general maintenance and janitorial services need to be included in the lease agreement. The facilities should feature all of the basic elements for establishing a working office for IT professionals that includes office furniture, power, cooling, initial telecomm, and network cabling. Appropriate power and cooling will need to be provided for any technical equipment required. Another major task would be to get the Technical Infrastructure ready (CMIS, 2004). The offshore office will need to be highly self-sufficient, and yet remain connected with the onshore corporate location for productive collaboration between IT professionals at offshore and onshore. The technical infrastructure that would be needed by offshore IT personnel include e-mail servers, file servers, Web servers, application servers, database servers, personal computers, printers, software and also the network infrastructure. Licenses for the software should allow its usage in the offshore location. A network operation team has to design the core network required to support the IT personnel’s offshore operations. Time should be allocated to ship, install, and configure the core network infrastructure in the new offshore office. For example, a private MPLS (Multi-protocol Label Switching) wide area network (WAN) between the offshore office and the onshore facilities may be set up for secure, inter-corporate data communication. Telecommunications networking (phones, PBX (private branch exchange) equipment, Telco, ISP (Internet service provider) setup) will also need to be done.
How to Plan Staffing at Offshore? An organization chart, staffing projection, and staffing budget will have to be made (CMIS, 2004):
•
•
•
An organization chart for the offshore staff and IT personnel should be developed. It should also explain how the offshore office should report into the onshore office. An offshore staffing projection describing the skill set of each staff member and IT professional, complete with approximate salary bands appropriate for the offshore region will be needed. A staffing budget will need to be prepared, and this will include costs for legal procedures, consultants, training, travel, communication, accommodation and various infrastructure facilities.
how to make use of the recruiting Options at Offshore? The options for recruiting at offshore possibly include (1) direct/permanent hiring, (2) contract hiring, and (3) contract-to-permanent hiring (Moses Associates, n.d.; Schweyer, n.d). The pros and cons for each option should be studied. Also, the labor laws of the offshore region need to be studied in great detail (Kobyashi-Hillary, 2004, pp. 177-190). Permanent hiring is highly recommended if the position requires the IT professional to have access to highly critical information systems, have security rights/privileges, or if the position requires a managerial role. If a company can groom and retain its offshore managerial and IT talent, then there is greater knowledge retention within the company, and there is a lesser threat of leakage of the company’s proprietary or sensitive information. Since there is a greater dependence on the knowledge possessed by the permanent IT personnel on key processes/tools/functions, if a key skilled employee quits, it is harder to find a replacement that can be equally knowledgeable and productive (however, strict emphasis on documentation of processes/tools/functions across the organization can help new hires to learn quickly). Permanent IT personnel also increase
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the companies’ benefits costs, they may become lackadaisical and may take their job for granted, and during business slumps it is expensive and difficult to manage the surplus manpower. Contract hiring involves hiring IT personnel temporarily on projects (such as for project work involving programming or engineering services) and the contracted IT personnel may be released by the company at any point. Contract hires can be more responsive to their responsibilities since they don’t take their job for granted. They try to stay updated with the latest technology and retrain on their skills. This is a more cost-effective approach because during business slowdowns the contracted IT personnel can be easily released. However, contract employees have very low job-security and this may lead to high attrition; also there is significant knowledge loss when the contract hire is released (there is scope for intellectual capital theft, and sensitive data may leave the company). When the economy is booming, it is difficult to find quality IT personnel in the competitive job market and getting good employees as contract hires will be a tough call. In Contract-to-permanent hiring, the IT professional is hired on a contract basis for a fixed period of time, beyond which there is an expectation that they could be converted into permanent employees based on performance. The company can groom, and test the technical knowledge and team skills of the IT professionals before deciding to retain them full-time. This ensures quality staffing. If business declines during the “term-of-contract,” the IT professional can be easily released. Offshore managers must be ideally hired on a permanent basis, because continually changing managers will significantly effect and slowdown the effective execution of IT and administrative functions. Moreover, managerial skills are rather hard to come by, and managers need to build a long-term rapport with their counterparts at onshore to better coordinate the operations of the two
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offices and develop a good working atmosphere in the offshore facility. Non-managerial staff at offshore can be hired on a contract-to-permanent basis, that is they will be on a contract basis for a limited period (say a year), beyond which they will either be made permanent or released (based on their performance). This allows the management to observe their work before making a permanent hiring decision. It is necessary to groom and build managerial and IT talent at offshore. To reduce the effects of attrition, there needs to be a strict enforcement of documentation of key processes, tools and functions, which in turn leads to better knowledge management. During temporary labor spikes, the company can step up the hiring of contract personnel on a project to project basis and release the temporary hires when demand declines. This will help the offshore company to be flexible and agile in terms of meeting business and staffing needs while keeping costs down.
how to use Expatriates for Offshore? Companies can bridge the gap of time zones, interaction styles and flawed communications by using the talents of individuals with multicultural fluency that is often found in expatriates who have been immersed in the customs, language and workplace rhythms that are essential in the diffusion of new offshoring processes with the overall enterprise (Bittinger, 2003). Some personnel from onshore may be deputed at offshore, and some personnel from offshore may be deputed at onshore, to bridge the onshore-offshore divide. Bittinger (2003) reports from a study by Hilary Harris (Cranfield School of Management, Cranfield University, UK) that organizations are using four types of international work assignments: •
Long-term: The expatriate and his or her family move to the host country for more than one year
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• • •
Short-term: Assignments are less than a year, and may involve family accompaniment International commuter: The employee commutes on a regular basis, while the family remains at home Frequent flyer: The employee takes frequent trips abroad, but does not relocate
Candidates selected for expatriate roles should preferably have work experience abroad for better cultural sensitivity and adaptability, language/ communication/interpersonal skills, leadership skills, ability to work and collaborate from remote locations, understanding of parent companies mission, vision and culture, and most importantly the person’s and the person’s family’s willingness to travel (Bittinger, 2003). Bittinger (2003) states that the biggest reason why the expatriate strategy sometimes fail is due to soft family related issues like resistance from spouse due to various personal and career related reasons, inability to adapt to foreign culture, or plain homesickness.
how to carry Out the recruitment and induction Training process? Will a company’s current structure be able to support the offshore recruitment process or will the company need to employ the services of a local HR consultant at offshore? The task of selecting the right staff and IT professionals and creating the right organization structure may require localized experience. A company moving offshore might want to maintain authority over the entire advertising, hiring and training process to gain greater control over the skill level and service quality of new employees. Figure 4 shows a possible example of how the recruitment and induction training may be conducted.
Recruitment Hiring of staff and IT professionals at offshore will involve many tasks (see Figure 4). Brand awareness should be created by advertising the recruitment program in the media (such as leading newspapers) and ensure that the job postings and advertisements have been posted on the company Web site and others job-search Web sites. Most HR consultants provide two types of selection services: database selection and advertised recruitment (Ma Foi, n.d.). Database selection uses an automated Web enabled database that allows for speedy matching of candidate profiles with recruiting company’s needs. Advertised recruitment can be used for tasks like “head-hunting” to attract specific segments of personnel such as senior managers, and also for skill specific recruitment. Interviews with short listed candidates need to be arranged. Interviews at offshore may be conducted by managers at onshore through videoconferencing; and in such a scenario, the difference in time-zones between onshore and offshore need to be taken into account. Access to facilities such as rooms, computers, internetconnectivity, projectors, printers, teleconferencing, videoconferencing, etc… should be available at interview sites.
Induction Training The newly hired managers from offshore may need to travel to the onshore offices to acquaint themselves with the company’s business, work culture, policies, practices, and people (see Figure 4). During this time, managers from offshore can study the onshore company’s business and IT work. Information gathered at onshore needs to be clearly documented so that the entire organization, including new employees, may benefit from it.
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Figure 4. Staffing at offshore (A possible recruitment and induction training process)
All the other offshore hires can be trained on the same matters by their offshore managers (when the managers return to offshore from onshore after their training), or by the onshore managers (by videoconferencing, or they can fly down from onshore to offshore). The knowledge transfer process for
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the new employees who haven’t traveled onshore may be limited by a lack of face-to-face contact. Though it might be advisable to send several of the offshore employees to onshore for training, this may involve a huge cost burden (temporary relocation, compensation, and travel needs).
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how to manage the iT personnel at Onshore and Offshore? How does a company overcome issues of communication, coordination, culture, language, trust, distance, time-zones, and knowledge transfer among IT professionals at onshore and offshore? These issues can be managed with the effective and intelligent implementation of the global delivery model. The global delivery model has been used by offshore based vendors like TCS (http://www. tcs.com), Infosys (http://www.infosys.com), and Wipro (http://www.wipro.com) to successfully provide services to its onshore clients. The same global delivery model can be adopted when a company decides to insource it’s IT needs from its own offshore subsidiary. In global delivery, a company’s offshore delivery centers are located worldwide and are comprehensively networked with collaborative systems and technologies that allow the seamless integration of projects being delivered from multiple locations, and thereby provide economies of scale & scope (Tata Consultancy Services, n.d.).
The “global delivery model” is an offshoring model that takes advantage of the global talent pool to give the best value to a company in terms of cost and quality. As illustrated in Figure 5, the work is broken down into logical components, which are then distributed to suitable global locations such that the company gets access to the global talents (of IT professionals from various countries) and also creates maximum value in terms of cost and quality (Infosys, 2005a). The procedure of narrowing down on the IT functions that can be insourced from offshore has been explained in the earlier section “What to insource from offshore?” In the example shown in Figure 5 where custom development of software is selectively offshored, the onshore IT professionals can be involved in user/customer interaction & coordination, systems planning & selection, systems analysis, requirements determination, high level design, acceptance testing, implementation, and rapid maintenance support; while the offshore IT professionals can be involved in project management, requirements analysis, detailed design, coding, testing and integration, documentation, and maintenance.
Figure 5. Global delivery in offshore-insourcing of custom software development
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The global delivery model (GDM) allows a company to make best use of low-cost and skilled IT professionals from across the world. This geographical and psychological distance between onshore and offshore IT personnel creates unique challenges that need to be managed. Bell (2003) proposes five steps to succeed in the implementing the GDM: (1) integrate levels of leadership, (2) focus on processes, (3) invest in cross-team training, (4) deploy collaborative tools, and (5) track success to team goals.
how to integrate levels of management at Onshore and Offshore to build a relationship? In the first step, leadership at both onshore and offshore must flow from “functional” managers (and not just the CIO/senior IT leadership), which is inclusive of various IT professionals such as application developers, infrastructure managers and project managers (Bell, 2003). The goal should be to develop a sense of team purpose and an understanding of the overall mission and vision of the onshore-offshore relationship. As discussed earlier, IT managers need not turn to offshore-outsourcing of work to external vendors for gaining access to low cost skills. Hirschheim and Lacity (2000) believe that with the support of upper management, IT managers can take the lead in replicating a vendor’s cost reduction strategies even with insourcing. The offshore-insourcing option offers lower cost advantages (primarily due to lower salary levels of offshore IT personnel) and this low cost advantage is probably biggest driver behind the offshoring trend (Apte & Mason, 1995; Carmel & Agarwal, 2002; Sobol & Apte, 1995). However, for achieving the kind of efficiency that established offshore vendors have attained, the IT managers should strive to integrate its own onshore and offshore units towards a common goal and purpose. A culture of collaboration, transparency, and accountability among the IT profession-
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als, coupled with clearly delineated roles and responsibilities would enhance cooperation and communication between onshore and offshore (Bell, 2003; Murphy, 2003). Personal relationships should be developed between the onshore and offshore IT professionals by encouraging regular videoconferencing and by actually visiting each other’s countries to better understand the cultural and social aspects of their counterparts.
how to Focus on processes to coordinate activities of Onshore and Offshore iT professionals? In the second step, IT managers must clearly define the work processes such as workflows and scheduling. Offshoring can lead to problems of communication, coordination, and lack of control over schedule and quality (Apte & Mason, 1995, pp. 1252-1253; Carmel & Agarwal, 2002, p. 68; Sobol & Apte, 1995, p. 271). Protocols should be established for coordinating across time zones, efficiently using resources, reporting expenses, resolving open issues, and managing risk (Bell, 2003). IT tasks can be designed in a modular fashion (by breaking down the larger tasks into smaller and relatively independent modules), which makes it easier to distribute the work globally. This also reduces transaction costs (the cost of coordinating work activities between onshore and offshore), improves synchronization, and simplifies the supervision and feedback processes (Carmel & Agarwal, 2002, p. 66). Processes should be established to coordinate activities between IT professionals at offshore and onshore. 24x7 operations (needed for faster cycle time for software production, customer service, network management, production support, etc…) can be potentially achieved by globally distributing the work across time zones, and this would need effective coordination processes among the onshore and offshore IT professionals (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002).
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The transition of IT processes from old to new state should be managed by creating a new onshore-offshore model of IT management, and establishing the new procedures and relationships with the cooperation of both onshore and offshore IT professionals. A variation of the Lewin’s “unfreeze-change-refreeze” change-management model may be used: • • •
Unfreeze: Prepare for change by unfreezing processes that are affected by offshoring Change: Implement the change by introducing new procedures and processes for effective offshoring Refreeze: Strive to regain stability by practicing and documenting the new procedures and processes. Proactively improve the onshore-offshore coordination, communication, and management processes for successful offshoring
how to invest in Training and relationship building to Overcome diversity between Onshore and Offshore iT professionals? In the third step, the firm should invest in an ongoing onshore-offshore training programs, where the main challenges to overcome are: distance, issues of trust, cultural and language differences. Training sessions should focus on improved team collaboration, planning, interpersonal skills, negotiation skills, dispute resolution skills, work processes, and knowledge transfer; all of which may be done through online self paced trainings, virtual classrooms (Web-casts, videoconferencing), or even traveling of onshore and offshore IT professionals to each other’s locations for face-to-face training (Bell, 2003). This can help in overcoming the barriers like cultural differences, lack of trust, distance, and language (Apte & Mason, 1995; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002; Sobol & Apte, 1995).
Also, the earlier section in this chapter titled “How to manage change among onshore IT personnel?” gave a detailed account on managing change and addressing such issues at onshore early on; and the earlier section “how to use expatriates for offshore?” elaborated on how expatriates may be used to bridge the onshore-offshore divide.
how to deploy collaborative Tools to manage projects across distance and Time-zones? In the fourth step, challenges of communication between onshore and offshore IT professionals, and time-zones should be continually mitigated using the best of collaboration technologies. Deployment of software applications/tools for online collaboration and synchronous meetings (audio/video), e-mail, calendar functions, scheduling, assigning tasks, time accounting, process and workflow management should be considered (Bell, 2003). Effective execution of the globally distributed work across time zones would need the latest collaboration tools and technologies, which can lead to successful 24x7 operations for faster cycle time for software production (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002), for continuous monitoring of critical IT functions and infrastructure, and for 24x7 customer service. The internet and the latest communication technologies such as e-mailing, teleconferencing, videoconferencing and instant-messaging allow collaboration among globally distributed teams in spite of the geographic distances (Carmel & Agarwal, 2002, p. 66). Pauleen and Yoong (2001) suggest that some electronic communication channels are more effective than others in building relationships. At the same time, Compeau, Higgins, and Huff (1999) state that self-efficacy with respect to information technology use is a factor in our choices about what technologies to adopt, how to use them (if we have a choice), and
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how much to persist in the face of obstacles to successful use of such technologies. Pauleen and Yoong (2001) suggest that while e-mail is a basic communication channel between distant teams, it is more suitable for communicating information and coordinating projects than for building relationships. The telephone on the on other hand is regarded as a reliable means for building relationships. Furthermore, desktop videoconferencing is seen to be an affordable alternative to face-to-face meetings, which can enhance relationships by putting face to a name; however internet based videoconferencing is taking time to catch on as it requires access to greater bandwidth. Also, Chat programs were found to set up opportunities for informal and spontaneous communication that facilitates socialization and allow participation of activities happening “backstage” where feelings and emotions can be exchanged. This seems to be in line with the findings of Compeau et al. (1999), from the perspective of an IT professional’s capacity or power to produce the desired effect (self-efficacy) of building better relationships.
how to Track individual and Team successes of Onshore and Offshore iT professionals? In the fifth and final step, using effective measures/ metrics and periodic appraisals, individual and group performance should be tracked based on an established set of achievement criteria. The links between company and project goals, team behavior, onshore-offshore collaboration, and individual contributions should be continually reinforced (Bell, 2003).
implEmEnTaTiOn: EvaluaTing OuTcOmEs While evaluating outcomes, the company should examine the open issues and develop risk mitiga-
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tion strategies to continually improve its chances of success in the future (Currie & Willcocks, 1998). Some of the possible frustrating experiences are: (1) lower than expected service quality of the offshored work, (2) the communication/coordination/collaboration issues between the onshore and offshore IT professionals, and (3) hidden costs that were not estimated earlier. On the other hand there may be many positive outcomes too, like: (1) satisfaction with skills and quality of work by offshore IT professionals, (2) the significant cost savings, (3) faster time to market and 24x7 hour support from IT professionals worldwide, and (4) the possibility of new business at the emerging offshore markets. To evaluate the outcomes, some of the key considerations are (Murphy, 2003): • •
•
•
•
•
Onshore-offshore rapport: Do the onshore and offshore IT professionals share good rapport? Allocation of roles and responsibilities: Are the roles and responsibilities understood and agreed? Is there confidence that each party will live up to its promises and is trustworthy in its actions? Measurement of employee performance: Is there a process for measuring success achieved by offshore and onshore IT teams and professionals? Do processes exist for providing performance based feedback? Measurement of work quality and financial performance: Can satisfaction with quality and costs be accurately assessed relative to estimated expectations from offshore IT work? Business process risks: Is the business at onshore and offshore being managed right? What changes in process and governance are required to improve the success rate? Technology/Infrastructure risks: Have the right technology, infrastructure and collaborative tools been deployed?
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•
Financial/Economic risks: Are the financials as per expectation? Are we realizing the expected economic benefits of offshoring?
Once outcomes have been evaluated, the next step is documenting the best practices and risk mitigation plans. These “lessons learned” should be analyzed in depth and the resultant feedback should be used to further improve the procedures in the decision and implementation phases of offshore-insourcing.
•
By 2008, labor rates for application-related services in India will rise by 40 to 60 %age points over 2004 rates (0.7 probability).
The previous predictions by Gartner Research point out that offshoring will continue to rise phenomenally, but the rise will be tempered by possible increase in labor rates, and security and privacy concerns. Iyengar and Terdiman (2003) interestingly note how strict immigration policies by certain governments can actually have the unintended of effect of encouraging offshoring:
Future Trends Is the trend of sourcing IT work from offshore sustainable? Or is it just a fancy paradigm that is over-hyped? Karamouzis et al. (2004) of Gartner Research list the following predictions: •
•
•
•
Gartner estimates that less than 3% of companies’ global IT services spending ($606 billion) will be on globally sourced services in 2004. By 2007, Gartner forecasts that the globally sourced component (external labor as billed to the client) of IT services spending will be about $50 billion, or about 7% of the $728 billion total. India will continue to dominate as a supplier of globally sourced services. By 2006, infrastructure services delivered in a global delivery model from India to U.S. companies will surpass $1 billion (0.8 probability). Gartner estimates that the BPO market will grow to $173 billion by 2007; of which, 14 % of labor costs will be delivered by offshore resources, with India accounting for more than half of that activity. By 2005, security and privacy concerns will replace human capital issues (such as job loss and displacement) as the No. 1 offshorerelated backlash issue (0.7 probability).
Some countries are tightening immigration rules and policies to limit the temporary or permanent migration of overseas staff into a country. This may have the unintended consequence of causing more work to be moved offshore. This is particularly the case in countries such as the United States, where business decisions are strongly driven by the need to deliver good returns to shareholders. Hence, the trend of offshoring would continue. Companies worldwide are realizing the benefits of offshore-insourcing, and at the same time managing various challenges that come with such bold initiatives (especially with regard to setting up the offshore facility for IT professionals, and thereafter managing the IT professionals).
cOnclusiOn This chapter introduced a prescriptive conceptual framework for the offshore-insourcing journey. The question “Why to insource from offshore?” was answered by discussing how a company should decide whether it needs to insource or outsource, and whether it needs to go offshore. Furthermore, the relevant challenges and issues were discussed, so that a company can make knowledgeable decisions towards making the best
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use of IT professionals worldwide. The question “What to insource from offshore?” was addressed by describing how a company can select the IT functions that it should insource from the offshore IT personnel. The question “Where to offshore?” was answered stage by looking at the criteria for choosing an offshore destination and by surveying some popular offshore countries. The question “How to insource from offshore?” was addressed by describing the process of creating the team that will implement the decision to offshore, process of managing change at onshore, getting the offshore office ready, and the process of recruitment and induction training. We discussed the management of the IT professionals at the offshore center using the global delivery model. Finally, we stated the importance of continuously evaluating the outcomes of the entire offshoreinsourcing process, and of using the feedback to further improve the decision making and implementation phases. The prescriptive conceptual framework for decision making and implementation of offshoreinsourcing presented in this chapter will hopefully serve as a guide to those who are curious about the journey of IT companies to new lands.
nOTE The author may be contacted at schakrabarty@ tamu.edu or chakrabartys @yahoo.com.
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search Note (Publication Date: 28 June 2004, ID Number: COM-22-9634). Retrieved July 4, 2005, from http://www.gartner.com/ Kempf, T., Scholl, R. S., & Sinha, D. (2001). Cross-border collaboration: a service aggregator model for offshore IT services (Executive Summary). Gartner Research Note (Publication Date: 5 October 2001, ID Number: ITSV-WWEX-0037). Retrieved July 4, 2005, from http:// www.gartner.com/ Kobyashi-Hillary, M. (2004). Outsourcing to India: The offshore advantage. Berlin, Germany: Springer-Verlag. Loh, L., & Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the kodak effect. Information Systems Research, 3(4), 334-358. Loh, L., & Venkatraman, N. (1995). An empirical study of information technology outsourcing: Benefits, risks, and performance implications. Proceedings of the 16th International Conference on Information Systems (pp. 277-288). Amsterdam, The Netherlands. Ma Foi. (n.d.). Staffing solutions. Retrieved July 04, 2005, from http://www.mafoi.com/ Marriott, I., & Wiggins, D. (2002). Factors in choosing a Chinese or Indian software company. Gartner Research Note (Publication Date: 7 June 2002, ID Number: SPA-16-6344). Retrieved July 4, 2005, from http://www.gartner.com/ Morello, D., & Terdiman, R. (2004). Seven rules for effective communication when going offshore. Gartner Research Note (Publication Date: 20 July 2004 ID Number: DF-23-2873). Retrieved July 4, 2005, from http://www.gartner.com/ Moses Associates. (n.d.). Solutions and services. Retrieved July 4, 2005, from http://www.mosesassociates.com/solutions.htm
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Murphy, J. (2003). Management update: Evaluating and mitigating outsourcing risk. Gartner Research Note (Publication Date: 6 August 2003, ID Number: IGG-08062003-02). Retrieved July 4, 2005, from http://www.gartner.com/ Nam, K., Rajagopalan, S., Rao, H. R., & Chaudhury, A. (1996). A two-level investigation of information systems outsourcing. Communications of the ACM, 39(7), 36-44. Nelson, P., Richmond, W., & Seidmann, A. (1996). Two dimensions of software acquisition. Communications of the ACM, 39(7), 29-35. Pauleen, D. J., & Yoong, P. (2001). Facilitating virtual team relationships via Internet and conventional communication channels. Internet Research: Electronic Networking Applications and Policy, 11(3), 190-202. Poppo, L., & Zenger, T. (1998). Testing alternative theories of the firm: transaction cost, knowledgebased, and measurement explanations for makeor-buy decisions in information services. Strategic Management Journal, 19(9), 853-877. Schweyer, A. (n.d). The case for “total workforce management” solutions. Retrieved July 4, 2005, from http://www.peopleclick.com/knowledge/ ind_schweyer1.asp Sinha, D., & Terdiman, R. (2002). Potential risks in offshore sourcing. Gartner Research Note (Publication Date: 5 September 2002, ID Number: ITSV-WW-DP-0360). Retrieved July 4, 2005, from http://www.gartner.com/ Sobol, M. G., & Apte, U. M. (1995). Domestic and global outsourcing practices of America‘s most effective IS users. Journal of Information Technology, 10(4), 269-280. Tata Consultancy Services. (n.d.). Flexible global delivery. Retrieved March 14, 2005, from http:// www.tcs.com/investors/BusinessOverview/ FlexibleGlobalDelivery.aspx
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Wiggins, D., Datar, R., & Liu, L. (2002a). Comparison: Indian and Chinese software services markets. Gartner Research Note (Publication Date: 31 May 2002, ID Number: M-16-1762). Retrieved July 4, 2005, from http://www.gartner. com/ Wiggins, D., Datar, R., Leskela, L., & Kumar, P. (2002b). Trends for the Indian and Chinese software industries. Gartner Research Note (Publication Date: 7 June 2002, ID Number: SPA-16-6118). Retrieved July 4, 2005, from http:// www.gartner.com/ Willcocks, L., & Lacity, M. (1998). Strategic sourcing of information systems. Chichester, UK: Wiley.
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2
Acknowledgements to Ms. Swetha Rao, and Mr. Vidyaranya M. Devigere (both have graduated from Mays Business School, Texas A&M University, USA, and both have previous work experience in the Indian software services industry) for their valuable suggestions on “how” offshore-insourcing can possibly be carried out. A survey of Web sites of the world’s 15 biggest IT companies for their presence in China and India was done by the author and Ms. Jun Wang. Acknowledgements to Ms. Jun Wang, a Chinese graduate student at Mays Business School, Texas A&M University, USA, with previous work experience in the Chinese software industry, for compiling information related to China.
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appEndix i: survEying ThE OFFshOrE-insOurcing in china and india Let us compare the two big offshore insourcing players, namely China and India (Cohen, 2005; Karamouzis & Young, 2004; Kempf et al., 2001; Wiggins et al., 2002a; Wiggins et al., 2002b). Some of the relevant comparative statistics between India and China are presented in Table 4 (Wiggins et al., 2002a). India seems to have a clear advantage in terms of its software exports and number of IT professionals, while China seems to have an advantage in terms of Internet Bandwidth, number of software companies and marginally lower costs of IT professionals. Let us consider the case of India in more detail. It is sometimes difficult to speak about information systems “offshoring” without using the word “India.” Debates on offshoring often target India, earning it both ire and admiration. Karamouzis and Young (2004) state that India continues to hold the undisputed leadership position as an offshore destination for IT firms in developed countries such as US and Western Europe. They attribute India’s competitiveness to abundance of resources, significant cost of labor differential, proven execution capacity, and also its English speaking capabilities, and predict the following: Through 2008, India will remain the dominant offshore service provider, with no other nation achieving a double-digit share of the global offshore service revenue (0.8 probability). By 2008, Indian labor rates for application-related services will rise by 40% to 60% beyond 2004 rates (0.7 probability).
Table 4. India’s and China’s IT statistics (Compiled from Wiggins et al., 2002a) (Source: Gartner Research/Gartner Dataquest) Attribute
India
China
Total Exports
$ 43.75 billion (+5.77%)
$ 265.1 billion (+6.8%)
Software Exports
$ 6.2 billion (+37.78%)
$ 0.85 billion (+112.5%)
Software as a % of Total exports
14.17%
0.37%
IT professional graduating each year
73,218
50, 000
Current IT Professionals
522,000
150,000
Demand for IT Professionals
400,000
350,000
Number of software companies
3000+
6000+
Internet Bandwidth
1.4 Gbps
7.6 Gbps
Hourly rate for Developer (2 years experience)
$24
$12 - $25
Hourly rate for Project Manager
$30 ($50 for top end)
$50
Annual Salary for Entry Level Developer
$2,555 - $4,913
$2,423 - $4,846
Annual Salary for Developer (2 years experience)
$4,913 - $9,212
$4,486 - $6,057
Annual Salary for Project Manager
$9,580 - $26,529
$6,057 - $28,992
Legend: All numbers are for 2001, unless specified. Percentage increase/decrease figures are for a one year period.
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India graduates a total of 300,000 to 400,000 engineering and computer/IT majors every year (of which graduating IT majors are more than 73,000 per year, however, many of remaining non-IT majors are already skilled or re-skill themselves on IT); at the same time, hiring and managing growth is challenging in India since it is witnessing unprecedented growth in demand for skilled human resources and the largest India based vendors plan to hire several hundred to thousand employees each month (Karamouzis & Young, 2004; Wiggins et al., 2002a). Furthermore, though there is ample supply of fresh graduates, “middle managers” are currently scarce in India, and the eagerness of expatriates of nonIndian decent to assume these scarce “middle manager” positions are low, thereby increasing effort is focused on tapping Indian repatriates from U.S. or Western Europe, or to build on local talent. Choosing a nation for offshoring is not an end in itself. Cities within nations have their own advantages and disadvantages. Choosing the right city to match your needs is crucial. To find out the extent to which top IT companies have offshore offices in Chinese and Indian cities, we2 first short listed the Top 15 Information Technology companies from BusinessWeek’s list of ‘The InfoTech 100’ based on Sales Revenues (BusinessWeek, 2004). We then decided to find out the cities in China and India in which these companies have set up offices by searching their respective Web sites. Attempt has been made to provide only the locations where information systems related work (R&D, software development, support, etc.) is probably performed, and explicit sales offices were omitted. See Figure 6 for each of the top 15 companies’ names, country of origin, rank, sales revenues, Chinese cities, Indian cities, and the Web site address. Most of the top 15 companies have set up offshore bases in China and India, the only exceptions being the Spanish Telefonica and the Japanese KDDI. While searching the Web sites it was found that most of these companies carry out high end R&D activities in China and India, which is contrary to the popular perception that these companies move offshore only for the low-cost advantage. A premier science and technology magazine “NewScientist” recently had a cover story titled “India: The next knowledge superpower,” and one article named “India special: The silicon subcontinent” (Cohen, 2005) stated: Some of the biggest names in IT are heading towards Bangalore once more, and this time round it’s not cheap labour they are looking for. They are hunting down the brightest, most inventive minds in India to populate a swathe of cutting-edge research facilities. The work being done in these labs rivals any in the U.S. and Europe. The article lists companies like Microsoft, General Electric, Hewlett-Packard, Texas Instruments, Google, and IBM that have set up research labs in India to take advantage of its skilled professionals. This realization of the value of offshore-insourcing is not just for the cities like Bangalore, but this optimism isseen across many emerging offshore-insourcing destinations across the world.
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Figure 6. World’s 15 biggest info tech companies (Presence in Chinese and Indian cities)
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appEndix ii: survEying FOr iT skills in OFFshOrE dEsTinaTiOns As an example, we have listed the services offered and the industries targeted by a large India based software services provider named Infosys (http://www.infosys.com) in Table 5 (Infosys, 2005b, 2005c). Such a survey might help a company to decide about the skill set availability of the IT professionals in the respective offshore destination, and hence aid in addressing the decision question “where to offshore?” Table 5. Services offered and industries targeted by Infosys Technologies Ltd. Services offered by Infosys (http://www.infosys.com) Application and Infrastructure Services: Custom Application Development, Application Maintenance, Application Re-engineering, Infrastructure Management, Independent Testing and Validation, Application Portfolio Management Enterprise Services (1) Packaged Applications: Supply Chain Management (SCM), Customer Relationship Management (CRM), Enterprise Application Integration (EAI), Enterprise Resource Planning (ERP) (2) Business Intelligence and Data Warehousing (3) Systems Integration: Strategic Technology and Architecture Consulting, Enterprise Content Management, Identity Management, Migration and Deployment, Enterprise Information Portal, Enterprise Mobility (4) Business Continuity (5) Platform Services Product R&D Services: Product Design & Development, Product Sustenance, Testing & Automation, Offshore Product Development Center, Additional Product Services, Product Consulting & Professional Services Consulting Services: Corporate Performance Management, Balanced Scorecard Business Process Outsourcing (1) Banking: Credit cards, retail lending, mortgage processing, retail banking and account management, cash management, trade services, lease and loan processing, investment banking, (2) Securities Industry: Custodians and Fund Administrators, Investment Managers, Investment Banking and Brokerage firms, Market Data and Analytics providers, (3) Insurance: Life, non-life, intermediaries, re-insurers, (4) Finance & Accounting: Accounts payable, accounts receivable, GL and fixed asset accounting, reporting and regulatory filings, (5) Telecom: Operators, OEMs and value service providers
Industries targeted • Aerospace and Defense • Automotive • Banking and Capital Markets • Communication Services • Discrete Manufacturing • Energy • Healthcare • High Technology • Insurance • Life Sciences • Media and Entertainment • Resources • Retail & Consumer • Packaged Goods • Transportation • Services • Utilities
This work was previously published in Managing IT Professionals in the Internet Age, edited by P. Yoong, pp. 277-318, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.8
Client-Vendor Relationships in Offshore Applications Development: An Evolutionary Framework Rajesh Mirani University of Baltimore, USA
absTracT This article presents an evolutionary framework for the establishment and progression of clientvendor relationships in the context of offshore applications development. It is argued that such a relationship typically begins as a cost-reduction exercise, with the client contracting out simple, structured applications to one or more offshore vendors. Over time, the client assigns increasingly complex applications to selected vendors and cultivates loose, trust-based, networklike relationships with them. As offshore applications continue to evolve and become business-critical, the client may seek to regain control by establishing a command-based hierarchy. This may be achieved through part or full ownership of a vendor organization or by starting a captive offshore subsidiary. Thus, the initial client objective of cost reduction ultimately is displaced by one
pertaining to risk control. Pertinent prior research is used to justify the proposed framework. This is followed by a case study that describes how a specialty telecommunications company is pursuing just such an evolutionary path.
inTrOducTiOn Strategic-level managers such as CEOs, CIOs, and CTOs lately have been under great pressure to seek out fresh approaches to control information technology (IT) costs and to demonstrate higher returns on technology investments. One increasingly popular response from decision makers is offshoring, or the shift of IT work to low-wage, offshore locations. Some offshore work tends to be project-oriented with specific completion criteria that were entailed in the design and development of applications. Other work comprises ongoing
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operations such as technology maintenance, or help desk support conducted out of call centers. This article focuses on the offshoring of applications development and how its attributes shape the evolution of relationships between client and vendor organizations. Much has been written about the management of IT outsourcing and offshoring. Proponents of various approaches have based their arguments on literature ranging from transaction cost economics to resource dependency, strategic choice, stakeholder theory, organizational learning, and institutional theory (Barringer & Harrison, 2000). Some of these suggested approaches also have been tested empirically. However, these management prescriptions neither have been presented nor tested in the specific context of offshore applications development. The implicit assumption underlying this omission appears to be that valid arguments in the general IT outsourcing or offshoring context also must apply to application development, regardless of task attributes. Most theories also embody static views of vendor-client relationships. They emphasize either vendor partnerships/alliances (a network-oriented, trustbased perspective) (Lander, Purvis, & McCray, 2004; Willcocks & Choi, 1995), contracts and transactions (a market-oriented, enforcementbased perspective) (Aubert, Rivard, & Patry, 2004; Richmond & Seidmann, 1993), or a mix of both (Koh, Ang, & Straub, 2004; Sabherwal, 1999). The few that offer evolutionary offshoring perspectives are focused either on client drivers and general industry trends (Carmel & Agarwal, 2002) or on vendor points of view (Rajkumar & Mani, 2001). It is the contention of this article that for offshore application development, these ostensibly disparate management approaches in fact may represent progressive stages for the client in the evolution of its relationships with one or more vendors. While several alternative evolutionary paths may be feasible, each with its own set of antecedents, process dynamics, and consequences,
the discussion here makes the case for one likely path. In this path, a given client organization evolves through successive offshoring stages, not all necessarily with the same application development vendor. Specifically, a client’s experimentation with offshoring begins with reduced development costs as the desired goal. Over time, interplay between the intrinsic task characteristics of application development and the unique attributes of offshoring broaden and evolve the client’s goals. These evolving goals, in turn, successively alter the nature of the vendor-client relationship in distinct stages. The rationale for this path is supported with logical argument, evidence from the published literature, and an original case study for illustration.
sTagEs in OFFshOrE applicaTiOns dEvElOpmEnT Like all buyers and suppliers, offshore vendors and clients essentially interact in one of two ways: transactional/market exchanges or relational exchanges. A transactional exchange is usually a short-term contract characterized by free market price mechanisms and the need for enforcement. A relational exchange implies a longer-term relationship with ongoing interactions. Relational options include long-term contracts, networks, and hierarchies. Long-term contracts resemble the short-term variety, except that they address many more contingencies and consequences. Networks emphasize interorganizational trust, association, and solidarity. Hierarchies refer to rather rigid structural relationships based on formal authority and command, usually stemming from ownership of one organization by another. As mentioned earlier, the published literature has focused almost exclusively on contracts and networks as mutually exclusive types of clientvendor relationships in the offshoring/outsourcing context. This article will show that applications
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development offshoring initiatives usually begin as transactional exchanges but end up in the relational realm. The evolutionary path that clientvendor relationships tend to follow consists of three stages. In the first stage, a client contracts out some application development to an offshore vendor with the objective of reduced costs. Success at this experimental stage may result in short-term contracts being replaced by fewer, long-term ones. Stage two arrives when the changing nature of tasks, together with the relationship attributes, makes it difficult for both client and vendor to continue in a purely contractual vein. The need for closer working ties and greater trust brings about a networklike relationship. With the increasing vendor dependence that this engenders, the importance of the client’s original cost-reduction objective gradually is displaced by a strong desire to manage vendor risk. Paradoxically, therefore, the very success of a network-style relationship causes the original success criteria to give way to new ones. This ushers in stage three. In an effort to regain tighter vendor oversight and control, the client seeks to establish a structural hierarchy with the vendor. Doing so may be impractical if there are multiple vendors or if a structural relationship is infeasible for other reasons, so one option in the third stage is for the client to establish a new captive offshore subsidiary.
stage 1: contracts Labor costs constitute the single major source of applications development expenses. The abundant availability of qualified software engineers in lowwage countries typically drive a client organization’s exploratory efforts to seek out an overseas vendor, with the objective of vastly reduced development costs (Matloff, 2004). Preliminary contact with a prospective offshore vendor has the attributes of a highly efficient, classic free market exchange. Both parties, unconstrained by prior contact experiences or future relationship expectations, are focused fully on negotiating the
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current transaction, with a view to maximizing their respective short-term utilities. Such an exchange tends to yield the best possible outcomes for both client and vendor but only in the presence of perfect information (i.e., complete knowledge about each other’s objectives, strengths, and weaknesses). All information services markets, however, are beset by the presence of information monopoly or asymmetry (Park, 1996), which is the exact opposite of perfect information or complete knowledge. Geographical, cultural, business, and regulatory differences that are inherent to the offshoring context exacerbate this asymmetry (Ramarapu, Parzinger, & Lado, 1997). The vendor faces a rather limited amount of risk from this asymmetry. Depending on its past experience with other clients, the vendor may or may not possess an understanding of this client’s application context or its industry’s business processes. The vendor also may have concerns regarding its interactions with the client or the latter’s financial stability. However, the client’s lack of familiarity with the vendor’s business environment exposes it to many more risks, including shoddy development processes and practices, poor product quality, poor documentation, incomplete or inappropriate solutions, and business process integration issues. The lack of information transparency thus affects the client more severely than the vendor. The larger and more complex the application is, the higher the development risks are (Barros, Werner, & Travassos, 2004). Therefore, in order to reduce these risks and to minimize the impacts of any detrimental outcomes, the client organization follows a cautious approach in identifying initial work to send offshore. This implies small applications or components of low complexity, for which specifications can be communicated completely and whose development process is highly structured. Such applications call for little vendor supervision and no need for a window into the vendor’s internal processes. A transactionoriented, contractual relationship between client
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and vendor suffices as the control mechanism, thereby keeping interorganizational coordination costs incurred by the client to a minimum. Unpleasant experiences with these initial applications quickly can end the client’s experimentation with offshore development. On the other hand, successful initiatives not only result in reduced costs but also make the client aware that offshoring can sustain or even raise software quality (Khan & Fitzgerald, 2004). This emboldens the client to outsource more applications to the same vendor or even to new vendors (Benamati & Rajkumar, 2002). Heightened client awareness, though, is accompanied by the expectation that vendors will put the effort into acquiring a deeper understanding of its business processes and informational needs. In turn, vendors rationalize the extra effort required from these fresh expectations with their own long-term goals of being assigned progressively higher-level work or serving larger markets. Successful outcomes that result from these mutual commitments serve to supplant the client’s original objective of reduced costs with the realization that it may be able to reap collaborative synergies with vendors by moving beyond the scope of simple applications into higher-end development (King, 2005). Collaborative efforts on more complex tasks can yield innovative outcomes, including new solutions; new approaches to problems; unique value added propositions; and, ultimately, original sources of competitive advantage for the client (Dyer & Singh, 1998). Accordingly, the client entrusts more complex applications to selected vendors, with less structure and more room for creativity and innovation. As enhanced complexity necessitates a closer working relationship, the client may move to the middle by replacing several short-term contracts with a handful of long-term contracts (Clemons, Reddi, & Row, 1993), essentially substituting transactional interactions with fewer relational mechanisms. However, long-term contracts increase interorganizational coordination costs by placing greater
collaborative and enforcement burdens on the client. They also hinder collaborative innovation, because both client and vendor may be reluctant to share valuable, firm-specific resources with unfettered, autonomous, distant partners (Goes & Park, 1997). Their mutual independence and freedom of action outside the limited terms of the contract, even a long-term one, causes both organizations to continue to be wary of each other’s intentions and actions. Thus, beyond the simplest applications, the continued use of purely contractual arrangements is ineffective, because contracts merely replace the traditional in-house project risks with a different set of more perilous vendor risks. Despite initial successes, therefore, the probability of eventual failure remains significantly high (Natovich, 2003). Ongoing offshore relationships also bring into play asset specificity, dependence, measurement difficulty, and uncertainty. Asset specificity refers to investments by relationship partners in informational or physical assets that have little value outside the context of that specific relationship. With higher application complexity, both vendor and client invest more time and energy into understanding each other’s unique processes, and increasing asset specificity is inevitable. Asset specificity and the resultant dependence give rise to opportunism, the tendency of one partner (usually the vendor) to take advantage of the fact that the other partner has invested too much in the relationship to walk away from it (Lonsdale, 2001). The awareness of such an exit barrier for the client may tempt the vendor to exhibit opportunism in the form of cost escalation, unreasonably high charges for services not explicitly mentioned in the contract, inexperienced staff assigned to the project, reduced quality and service levels, or holding the client captive to obsolete or inappropriate technologies. Measurement difficulty translates into inscrutability of the vendor’s work processes. Since both short-term and long-term contracts are much more conducive to the measurement of outcomes
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than processes, the vendor’s internal practices remain largely hidden from the client. This may trigger not just opportunism of the kinds already discussed but also vendor manipulation of internal project management data to deflect culpability in problem situations. Finally, uncertainty refers to the prospect of unanticipated developments in the technological, business, or political environments, which are of particular concern, given the global nature of offshoring relationships. Client organizations are aware of these pitfalls. In efforts to preempt problems that might stem from asset specificity, dependence, and measurement difficulty, some attempt to anticipate as many contingencies as possible and to incorporate them into increasingly intricate contracts. However, the preemptive use of contingent contractual clauses is a futile exercise. With consultants and legal experts in tow, such organizations eventually can get to the point where the sheer overheads of administering these contracts make them untenable. Alternatively, the mistrust engendered by minutiae can vitiate their relationships with offshore vendors. The intensification of these dysfunctional dynamics provides a window for network-style relationships to replace contracts.
stage 2: networks As application complexity increases, the efficacy of contractual mechanisms breaks down. The client’s success with unstructured, intricate projects is more dependent on the vendor’s internal practices and methods than before. This creates the need for better scrutiny of the vendor’s processes, which contracts alone are unable to provide, given their enforcement-oriented nature. Higher task complexity necessitates joint coordination and a closer, more cooperative working relationship. Pronounced differences in location, culture, business processes, and regulatory practices stemming from the very nature of offshoring magnify these imperatives. A networklike linkage based on trust, solidarity, shared values, and
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open communication, therefore, represents a better option for the client, because it engenders procedural coordination, vendor self-enforcement, and reciprocity (collaboration and cooperation). The establishment of such a relationship tends to foster product and process innovation (Ritter & Gemunden, 2003). Interorganizational networks such as joint ventures, alliances, associations, and consortia typically consist of three or more organizations. However, a client-vendor dyad with soft interorganizational boundaries can exhibit working interfaces and other properties similar to those of classic networks. The major advantage of networklike relationships over purely contractual mechanisms for offshoring is that they better facilitate the codification and communication of technological skills and organizational knowledge (Park, 1996). In particular, underlying tacit knowledge is more successfully exchanged due to the mutual trust, strong social ties, and shared values/systems in such relationships (Dhanaraj, Lyles, Steensma, & Tihanyi, 2004). The successful codification and transfer of tacit undocumented knowledge is crucial for more complex applications, as it provides the offshore vendor a better grasp of the client’s general business context and unstructured aspects of task requirements. Although such knowledge exchanges increase coordination costs even more (Sobrero & Roberts, 2001), they are accompanied by the joint creation of new knowledge, a higher order benefit (Sharma, 1997). Both tacit knowledge transfer and new knowledge creation are invaluable in the development of more complex applications and necessary in order for synergistic innovations to emerge (Hardy, Phillips, & Lawrence, 2003). Procedural coordination, a key attribute of network-style relationships, enhances the effectiveness of existing contractual client-vendor exchanges when used as a secondary linkage mechanism (Sobrero & Schrader, 1998). The complementary advantages that it provides are highly effective, even if the original contractual
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exchanges were highly customized (Poppo & Zenger, 2002). Studies of IT outsourcing have shown that trust, another critical attribute of networks, is preferred over contracts, particularly when contractual hazards are perceived as high (Barthelemy, 2003). In an empirical study, IT outsourcing projects often were found to begin with simple, outcome-oriented controls in place, but performance problems usually led to the introduction of additional controls oriented toward trust, vendor behavior, and clan-like affiliation (Choudhury & Sabherwal, 2003). Another empirical study that focused on software offshoring by small firms found that clients attempted to mitigate the high inherent transaction costs of contracts through embedded network ties in the form of mutually trusted individuals or liaisons of knowledge flows (Carmel & Nicholson, 2005). The importance of trust in interorganizational collaboration is well-documented elsewhere, as well, both for IT outsourcing (Jennex & Adelakun, 2003; Lanfield-Smith & Smith, 2003; Sabherwal, 1999; Willcocks & Choi, 1995) and in general (Vangen & Huxham, 2003; Zaheer, McEvily, & Perrone, 1998).
stage 3: hierarchies The introduction of trust and clan-like affiliation represents a step up from an exclusive reliance on contracts. However, network-style client-vendor relationships by themselves or in conjunction with long-term contracts by no means represent the stable state. The very network attributes that serve to bring the client and vendor together in a closer working relationship (i.e., trust, reciprocity, effective knowledge transfer, and vendor self-enforcement) ultimately render it ineffective. Eventually, more authoritative mechanisms are needed, and the appropriate relationship is a command-oriented hierarchy. This may be achieved in one of two ways. The first entails the client acquiring a formal stake in a vendor organization through part or full ownership (i.e.,
vertical integration). In the second approach, the client sets up a captive offshore subsidiary of its own (Preston, 2004). While neither of these two approaches may be feasible for every client organization, the following discussion justifies the eventual need for authoritative mechanisms. The primary impetus for the transition from Stage 2 to Stage 3 comes from continuing changes to the attributes of offshore applications to the point where higher complexity is accompanied increasingly by criticality to the client’s business processes (Jensen, 2004). This is but a natural outcome of a close working relationship in which client-vendor synergies constantly are being explored. Business criticality poses enhanced risk and necessitates greater checks and balances on the vendor than are feasible through the network. Trust and reciprocity alone become insufficient to maintain a healthy relationship, and institutional control mechanisms are needed (Miles & Snow, 1984). The resulting swing toward monitoring and formalization, however, threatens the autonomy of the partner organizations, even as they are highly interdependent (Van de Ven & Walker, 1984). The implementation of new checks, balances, and controls also imposes even higher coordination costs, which destabilizes and ultimately breaks the network (Park, 1996). Thus, networks, like contractual markets in the previous stage, eventually unravel in the face of ever-changing attributes of offshore applications. Key empirical evidence for this comes from a study that found that partner commitment in outsourcing relationships actually declines with the age of the relationship, increasing the chances of conflict (Lee & Kim, 1999). Trust, a fundamental basis of network-like arrangements, is known to be particularly fleeting in knowledge-sharing relationships. The progression of such relationships is affected more importantly by procedural justice than by trust (Daellenbach & Davenport, 2004) and by structures that propagate goal congruence, particularly in the presence of opportunism (Jap & Anderson, 2003). In a study,
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opportunism was found to be reduced more by formalizing policy than by encouraging cooperation (Dahlstrom & Nygaard, 1999). Procedural justice, goal congruence, and formalization are all attributes associated more closely with hierarchical relationships than with networks. In a seminal research study, equity-based mechanisms (e.g., part or full ownership of one organization by the other, etc.) were found to benefit partner organizations in a relationship more than nonequity mechanisms (Zollo, Reuer, & Singh, 2002). Likewise, in a study of strategic alliances, equity-based alliances were found to promote greater interfirm knowledge transfer (Mowery, Oxley, & Silverman, 1996). As has been noted, applications development offshoring entails a high degree of knowledge sharing and transfer. A study of vertical partnerships found that linkages that support the extensive integration of the structures and management of both organizations were more successful from the perspectives of both parties (Donada, 2002). Another study that focused on asymmetric partnerships, in particular, found that effectiveness and competitive advantage were higher when the leader organization utilized authoritative coordination mechanisms (Hernandez-Espallardo & Arcas-Lario, 2003). In other evidence, transaction cost economics theory (Williamson, 1975, 1985) predicts that a preponderance of transactions in which utilized assets have relatively little value outside of the transaction (high asset specificity) will lead to an integration of assets. The firm that stands the most to lose from a holdup (i.e., the client) by the other firm will tend to want to acquire the assets of the other. It also has been shown that in an interorganizational relationship in which the two firms hold complementary assets, the sum total of these assets leads to synergies or increasing returns to scale, and therefore, there is a natural tendency for integration or for both sets of assets to be acquired by one firm (Hart, 1995). Last, but not least, the introduction of a hierarchy alleviates internal political concerns in
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the client organization regarding loss of valued in-house technical expertise and skills to offshore vendors. The establishment of a hierarchy brings these skills back into the client’s fold and under its control, albeit possibly at arm’s length. This regained expertise now may be leveraged by the client and sold to other organizations, thus providing an added source of business revenue.
OFFshOrE dEvElOpmEnT FOr ETrus: a casE sTudy This section provides an illustration of the proposed framework for offshore applications development in the form of a case study. The narrative describes how the interactions of Etrus, a realworld client organization, with various offshore development vendors, successively has mirrored the three stages of contracts, networks, and hierarchies. It highlights the interplay among various factors that influenced this evolution, including constantly changing objectives, internal imperatives, and external compulsions on both sides. While the specific circumstances of this case are unique, the broader lessons it offers are consistent with the proposed evolutionary framework. Etrus Corp.1 is a 13-year-old specialty telecommunications company whose expertise lies in identifying and relieving critical stress points and bottlenecks that impede its business customers’ network performance. Using a mix of systems, software, and services, it helps its customers to make maximum use of their applications that drive their businesses, while minimizing the total cost of their network ownership. Originally established as a Delaware corporation in the highend, IP-based optical niche market, the company since has grown tremendously to approximately $400 million in annual sales, largely through a series of acquisitions and mergers, including 11 in the past eight years. It also has carefully crafted technology and business partnerships with major telecom players such as Cisco in order to offer a
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fuller range of solutions for its customers. Comprised of 1,500 employees, it now occupies specific niches across the breadth of telecommunications and serves customers on every major continent. These include cable service providers, telecommunications companies (telcos) such as Verizon, British Telecom, MCI, and AT&T; government agencies; and private corporations with their own networks. Its products and services include multiplexers, aggregators, switches, integrated platforms/systems, and specialized network layer services/enhancements, some of which have won prestigious industry awards. Essentially a design and engineering firm, Etrus envisions and builds new off-the-shelf products for both the horizontal and vertical markets, with customized variations for individual customers. Its contemporary rivals include Cisco (its business partner) as well as Lucent and Nortel. Along the way, Etrus also has acquired ISO 9001 certification. Etrus’ foray into applications development offshoring began with two conversion-oriented projects. These were precipitated by Etrus’ series of acquisitions of other specialty telecommunications companies in 2001 and 2002. The new product development processes of both Etrus and the acquired companies had depended extensively on an industry standard product management software tool from Agile, which enabled them to manage the cost of their products and to track various aspects of their supply chain (e.g., tracking parts and materials for manufacturing). While this platform compatibility between the acquiring and acquired companies definitely was a positive feature, all these companies were using different versions of the Agile software and, therefore, essentially employing somewhat different design, documentation, and manufacturing standards. Thus, an important objective was to get the data of the acquired companies into the structure and standards followed by Etrus so that the consolidated data could be managed centrally in an integrated manner. One of the conversion projects, therefore, entailed upgrad-
ing the software used by an acquired partner to a more modern and recent version by converting its design and database structure and content so that it was compatible with that used by Etrus. The other project actually entailed rolling a more recent version back to an older version, in the case of a different acquired partner that was using a more modern version of the software than Etrus was. While these conversion tasks were highly structured and fairly straightforward, they could not be fully automated, as the conversion process consisted of some decision points, choices, and new data creation. In addition, since Etrus had decided to leverage the opportunity created by both conversion efforts by adding new functionality to the off-the-shelf product, this called for some custom programming. Both conversion projects were outsourced to a Silicon Valley-based vendor called Blue Ridge, which had technology and business relationships with Agile and entrusted the projects to its offshore subsidiary in India. Etrus’ selection of Blue Ridge was based on the latter’s expertise with Agile software and on its apparent application development process maturity. This maturity was evidenced by its ISO-9001 certification, and its achievements related to the Capability Maturity Model (CMM), developed by Carnegie-Mellon University’s Software Engineering Institute (SEI).2 It used a proprietary extended framework that focused on key processes, and its unique internal governance mechanisms periodically monitored ongoing projects to provide directional guidance as well as to issue resolution. Blue Ridge previously had employed its skills and methodology successfully with Fortune 100 customers. It prided itself on being able to provide clients with a window into their internal processes and with total visibility of up-to-the-minute performance metrics and execution status of ongoing projects, regardless of the physical location of the actual application development efforts. Blue Ridge completed each project in about four weeks at a cost of approximately $20,000.
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Both development projects were deemed to be resounding successes. In the words of Etrus’ Vice President of Engineering Services, the conversion work, together with the custom-built features from Blue Ridge, “dramatically reduces the time to take a product from design to large-scale production, giving Etrus vastly more revenue and market share. This enables us to achieve aggressive new product launch objectives through supply chain collaboration, so critical to our success. We couldn’t have asked for better support from Blue Ridge.” These initial small experiments with application development offshoring represented the first offshoring stage for Etrus. The successful culmination of contracts with Blue Ridge set a positive internal tone within Etrus and bolstered the confidence of its IT managers in offshore development. As the company continued to grow rapidly through acquisitions, the IT group decided that it would be best to focus in-house resources on tasks associated with new product development and to offshore more of the other routine application development work. However, the fast pace of corporate change and the quick adaptation expected from IT meant that the internal IT staff had very little time available to engage collaboratively with vendors in order to jointly generate specifications that were clear and detailed enough for the latter to take over and to complete the development process. This constraint prevented many new offshoring projects from being initiated in the first place. The solution that was agreed upon was to look for parcels of work that were both complex enough to leverage the cost and quality benefits of offshore development and, at the same time, structured enough to not set the internal IT group back in terms of time spent working with the vendor to generate excessively detailed specifications. This approach also would require the careful selection of vendors whose strengths matched the attributes of specific projects. The first such opportunity came about in the shape of a need to customize and implement an internal business application, an off-the-shelf
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engineering and design information system oriented around engineering resources and portfolio management and built on a popular technology platform. The rest of the Etrus case study describes the characteristics of this particular development project, how the offshore vendor was selected and managed, the outcome of the development effort, and a discussion of its implications. This project represented a moderately complex application, whose deliverables consisted of the system setup, the standard template setup and custom template design, the standard reports setup and custom report design, and some custom workflow programming logic. It entailed a different technological platform than the other two projects, and Blue Ridge was deemed not to possess the ideal expertise for this job. Consistent with the aforementioned need to carefully select a vendor whose strengths matched the attributes of the application to be developed, the project instead was awarded directly to Fiore, a leading offshorebased global IT firm. Fiore’s strengths ranged across the full technology life cycle spectrum, including business and technology consulting, research and development, implementation, and process ownership/operations. For its applications development business line, Fiore owned and operated sophisticated, mature, offshore development facilities. Aside from Fiore’s excellent reputation, Etrus had had prior contacts with Fiore’s R&D group, which had designed and developed some components of their standard product offerings in the past. Since Fiore was well-placed in the high-end, engineering software niche, Etrus’ IT managers believed that Fiore possessed the background and skills to successfully deliver this application, which was more complex relative to the first two that they had offshored earlier. The application, when complete, would provide Etrus with the resource loading and skill prediction requirements across their entire engineering portfolio. It would enable them to load all their engineering projects that they had in the pipeline and track their status, their project plans, and the
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skills that it was going to take to get them done. This project portfolio information then could be rolled up and mapped onto the skill sets of individual product designers and engineers in order to yield accurate estimates of how many people of each skill set they would need over the next couple of years and the personnel budgets that all of this would entail. It also would enable Etrus to build the background or foundation to support the product development commitments that their salespeople were making to their customers and to reconcile market realities with their planning processes. At a higher level of complexity relative to the prior offshore development projects, the development of this application called for closer communication and interaction between client and offshore vendor. However, even as this project was underway, Etrus’ internal resources, including IT, were under severe strain due to other pending corporate acquisitions. It was decided, therefore, to focus as much of the iterative dialog with the vendor as possible in the initial stages of the development life cycle and then to hand over the process entirely to Fiore to manage until the end product was ready. Fiore’s project leads, who were technical specialists, worked closely with Etrus’ internal IT staff in the initial stages. This minimized the number of contact points between client and vendor in the later stages of development, thereby enabling Etrus to function within their time constraints, but it also ensured that each contact point served as an intensive knowledge transfer linkage. Once the leads had internalized the specifications and the deliverables, the client then would be ready for them to move the actual development work offshore to Fiore’s premises and to manage it from there. Thus, in the requirements analysis stage, Etrus’ internal IT staff provided the vendor not only with documents containing detailed requirements specifications but also with some graphical mockups of key deliverables such as input/output screens and reports. These prototypical screens
and reports then were subjected to iterative changes based on short, rapid feedback cycles between Fiore and Etrus. While the technical context was well-documented and communicated to the vendor in this manner, the transfer of business domain knowledge or the organizational context (i.e., knowledge of the client’s business processes) was not given as much attention. Both client and vendor agreed that the application, while moderately complex in effort, represented a fairly structured task with few unknowns; for instance, the hardware, software, and technical architecture for the project already had been decided by Etrus. Aside from some examples of how things were done at Etrus, it wasn’t really necessary to get into details of the business knowledge in order for Fiore to complete the project, despite the fact that the two organizations had no prior interactions. This also was the reason that the project leads from Fiore were technical specialists rather than business or process specialists. Since the moderate level of application complexity also called for some degree of vendor control, Etrus chose to anchor this control to outcome-oriented measurable standards for the vendor to follow. This was consistent with the fact that the technical architecture already had been set by the client. The contract, therefore, spelled out both timelines and quality standards. An example of the latter was specifications pertaining to the expected number of rework cycles and other measures of operational efficiencies such as software bugs. These standards were based on Etrus’ objective assessment of the project’s complexity and its own historical data from other internally developed applications. Also added to the contract were specific deliverables associated with checkpoints. One example of a deliverable at a checkpoint entailed running the set of custom workflows through a series of test processes to ensure that the set touched all the right spots in the workflow. Enforcement of standards, while not strictly followed through formal audits, was built into
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these checkpoints as threshold gates. If deliverables were determined not to have met certain standard levels, exit clauses would kick in, enabling Etrus to revisit the contract or to stop the project all together. Essentially, the client then could choose to take all the work that had been done to date, together with documentation, and to finish the project itself or hand it over to another vendor. Fiore then would be paid for work done to that point and no further. The intent of these clauses, though, was not based on an adversarial premise; the clauses were placed in the contract largely as mechanisms to document the expectations of quality to which both client and vendor were committed, essentially as vendor guidelines. Further, although the contract focused on deliverables rather than on process, it did not contain any provisions for special rewards or incentives for work that exceeded standards or that was completed ahead of schedule. The message to Fiore was, “We don’t have the time to accomplish this ourselves, so as long as you can manage the project and demonstrate the deliverables and the milestones, we’ll be perfectly happy.” Due to various reasons, including time constraints and the nature of the development work, the client maintained a clearly outcome-oriented stance; the vendor, on the other hand, was CMMcertified at a high level and took pride in following strictly established, documented, and publicized processes. Despite the fact that Fiore was a big player for whom this project represented, at best, a small foot in the door, it proceeded to apply high process standards for itself, including rigorous testing and documentation. This was over and above its self-enforcement of the deliverable-oriented contractual terms that had been set by Etrus. These respective outcome- and process-oriented approaches of client and vendor had a decidedly synergistic effect; the end result was a development project that came in at only slightly higher than the funds budgeted ($45,000 vs. $41,000), took less time than expected (six weeks vs. two months), and was regarded as successful by the
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client, despite an unplanned switch of offshore project managers in the middle of the development effort. The vendor’s process orientation ensured the continuity that was needed at the point of this switch, and the carefully crafted deliverablesoriented measures that had been set by Etrus helped Fiore to carve the path to an unambiguous end point. When the project was complete, the in-house IT staff at Etrus was unanimous in its opinion that, although the work could have been done internally, it would have been more unpredictable, it would have entailed a longer learning curve, it would have cost approximately 50% more, and it probably would not have been as high of a technical quality. Etrus’ successful experience with Fiore represents the second stage in its evolutionary experiences with application development offshoring. This stage was characterized by higher complexity work, a closer relationship with the vendor, and a greater focus on process. Ironically, though, as the IT staff at Etrus now considers a full-fledged role for applications development offshoring, some of the key factors that worked to its advantage in its recent project are the ones that it thinks will work against it in the future. Specifically, the dynamics of the telecommunications industry are changing, and the acquisition and consolidation mania is beginning to slow down. This implies that the IT staff will be less engaged in putting out acquisition-related fires and will be more available to leverage offshoring by sending out increasingly complex applications for development. While the benefits of offshoring more complex applications likely will be of a higher order, the need for closer working relationships between client and vendor IT personnel also is expected to be greater. The higher the application complexity, the greater is the need for joint, iterative activities in any development effort. While the internal IT staff finally may have more time available for such collaborative client-vendor activities, the uncertainty embedded in complex applications also usually results in several rounds of changes to
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initial specifications as possibilities are explored, as knowledge is exchanged between client and vendor, and as implications continually are clarified. With vendors who flaunt high-level CMM certifications, this creates two problems. One has to do with the enormous level of detail needed in initially documented specifications, because CMM processes require extensive documentation. The second has to do with the communications, documentation, testing, and recertification costs of reworking these specifications with each round of changes. In other words, while vendor CMM certification provides reliability and confidence in the end product, it also adds a tremendous overhead burden to the cost structure. The net result can be that any incremental gains or values from initial offshoring work are offset by the high coordination costs of adhering to process-oriented standards such as CMM as the work gets more complex. For these reasons, Etrus has decided to disengage itself from Fiore. It has committed itself to establishing a captive (subsidiary) offshore application development facility of its own in the near future so that it can better leverage the higherorder benefits of offshoring and, at the same time, maintain some control over what otherwise would be exorbitantly high vendor coordination costs. Doing so will take Etrus into the third and final evolutionary stage for offshore development.
discussiOn and implicaTiOns Using a theoretical framework and a supporting case study, it has been argued that client-vendor relationships in application development offshoring contexts evolve first from transaction-oriented, price-based contracts to loose, informal, but fewer networks based on trust and vendor selfenforcement. Subsequently, the growing complexity and criticality of applications introduces the need for greater checks and balances, which necessitates a hierarchical arrangement: part- or
full-client ownership of a vendor. While this final stage actually may not be feasible for every client, essentially, a cost reduction game is replaced by one of risk control. There is somewhat of an irony in the position taken by this article that a formal hierarchy ought to succeed a networklike stage in a client-vendor relationship. Vertical integration as a controloriented, preferred organizational response to external uncertainty first was proposed in a classic work a long time ago (Thompson, 1967). Many years later, however, it was argued that creating a hierarchy entails mechanisms that are unnecessary, that are overkill, and that are difficult to establish or too costly to sustain. In its place, the network, with its freedom of exit attributes, was propounded as a superior response to dynamic, unpredictable environments (Achrol, 1997). The knowledge of a natural relationship progression can help decision makers on either side of an offshoring relationship. On the client side, senior business and technology executives can make more informed judgments regarding the viability of offshoring beyond the short term, given the kind of commitments that such vendor relationships ultimately will entail. The resultant better decision process will prevent organizations that are ill-equipped to deal with the concomitant costs from embarking upon complex or critical offshore projects. It will also enable organizations that do possess such a capability to be better prepared for the internal changes that will accompany changing relationship structures with vendor organizations. At the least, the clarity resulting from understanding the sequential stages of interorganizational processes will encourage executives to make candid assessments of why they might be interested in offshoring in the first place. On the vendor side, the implications of a relationship progression perhaps are more profound. With the realization that clients will seek to regain control as applications evolve to become complex and critical, decision makers in vendor organi-
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zations are faced with fundamental questions pertaining to organizational mission, culture, and employee work autonomy. For example, should they even let client-vendor relationships progress to such points, or should they plan to stay with lower- and mid-level work? The greatest dilemma here is for the creative, decentralized, organic types of offshore vendor organizations. On the one hand, they may value the empowerment that their internal environment provides them. On the other hand, this empowerment may be threatened when put to good use for higher-level work. For researchers interested in pursuing further the progression of offshoring relationships, this article offers a couple of different directions for more rigorous empirical inquiry. The most obvious one is the implicit proposition that as a vendorclient offshoring relationship is established and as it ages and matures, vendor oversight first is conducted through possibly increasingly complicated contractual mechanisms; then through loose, trust-based, affiliation-solidarity networks; and finally, through a client-controlled hierarchy. An alternative investigation scheme would avoid using relationship age as the progression benchmark and, instead, would look for evidence of the three stages by employing application complexity as a surrogate for relationship maturity. If either of these two methods reveals the existence of such stages, then the next logical step would be to test whether hierarchies as the interorganizational structure of choice in mature relationships are really more effective than other alternative mechanisms.
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EndnOTEs 1
2
The identities of the client and key vendor organizations have been disguised, and other descriptive statistics and facts carefully distorted in order to maintain confidentiality and yet preserve the essence of the case. While the principles of the Software Capability Maturity Model (SW-CMM) continue to be followed by organizations worldwide, the model itself has been superseded by a
newer one called Capability Maturity Model Integration (CMMI), also from SEI. The original SW-CMM, now in sunset, focused on software development processes. Its structure was characterized by five levels of increasing maturity: Level 1–Initial, Level 2–Repeatable, Level 3–Defined, Level 4–Managed, and Level 5–Optimizing. Organizations at Level 5 epitomize highly mature, efficient, productive, innovative, and proactive development processes.
This work was previously published in Information Resources Management Journal, Vol. 19, Issue 4, edited by M. KhosrowPour, pp. 72-86, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.9
An Outsourcing Acceptance Model:
An Application of TAM to Application Development Outsourcing Decisions John “Skip” Benamati Miami University, USA T.M. Rajkumar Miami University, USA
absTracT The use of outsourcing is expanding rapidly. This study empirically tests a model of application development outsourcing acceptance based on the technology acceptance model (TAM). TAM suggested perceived usefulness and ease of use mediate the effects of other variables on users’ attitudes towards a technology. The model tested in this study suggests perceived usefulness and ease of use of outsourcing mediate the effects of the external environment, prior outsourcing relationships, and risks on decision-makers’ attitude toward application development outsourcing. One hundred and sixty respondents to a survey sent to 3000 IT decision makers provided data to confirm the applicability of TAM and the influences of these external variables. Support for applying TAM in this alternative context was found. Three
sub-dimensions of risk, project management, relationship, and employee risk emerged. Project management and employee risks along with prior relationships were found to significantly influence decision maker perceptions about application development outsourcing.
inTrOducTiOn An increased reliance on information technology (IT) for success combined with the rapid, accelerating rate of IT change, has intensified both the importance and complexity of managing this now vital corporate resource. IT outsourcing, the transferring of all or part of a company’s IT functions to an outside party, offers additional alternatives to organizational decision makers. Hence, there is an increasing focus on determin-
ing the correct sourcing strategy for IT and IT services (King, 2001). However, choosing the appropriate IT functions to outsource and the best outsourcing vendor is very complex (Kern, Willcocks, & van Heck, 2002). This is especially true now because the motivation for IT outsourcing has moved beyond traditional cost cutting or efficiency gains to become more transformational. IT outsourcing now plays a much more strategic role, enabling companies to be more adaptive and respond quickly to new opportunities (Mazzawi, 2002). Kodak brought IT outsourcing to the forefront with their landmark decision to outsource their IT functions in 1989. Recent surveys indicate that around the globe, firms of all sizes across many industries view outsourcing as a realistic alternative for some or all of their IT functions (Barthelemy & Geyer, 2001; Kakabadse & Kakabadse, 2002). The use of IT outsourcing continues to grow at a phenomenal rate (Kernet al., 2002; Ross & Westerman, 2004). A wide variety of IT functions are outsourced. This study focuses on one particular function, applications development (AD), defined as any efforts in the organization involved with the analysis, design, or implementation of information systems. AD was identified in multiple prior studies as an IT function commonly outsourced (McFarlan & Nolan, 1995; Hurley & Schaumann, 1997; Elmuti & Kathawala, 2000; Ross & Westerman, 2004). Furthermore, recent surveys indicate that AD outsourcing is on the rise (Hurley & Schaumann, 1997; Ketler & Willems, 1999; King & ColeGomolski, 1999). More and more AD outsourcing is also done offshore which adds complexity to the decision making process (Elmuti & Kathawala, 2000; Robb, 2000; Prencipe, 2001). Thus, a better understanding of the AD outsourcing decision is important. More importantly, this knowledge may help to improve the understanding of other outsourcing decisions. A prior outsourcing study (Benamati & Rajkumar, 2002) proposed an application of
the technology acceptance model (Davis, 1989; Davis, Bagozzi, & Warshaw, 1989) as a basis for investigating AD outsourcing decision making. The model also proposed risk, prior outsourcing relationships, and an organization’s external environment to be important antecedents to decision-maker perceptions and hence important factors in AD outsourcing decisions (Benamati & Rajkumar, 2002). The goal of this research is to empirically test and validate that model as a basis for further study and shed new light on factors that influence AD outsourcing decisions. The following section reviews the proposed model of outsourcing acceptance and develops hypotheses from it. The methodology used and findings from an empirical validation of that model are then explained. Finally, implications of both the results and the model for future research are discussed. No other research has empirically applied TAM in this way. Nor has there been empirical testing of the influence of these three antecedent factors on the decision to outsource AD.
ThEOrETical basis FOr ThE rEsEarch mOdEl and hypOThEsis TAM states that users’ perception of the usefulness of a technology, defined as the degree to which a person believes that using the technology will enhance his or her job performance, and ease of use, defined as the degree to which a person believes that using the technology will be free of effort (Davis, 1989), directly affect the users’ attitude about and hence their intention to use the technology. These two perceptions also moderate the effects of antecedent constructs on the decision to use the technology. The AD outsourcing acceptance model (Benamati & Rajkumar, 2002) that is the focus of this study, shown in Figure 1, illustrates TAM constructs, outsourcing decision antecedent
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constructs, and posited relationships among the constructs. It proposes that TAM constructs are applicable to the acceptance of AD outsourcing. The TAM constructs and interrelationships are applied consistently with previous TAM research (Davis et al., 1989; Mathieson, 1991; Karahanna, Straub, & Chervany, 1999). Decision-maker perceptions of the usefulness, defined as the degree to which the decision maker believes that AD outsourcing will enhance the performance of the IT group, and ease of use, the degree to which the decision maker believes that AD outsourcing will be free of effort, are posited to influence their attitude about AD outsourcing which in turn affects their intention to do it. Consistent with TAM, the model proposes that a decision-maker positively inclined towards outsourcing is more likely to have intentions to outsource. Many organization level decisions are ultimately made by an individual within the organization. IT managers most often prepare sourcing evaluations (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004) and IT sourcing decisions elevate to the CIO, CFO, and CEO levels in organizations (Kakbadse & Kakabadse, 2002). A study of 160 French and German companies found the decision to outsource IT was made by an individual executive in 90% of the French and 75% of the German organizations studied (Barthelemy & Geyer, 2001).
The studies indicate most IT outsourcing decisions are organizational decisions primarily made by individuals. The unit of analysis in prior TAM research has predominantly been individual adoption of a specific technology. Recent studies apply TAM to organizational level adoptions decisions by owners or executives in small and medium sized enterprises (SME) and more general technology categories such as ecommerce (Granden & Pearson, 2004) or having a Web presence (Riemenschneider, Harrison, & Mykytyn, 2003). Since AD outsourcing is a solution to a general technology problem, TAM constructs and relationships may be applicable to high level decision-makers’ acceptance of AD outsourcing. Furthermore, TAM is rooted in the theory of reasoned action (Azjen & Fishbein, 1980) and other research has drawn on attitude based choice theory rooted in the theory of reasoned action to study organizational level decisions. Mykytyn and Harrison (1993) studied the acceptance of strategic information systems by senior management and Candel and Pennings (1999), the choice of financial services by entrepreneurs. This provides further support for organizational level decision makers as a unit of analysis. Figure 1 also illustrates the hypotheses tested in this study. Hypotheses one through four stem directly from the established TAM relationships.
Figure 1. Outsourcing acceptance model Antecedents External Environment
H5 H6
Prior Outsourcing Relationships H10 (-)
Perceived Risks of Outsourcing
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H7 H8 (-) H9 (-)
TAM
Perceived Usefulness of Outsourcing
H2
Attitudes towards Outsourcing
H4
Perceived Ease of Use of Outsourcing
H3
H1
Intention to Use Outsourcing
An Outsourcing Acceptance Model
It is hypothesized that these relationships will hold in the AD outsourcing decision context as well. Hence, it is hypothesized that: H1: Decision maker attitude toward outsourcing AD positively affects their intention to use it. H2: Decision maker perception of the usefulness of AD outsourcing positively affects their attitude towards it. H3: Decision maker perception of the ease of use of AD outsourcing positively affects their attitude towards it. H4: Decision maker perception of the ease of use of AD outsourcing positively affects their perception of its usefulness. The model also proposes the external environment, prior outsourcing relationships, and the perceived risk of outsourcing AD as antecedents to decision maker perceptions of AD outsourcing. Each is proposed to affect one or both of the TAM perception variables. Support for the influence of these antecedents on outsourcing decisions exists in prior literature. A firm’s external environment plays a role in decision-making (Goll & Rasheed, 1997). A dynamic, competitive, or uncertain environment can lead firms to focus on core competencies and outsource others (Slaughter & Ang, 1996). As hypercompetition becomes an unavoidable way of life in many industries (D’Aveni, 1994), IT plays a bigger and bigger role in achieving and sustaining competitive advantages. Furthermore, environmental change prompts organizations to maintain flexible organizational structures (Burns & Stalker, 1961; Perrow, 1970; Thompson, 1967; Woodward, 1965). Outsourcing provides flexibility and offers a way to adjust organizational boundaries in response to pressures from the environment (Lonsdale & Cox, 2000). For example, the critical contingencies that arise due
to stiff competition were found to influence IT outsourcing decisions in the banking industry (Ang & Cummings, 1997). This provides support for the fifth hypothesis in the model. H5: A more competitive external environment positively affects decision maker perception of the usefulness of AD outsourcing. The importance of the client supplier relationships has received increasing attention in the outsourcing literature. Organizations and their outsourcing vendors have become more tightly coupled (Lee, Huynh, Chi-wai, & Pi, 2000) and long term partnerships are more appropriate (Nam, Rajagopalan, Rao, & Chaudjury, 1996; Saunders, Gabelt, & Hu, 1997; Mazzawi, 2002). Some outsourcing arrangements form as strategic alliances with deep levels of interdependence (Lacity & Willcocks, 1998; King, 2001) and the ability to build a trusted partnership and avoid relational trauma is imperative for success (Kern et al., 2002). It becomes critical to consider outsourcing as the management of relationships with service providers as opposed to simply managing contracts for IS commodities (Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). A recent survey of 700 IT professionals indicates that reliability and trust in the outsourcing vendor were the two most important factors in selecting an outsourcing vendor (Gareiss, 2002). Surprisingly, these two relationship qualities ranked above more traditional selection criteria such as cost and technical skills. Whitten and Leidner (2006) found that for varying perceptions of product and service quality (high, low or poor), poor relationship quality has caused the decision to backsource or bring application development back in-house. The quality of the outsourcing relationship is clearly important (Lee & Kim, 1999) as these relationships are becoming mission critical (Kern & Willcocks, 2002). From a decision making perspective, early outsourcing research predominantly overlooked
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the fact that many outsourcing decisions are not independent decisions but instead are based on prior outsourcing experiences (Nam et al., 1996; Lee et al., 2000). Past marketing research into customer-service provider relationships found that customer satisfaction with prior experiences with a provider affected their loyalty to that provider and the strength of the relationship increased with the length of prior experience (Bolton, 1998). Likewise, prior outsourcing experiences certainly influence follow-on outsourcing decisions. The outsourcing acceptance model posits that prior outsourcing relationships will influence decision maker perceptions about outsourcing’s usefulness and ease of use as stated in hypotheses six and seven. H6: Positive prior AD outsourcing relationships positively affect decision maker perception of the usefulness of AD outsourcing. H7: Positive prior AD outsourcing relationships positively affect decision maker perception of the ease of use of AD outsourcing. Risk is also an important factor in the AD outsourcing decision (Earl 1996; Aubert, Patry, & Rivard, 1998; Ketler & Willems, 1999). Risk, if ignored, leads to undesirable consequences, such as increased likelihood of project failure (Lyytinen, Mathiassen, & Popponen, 1998; Bahli & Rivard, 2005). IS managers may perceive outsourcing to reduce risk because it can provide skills the organization lacks to develop a particular application. However, outsourcing introduces many new risks such as hidden costs, lack of proper skills or infrastructure to manage the engagement, staff morale problems, and loss of control to or key dependence on a third party (Ketler & Walstrom, 1993; Hurley & Schaumann, 1997; Smith, Mitra, & Narasimhan, 1998; Barthelemy, 2001). Offshore outsourcing adds many additional challenges and risks to the outsourcing engagement (Ramarapu, Parzinger, & Lado, 1997). For
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example, the project team is, by definition, virtual and must be managed across time, distance, and perhaps even borders or oceans. Although some virtual organizations succeed, the value of virtual organizations has been oversold and more fail than succeed (Chesbrough & Teece, 2002). Perceived risk has been shown to inhibit system or product evaluation and adoption in e-service settings (Featherman & Pavlou, 2003). That study also provided strong empirical evidence that perceived risk adversely influences perceived usefulness. In an AD outsourcing context, perceived risk can be expected to negatively influence the perceived usefulness of outsourcing. Hypotheses eight states this expectation. H8: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the usefulness of AD outsourcing. The risks associated with outsourcing highlight the need to outsource in the right way (Ross & Westerman, 2004). When risk is perceived, users introduce standard risk management mechanisms such as risk assessment, and developing risk mitigation plans to handle the perceived risk. Contracts for example, are one mechanism used to effectively manage the outsourcing relationship and provide for early termination, in case of underperformance (Osei-Bryson & Ngwenyama, 2006). The outsourcer also typically sets up an organizational unit to coordinate interactions between its information technology staff and the vendor as well as monitor the vendor’s performance. Users must pay close attention to coordination in the early stages of the AD outsourcing projects so that costly adjustments to the coordination mechanisms do not occur later (Sabherwal, 2003). This additional effort to manage risks introduces a burden on the user to invest more time and effort in governance, oversight, and coordinating mechanisms, reducing the ease-of-use of outsourcing. Hence, this leads to the hypotheses:
An Outsourcing Acceptance Model
H9: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the ease of use of AD outsourcing. Today’s outsourcing relationships involve strategic alliances with shared risk between the provider and the purchaser of the outsourcing services (Lacity & Willcocks, 1998; Kishore et al., 2003). Just as good prior relationships should increase perceptions of ease of use and usefulness, it would be expected that positive past experiences would reduce the perception of risk associated with outsourcing. This expected inverse relationship forms the basis for a final hypothesis. H10: Positive prior AD outsourcing relationships negatively affect decision maker perception of the risk of AD outsourcing.
mEThOdOlOgy A survey instrument was implemented to empirically test the model and hence, the applicability of TAM and the influence of the antecedent variables. Most prior outsourcing studies applied more qualitative or case study research. Very few studies employed quantitative methods. This research is the first to employ a quantitative instrument to study the applicability of TAM and one of only a few to quantitatively examine antecedents to outsourcing decision making.
instrument development The instrument items used to operationalize the constructs in Figure 1 were all derived from past research. All questions used a 1 to 7 scale where 1 meant “strongly disagree” and 7 meant “strongly agree.” The items for the four TAM constructs are revisions of items from previously validated TAM instruments (Agrawal & Prasad, 1999; Hu, Chau, Liu Sheng, & Yan Tam, 1999; Venkatesh
& Davis, 2000). The items were reworded to change the focus from systems to application development outsourcing. For example, the TAM intention to use item “Given that I have access to the system, I predict that I would use it” became “Given that I have access to an outsourcer for applications development I predict that I would use them.” These items were applied to test the TAM hypotheses (H1-H4). Consistent with previous instruments applying TAM to organizational level adoption decisions (Grandon & Pearson, 2004), the items for ease of use focused on the decision maker’s perception of their own ability to use outsourcing. Grandon and Pearson (2004) operationalized perceived usefulness as a mix of the decision maker’s perception of the usefulness to themselves and to the organization. For example, “Using e-commerce would improve my job performance” and “Using e-commerce would enable my company to accomplish specific tasks more quickly” were used. For consistency, all usefulness items in the developed instrument addressed the usefulness of outsourcing to the organization. The items for external environment and prior relationships originated from instruments used in marketing research. To measure the competitive nature of the environment, items from Industruct (Pecotich, Hattie, & Peng Low, 1999), an instrument developed to measure Porter’s (1980) five competitive forces model were adapted. Only items from intensity of rivalry defined as “the extent to which firms in this industry frequently and vigorously engage in outwardly manifested competitive actions and reactions in their search for competitive advantage in the marketplace” (Pecotich et al., 1999) were applied. That study found that rivalry was the strongest force of the five. Competitive rivalry is also probably the one most directly applicable to help test hypothesis five. Many marketing studies have measured dimensions of relationship quality. The items for measuring relationship quality used here were
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drawn from two separate marketing instruments. This was done to tap into a representative set of relationship quality dimensions that may be applicable to outsourcing relationships. The first dimension adapted was relational norms (Heide & John, 1992). Relational norms allow both buyer and supplier to judge whether each party’s actions conform to established standards (Ivens, 2006). The measures tap into three aspects of the relationship norms; flexibility—the expectation of a willingness of the parties to be adaptable to changing circumstances, information exchange— the expectation that a proactive exchange of useful information will occur, and solidarity—the expectation that both parties place a high value on the relationship. Trust is also commonly identified as an important aspect of relationship quality (Crosby, Evans, & Cowles, 1990; Moorman, Zaltman, & Deshpande, 1992; Morgan & Hunt, 1994; Rindfleisch, 2000; Ulaga & Eggert, 2004; Huntley, 2006). Rindefleish’s (2000) five item scale for organizational trust, which he defined as “…
confidence in an exchange partner’s reliability and integrity” was adapted. This combination of 15 measures adequately represented the dimensions of relationship quality from an outsourcing perspective. These measures were applied to test hypotheses six, seven, and ten. Established measures for outsourcing risk were not found in prior research and hence were developed from outsourcing risks identified by Elmuti and Kathawala (2000). This was the most complete list that was found and is applied to explore risk factors and test the last three hypotheses. Table 1 details the number and the source of survey items for each construct in the proposed framework.
instrument pretest A pretest of the instrument was conducted with two IT academicians experienced in survey development, three IT executives who have outsourced applications development, and two executives from
Table 1. Source of survey items Construct
Number of Items
Source Venkatesh and Davis (2000) Agrawal and Prasad (1999) Hu et al. (1999)
Intention to Use
Intention to Use
5
Attitude
Attitude
4
Agrawal and Prasad (1999) Hu et al. (1999)
Perceived Usefulness
Perceived Usefulness
9
Davis (1989) Venkatesh and Davis (2000)
Perceived Ease of Use
Perceived Ease of Use
5
External Environment
Competitive Rivalry
9
Prior Relationships
Relational Norms
10
Trust
5
Outsourcing Risks
540
Prior Study Factor
18
Venkatesh and Davis (2000) Pecotich et al. (1999) Heide and John (1992) Rindefleisch (2000) Elmuti and Kathawala (2000)
An Outsourcing Acceptance Model
application development outsourcing providers. The pretest was done to ensure that the survey was clear and concise, and that items portrayed their intended meaning. Feedback was also sought on the length of the survey, its overall appearance, and how each participant would react to receiving it in the mail. Comments and suggestions were used iteratively to revise the survey. During each pretest, one of the authors met with each of the participants individually and discussed the purpose of the survey. The subjects were asked to complete the survey. They were also asked to suggest improvements and to identify anything not clear to them. After completion of the survey, the attending author clarified and recorded subject feedback and suggestions. The comments of each participant were incorporated before meeting with the next participant and the pretest iterated until all clarity issues in the survey were flushed out. The pretest resulted in substantial improvement in the clarity of the survey definitions and items. It also resulted in the addition of one ease of use item—using application development outsourcing makes it easier to share risk with the vendor. The Appendix lists all the survey items along with the instructions to subjects.
data collection To implement the survey, a random sample of 3000 IT executives was drawn from subscribers to an IS journal focusing on enterprise application issues. The journal qualified subscribers based on their level in the organization and provided a randomized sample from the over 25,000 subscribers with the level of director or higher in their organizations. Two mailings were done. The first contained a solicitation letter, the survey, and a postpaid return envelope. The letter also included the URL of an online version of the survey. The second mailing was a reminder card that also pointed to the online version. The IT executives provided a total of 160 usable responses.
Table 2. Subject organization industries Number
Percentage
Finance
Industry
20
12.50%
Other
19
11.88%
Education
18
11.25%
Manufacturing
18
11.25%
Consulting
15
9.38%
Government
14
8.75%
Communication
9
5.63%
Health Care
8
5.00%
Transportation
7
4.38%
Insurance
6
3.75%
Systems Integrator
5
3.13%
Utilities
4
2.50%
Marketing
4
2.50%
Software development
4
2.50%
Banking
3
1.88%
Publishing
2
1.25%
Construction
2
1.25%
Legal
2
1.25%
Subjects’ organizations represented a variety of industries. Table 2 summarizes them. The “other” category includes all industries represented by only one organization. Subjects’ demographics indicate they were indeed high level IT executives. They averaged 19.4 years of IS experience, 9.6 with their current employer. In addition, they managed on average 78 subordinates. All subjects also indicated they played significant roles in outsourcing decisions for their organizations. Table 3 summarizes the size of the subjects’ organizations in terms of number of IT professionals and IT budget. Subjects estimated that on average 13.2% of their IT budget was spent on application development outsourcing and 19.7% on all types of IT outsourcing. AD outsourcing decisions were being made in these organizations. Response rates in surveys of executive level individuals are often low (Pincus, Rayfuekdm, &
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An Outsourcing Acceptance Model
Cozzens, 1991; Baruch, 1999) due to the numerous demands on their time. Many executives have buffer systems in place to control the receipt of requests for information such as surveys (Cycyota & Harrison, 2002). Subject organizations that are small exacerbate the low response rate problem (Dennis, 2003). Not unexpectedly, the response rate of 5.33% was low. Low response rates can introduce response bias. However, the absence of differences in the responses received at different times would be consistent with the claim that response bias was not present (Anderson & Gerbing, 1988). The responses for all of the factors and numeric demographic variables collected were tested for responses received before and after the second mailing. None of the t-tests (continuous variables) or chi-squared tests (categorical variables) showed responses to be significantly different. Hence, response bias was not found.
daTa analysis The data analysis proceeded through two phases. The first phase examined the applicability of TAM to outsourcing decision making and the second the influence of the three antecedents on decision maker beliefs about outsourcing. The following two sections discuss these phases.
The applicability of Tam The TAM analysis proceeded through two steps. The first employed exploratory factor analysis (EFA) techniques to establish the validity of the instrument and identify the coping mechanism categories (Hatcher, 1994; Stevens, 1996). The second used simple linear regression to test the TAM hypotheses in the context of AD outsourcing. The EFA used the principle factor method with promax oblique rotation. Oblique rotation is suggested when factors are thought to be correlated factors (Harman, 1976; Hatcher, 1994). The factors are hypothesized to interrelate (in fact, the data later showed that each resulting factor correlated with at least one other factor at .24 or higher). Based on the prior expectation of four TAM factors and the percent of variance criterion (Hatcher, 1994) with a five percent cutoff, four factors variables were retained. In the factor analysis items PU2, PU8, and IN5 (see the Appendix) cross loaded onto the attitude construct, indicating multidimensionality in these measures. All three were dropped. Additionally, PU1, PU5, and EOU1 did not load above the recommended .40 cutoff on their factors and were also dropped. All remaining items loaded on their expected constructs. The constructs all
Table 3. Subject organization size Number of IT Professionals
542
Number of Subject Organizations
1-49
77
Reported IT Budget (Thousands)
Number of Subject Organizations
Under $99
5
50-99
13
$100-$499
22
100-249
30
$500-$1,999
29
250-499
16
$2000-4,999
18
500-999
5
$5,000-9,999
22
More than 1000
18
More than $10,000
56
Not reported
1
Not reported
8
An Outsourcing Acceptance Model
had Cronbach alphas of .77 or higher, well within recommended thresholds (Nunnally, 1967). This indicated the reliability of the instrument. Table 4 presents the descriptive statistics for the analysis including the mean factor scores.
The second step in this analysis employed simple linear regression to test the TAM research hypotheses (H1 through H4). The regression results illustrated in Table 5 indicate that all four hypotheses were strongly supported.
Table 4. Final results of TAM exploratory factor analysis Perceived Usefulness of Outsourcing
Intention to Use Outsourcing
.90
.03
-.07
-.02
.79
.08
.09
-.13
Item
Attitude Towards Outsourcing
AT2 AT3
Perceived Ease of Use of Outsourcing
AT1
.77
-.09
.09
.11
AT4
.62
-.08
.05
.17
PU4
-.13
.80
.05
.01
PU7
.07
.66
-.13
.06
PU3
.12
.63
.14
-.14
PU9
.28
.55
.09
.02
PU6
-.11
.49
.09
.06
IN2
-.02
-.01
.95
.01
IN1
.02
-.01
.91
.01 .05
IN3
.19
.15
.48
IN4
.17
.25
.41
-.04
EOU2
.04
.07
-.04
.75
EOU1
-.10
-.11
.03
.67
EOU3
.16
.21
.00
.60
EOU4
.26
-.01
.07
.46
Alpha
.87
.82
.87
.77
Eigenvalue
6.833
1.564
0.832
0.688
Percent of Variance Explained
71.0
16.3
8.7
7.2
Mean
4.25
5.12
4.72
3.23
Std. Dev.
1.16
0.96
1.19
1.09
Table 5. TAM hypotheses linear regression results Independent Variable (Hypothis)
T value (P-value)
93.44 (<.0001)
AT (H1)
9.67 (<.0001)
.6317
7.11 (<.0001) 5.59 (<.0001)
.4414 .3794
4.57 (<.0001)
.3769
Dependent Variable
R2
F-Value (p-value)
Intention to Use Outsourcing
.37
Attitude Towards Outsourcing
.45
61.95 (<.0001)
PU (H2) PEOU (H3)
Perceived Usefulness of Outsourcing
.12
20.86 (<.0001)
PEOU (H4)
Estimate
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Table 6. Final results of antecedent exploratory factor analysis Item
Relationship
Environment
Project Mgt. Risk
Relationship Risk
Employee Risk
REL11
0.76
-0.07
0.17
-0.07
-0.05
REL4
0.74
0.00
0.06
-0.03
-0.10
REL7
0.68
-0.19
-0.11
0.05
-0.03
REL10
0.67
0.10
-0.07
0.12
-0.12
REL13
0.65
-0.04
0.11
-0.12
0.14
REL1
0.65
-0.23
-0.09
0.05
0.04
REL8
0.65
0.06
0.26
-0.17
0.02
REL3
0.64
0.18
-0.04
-0.01
-0.11
REL2
0.63
0.16
-0.08
-0.03
-0.15
REL14
0.58
0.09
-0.08
-0.02
0.10
REL6
0.56
0.14
0.03
-0.05
-0.08
REL15
0.54
-0.02
-0.21
0.24
0.23
REL5
0.51
-0.06
-0.01
0.00
0.08
REL12
0.51
-0.03
0.01
0.02
0.08
EN6
0.03
0.81
0.10
0.03
0.00
EN3
0.00
0.79
0.05
0.05
-0.01
EN8
-0.06
0.74
0.02
-0.03
0.09
EN1
-0.06
0.73
0.06
0.00
-0.01
EN5
0.02
0.73
-0.17
0.18
-0.04
EN2
0.01
0.71
0.00
0.02
-0.04
EN7
0.02
0.67
-0.03
-0.09
0.08
EN4
0.08
0.41
0.04
-0.02
0.11
RSK4
-0.09
0.09
0.70
0.06
-0.07
RSK3
-0.05
0.09
0.59
-0.12
0.10
RSK5
0.13
0.04
0.54
0.13
0.03
RSK11
-0.06
-0.07
0.50
0.12
0.11
RSK16
-0.04
-0.27
0.46
0.12
-0.07
RSK1
0.07
0.23
0.45
-0.01
-0.02
RSK14
0.06
0.07
-0.13
0.74
0.04
RSK9
0.01
0.04
0.09
0.72
0.00
RSK8
-0.15
0.03
0.11
0.55
-0.18
RSK18
-0.10
0.07
0.07
0.53
0.00
RSK13
0.07
-0.24
0.31
0.45
0.03
RSK12
0.07
0.00
0.27
0.43
0.14
RSK2
0.07
0.02
-0.01
-0.10
0.82
continued on following page
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Table 6. continued RSK6
0.05
0.05
0.06
0.05
0.78
RSK10
-0.13
0.07
0.04
0.04
0.77
Alpha
.89
.87
.73
.76
.86
Eigenvalue
6.402
5.252
3.487
1.935
1.435
Percent of Variance Explained
26.1
21.4
14.2
7.9
5.8
Mean
4.86
4.04
4.70
4.64
4.42
Std. Dev.
0.87
1.30
0.96
1.07
1.50
Table 7. Definitions of the risk sub-dimensions Definition
Risk Sub-Dimension Project Management Risk
Environmental uncertainties or the lack of, management skills, control mechanisms, infrastructure, or high level support for the outsourcing effort.
Relationship Risk
Risks associated with vendor relations including vendor’s lack of knowledge of the business, contract length, flexibility in the relationship, meeting schedules, and maintaining security and confidentiality of information shared.
Employee Risk
Fear of layoffs and the accompanying risk of lower employee morale and performance due to outsourcing.
The Effects of the antecedents The same two steps were followed to analyze the effects of the three antecedents, the external environment, prior outsourcing relationships, and the perceived risk of outsourcing. An EFA was done including all 42 antecedent items. The expectation was that three factors would emerge. However, five factors accounted for more than 5% of the variance in the data and thus were retained. The risk items loaded onto three separate factors accounting for the two additional factors. Five items were dropped in subsequent runs. Items EN9, RSK7, RSK15, and RSK17 did not load above .40 on their respective factors and REL9 cross loaded onto one of the risk factors. All remaining items loaded on their expected constructs. The constructs all had Cronbach alphas above .73 indicating the reliability of the instrument. Table 6 presents the descriptive statistics for the analysis. The authors named the three risk factors: project management risk, relationship risk, and
employee risk based on an interpretation of the concepts embodied by the items in each. These names are reflected in Table 6. Table 7 explicitly defines these three sub-dimensions of Risk in terms of those items. To test hypotheses H5 through H10, again simple linear regression was employed. Due to the multiple sub factors of perceived risk of outsourcing, hypotheses H8, H9, and H10 were replicated as H8a, H8b, H8c, and so forth, to represent project management risk, relationship risk, and employee risk respectively. Table 8 summarizes the results. Support was found for 6 of the 12 hypotheses. The effect of prior relationships on perceived ease of use (H6, p<.001) and perceived usefulness (H7, p<01) suggest it to be an important antecedent to outsourcing decisions. The risk factors’ inverse relationships with the other factors in the model were partially substantiated. Results indicated that project management risk inversely affected perceived ease of use (H9a, p<.01), employee risk inversely influenced perceived usefulness (H8a,
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An Outsourcing Acceptance Model
Table 8. Antecedent hypotheses linear regression results F-Value (P-value)
Table 9. Hypotheses testing summary Hypothesis H1: Decision maker attitude toward outsourcing AD positively affects their intention to use it. H2: Decision maker perception of the usefulness of AD outsourcing positively affects their attitude towards it. H3: Decision maker perception of the ease of use of AD outsourcing positively affects their attitude towards it. H4: Decision maker perception of the ease of use of AD outsourcing positively affects their perception of its usefulness. H5: A more competitive external environment positively affects decision maker perception of the usefulness of AD outsourcing. H6: Positive prior AD outsourcing relationships positively affect decision maker perception of the usefulness of AD outsourcing. H7: Positive prior AD outsourcing relationships positively affect decision maker perception of the ease of use of AD outsourcing. H8: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the usefulness of AD outsourcing. H9: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the ease of use of AD outsourcing. H10: Positive prior AD outsourcing relationships negatively affect decision maker perception of the risk of AD outsourcing.
*** (p<.001) ** (p<.01) * (p<.05)
546
Supported
Significance
Yes
***
Yes
***
Yes
***
Yes
***
No
Yes
**
Yes
***
PrjMgtRisk—No RelRisk—No EmpRisk—Yes
*
PrjMgtRisk—Yes RelRisk—No EmpRisk—Yes
** (**) Reversed
PrjMgtRisk—No RelRisk—Yes EmpRisk—No
**
An Outsourcing Acceptance Model
p<.05), and prior relationships negatively affected relationship risk (H10b, p<.01). Surprisingly, employee risk had a positive affect on perceived ease of use (H9c, p<.01). Table 9 summarizes the results of all the hypotheses tests. Six of the first seven hypotheses were supported. Mixed support was found for the three risk hypotheses. The variance inflation factors of the independent variables in the tested models were all less than two indicating multicollinearity was not a problem in the data collected (Stevens, 1996). Additionally, Harman’s single method test failed to demonstrate common method variance was a problem (Podsakoff & Organ, 1986). The two factor analyses produced neither a single factor nor one general factor that accounted for the majority of the variance and each factor accounted for more than the viable cut-off of 5% (Hatcher 1994).
discussiOn The use of outsourcing is rapidly expanding. It is even growing outside the realm of IT outsourcing. Outsourcing decisions are strategically important to organizations. While much research has focused on IT outsourcing decisions, little has done so empirically. By empirically focusing on application development outsourcing decisions, this research has made several significant contributions to this body of knowledge. First, it contributed by empirically validating that the technology acceptance model has application to organizational level decision makers. Many organizational level decisions are ultimately made or strongly influenced, by a single individual. This study found that for outsourcing decisions, TAM may apply. Perceptions of the usefulness and ease of use of outsourcing strongly influence decision makers’ attitudes about and hence their intention to use AD outsourcing. This finding perhaps indicates that TAM is applicable in the study of other organizational level decisions. It
is interesting the note the striking difference in the means factor scores for usefulness (5.12) and ease of use (3.23). There is general agreement in the sample that AD outsourcing is useful, but not so easy to do. Useful information can be garnered from the items that were dropped in the factor analysis of the TAM items. Most of them were from the perceived usefulness construct. It appears that the usefulness of AD outsourcing to improve the IS function’s effectiveness, improve the quality of IS applications, and reduce costs is not recognized in the subject organizations surveyed. Perhaps this finding indicates this is not what is happening. Recent research has asserted that outside support may not be the panacea that it is touted to be (Benamati & Lederer, 2001). Empirical support was also found for two of the three hypothesized antecedents to decision maker perceptions, prior outsourcing relationships and perceived risk of outsourcing. Prior outsourcing relationships strongly influence both perceptions. While this seems intuitive, perhaps this study provides the motivation needed for both providers and receivers of outsourcing to attend to existing relationships more carefully. Positive prior relationships increase decision maker perception of outsourcing AD as well as attenuate relationship risk, one of the dimensions of risk identified in the study. AD outsourcing decisions are made in the face of risk. Categorizing the risks allows managers to select appropriate management tools and actions for each type of risk (McFarlan, 1981; Jurison, 1995). Thus, the three dimensions of risk empirically identified in this study employee, project management, and relationship risk provide necessary knowledge for the purpose of outsourcing decision making. The individual items in each category provide additional knowledge. Prior academic research and popular practitioner press have identified these potential hazards faced when outsourcing. The current empirical research more firmly establishes their relevance to the context of AD outsourcing decisions. 547
An Outsourcing Acceptance Model
Employee risks such as decreased morale (Antonucci, Lordi, & Tucker III, 1998; Kliem, 1999; Lonsdale & Cox, 2000) or performance (Garaventa & Tellefsen, 2001) are often cited as issues faced in the outsourcing process. Managers and their employees are interdependent on each other for success. This goes beyond any written contract stating responsibilities and remuneration for a job well done. Employees develop individual perceptions or psychological contracts of what they owe to their employers and what their employers owe to them (Robinson, 1996). A breach of this contract in the eyes of the employee negatively affects employee performance (Robinson, 1996; Garaventa & Tellefsen, 2001). Outsourcing can be viewed as such a breach and has actually been described as a betrayal of workers (Gordon, 1996). This study found that employee risk negatively impacts the perceived usefulness of outsourcing and hence the outsourcing decision. Proper management of the outsourcing engagement is also imperative for success. “Outsourcing does not eliminate the need to manage the function. Rather, it creates a situation requiring managers to utilize a different set of skills” (Garaventa & Tellefsen, 2001). A recent survey of 116 companies found that the struggle to manage the outsourcing process was a key reason for dissatisfaction with outsourcing arrangements (PA Consulting Group, 2003). Lacity and Willcocks (1999) identified the lack of active management of the supplier and lack of maturity and experience of contracting for and managing the outsourcing arrangement as two of the main reasons for negative outcomes in IT outsourcing deals (Lacity & Willcocks, 1999). Furthermore, one often cited reason for outsourcing IT functions is inadequacies in the current IT organization’s performance (Ketler & Walstrom, 1993; Lacity & Willcocks, 1998; Smith et al., 1998). “If the IT activity has been badly managed in the first place, will the IT managers be any better at managing an external provider?”
548
(Earl, 1996). Clearly, project management risk is an issue and this study found it negatively affects decision maker perceptions of ease of use. The third category of risk identified, relationship risk, stems from the risks involved when depending on a third party to deliver important products or services. Excessive contract length could lock the organization into a negative relationship (Kliem, 1999) in which they are held hostage by the vendor (Antonucci et al., 1998). Rigid outsourcing contracts, while intended to protect the buying organizations, might actually lead to less flexibility to take advantage of new technologies or react to changing business needs (Antonucci et al., 1998). Multiple studies have examined outsourcing contract parameters (Ketler & Walstrom, 1993; McFarlan & Nolan, 1995; Lacity & Willcocks, 1998; Kelter & Willems, 1999). Confidentiality and the proper care of sensitive data and business knowledge are now in the hand of a third party and must be protected (Jurison, 1995; Antonucci et al., 1998; Lonsdale & Cox, 2000). Another source of relationship risk is the vendor’s ability to deliver (Jurison, 1995), especially without prior relationships with that vendor. It was found that positive prior relationships reduce the perception of relationship risks. This research also found no support for the influence of the external environment on outsourcing decisions. The structured interviews in the model building study (Benamati & Rajkumar, 2002) found mixed responses about the importance of the external environment. Other studies report similar mixed responses. For example, Loh and Venkatraman (1992) found that outsourcing behavior of other organizations is a good indicator of outsourcing events, but Hu, Saunder, and Gabelt (1997) did not find corresponding effects. In spite of assertions that competition may influence decision maker perceptions about outsourcing, this was not the case in the subject organizations in this study.
An Outsourcing Acceptance Model
implicaTiOns FOr FuTurE rEsEarch This research was the first empirically study of the application of TAM to the decision to outsource. The applicability of TAM as a basis for explaining the mediating effects of decision-maker attitude on organizational decision making is a major contribution of this study. The instrument developed here based on prior TAM research could provide a basis for other decisions made at this level. The decision-making processes for outsourcing other IT functions or entirely different technology decisions could be examined. Influential external variables for these alternative decisions could also be studied. Additionally, the antecedents established in this research provide a basis for further study. This study identified prior relationships, employee risks, and project management risks as important to the AD outsourcing decision. Future research should look more closely at these to both validate and extend these findings. It might also be interesting to explore why increased perceptions of employee risk increased perceived ease of use for decision makers. Perhaps IT executives do feel that keeping employees on edge is good and helps ease the use of AD outsourcing. It is also possible that this result was due an anomaly of the sample or flaw in the measures. This finding is not unique to this study. A study of TAM and mobile commerce found, perceived risk positively influenced intention to use (Wu & Wang, 2005). They speculate that users are perhaps well aware of the risks, and weigh the benefits more than the risks. In either case, more research is required. The antecedents’ influences could also be examined for the outsourcing of other business processes. They could also be studied across organizations of different size, of different organizational structures, or in different industries. The R2 values in Table 8 indicate that these are probably not the only antecedents to outsourcing decisions. The methodology applied here could be used to
identify and study other important influential elements in outsourcing decisions. Finally, this study focused only on the decision to outsource. The antecedents identified here as influential to the decision most likely play significant roles in the outsourcing process itself. Future research could explore these relationships.
implicaTiOns FOr pracTicE Useful knowledge for practitioners also results from this study. Decision maker perceptions about outsourcing obviously influence their decisions. The identification of prior relationships and two of the three dimensions of risk: project management, employee, and relationship risk as strong influencers of these perceptions is useful knowledge to decision makers in both outsourcing customer and provider organizations. Application development outsourcing providers should work to manage decision maker perceptions about relationship quality and relationship risks when trying to sell further business. For example, the study indicates that organizations seeking an AD outsourcing vendor are sensitive to the length of the outsourcing contract and the amount of industry knowledge the outsourcing vendor has. Both should play a role in the marketing strategy to win outsourcing contracts. Outsourcing decision makers can learn from the experiences of others presented here. They should pay particular attention to the individual items from the risk antecedents identified as influential. Decision makers should also understand that the results indicate negative prior outsourcing experiences may predispose them to choose not to outsource in a future decision. While, this may indeed be the correct path, it may not.
limiTaTiOn A limitation of this study is the low response rate, 5.33% of the executive decision makers surveyed. 549
An Outsourcing Acceptance Model
Response rates in surveys of executive level individuals are often low (Pincus, Rayfuekdm, & Cozzens, 1991; Baruch, 1999) due to the numerous demands on their time. Regardless, this limitation should be carefully addressed in similar future studies. Doing so will help to ensure the generalizability of the findings of future research.
Aubert, B.A., Patry, M., & Rivard, S. (1998, January 6-9). Assessing the risk of IT outsourcing. In Proceedings of the Thirty-First Annual Hawaii International Conference on System Sciences (pp. 632-634). Kohala Coast, Hawaii.
cOnclusiOn
Baruch, Y. (1999). Response rate in academic studies—A comparative analysis. Human Relations, 52(4), 421-438.
The use of outsourcing application development is increasing. This study is the first to empirically validate the applicability of technology acceptance model to enhance the understanding of the decision to outsource application development. Outsourcing decision makers in organizations and outsourcing providers can glean useful insights from the results. Additionally, researchers can use this work as a platform for future research.
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An Outsourcing Acceptance Model
appEndix For the purpose of this survey, outsourcing vendors are defined as any organization external to your own to which you have in some way transferred responsibility for any type of application development efforts. This definition excludes contract workers.
industry Environment Please indicate your level of agreement with the following statements about the industry in which your organization operates. EN1
In our industry, price cutting is a common competitive action.
EN2
In our industry, firms compete intensely to hold and/or increase their market share.
EN3
In our industry, competitive moves from one firm have noticeable effects on other competing firms and thus incite retaliation and counter moves.
EN4
In our industry, foreign firms play an important role in industry competition.
EN5
In our industry, firms have the resources for vigorous and sustained competitive action and for retaliation against competitors.
EN6
In our industry, price competition is highly intense (i.e., price cuts are quickly and easily matched).
EN7
In our industry, advertising battles occur frequently and are highly intense.
EN8
In our industry, appropriate terms used to describe competition are ”warlike,“ “bitter,’’ or ”cut- throat.”
EN9
In our industry, there is a diversity of competitors (i.e., competitors may be diverse in strategies, origins, personality, and relationships to their parent companies).
potential Outsourcing risk Outsourcing applications development involves a level of risk to the organization requiring the application. To what level do you agree that each of the following is a concern when outsourcing application development in your organization? RSK1
Inadequate training/skills needed to manage application development outsourcing
RSK2
Fear of job loss by employees due to projects being outsourced
RSK3
Unclear expectations/unclear objectives of outsourcing
RSK4
Inadequate control mechanisms on the outsourced project
RSK5
Uncertainties in the environment
RSK6
Decline in performance of in-house employees due to the project being outsourced
RSK7
Over emphasis on short term benefits of outsourcing
RSK8
Meeting and enforcing time schedules are problematic with outsourcing
RSK9
Security is harder to maintain on outsourced projects
RSK10
Decline in morale of employees due to outsourcing
RSK11
Lack of infrastructure to support outsourcing efforts
RSK12
Excessive length of outsourcing contract
RSK13
Lack of flexibility by you and/or vendor
RSK14
Confidentiality is harder to maintain on outsourced projects
RSK15
Fear of becoming dependent on the outsourcing vendor
RSK16
Inadequate high level management support for outsourcing
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An Outsourcing Acceptance Model
RSK17
Inadequate knowledge transfer back from the outsourcing vender
RSK18
Vendor’s lack of knowledge of our business
perceptions of Outsourcing Please assess your level of agreement with the following statements relative to outsourcing applications development work in your organization. PU1
Using applications development outsourcing improves the IS function’s effectiveness.
PU2
Using applications development outsourcing improves the quality of IS applications.
PU3
Using applications development outsourcing allows the IS function to accomplish tasks critical to the organization.
PU4
Using applications development outsourcing allows the IS function to develop more systems than would otherwise be possible.
PU5
Using applications development outsourcing allows the IS function to reduce costs.
PU6
Using applications development outsourcing helps the IS function meet staffing goals.
PU7
Using applications development outsourcing allows the IS function to develop systems more quickly than would otherwise be possible.
PU8
Using applications development outsourcing makes it easier to perform IS functions
PU9
In general using applications development outsourcing is useful.
EOU1
I understand how to use outsourcing.
EOU2
Using outsourcing does not require a lot of mental effort.
EOU3
I find outsourcing to be easy to use.
EOU4
I find it easy to accomplish what I set out to do through outsourcing.
EOU5
Using application development outsourcing makes it easier to share risk with the vendor.
AT1
I like using application development outsourcing.
AT2
Outsourcing provides an attractive alternative to in house application development.
AT3
Using application development outsourcing is in general a good idea.
AT4
Using application development outsourcing creates a pleasant project environment.
IN1
Assuming I have an outsourcer for applications development, I intend to use them.
IN2
Given that I have access to an outsourcer for applications development I predict that I would use them.
IN3
I intend to increase my usage of application development outsourcing in the future.
IN4
I intend to use application development outsourcing as often as needed.
IN5
To the extent possible, I would use application development outsourcing frequently.
Outsourcing relationships If your organization has never outsourced application development work, please skip to the Demographic Information section. Otherwise, please think about your organization’s relationships with past outsourcing vendors and indicate your level of agreement with the following statements. REL1
556
We generally trusted our vendors.
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REL2
Flexibility in response to requests for changes was a characteristic of past relationships.
REL3
We kept each other informed about events or changes that might have affected the other party.
REL4
Both our vendors and us did not mind helping each other out.
REL5
If we were unable to monitor our vendors’ activities, we trusted them to fulfill their obligations.
REL6
Both us and our vendors expected to be able to make adjustments in the ongoing relationships to cope with changing circumstances.
REL7
We trusted our vendors to carry out important project-related activities.
REL8
Problems that arose in the course of these relationships were treated by both us and our vendors as joint rather than individual responsibilities.
REL9
We were willing to let our vendors make important decisions without our involvement.
REL10
In these relationships, it was expected that any information that might have helped the other party would be provided to them.
REL11
Both our vendors and us were committed to improvements that benefited the relationship as a whole, and not only the individual parties.
REL12
When some unexpected situation arose, together with our vendors, we worked out a new deal rather than hold each other to the original terms.
REL13
We trusted our vendors/vendors to do things we could not do ourselves.
REL14
Exchange of information in these relationships took place frequently and informally, and not only according to a prespecified agreement.
REL15
It was expected that we and our vendors would share our proprietary information if it could help the other party.
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 2, edited by M. KhosrowPour, pp. 80-102, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.10
Outsourcing and Multi-Party Business Collaborations Modeling Lai Xu Utrecht University, The Netherlands
absTracT
inTrOducTiOn
To remain competitive, enterprises have to integrate their business processes with their customers, suppliers, and business partners. Increasing collaboration includes not only a global multinational enterprise, but also an organization with its relationship to and business processes with its business partners. Standards and technologies permit business partners to exchange information, collaborate, and carry out business transactions in a pervasive Web environment. There is however still very limited research activity on modeling multi-party business collaboration underlying semantics. In this article, we demonstrate that an in-house business process has been gradually outsourced to third parties and analyze how task delegations cause commitments between multiple business parties. Finally, we provide process semantics for modeling multi-party collaborations.
Outsourcing has been a worldwide phenomenon for the past four decades (Gereffi & Sturgeon, 2004). Growth of outsourcing is driven by a number of business forces such as competition escalation, organizational reengineering, and new technology trends. Over the past decade, the number and quality of suppliers offering price-competitive and high-quality services has increased significantly. The organization is able to focus on the company’s main skills. In addition, large sizes of organizations are no longer a necessary advantage in production of products or services, and neither is small size—quality, flexibility, agility, and the ability to meet diverse consumer demands count for more (Drucker, 1992). Firms now respond to change by outsourcing when they face heightened competition pushes. Traditionally, after the part of business services is assigned, the initial
Outsourcing and Multi-Party Business Collaborations Modeling
organization can hardly monitor or get to control of the outsource services. Even a minor change of service is not easy. The advent of global digital networks, the Internet, the World Wide Web, and more recently, Web services, has drastically lowered the cost of coordination between firms and improved the possibilities for organizations and individuals to communicate in an effective and standard manner. New environment, newer technology, and rapid technological change provides an avenue for reducing human and equipment resources that do not fit with a company’s strategic direction for meeting the latest needs with up-to-date resources at competitive rates by outsourcing those business processes. Furthermore, the current technologies are also allowed to get control of outsource business processes. Rather than outsourcing an entire business process to a single supplier, multi-souring--using more than one supplier--is used. A classic example is Alcatel. Alcatel has outsourced supply chain management and R&D functions to Wipro, and its SAP and ERP environment work to Infosys (Pinto & Harms, 2005). Business process multi-outsourcing causes business collaboration. As business collaboration increases between different enterprises, the need for semantics also increases as a mediator between the structure and content of the different knowledge bases. There will be a need, not just for semantics to mediate the structure and content, but also for the services themselves. Semantics of multi-party business collaboration has been recognized as a major problem for a long time, but relatively little fundamental research has been devoted it. From the semantic perspective, we model the way organizations cooperate in a multi-party involved situation. A high-level view of the collaboration is provided, in terms of the parties involved, the roles they perform and the way they are related, also in terms of business functions they fulfill and the interactions between those.
In the rest of this section, we argue the reasons why multi-party business collaboration needs to be modeled. In the rest of this article, we provide the definitions of outsourcing, business transactions, and business collaborations. The following section starts by elaborating how an in-house business process has been gradually outsourced by using a multi-party business collaboration case. Moreover, we explain the issues in multi-party business collaboration modeling. We furthermore define all concepts needed for modeling multi-party business collaborations. We first introduce our meta-model of multi-party business collaboration language, which defines the attributes and relationships of the modeling concepts. Then, multi-party collaboration language is given with a concrete graphical syntax. We also evaluate related work in this area. The article concludes with a summary and directions for further research.
The Benefits of Multi-Party Business collaboration modeling Outsourcing business processes is highly complex. They consist of several organizations interconnected through networks and working together using sophisticated computer applications. When trying to understand, reorganize, or develop systems to support multi-party business collaborations, one is confronted with that complexity. As in any modeling activity, modeling multi-party business collaboration can help to deal with this (Rechtin & Maier, 1997; Wolstenholme, 1990). There are many possible reasons to create a model of multi-party business collaboration. The goal of multi-party business collaboration modeling may be • •
To understand the functioning of an existing multi-party business collaboration. To provide a starting point for analysis of requirements of design and for the redesign of an outsourcing business process.
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Outsourcing and Multi-Party Business Collaborations Modeling
•
To offer a starting point for the implementation of computer applications to support multi-party business collaboration. • To serve as a basis for analysis, for example, answer “what-if” questions, to evaluate the responsibilities between involved parties, or simulate an inter-organizational business process before implementing it. The benefits of using models to support these objectives, rather than a textual description, are as follows (Biemans, Lankhorst, Teeuw, & van de Wetering, 2001; Booch, Rumbaugh, & Jacobson, 1999): •
•
•
•
Models help us to visualize a system as it is or as we want it to be. It creates a common frame of reference for those who have to understand a design and facilitate the communication between clients, business analysts, designers, and engineers. Models permit us to specify the structure or behavior of multi-party business collaboration by representing only their essentials and abstracting from what we consider irrelevant. Abstraction can be done in two ways: by abstracting from details or by abstracting from aspects. Models give us a template that guides us in constructing a system. Properties of models can be thus analyzed. This can be used to assess the expected performance of business collaboration or check conformance to a set of business rules. Models document the decisions we have made, motivate changes, or point alternatives.
Modeling is definitely true that the larger and more complex the system, the more important modeling becomes. Involving multi-party business collaboration is a complex system. To be able to model this system, we have to understand concepts and issues in multi-party business collaboration, which will be discussed in the following sections. 560
TErminOlOgy In this section, we will discuss terms like outsourcing, transaction, transaction properties, business transaction, and business collaboration. Finally, we provide our definition of multi-party business collaborations. Outsourcing is a generic term of farming out certain company activities or processes, usually performed by company employees, to external contractors specializing in such activities or processes. It is used in most branches of industry and services worldwide. Transactions are a fundamental concept in building reliable distributed applications. A transaction is a mechanism to insure all the participants in an application achieve a mutually agreed outcome. Traditionally, transactions have held the following properties collectively referred to as ACID (Haerder & Reuter, 1983): •
• •
•
Atomicity: If successful, then all the operations happen, and if unsuccessful, then none of the operations happen. Consistency: The application performs valid state transitions at completion. Isolation: The effects of the operations are not shared outside the transaction until it completes successfully. Durability: Once a transaction successfully completes, the changes survive failure.
According to the International Organization for Standardization (ISO), a business transaction is “a predefined set of activities or processes of organization to accomplish an explicitly shared business goal” (ISO/IEC, 1997). A business transaction may involve any number of participants, it may be instant or last for years, and it can have various degrees of complexity. Following the ebXML business process specification schema (ebXML, 2001), the concepts of business transaction and business collaboration are defined as follows,
Outsourcing and Multi-Party Business Collaborations Modeling
•
•
A business transaction involves two parties and is an atomic unit of work that can result in either a success or a failure. A business collaboration can involve any number of parties and is a combination of choreographed business transaction, defining the ordering and transition between them.
According to the previous ebXML definitions of business transaction and collaboration, It implicates that a collaboration is a number of two-party transactions. This assumption is not reasonable. For example, if there is a broadcast message or an activity benefit to multiple parties, this assumption can not hold anymore. In the next section, we will analyze multi-party business collaborations that involve more than two autonomous parties that are coordinated and lead to the accomplishment of some result. Looking at such a collaboration one can not just see it as a number of two-party transactions.
Figure 1. Car insurance business processes
Insurance Company
Insurant*
Garage*
(a) Initial business model
Call Center Insurance Company
Insurant*
Garage*
(b) Outsourcing the call center
Call Center
Insurance Company
Garage*
Assessor *
Insurant*
(c) Outsourcing damage assessment
OuTsOurcE and mulTi-parTy businEss cOllabOraTiOns We provide a car insurance case for explaining how a car insurance business is gradually outsourced and in which collaborations are involved afterward. This case is an abstract version of a car insurance scenario involving AGF Irish Life Holdings Plc. It was taken from the CrossFlow project (Browne & Kellett, 1999). At the start time, a car insurance company probably only involves a group of garages to assess car damages and to repair damaged cars for an insurant who has bought car insurance from the car insurance company. The insurance company deals with the rest of the issues. More precisely, after the occurrence of car damage, a process starts including many interactions among the insurant, a garage, and the insurance company (see Figure 1(a)).
Call Center Day to Day Handling Company Insurant*
Insurance Company
Assessor* Garage*
(d) Outsourcing day to day handling
After some time, the insurance company decides to outsource its phone service to a call center. The business process is consequently changed (along the lines of Figure 1(b)). The call center is responsible for registering the insurant information, suggesting an appropriate garage (most times a close by garage is assigned), and notifying the insurance company about the insurant’s claim. Except the phone service, the
561
Outsourcing and Multi-Party Business Collaborations Modeling
insurance company still needs to handle the rest of the services for the insurant. It could be an alternative to outsource the inspection of damaged vehicles to an association of assessors. In this business model (see Figure 1(c)), the assessors conduct the physical inspection of damaged vehicles and agree upon repair figures with the garages. After the call center, the garages, and the assessors finish their obligations, the insurance company performs the rest of the services. Due to the increasing amount of different insurance businesses, the insurance company might finally decide to outsource the daily service to a day-to-day handling company. The day-to-day handling company coordinates and manages the operation on a day-to-day level on behalf of the insurance company (see Figure 1(d)). The detailed obligations of the day-to-day handling company are provided in Figure 2. After receiving the claim from the insurance company, the day-to-day handling company will agree upon repair costs if an assessor is not required for small damages; otherwise, an assessor will be assigned. After finishing repairs, the garage will issue an invoice to the day-to-day handling company, which in turn
will check the invoice against the original estimate. The day-to-day handling company returns all invoices to the insurance company monthly. As a result, the workload of the insurance company is significantly reduced. Changes of the business models do not necessarily go through from Figure 1(a) to (b), then from (b) to (c), and finally from (c) to (d). Changes can happen, for example, directly from (a) to (d). Figure 1 demonstrates how a business process is collaborated by more business parties in different circumstances. It also shows some essential characters of multi-party collaborations. One of them is that it is critical to understand when and who did, is doing, or will do what in a multiple parties involved business process.
issuEs in mulTi-parTy businEss cOllabOraTiOn mOdEling A distinction between a bilateral business process and multi-party business collaboration is the way of interactions. In a multi-party collaboration, many business activities, which involved different parties, can be parallel performed. The order of interactions is no longer sequential. Therefore, to
Figure 2. The Process diagram of car insurance case garage Receive car
Estimate repair cost
Issue Invoice
Repair car
insurant Claim damage
Gather information
Receive information
Validate date
Assign garage
call center
assessor
Send car
Inspect car
Notify insurance company
Obtain information
Notify day to day handling company
Contact garage
Assign assessor
Check Invoice
Estimated cost < 500
day to day handling company Obtain claim form
Send claim form to Insurant
Check claim form
Amend estimate
Reconcile information
Finalize claim
insurance company Receive claim form
Return claim form
insurant
562
Agree repair
Outsourcing and Multi-Party Business Collaborations Modeling
•
use absolute orders to specify the collaboration, which many bilateral collaborations are specified in this way, is not suitable for specifying multiparty collaborations. In addition, because different parties can operate different activities at the same time, it is difficult to find all violators responsible for even an unsatisfied performance or a mis-performance. Therefore, modeling multi-party business collaborations is different with a bilateral collaboration modeling. Because in total only two parties involved in a collaboration modeling a bilateral collaboration is not an important issue to recognize who does not do what. In a multi-party collaboration, it is however an important concern. There are many potential violations in the case as outlined in Xu and Jeusfeld (2004) and Xu, Jeusfeld, and Grefen (2005). For example, after sending invoices to the day-to-day handling company, the garage does not get money back from the insurance company. It could be caused by •
The insurant: Because the insurant did not return the completed claim form to the insurance company (see Figure 3 mark 2). The insurance company: Because the insurance company forgot to send the claim form to the insurant (see Figure 3 mark 3) or simply because the insurance company did not pay the garage in time (see Figure 3 mark 4).
•
Therefore, a model of parties’ responsibilities is needed. In multi-party business collaboration, one violation can be caused by more than one party, which motivates us to model multi-party business collaboration from different perspectives.
cOncEpTs FOr mOdEling mulTi-parTy businEss cOllabOraTiOn Many business applications can involve multiparty business collaboration like supply chains, electronic markets, online auctions, virtual enterprises, and multi-supplier business process outsource. The central concept of modeling multi-
The day-to-day handling company: Because the day-to-day handling company did not forward the invoices to the insurance company (see Figure 3 mark 1).
Figure 3. The violation of car insurance case garage Receive car
Estimate repair cost
Repair car
Issue Invoice
insurant Claim damage
Gather information
Receive information
Validate date
Assign garage
call center
assessor
Send car
Inspect car
Notify insurance company
Obtain information
Notify day to day handling company
Contact garage
Assign asses
Agree repair
Check Invoice
Estimated cost < 500
day to day handling company Obtain claim form
Send claim form to Insurant
Check claim form
Amend estimate
1 Reconcile information
Finalize claim
4
insurance company
3 Receive claim form
2
Return claim form
insurant
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Outsourcing and Multi-Party Business Collaborations Modeling
party business collaboration is that multi-party business collaboration is not to model a number of bilateral business collaborations. In some simple cases, a chain relationship between multiple parties for example, it is possible to break down a multi-party business collaboration into a number of bilateral business transactions. However, in complicated multi-party collaborations, this conversion results information of relations being lost or hidden. Consequently, this option to split the multi-party collaborations up into several bilateral transactions won’t work, especially when something is going wrong during automation of multi-party business collaboration. To find all violators is a big challenge. During a bilateral collaboration execution process, it is easier to discover the responsible party for an existing violation. In multi-party business collaboration, an existing violation can be as a result of a set of directly or indirectly involved parties (some examples are provided from the previous section). This raises the issue of finding all responsible parties for an unsatisfied or mis-performance in the execution of multi-party business collaboration. Those concepts should be reflected to our modeling of multi-party business collaborations. The use of modeling has a rich history in all the engineering disciplines. One of four basic principles of modeling is that no single model is sufficient (Booch et al., 1999). Every nontrivial system is best approached through a small set of nearly independent models. Following this basic principle, we distinguish three aspects that are relevant for modeling multi-party business collaboration. • •
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In terms of its structure, which are the parties involved and how are they interconnected. In terms of the commitments associated with those parties, which responsibility do they commit to each other and which roles may the parties play within a commitment.
•
In terms of its processes, what actions are performed by which parties after which properties are satisfied according to per-defined rules and which output can be expected, etc.
parties and channels In order to survive, companies are forced to constantly revise their business processes. Due to the decision of multi-supplier business process outsources, involved parties and interconnection are modeled as parties and channels. Depending on the chosen scope of the model, parties may represent individual people, organizational units such as departments, or an entire organization. Furthermore, a party represents an active organizational entity. Parties can be assigned a name to distinguish them. Parties may be connected by channels through which they interact. For example, parties may be linked by Internet, telephone, or truck. Usually channels can connect two parties, but multi-access channels can also be envisioned, for example, a broadcast channel. Channels can further be specified as bi-directional, uni-directional channels. A channel thus represents an interconnection between parties for the exchange of objects or information. Channels may be named by the medium (e.g., Internet, Post, EDI, etc.).
commitments and roles To model responsibilities between multi-parties, we provide speech act theory and its extension. Applying those theories, we provide our definition of commitments and roles. Part of Austin’s work on speech act theory (Austin, 1975) is the observation that utterances are not implied propositions that are true or false, but attempts on the part of the speaker that succeed or fail. Perfomatives, acts, or actions are organized as speech acts and non-speech acts. An individual speech act is either a solicit, which
Outsourcing and Multi-Party Business Collaborations Modeling
explains an attempt to achieve mutual belief with the addressee that the sender wants the addressee to perform an act relative to the sender’s wanting it done, or an assert, which expresses an attempt to achieve mutual belief with the addressee that the asserted statement is true. The model of speech acts and repartee developed by Longacre recognizes two kinds of relations among successive utterances: replay and resolution in Longacre (1976), and another two kinds of relations: resolves and completes by Van Dyke (1996). In the model of speech acts and repartee, every utterance in a conversation except for the first, must “respond,” “reply,” “resolve,” or “complete” to another, otherwise there would be no conversation. Analyzing relations between utterances, some characters can be split (Dooley, 1976). In the business process, domain physical actions and messages convey information between participants. An initial proposal can be triggered by a certain action and later on be finished by another action. During multi-party business collaboration, several proposals are initiated by different business parties. Each of them is followed and eventually finished by some actions. Actions are thus sorted into different commitments. A commitment is a guarantee by one party toward another party that some action sequences, provided that some “trigger,” “involve,” or “finish” action happens, and all involved parties fulfill their side of the transactions (Xu, 2004; Xu et al., 2004; Xu & Jeusfeld, 2003). To finish a commitment, more than one party must finish relevant actions. A commitment is one party toward a guarantee to another party. It allows more than one proposal in a commitment. From this point of view, the concept of our commitment is different from the definition of a commitment in papers (Ervin, 2002; Verdicchio & Colombetti, 2002), where a commitment only refers to two parties, a debtor and a creditor (Verdic-
chio et al., 2002), or a vendor and customer (Ervin, 2002). The notion of commitment in this article is not related to beliefs, desires, or intentions. In the research of Cohen and Levesque (1995), commitments are related to establishing common beliefs about a certain state of the world. All parties involving multi-party business collaboration fulfill different roles in different commitments. One role cannot be part of another role. However, it is possible for an actor to fulfill multiple roles in business collaboration. Each role is specified by using different names. Some examples, such as how to identify commitments, which party plays which role is going to show.
interaction and properties of actions Multi-party interaction models are composed of actions, commitments, properties of party, and connectors. An action is the atomic unit of behavior. The orders between actions are causal, conjunctive “splits,” disconjunctive “splits,” conjunctive “joins,” and disconjunctive “joins.” Each party has a set of per-determined properties. The party’s properties consist of three parts, which are inputs, outputs, and rules. The inputs and outputs of properties are domain related. The input of the property specifies a list of the domain elements, which will be formulated as pro-conditions. The rules of property are specified as the set of rules using predicate logic. The rules of properties provide a logic formula to specify the pro-conditions of fulfilling the action and also some domain elements as a consequence of performing the actions. The output of the property specified those domain objects, which are the results of the executing action. When the party attempts to execute an action, it first checks whether the input of the property is satisfied, and subsequently generates the output of the property according the rules.
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Outsourcing and Multi-Party Business Collaborations Modeling
mETamOdEl OF mulTi-parTy businEss cOllabOraTiOn mOdEling languagE (mbcml)
multi-party collaboration structure metamodel Parties involved and channels connected all parties of business collaboration are interrelated in Figure 5. How the parties are linked by the channels are presenting in a collaboration structure model. A party may contain other parties. A channel connects two or more parties, and as an option, attributes like medium and direction can be indicated.
In this section, we define the metamodel for MBCML. A concrete syntax is proposed in the next section. MBCML is used to define multiparty business collaboration models (MBCMs). A MBCM defines the cooperation of a number of organizations to involve a common business process. In order to capture all relevant aspects of collaboration, a variety of diagrams can be used, each offering a different view on the model. We distinguish three different diagram types, one for each conceptual domain, which has been defined respectively. The notation used for representing the metamodel of MBCM is the unified modeling language (UML) (Booch et al., 1999). An overview of the basic modeling concepts and their relationships are given as a metamodel in Figure 4. A multi-party collaboration consists of role, party, channel, commitment, and actions. Parties perform different roles in a commitment and fulfill different commitments. The roles perform actions. A channel connects two or more parties. A commitment aggregates many actions.
multi-party collaboration commitment metamodel Commitments and roles construct a commitment model. All concepts involved in the commitment model are roles, actions, commitments, commitment segments and connectors. The relationship between those concepts are provided in Figure 6. A party guarantees another party to perform a commitment to another party. A party acts different roles in different commitments. A commitment is a set of actions and is made up of one or more commitment segments. An action contains zero or more connectors that interconnect these com-
Figure 4. Metamodel for multi-party collaboration multi-party collaboration
* channel
*
fulfills
2..n party
*
1
ac
es olv inv
ts
* * * perform role 2..n
Figure 5. Metamodel for multi-party collaboration structure channel
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2..n
party
*
* commitment * * * action
Outsourcing and Multi-Party Business Collaborations Modeling
Figure 6. Metamodel for multi-party collaboration commitment fulfill
commitment
acts
l ve i nv o
*
*
*
perform
role
e lud in c
commitment segment
action
2..n
to from
from from
1
toto
party
2...*
connector
join
and-join
split
or-join
and-split
or -split
Figure 7. Connector representation
b
b
a
a
c or-split (choice) (a)
c
c
a
a
c
b
b
and-split (parallelism)
or-join (disjunction)
and-join (conjunction)
(b)
(c)
(d)
mitment segments to make up the commitment. A role (roles) performs (perform) an action within a commitment. The connectors are used to introduce relationships between commitments or commitment segments. There are four notations for specifying the connectors. The connectors can be specialized to “and-join” connector, “or-join” connector, “and-split” connector, and “or-split” connector. Commitments can be linked by causality, or-split, and-split, or-join, and and-join as Figure 7. Besides, the connectors may contain other connectors to specify more complex relationships. The causality relation is represented by an arrow from one node to another node. The “or-split” relation is represented by an empty-diamond, which means that a commitment from a role triggers exactly
one of multiple commitments from other roles (see Figure 7(a)). The “and-split” relation is expressed by a solid-diamond, which means that a commitment from a role triggers other multiple commitments (see Figure 7 (b)). The “or-join” relation is denoted by an empty-box, which means that one of multiple commitments triggers another commitment (see Figure 7(c)). The “and-join” relation is shown by a solid-box, which means that multiple commitments together trigger a commitment (see Figure 7(d)). A multi-party business collaboration consists of a set of commitments. A collaborating party can thus be involved in different commitments playing different roles and an action may be involved in more than one commitment.
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Outsourcing and Multi-Party Business Collaborations Modeling
Figure 8. Metamodel for multi-party collaboration interaction property *
fulfill
party 1 ct s a
input
* *
rule
commitment
* * *
e ol v inv
perform
role
action
2..n
output
to
connector
from
join
and-join
split
or-join
and-split
or-split
Figure 9. Collaboration structure model Internet (e.g. email, web), Post (e.g. letter), PSTN (e.g. fax, phone call), Banking system PSTN (phone call)
Internet (email, shared database)
Call Center
Internet
Insurant*
) TN all PS ne c o h ,p fax
(
Visiting Garage*
Visiting
Day to (email, Day shared Handling database) Company PSTN (fax, phone call)
Insurance Company
Assessor* PSTN, Banking system
multi-party collaboration interaction metamodel
mulTi-parTy cOllabOraTiOn mOdEling languagE
The part of the metamodel concerning interactions is refined in Figure 8. Interaction model consists of actions, connectors, parties, properties of parties. The property of a party includes inputs, rules, and outputs. Each party has a set of per-determined properties namely inputs, outputs, and rules. After the input property of a party is satisfied, the role of the party performs the action(s) and the result of actions will provide some output. Besides, the actions can be also linked by the connectors, which are provided in Figure 7. Those connectors represent the occurrence relationship of the actions.
In the business domain, we need to provide detailed and precise descriptions of multi-party business collaborations. In order to represent construct in the business domain, a language for modeling multi-party collaborations should be sufficiently expressive to represent a multi-party collaboration in terms of its structure, commitments and interactions. We separate views to represent a structural model, a commitment model and a interaction model in the following sections respectively.
collaboration structure model Collaborated parties involved and channels in a business process are modeled in collaboration
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Outsourcing and Multi-Party Business Collaborations Modeling
structure model. Figure 9 shows the collaboration structure model for the six parties involved car insurance case. It depicts how the insurance company and its cooperators are interconnected. It is an important model for future mapping to a specific implementation suits/toolkit. For example, the insurance company and its insurant can be connected by Internet such as Web and e-mail, by post office so they could send a letter to each other, by telephone network like they could use fax or phone call to contact each other, or by a bank system, which means they can transfer money. It is not always necessary to have all communication channels. It is up to the custom requirements. However, for each communication channel, it does require different implementation. Modeling collaboration structure is useful to identify the parties involved in business collaboration. It also provides a further step to clarify the responsibilities of parties.
commitment model To model commitments between multiple parties, we use concepts of commitments. The approach of how to determine the commitments in business collaboration, which have introduced in Commitments and Roles. We use the six parties involved in the car insurance case (see Figure 2) to explain how to determine the commitments. For example, an insurant phones a call center for a claim. Action A_phoneClaim triggered a conversation between the insurant and the call center to deal with the claim. Actions A_sendInfo and A_assignGarage follow, and action A_notifyClaim finishes the conversation. Actions A_phoneClaim, A_sendInfo, A_assignGarage and A_notifyClaim are sorted within a commitment, which records obligations of the call center to deal with the insurant claim. Action A_phoneClaim is a trigger of a conversation; actions A_sendInfo and A_assignGarage are the
Table 1. Commitments, actions, and action abbreviations Classification of Actions and Commitments Commitment
Labels Trigger
Involved
Finish
A_phoneClaim C_phoneService (PS)
PS.1 A_sendInfo
PS.2
A_assignGarage
PS.3 A_nitifyClaim
A_sendCar
RS.1 A_estimateRepairCost
C_repairService (RS)
RS.2
A_agreeRepairCar
RS.3, DS.7 A_repairCar
A_notifyClaim C_claimForm (CF)
PS.4, CF.1, DS.1
RS.4, DS.8 CF.1, PS.4
A_sendClaimForm
CF.2 A_returnClaimForm
CF.3, PR.2
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Outsourcing and Multi-Party Business Collaborations Modeling
Outsourcing and Multi-Party Business Collaborations Modeling
actions as “involved”; and action A_notifyClaim is an action to “finish” the conversation. Furthermore, six commitments of the care insurance case are identified according to the theory introduced in Commitments and Roles. According to Table 1, there are six commitments, detailed in Table 2. In commitment C_dailyService, actions A_ agreeRepairCar and A_forwardInvoice are both marked as “finished.” Action A_agreeRepairCar finishes a proposal by action A_notifyClaim and action A_forwardInvoice finishes a proposal by action A_sendInvoice. It is difficult to represent commitments graphically. In our commitment model, a party is represented as a rectangle with a name. A node denotes a role, which should stay in a rectangle. A commitment is indicated by a set of nodes (or commitment connectors) and a set of arrows. Figure 10 depicts the six parties and six commitments of the case in Figure 9. For example, in party “insurance company,” the solid-diamond connects commitments C_phoneService, C_ claimForm and C_dailyService. It means that after commitment C_phoneService is fulfilled, both commitments C_claimForm and C_dailyService are triggered. A solid-box is also in party “insurance company,” it connects commitments C_dai-
lyService, C_claimForm and C_payRepairCost. It means that commitment C_payRepairCost will be performed after commitments C_dailyService and C_claimForm. In the commitment model, we present the position of each commitment in terms of which parties and roles are involved, and which commitments are triggered, chose, and paralleled by other commitments. In the commitment model, we provide an overview of each party’s responsibilities. This is very important for both the business side and the IT side as it helps creating a common understanding. In the next section, the behavior of the parties is modeled.
modeling behaviors of the parties In interaction collaboration modeling, behavior is modeled as inter- or intra-organizational business processes. The vertical dimension is the time axis; time proceeds down the page. Each party is represented by a vertical column. An action is the atomic unit of behavior. The causal ordering between actions is modeled by conjunctive and disconjunctive “splits” and “joins.” Each party’s behavior is determined by three parameters as found from the business collaboration. The inputs and outputs of a party are domain
Figure 10. Commitments of multi-party collaboration model
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Outsourcing and Multi-Party Business Collaborations Modeling
Figure 11. Examples of actions and their parameters
related. The rules of a party in our model are specified using predicate logic. The input parameter specifies the actions that this party expects to be involved in as object, while the output parameter specifies results of the action. When a party attempts to execute an action, it first checks whether the current input can trigger this action and subsequently generates the output, which may be checked against the possible output. In Figure 12, an action is noted as a table-box (see Figure 11), where the first column shows the action label, which makes it possible to determine the commitment from this action label by looking it up in Table 1; the rest of the column shows the parameters involved in this action. The diagram includes a multi-step interaction between participants. It clearly shows which parties will communicate with other parties for which matters. From the insurant’s perspective, he only has contact with the call center, the assigned garage, and the insurance company. From the insurance company’s view, it receives and forwards the claim to the day-to-day handling company, sends the claim form to the policyholder, and finally pays the repair costs to the garage. Each party parameter is also included in the diagram. According to the party properties, each party can determine which actions should or may occur. For example (see Figure 11) after having received an input from the party property
572
“Records2,” the insurance company will perform actions A_sendClaimForm (as CF2) and A_forwardClaim (as DS2) according to rules “Records2 → CF2” and “Records2 → DS2 ” respectively that are joined by “and-join” connector. After finishing action A_sendClaimForm (as CF2), “Clam from” is sent. After performing action A_forwardClaim, “Records3” is recorded. As time passes (from top to down) and satisfying the party parameters, each participant takes actions while the business process is moving forward. A complex multi-party business process is divided into multiple commitments. Furthermore, business process steps are represented as the actions exchanged between the parties. In this section, we present multi-party business collaborations from three aspects. At the collaboration structure model, we provide a view how business parties are connected. Different connects can determine different ways to collaborate. At the commitment model, the responsibilities of all involved parties are presented. Furthermore, the behavior model provides more details of commitment fulfillment.
rElaTEd wOrk Much work is available concerning representation of computer processes. Processes for computer systems are commonly represented using flow charts, data flow diagrams, state transition diagrams (which define finite state machines, push down machines, or even Turing machines), Petri Nets, and specialization. A flow chart represents a process as a series of steps, with arrows between them, which represents an order in which the steps are to be performed. Some of the steps are decision points, so depending on the circumstances, different sets of steps might be performed. A data flow diagram is similar but represents how modules of a system are interconnected to perform the steps of a process but focuses on the ordering relationships imposed
pr 2, c F3
r s1
ps2
ps1
Output
Ru le
C l aim For m
In put
C l aim Fro mfi
C l aim For m- ->PR 2 /C F3; PR 2 /CF3 -->Cl ai mFo rm fi
C ar dam ged
as sig nedG as sig nedG ^R S1 - ->C ar dam ged
R ecor ds 1
PS 2-->R ecor ds 1
C lai m
PS 1-->C lai m
Insurant
Output
Ru le
In put
Outp ut
R ul e
Inpu t
Outp ut
R ul e
Inpu t
ps 4, c F1, d s1 R ul e
Inp ut
Output
R ec ords 1 -->PS3 ; PS3 - ->a ssi gnedG a ssi gnedG
R ec ords 1
R ecor ds 1^a ssi gnedG ^PS4 /C F1/D S 1 --> Re cord s 2 R ecor ds 2
R ecor ds 1,assi gne dG
R ule
Input
Output
ps 3
Call Center
ps 4
d s9
r s4 , d s8
d s4
r s2
Ou tpu t
R ul e
Inpu t
R ul e Ou tpu t
Input
Output
Ru le
In put
Outp ut
Paym ent
DS9 - ->Invo ice Inv oic e
ag reeR ep air - ->R S4 /D S8; R S4 /DS8 -->Ca rfixe d C ar fi xed
ag reeR ep air
esti matedR C '^DS3 -->DS 4; D S 4-->estim atedR C esti matedR C
esti matedR C '
Inp ut R ul e
estim atedR C '
C arda mag ed -->RS2 ; R S2 -->estim atedR C '
C arda mag ed
Outp ut
R ul e
Inpu t
Garage
ps 3
Output
R ul e
Input
ds2
cF2
R ecor ds 3
R ecor ds 2- ->D S2 ; D S2-- >R ecor ds 3
R ecor ds 2
C la im Form
R ecor ds 2- ->C F2; C F2 -->C la im Form
R ecor ds 2
Cl ai mFo rm fi ^Invoi ce -->PR 3; PR 3- ->Pa yme nt Paym ent
Cl ai mFo rm fi ,Invo ice
Output
R ul e
In put
Output
R ul e
In put
Insurance Company
R ule
Input
R ec ords 3 -->DS 3
R ec ords 3
Output
Ru le
Invoi ce Invoi ce -->D S10 /PR1 ; D S 10/ PR1 -->Inv oic e Invoi ce
ag reeR ep air
N ew R C-- >D S7 /R S3 ; D S7/ RS3 -->agre eR epai r
N ew R C
esti matedR C -->DS5 /IC 1 ; D S 5/IC 1 -->assi gne dA ass ign edA
RC= 5 00 esti matedR C
In put
Output
Ru le
In put
Outp ut
R ul e
Inp ut
a ted
Output
es t im
d s10 , pr 1
ds 7, rs 3
ds 5, ic1
d s3
D ay to day handling company
ic 3, d s6
ic 2
Outp ut
R ul e
Inpu t
Output
Input R ule
N ew RC
IC 3/ D S6-- >N ew RC
a ssi gnedA a ssi gnedA -- >IC2
Assessor
Outsourcing and Multi-Party Business Collaborations Modeling
Figure 12. Interactions between parties
estima ted RC<50 0 New RC =estim ate dRC
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Outsourcing and Multi-Party Business Collaborations Modeling
by the fact that data produced by some modules is used by other modules. A state transition diagram represents a process in terms of the possible states of the system. The steps taken in the process are the transitions that move the system from one state to another. The most powerful representation, which included a state transition diagram is a Turing machine, which can be used to describe any computer executing any computer program written in any computer programming language. A Petri net is similar to a finite state machine, but allows multiple states to be marked simultaneously. Transitions between states may be synchronized, since multiple states have to be marked at the same time for a particular transition to occur. There are few works concerning multi-party business collaborations. We provide the limitation of UML and Petri Nets for multi-party business collaboration modeling, as well as other models such as ebXML BPSS, Web services choreography, and SAP C-business scenarios. The UML has been used in enterprise and business process modeling (Eriksson & Penker, 2000; Jacobson, Ericsson, & Jacobson, 1995; Marshall, 1999). According to Steen, Lankhorst, and van de Wetering (2002), the UML is not suitable for modeling business. The UML does not support all the concepts needed for business collaborations. Modeling business collaborations is mainly concerned with what happens at the business level and how it is organized. First, the UML does not support expressing responsibilities. In the business world, parties permit the commitments to each other to execute a business activity. In our approach, the commitment model represents collaborations between business parties and provides the relations of the commitments. Second, for business party behavior, business processes are normally not confined to single actions. Therefore, state diagrams (also for Petri Net) are not really useful here. Most business collaborators do not reason about processes in terms of states but rather in terms of the activities
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performed and results produced. Although UML can be extended with stereotypes and profiles, the stereotyping mechanism just makes it possible to introduce new subtypes of existing concepts and profiles cannot introduce new concepts either (Henderson-Sellers, 2001). Using the Petri Nets to specify a multi-party business collaboration process, the amount of states of the Petri Net can be significantly increased. Especially, because the multi-party business collaboration process focuses on when and who did, is doing or will do what. A Petri Net representation can be too trivial, even by using state-based workflow patterns (van der Aalst, ter Hofstede, & Barros, 2003) because of a big amount of possible combinations of multi-party’s behavior. Two models for ebXML BPSS multi-party collaboration and Web services choreography are presented in Dubray (2002) and Webber (2004) respectively. Other research (Haugen, 2002) on multi-party collaboration tries to break down a multi-party collaboration into a number of bilateral relations. A principle cause behind this is that current e-commerce environments only support bilateral executions. In some simple cases, the approach to support multi-party collaboration execution in current e-commerce environments is to assume the whole business process runs correctly according to a number of bilateral relations. However, in complicated multi-party collaborations this conversion results in information of relations being lost or hidden. Consequently, this option to split the multi-party collaborations up into several two-party relations will not work for these complex multi-party collaborations (Dubray, 2002; Haugen, 2002). SAP’s collaborative business scenarios describe inter-enterprise business processes from three different perspectives (SAP, 2000), namely business view, interaction view, and component view. The purpose of the business view is showing the business advantages of implementing a collaborative business scenario. Business relations
Outsourcing and Multi-Party Business Collaborations Modeling
per se are out of the scope of our research through. The interaction view describes the process design and detailed dependency relationship between the different activities and responsibilities of the participants. It is too simple to describe the relationship like the action relations with conjunctive and disconjunctive “splits” and “joins.” The component view describes the logical application components needed to support the business process. Different channels in a collaboration structure model can determine different ways to implement a multi-party collaboration. Commitment model and interaction model provide enough details of interactions between multi-parties. Those three collaboration models can easily map into a component level model by using specifically software implementation packages.
complex and fast evolving business environments. In this article, we have presented multi-party business collaboration models from three perspectives for supporting monitoring multi-party business process. In the collaboration structure model, we provided a view of how business parties are linked. Different links can determine different ways of collaboration. In the commitment model, the responsibilities of all involved parties are presented. Finally, the behavior model provides details of commitment fulfillment. Further research has to map our multi-party business collaboration model to specific implementations like SAP or Baan’s ERP systems. This would allow the semantics of the Web of collaborating parties to be validated. This article introduced the approach and current development toward the stated goals.
cOnclusiOns
rEFErEncEs
We have looked at a multiple supplier business process outsource case. In the current business process outsource case, the outsourcing initiator should be able to get control for the whole business process, and its cooperators should also be able monitor the business process. Moreover, in the modern business world, we see that explicit structural collaboration between organizations is becoming more and more important. This is reflected in the emergence of tightly coupled supply chains, the service outsourcing paradigm, complex co-makerships, etc. Collaboration is not limited by geographical proximity, but is of an increasingly international character. As a result explicit multi-party business collaboration is becoming global. The need for a multi-party collaboration model for a business process is thus becoming evident. Our modeling approach can be applied in those cases. Nevertheless, most of the past initiatives have addressed only partial aspects of the problem, failing to understand and properly support the various business entities and their inter-relationships in
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SAP. (2000). mysap.com collaborative business scenarios,whitepaper. In Walldorf. Steen, M., Lankhorst, M., & van de Wetering, R. (2002). Modelling networked enterprises. The 6th International Enterprise Distributed Object Computing Conference (EDOC’02). van der Aalst, W., ter Hofstede, A. B. K., & Barros, A. (2003). Workflow patterns. Distributed and Parallel Databases, (3), 5-51. Van Dyke Parunak, H. (1996). Visualizing agent conversations: Using enhanced Dooley graphs for agent design and analysis. The 2nd International Conference on Multi-Agent System (ICMAS’96). Verdicchio, M., & Colombetti, M. (2002). Commitments for agent-based supply chain management. ACM SIGecom Exchanges, 3(1). Webber, D. (2004). The benefits of ebxml for e-business. International Conference on XML (XML’04). Wolstenholme, E. F. (1990). System enquiry: A system dynamics approach. New York, NY: John Wiley & Sons, Inc. Xu, L. (2004). Monitoring multi-party contracts for e-business. PhD thesis, Tilburg University. Xu, L., & Jeusfeld, M. A. (2004). Detecting violators of multi-party contracts. The Conference on CoopIS/DOA/ODBASE in Lecture Notes of Computer Science (Vol. 3290, pp. 526-543). Springer-Verlag. Xu, L., & Jeusfeld, M. A. (2003). Pro-active monitoring of electronic contracts. The 15th Conference on Advanced Information Systems Engineering in Lecture Notes of Computer Science (Vol. 2681, pp. 584-600). Springer-Verlag.
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Chapter 2.11
Agile Outsourcing Projects: Structure and Management Boris Roussev University of the Virgin Islands, U.S. Virgin Islands Ram Akella University of California, USA
absTracT Agile methods are lightweight, iterative software development frameworks used predominantly on small- and mid-sized software development projects. This article introduces a project structure and management practices creating Agile conditions for large software projects outsourced either offshore or onshore. Agility is achieved by slicing a large project into a number of small-sized projects working in Agile settings. Development is divided into R&D activities, located onsite, and production activities, located offsite. The proposed approach makes Agile applicable to the stressed conditions of outsourcing without compromising the quality or pace of the software development effort. Creating an Agile environment in an outsourcing project relies on maintaining a balance between the functions and sizes of onsite and offsite teams, on redefining
the developers’ roles, and on reorganizing the information flow between the different development activities to compensate for the lack of customer onsite, team co-location, and tacit project knowledge.
inTrOducTiOn We live in a digital world, where any activity not requiring a “physical presence” can be outsourced to any place that is connected to the Internet. Even the term “physical presence” comes with a qualification. Information and Communication Technologies (ICT) enable cooperation in a distributed mode. Technologies, such as groupware and videoconferencing, are increasingly becoming feasible for organizations to use in distributed projects.
Advances in ICT have been essential for loosening the spatial constraints on software development. The largely digital nature of software development allows changing its geography of provision. The combination of low labor costs, technological sophistication, satisfactory (but not outstanding) project management skills, and successful software establishment makes South Asia a particularly attractive location for software production outsourcing (Dossani & Kenney, 2003). However, the decision to outsource software production is not a simple matter of upside. Product and project managers have been looking for ways to mitigate risks in outsourcing projects to maximize reward (Craumer, 2002). Even though the total contract value of IT outsourcing transactions continues to increase (TPI, 2005; Hale, Souza, Lo, Adachi, & Babaie, 2005), many large organizations are bringing key IT projects back in house because outsourcing contracts have failed to meet expectations (Huber, 2005). Agile methods (Beck, 1999; Agile Alliance, 2001; Schuh, 2005) are popular software development processes designed for use on small- to mid-sized software projects. They are based on the notion that object-oriented software development is not a rigidly defined process, but an empirical one that may or may not be repeated with the same success under changed circumstances. Agile methods are based in four critical values: simplicity, communication, feedback, and courage, informing a set of key practices (Pollice, 2006), which will be considered in more detail in in a later section. Boehm and Turner (2004, p.27) define Agile methods as “very light-weight processes that employ short iterative cycles; actively involve users to establish, prioritize, and verify requirements; and rely on tacit knowledge within a team as opposed to documentation.” However, many of the Agile practices seem to be incompatible with the context of outsourcing,
especially when outsourcing offshore, such as, customer onsite, team co-location, short lifecycle, and embracing change. But above all, Agile methods are applicable mainly to small- and mid-sized projects because of many of the characteristics of Agile development. For example, smaller, co-located teams require fewer lines of communication, less coordination efforts, can use less formal development processes, can reach an agreement faster, and can adapt to change more rapidly (Schuh, 2005; Stephens & Rosenberg, 2003). In the past, there have been several attempts to reproduce the conditions for agility in large-sized projects. To the best of our knowledge, no such attempt has been made for outsourcing projects. Pollice (2001), Evans (2006) and Boehm and Turner (2004) propose to scale up Agile methods by balancing agility and discipline. Pollice and Evans, for instance, look for common grounds between Agile and RUP (Jacobson, Booch, & Rumbaugh, 1999), while Boehm and Turner try to get the best of both Agile and plan-driven (waterfall) worlds. In contrast, Kruchten (2004) proposes to scale down large projects to meet the Agile “sweet spot” based on experience reported in (Brownsword & Clements, 1996; Toth, Kruchten, & Paine, 1993). The “sweet spot,” or in other words, the ideal Agile context, is characterized by a small team of developers sharing common values, team co-location, customer onsite, and short lifecycle. In this work, we show how to reengineer large-sized outsourcing projects to benefit from the “sweet spot” of Agile while avoiding its “bitter spot.” The proposed approach makes Agile applicable to the stressed condition of both offshore and onshore outsourcing environments without compromising the quality of the software development effort. Creating a context congenial to Agile methods hinges on balancing the functions and sizes of onsite and offsite teams, on redefining the developers’ roles, and
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on reorganizing the information flow between the different development activities. The rest of the paper is structured as follows. The next section examines some critical issues in outsourcing software development activities. Next, the structure of the Agile outsourcing project is presented. Then, the following section elaborates on the inception and architectural activities in Agile outsourcing, which are crucial to slicing large-sized projects into multiple, relatively independent Agile projects. The section afterwards discusses some of the challenges likely to be experienced by outsourcing suppliers when applying the proposed approach, and the final section concludes.
OuTsOurcing sOFTwarE dEvElOpmEnT acTiviTiEs what can be Outsourced? When the software development process is considered in its totality, it appears to resist relocation because software production requires face-to-face interactivity with clients (and among co-developers), for example, user requirements
elicitation and testing. The development workflow has to be parsed into activities requiring different levels of interactivity, and the less client-communication-intensive activities can be potentially outsourced. The software complexity chain is frequently described as a series of processes, each of which is less complex than the earlier one (Akella & Dossani, 2001). The initial processes are less labor-intensive, but more complex than the later ones. The complexity of a process is roughly inverse-proportional to its labor intensity. The pyramid model in Figure 1 gradates the processes in terms of labor, complexity, risk, and communication intensity. Theoretically, outsourcing is possible for all the levels of the complexity pyramid, but there are important differences of how outsourcing for each level is likely to be implemented. The processes at or closer to the pyramid’s apex, such as domain knowledge acquisition, architecture design, and technology determination are objectively more difficult to outsource (King, 2005). Moving up the complexity pyramid entails establishing an intimate client-supplier rapport and acquiring knowledge about the client’s core and critical activities.
Figure 1. Activities and pyramid of labor
process adaptability complexity value communication
IT client activities can be divided into core and non-core on the one hand and critical and non-critical on the other hand. Core activities are services that differentiate a firm from its competitors, and they are key to its continued growth. Non-core activities are the firm’s noncompetitive services, such as payroll and human resources. Within both core and non-core activities, there are activities crucial to their functioning, termed critical activities. The higher the pyramid level is, the more communicationintensive the activities become, and the bigger the demand grows for domain, architectural, and design knowledge. Adopting Agile methods can help outsourcing suppliers move up the “value chain” because Agile methods address the issues enumerated above.
Rethinking of Earlier Cost-Benefit decisions The lower cost of highly skilled personnel calls for rethinking of established cost-benefit decisions. For example, the much lower cost of software engineers in India compared to the US (Outsourcing Institute, 2004; Dossani & Kenney, 2003) makes it feasible to increase the density of software inspections (Gilb & Graham, 1993) or to dispel managers’ doubts about the feasibility of pair programming (CeBASE, 2004). Other activities that are candidates for reconsideration are regression and integration testing, iteration planning, and metrics for tracking project progress. In all of the above-mentioned practices, lower labor costs can change the break-even point, and thus, create new sources of revenue.
interactivity Interactivity always comes across as a stumbling block for outsourcing (King, 2005). Interactivity has two dimensions—interaction among codevelopers and interaction with clients. Requirements elicitation and acceptance testing are the activities requiring the most active involvement on the part of the client, which makes them impossible to outsource. The greater the need of co-developers to interact across a set of different activities of the software process, the higher the risk threshold of outsourcing a subset of the activities is. Outsourcing the entire set of activities might be considered as a way of retaining interactivity at the new location. But, if some activities cannot be outsourced because that would disrupt the interaction with the client, then outsourcing the others might need careful consideration.
problems Experienced by Outsourcing suppliers Levina and Ross’ (2003) research on the IT outsourcing vendor’s value proposition indicates that cost, quality, and project management skills are the three most important attributes of value to clients. Success in IT development outsourcing projects is predicated on three factors related to the competencies and capabilities of the development team: technical knowledge, domain expertise, and management skills, including client management (Akella & Dossani, 2001; Levina & Ross, 2003). Offshore developers face problems in acquiring advanced domain knowledge as they are geographically separated from their clients’ business environments and more often than not have a different background and culture (Dossani & Kenney, 2003; Outsourcing Institute, 2004). The lack of advanced domain knowledge can lead to misunderstanding of client expectations and misinterpretation of client needs (Kruchten, 2000). The latter may be further compounded by the suppliers’ business interac-
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tion, client coordination and communication style, and the shortage of project management expertise, including planning, scheduling, and progress monitoring (Akella & Dossani, 2001). The end result is inadequate quality. Quality in outsourcing contexts should be considered on a much larger scale than merely in terms of defects, usability, maintainability, reliability, and performance (Akella & Dossani, 2001). Outsourcing clients define quality of work as the possession of advanced domain knowledge, adherence to schedule, high coordination between client and supplier, adaptability, and mature software processes, such as, SEI/CMM (Paulk, Curtis, Chrissis, & Weber, 1993) and ISO 9001 certifications, coupled with transparency (i.e., observability) and outcome measurability (Kirsch, Sambamurthy, Ko, & Purvis, 2002). As a consequence, clients attribute project failure mostly to poor coordination, communication, and scheduling. In addition, clients expect suppliers to be very responsive and to push beyond the stated goals by engaging actively in identifying new problems and opportunities, and offering innovative solutions. Clients anticipate outsourcing suppliers to become part of their teams and to advise them on which components and activities to outsource and which ones to keep in-house. The major impediment to satisfying these client expectations is the low value-added levels of activities (see Figure 1) on which most offshore software firms operate. Typically, offshore vendors undertake projects in the areas of applications development, testing, and maintenance, while the high-end work, such as developing the IT strategy, building the software architecture, designing the system, integrating the project with enterprise packages, and designing custom components are all discharged by firms in developed countries (Akella & Dossani, 2001; 2004). Another issue with outsourcing suppliers is employee turnover. The rapid growth of outsourcing suppliers at popular offshore locations
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has created a dynamic labor market with a big demand for lead developers for new projects. As a consequence, turnover levels can be extremely high, which could have an adverse impact on product quality, as later hires may not have adequate qualifications or time to make the transition to the new development environment (technology, software process, and domain expertise) (Mezak, 2005). In an environment where communication lines with clients and end users suffer by time difference, cultural issues, language barriers, business practices, and lack of advanced domain knowledge, project management skills and coordination with clients become even more critical to project success. However, management at offshore locations is often characterized by culture-bound, hierarchical administrative styles, instead of the more efficient and beneficial leadership through role modeling (Akella & Dossani, 2001). To sum up, the major causes for outsourcing failure can be attributed to lack of advanced domain knowledge, poor communication and coordination with clients, immature management and scheduling practices, insufficient experience in higher value-added activities, such as, architecture design, and last but not least, inadequate quality. There is also the danger of losing touch with the local and national environments. The problems experienced by outsourcing suppliers can be “objective” or “subjective.” For instance, it is objectively difficult to communicate effectively with a remote client. The lack of expertise in project scheduling is, on the other hand, subjective, in other words, particular because it is not universally true. More often than not, a lot more could be done to alleviate the subjective problems rather than the objective ones. Based on the above analysis, we can divide the problems experienced by outsourcing suppliers into three categories: (1) communication – rela-
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tionship and coordination with remote clients; (2) technical know-how – domain expertise, experience in building software architectures, design experience, and inadequate quality thereof; and (3) management – project controlling and scheduling. In order to deliver successfully software products, outsourcing supplier firms need to address the communication, technical know-how, and management issues listed above.
ThE agilE OuTsOurcing prOJEcT In this section, we present an Agile method of software development geared toward the context of outsourcing.
core agile practices Agile methods are iterative and incremental. In an iterative process, the activities that were performed earlier in the process are revisited later. Revisiting activities provides developers in areas such as requirements engineering and software architecture with the opportunity to correct mistakes they have made. The iterative model implies more interactions among the various management and technical groups. It is a means of carrying out exploratory studies early on in a project when the team develops the requirements and discovers a suitable architecture. Some important Agile practices are the following (Beck, 1999): • Embracing change: respond to change quickly to create more value for the customer. • Fast cycle: deliver small releases frequently, implement highest priority functions first, speed up requirements elicitation, and integrate daily.
• Simple design: strive for a lean design, restructure (refactor) the design to improve communication and flexibility or to remove duplication, while at the same time preserve the design’s behavior. • Pair programming: to quote from Beck, “if code reviews are good, we’ll review code all the time.” With pair programming, two programmers collaborate side by side at one machine. This quality control practice also helps disseminate tacit knowledge among the team members. • Test-driven development: quality control technique, where a developer first writes a test, and then, writes the code to pass that test. • Tacit knowledge: preference for project knowledge in team members’ heads rather than in documents. • Customer onsite: continuous access to a customer to resolve ambiguities, set priorities, establish scope and boundary conditions, and provide test scenarios. • Co-location: developers and onsite customer work together in a common room to enhance tacit project knowledge and deepen members’ expertise. • Retrospection: a post-iteration review of the work done and work planned. This reflective activity facilitates learning and helps improve the estimates for the rest of the project. The enumerated practices (or disciplines) can be divided into three broad categories: (1) communication, such as, pair-programming and tacit knowledge; (2) management, in other words, planning game, scrums (short daily planning sessions, in which the whole team takes part), short cycle and frequent delivery; and (3) technical, otherwise known as, test-driven design, simple design, and refactoring. These categories
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Customer onsite
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correspond to the three groups of problems commonly experienced by outsourcing suppliers, as discussed in previously. The fast cycle of Agile methods gives business stakeholders multiple and timely feedback opportunities, which makes Agile methods explorative (aiding in architecture discovery and requirements verification) and adaptive to change. There is a broad consensus that Agile methods perform well on small- and mid-sized projects in dynamic environments (Pollice, 2001), such as, in e-commerce. What is seen as problematic with Agile methods is that they lack formal project management practices, such as formal and sufficiently detailed plans, schedules, budgets, and milestones. Tiwana and Keil’s (2004) study strongly suggests that formal
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Scheduling
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Figure 2. Impact of Agile practices on outsourcing suppliers’ concerns
project management practices have the power to reduce project risk substantially. The feasibility-impact grid in Figure 2 shows how we map the core Agile practices to the outsourcing suppliers’ concerns discussed in a prior section. Agile practices incompatible with outsourcing are highlighted. A checkmark in a cell indicates that the Agile discipline listed in this cell’s row heading can alleviate the concern listed in this cell’s column heading. One concern, not listed in Figure 2, is employee turnover. Agility could break the impact of high turnover as several core practices, in other words, preference for tacit knowledge, pair programming, and retrospection make possible for new team members to be brought quickly up to speed.
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Figure 3. Typical RUP phases of the iterative process
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structuring the agile Outsourcing project The main question we address below is how to reproduce the conditions ideal for agility in an outsourcing project. Even a quick look at the core Agile practices above would reveal that some of them are incompatible, while others are not entirely consistent with the context of outsourcing, otherwise known as, customer onsite, co-location, short lifecycle, and embracing change. Above all Agile methods can be applied only to small projects. Kruchten (2004) proposes to scale down large projects to meet the Agile “sweet spot.” The author describes the organization of a large project as an evolving structure, starting out as one, co-located team, which over time is transformed to a team of teams (with a tree-like structure). Kruchten also suggests organizing the iterative process into four typical RUP phases as shown in Figure 3 (Kruchten, 2000). Each phase shifts the focus of the development effort onto a different activity. A phase consists of one or more iterations, where iterations can be thought of as mini waterfalls. The structure of the Agile outsourcing project is based in Kruchten’s approach. However, in an Agile outsourcing project the primary goal is not to slice a big project into multiple Agile subprojects (which might be required anyway), but to outsource the project to one or more
Construction iter. #i
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Agile teams, which are co-located at a remote site and share common culture and educational background. The structure of the development process is illustrated in Figure 4. The phases of the lifecycle are separated between “research and development” (R&D) activities and “production” activities, as suggested in Royce (2002). R&D is carried out onsite, i.e., close to the client, while production takes place offsite. Elaboration is split between R&D and production. The two new phases are called architectural elaboration and production elaboration. A team comprised of requirements engineers and architects starts the development process. The team is a mix of developers from the client’s organization and from the outsourcing supplier. Initially, this team focuses on the business case, vision document, and system requirements. The team works closely with the client in a typical Agile setting. The team’s objective, however, is not to deliver executable code (a must in Agile methods), but to set up an architectural prototype, including prioritized system-level use cases. When the team has got enough clarity on key architectural choices, it can set about building and testing an architectural prototype. Towards the end of the architectural elaboration phase, when the architecture stabilizes, additional teams are created offsite. Each new team is seeded preferably with two members of the architecture team. For large projects, the early
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Figure 4. Team structure of Agile outsourcing R&D
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architectural prototype is used to slice the project into smaller, considerably independent Agile projects. Each Agile project “owns” part of the system architecture. The “seed developers” transfer domain expertise from the client to the supplier’s site. Some of them are employees and managers from the client’s organization. The “seed developers” take on several roles. They lead the teams, serve as local architects, act as customer surrogates, and communicate with the initial architecture team, and if necessary, communicate directly with the client. This organization creates near-perfect conditions for agility in each offsite team. Each Agile offsite team works on a subsystem and develops its detailed subsystem use case model; hence the second elaboration phase, named “production elaboration” in Figure 4. For small projects, one offsite production team will suffice to develop the complete code.
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For large projects, however, several production teams might be necessary to do the job. In addition, one or more infrastructure teams must be set up to develop common elements such as middleware, services, and any reusable assets. The customers for the infrastructure teams are all other teams. Thus, no matter how many teams are spawned offsite, they all work in Agile conditions, even though predominantly with customer surrogates. It is important to use a common software tool to reduce the risk of miscommunication, to track and communicate project requirements, to identify replicated modules, to map test cases to requirements, and to successfully integrate the outputs from the Agile teams’ into builds. The context diagrams in Figure 5 model the environments in which the different offsite teams operate. Note the dual nature of “seed developers.” On the one hand, a “seed developer”
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Figure 5. Context diagrams for offsite teams
Seed Developer <<customer surrogate>>
Agile Production Team
Architecture Team <<customer surrogate>>
Seed Developer <<customer surrogate>>
Customer (real)
Production Team <<customer surrogate>>
(a) Production team
Agile Infrastructure Team
Architecture Team <<customer surrogate>>
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(b) Infrastructure team
Figure 6. Nested iterations
Integration (project) iteration: 1 month to 6 months
Agile team iteration : week to a month
impersonates a customer, and on the other hand, he/she is part of the team. The interactions of offsite teams with the real customer are supposed to be infrequent and to be mediated by the “seed developers” and the architecture team. For large projects, somebody needs to put together the builds delivered by the production and infrastructure teams and to test the assembled system. This job is assigned to the Integration
& Test Team, or integration team for short. The testing engages the client so that the client’s feedback can situates the project and steer the future effort. The problem with the integration team is that it gets input from the offsite teams, but receives feedback from the client. Normally, the input and the feedback are coming from the same place, in other words, the customer. To account for this anomaly, we split the integration team
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into two teams, one located onsite and the other offsite (see Figure 4). Both integration teams derive directly from the initial architecture team. This guarantees that the developers in charge of integration and testing thoroughly understand the client’s needs. A problem with the proposed organization is that of fault propagation. For example, a defect committed by one of the production or infrastructure teams, can propagate through the integration process before the client detects it. Owing to the late stage of its detection, isolating and removing such a defect is expensive. We have provisioned for two floodgates preventing fault propagation: (1) the “seed developers” in each offsite team; and (2) the test engineers in the integration team. Since they all come from the primary architecture team, it is very likely that they would be able to detect many of defects, which are normally revealed with help from customers. The only two teams operating in non-Agile, but still iterative and incremental mode, are the onsite and offsite integration teams. The iterations (heart beats) of both the Agile and integration teams can be best illustrated with the dual beat structure shown in Figure 6. Striking a balance between the lengths of the Agile and integration iterations is the underlying objective of the management team. The management team, comprised of all local team managers, is lead by the managers of the integration teams. We do not show the management team as a separate box in Figure 4 because management is thinly distributed across all teams. Since all offsite teams reside in the same country, and most probably in the same city there are no cultural differences to overcome and communications among production, infrastructure and integration teams are not as ineffective as they are with geographically distributed teams. The management team is in a favorable position
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because good communication is a prerequisite for effective coordination.
acTiviTiEs and wOrkFlOws In this section, we discuss the activities in an Agile outsourcing project.
inception phase During inception, the emphasis is on the user requirements. A user requirement is a specification of what the system must do. As user requirements are elicited, they are organized into use cases (Jacobson, 1987). Use case descriptions can smoothly scale to large and small systems alike. They promote refinement and traceability from system-level usage goals down to low-level (subsystem, component, and instance) usage goals. Use cases are sufficiently flexible to be used in highly iterative and incremental development environments (Jacobson et al., 1999), as the one proposed in this work. If a system consists of several subsystems, use case analysis can be applied recursively to the subsystems as well. This defines clearly the requirements and responsibilities of each subsystem. Subsystem-level use cases are derived from the system-level use cases and the system architecture (the architectural decomposition of the system into subsystems).
architectural Elaboration The onsite team carries out the architectural elaboration. The goals of the architecture team are to partition the system into multiple semantic domains centered around different subject matters, to define the architectural decomposition of the system into subsystems, and to map systemlevel use cases to subsystem use cases.
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Domain Modeling A domain is a subject area with a shared vocabulary (Mellor, Kendall, Uhl, & Weise, 2004), such as user interface (UI) or payment transaction management. Each domain contains many classes organized around a single subject matter. Most domains require specialized expertise, otherwise known as experience and knowledge in UI design or in payment transaction management. It makes sense to allocate the modeling of a domain to a developer with domain knowledge in that particular subject area. Since a domain model captures precisely the conceptual entities of a single subject matter, it can be said that domain models are logical models. Logical models are in sharp contrast to subsystem models, which are pieces of the physical system. Typically, a physical subsystem is constructed from instances of several logical models. For example, a collaboration realizing a system-level use case would involve instances from a UI domain, a business logic domain, a transaction management domain, a persistent storage domain, and a security domain. Domain modeling leverages scarce domain knowledge normally limited to very few team members and shields the rest of the team from the domain implementation detail. For example, to make an object persistent, a developer needs only to mark its class or one of its attributes as persistent, and a persistent software entity is automatically generated at compile time using the knowledge locked in the persistent storage domain model. The result is a simplified development process, where only a few developers need detailed knowledge about domain technicalities. Domains, unlike objects, are not elemental, but just like objects they are cohesive. The classes and components in a domain are tightly coupled and interdependent, and yet the domain is autonomous, in other words, its classes and components are decoupled from entities lying
outside the domain boundary. Once constructed, domain models have greater longevity than an application because they evolve independently of other domain models out of which the application is built, i.e., they become corporate assets and the biggest units of reuse. In UML, developers represent the containment hierarchy of a system through an aggregation of subsystems. A subsystem is defined as a subordinate system within a larger system. The subsystems define the large-scale physical architecture of the system.
Model Organization For small-sized systems, the subsystem structure can be organized by use cases. The system model is divided into subsystems of related use cases. This model organization is straightforward and allows tracing requirements easily to model elements. The downside of the use case-based model organization is that it does not scale up well and encumbers reuse. Developers are forced to reinvent similar classes in collaborations realizing different use case. For large systems, we propose to derive the subsystem structure from the requirements model and the domain model. A UML package is a container for modeling elements (Jacobson et al., 1999). It is an organizational unit defining a namespace for the modeling elements it contains. The top-level packages of the domain-based system model are: (1) system use cases package; (2) domains package; (3) infrastructure package; (4) subsystems package; and (5) builds package. The system use cases package contains system-level use cases and their actors. The domain package has one sub-package for each domain. The infrastructure domain is a special type of domain. Infrastructure domains contain services and extension points for system communication and infrastructure, and they are dependent on the selected imple-
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Table 1. Packages System use cases package
Architecture team
Domains package
Architecture team or reuse
Infrastructure domain packages
Infrastructure teams
Subsystem packages
Production teams
Builds package
Integration and test teams
mentation technology, such as RMI/J2EE or CORBA. The infrastructure package contains one sub-package for each infrastructure domain. Each infrastructure sub-package is assigned to an infrastructure team. Several production teams may use the classes and components realizing the services of an infrastructure subpackage. The subsystem package contains one package for each subsystem, otherwise known as, the classes and components of a subsystem. A large subsystem package can be recursively divided into sub-packages until the size of the leaf packages becomes manageable. A subsystem package normally refers to the classes of several domain packages. Finally, the builds package, containing the system test model, is divided into sub-packages, one per prototype to allow for easy management of incremental builds. The domain-based model organization scales up well to large-sized projects for three main reasons. First, subsystem package decomposition can be applied recursively, resulting in subsystems realizing subsystem use cases. Second, classes from different domains may be reused in different settings and deployments of the designed system, and third, domain models are assets that can be reused across projects. There are two problems with the domainbased model organization. Developers tend to blur the distinction between domain models and subsystem models, and there is an overhead associated with maintaining two separate types of
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Team
models: domain models (logical) and subsystem models (physical).
production Elaboration All strategic decisions for the overall organization structure of the system have been made in the architectural elaboration phase. Production elaboration drills down inside the subsystems to specify the semantic objects whose collaborations deliver the system’s structure and behavior. In production elaboration, the subsystem use cases are detailed and mapped to collaborations of components and objects using communication diagrams (Jacobson et al., 1999). In Table 1 we show how packages are assigned to teams, for example, the architecture team is in charge of developing the system use cases, and therefore, “owns” the system use cases package.
challEngEs TO agilE OuTsOurcing prOJEcTs Managers of Agile outsourcing projects ought to be aware of the following challenges to project success. The architecture team is the key to project success. It is of paramount importance that this team be a good mix of requirements analysts and architects. Members of the architecture team elicit requirements, build the primary system
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architecture, and subsequently take the roles of surrogate customers, local managers, integration and test engineers, and communicate with customers throughout the entire lifecycle. Inter-team dependencies reduce teams’ abilities (especially affected is the infrastructure team) to test code and deliver builds. Production teams should provide early on the infrastructure team(s) with stubs, so that the work of the infrastructure team(s) proceeds smoothly. With multiple teams, there is always the danger of replicating functionality across teams. The proximity and common culture of the offsite teams work against the chances of duplicating functionality. The participation of the members of the architecture, and later of the integration teams, in design reviews and software inspections helps detect replication early.
cOnclusiOn In the late 1990s and early 2000s, Agile methods took the imagination of software developers by storm. This fact clearly indicates that heavyweight methods have not been embraced wholeheartedly by developers and managers alike and are found either impractical or costly (or both) in many environments. In this article, we introduced a novel project structure creating Agile conditions for large outsourcing software projects. We showed how to slice a large software project into multiple Agile projects. We proposed to separate the development activities to R&D activities, carried out onsite, close to the client, and production activities, carried out offsite and possibly offshore. The onsite, architecture team starts work on the project. In cooperation with the client, the architecture team develops the high-level use case model of the system and completes an architectural prototype with the strategic decisions for the overall system structure. The Agile offsite teams are seeded
with members of the architecture team and start functioning toward the end of the architectural elaboration. The “seed developers” transfer domain expertise to the supplier’s site and act as customer surrogates to help reproduce Agile conditions offsite. Outsourcing entire sets of related production activities retains interactivity at the offsite location and reduces the project risk significantly.
rEFErEncEs Agile Alliance. (2001). Agile Aalliance Manifesto. Retrieved from http://www.aanpo.org Akella, R., & Dossani, R. (2001). IT outsourcing and the software value chain: The Indian supplier during the downturn. In IT Conference, Government of India, Bangalore, India. Akella, R., & Dossani, R. (2004). Private communication. Beck, K. (1999). Extreme programming explained: Embrace change. Boston: AddisonWesley. Boehm, B., & Turner, T. (2004). Balancing agility with discipline. Boston: Addison-Wesley. Brownsword, L., & Clements, P. (1996). A case study in successful product line development (Technical report CMU/SEI-96-TR-035). Software Engineering Institute. CeBASE. (2004). eWorkshop on Software Inspections and Pair Programming. Retrieved April 2005, from http://www.cebase.org Craumer, M. (2002). How to think strategically about outsourcing. Harvard Management Update, 7(5).
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Dossani, R., & Kenney, M. (2003). Went for cost, stayed for quality?: Moving the back office to India. Stanford University, Asia-Pacific Research Center. Reteived from http://APARC. stanford.edu Evans, G. K. (2006). Agile RUP: Taming the Rational™ Unified Process. In B. Roussev, & L. Liu (Eds.), Management of object-oriented software development process (pp. 231-246). Hershey, PA: Idea Group Publishing. Gilb, T., & Graham, G. (1993). Software inspection. Boston: Addison-Wesley. Hale, K., Souza, R., Lo, T., Adachi, Y., & Babaie, E. (2005). Forecast: IT services, worldwide, 2005-2009. Retrieved June 2005, from http:// www.gartner.com Huber, N. (2005, May 3). Outsourcing ‘backlash’ highlights need for IT leaders to sharpen management skills. Computer Weekly, 24-27. Jacobson, I. (1987). Object-oriented development in an industrial environment. ACM SIGPLAN Notices, 22(12), 183-191.
Levina, N., & Ross, J. W. (2003). From the vendor’s perspective: Exploring the value proposition in information technology outsourcing. MIS Quarterly, 27(3), 361-364. Mellor, S. J., Kendall, S., Uhl, A., & Weise, D. (2004). MDA distilled. Boston: AddisonWesley. Mezak, S. (2005). The seven deadly dangers of outsourced software development. Retrieved April 2005, from http://www.accelerance.com Outsourcing Institute. (2005). Retrieved April 2005, from http://www.outsourcing.com Pollice, G. (2001). RUP and XP, Part I: Finding common ground, and Part II: Valuing differences. The Rational Edge. Retrieved from http://www. therationaledge.com Pollice, G. (2006). RUP and eXtreme programming: Complementing processes. In B. Roussev, & L. Liu (Eds.), Management of object-oriented software development process (pp. 183-199). Hershey, PA: Idea Group Publishing.
Jacobson, I., Booch, G., & Rumbaugh, J. (1999). The unified software development process. Boston: Addison-Wesley.
Paulk, M. C., Curtis, B., Chrissis, M. B., & Weber, C. V. (1993). Capability maturity model, version 1.1. IEEE Software, 10(4), 18-27. Retrieved from http://www.sei.cmu.edu
King, W. R. (2005). Outsourcing becomes more complex, Information Systems Management, 22(2), 89-90.
Royce, W. (2002, June). The case for results-based software management. The Rational Edge. Retrieved from http://www.therationaledge.com
Kirsch, L. J., Sambamurthy, V., Ko, D., & Purvis, R. L. (2002). Controlling information systems development projects: The view from the client. Management Science, 48(4), 484-498.
Schuh, P. (2005). Integrating agile development in the real world. Hingham, MA: Charles River Media, Inc.
Kruchten, P. (2000). The rational unified process: An introduction. Boston: Addison-Wesley. Kruchten, P. (2004, August). Scaling down large projects to meet the agile “sweet spot.” The Rational Edge. Retreived from http://www. therationaledge.com
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Stephens, M., & Rosenberg, D. (2003). Extreme programming refactored: The case against XP. San Franciso: Apress. Tiwana, A., & Keil, M. (2004). The one-minute risk assessment tool. Communications of the ACM, 47(11), 73-78.
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Toth, K., Kruchten, P., & Paine, T. (1993). Modernizing air traffic control through modern software methods. In Proceedings of 38th Annual Air Traffic Control Association Conference, ATCA, Nashville, Tennessee. TPI. (2005). Technology International Inc. Quarterly Index. Retreived from http://www.tpi.net
This work was previously published in International Journal of e-Collaboration, Vol. 2, Issue 4, edited by N. Kock, pp. 37-52, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.12
Object-Oriented Software Design Patterns Applied to IT Management Theory Eric Tachibana National University of Singapore, Singapore David Ross Florey Merrill Lynch Global Business Technology, Singapore
absTracT
inTrOducTiOn
Since the mid to late 1990’s, object-oriented software design patterns have proven to be a powerful tool in support of software design and product management. However, the usefulness of the methodology need not be restricted to the technical domain alone. In fact, the design pattern methodology represents a powerful tool that can also be used in support of it management at a business level. In this paper, we discuss the design pattern methodology, provide an example of how the methodology could be implemented to solve a business problem, the multivariate vector map (mvm), and then apply the mvm pattern to the problem of choosing an it outsourcing strategy as a means to demonstrate its effectiveness to it managers and to it outsourcing vendors.
Since they were first introduced in the mid to late 1990’s, Design Patterns for object-oriented software development have become a powerful force in software engineering. However, the efficacy of Design Patterns need not be limited to the technical realm. In this chapter, we present a broad paradigm through which business managers can apply the object-oriented Design Pattern methodology to help solve strategic management problems and to better predict the market outcomes of their choices. We will begin the discussion by briefly recounting the history of Design Patterns in software engineering. Next, we will discuss and define Design Patterns themselves and explain how the Design Pattern paradigm is used effectively in object-oriented software development.
Object-Oriented Software Design Patterns Applied to IT Management Theory
Having defined our base of reference, we will then explore the ways in which the Design Pattern paradigm can be applied to the process of strategic management decision-making by examining how several popular management decision-making tools can be refactored as Design Patterns. Finally, we will propose our own Design Pattern, the Multivariate Vector Map (MVM), and demonstrate its effectiveness by applying it to the problem of strategic IT Outsourcing. In support of the case study, we have gathered data from a large multinational IT Services company based in Singapore that was able to provide the information and statistics required for the generation and implementation of the MVM Design Pattern.
whaT arE dEsign paTTErns? Over the last decade, Design Patterns have emerged at the forefront of object-oriented software engineering and have inspired dozens of books, conferences, online communities, and well-designed software solutions. Although the conceptual origins of Design Patterns were being postulated in the early 1990s by several sources, it was the groundbreaking book, “Design Patterns: Elements of Reusable Object Oriented Software” by Gamma, Helm, Johnson and Vlissides, affectionately known as the Gang of Four (GoF), which truly launched the Design Pattern paradigm into the popular consciousness. [FOWLER, 5] The core thesis argued by the GoF explains that rather than solving every software engineering design problem from first principles, good designers reuse abstracted designs developed (and copied) throughout their careers. When software architects discover designs that work, they continue using those designs over and over again. In the words of the GoF,
These patterns solve design problems and make object-oriented designs more flexible, elegant, and ultimately reusable….A designer who is familiar with such patterns can apply them immediately to design problems without having to rediscover them.…Once you know the pattern, a lot of design decisions follow automatically. [GoF, 1] Of course, the recognition of ‘good’ designs within software architecture was no epiphany. Any of the almost two dozen design patterns cataloged in the GoF’s revolutionary book were all designs that any senior, seasoned architect of the era would have intuitively recognized. The GoF’s truly novel contribution to the field was their definition of a paradigm with which to understand the process of recognizing, documenting, communicating and implementing Design Patterns. As they explain it, The purpose of [our] book is to record experience in designing object-oriented software as design patterns. Each design pattern systematically names, explains, and evaluates an important and recurring design. Our goal is to capture design experience in a form that people can use effectively. [GoF, 1] The benefits of using design patterns for objectoriented software engineering have proven to be numerous and significant. For one, while the object-oriented paradigm addressed reusability at the algorithm and object level, Design Patterns make it easier to reuse successful designs at the architectural level. This result is faster development turnaround and more reliable code. In addition, Design Patterns make more starkly visible the assumptions and consequences of design choices. This elevates the process of coding from fire-fighting to architecture, allowing developers to think more strategically about their designs. As noted by Shalloway and Trott,
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Table 1.1. The core structure of a design pattern ELEMENT Name
DESCRIPTION Many authors have remarked on the importance of pattern naming. Typically a pattern’s name must convey the essence of the pattern effectively. Good names, as has been shown historically, become core components of the vocabulary and folklore of the field. A pattern’s intent defines its purpose. Typically, the intent is captured as a short statement that explains what the pattern does and the rationale and intent behind it. Every design pattern must solve a certain type of problem faced by an engineer. In the literature of Design Patterns, problems are typically described as scenarios that depict situations in which the patterns are applicable and how to recognize those situations. The Solution defines the pattern itself and how the pattern can be used to solve the problem just stated Explains the variables or entities that effect the implementation of the pattern This section includes an analysis of the forces at work in the pattern and documents the trade-offs that might be required when one chooses to use the pattern. Note that consequences can be good, bad, or neutral Usually sample code that provides an example as well as supporting text explaining pitfalls, hints, or techniques that might be useful. A diagram that depicts the essential components of the pattern
“developers are freed from the tyranny of dealing with details too early.” [S&T, 84] Further, representing proven techniques as formal Design Patterns rather than describing them loosely merely through intuition or ‘experience’, means improved communication, documentation, and maintenance as a result of shared terminology. This, in turn, makes systems more accessible to developers of new systems or to new developers. Using Design Patterns means that passing “knowledge” between people is streamlined and made more accurate. For example, a developer on a team need only declare that he intends to implement a “Factory Pattern” and a huge amount of information about his design intentions and their consequences will immediately and effectively be communicated to all other team members. Finally, Design Patterns codify best-practices and help to ensure that there is maximum reuse of industry experience and accumulated knowledge
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by junior, intermediate, and senior professionals alike. Design Patterns are living, breathing artifacts of experience in that rather than being codified and frozen in place, they are starting points for extended dialog, open to continuous improvement and refinement from a variety of sources over time. In this way, they function as a basis for collaboration, analogous to written language in allowing knowledge to be imprinted and shared over space and time so that instead of constantly reinventing the wheel, we can benefit from the experience of others, past and to come. In Design Patterns, the GoF originally proposed 13 elements to define any Design Pattern. More recent authors have simplified the GoF Framework down to 8. Consider Table 1.1 that was adapted from Shalloway and Trott, [S&T, 83] All object-oriented software design patterns are defined rigorously using this format and, as noted in Section 4, we also use this format to define management design patterns.
Object-Oriented Software Design Patterns Applied to IT Management Theory
applicaTiOn OF dEsign paTTErns in managEmEnT Of course, despite the recent attention paid to the discipline of Design Patterns in software engineering, the theories upon which Design Patterns rely are not new. Nor are they specific to software. The roots of the pattern movement come from a wide array of sources, stemming at least all the way back to Plato’s musings on the nature of form and reality in the allegory of the Cave found in “The Republic”. However, most modern-day pundits would point to the works of Christopher Alexander as the watershed for Design Patterns in software engineering. Christopher Alexander was a professor of architecture at the University of California at Berkeley during the early 1990s. As part of his own studies, Alexander published a series of ‘pattern language’ books that defined his paradigm for recognizing, defining and cataloguing patterns in architecture. These works today are considered the prototypes for pattern books for the software engineering world, and much of the subsequent paradigmatic work, including the rows in Table 1.1, are drawn from his initial efforts. As noted by many authors, Alexander’s phrase, “a quality without a name” is often quoted as an attribute that all good software patterns should have. [Fowler, 6] At the heart of Alexander’s works was a search for the meaning of quality. As explained by Shalloway and Trott, Alexander was challenged by the question, Is beauty truly in the eye of the beholder, or would people agree that some things are beautiful and some things are not. What makes us know when an architectural design is good? Is there an objective basis for such a judgment - a basis for describing our common consensus? [S&T, 76] Ultimately, Alexander’s answer to the question was yes, there was an objective basis, beyond
taste or personal aesthetics, within architectural systems that could measure beauty through a quantifiable objective basis. This method would ultimately lead him to patterns. Of course, Alexander’s exploration of patterns was couched inside a study of architecture. He began by making observations of all manner of living spaces that people have erected, from individual buildings to towns and streets to more exotic creations. Over time, he tells us, repeatable patterns emerged from the data and commonalities became clear in all forms of constructs. As was explained by Shalloway and Trott, Architectural structures differ from each other, even if they are of the same type. Yet even though they differ, they can still be of high quality. Alexander understood this. He knew that structures couldn’t be separated from the problem they are trying to solve. Therefore, in his quest to identify and describe the consistency of quality in design Alexander realized that he had to look at different structures that were designed to solve the same problem. Alexander found that by narrowing his focus in this way, he could discover similarities between designs that were high quality. He called these similarities patterns. [S&T, 77] Alexander defined patterns as, solutions to a problem in a context. Each pattern describes a problem which occurs over and over again in our environment and then describes the core of the solution to that problem, in such a way that you can use this solution a million times over, without ever doing it the same way twice. [ALEXANDER, X] As with architects, anthropologists have pondered the same issues over the last 40 years. One branch of cultural anthropology, suggests that within a culture, individuals will agree to a large extent on what is considered
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to be a good design, what is beautiful. Culture makes judgments on good design that transcend individual beliefs. A major branch of cultural anthropology looks for such patterns to describe the behaviors and values of a culture. [S&T, 76] Examples include the structuralist movement pioneered by Claude Levi Strauss, in which meaning naturally forms into pairs of binary opposites whose very contrast defines both elements in sharp relief while binding them as a dyad. Levi Strauss applied these structuralist patterns broadly, throughout different cultures of the world and different elements within cultures, providing a new way of seeing culture not as amorphous and atomistic, but as an interaction of patterns and forms. [WIKI-STRAUSS] Also in the cultural realm, Richard Dawkins invented, or discovered if you like, the concept of memes. Memes are the cultural equivalent of genes, which of course are the ultimate biological pattern, defining our very physical makeup. Dawkins asserted that cultural patterns are no less real and relevant, and that their formation and replication formed a basis both for communication and investigation. [WIKI-DAAWKINS] Finally, patterns have been instrumental in Organizational Behavior with usage stemming at least as far back as Carl Jung whose work inspired a slew of Personality Sorter patterns including the well-renowned Meyers-Briggs Personality Types and the Keirsey Temperament Sorter [LEPLANTE, 15] Given the groundings of design pattern theory in the liberal arts, it makes sense that the framework should be applicable to management science. In fact, today’s management theory landscape appears very similar to the world of software engineering in the early 1990’s. Management models abound, but the discipline lacks a paradigm through which to organize patterns themselves into a meta-level analysis of the models. If the management science discipline can gain as much from an investigation at
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this meta-level as the object-oriented software discipline did, then further investigation is very much warranted. To help the reader understand this, Table 1.2 provides a summary of some of the more common patterns used in management science discourse, but which have been refactored as Design Patterns. It is important to restate as we conclude our discussion of Design Patterns in management science that as was the case in the object-oriented software design space, management models themselves are not at all new. The key benefit of an investigation of Design Patterns is not necessarily any one individual implementation of a pattern (such as the BCG matrix as an implementation of the Quadrant Pattern). Instead, the benefit is to allow an investigation of the models at an abstract level to understand how, when, and where they can be applied to management strategic decision making.
a samplE managEmEnT dEsign paTTErn: ThE mulTivariaTE vEcTOr map Having spent the first half of this discussion focusing on the Design Pattern paradigm, we now provide an example of the process of identifying, describing, and using a new Design Pattern. As was said above, the reader should focus first on the process and utility rather than the details of the Design Pattern. As is often said, patterns are not created, they are discovered. One way in which management theory patterns can differ from software patterns is in their generation. While, as with software patterns, management theory patterns can take existing abstractions and attempt to apply them to other contexts, the examples in Section 3 being germane, the generation of new patterns is a somewhat different matter as we are not looking necessarily at formal design decisions
Object-Oriented Software Design Patterns Applied to IT Management Theory
Table 1.2. Management design patterns ASPECT Name Intent
PATTERN S-Curve
Quadrant
Perceptual Map
Describes repeatable, Helps managers make strategic decisions Positions entities relative to each phased changes to variables based on two-variable analysis other based upon 2-4 variables over time (life span) and represents relative changes in positioning over time Problem Many entities within the Managers need a simple tool to help Managers need a way to business environment are them make strategic decisions. Often, compare multiple entities over subject to changes over for the sake of speed and simplicity, time along 2-4 qualitative axes time. Managers need decision criteria may be reduced to two of differentiation in order to a pattern to help them dimensions track more complex market movements represent these time-based metamorphoses Solution Uses an s-curve to represent Uses a 2x2 grid to generate 4 strategic Plots entities against two axes the life cycle where points choices. Then plots a position against the and size and/or color and tracks along the curve from left two axes to solve for the recommended movements in positioning over time using arrows to right represent changes strategy over time Participants & Time/effort x variable 2 variables of the managers choice as 2-4 variables of comparison as collaborators that is evolving (such as well as 4 strategic choices well as 2 or more entities to be performance) positioned Consequences • Naturalistic and • Simplicity is both a strength and a • Strong visualization tool emergent but weakness • Does not deal well with the predictive and unexpected quantitative view • Works more effectively of management that when comparing qualitative provides flexible, but variables sometimes, high level lens into strategy Implementation Product &, industry life BCG Matrix, Ansoff’s Product / Competitive positioning Maps, (Examples) cycle curves, Emergence Market Grid, Ofman’s Core Quadrants, Market Segmentation Maps of disruptive technologies, Porter’s Competitive Strategies Grid, Gartner Hype Cycle Gartner Magic Quadrant Generic Structure
as with software, but more often at unstructured or semi-structured data as pertains to successful and unsuccessful strategic decisions. Primarily, to be useful, patterns must align with actual data. There are two methods of performing this step, inductive and deductive. An inductive
pattern is more or less a hypothesis put forward based on management theory and experience. Given the input variables, this pattern must then be tested against historical successes and failures to prove, disprove, and/or refine the pattern. Then, it must be applied across domains to verify its validity as a meta-tool. 599
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For example, a manager might have a strategic theory that at a certain threshold, high margin product sales merit additional investment in sales staff. Let’s say his hypothesis, based on intuition, is that for margins of 30% or higher, growing sales staff by 50% will lead to overall revenue and profit benefits even after reflecting the additional overhead costs associated with hiring. In order to test this hypothesis, the manager can formulate the theory as a pattern, say a Quadrant with the staff increase on the y axis and the margin on the x axis. He postulates that the sweet spot for growth will be in the top right, when margin is above 30% and growth is 50% or below. The next step in this example would be to test the hypothesis against real-world data. In this example, we can suppose that the manager has access to data from multiple sales divisions over time and can plot the data points on the grid, with successful cases mapped as a dot and unsuccessful cases, those in which profit did not increase within one year, mapped as an x. The results of this exercise might prove or disprove the hypothesis, but will be valuable in either case. Once iterated a sufficient number of times for the data to cluster in a meaningful way, the pattern would be considered tested and would be useful for ongoing strategic decision making. A deductive method, on the other hand, would first rely on observing patterns in raw data, e.g. by use of pattern recognition algorithms and/or rigorous quantitative analysis. This method will find parallels between data clusters and successes and failures. These clusters can then be abstracted, formed into a pattern, and tested and refined as above. An example of the deductive method could be simple or complex, but because the algorithms and statistics that would be used for the deductive approach are beyond the scope of this discussion, for our purposes we will not delve into the details of the methodology. Rather, we will hold the pattern-recognition analysis as a black box. 600
Thus, let’s assume that a manager has a large amount of unstructured data on the situation described above, including profit margins and sales staff growth but does not have any intuition about the meaning of that data. We can assume for the sake of argument, that our “black box”, a pattern recognition algorithm or a diligent quantitative analysis, could identify data clusters using various statistics. In this case, the manager iterates several rounds of deductive analysis before a pattern is recognized – when profit margins are high enough growth in sales staff leads to successful returns. Again, the final result of the process is the pattern itself, which can then be used for strategic decision making. It is important to note that the method for generating the pattern, whether inductive or deductive, is more or less unimportant as the pattern, once discovered, enters into the feedback loop of retesting and refinement. Once the pattern holds up to the rigors of this process and can be predictive of success or failure based on relevant inputs, it can be generalized as a tool and applied to various contexts with customization. The efficacy of the approach is made clearer in the examples above that employ the magic quadrant pattern, which has been used successful time and time again and in numerous varied situations. Again, as in software patterns, management theory patterns are simply abstractions of solutions that have worked in one context and can be reused in other contexts. As discussed above, patterns are not a novel approach to management theory, which uses many approaches to abstract rules and representations to transform data to information and again, to actionable knowledge driving a solution set. As such, by applying the techniques of software patterns to management theory, managers will benefit from the ways that Design Patterns frame problems in useful ways and allow for repurposing some of the tools and methods that have been developed in the software community to a paradigm of management theory.
Object-Oriented Software Design Patterns Applied to IT Management Theory
The sample pattern that we have developed for this investigation is the Multivariate Vector Map (MVM). This sample pattern is purely used in this context to demonstrate the possible utility of such patterns to management theory and should be considered work-in-progress. As with all patterns, it should be approached as a template, more or less useful in different situations, and freely challenged or modified to suit a specific management problem being addressed. See Exhibit A. Generally, there will be two major steps in the creation of any MVM 1. 2.
Define the map topology Define the vectors
The definition of vectors on the other hand, is a two-stage process. From basic math we know that vectors have two components, 1. 2.
A numeric value A direction
The creation of the map topology follows iterations of inductions and deduction. Successful and unsuccessful results should tend to cluster in meaningful ways. One can either form areas on the map as solutions and then test with results, or take data and map successes and failures to ascertain which solutions cluster together as successes in particular points on the map. Once a few iterations are performed, the topology should be refined enough to be used as a pattern for new data points to be entered and evaluate the applicable solution based on the MVM. In the case of our analysis, the MVM was actually derived deductively from data forming the case study below, which should also help illustrate its use. It is important to note however that in this context, it is more appropriate to simplify the pattern and its use due to space constraints, as well as to more clearly show the concept without getting lost in an inordinate amount of detail. Finally, it is important to mention that while we decided to limit the map topology to 4 solutions for the purposes of this discussion, the MVM
DESCRIPTION Multivariate Vector Map The aim is to take a basic combination of input values, factor them together as vectors and apply their solution to a grid with a predetermined topology of strategic choices to help managers make the right choices given their unique business contexts In management, there is often a wide array of quantitative data and qualitative comparisons, that defy the visualization and contextualization required to justify specific strategic choices or solutions to an existing problem. While the Quadrant pattern is fairly well-recognized, it lacks the finesse to handle truly multivariate situations and also limits the solution domain to four solutions. This pattern seeks to frame inputs as values to add as vectors to arrive at a map point defining a strategic solution. The two key steps in applying this pattern are choosing relevant inputs and converting those inputs into relatively-scaled vector, then building the topography of the solution map. If properly applied, the multivariate vector map reduces complex analysis to a simple, easy to explain, graphical solution. However, if not properly developed and tested, the results may mislead. Refer to Case Study in Section 5, IT Services Solution Refer to Figure 1.1.
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pattern is not limited in any way to the number of solutions, nor to the use of a Quadrant-based solution map. The MVM would be just as useful, for example, using clouds, overlapping circles, or any other form of topology. With deductive analysis, quite unique and unexpected patterns will tend to arise from clusters of data. For the numerical values, the critical factor is to scale the input values more or less evenly across all vectors. Thus, for example, if you have a dollar value for one vector and a time value for another vector, if the dollar values vary between $1 and $1000 and the time from 10 to 100 days, you’ll want to make the dollar vector scale by units of $100 and the time by units of 10 days. This gives more or less comparable values so that the results don’t skew too wildly on the map. The second issue to address with vectors is their direction. Ideally, the inputs will vary in a predictable way versus each other, whether inversely, complementarily, or additively. For example, in situations where economies of scale preside, cost and volume should vary inversely, meaning that the vectors will be diametrically opposed. These relationships among vectors’ directions will allow them to usefully interact in combining to indicate a position on the map. Typically, as will be demonstrated in Section 5, the direction of vectors will be governed by the map topology.
form of IT Service solution is appropriate to any given particular environment? In today’s hyper-competitive and globalized market, all businesses that use IT services in performing core functions, from banks to farms, face the problem of how best to source and supply IT services to meet business goals in a way that is tailored to their business goals, capabilities, and resources. [BRAGG, 1] The same issue applies in reverse to IT service providers – which organizations (or market segments) are the best potential customers for specific solutions based on their IT environment? How should any one IT Service provider segment the total market? [BRAGG, 14] By deriving and applying the MVM Design Pattern to this problem, customers and providers can have greater confidence in a best-fit solution based upon a bounded rigorous methodology. As was mentioned in Section 4, application of the MVM begins first with an analysis of the solution topology. In the case of the IT Services market, we are quite fortunate because the map topology is fairly well defined by the industry itself. The typical decision space for IT service provision generates 4 generic solutions: •
•
dEsign paTTErns by ExamplE: using mvms TO analyzE dEcisiOns abOuT iT OuTsOurcing Given the importance as well as the real and perceived complexity of strategic IT services outsourcing in S.E. Asia (both from a supplier and a buyer perspective), and because both authors had access to industry data, it was natural to focus our research on this domain. The following case study addresses a basic problem in the industry – what
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In-house –An organization supports its business using its own IT environment, its own people, and its own management Out Tasking – an organization supports its business needs by employing external contract staff, possibly in addition to inhouse staff, to manage and run its own IT environment. Managed Services – an organization employs an IT Service provider to staff and provide a degree of management in fulfilling IT services. That is, the organization’s business is supported by its own IT environment, however, the environment is managed by the provider, using the provider’s people Outsourcing – an organization employs an IT Service provider to completely ac-
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cept responsibility for all, or an area, of its IT infrastructure, including management by contracted service levels. This solution in essence makes the service provider the organization’s IT department, governed by business goals and overall IT strategy codified as service levels. In many cases, the organization transfers people and capital equipment to the provider. The correct selection and application of these solutions has been the subject of much debate as IT infrastructures grow in cost, complexity, and importance and as outsourcing gains popularity as a viable option. However, in many instances, there is great uncertainty about the appropriate solution, and when an inappropriate solution is selected, many problems arise for both organizations hoping to outsource and their outsourcing service providers. As a result of the lack of a strategic decision-making tool, there has been a well-reported backlash against outsourcing and we believe some of the lack of confidence is avoidable by applying more rigorous methods to the selection process itself. [WIKI-OUT] In particular, using the MVM design pattern can result in stronger, more relevant decisions. Whatever the case, the MVM topology is based on a set of four solutions. It is important to note here that to some degree, the map positions are arbitrary since the weightings and direction of the vectors will be based on the solutions. But as noted above, from industry best practice and from experience we can say that Managed Services and Outsourcing are more similar and should be proximate to each other. If we place them both at the top left and top right of the grid respectively, then we need to look at the other two solutions in relation to them to propose their relative position. Since both In-House and Outsourcing solutions are managed by a team in which IT managers and staff are from a single organization, they would appropriately by nearer each other. The remaining
section next to Outsourcing is bottom right, so we place In-House there. This leaves Outtasking to the bottom left. This is a simplified topography – you might well have more solutions grouped in less symmetrical ways, but for our purposes, this topography should show the MVM in action. Figure 1.1 depicts the MVM solution grid for the IT outsourcing market. Having defined the map topology based upon industry practice, MVM analysis next calls for a definition of the vectors of differentiation. In our study, the vectors of differentiation selected to generate our data set were chosen because 1) management felt that they represented a statistically significant subset of possible data points, 2) our target company only captured certain data points and 3) the point of the study was to demonstrate the methodology of applying the Design Pattern paradigm to management strategy rather than to generate a complete and tested pattern, and, as a result, a key goal was to simplify the set for clarity and convenience. It is worth mentioning that we believe that in refining the MVM for this specific domain question, it would be useful to abstract the study across more companies and additional vectors of differentiation however this was beyond the scope of this study With that said, the data points are all very relevant to the process and the actual Design Pattern did support management intuition and experience. Thus, with no further ado, the vectors that we used for the case study are as follows: •
•
•
Criticality was defined as a measure of how critical the IT services provided are to business functions. Specificity is a measure of the degree of proprietariness of the infrastructure/applications. Complexity is a measure of the heterogeneity of the technical environment.
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•
Scale is a measure of staff/infrastructure size.
In regard to these four vectors, it is important to pause here to reference back to Section 4. As was mentioned there, all vectors have 1) a value and 2) a direction. Thus, the next step in the implementation of the MVM pattern is to define the vector values. But recall that because vectors must be measured in the same scale, we must also harmonize the scales across all four vectors. That is, if we say that the set of companies examined has a range of scale (staff and/or systems) from 100 to 1000, a complexity from 2 to 13, a specificity from 0 to 8, and finally criticality from USD50K/ week to USD900K/week; then we align the unit values to approximate a range of 1-10, we can arrive at the values given above. Scaling was done as follows: •
•
Criticality was defined as a measure of how critical the IT services provided are to business functions. The vector unit values are based on the financial impact in hundreds of thousands of USD per week to service interruption to 1. Specificity was defined as a measure of how bespoke the environment is, measured by the percentage of highly modified platforms and critical applications. Vector unit values were taken on a 10% to 1 basis.
Figure 1.1. MVM grid for the IT outsourcing market
•
•
Complexity was defined as a measure of the number of platforms employed, by OS and critical application. Vector unit values were taken on a one to one basis. Scale was measured in terms of the number of staff and the number of critical systems (servers, desktops, and software applications) available in the infrastructure. Unit values were taken in groups of 100 (100 staff or 100 critical systems equal 1 vector unit).
Thus, for example, consider one of the following study companies: Company X is a pharmaceutical company with manufacturing facilities in Singapore. Other than the ERP systems supporting the production lines, the majority of the IT infrastructure is fairly non-critical, including mostly admin, logistics, and finance support systems. However, because of the costs associated with manufacturing bottlenecks, a profitability analysis yields a cost of US$400,000 per week of downtime The scale of the operations is also fairly small including about 50 IT staff supporting about 150 systems. In addition, while the company does employ a fairly standardized Standard Operating Environment (SOE), for historical reasons there are 4 separate operating environments including Windows XP, AS400, UNIX, and LINUX. Finally, the infrastructure is highly specific. With the exception of the ERP environment, most of the environment is standard office suites, applications . Following our rules defined above, the company was given the following scores: Criticality – 4 Scale – 2 Complexity – 4 Specificity – 5
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As was mentioned in Section 4, the next step in the MVM design pattern is to assign directionality to each vector. To some degree, the directionality was determined inductively based first upon management experience and then tested against the data set in order to refine it and validate it. The following section records the decision criteria that went in to defining vector directions. •
•
Criticality reflects the business impact and means that cost is less decisive (because downtime is so expensive). As a result, the specialist expertise and flexibility of an external provider can be helpful to avoid outages. On the other hand, a highly developed inhouse staff is also a viable option. Ultimately, the fact that the vector is being pulled two ways yields a sloped direction. Although simplistic, for the purposes of our analysis, we chose to define the slope at a 45 degree angle upward to the right which reflected that outsourcing is strongly preferred over Outtasking, but Managed Services and In-House solutions both receive partial inclinations. Specificity This vector points in the exact opposite direction from Scale. In fact any vector which dis-incentivizes an outsourcing solution would point downward. In the group of vectors identified Specificity would be in this category as a highly proprietary environment, developed by in-house staff, would be exceedingly difficult for an external service provider to manage and would usually only be an Outsourcing candidate
•
•
if the scale was large enough to be overwhelming for a customer organization to manage on its own. Complexity - Heterogeneous environments are more difficult to manage and tend to work better if the team is monolithic, which is the case in both outsourced and in-house solutions where management and staff are all from the same organization so better coordination of efforts can be achieved. Therefore, the direction for this vector is horizontal to the right. Scale is slightly more straight-forward. Large-scale environments tend to be good candidates for outsourcing as they require a large number of staff and would represent a concomitantly large management distraction, especially for a non-IT company. Therefore, in the study we assigned to the scale vector an upwards direction, or 90 degrees from a horizontal axis, and used this as a reference direction for vectors that tend to lead to an outsourcing solution.
Figure 1.2 represents the directionality visually With the 1) map topology, 2) vector scaled values and 3) vector directionality, we are ready to apply the MVM Design Pattern to actual decisions. While the study included only 10 customers of our single IT Outsourcing vendor, for the purposes of demonstration we provide the analysis of 4, as they represent a fairly diverse and interesting set of solutions that test the efficacy of the pattern
Figure 1.2. Vector directionality
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Figure 1.3. MVM for Company 1
well. It is worth noting that details have been altered to protect the anonymity of the companies involved.
company 1 Criticality – 2 Specificity – 10 Complexity – 10 Scale – 2 Figure 1.3 provides a graphical representation of the solution grid for Company 1. Company 1 is a high-end technology research facility. Like the Pharmaceutical example in Section 4, while the systems are important to the ongoing profitability of the business, downtime is not particularly expensive. Specifically, Criticality was measured at 2. On the other hand, Specificity and Complexity reached their maximum values. The infrastructure heterogeneity is driven by the need to develop products on a variety of platforms, but this also means the staff are highly technically skilled. Because this is a development environment, by definition all the applications are completely
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proprietary and developed in-house. Finally, the scale of operations is fairly low as R&D tends to require smaller infrastructures. This was supported by the actual data. Ultimately, one can see from the MVM that for this company, in-house staffing should be the preferred solution and this company would not be a good candidate for the sales representative of an IT Services vendor. This makes sense intuitively as it is a small environment, highly modified, with a highly complex but less mission critical set of systems as outages have minimal impact as long as data is backed up since none of the applications are live. A small team can manage this environment, but they must be specialized.
company 2 Criticality – 10 Specificity – 10 Complexity – 10 Scale – 10 Figure 1.4 provides a graphical representation of the map solution for Company 2.
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This situation is quite different from Company 1. This company is a large bank with numerous servers on various platforms running highly proprietary applications. Needless to say, the infrastructure is as mission critical as exists, with millions of dollars of transactions running through the systems. While the backup and disaster recovery regimes mitigate the frequency and impact of downtime, any outage has a high monetary impact. This company can benefit from the economies of scale a service provider
can provide in outsourcing, with the benefits including backfill, remote support, and increased general background knowledge, as well as a pool of skilled resources.
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Figure 1.5 provides a graphical representation of the map solution for Company 3. Company 3 runs a call center, with replicated workstations and quite a few racks of identical network equipment. This environment is very large, but it is very generic given the scale, and is virtualized using blade servers and standard operating environments. In this case, a Managed Service solution can provide an external team to oversee the infrastructure to mitigate the impact of a high number of headcount being taken on by the customer, but since the infrastructure is simple and relatively non-critical, the organization can manage the external team relatively easily.
company 4 Criticality – 1 Specificity – 5 Complexity – 1 Scale – 1 Figure 1.6 provides a graphical representation of the map solution for Company 4. Company 4 is a small game-design workshop, with a fairly specialized infrastructure. Because
Figure 1.6. MVM for Company 4
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the skills required to manage the systems are unique, the company relies on finding correspondingly unique resources. If the company employs the resource directly, the management will likely have little knowledge of the platform expertise and if the resource must be replaced, the recruiting overhead can be high in finding the appropriate staff. Using a service provider does not interfere with the management process since in this case it is relatively hands off, and the task of finding and/or replacing the specialized skills is handed off to an outside company that is more experienced in recruiting for such roles., this scale might not even require full-time employees, so contracting staff from a third party is much more cost effective.
cOnclusiOn It is finally worth mentioning that these are relatively extreme cases, and also simplified to illustrate the utility of the pattern, but conceptually the strategic decisions driven by the use of the MVM should be well-supported by relevant market data. Use of the model should increase
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the confidence level both of the organization and the supplier that their IT service partnership is an appropriate, sustainable, and supportable one. These decisions are often made by management based on intuition and market trends. Intuition is as good or bad as the experience and knowledge of the manager making the decision, so this tool can aid managers, good and not so good, by allowing them to approach the problem at the correct level of abstraction and relevance. A CIO should not be looking at an asset list and employee roster, with numerous other detailed data points, but needs to focus on the real strategic bird’s eye view of the situation when making such a critical decision. Market trends can be useful, but only if interpreted properly, which is usually more beneficial in hindsight. Hype and bust curves are obviously misleading, and strategic market trends as a guide implicitly rely on the market performing a useful amount of analysis, that if it takes place at all is seldom transparent to outside organizations. Market data is far more useful when analyzed in context, using proven methods and tools. In the case of outsourcing, market trends have varied wildly, with success of implementations varying almost as much. In this environment, CIO surveys and the like become less reliable.
budget, or disruptor. Of course, this would take as much analysis and testing to derive as any other pattern, but we put it forward here to show other potential areas the pattern could address. Ultimately, individual MVMs can be more or less useful, but the power lies in the application of the Design Pattern Paradigm to management theory in order to allow a more formalized method for developing and communicating strategic analysis in the management field.
rEFErEncEs Alexander, C., & Ishikawa, S. (1977). A Pattern Language. New York: Oxford University Press. Bragg, S. M. (2006). Outsourcing. Hoboken, NJ: John Wiley and Sons. Fowler, M. (1997). Analysis Patterns: Reusable Object Models. Indianapolis, IN: AddisonWesley. Gamma, E., Helm, R., Johnson, R., & Vlissides, J. (2000). Design Patterns: Elements of Reusable Object-Oriented Software (Paperback). Boston, MA: Addison-Wesley. http://en.wikipedia.org/wiki/Claude_LeviStrauss
Another area of great debate and consternation is the pricing of products and services. The MVM pattern could potentially be applied successfully to this problem as well. For example, one could use the inputs of market size, market share, innovation, and value and create a map topology divided into market segments such as market leader on the high end, to mainstream,
Laplante, P. A., & Neill, C. J. (2006). Antipatterns: Identification, Refactoring, and Management. Boca Raton, FL: Auerbach Publications. Shalloway, A., & Trott, J. R. (2005). Design Patterns Explained: A New Perspective on Object-Oriented Design. Boston, MA: AddisonWesley.
This work was previously published in Strategic Information Technology and Portfolio Management, edited by A. Tan; P. Theodorou, pp. 296-312, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.13
The Creation of a Commercial Software Development Company in a Developing Country for Outsourcing Purposes Sam Lubbe University of KwaZulu-Natal, South Africa
absTracT SDC has financial services knowledge with cross-industry technical skill capabilities. Their emphasis is on advanced development techniques and tools. The model they used is proving to be successful for all parties and the growth process had provided them with invaluable experience and expertise in the HR transformation. The lesson they have is that they need to ensure that they have a strong presence in the market.
inTrOducTiOn Some case studies are qualitative while some are not. Custom also has it that not everything is a case, but firstly having established the criteria for case
studies, it was therefore decided to subsequently follow the case study method. This was also done because the authors felt that the creation of a software development company (SDC) justified a case study. This was further motivated because there has been a growing interest in the use of qualitative techniques in the administrative sciences and the case study could do justification to research. This case study will therefore report on the creation of a software development company (SDC) in South Africa using a detailed description of interrelationships between perceptions of what is happening in developing countries and what is happening in developed countries. The case describes the scenario and contributions stemming from the methodological point of view. The case study also illustrates points such as the value of
The Creation of a Commercial Software Development Company in a Developing Country
following a structured method of establishing a methodology for starting such an SDC. The need is discussed for context specific measures of the characteristics for an SDC and the reporting of process measures while establishing an evaluation of the SDC that is being created. Also the need to explore the necessary relationships between the clients and the systems that are created and the perceptions of the clients are discussed. This is because the unidirectional assessment of the SDC can impact on the users and user characteristics and on computer software implementation. Despite the normative nature of the SDC the most important conclusion is the desirability for a variety of approaches to studying SDCs. No one approach to SDC research can provide the richness that information systems research needs for further advancement of the skills in a developing country.
inFOrmaTiOn sysTEms in sOuTh aFrica in cOnTExT South Africa is a medium sized country, 471,000 square miles at the southern tip of the African continent with a population of some 43 million people. Relative to the rest of Africa, South Africa is substantially industrialised. The Republic of South Africa is a wealthy country from an industrial and agricultural point of view and computers have been actively in use in South African business and industry since the early 1960s when both IBM and ICL opened offices in Johannesburg. Today South Africa employs computers in every aspect of industry, business, and government, as well as having a relatively high percentage of home computers among the middle class. All the major vendors are present and there is considerable interest in hi-tech. The business and industrial sectors in South Africa are as sophisticated as anywhere in the world in the use of information systems. South Africa leads the world in deep level mining and
supports this activity extensively with computer systems. The country also has a substantial financial services sector that has won international recognition for its excellence in information technology. For example, the First National Bank (FNB) of South Africa was named one of the world’s top 100 computer users by ComputerWorld Magazine in May 1995 and in July 1996; the same bank also won the prestigious Smithsonian Institute prize for the innovative application of biometrics in their information technology.
background Information systems play an important role in the survival of a country and its organisations. Coupled with the lower costs, increased processing capabilities of hardware, and cost conscientiousness of many CIOs and CEOs, it becomes a vital source of deriving efficient and cost effective solutions for organisational problems. A good manager using a well-organised information system enhances any organisation’s ability to compete favourably and it minimizes the assumptions and presumptions in decision making that could lead to bad performance and eventually the downfall of the organisation. In many organisations, information technology (IT) (especially software) also shapes the process of product development. Organisations that are able to adapt new software technology into their development process have often seen increased productivity and improvement overall in product quality. This is why so much emphasis is being placed in South Africa on the correct procedure for software development. This has provided the motivation for many organisations to strive to become a software development company (SDC). The cost of software development systems, like information systems, stems directly from the cost of resources required to provide and support the functions of systems. The decision to outsource development to SDCs can be a serious strategic change. Therefore, before managers can support
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software engineering, these SDCs must have a realistic understanding of the viability and of the costs and benefits of the tools. Cost benefit analysis usually can mean continuous reaching of goals (Lubbe, 1997). Benefits must usually exceed costs to justify the expense and this is another reason why organisations will look at SDCs as an alternative to developing software in-house. The economics of software engineering has often focused on software cost estimation. Essentially this is a consideration of the costs related to single development projects. First world sophistication, which is in demand, requires worldwide growth of the use of information technology. However, a worldwide shortage of information technology skills exists. The high level of South African skills (business and technical) consequently causes an alarming rate of loss of top skills and thus a shortage of quality human resources in the IT sector.
motivation for starting a commercial software development Operation The external business pressure causes conversions and downsizing of industry sectors. This in turn causes a trend towards more efficient, focused business SDCs. The increasing competition in the global market place and new entrance is another motivation for starting a new commercial software development operation. The demand for faster and more cost-effective software systems delivery causes better local content as well as flawless production services, which can also be another motivating factor. Some of the internal IT pressures such as skill shortages, the need for incentives to retain IT staff, perceived lack of professionalism, better productivity, delivery speed, quality, and clear career paths could be a very good motivating factor for starting an SDC. Further motivation for starting an SDC in developing countries could be to stop the outflow of South African talent by creating job opportuni-
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ties for new graduates. The worldwide dispersion of these talents could be prevented, ensuring a nucleus of software developers. For all software developers, recruitment opportunities would be created, thus enabling a contracting option and keeping their talent for the newly proposed SDCs. The SDC should ensure retraining of these people—ensuring interest, loyalty, and the driving force to succeed in the company. Creating the previously mentioned nucleus of software experts makes it easier for customers to rely on excellent solutions and maintenance of the completed products. The solution could be a result of a mixture of the right professionals leading to applicable end products.
creating a commercial software development company Background to Starting a New SDC The vision of the SDC company is to become the leading SA systems integrator for speed of delivery, quality, and value, using the most advanced tools and techniques, and to be the most appealing IT employer in SA. One should keep in mind that to start a largescale software development company, some projects, such as high-volume commercial transactions processing systems, require advanced analysis, design, and development techniques. This will also entail doing an evaluation of the SDC’s software development process in respect of the capability maturity model (CMM). Currently a minimum of CMM Level 3 has been targeted. This will ensure that a standard system development process is integrated throughout all development activities of the SDC. As a result, of this a degree of certainty in the quality of the software products will be guaranteed. Furthermore, this will also allow the SDC to benchmark its development process against international standards. The present SDC company has signed and completed more than 1700 maintenance requests
The Creation of a Commercial Software Development Company in a Developing Country
in their first year of operation. On the other hand, they have finished 99 projects in the first year and the following figures were provided in respect of the attainment of their goals: •
have some academic connections with one SA university since 1990 and had recruited some of the IS graduates from this university. They regard this as a long and mutual friendship. The managing structure of the company starts as a normal hierarchical organisation with a managing director at the top and directors for various departments. The operations director controls the following sectors: strategy and architecture, software factory, business intelligence, systems maintenance, support and renewal, project office, and network infrastructure (see Figure 1). The company identified the software manufacturing industry in South Africa as a situation of concern. They identified the current outputs of the IT industry as of a low standard and regard this as a future challenge for the success of the SDC. Their strategy is basically to prevent high staff turnover and to keep abreast of dramatic changes in the software manufacturing business.
Of 78 projects with planned end dates: ○ 18% were delivered ahead of time. ○ 44% were delivered on time. ○ 27% were delivered within one month of the planned dates giving them a completed figure of 89%.
An issue of concern is that they did not speak about the 11% that were needed to complete a 100% record. Of the 60 projects with initial costs estimates: • • •
52% were delivered under estimate. 28% were delivered on estimate. Only 20% were delivered slightly over.
Services and Operations of the SDC Company
The 20% delivered slightly over, needs to be defined but they declined the offer to clarify this. The company was created in the late 1990s by combing an established existing organisation and some key staff from the present organisation in the ratio of 3:2. The organisation presently has nearly 200 staff members and is based in one of the harbour cities of South Africa. Their future aim is to expand into international markets. They
The company’s services include items such as strategy and architecture, software factory, business intelligence, systems maintenance, and support renewal. On the strategic architecture side of the SDC, IT enabled business transformation consulting for this newly established organisation consists
Figure 1. Organogram for SDC Managing Director
Research and Standards
Strategy and Architecture
Operations
Software Factory
Sales & Marketing
Business Intelligence
Finance & Admin
Systems Maintenance, Support & Renewal
Project Office
Provincial Operations
Network Infrastructure
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of project definition, planning, and management. Analysis is an important aspect of any SDC and for this specific SDC that had been set up. The design of processes, applications, and technology are important factors for managers of SDC and the organisation. Business migration and development coordination is an aspect that should be kept in mind by the managers when they want to develop a new system or application and development of technology. All of this ensures business change and proper development coordination. The SDC can evaluate packages on behalf of any organisation and look at gap analysis in order to ensure that all variations are within all acceptable norms. Project management is an important facet of systems development. The SDC would, however, struggle to do some systems integration if they are not an integral part of the company. The SDCs staff however, needs some training in order to ensure a successful implementation. On the other hand, business systems development is the main thrust for the company that had been selected as part of the case study component. They specialise in enterprise systems groups and the distributed systems for any organisation. Their approach is an engineered, model-driven approach with tight project definition, management, and control. They feel that this approach would enable them to satisfy requirements from organisations that approach them. They implement changes and new systems with a minimum disruption to any organisation. The problem they face is that as an organization, they have only six years component-based developing experience. However, overall the combined experience of the staff might be several years. They specialise in applications such as GEN (Sterling), Microsoft, DB2, SQL server, and Oracle. The business intelligence section of SDC entails the formulation of a data warehouse strategy for the organisation by designing, developing, and helping to implement the data warehouse. They
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regard their duties as including the following: data analysis and DB design, data sanitisation and transformation, data warehouse development, and metabase management. The important aspect of this part of their duty includes data distribution, data mining, information reporting, and decision support. Here they use software such as SA.S, BO, DB2, and the SQL server. The systems maintenance, support, and renewal sectors include some of the following duties: • • • • • • • • • •
•
•
Service level agreement Production maintenance, running, and control Help service desk Request logging and work tracking Change control and management Production management, support, and standby Optimisation of platform Legacy renewal via internet enablement and component wrapping They use software such as COBOL, IDB2, IDMS, ADS/Online, MS, and Delphi. The strong point of the SDC is whole personal finance solutions. The system entails personal insurance (life and risk), employee benefits, and medical aid thus ensuring a well-developed financial package that ensures that the human resources section of any organisation is well run. In this regard, they use an EB2000/Dataway. Their customer base expansion strategy includes the EB centre (retirement funds, life insurance, properties, healthcare, and investments) while they work across industry into telecommunications, transport, utilities and manufacturing. Their approach to systems development
They use a twin track type of development. This entails the following:
The Creation of a Commercial Software Development Company in a Developing Country
•
•
•
•
•
•
The first step is the usual application requirements gathering, analysis, and design. During requirements gathering and analysis, the underlying philosophy is centred around in-depth identification of business needs. It is recognised that these phases of development are as crucial in terms of final product quality, as is the choice of development technology and actual construction. Therefore, the deployment of good analysts with sufficient experience in the client’s business area is given a priority. Thereafter, development is split in two different tracks along a component based development timeline. The first track entails component design and operation specification and the specific development of components. They release the component and the two tracks meet each other. During the first track’s process they also release the component interface release to the second track developers. The second track entails the application interface prototyping, building the application and application integration testing. There is communication between these two tracks all of the time in order to ensure that tile timeline is honoured. The last combined step is the application release builds whereby the application is installed and tested in the organisation.
The important step for SDC is the tactical delivery approach that the organisation follows. They follow the European approach whereby code and older software is re-used. If this approach is not applicable, they would investigate. If it is not better to buy, they build the application. If this is not applicable, then build for re-use would be their suggestion to their clients. Their target market is existing systems in the open market but their conceptual approach might differ. They keep
a stock of component objects they can re-use. During the development process, they adopt an approach such that the end product is the application that can be generalized and used for other companies as well.
Taxonomy of Components Their taxonomy could be divided into two sections. The first section is the technical section and deals with the following aspects: •
•
•
•
The security aspect has eight entities in the component and more than 30 public operations. The ADPV is a purchased component as well as the audit part of it. They do registration of all the parts they develop and install. The main taxonomy of components can be found in the business side of the organisation. They have 40 FIC applications and 19 public operations. The important aspect of their business is the client environment (69 entities and 11 public operations), investment applications (12 entities and 2 public operations), contribution applications (14 entities and 3 public operations), annuity costing basis (11 entities and public operations), EB event (1 entity and 3 public operations), client agreement role (68 entities and 14 public operations), fees (12 entities and 2 operations), Notation (5 entities, 2 public operations), annuity calculations (2 entities), global operations (no entities or public operations), agreement applications (40 entities, 11 public operations), portfolio applications (34 component entities and 5 public operations), and some investment switching applications which they have finished but nothing is sold yet. Components in the developing pipeline entails issues such as EB late pay limits, EM membership fixed property, EB bonus rates, EB commutation limits, and global tax rates and limits. 615
The Creation of a Commercial Software Development Company in a Developing Country
•
The results of the joint venture are that they had a successful HR transformation ensuring that they do not lose too many of their employees (8% vs. 25% previously). Their productivity is 100% better and therefore they can deliver systems faster. There is an international demand for their products.
companies are building their research and development capabilities. This would require: • • • •
Broad Requirements for Sustaining SDC Development In order to succeed, an aggressive government plan is needed. Industry and regional initiative need to be coordinated and correlated. The important aspect is free movement of information and skills. This means the elimination of inflow barriers for high-tech skills. To reach this goal, the government needs to do aggressive international marketing. Furthermore, the government needs to offer incentives for sustaining the growth of SDCs. Some ideas could be tax holidays for new start-ups, facilitation of international links, and knowledge exchange programmes, and so forth.
Sustaining the Generation of SDCs Companies need to copy examples of the growth of a national software capability that will ensure survival. This would require a prototype roadmap for the growth of a software centre. A lesson can be learned from the government of India: The Indian government has drawn up some software companies contracts with multi-nationals to send Indian programmers to work in the USA or Europe at the client’s site or under direct suspension of clients’ technical managers. Indian companies set up development centres in India where development and maintenance was done under Indian managers. Typical projects were systems maintenance, software test development, and execution as well as software components. Furthermore, some value adding is required while
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Highly developed project management capabilities Quality by decision Extensive employee training The highly evolved practise of process engineering and relationship management
The South African software industry and the SDCs need extensive domain knowledge in banking, insurance, and financial services. They also need to create new technical capabilities and products to sell overseas. For all of this, SDCs in developing countries need a highly educated work force, low cost of labour, highly developed information and telecommunication infrastructure and business modules consisting of: • • • •
Pilot project Larger scale development Dedicated development centres Own development units
The success factors of countries such as India and Ireland need to be copied. South Africa and other developing countries would like to educate a young, highly educated workforce with strong technical and business skills. These workers need to be highly effective and efficient. SDCs need full government support for the industry, with both financial and nonfinancial industries for both indigenous and overseas companies. This would make these countries an ideal gateway to the international markets. To summarise some patterns: • • •
A well-educated work force is mandatory. Do not start building independent products. Take advantage of regional markets.
The Creation of a Commercial Software Development Company in a Developing Country
cOnclusiOn
rEFErEncE
They have strong financial services knowledge with strong cross-industry technical skill capability and an emphasis on advanced development techniques and tools. The model they are using is proving to be successful for all parties and the growth process had provided them with invaluable experience and expertise in the HR transformation. They think they are well positioned for significant growth.
Lubbe, S. (1997). The assessment of the effectiveness of IT investments in South African organisations. PhD dissertation. University of the Witwatersrand, Johannesburg, SA.
This work was previously published in Information Communication Technologies: Concepts, Methodologies, Tools, and Applications, edited by C. Van Slyke, pp. 862-869, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.14
Networked Knowledge Management Dimensions in Distributed Projects Ganesh Vaidyanathan Indiana University South Bend, USA
AbstrAct Can knowledge capture and dissemination be managed efficiently? Is there a framework that addresses distributed knowledge management from creation to facilitation? The generation and dissipation of knowledge needs to be embedded in corporate processes. These processes need to have an underlying principle that eliminates the obstacles of collecting multiple knowledge perspectives within complex organizations. Furthermore, extrinsic motivators, social-psychological forces and organizational climate factors are believed to influence knowledge sharing. This paper discusses a framework that provides a synergized view to collect, share, and manage the distributed corporate knowledge using organizational knowledge models and technology knowledge models. Structural, cognitive, relational, and technological factors are derived from a synthesized literature review to formulate this
framework. The role of peer-to-peer networks and grid computing on distributed knowledge management is also examined.
IntroductIon Distributed knowledge management (DKM) is important in today’s knowledge-based economy (Desouza & Evaristo, 2004; Ezingeard, Leigh, & Chadler-Wilde, 2000; Pedersen & Larsen, 2001; Spangler & Peters, 2001; Un & Cuervo-Cazurra, 2004). The concept of the management of intellectual capital is well established in the academic arena (Grant, 1996; Lynn, 1999; Masoulas, 1998; Nonaka, 1994; Templeton, Lewis, & Snyder, 2002). Firm-specific knowledge that is a part of the intellectual capital is difficult for competitors to imitate even when employees are hired away since that knowledge is specific to the original work environment (Hatch & Dyer, 2004). How-
Networked Knowledge Management Dimensions in Distributed Projects
ever, the firm-specific human capital of knowledge can be retained by using knowledge management systems (KMS). Knowledge management (KM) is of paramount importance to organizations and is emerging as a powerful source of competitive advantage (Hahn & Subramani, 2000). Scholars have recognized inter-organizational knowledge transfer and knowledge flows and their link with competitive success (Inkpen & Tsang, 2005; Gupta & Govindarajan, 2000). One of the reasons why multinational corporations exist is because of their ability to transfer and exploit knowledge more efficiently and effectively (Gupta & Govindarajan, 2000). Knowledge flows in such firms provide them the ability to be flexible, respond more quickly to changing market conditions, be more innovative, and improve decision making and productivity (Alavi & Leidner, 1999). The goal of such organizations is to be aware of the existence and management of collective and individual knowledge (Bennet & Bennet, 2003). KM incorporates organization of corporate knowledge according to a single, supposedly shared and objective classification. However, most of the KMS do not have this vision of knowledge (Bonifacio, Bouquet, & Traverso, 2002). Moreover, in the process of knowledge extraction and refinement, all subjective and contextual aspects of knowledge are eliminated (Bonifacio, Bouquet, Mameli, & Nori, 2003). DKM is an approach to KM based on the principle that multiplicity and heterogeneity of perspectives within complex organizations should not be viewed as obstacles to knowledge exploitation, but rather as an opportunity that can foster innovation and creativity (Bonifacio et al., 2002). DKM is a distinct and explicit process that attempts to leverage various perspectives of organizational knowledge into shared institutional capital. While DKM is a process and a strategy, KMS is an advanced information technology tool that is essential to implement the knowledge management process and strategy. Literature on KM may be broadly classified into four dimensions that includes structural, cog-
nitive, and relational dimensions in management journals (Rulke & Galaskiewicz, 2000; Inkpen & Tsang, 2005), and technology solutions dimension in information systems research (Hahn & Subramani, 2000; Lee & Choi, 2003). The KM enablers that include social and technical perspectives were mapped to a knowledge creation process (Nonaka, 1994) to initiate an integrated view of KM (Lee & Choi, 2003). This integrated model discusses only the knowledge creation process. But, KM is more than just knowledge creation. In general, KM is the creation, representation, storage, dissemination, transformation, application, maintenance, and facilitation of distributed organizational knowledge (Schultze & Leidner, 2002; Alavi & Leidner, 2001). In DKM, knowledge discovery, knowledge transfer and facilitation of knowledge are as important as knowledge creation (Briggs, De Vreede, Nunamaker, & Sprague, 2002; Grover & Davenport, 2001). The literature lacks a general framework that captures all these facets of DKM to represent a unified model of DKM. Such a framework is needed for academicians to further research distributed knowledge systems and for practitioners to understand the implications of DKM implementations. In this paper, a framework for DKM using structural, cognitive, relational, and technology dimensions is proposed. The framework is based on a balanced view of organizational management, social, cognitive, and technological facets of DKM. Peer-to-peer (P2P) and grid computing are discussed as technologies for organizational knowledge management using these dimensions of DKM. The rest of the paper proceeds as follows. The next section defines DKM and provides the background literature for the proposed framework. The following section derives the four dimensions of DKM supported by existing research literature. The section afterwards defines P2P technology and grid computing in the context of organizational knowledge management and discusses how these technologies can be used. The final sections discuss the contributions of the study and presents avenues for future research. 619
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orgAnIzAtIonAl Knowledge And dIstrIbuted Knowledge MAnAgeMent The concept of DKM has received widespread attention primarily because organizations have come to realize that a large amount of corporate knowledge resides in the heads of workers and is dispersed in the processes, practices, and documents of the organization (Davenport, DeLong, & Beers, 1998). Sharing this knowledge is a critical catalyst for creativity and subsequent innovation (Peters, 1999) as it provides a means by which ideas can be conceptualized, shared, and tested. To share this disparate knowledge, a distributed knowledge strategy is needed. Without an effective distributed knowledge strategy, firm-specific individual-owned organizational knowledge is lost when employees leave the organization (DeLong, 2004). It is appropriate to define knowledge in an organizational context before discussing DKM approaches. Most researchers distinguish knowledge from data and information (Courtney, 2001). Davenport et al. (1998) defines knowledge as information combined with experience, context, interpretation, and reflection. There are several classifications of KM in the research literature. Courtney (2001) describes several types of knowledge recognized in the literature that includes explicit vs. tacit, procedural vs. declarative, esoteric vs. exoteric, and shallow vs. deep. The distinction between explicit and tacit knowledge is of particular importance in KM. While both types of knowledge are important, organizations have focused primarily on managing explicit knowledge. The attempt to manage tacit knowledge is relatively a recent development. Nonaka (1994) was among the first researchers to suggest the importance of managing tacit knowledge and he proposed the Spiral model of organizational knowledge creation. The Spiral model is comprised of four modes of knowledge
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conversion that include socialization, combination, externalization, and internalization. The socialization mode refers to the conversion of tacit knowledge to new tacit knowledge through social interactions and shared experience among organizational members, for example, mentoring. The combination mode refers to the creation of new explicit knowledge by merging, categorizing, reclassifying, and synthesizing existing knowledge, for example, statistical analysis of sales data. Externalization and internalization are the critical steps in the spiral of knowledge. Externalization refers to converting tacit knowledge to new explicit knowledge, for example, writing requirement specifications after interviewing a potential client. Internalization refers to the creation of new tacit knowledge from explicit knowledge, for example, gaining new research ideas through reading a journal article. Earl (2001) proposes a more extensive classification of KM strategies. His research identifies the following schools of KMS that include cartographic, engineering, commercial, organizational, spatial, and strategic. The “learning ladder” model (Ciborra & Andreu, 2001) discusses a compact way of describing the unfolding of multiple organizational knowledge creation, transformation and transfer processes to three different organizational contexts. For a distributed decision support system, a classification based on dimensions of system design and their attributes were developed (Ba, Stallaert, & Whinston, 2001). In this view of classification, three dimensions that include software engineering, technology acceptance, and incentive alignment are discussed. All these three dimensions are key attributes to any generic information systems design. However, there are important factors to be considered for DKM other than the generic design attributes. Collaboration (Lee & Choi, 2003), social networks (Cross & Cummings, 2004) and facilitation of knowledge (Kwok, Ma, & Vogel, 2002) are essential to DKM implementation.
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Grover and Davenport (2001) developed a framework that focuses on the knowledge process and the context in which the process is embedded. Even though this framework considers the generation, codification, transfer, and realization of KM, it can be extended with specifics of how technology may be integrated towards the success of firms. A model for KM success takes into account key managerial influences, key resource influences, and key environmental influences (Massey, Montoya, & O’Driscoll, 2002). KM initiatives will not be successful by focusing on the knowledge transfer processes alone. The knowledge transfer processes combined with knowledge acquisition using the efficiencies of the technology will likely to be more successful in managing knowledge. These studies pose a question: What technologies are to be used for successful knowledge management? Even though there is a great deal of advanced technologies, due to variations in organizational nature and different KM approaches, executives confront the challenging task of deciding the type of information technology (IT) to deploy in support of their KM initiatives (Kankanhalli, Tanudidjaj, Sutanto, & Tan, 2003). Effective use of tools like knowledge management systems (KMS) result in successful management of knowledge and are manifested in a variety of implementations (Davenport et
al., 1998). IT tools and IT infrastructures are important enablers of DKM systems (King, Marks, & McCoy, 2002). Collaborative computing tools, knowledge servers, enterprise knowledge portals, electronic document management tools, knowledge harvesting tools, search engines, and knowledge management suites are some of IT tools that support DKM. These tools help firms to produce, manipulate, store, communicate, and disseminate information and knowledge. These IT tools need to harmonize with existing infrastructure as firms have invested enormous amounts of capital in their existing computer systems (King et al., 2002). IT can play an important role in transcending organizational boundaries such as functional knowledge repositories and geographically dispersed employees. While the most obvious role of IT is seen in the creation, capture, and maintenance of knowledge repositories, IT also plays a dominant role in the access and dissemination of distributed organizational knowledge (Hendriks, 1999). These KM strategies and technology may be used to formulate a framework of networked knowledge management. Organizations should strive to balance the efficiencies of process capabilities and technology infrastructure capabilities (Gold et al., 2001). The process capabilities of organizations, in the form of structural, cognitive, and relational dimensions found in management
Figure 1. Four dimensions of distributed project knowledge management
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journals along with the technology solution dimension in information systems research can be integrated to form a framework as described in the next section.
Four-dIMensIonAl FrAMeworK Firms incorporate knowledge repositories to store knowledge. Knowledge of individual employees do not transform easily into organizational knowledge even with the implementation of knowledge repositories (Bock, Zmud, Kim, & Lee, 2005). Individuals tend to hoard knowledge for various reasons. Factors such as extrinsic motivators, social-psychological forces and organizational climate factors are believed to influence individuals’ knowledge sharing intentions (Bock et al., 2005). While these factors contribute to knowledge sharing, other attributes of social capital networks are important to knowledge transfer in firms (Inkpen & Tsai, 2005). In addition, technology to manage creation, sharing and transfer knowledge is much needed to realize knowledge flows (Grover & Davenport, 2001). Firms use technology tools to support knowledge transfer and management (Alavi & Leidner, 2001). All of these organizational attributes of distributed knowledge management may be organized in four dimensions. These four dimensions are illustrated as a framework in Figure 1. Each one of these dimensions is comprised of various factors that are discussed in the following sections and detailed in Table 1. The dimensions and factors have been adapted from multi-disciplinary research literatures.
structural dimension Structural dimension (Nahapiet & Ghoshal, 1998; Inkpen & Tsang, 2005) involves the pattern of relationships between the project team members. The structural dimension factors include ties,
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configuration, stability, informality, and management of project teams.
Ties Team member ties deal with the specific way members are related. Social ties facilitate interteam member social interactions and provide channels for knowledge transfer. Strong ties between members are needed for knowledge transfer to occur. Factors that support these ties are prior team relationships and repeated transactions during projects (Inkpen & Tsang, 2005). Griffith, Sawyer, and Neale (2003) proposed location and time spent interacting with team members via various media as one of the constructs in their research. In group performances, Fjermestad (2005) illustrated that teams using constructive consensus procedures in a virtual environment have a greater willingness to work together than the teams using structured conflict procedures, especially after the first task and have a tendency towards stronger decision acceptance.
Configuration The configuration determines the pattern of linkages among project members. Hierarchy, density, and connectivity affect the flexibility and ease of knowledge transfer through their impact on the extent of the contact and accessibility among the team members (Krackhardt, 1992). Intra-corporate project teams are arranged in a hierarchical way providing connectivity among the team members. Decentralization of authority to the team members is important so that they can determine how to make the best use of their knowledge (Inkpen & Tsang, 2005). The quality and pattern of relationships existing among group members (Argote, McEvily, & Reagans, 2003) is important as specialists and generalists perform well in decentralized teams (Rulke & Galaskiewicz, 2000).
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Stability Organizational learning depends partially on memories of individuals and their learning abilities (Carley, 2005). Intra-corporate teams are usually stable, but this stability may not help if there is a high personnel turnover. Maintaining a stable pool of personnel can help individuals develop relationships. This stability retains knowledge as well as promotes knowledge sharing by establishing rapport and friendship (Inkpen & Tsang, 2005).
Flexibility Knowledge creation requires flexibility and less emphasis on work rules. Flexibility gives rise to new ideas. Increase flexibility in an organizational structure can result in increased creation of knowledge (Lee & Choi, 2003). This flexibility enables team members to communicate and interact with one another (Jarvenpaa & Staples, 2000).
Management The competence of knowing what others know enhances a team’s overall knowledge capacity (Grant, 1996). Maintaining this directory of the environment is needed for managing distributed projects. Ability to develop and maintain relationships with others as well as interacting and working with team members is crucial to managing others (Joseph, Ang, & Tan, 1996). Leadership and disciplined project management helps managing project teams and enables project managers to interact and find ways of combining business processes and establishes an appreciation of knowledge assets relative to core business processes (Bassellier & Benbasat 2004; Massey et al., 2002). Managerial influences that establish enabling conditions for KM includes leadership, coordination, control and measurement. Measurement is essential for evaluation of the impacts of KM initiatives and consequently leadership,
coordination and control (Massey et al., 2002). Knowledge managers facilitate knowledge creation, transfer, sharing and maintenance (Grover & Davenport, 2001).
cognitive dimension The cognitive dimension represents the resources that provide shared meaning and understanding between project team members (Nahapiet & Ghoshal, 1998; Inkpen & Tsang, 2005). Shared goals and shared culture encouraged in organizations enable project team members to achieve tasks and outcomes (Inkpen & Tsang, 2005). Learning is part of this cognitive dimension as leaning can be defined as the degree to which it is encouraged in organizations (Hurley & Hult, 1998; Lee & Choi, 2003). Through a learning environment organizations can help team members play active roles in knowledge creation (Lee & Choi, 2003). The cognitive dimension factors include shared goals, shared culture and learning as resources and environments provided by organizations to share knowledge.
Shared Goals Shared vision (Tsai & Ghosal, 1998) involves collective goals and aspirations for project team members. Members have similar perceptions on interacting with each other. This promotes mutual understanding and exchanges of ideas and resources. A shared vision is a bonding mechanism that helps different parts of distributed project teams to integrate knowledge (Inkpen & Tsang, 2005). Lower levels of goal clarity increases frustration and dissatisfaction among team members (Schnake & Cochran, 1985).
Shared Culture Distributed project teams may be culturally diverse. The local or national culture needs to be understood and accommodated so that when
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knowledge is transferred from one to another, cultural conflicts will not hinder the knowledge transfer (Inkpen & Tsang, 2005). Overall effect of cultural diversity should be beneficial to knowledge transfer (Inkpen & Tsang, 2005).
Learning The organizational level is where we find stores of knowledge and learning in such nonhuman elements as structures, systems, procedures, routines, and strategy (Crossan & Berdrow, 2003). Analysis at the organization level shows us the importance of aligning these nonhuman resources with the competitive environment (Mintzberg, Ahlstrand, & Lampel, 1998). Successful KM requires appropriate management style, work environment, and incentives. For successful knowledge creation, organizations should develop a deeply integrated
learning culture and provide resources such as education, training, and mentoring (Lee & Choi, 2003; Alavi & Leidner, 2001).
relational dimension The relational dimension focuses on the role of the direct ties between team members. This dimension is relational as opposed to structural outcomes of project team interactions (Inkpen & Tsang, 2005). The relational dimension factors include trust and collaboration among distributed project teams.
Trust Trust is essential for the coherence of any social system and is an essential and pervasive feature of individual and organizational relationship
Description Strong ties between members; Prior partner relationships and repeated transactions; constructive consensus Decentralization of authority by headquarters; group structure Personnel relationships; Low personnel turnover Flexible work rules; lack of formal structure; synergistic group processes Disciplined project management; leadership
Shared vision; collective goals; goal clarity Shared Culture Cultural diversity; accommodation Learning environment; training; Learning mentoring Clear and transparent reward; incentives Trust to reduce mistrust Active available help within team; Collaboration sharing of knowledge; expertise credibility; perceived status Shared goals
Cognitive
Relational
Technical
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Tools
IT to enable DKM; technology acceptance & adoption; compatibility; ontology; security
Support and Maintenance
Support from IT; knowledge maintenance; loose structure
References Inkpen & Tsang (2005); Griffith et al. (2003); Fjermestad (2005) Inkpen & Tsang (2005); Rulke & Galaskiewicz (2000) Inkpen & Tsang (2005) Lee & Choi (2003) Massey et al. (2002); Bassellier & Benbasat (2004); Grover & Davenport (2001) Inkpen & Tsang (2005) Inkpen & Tsang (2005) Lee & Choi (2003); Alavi & Leidner (2001) Inkpen & Tsang (2005); Ba et al (2001) Lee & Choi (2003); Herzog (2001); Thomas-Hunt et al. (2003); Sussman & Siegal (2003) Bonifacio et al. (2003); Ba et al (2001); Grover & Davenport (2001); King et al. (2002); Gregor & Benbasat (1999); Edgington et al. (2004) Lee & Choi (2003); Hahn & Subramani (2000)
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(Maclagan, 1997). Trust plays an important part in the willingness of team members to share knowledge. Trust in a firm focuses on the role of direct ties between actors and the relational, as opposed to structural, outcomes of interactions (Inkpen & Tsai, 2005). As trust develops over time, opportunities of knowledge transfer should increase (Inkpen & Tsang, 2005). When team members compete against one another for resources, suspicion may replace trust in their relationship and consequently, knowledge sharing is sacrificed (Inkpen & Tsang, 2005). Hence, it is important that corporations establish clear and transparent reward criteria so that the team members concerned will not suspect any underthe-table favoritism (Inkpen & Tsang, 2005). Knowledge sharing is both constrained and difficult without proper and necessary incentives for doing so (Ba et al., 2001).
Collaboration Collaboration is defined as the degree to which team members actively help one another in their work (Hurley & Hult, 1998). Electronic collaboration is defined as collaboration among different individuals to accomplish a common task using electronic technologies (Kock & D’Arcy, 2002). Collaborative culture fosters this type of exchange by reducing fear and increasing openness to other members. There is a positive relationship between collaboration and knowledge creation process (Lee & Choi, 2003). Trust has been identified as a factor in successful collaboration. Successful collaborative project teams use shared processes and conditions to build trust and enable open and honest communication. Collaborative sharing of knowledge can be a valuable and powerful tool for building collaborative team trust (Herzog, 2001). In the context of text-based messages, which is one of the mediums of collaboration in distributed projects, the opinions changed significantly in the direction advocated by the communicator when the material was attributed
to a high-credibility source than when it was attributed to a low-credibility source (Sussman & Siegal, 2003). Individuals within a project team may derive status both from social interaction with other members and their knowledge or expertise (Thomas-Hunt, Ogden, & Neale, 2003). Socially isolated members participate more in discussions and express greater unique knowledge than socially connected members. Social status can promote the differential emphasis of shared, own, and other unique knowledge, as well as biased evaluations of member knowledge and contribution (Thomas-Hunt et al., 2003).
technical dimension Technology plays an important role in all aspects of KM (Grover & Davenport, 2001). Collaborative computing tools, knowledge servers, knowledge portals, search engines, document management tools, knowledge harvesting tools, and KM suites encompass the technologies used in distributed projects. Firms are making significant IT investments in deploying systems to manage knowledge (Hahn & Subramani, 2000). The major challenge of managing knowledge is less its creation and more its capture and integration (Grant, 1996). To effectively manage knowledge, organizations should strive to balance the efficiencies of process capabilities and technology infrastructure capabilities (Gold, Malhotra, & Segars, 2001). To achieve this balance, technology and its support functions need to be addressed as a dimension. The technology dimension includes IT tools, support, and maintenance.
Tools System design plays an important role in KM initiatives (King et al., 2002). As with most information systems, the success of a DKM system partially depends upon the extent of use, which itself may be tied to system quality, information quality, and usefulness (Delone & McLean,
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1992). One difference between traditional IT and DKM systems is the ex ante nature of objectives, outcomes, and processes of the system to be developed (Hahn & Subramani, 2000). Traditional approaches to system development may not be appropriate for KMS. A distributed knowledge representation is needed. Knowledge schemas change over time and different schemas may be used for different parts of the organization (Hahn & Subramani, 2000). Further, quality of the DKM system may be addressed using information systems product measurements. The quality of a product is measured with respect to whether the software functions correctly under every possible contingency, whether the system can be ported easily, whether the system has been well documented, whether standards have been adhered to, whether open architecture has been followed, and so forth (Ba et al., 2001). Technology acceptance has been a subject in research for a number of years (Davis, Bagozzi, & Warshaw, 1989; Devaraj, Fan, & Kohli, 2002).User friendliness, user acceptance, perceived ease-ofuse, perceived usefulness, user satisfaction, cognitive fit, and task/technology fit along with incentives make users adapt and contribute to a system (Ba et al., 2001). KMS need to adapt this view to be more successful. Size of the KM system especially in the technology sense, needs to be addressed. Users of P2P networks established that there is an optimal size in network externalities and that they are less likely to contribute resources to the system as the network size increases (Asvanund, Clay, Krishnan, & Smith, 2004). Explanations, when suitably designed, improve performance and perceptions of the system especially when the users perceive an anomaly, when they want to learn, and when they want a specific piece of knowledge to solve a problem (Gregor & Benbasat, 1999). In a distributed project system, support of local languages as well as company-specific functional language translations of knowledge is needed (Massey et al., 2002).
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KM success is enhanced when applying ontology as an enabler to integrate KM practices and processes (Edgington, Choi, Henson, Raghu, & Vinze, 2004). A centrally located index for knowledge in projects helps foster an efficient coordination mechanism, as this index contains the sources of knowledge in projects (DeSouza & Evaristo, 2004). Security of the stored knowledge is of utmost importance as the intellectual wealth of an organization is capture electronically. DKM infrastructure has to be compatible with the existing computer systems (King et al., 2002). Finally, as with any information systems technical standards need to be established for DKM (King et al., 2002). In summary, IT tools include data mining, learning, bulletin boards, repositories, knowledge directories, expert systems and workflow systems enable knowledge creation, storage, retrieval, transfer, and application.
Support and Maintenance Maintaining contributions to distributed knowledge content is an important issue. Motivating team members to contribute depends on the structuring of content (Hahn & Subramani, 2000). When knowledge structure is loosely structured, response behavior of members is enhanced and thus provides a source for motivation, greater visibility, and in general, engendering a higher social status (Hahn & Subramani, 2000). IT facilitates collection, storage, and exchange distributed project knowledge, integrates fragmented flows of knowledge, and fosters all modes of knowledge creation (Lee & Choi, 2003). This support from information technologies is critical in all aspects of DKM. Recent research has established relevant technologies that pertain to DKM in organizations (Bonifacio et al., 2003; Desouza & Evaristo, 2004). The framework established in this study embraces technology as one of the main dimensions of networked knowledge management. In large global firms and in hypercompetitive environ-
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ments, IT will be interlaced with organizational KM strategies and processes (Alavi & Leidner, 2001). The next section illustrates how technology can be used in conjunction with the proposed DKM framework.
organizational Knowledge Management and technologies P2P technologies include file sharing, resource sharing, and collaboration systems. The primary challenge in P2P computing is to design and implement a robust and scalable distributed system composed of inexpensive, individually unreliable computers in unrelated administrative domains (Balakrishnan, Kaashoek, Karger, Morris, & Stoica, 2003). The demand of users for transparent access to information and applications, regardless of the hosts on which they reside, are changing the computing environment from a traditional centralized model to a distributed model (Bauer & Coburn, 1994). In the long term, the partitioning of components into clients and servers will become constraining and a computing environment based on P2P interactions will be required (Bauer & Coburn, 1994). P2P technologies permit a greater degree of freedom and independence on the part of users by making resources available in a more customized manner (Schoder & Fischbach, 2003). P2P computing mirrors face-to-face human interaction more closely than do client/ server architectures (Barth, 2001). Peer-mediated DKM technology has been proposed by Bonifacio et al. (2003). A hybrid approach including centralized (client-server) technology and a peer-mediated technology has been proposed by Desouza and Evaristo (2004). Moreover, P2P networking naturally supports DKM by closely adopting the conventions of face-to-face human communication (Tiwana, 2003). For P2P technologies to be established in DKM, it must support robust security. A viable hybrid model incorporating both client/server and P2P architecture will give end-users the flexibility to
share documents and applications and still allow a central authority to exercise basic policies and control (Desouza & Evaristo, 2004). Fattah (2002) distinguishes between two main categories of applications for the P2P architecture: active ones in which users or systems take some action; and passive ones in which idle resources are harnessed for other uses. Table 2 illustrates this classification scheme and provides examples of applications in each category. Each of these application categories offers unique solutions to specific problems and they are mostly independent of each other. Another facet in research of DKM technologies is the knowledge grid (Cannataro & Talia, 2003). Although grid computing is becoming an important framework for enabling applications to utilize widely distributed collections of computational and data resources, current grid software is still in rudimentary stages. Grid computing is the most promising framework for future implementations of high-performance data-intensive distributed applications. The knowledge grid is a significant step in the integration architecture for distributed data mining and knowledge discovery (Cannataro & Talia, 2003). Bilykh et al. (2003) use the grid computing paradigm to integrate medical information. When data is maintained over geographically distributed sites the computational power of distributed and parallel systems can be exploited for knowledge discovery in databases. In this scenario the grid can provide an effective computational support for distributed knowledge discovery on large data sets (Congiusta, Pugliese, Talia, & Trunfio, 2003). P2P technologies and grid computing have great potential to grow into a strategic organizational tool for knowledge sharing. Current IT solutions for DKM are mostly focused on explicit knowledge, its capture and codification. P2P and grid computing provides a way to circumvent the limitations of current IT for KM in distributed project purposes. Kini (2002) suggests that the corporate version of P2P will enable users to actively share knowledge and information in innovative
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Table 2. Classification scheme of P2P technologies Active Applications User Collaboration: File Sharing, Workgroups & Communications, Gaming Application Interaction: Knowledge Management Systems
and flexible ways. Schoder and Fischbach (2003) state that P2P refers to technology that enables two or more peers to collaborate spontaneously in a network of peers by using appropriate information and communication systems without the necessity for central coordination. Current collaboration systems are designed to provide the ability for easy formation of ad hoc groups and communities without intervention from any central authority. Groove Networks’ Groove platform has received the most attention in this arena. Groove has bundled instant messaging, file sharing, online chat, and video conferencing in a single platform. When users work offline in the Groove space, their changes to group documents are synchronized with the rest of the group as soon as each person returns to the Web. GlaxoSmithKline PLC uses Groove Networks P2P software for collaboration with scientists at other biotech firms and universities (DiSabatino, 2001). Since current P2P technologies are still in their rudimentary stages, the decentralized nature of P2P architecture poses special challenges. Schoder and Fischbach (2003) list the following P2P concerns in an organizational context that includes network control, security, interoperability, metadata, and cost sharing. Finally, P2P technologies create significant legal and ethical concerns. The ability to access information from individual’s computer and share this information with a number of users raises security and privacy issues.
conclusIon The knowledge network in an organization must be supported by its technology network as well as structural, cognitive, relational networks. KM involves distinct but interdependent processes of knowledge creation, knowledge storage and retrieval, knowledge transfer and knowledge application (Alavi & Leidner, 2001). The integrated four dimensions that form a unified model of DKM discussed in this paper form a strategy to integrate these interdependent processes. The extent to which P2P and grid technologies are implemented for organizational purposes will depend on technological, economic, and legal factors. While the discussion of the “purity” of P2P and grid computing efforts is of academic interest, organizations are only interested in the practical consequences of P2P computing. The short term benefits of P2P and grid technologies include cost savings, efficiency, and better human interface. In the long term, P2P and grid technologies have the potential to change how organizations do business using KM in distributed projects.
lIMItAtIons And Future reseArch The primary objective of this paper is to characterize an integrative view of distributed knowledge management and provide a strategic guideline to practitioners and academicians. This study has a few limitations. We have discussed only the major
Networked Knowledge Management Dimensions in Distributed Projects
factors of the four dimensions and there are other social capital relationships exist. Environmental, political and legal relationship factors have not been considered in this study. Knowledge transfer across strategic alliances is important and was not taken into account in this study. Most studies in this area have examined some of the dimensions in isolation (Inkpen & Tsang, 2005; Lee & Choi, 2003; Becerra-Fernandez & Sabherwal, 2001; Szulanski, 1996; Zander & Kogut, 1995). Researchers and practitioners have not tried a fully integrative model of DKM. The framework discussed in this article integrates the voluminous scholarly work in area of DKM and is ready to be examined by researchers for further studies. One challenge is to decipher the relationships among the four dimensions proposed in this study. The results of this study needs to be formulated and tested in a theoretical model. The framework may be used as a stepping stone for further empirical research and can help formulate robust strategies that involve trade-offs between these four dimensions. The relationships among the four dimensions of DKM can provide insights to practitioners of knowledge management, IT managers, as well as academicians. The ideas, discussion, and the integration of research views in this paper hopefully will stimulate further interest in this topic.
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This work was previously published in International Journal of e-Collaboration, Vol. 2, Issue 4, edited by N. Kock, pp. 19-36, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.15
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era Igor Crk University of Arizona, USA Dane Sorensen Raytheon Missile Systems, USA Amit Mitra TCS Global Consulting Practice, USA
Abstract
Introduction
Collaborative work groups that span multiple locations and time zones, or “follow the sun,” create a growing demand for creating new technologies and methodologies that enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. The hurdles faced by members of such virtual teams are in three key areas: differences in concepts and terminologies used by the different teams; differences in understanding the problem domain under consideration; and differences in training, knowledge, and skills that exist across the teams. These reasons provide some of the basis for the delineation of new architectural approaches that can normalize knowledge and provide reusable artifacts in a knowledge repository.
The increasing prevalence of collaborative work groups that span multiple locations and time zones create a growing demand for creating new technologies and methodologies that can enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. In the specific case of information technology (IT), more than 380,000 professionals are currently focused exclusively on export-oriented activities (Aggarwal & Pandey, 2004). The hurdles faced by members of such virtual teams are in three key areas: (i) differences in concepts and terminologies used by the different teams; (ii) differences in understanding the problem domain under consideration; and (iii) differences in training, knowledge, and skills that exist across the teams (Chang, Dillon, Sommerville, & Wongthongtham, 2006). These reasons provide some of the basis for the delineation of new architectural approaches
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
that can normalize knowledge and provide reusable artifacts in a knowledge repository. This article focuses on the issue of providing information systems agility, especially when the work is outsourced from one country (or company) to another or as the work is performed in multiple countries using a hybrid offshoring model such as the 24-Hour Knowledge Factory concept (Gupta, Seshasai, Mukherji, & Ganguly, 2007). This article also deals with the issue of creating an evolving knowledge repository that can be used when systems need to be redesigned or reimplemented.
Related Work The object management group (OMG) is actively involved in the creation of a heterogeneous distributed object standard. In a departure from modeling standards, such as the common object request broker architecture (CORBA) and the related data distribution service (DDS), OMG moved towards the unified modeling language (UML) and the related standards of meta-object facility (MOF), XML data interchange (XMI), and query views transformation (QVT). The latter standards provide a foundation for the model drive architecture (MDA). In an effort to bring UML and the Semantic Web together, OMG is leading progress toward the ontology definition metamodel. More specifically, MDA, as related to software engineering, composes a set of guidelines for creating specifications structured as models. In MDA, the functionality is defined using a platform-independent model with a domain-specific language. The domain specific language definition can be translated into platform-specific models by use of a platform definition model (PDM). The ontology definition metamodel is an OMG specification that links common logic and OWL/ RDF ontologies with MDA. Common logic being an ISO standard for facilitating the exchange of
knowledge and information in computer-based systems, and resource description framework (RDF) and Web ontology language (OWL) being the latest examples of framework and related markup languages for describing resources authored by the World Wide Web Consortium (W3C). OMG and W3C standards are available online at omg. org and w3.org, respectively. The notion of reuse of knowledge has been previously explored with respect to organizational memory systems. Markus (2001) identified distinct situations in which reuse arose according to the purpose of knowledge reuse and parties involved. The knowledge reuse situations exist among producers who reuse their own knowledge, those who share knowledge, novices seeking expert knowledge, and secondary knowledge miners. The solutions to the problems of meeting the requirements of knowledge storage or retrieval were presented as a combination of incentives and intermediaries. In the context of allocation of IT resources, O’Leary (2001) conducted a case study of a knowledge management system of a professional service firm concluding that service-wise requirements for knowledge reuse should impact the design of knowledge systems. For example, the studied firm contained three primary service lines: tax, consulting, and audit. Differential reuse, stemming from the relatively low reuse in the consulting service line to high reuse in the tax line, leads to a particular allocation of knowledge bases, software, hardware, and network resources. O’Leary’s paper supports earlier work by Vanwelkenhuysen and Mizoguchi (1995), which showed that knowledge reuse has depended on organizational aspects of knowledge systems. Their work suggested dimensions along which ontologies for knowledge reuse may be built, based on workplace-adapted behaviors. The concept of knowledge reuse and agility is especially relevant to “follow the sun” models, similar in spirit to the 24-Hour Knowledge Factory, and have been attempted by others. Carmel
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(1999, pp. 27-32) describes one such project at IBM. In this project, IBM established several offshore centers in a hub-and-spoke model where the Seattle office acted as the hub. Each offshored site was staffed by a phalanx, a mix of skill sets that were replicated across each spoke. Work would be handed out by the Seattle hub; each spoke would accomplish the given task and send the results back to Seattle. This hub-and-spoke model necessitates specialization of the Seattle site. With only one site offering the specialized service, the Seattle site quickly became overwhelmed. The original goal of daily code drops could not be maintained. Treinen and Miller-Frost (2006) highlight several lessons learned that are echoed in other studies, particularly problems with continuity, misunderstanding and the lag time between cycles of conversation. Cultural differences are also cited as being problematic, especially with respect to various assumptions that were held in lieu of well specified requirements and planning. Perhaps the most relevant study in respect to the 24-Hour Knowledge Factory, Follow the Sun: Distributed Extreme Programming Development (Yap, 2005) describes a globally distributed, round-the-clock software development project. Here, a programming team was distributed across three sites (United States, United Kingdom, and Asia). One of the three sites had prior knowledge of extreme programming. The two remaining sites were coached on extreme programming practices prior to the collaboration. These two sites believed that the first site had an advantage due to its previous knowledge with extreme programming. Individuals from the three sites also met in person, which helped to build confidence about the capabilities of the members of other sites. The team used virtual network computing (VNC) and video conferencing to facilitate communication. Hand-off of project artifacts initially consisted of a daily work summary, but later grew to include knowledge learned and new objectives.
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Xiaohu, Bin, Zhijun, and Maddineni (2004) discussed the situation where development teams were dispersed globally, though it seemed that each global unit was still responsible for its own module of the project. The teams did not need to discuss development decisions with each other unless they were related to interfacing or would affect another team. They used the extreme programming method, but because of the global dispersal of teams, they lacked the benefits of customer colocation and participation. They thought the inability to get rapid customer feedback when the customer was in a different location adversely impacted the development of the product and the development time. These issues could easily impact development in a 24-Hour Knowledge Factory setting because customers in one location would thus not be able to interact with all sites. The above examples highlight the need for an agile knowledge ontology that can more adequately manages the problem of change.
Agility and the Problem of Change Change is difficult, complex, and risky because it usually has unintended side effects. Each decision has many consequences, which in turn have many more. The Y2K problem is a classic example of a seemingly innocuous design decision that snowballed into a worldwide problem. The decision to use a 2-digit representation of the year was originally deemed to be prudent. Later, it was thought to be a problem that would cripple computer systems when their clocks rolled over into the year 2000, since 00 is ambiguous. Ultimately, it cost the world around $600 billion (López-Bassols, 1998) to convert a 2-digit representation of the calendar year to four digits!
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Fundamental Computing Technologies
application frameworks, which provide the architecture for assembling components into a software system. Components and frameworks may be either developed in-house or externally procured. CBD typically involves using both inhouse developed and externally procured software components and frameworks. CBD leverages the emergence of middleware and software objects standards to make software reuse a reality (Ravichandran, 2005). Since CBD encourages the move toward more modular systems built from reusable software artifacts, it was expected to enhance the adaptability, scalability, and maintainability of the resultant software (Szyperski, 1997). CBD requires systems to be architected using a component framework necessitating developers to think through the interrelationships between various elements of an application system at a more granular level at an earlier stage in the development process than in traditional development approaches (Sparling, 2000).
Figure 1 shows the evolution of computing technology as researchers sought to tackle the problem of change and to remain agile though increasingly more complex demands are placed upon the technology. At the far left end of the spectrum lies hardware, originally physically and meticulously programmed to perform relatively simple tasks. Machine code replaced the physical machine programming by the formulation of CPU-specific words, bit patterns corresponding to different commands that can be issued to the machine. Each type of CPU has its own machine code. Similarly, the CPU architecture has a corresponding assembly language. As such, assembly language is not portable and does not increase flexibility, but it does provide the essential abstractions that free the programmer from the tedium of remembering numeric codes or calculating addresses (as was the case when programming was accomplished through machine code). An assembly language is an example of a second-generation language. Third generation languages, denoted by 3GL in Figure 1, finally freed the task of programming from the underlying hardware. This is a much overlooked, but crucial, example of adapting technology to find a solution to the problem of change. The more recent notion of component-based development (CBD) involves building software systems using prepackaged software components (Ravichandran, 2005). CBD involves reusing
IBM’s System/360: The Beginnings of Agile Development A good example of a business transformation tackling the issues of agility and change through modularity is provided by IBM’s System/360 (Amdahl & Blaauw, 2000) in the 1960s (Baldwin & Clark, 2000). The hardwired instruction sets of virtually all computers in the 1950s imposed a high level of interdependence of design parameters. Each computer was designed from scratch and each market niche was matched with
Figure 1.
Increasing Flexibility and Abstraction Hardware
Machine Assembly Code
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
a different system. Searching for new ways for teams to work together on a project, IBM led the effort to use modularity as a guiding principle. System/360 was the result of that effort. Further, System/360 marks the point at which the industry was transformed from a virtual monopoly to a modular cluster comprised of more than a thousand publicly traded firms and many startups (Fergusson, 2004). What makes System/360 an important landmark in the agility effort is that it belongs to the first family of computers that was designed with a clear distinction between architecture and implementation. The architecture of each model in the 360 family was introduced as an industry standard, while the system peripherals, such as disk drives, magnetic tape drives, or communication interfaces allowed the customer to configure the system by selecting from this list. With the standardization of the architecture and peripheral interfaces, IBM opened the doors for the commodity component market. With its list of peripherals, System/360 allowed the technology to adapt to a customer’s needs. Its backward compatibility tackled the problem of change in its own right, by allowing customers to upgrade and replace their hardware without losing essential capabilities. The ideas of encapsulation of functionality and the standardization of system interfaces inherent in System/360 are critical to understanding the importance of leveraging and reuse of knowledge.
Business Rules and the Structure of Information Just as was the case with early computer technology decades ago, prior to 3GL in our first example and System/360 in the second, today’s business rules are replicated in dissimilar formats in intermingled ways in multiple information systems and business processes. When any rule is changed, a concerted effort must be launched to
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make modifications in multiple systems. It makes change and innovation complex and error-prone. The framework described in this article attempts to untangle business rules with an ontology derived from the inherent structure of information. By untangling business rules even in complex legacy models and systems, one gains the capability to represent specific elements of business knowledge once, and only once, in a knowledge repository. Using this repository, the specific elements of knowledge can be designed to naturally manifest themselves, in appropriate forms, to suit the idiosyncrasies of different business contexts. As business processes became more tightly coupled with automation, the lack of agility in information systems became a serious bottleneck to product and process innovation. Frameworks that have attempted to solve this problem include structured programming, reusable code libraries, relational databases, expert systems, object technology, CASE tools, code generators and CAPE tools. They were not very effective partially because they did not adequately address the ripple effects of change; ideally, business rules and knowledge should be represented so that when we change a rule once, corresponding changes should automatically ripple across all the relevant business processes (Mitra & Gupta, 2006). Knowledge transfer and reuse (Kingston 2002; Myopolous 1998; Van Zyl & Corbett, 2000) attain greater importance in the case of outsourcing. In order to achieve efficiency of resource consumption, we need new approaches to facilitate encapsulation of knowledge and the sharing of such knowledge among the relevant set of workers.
The Framework of Knowledge Reuse While meaning and understanding are abstract notions, they are rooted in the physical world. We learned in chemistry that we can continually
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
subdivide a substance before reaching a building block, the subdivision of which would disallow us from identifying the substance and knowing its properties. Similarly, to identify the components of knowledge, we must distinguish between assertions whose division will involve no loss of information, and assertions whose division will sacrifice meaning: if an assertion is decomposed into smaller parts and the information lost cannot be recovered by reassembling the pieces. The fundamental rules that cannot be decomposed further without irrecoverable loss of information are called indivisible rules, atomic rules, or irreducible facts (Ross, 1997).
Objects, Relationships, Processes, Events, and Patterns In the real world, every object conveys information. The information content of physical objects is conveyed to us via one or more of our five senses. Objects are associated with one another. While some associations involve the passage of time, other associations, such as the relative locations of physical objects, are relationships that do not necessarily involve time. These relationships and associations are natural storehouses of information about real world objects. Further, these relationships are objects in their own right. Processes are artifacts for expressing information about relationships that involve the passage of time (i.e., those that involve before and after effects). As such, the process is not only an association but also an association that describes a causative temporal sequence and passage of time. This is also how the meaning of causality is born: The resources and the processes that create the product are its causes. A process always makes a change or seeks information. Business process engineers use the term cycle time to describe the time interval from the beginning of a process to its end. A process, like the event it is derived from, can even be instantaneous or may continue on indefinitely. Processes that do not end, or have no
known end, are called sagas. Therefore, a process is a relationship, and also an event, which may be of finite, negligible, or endless duration. Knowledge involves the recognition of patterns. Patterns involve structure, the concept of similarity, and the ability to distinguish between the components that form a pattern. Claude Shannon developed a quantitative measure for information content (Shannon, 1948). However, he did not describe the structure of information. For that, we must start with the concept and fundamental structure of Pattern and measurability in order to build a metamodel of knowledge. The integrated metamodel model of Pattern and measurability (from which the concept of “property” emerges) will enable us to integrate the three components that comprise business knowledge (inference, rules, and processes) into one indivisible whole. The interplay between objects and processes is driven by patterns. Patterns guide the creation of relationships between objects, such as the formation of a team or the modular assignment of duties within a team and across geographically distributed teams. Partnering Employee belonging to one team with that of another is caused by a skill or performance pattern that governs the relevant properties of Employee. As such, the ownership of an artifact under development is shared between Employee objects, which, at a coarser granularity, exist as a unified object we can refer to as a Composite Persona (CP) (Denny et al., 2008).
Perception and Information: Meaning, Measurability, and Format When an object is a meaning, it is an abstract pattern of information. Its perception is a concrete expression of this meaning, and the same information may be perceived or expressed in many ways. Lacking perceptual information, several expressions or perceptions may all point to the same pattern of information, or meaning. In order to normalize
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knowledge, we must separate meaning from its expression. This may be done by augmenting our metamodel to represent entities of pure information that exist beyond physical objects and relationships. This section will introduce three of these objects: domain, unit of measure (UOM), and Format. Unlike matter or energy, meaning is not located at a particular point in space and time; only its expression is (Verdu, 1998). All physical objects or energy manifested at a particular place at a point in time convey information, and the same meaning can occur in two different artifacts that have no spatial or temporal relationship with each other. They only share meaning (i.e., information content; Baggot, 1992). A single meaning may be characterized by multiple expressions. Differing understandings of concepts, terminology, and definitions are some of the problems that have characterize software developers working in a multisite environment (Chang et al., 2006). Unlike a specific material object or a packet of energy that is bound to only a single location at a single point in time, identical information can exist at many different places at several different times. The need to understand the underlying natural structures that connect information to its physical expressions is inherent in the effort to normalize business rules. Information mediation and expression within the real world is achieved by two metaobjects. One is intangible, emerging from the concept of measurability and deals with the amount of information that is inherent in the meaning being conveyed. The other is tangible; it deals with the format, or physical form, of expression. The format is easier to recognize. It is much harder to recognize the domain of measurability, henceforth referred to simply as domain (Finkbeiner, 1966).
Measurability and Information Content Through the behavior, or properties, of objects we observe, the information content of reality manifests itself to us. Although these are quite dissimilar qualities of inherently dissimilar ob-
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jects, such as a person’s weight and the volume of juice, both these values are drawn from a domain of information that contains some common behavior. This common behavior, that each value can be quantitatively measured, is inherent in the information being conveyed by the measurement of these values, but not in the objects themselves.
Physical Expression of Domains Domains convey the concepts of measurability and existence. They are a key constituent of knowledge. There are four fundamental domains that we will consider in this article; two of them convey qualitative information and the other two convey quantitative information, as follows: •
Qualitative domains, containing: Nominal Domains, which convey no information on sequencing, distances, or ratios. They convey only distinctions, distinguishing one object from another or a class from another. Ordinal domains, which convey distinctions between objects and the information on arranging its members in a sequence. Ordinal domains are a pattern of information derived from nominal domains by adding sequencing information. However, ordinal domains posses no information regarding the magnitudes of gaps or ratios between objects (values). • Quantitative domains: Difference-scaled domains not only express all the information that qualitative domains convey, but also convey magnitudes of difference; they allow for measurement of the magnitude of pointto-point differences in a sequence. This makes difference-scaled domains to be a pattern of information derived from ordinal domains by adding quantitative information on differences between
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
values in the domain, which makes it a subclass of ordinal domains in the ontology of the meaning of measurability. Ratio-scaled domains perform three functions; they assist in the classification and arrangement of objects in a natural sequence, are able to measure the magnitude of differences in properties of objects, and take the ratios of these different properties.
The hierarchy of domains provides the most fundamental kind of knowledge reuse. However, this information is still abstract. In order to give information a physical expression, it must be physically formatted and recorded on some sort of medium. A single piece of information must be recorded on at least one medium, and may be recorded in many different formats. A symbol is sufficient to physically represent the information conveyed by nominal and ordinal domains. Of course, ordinal domains also carry sequencing information, and it would make sense to map ordinal values to a naturally sequenced set of symbols like digits or letters. Unlike qualitative domains, quantitative domains need both symbols and units of measure to physically express all the information they carry. This is because they are dense domains (i.e., given a pair of values, regardless of how close they are to each other, it is always possible to find a value in between them). A discrete set of symbols cannot convey all the information in a quantitative domain. However, numbers have this characteristic of being dense. Therefore, it is possible to map values in a dense domain to an arbitrary set of numbers without losing information. These numbers may then be represented by physical symbols such as decimal digits, roman numerals, or binary or octal numbers. There may be many different mappings between values and numbers. For example, age may be expressed in months, years, or days; a person’s age will be the same regardless of the number used. To show that
different numbers may express the same meaning, we need a unit of measure (UOM). The UOM is the name of the specific map used to express that meaning. Age in years, days, months, and hours are all different UOMs for the elapsed time domain. Both the number and UOM must be physically represented by a symbol to physically format the information in a quantitative domain. Indeed, a UOM may be represented by several different symbols. The UOM “dollars,” for the money domain, may be represented by the symbol “$” or the text “USD.” In general, a dense domain needs a pair of symbols to fully represent the information in it: a symbol for the UOM and a symbol for the number mapped to a value. We will call this pair the full format of the domain. Domains, UOMs, and Formats are all objects that structure meaning. They are some of the components from which the very concept of knowledge is assembled. The metamodel of knowledge is a model of the meaning of knowledge built from abstract components. Figure 2 depicts a semantic model. The lower limit (1) on the occurrence of Unit of Measure highlights the fact that each quantitative domain must possess at least one unit of measure. This is because the unit of measure is not optional. A quantitative value cannot be expressed unless a unit of measure can characterize it. The arrow that starts from, and loops back to, Unit of Measure reads “Unit of Measure converts to none or at most 1 Unit of Measure.” Conversion rules, such as those for currency conversion or distance conversion, reside in the Metamodel of Knowledge. This relationship provides another example of a metaobject (since relationships are objects too), and demonstrates how a metaobject can facilitate the storage of the full set of conversion rules at a single place. The conversion rule is restricted to conversion from one UOM to only one other UOM; this constraint is necessary to avoid redundancy and to normalize information. A single conversion
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Figure 2. A partial metamodel of domain Domain
Quantitative
Qualitative
Ordinal
Nominal
DifferenceScaled
Ratio-Scaled
Increasing Information Content
Qualitative Domain
Quantitative Domain
is expressed by 1 or many
is expressed by 1 or many
Format
is expressed by 1 or many
convert to 0 or 1
rule enables navigation from one UOM to any other arbitrary UOM, by following a daisy chain of conversion rules. The upper bound of one on the conversion relationship in the metamodel also implies that if you add a new UOM to a domain, you have to add only a single conversion rule to convert to any of the other UOMs, and that such information will suffice to enable conversion to every UOM defined for that domain.
Metaobjects, Subtypes, and Inheritance Metaobjects help to normalize real world behavior by normalizing the irreducible facts we discussed earlier. The metaobjects that of interest are object, property, relationship, process, event, domain, unit of measure (UOM), and format. The kinds of atomic rules normalized by each type of metaobject are summarized in Figure 3. The ontology in Figure 3 organizes objects in
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Unit of Measure convert to 0 or 1
a hierarchy of meaning. Lower level objects in the ontology are derived from objects at higher levels by adding information. Figure 3 shows that the meaning of process is configured by combining the meanings of relationship, an interaction between objects, with the meaning of event, the flow of time. This kind of relationship is special. It is called a subtyping relationship and forms the basis of the ontology. Subtyping relationships convey information from higher levels to lower levels of an ontology. The lower level object becomes a special kind of higher level object. Figure 3 shows that ratio scaled domain is a special kind of domain because of the chain of subtyping relationships that lead from Domain to ratio scaled domain via quantitative domain.
The Repository of Meaning The atomic rule is the most basic building block of knowledge and the ultimate repository of information. It is a rule that cannot be broken into
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Figure 3. Basic inventory of metaobjects Object
Relationship
Dynamic
Domain
Property
Static
smaller, simpler parts without losing some of its meaning. The metaobjects of Figure 3 are the natural repositories of knowledge. They provide the basis of real world meaning. Just as molecules react with molecules in chemical reactions to produce molecules of new substances with different properties from the original reagents, atomic rules may be built from other atomic rules. As we enhance our business positions with product and process innovation, some atomic rules will be reused. These rules are examples of those that can act as reusable components of knowledge. In order to build specialized domains of knowledge, entire structures and configurations may be reused. This is similar to manufacturers creating reusable subassemblies to build machines from ordinary parts. The end product may incorporate many versions and modifications of these reusable subassemblies.
24HrKF: A Practical Application of Knowledge Reuse Suchan and Hayzak (2001) found that a semantically rich database was useful in creating a
Increasing information content
Event
Nominal
Ordinal DifferenceScaled RatioScaled
Format
} }
Unit of Measure
Qualitative
Quantitative
shared language and mental models. MultiMind is a collaboration tool under development at the University of Arizona (Denny et al., 2008), aimed at improving upon DiCE (Vin, Chen, & Barzilai, 1993) and other collaborative engineering tools. A Lifestream database (Freeman & Gelernter, 1996), is a chronologically ordered persistent database, used to collect objects and events relevant to a project. Lifestream incorporates incorporates an algebra that can be coupled to the semantics of project artifacts and knowledge events, allowing substantial opportunity for the automation of mundane tasks and higher level functions. In MultiMind, the Lifestream archives project artifacts and provides configuration management services, in a similar fashion as the Concurrent Versioning System (CVS) or Subversion (SVN) revision control system. In MultiMind, knowledge events are observed and logged into Lifestream. Activities such as reading a message, posting a message, executing a search, or reading a web page, are logged into LifeStream. The correlation of knowledge events with the evolution of project artifacts allows for the reuse of relevant knowledge
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between members of a development team. Communication is facilitated by the encapsulation of knowledge as objects which represent interactions with the development environment. Higher level tasks, such as the visualization of the current state of a project under development or decision facilitation can also be automated. Through MultiMind and its underlying LifeStream, information regarding artifacts and project progress can easily be visualized, identifying the artifacts which required the most maintenance or debugging. This visualization can be used as a guide for business decisions, when queries to MultiMind are filtered to visualize information relevant to a decision.
An Architecture of Knowledge Information systems are built to satisfy business requirements. Sometimes they are undertaken to implement purely technical changes (Smith & Fingar, 2002). Poorly formulated and ill-managed requirements have led to many of the problems that Information Systems projects currently face (Bahill, & Dean, 1999). Our first task, therefore, is to understand the meaning and structure of requirements. Requirements flow from knowledge. Knowledge is encapsulated in configurations of atomic rules. Knowledge of Information Systems involves configurations of (atomic) rules of business as well as technology. A four-layered hierarchical approach can be used, as depicted in Figure 4. Table 1 contains brief descriptions of each layer of the architecture of business knowledge, examples of the kinds of policies that may be implemented at the layer, as well as examples of change that may occur in that layer along with examples of the effects of change within a particular layer. The top business layer helps to assemble components of knowledge into business concepts, such
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as products, services, markets, regulations, and business practices. Consider a situation where a telephone services provider wishes to integrate cable TV and entertainment media into its business. Such changes in the Business Rules layer will impact business functions and systems functionality, whereas changes to process automation layers alone will impact only availability, timeliness, accuracy, reliability, and presentation of information. Changes in business process automation, in turn, can impose new requirements for performance, reliability and accuracy on technology platforms, which will impact the technology layer. The level of Business Process Automation is usually changed to leverage information technology or to focus on those processes that create most value while eliminating those of little value. Changes in this layer seldom impact the fundamental business of the firm. For example, the firm could deploy its ordering process on the Web, but not make any fundamental change in the nature of its products, services, or markets. Business Process Automation refers to process innovation and change that leverages information technology. The technology layer is changed primarily to improve computer performance in terms of speed, cost, reliability, availability or alignment, and support for business process automation. The fundamental ideas of separating systemspecific rules from software implementation, as in the case of 3GL, and separating system architecture and implementation, as in the case of System/360, are even more important today in the context of separating business rules from implementation technologies. The rules related to transporting and presenting the information would belong to the Business Process Automation layers, not the pure business layer. Figure 4 shows that Business Process Automation consists of two layers. The Information Logistics layer is the repository for rules related to the logistics of moving and storing information in files, and the Interface layer is concerned with how this infor-
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Figure 4. The architecture of knowledge BUSINESS OPPORTUNITY OR ENVIRONMENTAL CHANGE
Acquisition of new assets necessitates the addition of new relationships between customers and services.
Information Logistics
Contains the repository of rules related to the logistics of storage, transfer, and utilization of business information.
Digital artifacts under development will be stored using a versioning system; artifact access privileges are maintained at a fine granularity
A new employee joins an active team necessitating a change in the rules regarding access to a team-owned artifact.
Interface
Contains the rules for the presentation of business information to human entities.
Access to team-owned objects is controlled by an administrator in close contact with team members; GUI follows Microsoft’s Inductive User Interface guidelines.
A new employee joins an active team, necessitating the creation of additional security rules regarding artifact access privileges.
Technology
Contains low-level operational and strategic rules regarding the operation of technology.
Hardware and systems software is standardized through a single reputed vendor.
A change of hardware or systems software vendor necessitates change of legacy software developed for obsolete system.
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mation is presented to human operators. Creating a business knowledge hierarchy such as the one depicted in Figure 4 facilitates the flow of information between the business entities responsible for managing knowledge. Organizing knowledge and information, as described in previous sections, is essential for realizing the flow of information between the layers and creating meaningful and useful relationships between objects within each layer. Efforts to process and integrate information based on meaning have been made by the W3C consortium, which recommended two modeling standards in 2004: RDF, the Resource Description Framework for metadata, and OWL, the Web ontology language for integrating information. We have seen examples of how some meanings are
derived from others by constraining patterns of information they convey to create new meanings. These constrained patterns are subtypes of the meanings they constrain, and every meaning is a polymorphism of the universal object, an unknown pattern in information space that means everything and anything, and conveys nothing. Every object in the inventory of components is a polymorphism of the universal metaobject. RDF and OWL are tailored for the Web and applications of the Semantic Web. Tables 2, 3, and 4 show that the various elements of RDF and OWL as well as their metaobject inventory equivalents, showing that, in effect, the Metaobject Inventory provides a more general framework than either RDF or OWL, and that either of the restricted frameworks are special cases of the types of ontology frame-
Table 2. RDF Classes (retreived from http://www.w3schools.com/rdf/default.asp) and their Metaobject Inventory Equivalents Element
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Class of
Subclass of
Metaobject Inventory Equivalent
Class
All classes
Datatype
All Data types
Class
All value Domain, Meaning
Resource
All resources
Class
Resource
Container (set of objects)
All Containers
Resource
Aggregate Object
Collection(set membership is restricted by some criteria)
All Collections
Resource
Object Class
Literal
Values of text and numbers
Resource
Subtype of Symbol
List
All Lists
Resource
List of
Property
All Properties
Resource
Property, Feature
Statement
All RDF Statements
Resource
Irreducible fact, rule, atomic rule
Alt
Containers of alternatives
Container
Mutability; Liskov’s principle, aggregation of mutable resources
Bag
Unordered containers
Container
Aggregate Object
Seq
Ordered containers
Container
Subtype of Aggregate Object
ContainerMembershipProperty
All Container membership properties
Property
Subtype of Relationship
XMLLiteral
XML literal values
Literal
Subtype of symbol. XML is a subtype of language.
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Table 3. RDF properties (retrieved from http://www.w3schools.com/rdf/default.asp) and their metaobject inventory equivalents Property
Operates on
Produces
Description
Metaobject Inventory Equivalent
Domain
Property
Class
The domain of the resource The domain defines what a property may apply to (operate on).
Domain
Range
Property
Class
The range of the resource. It defines what the property may map to (produce).
co-domain
subPropertyOf
Property
Property
The property of a property
Feature
subClassOf
Class
Class
Subtyping property
Polymorphism
Comment
Resource
Literal
User friendly resource description
Elaboration, description, synonym
Label
Resource
Literal
User friendly resource name
Name, synonym
isDefinedBy
Resource
Resource
Resource definition
Id
seeAlso
Resource
Resource
Additional information about a resource
Elaboration, reference
Member
Resource
Resource
The property of being an instance of a kind of resource
Instance of
First
List
Resource
The property of being the first member of a list
A demiliting role: Lower Limit
Rest
List
List
The second and subsequent members of a list
Subtype of List
Subject
Statement
Resource
The subject of an assertion, i.e., the subject of a resource in an RDF statement
The source of a relationship
predicate
Statement
Resource
Similar to “subject”: The predicate of an assertion
Relationship, function
object
Statement
Resource
The object of the resource (in an RDF) Statement
The target of a relationship
value
Resource
Resource
The value of a property
Value
Type
Resource
Class
An instance of a class
Member of a class of classes
works that can be realized through the various polymorphisms of the universal object.
Conclusion In an effort to provide a framework for surmounting the temporal and spatial separations in collaborative, distributed environments, this article
presented a framework for knowledge object management that can facilitate reuse of knowledge. The encapsulation of knowledge for distributed environments is also highlighted. The knowledge encapsulation uses a four-tier architecture that facilitates knowledge transfer and reuse, as well as enables better understanding of the problem domain under consideration. Differences in training, knowledge, and skills that exist across the distributed teams can be surmounted by use of a
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Table 4. OWL dlasses (retrieved from: http://www.w3.org/TR/owl-ref/) and their metaobject inventory equivalents Class
Description
Metaobject Inventory Equivalent
AllDifferent
all listed individuals are mutually different
Subtype of Exclusion partition, exclusivity constraint. The concept of distinctions emerges as a polymorphism of the concept of class as information is added o an object/pattern.
allValuesFrom
All values of a property of class X are drawn from class Y (or Y is a description of X)
Domain, Inclusion Set, inclusion partition
Subtypes of Elaboration
AnnotationProperty
Describes an annotation. OWL has predefined the following kinds of annotations, and users may add more: • Versioninfo • Label • Comment • Seealso • Isdefinedby OWL DL limits the object of an annotation to data literals, a URI, or individuals (not an exhaustive set of restrictions
Version is implicit in temporal objects. Audit properties are implicit in object histories: • The process, person, event, rule, reason and automation that caused a state to change • Time of state change • Who made the change (all the dimensions of process ownership: Responsibility, Authority, Consultation, Work, Facilitation, Information/ knowledge of transition) • When the change was made • The instance of the process that caused the change and the (instances of resources) that were used • Why it was made (the causal chain that led to the process) • How long it took to make the change Label is implicit in synonym, name Comment may be elaboration or reference. The two are distinct in the metamodel of knowledge See also: same remarks as comment. IsDefinedBy may be elaboration, Object ID, or existence dependency. Each is a distinct concept in the metamodel of knowledge
backwardCompatibleWith
The ontology is a prior version of a containing ontology, and is backward compatible with it. All identifiers from the previous version have the same interpretations in the new version.
Part of Relationship between models or structures
cardinality
Describes a class has exactly N semantically distinct values of a property (N is the value of the cardinality constraint).
Cardinality
Class
Asserts the existence of a class
Object Class
complementOf
Analogous to the Boolean “not” operator. Asserts the existence of a class that consists of individuals that are NOT members of the class it is operating on.
Set negation, Excludes, Exclusion set, Exclusion partition
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Table 4. continued Class
Description
Metaobject Inventory Equivalent
DataRange
Describes a data type by exhaustively enumerating its instances (this construct is not found in RDF or OWL Lite)
Inclusion set, exhaustive partition
DatatypeProperty
Asserts the existence of a property
Feature, relationship with a domain
DeprecatedClass
Indicates that the class has been preserved to ensure backward compatibility and may be phased out in the future. It should not be used in new documents, but has been preserved to make it easier for old data and applications to migrate to the new version
Interpretation. However, the specific OWL interpretation of depreciated class is considered to be a physical implementation of a real life business meaning, outside the scope of a model of knowledge that applies on the plane of pure meanings.
DeprecatedProperty
Similar to depreciated class
See Depreciated Class
differentFrom
Asserts that two individuals are not the same
The concept of distinctions emerging as a polymorphism of the concept of class as information is added o an object/pattern.; subtype of exclusion partition
disjointWith
Asserts that the disjoint classes have no common members
Exclusion partition
distinctMembers
Members are all different from each other
Exclusion Set, List
equivalentClass
The classes have exactly the same set of members. This is subtly different from class equality, which asserts that two or more classes have the same meaning (asserted by the “sameAs” construct). Class equivalence is a constraint that forces members of one class to also belong to another and vice versa.
Mutual inclusion constraint/equality between partitions or objects.
equivalentProperty
Similar to equivalent class: i.e., different properties must have the same values, even if their meanings are different (for instance, the length of a square must equal its width).
Equality constraint
FunctionalProperty
A property that can have only one, unique value. For example, a property that restricts the height to be nonzero is not a functional property because it maps to an infinite number of values for height.
Value of a property, singleton relationship between an object and the domain of a property
hasValue
Links a class to a value, which could be an individual fact or identity, or a data value (see RDF data types)
relationship with a domain
imports
References another OWL ontology. Meanings in the imported ontology become a part of the importing ontology. Each importing reference has a URI that locates the imported ontology. If ontologies import each other, they become identical, and imports are transitive.
Subtype of Composed of. Note that the metamodel of knowledge does not reference URIs. This is an implementation specific to the Web. The Metamodel of Knowledge deals with meanings.
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Table 4. continued Class
Description
Metaobject Inventory Equivalent
incompatibleWith
The opposite of backward compatibility. Documents must be changed to comply with the new ontology.
Similar to set intersection. Members are common to all intersecting classes.
Subtype of Partition, subtype with multiple parents, set intersection
InverseFunctionalProperty
Inverses must map back to a unique value. Inverse Functional properties cannot be many-to-one or many-to-many mappings
Inverse of an injective or bijective relationship
inverseOf
The inverse relationship (mapping) of a property from the target (result) to the source (argument)
Inverse of
maxCardinality
An upper bound on cardinality (may be “many”, i.e., any finite value)
Cardinality constraint:, upper bound on cardinality (subtype of cardinality constraint and upper bound)
minCardinality
A lower bound on cardinality
Cardinality constraint: Lower bound on cardinality (subtype of cardinality constraint and lower bound)
Nothing
The empty set
of the empty set, null value
Instances of properties are not single elements, but may be subject-object pairs of property statements, and properties may be subtyped (extended). ObjectProperty asserts the existence and characteristics of properties:
ObjectProperty
•
RDF Schema constructs: rdfs:subPropertyOf, rdfs:domain and rdfs:range
•
relations to other properties: owl:equivalentProperty and owl:inverseOf
•
global cardinality constraints: owl:FunctionalProperty and owl:InverseFunctionalProperty
•
logical property characteristics: owl:SymmetricProperty and owl:TransitiveProperty
Property, a generalized constraint, which implies an information payload added to a meaning.
oneOf
The only individuals, no more and no less, that are the instances of the class
members of a class, the property of exhaustivity of a partition
onProperty
Asserts a restriction on a property
constraint on a Feature (makes the feature (object) a subtype of the unconstrained, or less constrained feature (object)
Ontology
An ontology is a resource, so it may be described using OWL and non-OWL ontologies
The concept of deriving subclasses by adding information to parent classes
OntologyProperty
A property of the ontolology in question. See imports.
None, beyond the fact that the ontologoly is an object, which means that it inherits all properties of objects, and adds the property of interpretation
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Table 4. continued Class
Description
Metaobject Inventory Equivalent
priorVersion
Refers to a prior version of an ontology
An instance of Object Property where a relevant instance of ontology Object Class exists, containing a Temporal Succession of concepts. The property of reinterpretation is implicit between versions of an ontology.
Restriction
Restricts or constrains a property. May lead to property equivalence, polymorphisms, value constraints, set operations, etc.
Rule Constraint
sameAs
Asserts that individuals have the same identity. Naming differences are merely synonyms
Set Equality, Identity
someValuesFrom
Asserts that there exists at least one item that satisfies a criterion. Mathematically, it asserts that at least one individual in the domain of the “SomeValuesFrom” operator that maps to the range of that operator.
Subsetting constraint
SymmetricProperty
When a property and its inverse mean the same thing (e.g., if Jane is a relative of John, then John is also a relative of Jane)
Symmetry
Thing
The set of all individuals.
Instance of Object Class
TransitiveProperty
If A is related to B via property P1, and B is related to C via property P2, then A is also related to C via property P1. For example. If a person lives in a house, and the house is located in a town, it may be inferred that the person lives in the town because “Lives in” is transitive with “Located in”.
Transitive Relationship
unionOf
Set union. A member may belong to any of the sets in the union to be a member of the resulting set
offset Union, Aggregation
versionInfo
Provides information about the version
Instance of Attribute. Implicit in the concept of the history of a temporal object
common means of discourse about the problem domain under consideration. For Further Reading The concepts described here have been utilized and extended in this article to cater specifically to the special needs of offshoring and 24-Hour Knowledge Factory environments. For a detailed discussion of the basic concepts and their wider applications, please refer to the following books by Amit Mitra and Amar Gupta:
•
• •
Agile Systems with Reusable Patterns of Business Knowledge —a Component Based Approach (Artech House Press, Norwood, Massachusetts) Creating Agile Business Systems with Reusable Knowledge (Cambridge University Press, Cambridge, England) Knowledge Reuse and Agile Processes— Catalysts for Innovation (IGI-Global, Hershey, Pennsylvania [in press])
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References Aggarwal, A., & Pandey, A. (2004). Offshoring of IT services—Present and future. Evalueserve. Retrieved from http://www.evalueserve.com Amdahl, G. M., Blaauw, G. A., & Brooks, F. P., Jr. (2000). Architecture of the IBM System/360. Retrieved November 12, 2007, from http://www. research.ibm.com/journal/rd/441/amdahl.pdf Baggot, J. (1992). The meaning of quantum theory. Oxford University Press. Bahill, A. T., & Dean, F. (1999). Discovering system requirements. In A. P. Sage & W. B. Rouse (Eds.), Handbook of systems engineering and management (pp. 175-220). New York: Wiley. Baldwin, C. Y., & Clark, K. B. (2000). Design rules, Vol. 1: The power of modularity. Cambridge, MA: The MIT Press. Beck, K. (1999). Extreme programming explained: Embrace change. Reading, MA: AddisonWesley. Boehm, B. (1988). A spiral model of software development and enhancement. Computer, 21(5), 61-72. Blanchard, E.. (2001). Introduction to networking and data communications. Commandprompt, Inc. Retrieved from http://www.w3.org/2004/12/ rules-ws/paper/105/ Carmel, E. (1999). Global software teams: Collaborating across borders and time zones. Upper Saddle River, NJ: Prentice Hall. Chang, E., Dillon T. S., Sommerville, I., & Wongthongtham, P. (2006). Ontology-based multi-site software development methodology and tools. Journal of Systems Architecture, 52(11). Coleman, G., & Verbrugge, R. (1998). A quality software process for rapid application development. Software Quality Journal, 7, 107-122.
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Danait, A. (2005). Agile offshore techniques— A case study. In Proceedings of the IEEE Agile Conference (pp. 214-217). Denny, N., Mani, S., Sheshu, R., Swaminathan, M., Samdal, J., & Gupta, A. (in press). Hybrid offshoring: Composite personae and evolving collaboration technologies. Information Resources Management Journa. Fergusson, N. (2004, April 12). Survival of the biggest. Forbes 2000, p. 140. Finkbeiner, D. (1966). Matrices and linear transformations. Freeman. Freeman, E., & Gelertner, D. (1996). Lifestreams: A storage model for personal data. ACM SIGMOD Record, 25(1), 80-86. Gupta, A., & Seshasai, S. (2007). 24-hour knowledge factory: Using Internet technology to leverage spatial and temporal separations. ACM Transactions on Internet Technology, 7(3). Gupta, A., Seshasai, A., Mukherji, S., & Ganguly, A. (2007, April-June). Offshoring: The transition from economic drivers toward strategic global patnership and 24-hour knowledge factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. Kanka, M. (2001). A paper on semantics. Berlin, Germany: Institut für deutsche Sprache und Linguistik. Kingston, J. (2002). Merging top level ontologies for scientific knowledge management. Proceedings of the AAAI Workshop on Ontologies and the Semantic Web. Retrieved from http://www. inf.ed.ac.uk/publications/report /0171.html Kussmaul, C., Jack, R., & Sponsler, B. (2004). Outsourcing and offshoring with agility: A case study. In C. Zannier et al. (Eds.), XP/Agile Universe 2004 (LNCS 3132, pp. 147-154). Springer. López-Bassols, V. (1998). Y2K. The OECD Observer, 214.
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Markus, L. M. (2001). Toward a theory of knowledge reuse: Types of knowledge reuse situations and factors in reuse success. Journal of Management Information Systems, 18(1), 57-93.
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Van Zyl, J., & Corbett, D. (2000). Framework for comparing methods for using or reusing multiple ontologies in an application. In Proceedings of the Eighth International Conference on Conceptual Structures.
O’Leary, D. E. (2001). How knowledge reuse informs effective system design and implementation. IEEE Intelligent Systems, 16(1), 44-49. Ravichandran, T. (2005). Organizational assimilation of complex technologies: An empirical study of component-based software development. IEEE Transactions on Engineering Management, 52(2)
Vanwelkenhuysen, J., & Mizoguchi, R. (1995). Workplace-adapted behaviors: Lessons learned for knowledge reuse. In Proceedings of KB&KS (pp 270-280). Verdu, S. (1998). IEEE Transactions on Information Theory, 44(6).
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This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 2, edited by M. Khosrow-Pour, pp. 1-20, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.16
A Multi-Agent System for Optimal Supply Chain Management Hyung Rim Choi Dong-A University, Korea Hyun Soo Kim Dong-A University, Korea Yong Sung Park Catholic University of Busan, Korea Byung Joo Park Dong-A University, Korea
AbstrAct Supply chain management recently has been developing into a dynamic environment that has to accept the changes in the formation of the supply chain. In other words, the supply chain is not static but varies dynamically according to the environmental changes. Therefore, under this dynamic supply chain environment, the priority is given not to the management of the existing supply chain but to the selection of new suppliers and outsourcing companies in order to organize
an optimal supply chain. The objective of this research is to develop a multi-agent system that enables the effective formation and management of an optimal supply chain. The multi agent system for optimal supply chain management developed in this research is a multi agent system based on the scheduling algorithm, a cooperative scheduling methodology, which enables the formation of an optimal supply chain and its management. By means of active communications among internal agents, a multi-agent system for optimal supply chain management makes it possible to quickly respond to the production environment changes such as the machine failure or outage of outsourc-
A Multi-Agent System for Optimal Supply Chain Management
ing companies and the delivery delay of suppliers. This research has tried to suggest a new direction and new approach to the optimal supply chain management by means of a multi-agent system in dynamic supply chain environment
IntroductIon Many companies have tried to introduce SCM (supply chain management) in an effort to enhance competitiveness amid severe competition caused by market globalization. Now, the participating companies in the supply chain are not fixed but rather are dynamically being changed in response to the environmental changes. Under such a dynamic SCM, it is very important to determine with whom to cooperate in order to solve these problems coming from environmental changes. Instead of seeking to optimize the existing supply chains, this study has focused on optimizing the supply chain itself. The optimization of an existing supply chain can be efficient to a fixed supply chain, but it is difficult for a dynamic supply chain to respond flexibly under the environment that its member is always changing. When a company joins an existing optimal supply chain, or when a company, which is currently joining a supply chain, has to transfer to another supply chain, they have to change their systems or processes in order to join in the new supply chain. However, this is not an easy job. The optimization of a supply chain is not made only once. Rather, it is to be made continually in response to diverse environmental changes. That is, it needs to be made on a real-time basis. By the way, the supply chain, which consists of a lot of companies, is likely to meet with various complex problems for entire optimization, and these problems bring a significant influence on making the optimal supply chain. For example, machine failure of one participating company affects not only its related member companies but also the whole supply chain that the com-
pany belongs to. Therefore, this problem must be coordinated or adjusted not as a problem of one company, but as a problem of whole supply chain. To this end, each member of the supply chain has to cooperate and exchange information between members on a real-time basis. A multi-agent system can provide a useful tool for this purpose. Many preceding studies have emphasized that the multi-agent system is the best way in solving many complicated problems under diverse environmental changes (Bussmann, 1999; Choi, Kim, Park, & Park, 2004; Fox, Barbuceanu, & Teigen, 2000; Julka, Karimi, & Srinivasan, 2002; Shen & Norrie, 1998; Shen, Norrie, & Kremer, 1999). Also, this is an efficient way of exchanging and sharing information without integration of its applications among companies. That is to say, it enables relevant companies to move smoothly to another supply chain without changing their systems and processes. Accordingly, only by the transfer of the agent alone, which represents the relevant company, cooperation, and information exchange among members within the supply chain can this be made possible. In this study, we developed an integrated scheduling method in order to organize and manage an optimal supply chain and a multi-agent system in order to solve the various problems occurring on a real-time basis in the optimal supply chain. The integrated scheduling method enables the scheduling for the entire supply chain in cooperation with related members in a supply chain, thus it is possible for a manufacturing company to make scheduling by taking into consideration the production environments of outsourcing companies and the delivery status of suppliers. And the multi-agent system shares the information on production environment and supply capacity of both outsourcing companies and suppliers, making it possible to respond to the dynamic environmental changes such as a delay in supplying parts or raw materials, power stoppage, or machine failure of the outsourcing companies for an optimal supply chain management.
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bAcKground A multi-agent system has been considered the best way to solve complicated problems under the diverse environmental changes (Shen et al., 1999). In fact, it is not easy for manufacturing companies to be flexible for dynamic changes. A number of researchers have attempted to apply agent technology to manufacturing enterprise integration, supply chain management, manufacturing planning, scheduling, and control (Bussmann, 1999; Maturana & Norrie, 1996; Parunak, 1987; Parunak, Baker, & Clark, 1997). This trend is well described in Shen et al.’s studies on agent-based production system (1999). Shen et al. developed in their studies many production-related agents with diverse functions and configurations. Their studies mainly focused on making new a manufacturing system using an agent technology for automation and efficiency in the process planning and scheduling. Also, the AARIA (Autonomous Agents for Rock Island Arsenal) project of Intelligent Automation company (Baker, Parunak, & Erol, 1997), ABCDE (Agent-Based Concurrent Design Environment) system developed by KSI (Knowledge Science Institute) of University of Calgary (Balasubramanian & Norrie, 1995), a virtual manufacturing agent made by LIPS institute of the University of Texas at Austin (Chuter, Ramaswamy, & Baber, 1995) and MASCOT (Multi-Agent Supply Chain cOordination Tool) agent of Intelligent Coordination and Logistics team of Carnegie-Mellon University (Norman, David, Dag, & Allen, 1999) are representative studies that have used a multi-agent system for development of intelligent manufacturing system. While making intensive studies on the intelligent manufacturing system by means of an agent system, the scope of this research has been extended to the study on a multi-agent system for supply chain management. Shen et al. (1999) emphasized that there are a lot of complexities and changes in the manufacturing environment under supply chain, and that the agent system can be the
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best way for effective supply chain management. Also, they said that a multi-agent system can be the best method to integrate the activities of suppliers, customers, and business partners with internal activities of a company (Shen & Norrie, 1998). Meanwhile, more active research has been done on the agent-based supply chain models. Wu, Cobzaru, Ulieru, and Norrie (2000) suggested a new method that one participating member is connected via a Web system to the agents of its related business partners in the manufacturing, distribution, and service field. When an event happens, each agent cooperates to organize a virtual cluster to solve a specified problem. Julka et al. (2002) suggested an SCM model based on an agent while emphasizing the importance of a more flexible and efficient system. Shen et al. (1999) divided production management into five divisions such as design, process planning, scheduling, marketing, and coordination. And then they established a mediator agent for each division and a mediator agent for each mediator agent. Through this mediator-based multi-agent system, they suggested the possibility that if the scope of manufacturing activities within a factory is extended to its suppliers or business partners, an effective SCM could be established. MetaMorph II system suggested by ISG has a mediator-based multi agent structure, suggesting a supply chain network model where the agents for suppliers, business partners, and customers are connected to the mediator of the system via Internet (Shen et al., 1999). Most existing research has tried to solve the complex and difficult problems, which cannot be solved by individual application programs, by means of mutual cooperation among agents. That is to say, the existing studies have focused on solving various problems occurring within a supply chain by way of communicating among agents. But this study has tried to organize an optimal supply chain by means of communicating among agents, while focusing on maintaining and managing the optimal supply chains. The existing
A Multi-Agent System for Optimal Supply Chain Management
studies and this study are similar in the sense that both have made use of a multi-agent system, but differences between them are in where and how the multi-agent system has been used. Also, it can be said that the studies on the optimization of supply chain by means of a multi-agent system have not yet been made much.
A Method For oPtIMAl suPPly chAIn MAnAgeMent organization of optimal supply chain This study focuses on the following problems: How to organize an optimal supply chain under the dynamic supply chain environment? When environmental changes have occurred to the optimal supply chain, how to respond to it? As an object of our research, this study chose a molding company among many make-to-order manufacturers. When a molding company tries to select a supplier and an outsourcing company, such factors as delivery date, cost, and productivity are to taken into consideration. In particular, owing to its industrial characteristics, the due date is the most important factor. A molding company is a typical make-toorder manufacturer, and so if it fails to meet the due date required by a customer, it is impossible for the company to sell its product. Also, as most products of the molding companies are standard-
ized, their price and quality are almost the same, thus showing no much difference. Because of this, instead of the price and quality, the delivery date becomes a critical factor in choosing a supplier or an outsourcing company. When there are many outsourcing companies and suppliers, as illustrated in Figure 1, this study has selected the supplier and outsourcing company that can meet the due date demanded by customers in order to organize an optimal supply chain. If an outsourcing company participating in the optimal supply chain is unable to perform operation due to its machine failure, or a supplier fails to provide the specified parts on the due date, the manufacturer has to reorganize the supply chain. Like this, when environmental changes occur, it is absolutely necessary to automatically obtain, exchange, or share information in order to speedily respond to the sudden environmental changes.
An Integrated and dynamic scheduling Method for optimal supply chain Management This research uses genetic algorithm to establish integrated and dynamic scheduling. This algorithm integrates process planning and scheduling in order to consider alternative machines of outsourcing companies and operation sequences, and also can perform rescheduling in response to the changes in the production environment. Traditionally, process planning and scheduling were
Figure 1. Optimal supply chain Outsourcing companies A
Suppliers A
Suppliers B
Suppliers C
manufacturer
Outsourcing companies B Outsourcing companies C
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A Multi-Agent System for Optimal Supply Chain Management
achieved sequentially. However, the integration of process planning and scheduling brings not only best effective use of production resources but also practical process planning without frequent changes. Choi, Kim, Park, and Park (2004) have proved that this integration of process planning and scheduling is far superior to the sequential process of planning and scheduling in the aspect of completion time of jobs. We used a genetic algorithm with flexible representation structure for the integrated and dynamic scheduling method. Genetic algorithm enables integrated scheduling, considering alternative machines of outsourcing companies and operation sequences. Also, it enables rescheduling when changes have been made to the suppliers, outsourcing companies, and producer. In order to design genetic algorithm, first of all, the attribute of the problem should be analyzed, and then the presentation proper to the problem, performance measure, genetic operator, and genetic parameter should be decided. The following is genetic algorithm for the establishment of integrated scheduling considering alternative machines and operation sequence under the dynamic situation.
Representation To achieve integrated production plan through genetic algorithm considering alternative machines and operation sequences, first of all, the problem should be represented in chromosome. The representation should be made in the way that
all the processing sequence, alternative operation sequences, and alternative machines could be decided. First, to represent processing sequence, the pattern to repeat the number of the job as many as the number of operation is used. One gene means one operation, and in the represented order it will be allocated to the machines. For example, the problem of three jobs and three machines is represented in sequence as shown in Figure 2. The threefold repeated number in the first row is the number of the job, and the reason that each job number has been repeated three times is that each job has three operations. The first repeat of the job number means the first operation of the job, and the second repeat means the second job operation. If the job number continues to represent the number of job operation, this chromosome will always maintain its feasibility. The second row is the random numbers that will be used to decide alternative operation sequence. As each job is done in the one-operation sequence, each job produces the same random number within the number of maximum alternative operation sequence. For example, as job 2 in Table 1 has three alternative operation sequences, the random figure has to be produced within three. The third row has the random numbers to decide the alternative machine, producing them within the number of maximum alternative machines. In Table 1, the second operation of job 1 is to be done in the M2 but also can be done in the M1 and M3. In this case, the number of machines that can handle the second operation of job 1 is 3. As there are no more alternative machines than this in Table 1, the random figures for all alternative machines will be produced within three. The index in the last row means the repeat number of job numbers, namely showing the ordinal operation of each job.
… (Index)
The seed selection is used as a way of selection (Park, Choi, & Kim, 2001). Seed selection, as
A Multi-Agent System for Optimal Supply Chain Management
Table 1. Alternative machines and alternative operation sequences of each job
a way of individual selection that is used in the propagation of cattle and the preservation of the individual, has been introduced to the evolution of genetic algorithm. If the random value of the individual, which belongs to the father among parents, comes within the figure of probability (0.9), the best individual will be selected from within superior individuals from ranking population. But, if not, the individual will be randomly selected from among the entire group. The mother will be selected randomly among the entire group, but in this case, first two individuals will be selected randomly, and then the better individual based on the value of probability will be selected. These will be used as parents, and then returned
M2
(M2) M1
M2
M3 (M1) (M2)
to the individual groups, so that they will be used again later.
Genetic Operator Crossover operator should maintain and evolve the good order relationship of chromosome. The crossover operator used in this research has a process as follows:
Produce a random section Insert all the genes inside the random section into parent 2 All genes with the same index as the genes in the random section will be deleted in parent 2
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A Multi-Agent System for Optimal Supply Chain Management
a chromosome is represented as a permutation type, the makespan is produced by the process that assigns operations to the machines according to sequence of gene from left to right, while maintaining the technological order of jobs and considering its alternative operation sequence and alternative machine. The process is shown in Figure 3. The next generation will be formed by the selection among the current generation and with the help of genetic operator. The new individuals will be produced as many as the number of initial population and form the next generation. By using elitism, bad individuals will be replaced with good individuals. Also, because of crossover rate and mutation rate, some individuals will be moved to the next generation without getting through the genetic operator.
It will be corrected according to the alternative operations sequence of the initial job number to make alternative operation sequence coincide to the same job number These processes will be performed alternating parent 1 and parent 2
The position of insertion is just before the gene where the random section has started. If in parent 1 the random section starts in the fourth place, then the position of insertion will be before the fourth gene in parent 2. This crossover operator produces two children. After two offspring are evaluated, the better one will be sent as a next generation. The mutation operator gives a change to the chromosome, thus maintaining diversity within the group. This research uses the mutation operator based on the neighborhood searching method (Park et al., 2001).
Genetic Algorithm for Dynamic Scheduling
Objective Function and Replacement
The genetic algorithm suggested in this paper reflects the dynamic changes in the suppliers and outsourcing companies along with the produc-
The minimum makespan in the scheduling often means the highest efficiency of a machine. When
Figure 3. The example of crossover ¤ |- random section-|
A Multi-Agent System for Optimal Supply Chain Management
tion changes of the producer. When the changes of production environment have happened in suppliers or outsourcing companies—the acceptance of new orders, machine failure, outage, and the absence of the worker in duty—all these changes will be reflected in the rescheduling. For example, when a machine cannot be operated for 10 hours because of its failure, or a supplier cannot keep the lead-time, thus delaying 10 hours, the integrated scheduling will reflect the usable time of each machine and the possible starting time of each job. Figure 4 shows the process of rescheduling when a new order has been accepted at the time of t1. In the process of rescheduling, the remaining jobs and the new jobs to be done by the new orders will be considered in the new production planning. It also considers the starting time of jobs and the usable time of machines. The starting time of jobs can be changed by the delay of supply or the operation delay of its prior process. The usable time of machines, as shown in the black shade of Figure 4, can be changed by when the machine has already been allotted to other job, machine
failure, and the absence of the worker on duty. All these dynamic changes will be reflected in the rescheduling (Park, 1999). In the rescheduling process, the chromosome is to be modified, and a new objective function is to be produced in response to the environmental changes. Based on this rescheduling, a new supplier or an outsourcing company is to be selected, and the information of rescheduling is to be transmitted through the multi-agent system. In order to solve several problems simultaneously, the genetic algorithm in this study has been represented in a chromosome and has been designed for better evolution, so that it can more effectively solve the complex problems of integrated scheduling. Like this, the strong point of genetic algorithm lies in its approach based on the problem-centered chromosome design. Also, thanks to its flexible representation, speedy performance, and excellent performance capability, the genetic algorithm makes it possible to reflect in the rescheduling all the information about suppliers and outsourcing companies, which comes from the multi-agent system on a real-time basis. In this respect, the
Figure 4. Example of dynamic scheduling
when a new order has been accepted
Rescheduling
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A Multi-Agent System for Optimal Supply Chain Management
genetic algorithm is considered to be best suited to the dynamic supply chain management.
A MultI-Agent systeM For oPtIMAl suPPly chAIn MAnAgeMent the whole structure of a Multi-Agent system The key factor in the development of a multi-agent system is how the roles should be assigned to each agent. In the multi-agent system, one agent doesn’t perform all functions. Rather, each agent has an individual function, and so they mutually
communicate with each other to jointly solve complicated matters. Because of this reason, how to classify each agent is a key factor to designing a multi-agent system. For the development of a multi-agent system, all the activities from a customer’s order to manufacturing were reviewed, and then these activities were assigned to each agent. Each agent is given a specified function so as not to have many functions. As illustrated in Figure 5, the multi-agent system can be divided in two subsystems: virtual manufacturing system and SCM system. The virtual manufacturing system is composed of an inventory analysis agent, manufacturability analysis agent, process planning agent, and scheduling agent. This system makes a decision on whether it will be able to manufacture or
Figure 5. Structure of multi-agent system of an optimal supply chain
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not, makes scheduling in consideration of the production environments of both suppliers and outsourcing companies, and makes a decision on the necessity of parts or materials through inventory analysis. This activity is directly related to the selection of suppliers. The SCM system consists of an outsourcing management agent, supplier management agent, outsourcing company communication agent, supplier communication agent, and registry server agent. This system organizes and manages the optimal supply chain based on the integrated scheduling that is the result of virtual manufacturing. Based on the exact scheduling, the virtual manufacturing system makes a decision on whether it can manufacture within the due date. The SCM system’s main function is to respond to the manufacturing environment changes occurring in the optimal supply chain. To this end, the mediator of the manufacturing company has to exchange information on a real-time basis with both the supplier’s and outsourcing company’s agent. The multi-agent system has a mediator-centered structure. All the agents are connected to the mediator, which takes control of each agent, and also are responsible for smooth information exchange with suppliers and outsourcing companies.
Function of each Agent All agents own their basic function to communicate with each other, and each one has diverse kinds of engines according to his role.
Mediator The mediator plays the role of controlling and coordinating the message exchange among agents within the system. The agent in charge of controlling and coordination is necessary in order to perform harmoniously the various jobs of many agents, to remove the bottlenecks occurring within the system, and to prevent the collision
between each agent. For this purpose, the mediator has a knowledge base for agent coordination and message exchange as well as information on each agent. For example, when the SMA (supplier management agent) received from the SCA (supplier communication agent) the information on production environment change, that is, “The material delivery from the supplier is delayed,” the mediator is to send this information speedily to the SA (scheduling agent) so that it may make rescheduling according to the production environment changes. The roles of mediator are as follows: • • • • •
Message transmission between internal agents Function control of internal agents Function of filtering the messages Knowledge of mediator’s behaviors Knowledge of internal agents
The mediator is in charge of controlling and coordinating each agent, and has diverse knowledge base to help the message exchanges between agents, which are illustrated in Table 2. As illustrated, the knowledge is expressed in the form of rules. Case 1 shows that when OMA (order management agent) receives an order, the mediator is to send the message asking the MAA (manufacturing analysis agent) to make a decision whether it can be produced or not. See Case 1. Case 2 shows that when it receives the message that it can produce the ordered product from MAA, the mediator is to send PPA (process planning agent) the message asking for scheduling. See Case 2. Diverse messages from internal agents converge to the mediator. The mediator is to perform the function of operating its system smoothly, so that it can remove bottlenecks and prevent collisions between each agent. This study adopted the FIFO (first in first out) method in handling
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Table 2. The knowledge in the mediator Knowledge of agent role Knowledge of message exchange Knowledge of problem solution
Knowledge of subagent composition Knowledge of subagent role Knowledge of job handling procedures Knowledge of how to handle the contents of message Knowledge of how to handle message in case of no answer Knowledge of how to express in time of trouble
the messages. If messages from the agents come to the message queue, those messages will be handled in sequence.
Registry Server Agent Buyer agent, outsourcing company agent, and supplier agent are to be registered in the registry server agent (RSA). Registered agents are to obtain position information from RSA so as to be able to communicate to his or her partner agent. The agents registered in the RSA can be candidates for the participating member of the optimal supply chain. In principle, the optimal supply chain needs to be organized through communication with the agents of all the suppliers and outsourcing companies. But in reality, for mutual communication among agents, each agent has to obtain information about his or her partner agent. For this reason, only the agents who can communicate via RSA can be candidates for the optimal supply chain organization. The outsourcing companies and suppliers have to register the information on their agent’s position and basic data of their companies. The basic data of the companies includes their name and role. Their role is whether they are outsourcing companies or suppliers. Outsourcing company and supplier have a different role. Because of this, they have to register additional information besides basic data. That is, the outsourcing company has to provide information on machines and facilities, and the supplier has to include information on the parts and materials that it can provide. In particular, in
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case of an outsourcing company, as an outsourcing company executes some parts of an ordered product, information on its production facilities such as a mill or a drill has to be registered.
Order Management Agent (OrderMA) An order management agent receives orders and confirms them. It keeps order information and analyzes and classifies buyers through data mining and statistic analysis.
Supplier Management Agent A supplier management agent provides the information on the environmental changes in the suppliers to the inside system and also transmits the information on supply schedule to the suppliers. This agent also keeps the suppliers’ priority on the basis of their capability and confidence. This data will be used at the time of selecting suppliers when they all can keep the same due date.
Outsourcing Management Agent (OMA) An outsourcing management agent provides the information on the machine situation of outsourcing companies for the sake of scheduling, and also, based on the scheduling, it makes a decision on the necessity of outsourcing. The criteria for the decision-making are whether the outsourcing company can keep the due date or not. When the producer cannot keep the due date for itself, this agent sends the message containing the necessity
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Case 1. [ case 1 ] rule name Accept Order if contents_name = order then send product_width and product_length and product_height and raw_material and part_width and part_length and part_height to ManufacturabilityAnalysisAgent
Case 2. [ case 2 ] rule name Accept ManufacturabilityAnalysisResult if contents_name = ManufacturabilityAnalysisResult and ManufacturabilityAnalysisResult = yes then send use_for and model_name and number_of_part and process_time and product_width and product_length and product_height and raw_material and part_width and part_length and part_height to Process Planning Agent.
of outsourcing. The following is the agent’s action knowledge represented in the form of IF-THEN, saying, “If the due date based on the production planning is not satisfactory, inform the mediator of the necessity of outsourcing.” Here, Last_time is the finishing time of the last operation in the production planning. IF Last_time > due_date Then send yes_message to Mediator
This agent has the priority information on outsourcing companies, and this information will be used for selecting outsourcing companies.
Inventory Analysis Agent (IAA) An inventory analysis agent analyzes the inventory level and makes a decision on the purchase of materials. The information on the inventory level is to be secured from the inside of the system. The inventory analysis agent makes a decision based on the purchase necessity analysis knowledge.
Manufacturability Analysis Agent (MAA) Based on the information on products and parts, MAA checks up the constraints related to the manufacturing process in order to make a decision on its manufacturability. Constraints usually come from the size and weight. In case the size of an ordered product is too large or the weight is too heavy, the small manufacturer cannot produce it. For example, if the size and weight surpass the capacity of the cranes of the manufacturer, it cannot execute the order. The judgment on manufacturability can be made by the knowledge base. This knowledge base includes information on various kinds of size and weight as well as the cases making it impossible to execute an order. The knowledge in Box 1 shows how the judgment on manufacturability can be expressed in JESS, that is, a language of java-based rule expression.
Process Planning Agent (PPA) A process planning agent performs the role of process planning. This paper used CBR (case-based
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Box 1. “The mold size of cavity plate is a>600, b>270, c>400, it is impossible to execute the order.” (constraint_rule_002 (size_a
?a)
(size_b
?b)
(size_c
?c)
=> (if (&& (>=?a600) (>=?b270) (>=?c400))) then (assert (manufacturability no)))
reasoning) based on a process planning engine. The reason is that if the products of order-based producers are similar, the same process will be used (Kolodner, 1993). Choi, Kim, and Park (2002) have proved the availability of this methodology by applying it to molding industry.
Scheduling Agent A scheduling agent performs the role of scheduling based on a genetic algorithm-based engine, considering alternative machines and operation sequence. This agent plays the critical role in the multi-agent system, and based on this scheduling, the supplier and outsourcing company will be selected.
Supplier and Outsourcing Company Communication Agent A supplier and outsourcing company communication agent performs the role of communications between multi-agent system and suppliers and outsourcing companies. For the establishment of scheduling, the supplier communication agent provides the possible due date of raw materials, and the outsourcing company communication agent provides the information on the machine situation. These two agents provide multi-agent systems with the information on the production environment changes through user interface.
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the Process of the Multi-Agent system The process of the multi-agent system is composed of the followings: the process of scheduling for self-production, the process of scheduling for selecting outsourcing company, the process of scheduling for selecting supplier, and the process for rescheduling in case the production environments of suppliers and outsourcing companies have been changed. If necessary, based on the rescheduling, the supplier and outsourcing company should be reselected.
The Process of Scheduling for Self-Production Figure 6 shows the case that a producer can make for order-based products at his own factory without the help of suppliers and outsourcing companies. The producer establishes the scheduling for accepted orders, and provides the result to the buyer agent.
The Process of Scheduling for Selecting Outsourcing Company Figure 7 shows the case that if a producer cannot meet the required due date by self-production, he has to select an outsourcing company.
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Figure 6.The process of scheduling for self-production
Figure 7. The process of scheduling for selecting outsourcing company
Figure 8. The process of scheduling for selecting supplier
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The outsourcing management agent analyzes the necessity of outsourcing based on the scheduling, and if necessary, it asks for the information on the machine situation of outsourcing companies. Based on this information on machine situation, the scheduling agent establishes rescheduling. Based on this rescheduling and outsourcing company priority, the outsourcing management agent selects an outsourcing company.
The Process of Scheduling for Selecting Supplier Figure 8 shows how to select the supplier in case that the producer doesn’t have enough inventory of raw materials. The inventory analysis agent analyzes the inventory of the inside system and required raw materials for orders. If it thinks the supplier should be selected, the supplier management agent will ask the suppliers for a possible due date, and based on this information, it will select a supplier.
The Process of Rescheduling for Production Environment Changes Figure 9 shows how to respond to the changes in the production environment. When there are changes in the production environments of outsourcing companies, the outsourcing communication agent provides this information to the outsourcing management agent. And based on this changed production environment, the scheduling agent achieves rescheduling, and the outsourcing management agent analyzes this rescheduling. However, if this rescheduling cannot meet the required due date, other outsourcing company should be selected. To testify to the availability of the above processes of the multi agent system, this research adopts a molding company as a case study.
Figure 9. The process of rescheduling for production environment changes
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cAse study oF MultI-Agent systeM Case Definition In order to test the validity and practicality of the multi-agent system developed by this study, we made a prototype and applied it to real field cases. We visited the small “J molding company,” the domain of this study, and reviewed and analyzed the facilities of the factory and its field situation. J molding company has such machines as a large mill, medium and small mill, drill, and lathe to perform milling, drilling, grinding, and electric discharge machining. Meanwhile, due to the constraint of facility of this company, there are some molds that cannot be manufactured. That is, the cranes of this company cannot handle the mold exceeding the weight of five tons. But there
are no other difficulties in the resources, like manpower or machines, and in technologies. The knowledge base of MMA defines the constraints and uses them in judging manufacturability. The J molding company was maintaining a close relationship with its outsourcing companies and suppliers while outsourcing some part of milling and electric discharge machining. As illustrated in Figure 10, J molding company has a supply chain consisting of material suppliers, outsourcing companies, and customers. Also, in order to meet the due date of the order, it tries to organize an optimal supply chain. The company keeps a good business relationship with three outsourcing companies and three suppliers. This case study is for the mold production of a “cake box.”
Figure 10. Supply chain of J molding company
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case study The case study has two stages: The first stage is how to organize an optimal supply chain according to the procedures as illustrated in Figure 11. The second stage is how to respond to the environmental changes such as a machine failure or power stoppage after organizing an optimal supply chain. As illustrated in Figure 11, the organization of an optimal supply chain needs two steps: The first step is to perform virtual manufacturing for
an ordered product. The second step is to select an optimal supplier and outsourcing company according to the result of virtual manufacturing. Step 1. Virtual manufacturing If the mediator receives from OMA a message that a client order “cake box” within six days from order date, it sends necessary information to the MAA so as to make judgment on manufacturability. If the mediator receives a “yes” message from MAA, it sends order-related information to the
Figure 11. Procedure for organizing an optimal supply chain
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Figure 16. Message interface asking for information on the machine situation of outsourcing companies
Figure 17. Rescheduling-related message interface in consideration of outsourcing companies’ situation
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PPA and SA so that both agents may prepare for process planning and scheduling respectively. The mediator sends scheduling information from SA to the OMA to make a decision on whether there it is necessary to outsource. “Makespan 61” is the result of scheduling for an ordered “cake box” mold. This means that if the factory operates eight hours per day, it takes eight days. In this case, as the customer’s due date request is within six days from his or her order date, J molding company cannot satisfy the customer’s due date. Accordingly, the OMA sends the message of outsourcing necessity to the mediator. Step 2. The organization of an optimal supply chain In order to select an optimal outsourcing company that can meet the due date, the mediator asks OMA for the information on the machine situation of outsourcing companies registered in the RSA. OMA asks the OCCA (outsourcing company communication agent) of each outsourcing company for the information on machine situation, which includes the machine schedule. If the machine is now in operation, that machine cannot be used for another order until the current operation is over. When the mediator receives the following information on machine schedule from outsourcing companies, it sends this information to the SA so that it may prepare for rescheduling. • • •
A outsourcing company: two units of mill are now not in operation. (AM 1 0, AM 2 0) B outsourcing company: one unit of mill can be used after six hours. (BM 6) C outsourcing company: one unit of mill can be used after three hours, and another one unit is now not in operation. (CM 3, CM 0)
As illustrated in Figure 17, rescheduling was made by considering outsourcing companies’ machine situation. As a result of rescheduling,
in case of A and C outsourcing companies, possible due date is October 18, 2005, thus satisfying customer’s request. But B outsourcing company’s possible due date is October 20, consequently not meeting the requested due date. This means that A and C can be a participating member of the optimal supply chain. Therefore, the mediator asks OMA to choose one company between these two outsourcing companies. Based on the priority information, OMA chooses A outsourcing company, and then notifies the mediator and OCCA of it. By selecting A outsourcing company, the optimal supply chain for a “cake box” mold was organized. In this case study, the case of selecting a supplier was excluded, but the supplier also can be selected in the same way as the above-mentioned outsourcing company. Meanwhile, the optimal supply chain is not fixed, rather it can be changed in response to the changes of a manufacturing environment. But even if such environmental changes take place repeatedly, an optimal supply chain can be organized in the same way as the first organization of an optimal supply chain. As illustrated in Figure 19, this study performed the tests for two kinds of environmental changes. The first environmental change is: A outsourcing company, which is chosen as a member of the optimal supply chain, is unable to work because of milling machine failure. The second one is: A supplier becomes unable to provide the parts within the requested date. Figure 19 shows the process to solve the environmental changes. The above two environmental changes can affect J molding company in the following two ways: one is that the delay of work doesn’t directly affect the due date requested by the customer, and the other is that it affects the due date. In the first case, the company’s manufacturing activity will be continued according to the rescheduling, but in the second case, it has to reselect a new outsourcing company or supplier. As shown in the above tests, the optimal supply chain can be reorganized in response to
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Figure 18. Message interface related to the notification of the result of outsourcing company selection
Figure 19. The test procedures of optimal SCM cases
the dynamic changes in the manufacturing environment, so that the manufacturing company may smoothly maintain and manage its optimal supply chain.
review of case study In order to test the validity and practicality of the developed multi-agent system, this study produced
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a prototype performing key functions and applied it to the field for case study. Unfortunately, the multi-agent system has not yet commercialized because of many difficulties in realizing its knowledge base. Likewise, the multi agent system’s prototype made by this study is not enough to be commercialized, and so we couldn’t measure the performance and effect by means of application. Instead, as a way to test its validity and practicality,
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we had interviews with the experts in charge of scheduling at the make-to-order manufacturing companies, including the J molding company and 15 software developers related to agent development. The experts in charge at the make-to-order manufacturing companies testified to the validity of the multi-agent system, and those software developers evaluated the systemic performance of the multi-agent system. Evaluation was performed on a five-point scale on the next major items. •
•
Experts in charge at the make-to-order manufacturers ° Is the scheduling of this system correct and accurate? ° Is it reasonable that the optimal supply chain consisting of suppliers and outsourcing companies focused on due date for supply chain organization? ° Does the work process for calculating the possible due date reflect well the reality? ° Does this system smoothly react to the environmental change occurring in the supply chain? Software developers ° Is communications among agents smoothly performing? ° Is the role of each individual agent well assigned? And is the multi-agent structure appropriate? ° Is the handling speed of the system satisfactory? ° Is the agent development method reasonable? ° Is there any serious mistake in the system?
As a result of evaluation, the experts in charge at the make-to-order manufacturers gave a score of 3.8 on the overage, and software developers gave a score of 4.2. The experts in charge gave a relatively higher score to the capability to react to the environmental changes and well-reflected
work process, but a somewhat low score to the accuracy of scheduling. This seems to come from the fact that the current algorithm is not fully enough, because of the complex scheduling of the molding industry. However, they put a high value on the automation of scheduling and the possibility of job handling without human intervention and believed that commercialization of the multiagent system will be able to bring cost reduction and productivity improvement. They also added that many efforts were being made to maintain a solid relationship with outsourcing companies and suppliers that satisfy the due date. These efforts mean that the core point of satisfaction of due date in the organization of optimal supply chain has validity. The agent software developers, who gave a higher score, seem to value the current high level of agent development. The evaluation team as a whole rated the validity and practicality of the multi-agent system very high. In particular, they have paid attention to the new approach to SCM.
Future trends Owing to the characteristics of the domain of this research, we organized an optimal supply chain based on the satisfaction of due date. From now on, however, further research on the optimal supply chain, which has two different objectives, or considers two key factors simultaneously, will be made. Many companies consider the problem of price to be very important as well as due date. For example, when we consider the two factors of price and due date simultaneously, as the due date is the same but the price is different like Figure 20, it is easy to select its business partner. But as shown on the right side of Figure 20, if the price and due date are respectively different, it is not easy to evaluate them because the two have different worth. Therefore, the method to evaluate due date and price simultaneously has to be developed.
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Figure 20. Evaluation of due date and price
Furthermore, as due date and price have a trade-off relationship, negotiation is possible. That is, the following negotiation can be made: Instead of lowering the price, the due date can be lengthened, or if an earlier due date is required, the price will be higher. In these cases, a new negotiation protocol as well as a new negotiation method needs to be developed.
conclusIon Owing to the increasing importance of quick response to the rapid changes of business environments, the supply chain also needs dynamic changes according to its environmental changes. In the dynamic supply chain environment, it is a key factor to decide who to cooperate with for effective manufacturing. This study developed a system to efficiently select an optimal business partner under the dynamic supply chain environment. To this end, this study developed an algorithm for both scheduling and rescheduling, which is to be made by taking into consideration the manufacturing environments of both suppliers and outsourcing companies. Also, by using a multi-agent system, this study made it possible to organize and manage an optimal supply chain on a real-time basis in response to the dynamic changes in the supply chain environment.
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Like this, instead of trying to optimize an existing, fixed supply chain, we have tried to organize a new supply chain that can dynamically respond to the environmental changes, so that it can bring diverse effects such as cost saving, productivity enhancement, and speedy job handling. These effects are well presented in the results of our case study. Finally, we expect that this multi-agent system will be usefully applied to the complex supply chain environment and also have expectations that the agents realized in the wrapper method through a new development framework will be used in diverse fields.
reFerences Baker, A. D., Parunak, H. V. D., & Erol, K. (1997). Manufacturing over the Internet and into your living room: Perspectives from the AARIA project (Tech. Rep. TR208-08-97). ECECS Dept. Balasubramanian, S., & Norrie, D. H. (1995). A multi-agent intelligent design system integrating manufacturing and ship-floor control. Proceedings of the First International Conference on Multi-Agent Systems. San Francisco: The AAAI press/The MIT Press. Bussmann, S. (1999). An agent-oriented architec-
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ture for holonic manufacturing control. Proceedings of the First International Workshop on IMS, Lausanne, Switzerland.
algorithms for scheduling of static and dynamic job shop. Unpublished doctoral thesis, Dong-A University, Busan, Korea.
Choi, H. R., Kim, H. S., & Park, Y. S. (2002). Intelligent injection mold process planning system using case-based reasoning. Journal of Korea Intelligent Information Systems Society, 8(1), 159-171.
Park, B. J., Choi, H. R., & Kim, H. S. (2001). A hybrid genetic algorithms for job shop scheduling problems. Computers & Industrial Engineering, 45(4), 597-613.
Choi, H. S., Kim, H. S., Park, B. J., & Park, Y. S. (2004). Multi-agent based integration scheduling system under supply chain management environment. Lecture Notes in Artificial Intelligence, 3029, 249-263. Chuter, C. J., Ramaswamy, S., & Baber, K. S. (1995). A virtual environment for construction and analysis of manufacturing prototypes. Retrieved from http://ksi.cpsc.ucalgaly.ca/projects/ mediator Fox, M. S., Barbuceanu, M., & Teigen, R. (2000). Agent-oriented supply chain management. The International Journal of Flexible Manufacturing Systems, 12, 165-188. Julka, N., Karimi, I., & Srinivasan, R. (2002). Agent-based supply chain management-2: A refinery application. Computers and Chemical Engineering, 26, 1771-1781. Kolodner, J. (1993). Case-based reasoning. Morgan Kaufmann Publishers. Maturana, F., & Norrie, D. H. (1996). Multi agent mediator architecture for distributed manufacturing. Journal of Intelligent Manufacturing, 7, 257-270. Norman, M. S., David, W. H., Dag, K., & Allen, T. (1999). MASCOT: an agent-based architecture for coordinated mixed-initiative supply chain planning and scheduling. Proceedings of the Third International Conference on Autonomous Agent (Agents ’99), Seattle, WA. Park, B. J. (1999). A development of hybrid genetic
Parunak, V. D. (1987). Manufacturing experience with the contract net. In M. N. Huhns (Ed.), Distributed artificial intelligence (pp. 285-310). Pitman. Parunak, V. D., Baker, A. D., & Clark, S. J. (1997). The AARIA agent architecture: An example of requirements-driven agent-based system design. Proceedings of the First International Conference on Autonomous Agent, Marina del Rey, CA. Shen, W., & Norrie, D. H. (1998). An agent-based approach for distributed manufacturing and supply chain management. In G. Jacucci (Ed.), Globalization of manufacturing in the digital communications era of the 21st century: Innovation (pp. 579-590). Kluwer Academic Publisher. Shen, W., & Norrie, D.H. (1999a). Developing intelligent manufacturing systems using collaborative agents. Proceedings of the Second International Workshop on Intelligent Manufacturing Systems (pp. 157-166). Shen, W., & Norrie, D. H. (1999b). Agent-based systems for intelligent manufacturing: A stateof-the-art survey. The International Journal of Knowledge and Information System Shen, W., & Norrie, D. H. (1999c). An agent-based approach for manufacturing enterprise integration and supply chain management. Shen, W., Norrie, D. H., & Kremer, R. (1999). Implementing Internet enabled virtual enterprises using collaborative agents, infrastructures for virtual enterprises. Kluwer Academic Publisher. Shen, W., Ulieru, M., Norrie, D. H., & Kremer,
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R. (1999). Implementing the Internet enabled supply chain through a collaborative agent system. Proceedings of Workshop on Agent Based Decision-Support for Managing the InternetEnabled Supply-Chain, Seattle. Wu, J., Cobzaru, M., Ulieru, M., & Norrie, D. H. (2000). SC-web-CS: Supply chain Web-centric systems. Proceedings of the IASTED International Conference on Artificial Intelligence and Soft Computing (pp. 501-507).
Xue, D., Yadav, S., & Norrie, D. H. (1999). Development of an intelligent system for building product design and manufacturing - Part I: Product modeling and design. Proceedings of the 2nd International Workshop on Intelligent Manufacturing Systems (pp. 367-376).
This work was previously published in Architectural Design of Multi-Agent Systems: Technologies and Techniques, edited by H. Lin, pp. 281-304, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.17
Integration of Global Supply Chain Management with Small and Medium Suppliers Asghar Sabbaghi Indiana University South Bend, USA Ganesh Vaidyanathan Indiana University South Bend, USA
AbstrAct The purpose of this chapter is to develop a conceptual insight and an integrated framework to global supply chain management through strategic aspects of business philosophy as it pertains to the small- to mid-sized supplier. Primary consideration is given to characteristics of the integrated supply chain and the necessity of adaptation in managing the supply chain in order to attain competitive advantage. A review of the current literature and an analysis of the supply chain in changing global markets emphasize the relative importance of strategically managing the supply chain process given the limited resources of the small- to mid-sized firm. It is argued that managing the supply chain through the development of market specific strategies allows the small to mid-sized firm to be anticipatory as opposed to being reactive in its strategic planning, which can greatly benefit customer satisfaction levels and
thus enhance the performance of the firm.
IntroductIon Supply chain management (SCM) as a strategy for competitive advantage has gained prominence in both large and small organizations. An understanding of the supply chain management concept from the perspective of suppliers and, in particular, small and medium enterprises (SMEs) is crucial to the study of vertical integration of global SCM. This understanding will better formulate internal business strategies of suppliers by supporting both the objectives of the supply chain and their own businesses. About 80% of the supply chain members are SMEs, and a major impact and savings may well be found with the SMEs within the supply chain (Smeltzer, 2002). By taking advantage of their position and criticality in the supply chain, SMEs can add value and
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contribute to the vertical integration essential in the supply chain. This creates advantages not just for themselves, but also for other members within their supply chain. By some definitions, a supply chain is a network of facilities that performs the functions of procurement of material, transformation of material to intermediate and finished products, and distribution of finished products to customers (Lee & Billington, 1995). The supply opportunity analysis technique (SOAT) moves away from a reactive to a proactive mode by taking (determining) the suppliers’ perspective (Bhattacharya, Coleman, & Brace, 1995). When customers demand customized products, products often become increasingly complex. In addition, the development and manufacturing of such products demand even greater resources that need to be shared by the supply chain members. In addition, the development and manufacturing of such products by the original equipment manufacturing (OEM) partners require supply chain members to increasingly share available resources as virtual partners (Rota, Thierry, & Bel, 2002). To the suppliers, these virtual partnerships can provide both opportunities of growth and threats of becoming obsolete from the supply chain. A supplier is usually involved with multiple customers and therefore in several supply chains. The supplier receives both firm orders and forecast orders. To be successful, the supplier needs to negotiate these firm orders and the forecast orders with its suppliers. To deliver customized products with short delivery times and high due-date observance, to plan for the supplier’s own raw material requirements, it is important for the customer to effectively share information (Rota et al., 2002). The transformation from reactive to proactive procurement parallels a transformation in relationships between suppliers and buyers. Suppliers have developed partnerships with customer firms. This partnership has turned into collaborative relationships or strategic alliances (Burt, Dobler, & Starling, 2003). The rising cost
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of product development, globalization, and shorter product lead times have been cited as important reasons for supplier collaboration (Bruce, Fiona, & Dominic, 1995; Helper, 1991; Lamming, 1993). The involvement by partners has a positive impact on strategic purchasing, and strategic purchasing has a positive impact on a firm’s financial performance (Masella & Rangone, 2000). Even though there are many benefits from this collaborative or alliance network between suppliers and customers, there are obstacles. Trust plays a critical role in such collaborative or alliance relationships between suppliers and customers (Burt et al., 2003). However, such collaborations and alliances enable information flow across the supply chain. To answer questions such as why a supplier was not treated according to its capabilities or why did engineering think it had capabilities when it did not, the characteristics of the suppler has to be clearly articulated (Nellore, 2001). Developing visions for suppliers can help OEMs to create clear expectations and thus better the core capabilities of the buyer and supplier firms (Nellore, 2001). OEMs also increase supplier involvement in product development and the share of inbound just-in-time (JIT) deliveries. However, while suppliers increase their outsourcing and globalization of production and product development activities, OEMs do not (von Corswant & Fredriksson, 2002). By outsourcing certain activities to specialized suppliers, companies can focus on those products and activities that they are distinctively good at (Venkatesan, 1992). This specialization, enabling a reduction of the capital base, implies improved return on invested capital (Quinn & Hilmer, 1994) and the possibility to benefit from economies of scale. However, outsourcing means that important activities are placed outside the boundaries of the firm (Richardson, 1972). In addition, coordination of these activities demands vast resources, and many companies therefore strive to reduce their supply bases (Cousins, 1999). A cooperative strategy between OEMs and suppliers is needed
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to ensure efficient coordination of these activities. Information flow enables such cooperative strategies. A significant portion of product nonconformance costs can be directly attributed to variation in supplier processes. To mitigate the effects of variation in the near term it may be tactically prudent to assess tolerances to influential supplier processes. Such tolerance allocation strategies tend to be adversarial in nature, since the cost associated with a nonconforming product is principally borne by suppliers via scrap and repair costs, not to mention costs associated with safety stock increases, and so on. However, a more appropriate long-term strategy for reducing nonconformance costs is to consider ways to achieve a reduction of variation in supplier processes (Plante, 2000). Variance reduction of a supplier’s processes requires knowledge of what influences the process variation so that appropriate improvement action can be undertaken in an informed manner. Gaining such knowledge requires that organizations invest in and commit to continuous learning (Plante, 2000). Companies such as Raytheon finds that 50% to 70% of its product costs are represented by outside purchases, with a majority of the material dollars spent on a few key parts provided by a few key suppliers. To address this conundrum, the Raytheon Six Sigma with Suppliers process was created, providing a set of tools and resources to help reduce supplier costs. The Raytheon Six Sigma with suppliers process has six steps (visualize, commit, prioritize, characterize, improve, and achieve), including an intense two-day workshop, which requires a heavy involvement and commitment by the supplier. Information flow between suppliers and customers can enable acquisition and use of this process knowledge to reduce supplier costs. Measures related to quality, cost, delivery, and flexibility have been used to evaluate how well the suppliers are performing. Companies track supplier performance over time to detect problems early. It is imperative for even small businesses
to establish performance measures (Knechtges & Watts, 2000). Performance cannot be measured solely by past or current levels of sales and profitability but should also include quantitative indicators of how the firm will do in the future. A recent study showed that in a supply chain, the supplier management practices adopted by first-tier suppliers affected second-tier suppliers’ performance. Second-tier suppliers’ performance consequently influenced both first-tier suppliers’ quality and delivery performance (Park & Hartley, 2002). As performances of suppliers are evaluated regularly and frequently, these problems can be mitigated easily and at an earlier stage. The implementation of a successful supplier performance measurement system not only clarifies supplier understanding of performance expectations, consequences for poor performance, and rewards for performance excellence, but it also provides documentation of actual supplier performance. Supplier performance metrics can be used for a wide range of continuous improvement efforts. For example, they can be the basis for a establishing a proactive supplier development process, or making critical decisions when rationalizing the supply base, or even for determining how to distribute costs over several suppliers to better manage risk. Information flow of performance plays a critical part for maintaining supplier relationships. Supplier process, performance, strategy, and relationships can be made effective and efficient using information technology. Given the symbiotic relationship existing between supplier and customer, all participants of the global supply chain need to be educated and trained to facilitate IT adoption (Kirby & Turner, 1993). In the next section, we present the characteristics, opportunities and challenges for SME companies and suppliers in general. Based on that discussion, we illustrate a conceptual framework consisting of five dimensions for suppliers in the third section. The remaining sections expand these five dimensions. The final section presents a summary and conclusions of the five dimensions.
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small- to Medium-sized companies: their characteristics, opportunities, and challenges Small and medium enterprises (SMEs) have played a significant role in the global supply chain management in various countries and in the landscape of global business competition (Chapman, Ettkin, & Helms, 2000). As reported by the U.S. Small Business Administration (USSBA, 1999), SMEs are an integral part of the renewal process that pervades and defines market and economies. New and small firms play a critical role in experimental and innovation that leads to technological changes and productivity growth. With the emergence of the new technologies, new products, new services, new markets, and new management concepts, the pattern of competitive advantage for companies— particularly for small- to medium-sized organizations—has changed and has subsequently led to new opportunities and new challenges. There is no universally accepted definition of a small and medium enterprise (SME). In the literature, the definition of SME varies based on the number of employees, ownership of the shares capital investment, or financial turnover, among others (Reed, 1998; Taylor & Adair, 1994). In order to better understand the strategic roles of SMEs in the global business, it is important to recognize their inherent characteristics. SMEs are often independently owned and operated and closely controlled by the owners/managers who are the principal investors and decision makers having entrepreneurial behavior. The attitude and expression of values (cultural and personal) of owners can play a significant role in the adoption of new technology and strategy development (Stansfield & Grant, 2003). The decision maker, often an entrepreneur or small network of associates, formulates attitudes based on perception of its environment. The entrepreneur’s attitudes influence his/her own behavior, such as decision making, and thereby have a direct impact on the
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SME’s capability. They also influence an employee’s attitudes and behaviors and thus affect the internal environment through the organizational culture factor, and further indirectly affect the SME’s capability through that mechanism. SMEs are also characterized by an absence of standardization and formal working relationships, having a flat organizational structure. Thus, they have a more organic organizational structure when compared to a more bureaucratic structure in large firms (Ghobadian & Gallear, 1996). These characteristics make SMEs more flexible to environmental changes (Levy, 1998; Storey & Gressy, 1995) as well as incurring lower overhead expenses and thus are perceived more innovative. Consequently, they have the potential of playing a significant role in global competition. In particular, SMEs who possess/ exhibit entrepreneurial behavior can use the new information technologies as the strategic tools to generate new products and services, and as driving force behind new processes, new forms of business organization, new scope for consumers, and new market opportunities and supply chain management. The characteristics of an SME can determine the strategic opportunities and challenges available to these companies, particularly in the area of supply chain management. The entrepreneurial behavior of SMEs differentiates them from larger companies in supply chain management, particularly in a cross-cultural dimension and global market. While SMEs’ managers are more sales oriented, they do not have a well-developed overall strategic plan. According to Dodge and Robbins (1992), 64% of SMEs that failed did not have a business plan. SME managers tend to rely on their tacit knowledge rather than systematic techniques in supply chain management planning activities, such as vendor selection (Park & Krishnan, 2001). The competitiveness of an SME is defined by its flexibility to environmental changes and dependent on its owner/manager (OECD, 1993), since the adoption of a strategic planning approach is
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affected by its ownership structure (O’Regan & Ghobadian, 2002). However, they may have limited resources required for efficient supply chain management and find themselves encountering more barriers due to increased competition at national and international levels, particularly when they do not have the resources to meet the demands of their trading partners in the supply chain. SMEs that are subsidiaries of larger organizations may be able to access resources from their parent organizations (O’Regan & Ghobadian, 2002) and be able to overcome these challenges of limited resources. However, they are typically responsible for their local strategies and limited flexibility in their national and international strategies. Furthermore, as managers of SMEs are usually holding multiple roles as entrepreneur, and owner/manager, the management focus tends to be operational rather than strategic. However, in order to take advantage of supply chain management as a means for competitive advantage and succeed, these companies need to take a strategic approach of supply chain management. In particular,
SMEs are challenged to balance their short-term operational focus with long-term strategies and technological innovations. This in turn requires greater financial and technical resources. The lack of resources required for effectiveness and efficiency is another major challenge for SMEs in adopting appropriate strategies for their supply chain management, particularly in their quest for global competition. Small to medium suppliers are less resourceful and often play niche roles within the supply chain as a commodity supplier, collaboration specialist, technology specialist, and problem-solving supplier (Kaufman, Wood, & Theyel, 2000) as shown in Table 1. The supplier topology divides along two dimensions: technology and collaboration. By dividing these dimensions into high and low categories, Kaufman et al. (2000) create four distinct supplier strategies. The top left quadrant defines suppliers who use standard technologies and relate to customers through standard market contracts. These suppliers compete on the basis of low cost. These suppliers can be replaced since
Table 1. Strategic supplier typology High Collaboration
Low Collaboration
Low Technology
High Collaboration
Commodity Supplier
Collaboration Specialist
•
Spot m arket s upplier
•
Detailed control parts supplier
•
Low c ost, l ow p rice p riorities
•
•
Little o r no d ifferentiation
Uses a c losed network i n each industry
•
Can b e in many i ndustries to maintain c ustomer product i nformation
Technology Specialist
Problem-solving Supplier
•
Proprietary p arts supplier
•
Black box supplier
•
Innovation in p roduct technology u sed to p roduce h igh barriers t o entry
•
High differentiation
•
Cost less i mportant
•
Small r uns, h igh process a nd labor flexibility
•
First m over advantages
•
Uses design capabilities for competitive advantage
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switching costs are low. These commodity suppliers design and sell parts to their customers as specified by their customers. The top right quadrant describes collaboration specialists. These suppliers use standard technologies that meet customer specifications and delivery schedules. However, these firms develop enhanced collaborative techniques to fulfill current and to anticipate future customer needs. These suppliers use vendor managed inventory (VMI) strategy. The collaboration essentially requires accurate and timely information. They reduce the customers’ internal monitoring or administrative costs. The suppliers in the lower right quadrant are the problem-solver suppliers. They help their customers to avoid costly investments in specific resources. They employ both advanced technologies and collaborative methods in promoting innovative design and manufacture of supplied parts. The bottom left quadrant defines the technology specialists. They supply proprietary parts using advanced technologies. However, they have weak relationships with customers and the customers benefit from acquiring high technology parts without having to invest in resources. These different suppliers can also be classified as subcontractors who are connected to their customers through supply networks and play coordinating roles between both domestic and foreign players (Andersen & Christensen, 2005). The common theme in this four dimensional topology is information technology (IT). Information technology is perceived as a critical enabler for efficient exchange of information between the SMEs and the members of supply chain management, and to improve organizational performance and enhance competitive advantage. However, due to resource constraints, SMEs place lower priority on IT investments. Thus, SMEs differ from large companies in their supply chain management practices and technology. Large companies have a greater scope of operation and thus are more likely to be involved in diverse markets. They can spread costly new systems over large units
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of production, and have internal technical development and maintenance capabilities (Smeltzer, 2001). SME managers and, in particular, small business entrepreneurs, tend to lack or not value many of the basic skills needed to adopt and implement networked processes. They are not operationally inclined or concerned with issues of managing their supply base methodically. They are keen to sell more. Larger firms have invested time and money in implementing their enterprise resource planning (ERP) and e-commerce strategies, including e-procurement and online selling, integrating with these firms can be frustrating. SMEs must develop the business planning skills to identify, select, and implement the supporting technology. Particularly, SMEs must adopt an integrated system such as ERP, e-commerce, and e-procurement systems to support their supply chain management and be able to “pull through” from downstream customers. In the context of Porter’s framework of competitive advantage strategies, and given the characteristics, opportunities, and challenges facing SMEs, the competitive success of these companies may not critically depend on price leadership or differentiation strategies but on how they are unique and critical to their trading partners (Quayle, 2002). In this context, SMEs could focus on meeting ultimate customers’ needs, strive to supply quality products/services, and add value to meet the demands of their supply chains. Thus, it is essential that SMEs can link their business strategies to that of the supply chain. The organic organizational structure of SMEs should enable them to develop strategic alliances with their trading partners in the supply chain so that they are able to leverage the skills and expertise of supply chain partners to gain strategic advantage for the whole chain.
conceptual Framework Forrester (1958) viewed a supply chain as part of industrial dynamics, alternatively known as system dynamics and management system dynamics;
Integration of Global Supply Chain Management with Small and Medium Suppliers
it is broadly defined as the application of feedback thinking and control engineering concepts to the study of economic, business, and organizational systems. System dynamics is concerned with problem solving in living systems that bring together machines, people, and organizations. It links together the system theory and the control theory so that we are able to generate added insight into system dynamic behavior and, particularly, into the underlying causal relationships in the context of global performance of the system and internal control. In this context, supply chain is defined as a system of business enterprises that link together to satisfy customer demands and to provide value to the end customer in terms of product and services. We can discern a distinct generic procedure as part of the production/ operation process in a supply chain that is called an echelon. In their most basic form, materials/ goods flow from one echelon to the next until they reach the end customer. In reality, however,
supply chains do not exist in isolation, but form part of a network of supply chains satisfying different demands. Figure 1 describes a framework for suppliers in the global integrated supply chain. The four major dimensions of the framework include strategy, process, partnership, and performance. These dimensions are enabled by the fifth dimension, global information flow. The ultimate goal in supply chain management is to create value for the end customers and the firms in the supply chain network. To accomplish this, firms in the supply chain network must integrate all their supply chain process activities both internally and with other firms in the network. This integrated supply chain process needs a supply chain strategy. The strategic fit requires the firm to achieve a balance between its responsiveness and its efficiency in its supply chain that best meets the requirements of its competitive strategy. The supply chain performance of the firm with respect to its supply
Figure 1. Integration framework for supplier network
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chain strategy is in terms of its responsiveness and efficiency (Chopra & Meindl, 2004). Furthermore, to create value for the supply chain network, it is critical that suppliers and customers develop strong relationships and partnerships based on a strategic perspective. Good supplier relationships are a key ingredient necessary for developing an integrated supply chain network (Wisner, Leong, & Tan, 2005). Good supplier and customer relationships and a great supply chain strategy are not enough to create value in an efficient, integrated supply chain process. The supportive role of information technology is essential along with the use of information technology to measure the supply chain performance. This provides the firm with the ability to make decisions about supply chain improvements. It is generally accepted in the literature that today’s forward thinking managers use an integrated approach to managing their business by using quantitative and technological tools to bring together multiple facets of the business including, but not limited to, procurement, inventory management, manufacturing, logistics, distribution, and sales. It has been argued that the next century’s paradigm for addressing challenges from increasingly demanding customers and global competition will rely on the effective use of information sharing and inventory control to streamline operations and coordinate activities throughout the supply chain. The conceptual integrated framework of the supply chain network brings collaboration and information sharing to fruition. The collaboration and information sharing results in reduced supply chain costs, greater flexibility to respond to market changes, less safety stock, higher quality, reduced time to market, and better utilization of resources (Wisner et al., 2005).
Integrated Process According to the Global Supply Chain Forum, supply chain management is defined as the integration of key business processes from end user
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through original suppliers that provides products, services, and information that add value for customers and other stakeholders (Croxton, Garcia-Dastugue, & Lambert, 2001). This definition identifies eight key processes as the core of supply chain management. The eight processes include: (1) customer relationship management, (2) customer service management, (3) demand management, (4) order fulfillment management, (5) manufacturing flow management, (6) supplier relationship management, (7) product development and commercialization, and (8) returns management. These processes transcend the length of the supply chain cutting through firms and functional silos alike. These processes also provide a framework for various aspects of strategic and tactical issues present in the supply chain processes. The integration of such processes would allow successful management of the supply chain for the suppliers as well. Figure 2 shows a relatively simple and generic supply chain that links a company with its suppliers upstream and its distributors and customers downstream. Upstream supply chain includes the organization’s first-tier suppliers and their suppliers. Such a relationship can be extended in several tiers all the way to the origin of material. Downstream supply chain includes all the processes involved in delivering the product or service to the final customers. Thus, there are physical flows in the form of raw materials, workin-process inventories, and finished products/ services, between supply chain echelons, from suppliers/vendors to manufacturers to distributors and retailers, and to consumers. Supply chain also includes the movement of information and money, and the procedures that support the movement of a product/service. Managing these physical and informational flows effectively and efficiently requires an integration approach that promotes organizational relationship and fosters the sharing of strategic and technological efforts (Sabbaghi & Sabbaghi, 2004).
Integration of Global Supply Chain Management with Small and Medium Suppliers
Figure 2. Integrated supply chain process
An effective supply chain management has required an integrated approach and collaboration among the various tiers of suppliers and retailers, and has led to information sharing relations. In 1995, a pilot project between Wal-Mart, WarnerLambert, Benchmarking Partners, SAP, and Manugistics led to the concept of collaborative planning, forecasting and replenishment (CPFR) (Cooke, 1998). Skoett-Larsen, Thernoe, and Anderson (2003) have defined three levels of CPFR: (1) basic CPFR collaboration that only involves few business processes and a limited integration with trading partners, (2) developed CPFR collaboration that is characterized by increased integration in several collaboration areas, and (3) advanced CPFR collaboration that deals with synchronization of dialogue between the parties in addition to data exchange. While in basic CPFR, the supply chain partners will usually choose a few key processes relevant to precisely their form of collaboration with customers and suppliers, in developed CPFR the parties start to coordinate data and information exchange by making agreements about the type of information sharing and exchanges. In advanced CPFR, the collaboration will be expanded to coordinate
processes within forecasting, replenishment, and planning. The planning processes may in turn be decomposed into collaboration on production planning, product development, transport planning, and market activities. CPFR is a set of norms and procedures created by the Voluntary Inter-industry Commerce Standards (VICS) Association to drive companies toward common business planning procedures and to search for efficiency in the supply chain while establishing standards to facilitate the physical and informational flow. The CPER model is part of the integration mechanism among these processes and a valuable technological innovation tool to support the implementation of various types of transactions among the supply chain companies. These norms would provide the foundations for companies in the supply chain to collaborate in sharing data and information, in forecasting and ordering, in better production and distribution, and to achieve a global optimum of cost and services. Successful collaboration and implementation of CPFR norms would enhance the partnership in a supply chain. This would lead to lower costs, improved product or service quality, better customer service, quicker project results, reduced cycle
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time/lead time, and improved value to customers. Furthermore, managing business processes requires both internal and external knowledge about the company’s operations and its strategies, as the development of effective behavior standards influences operational processes among the partners in the supply chain. Thus, given the constant need for innovation in organizational processes and corresponding information technology, CPFR can be viewed as a tool for competitive advantage in the supply chain. The effective competitiveness of supply chain between supplier and customer partly depends on the effectiveness and efficiency of the flow of order and information between various parties in the supply chain. Participating organizations need to adopt an appropriate business model and culture that facilitate inter-organizational integration, sharing of skills and knowledge, and enable change in response to market forces. The challenge at the front end, before the order, is to have relationships with suppliers over time using as much electronic technology as possible to be able to source product availability in real time, to meet the customers’ requirements. At the back end, the challenge is to understand and identify the best way to integrate with all their suppliers. This requires system standardization that allows suppliers to easily connect into their IT systems to improve not only their data communication facilities but also improve their business processes and facilitate collaboration between partners. This can be supported by the use of an integrated enterprise-wide information system such as enterprise resource planning (ERP) system. Enterprises, particularly SMEs within a supply chain, must then be evaluated as to added value in this process provided to customers and by their working relationships and partnerships to improve their performance and competitiveness. Where material and component suppliers are regarded as partners in the activity of satisfying customers, the adversarial approach to supplier auditing is not appropriate. All aspects of the supplier’s business
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process, from receiving and reviewing an order, through manufacture to delivery, needs to be reviewed by the auditor to ensure that they meet minimum acceptable standards and to identify opportunities to improve. The auditor acts as an independent observer in reviewing the SCM system. This method aims to identify opportunities for improvement in the customer-supplier relationship that will improve quality, delivery, and service (Saunders, 1994). In a move to remain competitive, many OEMs have resorted to outsourcing a large amount of design and manufacturing work. In so doing, they have repositioned themselves as customer-focused market players instead of design and manufacturing experts. This repositioning has consequently led to an increased reliance on the Tier 1 suppliers. With increased reliance comes increased pressure. Because of these new market changes, today’s suppliers are facing a significant shift in responsibilities: while their share of the design and development responsibilities has increased, there is a concomitant expectation that costs will decrease. Furthermore, suppliers have multiple OEMs and consequently need to respond to multiple process integration. There is an increased focus on suppliers becoming leaner, as well as a push for heightened investment in rigorous processes that focus on innovation in close collaboration with OEM customers. A significant factor contributing to the length of product development is the time and process required in responding to design changes. Communicating design changes in language relevant to or understood by both the manufacturer and supplier is difficult, time consuming, and expensive. Evaluating the impact of change, reaching agreement on options, and implementing the change can take months due to the back and forth communication between all parties involved in the project. This complex communication process involves exchanging and remastering design information in a variety of formats during product design, analysis, and change. This can be improved by using a collaboration tool that shares
Integration of Global Supply Chain Management with Small and Medium Suppliers
design intelligence between these departments, dramatically shortening the time to communicate change, evaluate tradeoffs, and make decisions. Engineering supply chain collaboration also results in early problem detection, saving time and money for all involved, and making it easy to tie and integrate processes from various OEMs and respond to them individually. SMEs need to identify a number of factors that can impede external process integration along the supply chain, causing information distortion, longer cycle times, stock-outs, and the bullwhip effect, resulting in higher overall costs and reduced customer service capabilities (Wisner et al., 2005). Failing to see the big picture and acting only in regard to a single department within the firm or a single tier in the supply chain can create quality, cost delivery timing, and other service problems. To overcome this silo mentality, firms must strive to align their supply chain processes and strategy to the overall vision of the supply chain network. The inability to easily share information from all the members of the supply chain is a common process integration problem. Using information technology, one of the dimensions discussed in this chapter, can solve this problem. Successful process integration between the members of the supply chain requires trust. Trust and commitment may be improved by collaborating on a small scale, better communication, and going for a win-win situation. Lack of process knowledge within the firm and among partners can lead to the downfall of supply chain activities. Educating and training the employees can improve their process knowledge. Finally, reducing the length of supply chain, making demand data available to suppliers, improving order batching efficiency, reducing price fluctuations, and eliminating short gaming can improve the supply chain integrated process (Wisner et al., 2005).
Integrated strategy The integration of business processes in supply chain management from suppliers would add value first to original equipment manufacturers (OEM) and finally to their customers. This integrated strategic process is enhanced through the use of logistics management. According to the Council of Logistics Management (Cooper, Lambers, & Pagh, 1997), logistics management is defined as the process of planning, implementing, and controlling the efficient, cost-effective, flow and storage of raw materials, in-process inventory, finished goods, and related information flow from pointof-origin to point-of-consumption for the purpose of conforming to customer requirements. The scope of the supply chain management expands further upstream to the source of supply and downstream to the point of consumption, involving the integrated strategic process. The need for integration of information systems, planning, and control activities exceeds the level of integration necessary in the management of logistics alone (Cooper et al., 1997). Although not all efforts toward integration are successful, companies are increasingly using an integrated, strategic approach not only to manage the supply chain, but as a general philosophy in managing the business due to the perceived benefits of improved performance (Tan, 2001). In fact, one study completed in 1998 supports a positive impact to performance by correlating supplier performance and firm performance (Tan, Kannan, & Handfield, 1998). The study summarizes literature available to that point. The study also concludes that a company’s customer relations and purchasing practices—as major components of supply chain management strategy—have a positive impact on the effectiveness of supply chain management as a whole. Furthermore, through empirical analysis, the same study lays a foundation for the premise that additional practices of concurrent engineering, customer focus, strategic alliances, and quality-driven production improve the strategic management of the supply
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chain management function as a whole (Tan et al., 1998). However, in slight contrast to these findings, companies should be further interested in the firm’s overall performance and their ability to attain competitive advantage, as opposed to merely positively impacting the supply chain management strategic process. Since the concept of supply chain management as a strategic tool for business planning is relatively new, there is less clear data on the effect of “overall” performance of the corporation given a successful supply chain management strategy. A statistical study on the impact of purchasing and supply chain management of activities relating to corporate success was published in 2002 (Ellram, Zsidisin, Siferd, & Stanly, 2002) that attempted to answer many of the questions concerning overall firm performance by stratifying companies into three categories using a number of different financial and benchmarking criteria. The results determined that above-average firms showed no increased use of supply chain management processes when compared to average and below-average firms and that below-average firms had higher perceptions of actually practicing this strategic process. The reasons for this are partially explained by realizing that firms with average and below-average performance levels may be facing market pressures and declining profitability and must seek ways to improve performance and lower costs. In other words, above-average performing firms may not seek the advantages of strategically managing the supply chain given the relative success of the corporation despite additional opportunities to increase the firm’s performance. These results heavily support many of the underlying principles developed later in this analysis when looking closer at the scarce resources available to the small firm and any attempts at using supply chain management as a replacement for corporate strategy, as some of the supply chain management literature suggests. Although many companies are moving toward such strategies due
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to the far-reaching effects of overall customer satisfaction, supply chain management should not be confused with, and cannot make up for, broader corporate strategy and the need for managing effective strategic processes in areas such as marketing, financing, and distribution, just to name a few (Ellram et al., 2002). Small- to medium-sized firms are confronted with the issue of scarce resources to a greater extent than are larger corporations. In fact, often in such companies, it is the same individual(s) developing the strategic initiative, which means focusing too heavily on any one strategic area, inclusive of supply chain management, may actually lead the company to greater risk. Product and technology life cycles have shortened significantly and competitive product introductions make life cycle demand difficult to predict. At the same time, the vulnerability of supply chains to disturbance or disruption has increased, not only to the effect of external events such as wars, strikes or terrorist attacks, but also to the impact of changes in business strategy. Many companies have experienced a change in their supply chain risk profile as a result of changes in their business models, for example, the adoption of “lean” practices, the move to outsourcing, and a general tendency to reduce the size of the supplier base. A research study (Christopher & Lee, 2004) suggests that one key element in any strategy designed to mitigate supply chain risk is improved “end-to-end” visibility. It is argued that supply chain “confidence” will increase in proportion to the quality of supply chain information. Rather, it is the balance of strategic planning and execution within these organizations that is the common denominator among successful firms of small- to mid-size. Consequently, it is the successful management of the supply chain for any firm in context of its overall business strategy that can provide it with a competitive advantage, but doing so with a poor business strategy or a weak marketing plan is not likely to provide the firm an advantage in the marketplace. It is clear that the uncertainty of global market conditions leave companies on the edge with respect to their strategic thought process in all
Integration of Global Supply Chain Management with Small and Medium Suppliers
aspects of strategic planning; yet it is the responsibility and opportunity of the enterprise to interpret, comprehend, and even predict circumstances relevant to the global market that determines its effectiveness. Global supply chain management provides a key element to understanding these conditions of uncertainty and is one of the primary reasons that the strategy is being so well accepted across organizations of all types and sizes. However, some unique problems and opportunities arise for smaller companies who are able to redefine, adapt, and redesign the supply chain. Managing each defining component of the supply chain is difficult for the small to mid-sized entity due to scarce resources. However, given the knowledge base and the in-depth understanding of the supply chain processes by limited individuals in the smaller firm, it seems reasonable to change and make necessary adjustments to the supply chain management processes. For the smaller corporation, supply chain performance is based on the flexibility of the management strategy practiced by the entity to reduce the level of risk provided by factors of global market uncertainty. A company’s performance in the marketplace has been specifically linked to flexibilities involving volume, product launch, and target markets (Vickery, Calantone, & Droge, 1999). This empirical study looks at the furniture trade and is extremely relevant given the trend toward overseas production and a declining U.S. market for producers. It reveals that companies able to adapt to changing market conditions performed more favorably in terms of financial measures and marketability by exhibiting performance in areas of volume flexibility and product launch flexibility over all others. Volume flexibility is the ability to increase or decrease aggregate production of a good or service, and launch flexibility refers to the ability to introduce new products, as well as variations of existing products, involving the entire supply chain. Both provide excellent examples of ways small companies should be able to pursue competitive
advantages, given their ability to control these processes initiating with the need to do so. In other words, they do not require direction from other “functional” departments, but rather respond to immediate needs of the market as opposed to reacting too late. Clearly, flexibility can be used as a strategic tool for the smaller enterprise.
Partnerships Partnerships are business relationships based on mutual trust and openness as companies share risks and rewards leading to such an advantage (Muskin, 2000). The ability of a firm to extend beyond traditional corporate boundaries by working with partners will increase efficiencies and success. Traditionally, in the market economy, products and services are produced to meet the forecasted demand. Firms in a supply chain are tightly integrated and focused on high-volume, maximum utilization of working capital, and cost efficiency in their supply of products/services. The optimum competitive decision is often accepted as achieving economies of scale and/or economies of scope. Productive processes are arranged so as to optimize the utilization of production and distribution capacity. In this economy, sharing technology and expertise with customers or suppliers was considered risky and thus unacceptable. There has been much emphasis on in-sourcing and vertical integration in supply chain strategies and little emphasis on outsourcing and cooperative and strategic buyer-supplier partnership (Sabbaghi & Sabbaghi, 2004). For example, in the computer industry, companies such as IBM or Digital Equipment Corporation tended to provide most of the key elements of their own computer systems, from operating system and application software to the peripherals and electronic hardware, rather than sourcing bundles of subsystem modules acquired from third parties. Products and computer systems typically exhibited closed, integral architectures, and there was little or no
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interchangeability across different companies’ systems, keeping existing customers hostage. Each company maintained technological competencies across many elements in the chain and emphasized the value of its overall systems-and-service package, determined to stave off competitors who might offer better performance on one or another piece of the package. The supply chain strategy in the market economy has been designed to “push” products to the customer based on forecasted demand. It focuses on supporting a tightly integrated enterprise geared toward mass production of goods at the lowest possible price. The production processes across the supply chain are synchronized for efficient utilization of all resources. Information technology, however, acts as an enabler for operational optimization across the supply chain by offering better forecasts that are customer driven in addition to robustly synchronizing the sourcing, production, and processes across the supply chain to achieve optimal performance, even if the forecasts are not perfect. For example, in car manufacturing, cars are traditionally manufactured to match forecasted demand that lacks much customer input. However, in the new information economy, also called the Internet economy or the Web economy, the focus is exclusively on customer needs. To this end, the firms collaborate in a network of trading partners, each specializing in one or more core competencies (be it shipping, manufacturing, marketing, billing, order entry, or procurement services) and divesting itself of non-core activities beyond those associated with sourcing, manufacturing, or distributing products/services. In this network economy, information technologies, digital networking, and communication infrastructures provide a global platform over which people and organizations interact, communicate, collaborate, and search for information. The Internet has created more sophisticated customers who demand innovative, personalized products/services delivered at
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their convenience. It has also expanded the very definition of the word “customer,” so that it now includes employees, distributors, suppliers, business partners, and shareholders. As a result of these changes, a company’s competitive position in this Internet economy depends on its ability to deliver customized, relevant, highly responsive service to every participant in these networks of economic relationships. This new economy has led to the rapid emergence of business networks and new business models within and outside the firm to satisfy the strategic need for competitive flexibility. In this new economy, the supply chain is geared toward the customer “pulling” products customized to their specific needs, and the firm’s resources are organized to meet the unpredictable demand patterns of the customer. Therefore, the benefits of supply chain management integration promote organizational relationships that in turn foster the sharing of information technology and strategic efforts. Partnership in supply chain management, in this network economy, has led to the development of various cooperative arrangements among various supplier and retailers. Jagdev and Thoben (2001) identify three types of collaboration and partnership between independent companies: 1.
2.
3.
Supply chain type of collaboration based on long-term collaboration where the participating companies in the supply chain must operate synchronously to meet customer demands; Extended enterprise type of collaboration, most integrated form of collaboration, where the information and decision systems and respective production processes are integrated; and Virtual enterprise type of collaboration, as a short-term collaboration where the participating companies, without system integration, are loosely related to bundle their competencies to meet customer demand.
Integration of Global Supply Chain Management with Small and Medium Suppliers
The type of partnership would determine the effective strategies that SMEs may consider and the perceived value added in the supply chain. For example, in vendor-managed inventory system, the responsibility of stock management is handed over to the supplier (Hvolby & Trienekens, 2002). This would make it possible for the supplier to adjust production and distribution planning to changes in consumer demand. In this system, SMEs as the suppliers would be able to access the retailer’s information systems to view stock levels and future requirements. On the other hand, advanced planning systems (APSs) make it possible to include suppliers and customer relations in the planning procedure to optimize the whole supply chain on a real-time basis (Kennerly & Neely, 2001). They would support collaborative planning among several partners in a network by shared access to information about known and expected material requirements and resources (Hvolby & Trienekens, 2002). Quantity flexibility (QF) contract is an arrangement between supplier and retailer that responds effectively to the demand fluctuations over time and divides the risk of excess capacity. A retailer in this model is committed to purchasing a percentage of its forecasted demand. However, the supplier is committed to delivering more than the forecast. For example, if they agree to a 25% of QF contract, the retailer is committed to purchase 75% of the forecast while the supplier is committed to delivering up to 125% of the forecast should the retailer need more than forecast. If demand turns out to be low, the supplier is protected by the lower limit, whereas if demand turns out to be high, the retailer can take advantage of that upside by knowing that the supplier has some additional capacity. Thus, both supplier and retailer can be better off in a QF contract. As another type of arrangement, revenuesharing contracts between suppliers and retailers, for example, in the video rental industry, would allow retailers to increase their stock of newly released movies, thereby substantially improving
the availability of popular movies. Under a typical revenue-sharing contract, a supplier charges a retailer a wholesale price per unit plus a percentage of the revenue the retailer generates from the unit. This revenue-sharing model has been practiced for quite some time in the distribution of films to theaters, where the studio charges the theater a small up-front fee and then takes a certain fraction of the box-office revenues. Cachon and Lariviere (2005) examined the revenue-sharing contract model in supply chain management where the partnership between supplier and retailer would improve the performance of any supply chain toward a global optimization. They have cited Blockbuster, a video rental chain, as a successful case to illustrate the effectiveness of revenue-sharing strategy in collaborative supply chain management. Traditionally, video rental stores have to spend typically $60 to purchase a tape from a distributor and then rent that tape to customers for $3 to $4. However, demand for new releases drops dramatically after the first few weeks, and video retailers have a hard time making any money on the rentals. Consequently, they can only afford to buy a few cassettes to accommodate that initial surge in demand. Customers consistently complained about the poor availability of new release videos. Blockbuster decided in 1998 to enter into revenuesharing agreements with the major studios. The rental company agreed to pay its suppliers 30 to 45% of its rental income in exchange for a reduction in the initial price per tape from $60 to $8. The introduction of revenue-sharing model at Blockbuster coincided with a significant improvement in performance in the supply chain. It has been reported that Blockbuster’s market share of video rentals increased from 24% in 1997 to 40% in 2002 after a revenue-sharing contract was adopted (Warren & Peers, 2002). The increase in the industry’s total profit due to revenue-sharing strategy has been estimated at 7% (Moretimer, 2000). However, there are some limitations and drawbacks in revenue-sharing model. The first is
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that it is administratively burdensome compared with the straightforward wholesale price-only contract. Revenue sharing takes an organizational effort to set up the deal and follow its progress. If profits are only increasing by a very small percentage so that the revenue sharing does not cover the extra administrative expenses, then there is no incentive for the retailer to enter into a revenue-sharing contract. The second limitation, according to Cachon and Lariviere (2005), is when the retailer actions influence demand. Specifically, it is assumed that the retailer can increase demand by exerting costly effort, and that this effort is non-contractible. If a retailer is taking in only a small fraction of the generated revenue, this may not be sufficient incentive to improve sales. On the other hand, a supplier wants the retailer to buy the right quantity and to sell at a higher rate. The model may help to make sure the retailer buys the right quantity, but it may hurt its sales effort. Collaborative computer-based information systems have become a major trend in today’s business (Grossman, 2004). SCM evolved with the aim of integrating disparate functions like forecasting, purchasing, manufacturing, distribution, sales, and marketing into a harmonious ecosystem that would envelop the company’s suppliers and customers. SCM promised to align all participants to act in unison to serve the end customer. Collaboration would enable managers to stop optimizing their individual silos to work together with partners—both internal and external—to achieve efficiency and effectiveness across the value chain. A truly collaborative partnership would encompass multiple customers and suppliers. OEMs would regularly communicate product availability, supply plans, and product content changes to distributors and other channel partners. Based on upstream forecasts and product changes, the channel partners would communicate demand requirements to manufacturing service providers. In this fashion, members of the outsourced supply chain would be assured of accurate, up-to-date
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information to help them make decisions that elicit common, supply chain-wide benefits. While collaborating, there is distinction between big and small companies; it is between big, aggressive, large muscled organizations and agile, flexible, adaptable organizations that can survive in an environment of rapid change, constant uncertainty, and disruptive technologies. Involving suppliers early and giving them influence over design is associated with greater contributions of suppliers to cost reduction, quality improvement, and design for manufacturability (Liker, Kamath, & Wasti, 1998). Increasing competitive parity in the areas of cost and quality has forced global manufacturers to seek other sources of competitive advantage, with new product development rapidly becoming the focal point in the quest for sustained growth and profitability. The essence of today’s new product development strategies is the simultaneous development of the new product and the accompanying manufacturing process such that quality is enhanced, costs reduced, and lead times shortened. The implementation of the integrated product development (IPD) process has come to depend on the use of multifunctional teams. Supplier involvement promotes better resource utilization, the development and sharing of technological expertise, and network effectiveness (Birou & Fawcett, 1994). Evaluation and monitoring of performance metrics are key aspects of the integration process, partnerships, and strategy. In the next section, we will discuss how customers evaluate suppliers’ performance, how SMEs respond to their customers’ evaluation actions, and the impact of these performance evaluations.
PerForMAnce Buying firm respondents who reported their firms’ supplier development efforts to be satisfactory were more likely to have a proactive philosophy regarding suppliers’ performance, put more
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effort and resources into their supplier development efforts, and exhibit a greater willingness to share information with their suppliers than their counterparts, who were generally dissatisfied with their firms’ supplier development results (Krause & Ellram, 1997). On its Global Procurement Web site (http:// ch0107.whirlpool.com/SRM/generalhelp.htm), Whirlpool provides a list of requirements for potential companies wanting to become a Whirlpool supplier. All Whirlpool suppliers are required to pass a supplier quality audit. These requirements are based on ISO 9000, QS 9000, and ANSI/ ASQC Q90-94 standards. They are to ensure the best cost, quality, manufacturing efficiency, and continuous innovation in design and manufacturing. All Whirlpool suppliers are to meet the Integrated Supply Management (ISM) guidelines as a common process for doing business using electronic communication. Whirlpool is also committed to establishing and maintaining a capable, qualified, competitive, and diverse supply base providing minority-owned, disadvantaged, and small businesses. Whirlpool also provides each supplier with the plan year’s forecast, profit plan volume, and cost to be used later for total cost productivity targets. Information provided by the supplier performance will be used to assess efficiency in the supply chain (Wisner et al., 2005). FedEx not only has performance scorecards for its suppliers but also has developed a Web-based “reverse scorecard” that allows suppliers to provide constructive performance feedback to enhance the customer-supplier relationship. A supplier’s service level is, in general, insufficient for the manufacturer to warrant the desired service level at the customer end. The method by which the supplier achieves its service level to the manufacturer also affects the customer-service level. Procedures and metrics must be in place to collect and report performances of the eight processes that were discussed earlier in the integrated process section of this chapter. To assure
that the integrated process is supporting the integrated strategy and the working relationships of partners, performance is continuously measured using metrics for each of the eight processes. These performance measures need to be both internal and external. As process integration improves across the supply chain, the overall performance will improve. Over time, under-performing suppliers and unsuitable customers will be eliminated. Suppliers can then concentrate on establishing beneficial relationships and forming strategic alliances to create a win-win situation. As shown in Figure 3, evaluating and responding to the results of supply chain performance metrics and measurements have a huge impact on business performances. Four generic performance factors have been identified by Bozarth and Handfield (2005) as relevant to the supply chain management. These factors include quality, time, flexibility, and cost, as illustrated in Figure 3. Performance quality includes the basic operations characteristics of the product or service, conformance quality questions whether the product was made or service was performed to specifications, and reliability quality explores whether the product or service will perform consistently over a period of time and without failing or high maintenance costs. Time has two basic characteristics: speed and reliability. Delivery speed refers to how quickly the supply chain can fulfill a requirement, while delivery reliability refers to the ability to deliver products or services when promised. The ability to produce a wide range of products and services is the mix flexibility, while changeover flexibility questions the ability to provide a new product with minimal delay, and volume flexibility is the ability to produce whatever volume the customer needs. Cost categories include labor costs, material costs, engineering costs, quality-related costs, average delivery costs, rush order costs, carrying costs, safety stock costs, returned order costs, and spoilage costs (Bozarth & Handfield, 2005; Wisner et al., 2005).
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In a study by Purdy, Astad, and Safayeni (1994), automotive supply organizations were interviewed regarding their perceptions of the effectiveness of a North American automotive certification program. The major findings were that: •
•
•
•
suppliers viewed preparing for the performance evaluation as the most important aspects of the process; the evaluators detected only a small percentage of the suppliers’ significant business and manufacturing problems; suppliers perceived an overemphasis on procedures and documentation on the part of the evaluators; and suppliers felt that the performance evaluation did not accurately reflect their effectiveness.
The same study concluded that the supplier evaluation program reflected the management style of the large bureaucratic customer organization, which was not necessarily appropriate for the
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size and nature of the supplier’s business. Further, good performance on the evaluation did not directly correspond with further business contracts (Lyn et al., 1994). In today’s world, definition of quality revolves around customer satisfaction, quality of product and service, timely delivery, and cost/price (Mehta, 2004).
InForMAtIon technology Information technology (IT) offers huge potential for large suppliers as well as SMEs to achieve effective SCM mechanisms. In today’s global marketplace, organizations are faced with everchanging customer requirements and intensifying competition. To succeed, companies are looking at streamlining their supply chain through the successful deployment of Information Technology. Supply chain management expands the notion of integration beyond a single company to encompass all related trading partners in the supply chain. Suppliers, customers, third-party lo-
Integration of Global Supply Chain Management with Small and Medium Suppliers
gistics providers, distribution centers, and relevant government agencies share the information and plans necessary to make the chain more efficient and competitive. Manufacturers increasingly rely on IT to streamline their business processes. By integrating business processes across the supply chains, companies can quickly move information and materials to their trading partners and respond quickly to market changes. Internet technology is considered to be the most promising network infrastructure for supply chain connectivity. By having an integrated network infrastructure, companies can now manage their operations anywhere by accessing information using the Internet. Most companies are positioning IT as one of the key components for enhancing supply chain management, and they want to be updated regularly on new technologies that they can apply in their work. Achieving integration in the global supply requires an enormous commitment by all members of the supply chain. In order to exploit competitive advantages by forming strategic alliances and partnerships and facilitating these relationships, companies must exchange information through increased communication and cooperation. The level of integration companies strive for now and in the future can only be possible through significant advances in information technology, which, in the past, has been costly and available only to larger companies with budgets that could support such endeavors. It has been argued that this helps explain the trend toward vertical integration as opposed to increasing horizontal communication efforts between suppliers, manufacturers, distributors, and customers. Information flow and sharing are essential in all components of supply chain. Supply chain information flow integrates all the facets of logistics as well (Vaidyanathan, 2005). Although companies utilize technological tools such as electronic data interchange (EDI), and enterprise resource planning (ERP), there are still many issues arising from incompatible systems (interoperability) that drive inefficiencies.
Additionally, as new technology develops, such as wireless networks, which still lack standard protocols, the problem does not appear to be going away too fast. This can be a major issue for the small- to mid-sized company, given budget restraints and the aggressive nature of larger budget companies to incorporate new technologies and information systems. Therefore, despite companies feeling they are actively sharing information with their supply chain partners, there continues to be inefficiencies and waste throughout the supply chain. The problem is further intensified when looking at partnerships on a global scale due to the traditional issues of cultural barriers and communication differences. Internet technology has been increasingly used to enhance global supply chain through electronic commerce functionalities. Many Internet-based systems have been designed and developed for SCM to interconnect suppliers and customers. A four-phase migration model with technical, security, and financial requirements as a plan for the migration of the procurement process onto the Internet has been proposed by Yen and Ng (2003). The first part of the migration is the digitization of data in a local area network (LAN) to manage the information storage and retrieval within the company. The second phase is deployment of communication infrastructures such as EDI. The third phase is the installation of electronic commerce front-end system to implement procurement business processes such as Web sites and search engines. The fourth phase is the integration of vertical portal, that is, information processing with third-party service providers for financial transactions and logistics. Small- and medium-sized enterprises are different than large enterprises in three primary ways that hinder e-commerce adoption (Smeltzer, 2002). SMEs seldom have mature technology. They usually emphasize product development and survival rather than supply chain integration. The large enterprises have costlier, mature integration software as well as internal technical
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development and maintenance capability (Smeltzer, 2002). Some of the large companies have integrated SMEs in their supply chain. As a $41 billion retailer, Sears has successfully connected every one of its 7000 suppliers by using a targeted technology, a proven process, and dedicated resources provided by a supply chain integration service (Smeltzer, 2002). The question confronting these suppliers is often not whether they should use SCM systems, but rather how they can take advantage of these systems and benefit from their use (Subramani, 2004). Suppliers use IT for many reasons that include: requests for quotation (RFQ) received electronically by suppliers, support documents such as detailed part drawings and quality specifications accessed online, electronic transmission of purchase orders, shipment notifications, scheduling delivery windows at warehouse loading docks, electronic payment, electronic notification of changes, and inventory alerts based on preset triggers to communicate stocking levels of products in warehouses (Subramani, 2004). Internet technology with its communication infrastructure has enhanced SCM initiatives. Companies are taking advantage of this technology and moving their procurement functions such as sourcing, negotiating with suppliers, payment, and other transactions onto the Internet. Such electronic procurement (e-procurement) results in control, flexibility, and cost savings. This provides suppliers with the ability to become proactive in doing their business. By implementing the supply chain onto the Internet, both suppliers and the customers will face both challenges and opportunities. Such challenges and opportunities include careful planning of the ways that people integrate changes and the benefits that the Internet can bring to the business, such as reduction in overall costs, respectively (Srinivasan, Reeve, & Singh, 2000). A large academic bookseller, Coop Bookshop, launched electronic commerce and faced difficulties when competing globally. The lesson learned from this launch is that a company
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should study the existing customers and markets before it deploys e-commerce on the Internet (Loebbecke, Powell, & Gallagher, 1999). E-procurement is more than putting purchasing decisions online; its functions also include linking suppliers and buyers into the purchasing network and rethinking of business processes such as transactions (Fisher, 2000a). With efficient information, such product information is structured by electronic catalogs with which e-procurement can form a good basis in order to attract more buyers to the shopping site (Avery, 2000a). Shell Services International launched its e-procurement service as a cost-cutting driver, and its electronic catalogs contain a broad list of suppliers ranging from huge contract partners to small chemical producers with which Shell has pre-negotiated discounts and service contracts. When a purchasing order is received, it will be automatically forwarded to the appropriate suppliers (Fisher, 2000b). Eprocurement could reduce costs and cycle time by fostering a better relationship between buyers and sellers with a vertical supply chain Avery (2000b). The introduction of an e-procurement system in Texas Instruments has reduced the number of transactions in which purchasing was involved and replaced the internally based catalog system, saving a significant amount of cost (Atkinson, 2000a). The Texas-based Burlington Northern Santa Fe Railway planned to apply e-procurement for strategic sourcing and SCM, as it believed that collaboration with its suppliers could be facilitated in order to achieve full contract discount pricing (Atkinson, 2000b). Yen and Ng (2003) classified the impact of electronic commerce in the procurement process into buyer and seller, and then further divided it into individual and inter-organizational categories. Individual and inter-organization classifications represent the internal efficiency and external impact, respectively. With sourcing, buyers can search for quick and complete information of materials from suppliers’ online electronic catalogs while purchasing is enhanced. During quotation
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and negotiation, sending inquiries with the electronic and automated inquiry forms to suppliers can save time, and, in return, suppliers could direct the forms with quick and customizable responses, facilitating communication between buyers and sellers. With automated, synthesized, and modifiable order placement, cost and time are saved while purchase records can be viewed in a quick and timely fashion. Suppliers can benefit from efficient and error-free profiling management and more accurate demand forecasts in order to improve overall profitability. Again, communications between buyers and sellers can be enhanced while time is saved. Electronic transactions can take place without the need for physical forms of payment that are restricted by geographical and currency barriers. Suppliers can benefit from secure real-time collection of payment while the risk of unsuccessful receipt of payment is lowered, resulting in improved profitability. With delivery, uncertainty of receiving time is reduced by separated logistics and shipment, while information flow or communication between suppliers and logistic third parties is facilitated. Electronic data interchange (EDI) is a way of conducting inter-organizational transactions electronically (O’Callaghan & Turner, 1995). The key components of EDI are: the electronic transfer of data, the use of standards, and the exchange of data with minimal human intervention. An event in a customer company’s operational processes, for example, a purchase order, may trigger a computer application that generates an electronic message which is sent to, received, and processed by another computer application in a supplier’s company. This message will trigger another event in the receiving supplier organization, for example, the delivery of products. Enabled by standardization of the message exchange, this communication takes place without human intervention. The organizations involved have to agree on contents, grammar, and organizational actions resulting from the message exchange. SMEs can improve their competitiveness by integrating
their systems with their suppliers or other trading partners. Existing approaches to integration like EDI might help SMEs to overcome part of the integration problems, but they have their limitations (Themistocleous & Chen, 2004). The Dutch coordination center for EDI reported that around 25.000 out of a potential 400.000 companies in the Netherlands are currently using EDI. The number of users has grown by 10.000 companies since 1994, but despite this relatively high growth in the number of EDI users, the current number still falls short of expectations (van Heck & Ribbers, 1995). In the U.S., for instance, Oakie (1997) reports that only 100,000 out of a potential 1.9 million companies are currently participating in EDI. Therefore, the adoption and implementation of EDI is still not prevalent. There are different reasons for this apathy to the adoption of EDI. One of the difficulties in EDI adoption is that its full benefit can be reached only if enough critical mass is achieved. To transact EDI messages, one needs to have partners who also are willing to adopt EDI. The other reason is that some EDI implementations are costly. One of the critical factors is the availability of EDI standards. The use of commercially available standards reduces the development costs and time and decreases the risk linked to the new EDI application (Krcmar, Bjÿrn-Andersen, & O’Callaghan, 1995). SMEs will adopt EDI if EDI message formats are available, if they decrease the risk linked to the new EDI standards, and if they reduce the development cost and time (van Heck & Ribbers, 1995). As more competitors and trading partners become EDI-capable, small firms are more inclined to adopt EDI in order to maintain their own competitive position (van Heck & Ribbers, 1995). Another medium of e-procurement is the use of electronic business-to-business (B2B) commerce marketplaces. While there are many advantages to the use of B2B marketplaces, there are many disadvantages as well. The potential decrease in product quality is a big issue for B2B partici-
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pants. Expectations will vary from one buyer to another, and the definition of quality will vary across suppliers. B2B may not be of interest to suppliers since the forced price reduction of supplies by new suppliers trying to gain a share of the market will hurt the supplier’s margins and strain their ability to stay in the market (http:// www.primetechnologywatch.org.uk). Rovere (1996) argues that the role of SMEs should be investigated with regard to innovation and regional development studies with a focus on industrial districts. This argument is based upon the increasing importance of flexible organizations in today’s economic environment, with the main elements of the flexible specialization model being networks of small firms, flexibility of equipment, and human resources. Rovere further argues that these ideas must be thoroughly considered in defining an IT diffusion policy for SMEs. The relatively inexpensive availability of IT products and services serves to create many new business opportunities for SMEs. If flexible production capabilities do indeed lie within the environs of networked SMEs, IT increases in importance to ensure the platform to allow for efficient information flow within and outside of SME networks. Another problem posed to the SSM for the SMEs is integration. Enterprise resource planning (ERP) systems are an integrated software solution to manage a company’s resources and to integrate all business functions, such as planning, inventory/materials management, sales and distribution, finance, human resources, and services. The complexity of ERP systems and the nonflexible nature of ERP solutions, combined with their high cost of implementation have impeded many companies’ quest for integration. The major problem with ERP is integration, as ERP packages are not designed to tie up other autonomous applications (Cingil, Dogac, & Azgin, 2000). As a result, autonomous and heterogeneous applications coexist in companies with ERP systems, and integration problems have not been addressed. Therefore, the use of ERP systems no longer
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supports or leads to competitive advantages for organizations, especially SMEs (Themistocleous & Chen, 2004). According to the United Nations report on ecommerce and development (avaliable at http:// www.unctad.org/en/docs/ecdr2004ch2_en.pdf), SMEs in Latin America have recognized the need to increase their capacity to differentiate their products and services, and to link electronically with their customers and suppliers. However, none of the enterprises surveyed had advanced beyond the first stage of information and communications technology (ICT) adoption. For example, while most of them were on a local area network (LAN) and some of them used the Internet for looking up information, none used EDI or an Intranet, and very few communicated with clients via electronic mail, preferring to use the telephone or fax. According to a study conducted by the World Wide Worx (http://www.theworx.biz/ download/Exec%20Summary%20%20SME%20 Survey%202003.doc), investment in information technology is having a major impact on the competitiveness of small and medium businesses in South Africa. Among the key findings of the survey was that SMEs are spending a higher proportion of their turnover on IT each year. In 2001, 47% of SMEs spent more than 1% of turnover on IT; in 2002, 48%; and in 2003, 49% expect to spend more than 1% of their turnover on IT. According to a Canadian net impact study (http://www.netimpactstudy.com/ca/pdf/ release_final.pdf), 50.2% of Canadian SMEs are currently using or implementing the Internet. The same study concludes that a firm with $10M in revenues, with a 20% gross margin and 10% net margin, can achieve increases in net profit of up to 154% in a “best case” scenario, that is, if these average changes in revenues and costs were realized together. In a recent survey, Deloitte Research undertook an exploratory study of IT purchasing by SMEs (available at http://www.deloitte.com/dtt/ research/0,1015,sid%253D16418%2536cid%25
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3D632D63293,00.html) in an effort to understand decision making in different stages of the information technology purchase process. The resulting study identifies the key factors impacting technology purchase decisions by small and medium enterprise owners. In particular, it found that: SMEs need information and help to manage their IT growing pains; price isn’t necessarily the bottom line when considering IT purchases; and vendor Web sites and reputations are extremely important in the minds of SME decision makers when looking for information and making purchase decisions. Various forms of SCM applications are arising among the enabling technologies. Prominent vendors in SCM applications market include i2 Technologies, SAP, Oracle, and Invensys, which produce a range of hardware and software components that span communication, optimization, and modeling systems. SMEs are becoming increasingly dependent on information technology to operate efficiently, serve customers effectively, and work with partners and suppliers more collaboratively. Faced with all the challenges and opportunities of competing in a fast-paced environment, growing companies must be especially confident that their networks can support business evolution. Building an effective network foundation is integral to, and an operational insurance policy for, achieving e-business transformation. It is vital that SMEs focus their attention on the critical success factors that drive growth in their particular market. They cannot afford to expend precious time rearchitecting, re-learning, and managing networks. Network infrastructures should be the invisible plumbing that enables the transport of company information and communications and enables efficient processes.
conclusIon The subject of global supply chain management is an important new frontier for businesses choosing to participate in the new global economy. The inherent processes range from raw material supplier to end-user and involve literally all functions in between. Consequently, the integration of these processes is crucial to achieving supply chain management success, which is only facilitated by adequate information exchange between partners within the supply chain—a task not easy to accomplish due to issues of interoperability. Yet, the ability for companies to successfully implement strategic relationships relies on their ability to develop or maintain an effective partnership strategy, as it is not always necessary to enter into full-scale partnerships with all suppliers perceived to be partners within the chain. Additionally, in today’s uncertain global economy and associated issues of security and trust, many companies continue to re-evaluate their partnerships and foster those relationships that are more likely to lead to a competitive advantage. The literature emphasizes the importance of trust in developing such partnerships, as firms will attempt to reduce risk by not entering into partnerships lacking trust. However, the need to leverage the resources of the supply base and revenue sharing cannot be overlooked, and companies will pursue such relationships. In a changing world, the subject of truth and ethics is important when discussing supply chain management strategy. Most discussions of supply chain management are presented in abstract terms and in ways that apply to product and service organizations alike. However, most small companies, and even larger corporations, focus on niche markets. Niche markets are where managers will correctly argue that profits are created and realized; therefore, the goal of many organizations is to develop business and market strategies to exploit these opportunities in the market. Similarly, as this chapter has detailed, it has been shown that an affective sup-
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ply chain management strategy can benefit these very initiatives. More specifically, the smaller firm in the supplier role has unique opportunities to develop business, market, and supply chain management strategies that are unique from those of the larger established companies. Realizing that the “buying” company within the supply chain—or enduser—is actively pursuing competitive advantage through marketing of its unique product or service, the small company is often better positioned to adapt to the needs of the customer. More precisely, the level of information available to key members of the smaller supplying organization and its integrated partners provide market opportunities that may not exist to larger corporations. Supply chain management strategies, because of the unique circumstances of specific markets, can not be characterized as “one size fits all.” In fact, global supply chain strategies are contingent upon market characteristics and business strategy, which seek to attain higher-level customer responsiveness at less total cost to the supply chain as a whole. Nowhere are the unique characteristics more prevalent than in the small- to mid-sized corporations, as each of these types of corporations seeks competitive advantage through management of the supply chain and, more specifically, management of the supply chain for a specific niche market. Moreover, there are some unique obstacles and challenges in managing the supply chain given the scarce resources of the small- to mid-sized supplying company. More specifically, because of the involvement of so few within the supply chain management process in the smaller firm, there is greater responsibility for those individuals to manage this very important strategic process given the unique opportunities to exploit niche markets. The ability of a small firm to offer flexibility in terms of volume and product differentiation provides the competitive advantage businesses of all size pursue. Supply chain management strategy, then, is applicable to all sized firms and
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has unique characteristics for smaller entities. To maximize the Internet and supply chain management, SMEs must be included. The SMEs need to have the information technology capability to fully integrate into the supply chain. Only then will the supply chain management be effective to save time, decrease costs, improve relationships, and maximize overall responsiveness.
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Chapter 2.18
An Application of Multi-Criteria Decision-Making Model to Strategic Outsourcing for Effective Supply-Chain Linkages N. K. Kwak Saint Louis University, USA Chang Won Lee Jinju National University, Korea
Abstract An appropriate outsourcing and supply-chain planning strategy needs to be based on compromise and more objective decision-making procedures. Although factors affecting business performance in manufacturing firms have been explored in the past, focuses are on financial performance and measurement, neglecting intangible and nonfinancial factors in the decision-making planning process. This study presents development of an integrated multi-criteria decision-making (MCDM) model. This model aids in allocating outsourcing and supply-chain resources pertinent to strategic planning by providing a satisfying solution. The model was developed based on the data obtained
from a business firm producing intelligent home system devices. This developed model will reinforce a firm’s ongoing outsourcing strategies to meet defined requirements while positioning the supply-chain system to respond to a new growth and innovation.
Introduction In today’s global age, business firms are no longer able to manage all supply-chain processes from new product development to retailing. In order to obtain a successful business performance, appropriate outsourcing and supply-chain practices should be identified, established, and implemented
An Application of Multi-Criteria Decision-Making Model
within the firm. The growth of business scale and scope forces business decision-makers to resolve many of the challenges confronting business firms. These tasks and activities are often not welldefined and ill-structured. This new paradigm in business practices can deliver unprecedented opportunities to establish the strategic outsourcing and supply-chain planning in business firms (Heikkila, 2002; Li & O’Brien, 2001). Due to the technology and market paradigm shift, strategic outsourcing and supply-chain planning process in business firms may become more tightly coupled with new product research and development, capacity and financial planning, product launching, project management, strategic business alliances, and revenue planning. Successful linkages of these complicated processes play a critical role affecting business performance in manufacturing settings (Cohen & Lee, 1988; Fisher, 1997; Min & Zhou, 2002; Quinn & Hilmer, 1994). Strategic outsourcing and supply-chain planning is a growing requirement for improving productivity and profitability. Many outsourcing studies have been conducted with supply-chain linkages directly and indirectly as follows: capacity planning (Lee & Hsu, 2004), downsizing (Schniederjans & Hoffman, 1999), dual sourcing (Klotz & Chatterjee, 1995), information system decision (Ngwenyama & Bryson, 1999), line balancing (Liu & Chen, 2002), service selection (Bertolini, Bevilacqua, Braglia, & Frosolini, 2004), transportation mode choice (Vannieuwenhuyse, Gelders, & Pintelon, 2003), and vendor selection (Karpak, Kumcu & Kasuganti, 1999). In spite of a plethora of outsourcing studies in the existing literature, multi-criteria decision making (MCDM) applications are scarce and seldom identified as the best practice in business areas. Especially, an integrated MCDM model comprising goal programming (GP) and analytic hierarchy process (AHP) is rarely applied to manage an emerging outsourcing and supply-chain concern. This chapter has dual purposes: (1) to
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develop a decision-making model that aims at designing a strategic outsourcing and supply-chain plan, and (2) to provide the decision-makers with an implication for effectively managing strategic outsourcing and supply-chain planning in business firms and other similar settings. The chapter is organized in the following manner. The “Introduction” section presents current research issues in both strategic outsourcing and supply-chain planning and MCDM in a business setting. The next section “Multicriteria Decision Making” provides a review of MCDM models. After that, a problem statement of the case study along with description of data collection is described. The model development to a real-world setting and the model results and a sensitivity analysis are provided, followed by concluding remarks.
MultI-crIterIA decIsIon MAKIng Multi-criteria decision making (especially integrated MCDM) is defined as an applied linear programming model for a decision process that allows the decision-maker to evaluate various competing alternatives to achieve certain goals. Relative importance is assigned to the goal with respect to a set of chosen criteria. MCDM is appropriate for situations in which the decisionmaker needs to consider multiple criteria in arriving at the best overall decisions. In MCDM, a decision-makers select the best strategy among a number of alternatives that they evaluate on the basis of two or more criteria. The alternatives can involve risks and uncertainties; they may require sequential actions at different times; and a set of alternatives might be either finite or infinite. A decision-maker acts to maximize a value or utility function that depends on the chosen criteria. Since MCDM assumes that a decision-maker is to select among a set of alternatives, its objective function values are known with certainty. Many
An Application of Multi-Criteria Decision-Making Model
MCDM problems are formulated as multiple objective linear, integer, nonlinear, and/or interactive mathematical programming problems. One of the most widely used MCDM models is goal programming (GP). Charnes and Cooper (1961) conceptualized the GP technique and applied to an analytical process that solves multiple, conflicting, and noncommensurate problems. There are many different methods and models used to generate solutions for GP models. The natural decision-making heuristic is to concentrate initially on improving what appears to be the most critical problem area (criterion), until it has been improved to some satisfactory level of performance. Classical GP assumes that there are some absolute target levels that can be specified. This means that any solution cannot always satisfy all the goals. Thus, the objective of GP is to find a solution which comes as close as possible to the target. The formulation of a GP model assumes that all problem constraints become goals from which to determine the best possible solution. There are two types of constraints in GP: goal constraints and systems constraints. Goal constraints are called the goal equations or soft constraints. Systems constraints are called the ordinary linear programming constraints or hard constraints which cannot be violated. One major limitation of GP is that the decision-makers must subjectively prioritize goals in advance. The concept of nondominated (noninferior) solutions for noncommensurable goals cannot make an improvement of one goal without degrading other conflicting goals. Regardless of the weighting structures and the goals, GP can lead to inefficient and suboptimal solutions. These solutions are not necessarily optimal for the decision-maker to acquire so that a satisfying solution is provided. Among the MCDM models, the analytical hierarchy process (AHP) is another popular decisionmaking tool for multi-criteria decision-making
problems. AHP provides a method to assess goals and objectives by decomposing the problem into measurable pieces for evaluation using a hierarchical structure. The procedure requires the decision-maker to provide judgments about the relative importance of each criterion and then specify a preference on each criterion for decision alternatives. The output of AHP is a prioritized ranking indicating the overall preference for each of the decision alternatives. An advantage of AHP is that it enables the decision-maker to handle problems in which the subjective judgment of an individual decision-maker constitutes an important role of the decision-making process (see Saaty, 1980 for a detailed analysis).
ProbleM bAcKground Problem statement A consortium of seven different firms developing and manufacturing the related products of the smart home system for home security was established in Korea. The consortium firm has recently released the smart home system to the general public. The consortium firm secured $20 million for new product development in the 5-year period (2004-2008). It currently possesses a world-class frontier for developing a smart home system. Each member company has its own unique, special knowledge and human resources to carry on required manufacturing. There are five primary systems for making a smart home system: (1) multifunction home server with an Internet gateway function, (2) intelligent context awareness-based agent system, (3) digital video recorder for home security and applications, (4) biokey system with fingerprint access control solution, and (5) wireless digital home controller functions. It is intended to support a further growth and innovation in home security, home automation, remote controlling, and mobile multimedia functions. The infusion
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An Application of Multi-Criteria Decision-Making Model
of additional information technology must be consistent with the business mission, strategic direction, business plans, and priorities of the consortium firm. This special project for an integrated intelligent information technology is intended to address the dramatic growth in information technology use, to foster continued innovation and adoption of new technologies, and to expand information technology foundation for the next-generation smart home system. Thus, the consortium’s information technology investment strategies throughout the next five years have been developed.
data collection The data utilized to formulate this MCDM model was collected from the consortium of business firms developing and manufacturing the smart home system for home security. All the necessary data on budget, technical services, and personnel resources was gathered through the consortium’s strategic business units. Additional data for establishing the consortium’s resource allocation model was collected through the consortium’s international business development directors who are in charge of outsourcing and supply-chain management. Project managers participated in the strategic planning process and identified the necessary goals and criteria derived from the proposal for strategic outsourcing and supplychain planning. The data was validated by the consortium decision-makers in the outsourcing and supplychain planning process. The validation of the consortium’s resource allocation model is critical to accept the model solutions and to implement the result. The validation process provides the management with a meaningful source to ensure the input, decision-making process, and the outcomes. The success of the model is based on the accurate measurement of the established goals and criteria. Decision-makers involved in the
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current outsourcing and supply-chain planning process to complete the validation reviewed the results of both prioritization of the goals, as well as the related projects/alternatives. Figure 1 presents a framework for strategic goals and related criteria.
Model develoPMent goal decomposition and Prioritization In the MCDM model development of outsourcing and supply-chain planning process, the AHP has been utilized for establishing goal decomposition and prioritization. In order to obtain the overall relative importance of the seven goals, a synthesized priority is calculated for each goal. The proposed model requires the evaluation of goals with respect to how much these goals affect the overall effectiveness of strategic outsourcing and supply-chain planning for resource allocation in the consortium firm. Since no prior quantitative data exists for each goal combination, the decision-maker will make pairwise comparisons of each goal with all others, using the AHP judgment scale. The AHP values for goal prioritization provide their eigenvalue and consistency ratio. There are four derived criteria, such as financial (C1), customer (C2), internal business (C3), and innovation and learning criteria (C4). Strategic outsourcing and supply-chain management is prioritized with AHP weights as follows: quality improvement (G1), cost effectiveness (G2 ), customer satisfaction (G 3 ), customizing services (G4), manpower quality (G5), supplier competency (G6), and strategic partnership (G7).
An Application of Multi-Criteria Decision-Making Model
Figure 1. Strategic goals and criteria
Vision
Strategic Outsourcing Goals
Criteria
Quality Improvement (G1)
Financial Criteria (C1)
Cost Effectiveness (G2) Becoming the industry leader in smart home systems
decision variables The integrated GP problem consists of two types of decision variables in this study. The consortium firm wants to contract for the supply of five different smart home system components. Five outsourcing suppliers are being considered for contracting on the system components. Tables 2 and 3 present the necessary information for decision variables and constraints. The decision variables are: Xs i j =
decision variables for demand levels assigned to different types of component i (i =1,2,..,5) to be selected with various suppliers j (j =1,2,..,5) in demand capacity
where Xs i ≥ 0 Xp i j = decision variables for project i (1, 2, 3, and 4) to which available amounts can be allocated over three-stage period j (1,2 and 3)
where: Xp i j =
1 if ith project is selected 0 otherwise
constraints The MCDM model has 37 constraints: 14 systems constraints and 23 goal constraints. Systems constraints for this consortium firm’s outsourcing and supply-chain planning are (1) demand-supply constraints for each system component, and (2) supply-chain linkages on the number of certain projects development. Systems constraint 1: Set the demand-supply constraints for five components. 14,400 units [displayed as 144(00)]. Xs 11 + Xs 1 2 + Xs 1 3 + Xs 14 + Xs 1 5 ≤ 144(00) (1) Xs 21 + Xs 2 2 + Xs 2 3 + Xs 2 4 + Xs 2 5 ≤ 360
(2)
Xs 31 + Xs 3 2 + Xs 3 3 + Xs 3 4 + Xs 3 5 ≤ 380
(3)
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An Application of Multi-Criteria Decision-Making Model
Table 1. AHP results for goal prioritization Criteria
G1
G2
Goal Decomposition G3 G4 G5
G6
G7
GEV
C1 G1 G2 G3 G4 G5 G6 G7
4
3 2
4 2 3
6 4 3 3
8 6 5 4 2
8 7 6 5 3 2
.352 .218 .144 .139 .070 .044 .032
G1 G2 G3 G4 G5 G6 G7
4
3 2
4 2 3
6 4 3 3
8 6 5 4 2
8 7 6 5 3 2
.404 .200 .168 .110 .056 .035 .026
G1 G2 G3 G4 G5 G6 G7
4
3 2
4 2 3
6 4 3 3
8 6 5 4 2
8 7 6 5 3 2
.342 .238 .158 .116 .078 .034 .034
G1 G2 G3 G4 G5 G6 G7
4
3 2
4 2 3
6 4 3 3
8 6 5 4 2
8 7 6 5 3 2
.334 .258 .174 .099 .067 .041 .026
.244
.168
.106
.068
.040
.028
C2
C3
C4
Goal Priority
.347
CEV
CR
.165
.083
.620
.046
.142
.086
.073
.059
GEV: Goal Eigenvalue, CEV: Criteria Eigenvalue, CR: Consistency Ratio
Xs 41 + Xs 4 2 + Xs 4 3 + Xs 4 4 + Xs 4 5 ≤ 420
(4)
Xs 1 5 + Xs 2 5 + Xs 3 5 + Xs 4 5 + Xs 5 5 = 300
Xs 51 + Xs 5 2 + Xs 5 3 + Xs 5 4 + Xs 5 5 ≤ 320
(5)
Xs 11 + Xs 21 + Xs 31 + Xs 41 + Xs 51 = 300
(6)
Systems constraint 2: Select one project for supply-chain management perspectives in each development stage.
Xs 1 2 + Xs 2 2 + Xs 3 2 + Xs 4 2 + Xs 5 2 = 300
(7)
Xp 11 + Xp 1 2 + Xp 1 3 = 1
(11)
Xs 1 3 + Xs 2 3 + Xs 3 3 + Xs 4 3 + Xs 5 3 = 300
(8)
Xp 21 + Xp 2 2 + Xp 2 3 = 1
(12)
Xs 14 + Xs 2 4 + Xs 3 4 + Xs 4 4 + Xs 5 4 = 300
(9)
Xp 31 + Xp 3 2 + Xp 3 3 = 1
(13)
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(10)
An Application of Multi-Criteria Decision-Making Model
Table 2. Estimated price ($) per system component in each supplier group Outsourcing Supplier Group System Component Home server Awareness agent Recorder database Biokey Controller box Monthly Supply Level (00 units)
An Application of Multi-Criteria Decision-Making Model
Priority 4 (P4 ): In terms of customizing services goal (G4), avoid underachievement of resources to select an outsourcing supplier by using a total budget amount ($000) for (1) a home server outsourcing of $1,200; (2) an awareness agent component outsourcing of $3,060; (3) a digital recorder database component outsourcing of $3,200; (4) a biokey component outsourcing of $3,500; and (5) a controller box component outsourcing of $2,700 (see Table 2). 80Xs 11 + 90Xs 21 + 75Xs 31 + 85Xs 41 + 90Xs 51 + d- 6 = 1,200 (20) 75Xs 1 2 + 85Xs 2 2 + 90Xs 3 2 + 80Xs 4 2 + 85Xs 5 2 + d- 7 = 3,060 (21)
Priority 7 (P7 ): In terms of strategic supplier partnership goal (G7), decision-makers in the consortium firm decide that all suppliers are assigned to supply a certain component.
Xs 14 + Xs 2 4 + Xs 3 4 + Xs 4 4 + Xs 5 4 + d- 2 2 – d+ 2 2 = 1 (36) X s 1 5 + X s 2 5 + X s 3 5 + X s 4 5 + X s 5 5 + d - 2 3 – d+ 2 3 = 1 (37)
objective Function Xp 31 + Xp 3 2 + Xp 3 3 + Xp 3 4 + d- 1 3 - d+ 1 3 = 1 (27) Priority 6 (P6 ): Determine the demand capacity in each supplier to assign an appropriate outsourcing supplier group in terms of supplier competency goal (G6).
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The objective of this MCDM problem is to minimize the sum of the deviational variable values subject to constraints (1)-(37), satisfying the preemptive priority rules. The objective function depends on the preemptive priority sequence of the goals that have seven priorities.
An Application of Multi-Criteria Decision-Making Model
Minimize: Z = P1 d+ 1 + P2 d- 2 + P3 d+ i + P4 d- i + P5 (d+ i + d- i) + P6 (d+ i + d- i) + P7 (d+ i + d- i)
Model AnAlysIs Model solution and discussion In this MCDM model, decision-makers seek a solution that satisfies as close as possible a set of goals. Thus, GP requires the concept of measuring discrepancy from the goals. The concept of nondominated solutions for noncommensurable goals cannot make an improvement of one goal without a trade-off of other conflicting goals. In the GP problem, a nondominated solution is examined. A nondominated solution is defined in the following manner: a feasible solution to an MCDM problem which is efficient, if no other feasible solutions yield an improvement in one goal, without sacrificing another goal. This MCDM model was solved using AB: QM system software (Lee, 1996). Table 4 presents an analysis of the objective function. Table 5 exhibits the results of both decision and deviational variables. Priority 1 (P1) is to avoid overachievement of the financial resource level for continuous quality improvement (i.e., G1). Priority 1 is fully satisfied (P1 = 0). The related deviational variable (d+ 1) is zero.
Priority 2 (P2) is to avoid underutilization of the budget level for cost effectiveness. Priority 2 is fully satisfied (P2 = 0). The related deviational variable (d- 2) is zero. Priority 3 (P3) is to not overutilize the available market resource level in each product development period for customer satisfaction. The management desires that their market resource of outsourcing should not be overutilized in each development stage 1 (d+ 3), stage 2 (d+ 4), and stage 3 (d+ 5). This third priority goal is fully satisfied (P3 = 0), and its related deviational variables (d+ 3 , d+ 4 , and d+ 5 , ) are zero. Priority 4 (P4) is to avoid underachievement of resources to select outsourcing suppliers who have the industrial leading knowledge in five different smart home system components, since the management considers that all five technology resources are highly unattainable. This priority goal is fully satisfied (P4 = 0). Its related deviational variables are all zero: underachievement in home server technology outsourcing resources (d- 6 = 0); underachievement in awareness agent technology outsourcing resources (d- 7 = 0); underachievement in recorder database technology outsourcing resources (d- 8 = 0); underachievement in biokey technology outsourcing resources (d- 9 = 0); and underachievement in controller box technology outsourcing resources (d- 10 = 0). Priority 5 (P5) is to implement appropriately four projects in the three product development
periods for securing outsourcing manpower balancing. This priority goal is partially satisfied (P5 = 1). Its related deviational variables are not all zero (d+ 11 = 1, d+ 1 2 = 0, d+ 1 3 = 0, d- 11 = 0, d- 1 2 = 0, d- 1 3 = 0). There is one project with overachievement. However, this does not mean that the goal is not achieved because four projects should be assigned in any product development stage. Priority 6 (P6) is to meet the demand-supply level to select an appropriate outsourcing supplier group for a supplier competency goal. This priority goal is partially satisfied (P6 = 1,495). Its related deviational variables are not all zero (d+ 14 = 143, d+ 1 5 = 235, d+ 16 = 379, d+ 17 = 419, d+ 18 =
319, d- 14 = 0, d- 1 5 = 0, d- 16 = 0, d- 17 = 0, d- 18 = 0). Table 6 indicates demand levels that are assigned to supplier groups for each system component. Supplier 1 is assigned to a demand level of 300 biokey components. Likewise, supplier 2 has demand levels of 280 recorder database and 20 control box components; supplier 3 for a demand level of 300 control box components; supplier 4 for demand levels of 144 home server, 36 awareness, and 120 biokey components; and supplier 5 for demand levels of 200 awareness agent and 100 recorder database components. Priority 7 (P7) is to assign certain contracts to supplier groups to achieve a strategic partnership
An Application of Multi-Criteria Decision-Making Model
Table 6. Demand level assigned supplier groups to system components
System Component Home server Awareness agent Recorder database Biokey Controller box
Table 7. Assigned projects in each development stage
Project Category Security Automation Remote control Mobile multimedia
Product Development Stage 1 Stage 2 Stage 3 X X X X
goal. This priority goal is partially satisfied (P6 = 1,495). Its related deviational variables are not all zero (d+ 1 9 = 299, d+ 2 0 = 299, d+ 21 = 299, d+ 2 2 = 299, d+ 2 3 = 299, d- 1 9 = 0, d- 2 0 = 0, d- 21 = 0, d- 2 2 = 0, d- 2 3 = 0). Table 7 presents the selected projects assigned to each development stage. In stage 1, remote control function and mobile multimedia function will be recommended to develop. Home automation function will be developed in stage 2 and home security function in stage 3. Outsourcing and supply-chain planning in supply-chain management perspective has become a significant and integral activity of strategic planning in a firm. The goals surrounding outsourcing and supply-chain planning decisions are complex and conflicting. Like other business decision making problems, outsourcing problems cannot derive a single optimal solution. Most top decision-makers agree that this planning process ultimately depends on a firm’s business strategies, competitiveness roadmap, and business value and mission. In order to improve the system’s overall effectiveness, decision-makers should recognize
the ways to improve product quality, to enhance the internal and external customer satisfaction, to provide more strong commitment to manpower management, and to establish a sound alliance and collaboration with other business partners.
sensitivity Analysis Sensitivity analysis is an evaluation tool that is used once a satisfying solution has been found. It provides an insight into how satisfying solutions are affected by changes in the input data. Sensitivity analysis is performed with two scenarios. The management considers three goals (G1 , G6 , and G7) to be evaluated. Quality improvement goal (G1) and supplier competency goal (G6) are changed (i.e., P6 → P1 and P1 → P6); and quality improvement goal (G1) and strategic partnership goal (G7) are changed (i.e., P7 → P1 and P1 → P7). With sensitivity analysis available for the management, various scenarios can be evaluated more easily at less cost. Table 8 presents the results of two scenarios. It shows an important
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An Application of Multi-Criteria Decision-Making Model
Table 8. Sensitivity analysis with two scenarios Original Option Decision Solution Variables Value 0 Xs11 Xs12 s
X 13 s
Revised Scenario 2 Decision Solution Variables Value 0 Xs11
0
Xs12
0
Xs12
64
0
s
0
Xs13
0
s
s
0
X 14
0
0
X 15
0
s
X 15
80
0
Xs21
0
Xs21
0
s
X 22
0
s
X 22
256
s
X 22
236
Xs23
0
Xs23
0
Xs23
0
s
s
s
X 15 Xs21
s
144
X 13 s
X 14
X 14
X 24
36
X 24
0
X 24
0
Xs25
200
Xs25
0
Xs25
0
s
s
s
X 31
0
X 31
80
X 31
0
Xs32
280
Xs32
0
Xs32
0
s
s
s
X 33
0
X 33
0
X 33
0
s
X 34
0
s
X 34
0
s
X 34
180
Xs35
100
Xs35
300
Xs35
200
X 41
300
s
X 41
76
s
X 41
300
Xs42
0
Xs42
44
Xs42
0
X 43
0
s
X 43
Xs44
120
Xs44
Xs45
0 0
s
s
s
X 51 s
X 52 s
20
0
s
X 43
0
300
Xs44
120
Xs45
0
Xs45
0
s
0
Xs51
0
0
s
X 52
0
s
X 51 s
X 52 s
X 53
300
X 53
300
X 53
300
Xs54
0
Xs54
0
Xs54
0
s
X 55
0
s
X 55
0
s
X 55
0
Xp11
0
Xp11
0
Xp11
0
12
0
Xp12
0
Xp12
0
Xp13
1
Xp13
1
Xp13
1
21
0
Xp21
0
Xp21
0
Xp22
1
Xp22
1
Xp22
1
23
0
Xp23
0
Xp23
0
Xp31
1
Xp31
1
Xp31
1
32
0
Xp32
0
Xp32
0
Xp33
0
Xp33
0
Xp33
0
s
X 41
1
s
X 41
1
s
X 41
1
Xs42
0
Xs42
0
Xs42
0
0
s
0
s
0
p
X
p
X
p
X
p
X
s
X 43
718
Revised Scenario 1 Decision Solution Variables Value 144 Xs11
X 43
X 43
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implication for strategic planning considering effective outsourcing and supplier management. Solution values of supplier decision variables in the original option and the revised scenarios indicate the new demand levels that are assigned to the supplier groups. The top decision-makers in the consortium firm have accepted the final results as valid and feasible for implementing the outsourcing planning in their real business setting. The consortium firm has started its strategic outsourcing and suppliercustomer management planning with ongoing base. The effects from these model outputs will be evaluated in the next fiscal year or two. The future outsourcing and supplier management planning agenda will be identified to compare with this proposed MCDM model for the strategic outsourcing planning. The strategic outsourcing planning based on the proposed MCDM model will provide the management with a significant insight to set an appropriate outsourcing strategy, while enhancing customer satisfaction and relationship management, and improving the firm’s global competitiveness. Thus, the consortium firm currently reviews all these alternatives as possible outsourcing strategies.
member organizations within the supply chain. This requires a performance measurement system that can not only operate at several different levels but also link or integrate the efforts of these different levels to meeting the objectives of the supply chain. When management considers several conflicting goals to achieve, subject to a set of constraints, MCDM models can provide effective decisionmaking results for strategic outsourcing and supply-chain planning in business operational environments. Subjective decision-making processes can make the multiple and complicated business problems into the worst situation of both business performance and business partnership due to the potential irrational decision-making. Thus, an appropriate use of MCDM models for effective decision-making is essential to create a long-term strategic plan for a competitive advantage and survival of any business organization in challenging environments.
AcKnowledgMent This work was supported by the Korea Research Foundation Grant (KRF 2003-041-B20171).
conclusIon reFerences This study presents an MCDM model for outsourcing and supply-chain planning in a smart home system components manufacturing industry in Korea. The proposed MCDM model will provide the management with better understanding of outsourcing and supply-chain planning. This proposed model would give a practical decisionmaking way for analyzing the outsourcing resource planning. This study indicates that the effective decision-making process in outsourcing and supply-chain planning can enforce the firm’s competitive advantages and improve the firm’s business performance. It is necessary to be able to assess the relative contribution of the individual
Bertolini, M., Bevilacqua, M., Braglia, M., & Frosolini, M. (2004). An analytical method for maintenance outsourcing service selection. International Journal of Quality & Reliability Management, 21(7), 772-788. Charnes, A., & Cooper, W. W. (1961). Management models and the industrial applications of linear programming. New York: Wiley. Cohen, M., & Lee, H. (1988). Strategic analysis of integrated production-distribution systems: Models and methods. Operations Research, 36(2), 216-228.
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Fisher, M. L. (1997). What is right supply chain for your product? Harvard Business Review, 75(2), 105-116. Heikkila, J. (2002). From supply to demand chain management: Efficiency and customer satisfaction. Journal of Operations Management, 20(6), 747-767.
Liu, C.-M., & Chen, C.-H. (2002). Multi-section electronic assembly line balancing problems: A case study. Production Planning & Control, 13(5), 451-461. Min, H., & Zhou, G. (2002). Supply chain modeling: Past, present, and future. Computers and Industrial Engineering, 4, 231-249.
Karpak, B., Kumcu, E., & Kasuganti, R. (1999). An application of visual interactive goal programming: A case in vendor selection decisions. Journal of Multi-Criteria Decision Analysis, 8(2), 93-105.
Ngwenyama, O. K., & Bryson, N. (1999). Making the information systems outsourcing decision: A transaction cost approach to analyzing outsourcing decision problems. European Journal of Operational Research, 115, 351-367.
Klotz, D., & Chatterjee, K. (1995). Dual sourcing in repeated procurement competition. Management Science, 41(8), 1317-1327.
Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-55.
Lee, C.-E., & Hsu, S.-C. (2004). Outsourcing capacity planning for an IC design house. The International Journal of Advanced Manufacturing Technology, 24(3-4), 306-320.
Saaty, T. L. (1980). The analytic hierarchy process. New York: McGraw-Hill.
Lee, S. M. (1996). AB:QM system software. Englewood Cliffs, NJ: Prentice Hall. Li, D., & O’Brien, C. (2001). A quantitative analysis of relationships between product types and supply chain strategies. International Journal of Production Economics, 73(1), 29-39.
Schniederjans, M. J., & Hoffman, J. J. (1999). Downsizing production/operations with multiobjective programming. International Journal of Operations & Production Management, 19(1), 79-91. Vannieuwenhuyse, B., Gelders, G., & Pintelon, L. (2003). An online decision support system for transportation mode choice. Journal of Enterprise Information Management, 16(2), 125-133.
This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans; D. Schniederjans, & M. Schniederjans, pp. 320-338, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Using Collaborative Transportation Management in Global Supply Chain Jonah C. Tyan Taiwan Semiconductor Manufacturing Company, Taiwan
IntroductIon Due to escalating global competition and a decline in profit margins, most multinational corporations pursue global sourcing through a global supply chain (GSC) in order to secure market share and improve profits. The practice of e-commerce and the business trend of mass customization force both manufacturers and retailers to shorten cycle time by managing GSCs more effectively. Successful applications of GSCs, such as that by Dell Computer, have been widely discussed and publicized in the supply chain literature. However, the physical distribution of GSC execution is recognized as its weakest link and can result in inefficient and unreliable product delivery. The collaborative integration with global third party logistics (3PL) to execute physical distribution dictates the success of any GSC application. This article introduces an application of logistic col-
laboration, namely collaborative transportation management (CTM), which is a new business model that includes the carrier as a strategic partner for information sharing and collaboration in a supply chain.
bAcKground The key reasons for the globalization trend are overcapacity in highly industrialized countries, significant disadvantages with respect to labor costs, and the emergence of worldwide information networks that connect corporate information systems (Arnold, 1999). An increasing number of firms are combining domestic and international sourcing through GSCs as a means of achieving a sustainable competitive advantage (Bonarth, Handfield, & Das, 1998). A GSC is currently viewed as a strategic weapon in the quest for
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improved performance and profitability through greater availability, quality, delivery and price advantage (Lee, 2000; Smith, 1999). The principle and methodology of GSC management are similar to those of traditional supply chain management (SCM), except that multiple countries are taken into consideration. Traditional SCM is the integration of functions from the procurement of raw materials to final customer delivery. The GSC model is more complex than SCM, as it includes different taxes and duties, differential exchange rates, trade barriers, customs clearance, and a sophisticated international transportation network (Vidal & Goetschalckx, 1997). Most companies establish a virtual integrated enterprise with their suppliers by implementing an e-business model in order to address the information and the finance flow of a GSC. However, the integration of physical distribution in a GSC appears to be the weakest link, due to the high level of investment required when construct in a global distribution network. The traditional international shipping practice with extensive consolidation operations (Crainic, 2000) takes 8 to 14 business days, exclusive of manufacturing cycle time. The new economy calls for alliances to be made with 3PL providers in order to manage GSCs effectively by focusing on each player’s core competencies (Lieb & Randall,
1999). Most high-tech companies select global door-to-door 3PL providers such as FedEx, UPS, and DHL in order to streamline logistic operations and to reduce delivery cycle times. The typical benefits of a global door-to-door delivery service are shorter delivery cycle times, more reliable transit times, less complex customs clearance procedures, and real-time global tracking and tracing systems (Christopher, 1998). While the unit transportation cost is higher than that of traditional consolidated airfreight service, the total logistics cost is lower as a result of inventory and cycle time reduction throughout the GSC. The success of these integrated 3PL providers is determined by its global transportation network, warehousing network, and information network. Figure 1 depicts the international distribution cycle time by traditional consolidated airfreight model and a door-to-door service provided by a global 3PL provider can compress the distribution cycle from 8 to 14 days to 2 to 4 days.
descrIPtIon oF collAborAtIve trAnsPortAtIon MAnAgeMent The level of collaboration amongst all players in the chain, determines the success of a GSC. Classic supply chain collaboration is found in
Figure 1. International distribution cycle time of (a) a traditional international consolidated airfreight model and (b) a global door-to-door service model
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retailer-supplier partnership programs (Tyan & Wee, 2003) such as quick response, continuous replenishment policy, and vendor managed inventory, which aim to reduce inventory and provide a quick response to consumer demand. The most recent developments in collaborative planning, forecasting, and replenishment (CPFR) is designed to further improve the retailer-supplier relationship. However, the carrier relationship with supply chain players was not considered until the introduction of CTM, which extends the supply chain collaboration to physical distribution partners (Strozniak, 2003). CPFR, developed by the Voluntary Interindustry Commerce Standards Association (VICS), is a nine-step business process model permitting value chain partners to coordinate sales forecasting and replenishment processes in order to reduce the variance between supply and demand (Aichlymayr, 2000). Under CPFR, each party share information and compares calculations. Manufacturers and retailers exchange forecasts, including point of sale, on-hand and delivery data. They review the data and collaborate to resolve forecasting discrepancies. A VICS subcommittee recently initiated a new shipper-carrier partnership strategy, known as CTM, in order to reduce cycle times and inventory carrying costs for the retailer and its suppliers, while increasing asset utilization for motor carriers (Cooke, 2000; Tirschwell, 2004).
ctM business Model CTM is a new process for carriers, involving them in five key business activities: the creation of a joint business plan, order forecasting, order generation, freight order confirmation, and carrier payment processes (Browning & White, 2000). The CTM business model was proposed by VICS and consists of 14 steps. The CTM process can be further divided into three distinct phases: planning, forecasting, and execution, as shown in Figure 2.
The planning phase makes up steps 1 and 2. In step 1, the trading partners establish a collaborative agreement to define the relationship in terms of freight shipment, exception handling, and key performance indicators. Step 2 involves aggregative planning to determine resource and equipment requirements by matching the planned shipment. The forecasting phase includes steps 3 to 5. By sharing order and shipment forecasts in step 3, the carrier gains an insight into the planned volume changes and adjusts equipment requirements accordingly. Any exceptions caused by the manufacturer, distributor, or carrier are generated in step 4 and resolved collaboratively in step 5. Unlike the traditional 1- to 2-day advance notice of potential shipments, the carrier has ample time to handle the revised volume—1 to 4 weeks, depending on the forecasting horizon. The execution phase consists of four stages: shipment tenders, distribution, payment, and a review in order to manage the entire distribution cycle. The shipment tenders stage covers steps 6 to 8 of the CTM. Step 6 is the creation of order/ shipment tenders, based on the revised order forecast. Any exceptions based on the latest equipment availability or pickup and delivery requirements, are identified in step 7 and resolved collaboratively in step 8. The distribution stage—steps 9 through 11—involves the physical distribution and shipment status visibility. Step 9 is the creation of the final shipment contracts outlined in the collaborative tender acceptance and shipment terms. Shipment status is continually updated throughout the distribution cycle and any exception is identified during step 10. Step 11 is the resolution of delivery exceptions. The payment stage is covered by steps 12 and 13. Step 10 ensures that invoicing discrepancies between carriers and shippers are greatly reduced by the exchange of shipment attributes, such as weight, freight class, and destination. Any payment exceptions identified in step 12 are collaboratively resolved in step 13. Finally, the review phase in step 14 involves measuring the distribution performance against
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Figure 2. Generic CTM business model (From Browning & White, 2000)
1. develop Front-end Agreement
Manufacturere/distributor business development Activities
2. create Joint business Plan
carrier business development Activities equipment Planning
3. create order/shipment Forecast
4. Indentify exceptions for
5. resolve/collaborate on
6. order/shipment tenders
carrier equipment Planning
7. Indentify exceptions for
8. resolve/collaborate on
shipment status updates
shipment status
9. Freight Contract Confirmation
Pickup shipments
10. Identify delivery exceptions
shipment status
11. resolve delivery exceptions
deliver shipments
12. Identify Invoice exceptions
Invoice for shipments
13. resolve Invoice exceptions
14. Manage Performance
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the key performance indicators and seeking opportunities for continuous improvement.
ctM Implementation Issues The proposed CTM model is generic and can be modified to fit a specific supply chain application. We are interested in the application of CTM in GSC from the perspective of logistic operations. The benefit of CTM is the first issue to be addressed. The most obvious benefit to 3PL providers is the ability to develop business plans with their key customers in order to better fulfill distribution requirements. This is achieved through proactive participation in the planning, forecasting, and execution phases of CTM. The manufacturers and distributors, consequently benefit from better transportation transit times, shipment status visibility, and the payment process. The collaboration in execution between trading partners creates supply chain competitiveness and value. Other benefits include reduced costs, increased revenue, an improved service level, improved customer satisfaction, and increased asset utilization (Browning & White, 2000). CTM technology requirements for are the next issue to be discussed. In order to foster collaboration, new information technology (IT) is needed to link between the carrier and the manufacturer/ distributor. The CTM IT requirements proposed by VICS are vendor and platform independent, so that any trading partner entering into a collaborative relationship will not be hindered by technical limitations (Browning & White, 2000). The CTM information system integration across the entire supply chain can be achieved by the development of IT standards, IT infrastructure, e-commerce, and a supply chain system (Esper & Williams, 2003). Organizational infrastructure is another CTM implementation factor, and is identified as the most important enabler of successful SCM implementation (Marien, 2000). It sets commit-
ments and regulates all parties so they accept their responsibilities and share both the gains and risks, as outlined in step 1 of the CTM. GSC is a highly dynamic system and any changes may impact logistic activities. The core concept of CTM is to resolve these transportation exceptions collaboratively. In order to achieve the benefits of CTM, empowered designated personnel from each party are essential.
case study This study discusses the case of a global 3PL provider that provides door-to-door distribution services for major notebook (NB) manufacturers in Taiwan. Manufacturing capability as well as cost and quality advantages enables Taiwan to be one of the most competitive strategic NB computer suppliers for many of the major personal computer manufacturers, such as Apple, Compaq, Dell, HP, IBM, and Toshiba. About 50% of the world’s notebook computers are manufactured in Taiwan. In order to reduce cycle times and total costs simultaneously, Taiwan NB manufacturers transformed their international transportation from a consolidated airfreight mode to a door-todoor service. This practice is also called Taiwandirect-shipment. In order to enter the Taiwandirect-shipment distribution market, the global 3PL provider aligned with each NB manufacturer and formed a specific GSC with its retailer. The representative GSCs and transportation network are shown in Figure 3. The NBs are delivered to customers throughout North America using a door-to-door guaranteed service, with a cycle time of 3 to 5 business days. The partnership was started in late 1999. In the beginning, the 3PL provider experienced a major challenge in attempting to manage service levels and aircraft capacities due to the volume fluctuations of NB demands. For example, the aggregated daily shipment to the 3PL provider varied from 600 to 6,799 with a mean of 3,368
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Figure 3. Transportation network of the notebook computer global supply chain
and a standard deviation of 1,535. The daily available aircraft capacity, on the other hand, could only accommodate about 4,000 shipments in that particular month. In order to resolve the service level issue, the 3PL provider initiated a project to establish CTM partnership with key NB shippers in early 2000. The project objective was to achieve a 95% service level by the end of 2000 for all NB shipments. The project team—which consisted of personnel from sales, technology, engineering, customer service, and operation fields—was responsible for CTM implementation with respective NB shippers. In the CTM planning phase, shipping agreements were outlined to include rate, expected delivery cycle time, pickup cutoff time, and maximum daily guaranteed volume. If shipments were over the daily guaranteed volume, an additional transit day was added to the delivery cycle time. The 3PL provider performed capacity requirement planning based on the planned demands from shippers. In the forecasting phase, shippers updated monthly and weekly shipment forecasts to the 3PL provider for aircraft capacity planning. As a result, the 3PL provider gained sufficient time to acquire
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additional aircraft capacities for month-end and quarter-end peak shipment demands. In the CTM execution phase, IT integration was first identified to facilitate the collaboration. A new CTM integrator was developed by the 3PL provider to link manufacturer ERP system in order to retrieve shipping information in the shipment tender stage. Outbound and inbound customs clearances are required processes for international shipping. The shipment manifest and commercial invoice were transmitted to the 3PL provider through the CTM integrator before the actual shipment pickup in order to process preclearance (i.e., to prepare and submit customs clearance before the actual shipment arrived at Customs) so as to eliminate customs delay. Once the shipments were picked up, a pickup confirmation notice was sent back to the manufacturer through the CTM integrator. A Web-API provided by the 3PL provider enabled the manufacturer to access the real-time tracking status via the Internet. The shipper would be notified of any delivery exceptions through e-mail and phone. The customer, as well, could then check the delivery status via the Internet or through customer
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Figure 4. Architecture of integration IT and CTM in a NB GSC
Figure 5. The 3PL provider shipment volume and delivery performance in the year 2000 service. The IT integration of the CTM model in the GSC is shown in Figure 4. The CTM project was implemented progressively and three key shippers had entered into collaboration with the 3PL provider by June 2000. Through an aggregate planning process, the 3PL provider acquired additional aircraft capacity in October in order to accommodate volume growth. The key performance indicator identified by the 3PL provider was the delivery service level, measured by percentage of on-time deliveries. The delivery volume and delivery performance of the 3PL provider in 2000 was shown in Figure 5. Apart from September 2000, the service level achieved a progressive improvement. This case also reported other findings such as the CTM implementation cost, total supply chain cost, and business growth. The CTM project incurred minimum cost for the 3PL provider by using existing IT systems and staff except for the CTM integrator that was developed by in-
house development team. On the other side, the retailer and manufacturer brought in cost saving since their shipping activities were taken over by the 3PL provider partially. Moreover, the total supply chain cost was reduced with a significant improvement in delivery cycle time. The shipment volume growth indicated the CTM approach was a positive business strategy for all parties.
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IMPAct oF collAborAtIve trAnsPortAtIon MAnAgeMent E-collaboration has emerged as the new focus for supply chains to seeking additional business and cost savings. Early adopters of e-collaboration such as retailer chains apply CPFR and CTM to synchronize manufacturing and shipping activities. Drug Store News (2001) reported a CPFR case that inventories for retailers have been reduced as much as 14%, whereas business has increased about 32%. Dutton (2003) reviewed a CTM application between Procter & Gamble and J. B. Hunt to include shipping into the supply chain. Carrier J. B. Hunt reported a 16% decrease in unloading time and a 3% drop in empty miles because of information sharing. The success of e-collaboration in retailing chains motivates other industries to follow. This application examines the case of a global 3PL provider engaging in e-collaboration through CTM in global supply chain across continents. The improved service level implies the CTM is a successful logistic alliance to both distributor and manufacturer. At the same time, this alliance also implies that 3PL provider can attain multiple cost saving opportunities such as improved fleet utilization through various freight consolidation policies and reduced labor cost by automating shipping operations. A maximum of 18% cost reduction was reported by the 3PL for a particular month after the implementation of the CTM (Tyan, Wang, & Du, 2003). The principles and process of the CTM application discussed can be generalized to cover other applications. A full scale CTM implementation as illustrated in the case requires a prerequisite of a well established IT infrastructure and streamlined business processes amongst supply chain participants. However, a reduced CTM model by eliminating unnecessary steps can be adapted to Small and Medium-sized Enterprises.
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conclusIon The trends of globalization and mass customization challenge the traditional single enterprise to respond and meet market demand. The new economy calls for alliances to be made with 3PL providers in order to form a GSC that focuses on the core competencies of each player. Companies that have implemented a GSC, such as Dell and Compaq, have gained a higher market share, improved profit margins and services, and increased response times. GSC management has become a strategic tool for reducing costs as well as enhancing a company value. With the introduction of the CTM model, the carrier is able to establish collaboration with the manufacturer and retailer during the planning, forecasting, and execution phases of the GSC execution process. CTM brings to the carrier the benefits of better strategic capacity planning, increased asset utilization, and an improved delivery service level. In return, the manufacturer enjoys reduced costs, improved delivery reliability, increased visibility, and increased revenue. The illustrated NB GSC case shows that CTM is an effective approach for 3PL providers to deliver benefits to all parties in the supply chain. Freight consolidation is identified as another opportunity for the global 3PL provider to realize the full benefits of CTM application. In an attempt to minimize the system-wide cost, the global 3PL provider can apply various consolidation policies in order to maximize aircraft utilization while simultaneously maintaining their service commitments. With real time logistic information exchange of CTM model, the global 3PL provider gains the benefits by selecting an optimal consolidation policy to minimize the total cost under capacity and service requirement constraints.
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reFerences Aichlymayr, M. (2000). DC mart: Who manages inventory in a value chain? Transportation & Distribution, 41(10), 60-68. Arnold, U. (1999). Organization of global sourcing: Ways towards an optimal degree of centralization. European Journal of Purchasing & Supply Management, 5, 167-174. Bonarth, C., Handfield, R., & Das, A. (1998). Stages of global sourcing strategy evolution: An exploratory study. Journal of Operations Management, 16, 241-255. Browning, B., & White, A. (2000, April). Collaborative transportation management—A proposal. Logility, Inc. Retrieved January 2004, from http:// www.logility.com/news/logility_library.html Christopher, M. (1998). Logistics and supply chain management, strategies for reducing cost and improving service. Harlow, UK: Prentice Hall. Cooke, J. A. (2000). Bringing carriers into the loop. Logistics Management and Distribution Report, 39(9), 77-80. Crainic, T. G. (2000). Service network design in freight transportation. European Journal of Operational Research, 122(2), 272-288. Drug Store News. (2001). E-collaboration leads chains to e-savings. Drug Store News, 23(2), 13-14. Dutton, G. (2003). Collaborative transportation management. World Trade, 16(2), 40-43. Esper, T. L., & Williams, L. R. (2003). The value of collaborative transportation management (CTM). It’s relationship to CPFR and information technology. Transportation Journal, 42(4), 55-65.
Lee, H. L. (2000, September/October). Creating value through supply chain integration. Supply Chain Management Review, 30-39. Lieb, R. C., & Randall, H. L. (1999). 1997 CEO perspectives on the current status and future prospects of the third party logistics in the United States. Transportation Journal, 38(3), 28-41. Marien, E. J. (2000, March/April). The four supply chain enablers. Supply Chain Management Review, 60-68. Simchi-Livi, D., Kaminsky, P., & Simchi-Livi, E. (2000). Designing and managing the supply chain-concepts, strategies, and case studies. Singapore: McGraw-Hill. Smith, J. M. (1999). Item selection for global purchasing. European Journal of Purchasing & Supply Management, 5, 117-127. Strozniak, P. (2003). Collaborative logistics. Frontline Solutions, 4(8), 18-22. Vidal, C. J., & Goetschalckx, M. (1997). Strategic production-distribution models: A critical review with emphasis on global supply chain models. European Journal of Operational Research, 98(1), 1-18. Tirschwell, P. M. (2004, January 19). Demanding, extracting, uncompromising. Journal of Commerce, 19, 1-3. Tyan, J. C., Wang, F.-K., & Du, T. (2003). Evaluation of freight consolidation policies in global third party logistics. Omega, 31(1), 55-62. Tyan, J. C., & Wee, H.-M. (2003). Vendor managed inventory (VMI): A survey of the Taiwanese grocery industry. Journal of Purchasing and Supply Management, 9(1), 11-18.
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Key terMs Distribution Cycle Time: The span of time between the beginning of the shipment pickup and the end of the shipment delivery. Door-to-Door Delivery: Shipping service from shipper’s door to receiver’s door. Freight Consolidation: The combining of small shipments into a composite truckload or other unit of volume that is sent to a destination point. Inventory Carrying Costs: The costs associate with carrying the storage of supplies and final products.
Physical Distribution: A transportation service that accepts a shipment from a shipper and at destination separates and sorts the packages and distributes them to many receivers. Taiwan-Direct-Shipment: A distribution practice that Taiwan manufacturers sends their notebooks to buyers through door-to-door service in order to reduce distribution cycle time. Third Party Logistics: The activity of outsourcing activities to an independent company that perform client’s management function of the logistic operations.
This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 1126-1132, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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A Reference Model for Strategic Supply Network Development Antonia Albani Delft University of Technology, The Netherlands Nikolaus Müssigmann University of Augsburg, Germany Johannes Maria Zaha Queensland University of Technology, Australia
AbstrAct Based on rapidly changing market conditions and increasing pressure on cost and productivity, companies in different industries have started to concentrate on their core competencies and to decrease vertical range of manufacture. This resulted in an increasing dependency between the producing companies and their suppliers. Enterprise networks are formed creating the necessity to focus on the strategic development of supply network partners. While currently strategic purchasing mainly deals with direct suppliers, future strategic purchasing needs to deal with flexible and dynamic supply networks. This results in a paradigm shift in the domain of strategic sourcing from a supplier-centric to a supply network scope. In order to support the paradigm shift,
the development of a reference model specifying the organizational and functional implications is necessary. This chapter therefore introduces a reference model for the domain of strategic supply network development extending the traditional frame of reference in strategic sourcing to a supply network perspective.
IntroductIon Driven by drastically changing market conditions, companies are facing an increasingly complex competitive landscape. Decisive factors such as globalization of sales and sourcing-markets, shortened product life cycles, innovative pressure on products, services and processes and customer requests for individual products are forcing
A Reference Model for Strategic Supply Network Development
companies to undergo a drastic transformation of business processes as well as organizational and managerial structures (Burtler et al., 1997). The shift from a function-oriented to a processoriented organization with a strong customer focus is essential in order to better adapt to fast changing market requirements and to become more flexible while meeting individualized customer demands (Osterloh & Frost, 2003, pp. 28-31). Within an enterprise, the core business processes (Prahalad & Gary, 1990) need to be identified, improved and (partly-) automated, while at the same time other processes are outsourced to business partners. As a consequence, business processes concerning, for example, product development, market research, sales, production, delivery and services, are affected and have to be adjusted and integrated not only within a single company but also with external partners, spanning multiple tiers of suppliers. As already recognized by Malone (Malone & Lautbacher, 1998, pp. 151-152), “the boundaries between enterprises will become much less important. Transactions within organizations will become indistinguishable from transactions between organizations and the business processes, once proprietary, will freely cross organizational boundaries.” Companies recognize that the source of their competitive strengths does not only lie in their core competences, but also in the cooperative relationships with their business partners (Jarillo, 1988, p. 31). To an increasing degree, traditional organizational structures are nowadays evolving towards hybrid and network structures ( Malone & Lautbacher, 1998, p. 166; Picot et al., 2003, p. 289), taking advantage of complementary competences of their external partners. In hybrid organizational structures, cooperation (Picot et al., 2003, pp. 303-304) describes the dependency between two firms, which are coequal and collaborate in order to exchange or share information, products or services. Cooperation has a symbiotic character, can take a variety of forms, such as strategic alliances, strategic partnerships, strategic cooperations, operative
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cooperations and joint ventures and occurs across vertical and horizontal boundaries. Cooperation mainly occurs as a result of outsourcing nonspecific activities—necessary for the production of a product or service—which are of medium strategic relevance. If instead, idiosyncratic activities with low strategic relevance are outsourced to business partners, the degree of autonomy between the partners may change, depending on the level or importance of the single enterprises. If two or more companies are involved in inter-organizational collaboration, an enterprise network structure is created. Enterprise networks are formed to better fulfill specific customer requests providing customized products on time in the right quality and for a competitive price. Such networks can span over several tiers, especially in large manufacturing companies (e.g., in the automotive industry). Even if enterprise networks have been introduced many years ago by Jarillo, Malone and Miles, (Jarillo, 1988; Malone et al., 1987; Miles & Snow, 1984; Thorelli, 1986), there is no single, broadly accepted definition of an enterprise network today. Several expressions exist to define different, or sometimes similar, types of enterprise networks. Terms such as strategic networks (Gulati et al., 2000), alliance networks (Gulati, 1998), economic webs (Hagel III, 1996), business webs (Tapscott et al., 2000), value webs (Herman, 2002), virtual networks (Malone & Lautbacher, 1998) or dynamic networks (Pine et al., 1993), can be found in the literature. As defined by (Gulati et al., 2000, p. 203), “strategic networks potentially provide a firm with access to information, resources, markets, and technologies; with advantages from learning, scale, and scope economies; and allow firms to achieve strategic objectives, such as sharing risks and outsourcing value-chain stages and organizational functions.” Gulati uses strategic networks in a quite general manner, assigning several types of networks— which are composed of inter-organizational ties— for example, strategic alliances, joint ventures and long-term buyer-supplier partnerships to this
A Reference Model for Strategic Supply Network Development
term. More precisely, Gulati defines strategic alliances (Gulati, 1998, p. 293) as “voluntary arrangements between firms involving exchange, sharing, or co-development of products, technologies, or services.” The authors of economic webs, business webs, value webs, virtual networks and dynamic networks all discuss the same basic idea of supporting enterprises by means of information and communication technology, primarily the Internet, in order to “shed functions in which they are not competitive to service providers and partners that may have far greater expertise, scale or geographical reach” (Herman, 2002, p. 35). Malone (Malone & Lautbacher, 1998, pp. 146148) mainly sees the increasing importance of “ad-hoc structures,” where single business units join together into virtual and temporary networkcompanies in order to produce or sell goods and services, and as soon as such projects finish, the temporary companies would become obsolete. Hermann (2002, p. 31) envisions, that “the traditional value chain, which optimized as sequence of functions for one business, is transforming into a global value web, which can optimize the supply, demand, and product design activities for an entire network of partners. (…) Rather than think in terms of a linear value chain, we think of a value web where material, information, and money flow in parallel, taking multiple separate path through a complex network of suppliers, service providers, distributors, and customers.” Pine additionally adds a dynamic aspect to the enterprise networks in order to make mass customization work, saying that “companies must break apart long-lasting, cross-functional teams and relationships and form dynamic networks” (Pine et al., 1993, p. 114). In mass-customization, where, for example, processes, technology and products need to be reconfigured in order to fulfill the individualized demands of customers, the corresponding enterprise networks cannot remain fixed, but need to be adjusted dynamically. Considering the network definitions introduced above, we use the term strategic supply
network in this chapter in order to define in the manufacturing industry (e.g., in the automotive industry) a network of suppliers spanning over several tiers and communicating among each other using the Internet. The network has a fixed part, namely the original equipment manufacturer (OEM), and a dynamic part, the suppliers, allowing flexible extension and modification of the network when additional competencies are needed. The OEM has a higher degree of autonomy, since it is the requestor for specific products and therefore the initiator of the identification of the network partners. The network has strategic relevance and focuses only on long-term relationships. Supply networks are gaining more and more importance, especially in the automotive industry. For example, Dodel (2004) cites in his research on the logistic criticality in the automotive industry a logistics manager of DaimlerChrysler AG, who states that “the processes and skills of the direct suppliers are well known. What is missing is the transparency on the complete supply network, which serves behind the direct suppliers. If a supply problem occurs, great efforts have to be taken to identify the cause of the problem.” Additionally, in spring 2004 DaimlerChrysler had to call back 1.3 million cars due to problems with the integration of system modules provided by different supply partners. Jürgen Schrempp, CEO of the company, stated during an interview prior to the annual general meeting, “the company underestimated the complexity of networking partners, who deliver complete system modules.” In order to gain competitive advantage in such supply networks, the selection, development, management and integration of respective suppliers, located not only in tier-1 but also in the subsequent tiers, are of major relevance. Modern information and communication technologies— like the Internet, semantic standards, distributed applications, component based, and respectively service-oriented architectures—are necessary in order to sustain the creation and management of supply networks (Kopanaki et al., 2000). However,
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at present IT-enabled networks can be largely found in form of rather small, flexible alliances of professionalized participants. The support of large networks with multiple tiers of suppliers still causes considerable difficulties. The high degree of complexity resulting from dynamic changes in supply networks is the main reason for the lack of practical implementation that is connected with the identification of supply network entities and the modeling of the supply network structure, as well as with the high coordination effort, as described by Lambert and Cooper (2000). Despite the fact that those are basic principles in order to succeed in supply networks, many research efforts have been based on more operative tasks primarily focusing on the optimization of forecast and planning accuracy and the optimization of material flows over the whole supply chain (Houlihan, 1985; Jones & Riley, 1985). Current enterprise resource planning (ERP) systems build the fundamentals for the management and controlling of supply networks but there is a lack of functionality to support dynamic identification, evaluation and qualification of competent partners (Angeli, 2002). In order to analyze the basic principles, such as network modeling, it is necessary to focus primarily on strategic tasks such as long-term supplier development before dealing with operative tasks of supply chain management. Strategic tasks have not been widely discussed in a network perspective yet, even if current research work, such as Carr and Smeltzer (1999), give an extended interpretation of supply chain management partly considering supplier relationships as part of that management. Therefore, the domain of strategic supply network development (SSND), which extends the traditional frame of reference in strategic sourcing from a supplier-centric to a supply-network scope, has been developed and described in a reference model, specifying the implications for the construction of the supporting IT-infrastructure.
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According to vom Brocke (2004, p. 390), a reference model is understood as an information model, which is developed or used to support the construction of application models. Since this definition gives a very wide description of the reference model concept, a classification is needed in order to better understand the development and the purpose of a concrete reference model. The classification provided in Fettke and Loos (2004, p. 332), differentiates between reference models describing existing real world business aspects and reference models describing theoretical constructs of business challenges. The paradigm shift from a supplier-centric to a supply network perspective is an implication which became necessary due to massive changes in current markets. As described above, existing information models and systems do not sufficiently support the basic principles of the network perspective. The SSND reference model, as a theoretical construct, provides the relevant information for modeling complex and dynamic changing supply networks and builds the basis for the development of information systems for those value networks. Fettke and Loos (2004, p. 332), divides the class of reference models as a theoretical construct additionally into several sub classes. One of the sub classes defines reference models as a technique used for building supporting information systems in order to improve business efficiency such as increasing product quality and reducing costs and product development time. The SSND reference model is a contribution to this sub class since it describes functional, data and process aspects in strategic sourcing in order to optimize the purchasing function in a network perspective. The SSND reference model is therefore not based on empirical studies, but, as a first step, the efficiency of the model is evaluated by a prototype implementation. The work presented in this chapter summarizes different aspects of the SSND reference model, which have already individually been published in Albani et al. (2004a), Albani et al. (2003a, 2003b), Albani and Müssigmann (2005), Albani
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et al. (2004b), and focuses on two functional aspects, the strategic demand planning and the modeling of strategic supply networks. An overall description of the domain is introduced and an extract of corresponding process models and data diagrams of the functions mentioned is given. Additionally, the prototype implementation of SSND is shortly described.
the doMAIn oF strAtegIc suPPly networK develoPMent The relevance of the purchasing function in enterprises has increased steadily over the past two decades. Until the 70s, purchasing was widely considered an operational task with no apparent influence on long term planning and strategy development (McIvor et al., 1997, p. 166). This narrow perspective was broadened by research that documented the positive influence that a targeted supplier collaboration and qualification could bring to a company’s strategic options (Ammer, 1968). In the 80s, trends spurred the recognition
of the eminent importance of the development and management of supplier relationships for gaining competitive advantages. Such trends were, for example, the growing globalization, the focus on core competencies in the value chain with connected insourcing and outsourcing decisions, as well as new concepts in manufacturing. As a result, purchasing gradually gained strategic relevance on top of its operational and tactical relevance (Kaufmann, 2002). Based on these developments, purchasing has become a core function in the ’90s. Current empirical research shows a significant correlation between the establishment of a strategic purchasing function and the financial success of an enterprise, independent from the industry surveyed (Carr & Pearson, 1999, p. 513). One of the most important factors in this connection is the buyer-supplier relationship. At many of the surveyed companies, a close cooperation between buyer and supplier led to process improvements and resulting cost reductions that were shared between buyer and suppliers (Carr & Pearson, 1999, p. 516).
Figure 1. Functional decomposition diagram for strategic supply network development
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In practice, supplier development is widely limited to suppliers in tier-1 (i.e., the direct suppliers). With respect to the superior importance of supplier development, as mentioned above, we postulated the extension of the traditional frame of reference in strategic sourcing from a supplier-centric to a supply-network-scope (Albani et al., 2004a; Albani et al., 2003b; Albani et al., 2004b). That means the further development of the strategic supplier development to a strategic supply network development. This shifted the perspective in the field of strategic sourcing to analyze multi-tier supplier networks instead of single suppliers. The tasks within the strategic supply network development can be grouped into three main areas as illustrated in Figure 1: Strategic demand planning, strategic supply network modeling and strategic supply network qualification (Albani et al., 2004a). Those tasks are derived from the main tasks in strategic sourcing. The most evident changes apply for functions with cross-enterprise focus. Within the function strategic demand planning, a corporate framework for all purchasing-related activities is defined. This framework consists of a consistent and corporate-wide valid purchasing strategy (define purchasing strategy), a strategic demand planning and demand bundling function (plan strategic demand) and the definition of methods and tools to control performance and efficiency of purchasing and to establish a conflict management concept (define operational framework). The function strategic supply network modeling provides a methodology for the identification (identify strategic supply network), evaluation (evaluate strategic supply network) and selection (select strategic supply network) of potential suppliers, not only located in tier-1 but also in the subsequent tiers. Using evaluation criteria such as lowest cost, shortest delivery time or best quality, and corresponding evaluation methods, the
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identified supply networks are evaluated. If there is a positive result on the evaluation, the supply network is selected and contractually linked to the company. Within the function strategic supply network qualification, the quality of a performing supplier network is evaluated using evaluation criteria and evaluation methods (evaluate quality of supply network). Dependent on the result of the evaluation, sanctions may be used to improve the quality of the supply network (improve quality of supply network).
strAtegIc deMAnd PlAnnIng Due to the positive effect that long-term and high-quality supplier relationships contribute to the success of a company (Ammer, 1968), the purchasing function was divided into a strategic and an operational domain. The field of responsibility of strategic purchasing comprises not only the selection and qualification of strategic suppliers but also the long-term strategic activities for demand planning. The paradigm shift in strategic purchasing has influenced the strategic tasks and led to different characteristics in the area of strategic supply network development. Figure 2 shows the sub- and elementaryfunctions of strategic demand planning which are described in detail in the following subsections.
Define Purchasing Strategy The purchasing strategy (a) describes the purchasing policy of the company, (b) determines whether consumption-oriented or safety-based purchasing will be accomplished and (c) declares the basic principles of the purchasing and sourcing strategy respectively (see elementary function in Figure 2).
A Reference Model for Strategic Supply Network Development
Figure 2. Function decomposition diagram of the function strategic demand planning
The corporate purchasing policy defines responsibilities and approaches, which need to be followed by the entire purchasing organization of a company (Strache, 1983, p. 76). This policy consists of the specification of a corporate purchasing organization, the definition of a consistent approach for (e.g., demand consolidation) and the adoption of corporate operational guidelines for implementation. An important task thereby is the creation of a corporate directive for agreements regarding the cooperation with suppliers and the propagation of business risks to suppliers in strategic supply networks. So far it was sufficient for strategic purchasing to check direct suppliers with regard to critical regions or political impact. Now all nodes of a strategic supply network have to be verified. Furthermore, it turned out that an involvement of strategic suppliers in product design and product development led to process improvements and increased efficiency for both the buyer and the supplier (Carr & Pearson, 1999, p. 513). Additionally, efficient agreements for environmental protection and recycling are needed. Environmental needs as well as the protection of
fundamental living conditions obtain more and more importance. Hence, efficient agreements comply not only with legal requirements but avoid cost significantly. All nodes of a supply network need therefore to be involved in an environmentfriendly purchasing strategy, including the usage of environmentally sound goods and transportation facilities as well as reusable packages and fillers. Criteria on environmental protection and recycling need therefore to be considered while selecting supply networks. Another important task of the purchasing strategy is the definition of a consumption or safety strategy. Consequential use of a company’s demand power on the purchasing market results in favorable prices and best conditions, whereas it is important to assure availability of purchasing goods (Jahns et al., 2001, p. 40). The decision whether a consumption or safety purchasing strategy is applied has an impact on the composition and development of supply networks. If the main focus is set on supply safety, then long-term and stable relationships with supply networks are desirable. In the case of a consumption strategy, it is
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important to identify comparable supply networks in order to select the one that fits best in the sense of prices and conditions in a concrete purchasing situation. Such a consumption strategy is used especially for standardized goods, allowing a good comparison of supply networks. In order to define a concrete sourcing strategy, it is necessary to distinguish between different sourcing strategies (e.g., single sourcing vs. multiple sourcing, local sourcing vs. global sourcing or insourcing vs. outsourcing). Single sourcing defines the supply of a good without using a contest between different supply networks. It is possible for strategic purchasing to ensure good prices, for example, by establishing long-term contracts with entire supply networks as it is managing direct suppliers. Multiple sourcing is aimed at the competition of existing and potentially new supply networks. Depending on which decision criteria (e.g., price, availability, lead time and quality) are used while comparing supply networks, the process of selecting a supply network is much more complex than selecting a single direct supplier. Local sourcing restricts purchasing on markets in the company’s home country—cost savings (e.g., because of a shorter route of transport) and higher reliability because of stronger control possibilities are the main advantages (Large, 1999)—whereas global sourcing describes international purchasing activities using worldwide resources. In the case of global sourcing, opportunity and risk profiles need to be elaborated. It is reasonable to use the strategic decision on local or global sourcing as a parameter while identifying and modeling supply networks. Decisions on make or buy (in- or outsourcing) need to be considered while sourcing entire modules or even systems (Large, 1999). Such a decision has significant influence on the company’s vertical range of manufacture and permits drastic reduction of internal costs. Choosing the right strategy for a purchasing good depends on the importance of the good for the corporate goods and services. With high quality, non-standardized goods the safety and single
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sourcing strategy is desirable. On standardized goods with low complexity a company may choose a consumption strategy and use a multiple sourcing strategy to achieve low purchasing prices. Another important task area of strategic purchasing is the reduction of complexity and variety of goods while at the same time transparency needs to be increased. This can be achieved by using standardized goods and a corporate classification system.
calculate strategic demand In order to consolidate demands, the purchasing goods need to be categorized into a corporate classification system. The classification of purchasing goods therefore needs to be performed for goods which are already in use as well as for all new goods. Fuhry et al. (2002) suggests to classify the purchasing goods into three groups: indirect material, basic direct material and strategic direct material. Indirect materials are goods and services which are not directly necessary for the production of an end product (e.g., office equipment). The focus of such goods lies, therefore, on the optimization and increase of efficiency of the order management and invoice processes (e.g., by using e-procurement systems). The share of this group is about ten percent of the total purchasing volume. Basic direct materials are directly used in the end product (e.g., raw materials and prefabricated parts). With this group of material, the competition can be increased by standardization and transparency in the market, which results in a direct decrease of cost. The use of IT-Systems like online auctioning or automated bidding systems can significantly increase the efficiency of the purchasing process. The share of this group of material is about 30% of the total purchasing volume. Strategic direct materials are complex components, pre-fabricated goods and systems or extensive services, which are used in the end product (e.g., motors and car seats). With this group of material, it is important to develop and
A Reference Model for Strategic Supply Network Development
maintain long-term and high quality relationships with the suppliers, and therefore with the related strategic supply networks. In addition, it is necessary to involve the suppliers that are participating in such strategic supply networks at an early stage into product planning and product development. The share of this group of material is about 60% of the total purchasing volume. For the classification of goods it is possible to use classification standards (e.g., eClass and UN/ SPSC). The value based share of the purchasing volume of a good can be calculated by using the ABC- or the portfolio analysis (Hirschsteiner, 2000, p. 11). The extension of the view from a supplier-centric to a supply network approach has significant influence on the purchasing of strategic direct material. In most cases, these goods are purchased with a safety strategy and single sourcing. Selecting and qualifying of appropriate supply networks is hereby an important task. The transparency of a supply network is a prerequisite for the buyer to evaluate and develop a supply network. Demand consolidation combines demands of several divisions and locations of a company in order to use the appearance on the purchasing market to strengthen the negotiating position. Prerequisites for a successful demand consolidation are the standardization and consistent classification of goods as well as the explicit identification of supply networks. Demand consolidation can improve the purchasing conditions. Supply marketing has the responsibility to analyze purchasing markets and identify powerful supply networks on the supply markets (Schifferer, 2001, p. 68). The bases for it are the basic conditions defined within the supply policy, such as transfer of business risk to supply networks or the compliance with environmental regulations. Adequate supply networks can be found through Internet search engines, external service providers (e.g., international yellow and white pages) or other data sources, such as up-to-date company profiles and key performance indicators. Based on sup-
plier self service information, a concise profile is generated in order to decide for a supply network. With the help of supply market research, a transparency is established and continuously improved in order to provide information and outlook on future market trends and their interference with the decision strategy. A further task of supply market research is the exposure of competitors and their demand potential for specific services of a supply network. Thus, significant changes in the purchasing price can arise. Further important influencing factors are so called quantity or tool monopoly. It is necessary to recognize whether only one supply network can deliver the amount of goods or whether only one node of a specific supply network can implement and operate a special tool (Strache, 1983, p. 19). Furthermore, it is important to identify the critical path in a supply network in order to take appropriate action for adjustment if a node on this critical path fails.
Define operational Framework Methods and procedures for risk management, controlling of purchasing and conflict management are provided by strategic supply network development in order to manage operational purchasing. The perception of the purchasing market research needs to be applied in order to establish effective risk management. Risk management deals with early detection of market, service and financial risks. Based on the business objectives and the purchasing policy of the company, concrete risk strategies are defined (e.g., fundamental risk avoidance or risk degradation strategies). Subsequently, the actual purchasing situation is analyzed, considering risk types, risk areas and risk reasons. Thus, it is examined from which countries and which industries goods are to be purchased in order to identify high-risk regions. These can be countries having high political risk, high inflation rates, high currency risks or even companies with the risk of insolvency. Through
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the gathering of such information, it is possible to create and evaluate quantitative and qualitative predictions (Das & Teng, 1998, p. 22). The controlling of purchasing accompanies the purchasing process throughout the entire purchasing organization. It consists of the definition of operating figures and their target values. The actual values are periodically measured and compared with the target values. Deviations are analyzed and appropriate action is taken. Controlling therefore ensures the ability of a company to adapt and react as well as to coordinate and innovate. The definition and monitoring of these values is supported by design and safety goals. Regarding design goals, the controlling defines target values in order to reduce the maximum number of supply networks or the purchasing quote related to framework agreements (Schifferer, 2001, p. 62). The target values are monitored by analyzing whether the goods needed in the corporate processes are supplied in the right quantity and the right quality at the right time and the right place. Sample measures are: resource consumption, cost of purchasing staff and cost of handling the purchasing tasks but also adherence to delivery dates, quantity stipulations and the price behavior of supply networks. Furthermore, it is monitored that buying is based on a purchase order. It is recommended to use balanced score cards to compile the operating figures. The method of the balanced score card allows, with a limited number of operating figures, implementation of a very efficient and flexible mechanism to manage a purchasing organization. The introduction of conflict management processes is necessary in order to avoid conflicts in purchasing. Conflicts can occur while defining tasks and decision competency between the strategic and the operational parts of the purchasing organization. This may apply to selecting supply networks while conducting a single purchasing. A large conflict potential may also arise if operational purchasing does not adhere to strategic instructions, such as cost limitations,
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amounts or dates. Companies having more than one production facility or having decentralized purchasing divisions may have the same problems while purchasing identical goods. Conflicts may also arise if the purchasing staff does not stick to corporate framework contracts with supply networks due to individual connections to suppliers. An effective incentive system helps to implement the objectives of strategic purchasing. This can be established by using the extensive data gathered by controlling. It is measured how the supply objectives are achieved. The cost savings reached by the employees involved are the basis for a bonus system. Besides the cost savings, a strategic purchaser can be measured as well on the quote of newly negotiated framework contracts. An operational purchaser can be measured on the adherence to supply lead time or the securing of a specific quality level on purchased goods (Schifferer, 2001, p. 90).
strategic demand Planning: business Process and data Models The elementary function classify purchasing goods (see Figure 2) is used to illustrate how the process organization is established and which information objects are used in the domain of strategic supply network development. The business processes for introducing material group codes and planned conversion of material strategies are modelled in Figure 3 and Figure 4, whereas the data model for purchasing goods can be found in Figure 5. For modeling the business domain, the ARIS (Scheer, 1999) method has been used. The classification of purchasing goods in the company builds the basis for a material-specific purchasing strategy and is a prerequisite for effective purchasing marketing, for a consolidation of demands as well as an optimized supply network management. Initially, all purchasing goods are listed in order to decide whether a proprietary material code is being used or whether a standardized method like eClass or UN/SPSC needs
A Reference Model for Strategic Supply Network Development
Figure 3. Business process for the introduction of a material group code
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Figure 4. Business process for planning conversion of material strategies
to be introduced (Figure 3). It is important that all existing and new goods are grouped with a consistent material code. While working with supply networks, the material code needs to be based on a standard such that all nodes of the supply network adhere to the same method. If it is necessary to use a proprietary material code, this code has to be distributed to the entire supply network. It may be necessary to provide assistance to the nodes of the supply network in order to show how to implement and use the material code. According to the strategic decision for a material group code, either a standardized method is adapted (preferred while working with supply networks) or a proprietary material group code is defined. This material group code is then implemented in the entire purchasing organization. The purchasing divisions are now asked to classify all
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purchasing goods with this material group code. In doing so, purchase controlling needs to observe the progress of this process (e.g., supported by a balanced scorecard). Besides the material group code, other criteria (e.g., the purchasing volume or the importance) are used to further group the purchasing goods. The process of structuring goods according to their share of the total purchasing volume and starting specific actions is illustrated in the process flow plan conversion of material strategies in Figure 4. The consistent classification of purchasing goods allows for the standardization of products and recognition of product correlations. Such a consolidation of the material master can reduce the variety of goods, which are required in the company. Purchasing goods are of different importance for the success of a company. Therefore,
A Reference Model for Strategic Supply Network Development
Figure 5. Semantic data model for purchasing goods
purchasing goods are grouped according to their relevance and their purchasing volume in three groups: indirect material, basic direct material and strategic direct material. For each of the groups, individual activities are deduced. While purchasing indirect material, for example, it is important to design the purchasing process as efficiently as possible. This can be achieved by the use of e-procurement processes and systems. While purchasing basic direct material, a minimization of the purchasing costs can be achieved by arranging auctions or biddings. While purchasing strategic direct material, the main focus is set on the development and maintenance of long-term relationships with supply networks. Therefore, the modeling and qualification of supply networks is of great importance. In order to describe the information objects of the strategic supply network
development, a semantic data model is created within the scope of this reference model. An extract, showing the information objects of the process flows illustrated above, is presented in Figure 5 in an entity relationship diagram. Starting with the specification of the demand of a customer (e.g., the demand for strategic direct material), data are collected not only from the direct suppliers but also from all upstream suppliers in order to support the strategic supply network development. The specific demand (as shown in the upper center of the picture) consists either of services, purchasing goods or other requirement types which are subsumed to the term requirement type. Every requirement type has features, such as structural shape, weight, and so forth. A purchasing good belongs to exactly one material group, which is identified by a material
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group code. Features as well as material groups are provided by standardization information. A requirement type belongs to a classification (e.g., strategic direct material). A classification is defined by different criteria. The purchasing volume of a requirement category as well as the material groups or the purchasing goods can be criteria for the classification of requirement categories. The objects, which are shadowed, will later on be found again in the extension of the semantic data model.
strAtegIc suPPly networK ModelIng To model a supply network in a structured way, potential supply networks need to be identified, evaluated and then selected. Figure 6 shows the sub- and elementary-functions of model strategic supply networks, which are described in detail in the following sub sections.
Identify strategic supply networks For the identification of potential supply networks, a specific strategic demand for an offer to a product to be built is specified and communicated from the OEM to existing and/or potential suppliers. Figure 7 illustrates an example for an identification process and its results. In the example, the OEM is connected to a potential network of suppliers as shown in the left part of Figure 7. It is assumed that the OEM needs to order two products externally, product 1 and product 2. During the identification process, the OEM sends out demands for these products to its strategic suppliers in tier-1. In the example, it is assumed that supplier 1-1 and supplier 1-2 get the demand for product 1 while supplier 1-3, supplier 1-4 and supplier 1-5 receive the demand for product 2. These suppliers check whether they can fulfill the demand internally and, if not, send out subsequent demands to their respective suppliers. Each node executes the same process as
Figure 6. Function decomposition diagram of the function model strategic supply networks
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described until the demand has reached the last tier. The requested information is then split-lot transferred to the OEM, aggregated and finally visualized as a supply network, in which each participant of the supply network constitutes a network node. This process may result in the identification of several possible supply networks as shown in the right part of Figure 7, where, for exmple, product 1 can be provided by two supply networks, supply network 1 (root node S1-1) and supply network 2 (root node S1-2), whereas product 2 can only be provided by supply network 3. It is now up to the OEM to decide which of the potential strategic supply networks (in the example above for product 1) will be selected to fulfill its original demand. The basic information needed for the selection results from the evaluation of potential networks.
evaluate strategic supply networks Based on defined evaluation criteria, potential networks are evaluated. Evaluation criteria may span from simple facts to highly complex considerations. One of the simplest criterion is the minimum number of nodes in the supply network, which can be used to minimize overall complexity of supply networks. Criteria with more complex calculations, for example, are the shortest total delivery time, the minimum total cost or the regional only sourcing (indicating, that only those suppliers are selected which are located within a certain region). Complex criteria are maximization of product quality or delivery time liability, since these criteria implicate the evaluation of past experience. While considering critical areas in the supply network, it is also of main importance to
Figure 7. Example for result of identification process
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know which nodes have absolute monopoly with their supply value or which are involved in more than one potential supply network (see S2-2 and S3-1 in the example in Figure 7). After having specified the evaluation criteria, the next step is to define the evaluation method. In most cases, a method is represented by an algorithm which itself is related to the selected evaluation criterion. For example, the criterion minimum number of nodes involves a simple algorithm counting the nodes in potential tree graphs, comparing the results and selecting the tree (supply network) with the least number of nodes. Assuming that the identification process will provide several possible supply networks for different products, the function select supply network(s) will select the supply networks related to a specific product in order to evaluate them using the evaluation criteria and methods as just introduced above. The result of the evaluation process is a rated list of all supply networks related to a specific product. This list can therefore be visualized and used for the selection of strategic supply networks in order to produce the specific product.
select strategic supply networks Based on the evaluation results of potential supply networks, target suppliers are identified for negotiation. In order to close a contract with those suppliers, contract negotiations are conducted first in order to specify the contract terms relevant for ordering the required goods. Those elementary functions highlighted in white in Figure 6 express that the steps cannot be automated and therefore need face-to-face communication in order to be executed.
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strategic supply network Modeling: business Process and data Models The semantic data model, introduced in Figure 5 has been extended with data objects used for the identification of supply networks. The extension of the model can be found in Figure 8. The objects, which are shadowed, connect the different semantic data models to each other (see Figure 5 and Figure 10). Starting from the demand of a customer, it is relevant to collect data not only from the suppliers in tier-1, but also from all suppliers in tier-n. A whole supply network specified by a demand is a network of suppliers, providing information to the customer, which is used for the development of the supply network. This network of suppliers is represented in the data model as a complex monitoring object, whereas a single supplier is represented as an elementary monitoring object. With the affiliation of elementary monitoring objects to a complex monitoring object, and with the identification of predecessors and successors of such elementary monitoring objects, the whole supply network is defined. Each complex monitoring object is related to a contract which has been offered to the customer for delivering a requested product. At a particular time, each elementary object provides information about the product range, bill of material, financial data or more. This information is known as supplier generated data. In addition, the customer generates their own data, called customer generated data, specifying the performance of the respective supplier of the elementary monitoring object. Examples for data generated by the customer are target performance data and actual performance data. Target performance data are guidelines for the supplier, and
A Reference Model for Strategic Supply Network Development
Figure 8. Semantic data model for the function strategic supply network modeling
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Figure 9. Business process for the identification of strategic supply networks
the actual performed data are the work performed by the customer. With the acquisition of supplier generated data and with the definition and the measurements of performance data, the customer holds all the needed to evaluate different complex monitoring objects of the supply network. Different evaluation methods are defined by different evaluation criteria.
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The whole process of modeling the supply network for a specific demand sent by a customer is shown in Figure. 9. The process modelled holds for each company in the network. Requests from a customer may arrive (contract offer requested) for a specific product, or different contract offers from one or more suppliers (contract offer stated) may be sent to the company examined. If the com-
A Reference Model for Strategic Supply Network Development
Figure 10. Semantic data model for the identification of strategic supply networks
pany has received a request for a specific product, a bill-of-material-explosion is produced in order to identify the products, which need to be ordered from suppliers. Contract offers need therefore to be requested from the respective suppliers. A request for one and the same product may be sent to different suppliers. The company examined waits for the different contract offers of the suppliers in order to evaluate them and conclude their own contract, containing the contract aspects of all suppliers involved. The contract is then offered to the requesting customer. Since each node in the network performs the process just described, the contract offered to the customer includes all contract aspects of the supply network. The semantic data model introduced in Figure 5 and Figure 8 has been extended with the contract information objects shown in Figure 10.
Each node in the network is a company. A company can either be a customer or a supplier. One and the same company can be a supplier for a specific product, and at the same time a customer ordering goods necessary for production of the requested product. A company concludes contracts with their customers and suppliers for a specific product. An assembly defines a product, which may contain additional products. A contract has different states. Each contract, which has been received from a supplier, is an offered contract. Such a contract is then evaluated with evaluation methods, reaching the state of an evaluated contract. Evaluated contracts with good evaluation results may become potential contracts, which are then concluded and accumulated to a concluded contract, which again is offered to the requesting customer.
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Figure 11. SSND supply network for an electronic motor
PrototyPe IMPleMentAtIon oF ssnd For proof of concept, the prototype tool SSND has been implemented providing the functionality for the identification and dynamic modeling of strategic supply networks. A sample view of a supply network with detailed information about every supplier contributing to an example demand for the production of an electronic motor is shown in Figure 11. Only a selected area of the whole supply network is shown. The rectangles represent the different companies of the supply network visualized with important information about the node contributing to the supply network of the electronic motor. Relevant information for the requestor about the suppliers is, for example, name of the company, material group the supplier
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is producing, minimum volume necessary to be ordered and capacity per day. The companies are visualized in the SSND prototype in different colors, differentiating between (a) suppliers who are able to deliver the product and amount requested, (b) suppliers who are not answering to the demand sent, (c) suppliers who are not online or where a communication problem exists and therefore can not be reached and (d) suppliers who do not have enough capacity for producing the required product, or where the volume required by the client is too low. The tool provides different modes of visualizing the network—adding more detailed information to the nodes, showing just parts of the network, and so forth—in order to support the client with all necessary information for developing the strategic supply networks.
A Reference Model for Strategic Supply Network Development
conclusIon
reFerences
Challenges in today’s economy are more and more transforming formerly closely-linked value chains into flexible networks, thus significantly changing the buyer/producer-supplier relationship. As laid out in this chapter, this is especially true for the field of strategic purchasing, where an extension from a supplier-centric to a supply network perspective is required. In order to accomplish this extension, complexity issues connected with the modeling of supplier networks have to be overcome. Having identified the need for managing the complexity of supplier network modeling, a reference model for the domain of strategic supply network development has been developed. It contributes to the class of theoretical constructs of potential business challenges and describes functional, data and process aspects in strategic sourcing in order to optimize the purchasing function in a network perspective. In this chapter, an overview of the reference model has been given detailing the functions of demand planning and identification of supply networks. Additionally, a prototype of the model has been implemented in order to evaluate the described concepts. Since the reference model is classified as a theoretical construct, and the prototype implementation has until now only been evaluated in small examples, additional work needs to be investigated in validating the concept in practice. Additionally, the prototype needs to be extended in order to allow additional product classifications next to eClass. Such an enhanced version of the existing prototype, based on a consistent and validated reference model, would constitute a basic component in an IT-infrastructure that enables companies to efficiently develop and maintain their strategic supply networks.
Albani, A., Bazijanec, B., Turowski, K., & Winnewisser, C. (2004a). Component framework for strategic supply network development. Paper presented at the 8th East-European Conference on Advances in Databases and Information Systems (ADBIS-04), Budapest, Hungary (LNCS 3255). Albani, A., Keiblinger, A., Turowski, K., & Winnewisser, C. (2003a). Domain based identification and modelling of business component applications. Paper presented at the 7th EastEuropean Conference on Advances in Databases and Information Systems (ADBIS-03), Dresden, Deutschland (LNCS 2798). Albani, A., Keiblinger, A., Turowski, K., & Winnewisser, C. (2003b). Dynamic modelling of strategic supply chains. Paper presented at the E-Commerce and Web Technologies: 4th International Conference, EC-Web 2003 Prague, Czech Republic (LNCS 2738). Albani, A., & Müssigmann, N. (2005). Evaluation of supply networks. Paper presented at the International Workshop on Modelling InterOrganisational Systems (MIOS), in conjunction with the OTM 2005 Federated Conferences, Larnaca, Cyprus (LNCS). Albani, A., Winnewisser, C., & Turowski, K. (2004b, 25.09. - 29.09.). Dynamic modelling of demand driven value networks. Paper presented at the On The Move to Meaningful Internet Systems and Ubiquitous Computing 2004: CoopIS, DOA and ODBASE, Larnaca, Cyprus (LNCS). Ammer, D. (1968). Materials management (2nd ed.). Irwin, Homewood, IL.
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Angeli, R. (2002). Development and coordination of dynamic enterprise networks. Paper presented at the Wissenschaftssymposium Logistik der BVL. [in German] Burtler, P., Hall, T. W., Hanna, A. M., Mendonca, L., Auguste, B., Manyika, J., et al. (1997). A revolution in interaction. The McKinsey Quarterly, 1/97, 4-23. Carr, A. S., & Pearson, J. N. (1999). Strategically managed buyer-supplier relationships and performance outcomes. Journal of Operations Management, 17, 497-519. Carr, A. S., & Smeltzer, L. R. (1999). The relationship of strategic purchasing to supply chain management. European Journal of Purchasing & Supply Management, 5(1), 43-51. Das, T. K., & Teng, B. S. (1998). Resource and risk management in the strategic alliance making process. Journal of Management, 24(1), S. 21-24. Dodel, J. H. (2004). Supply chain integration: Reduction of the logistic criticality in the automotive industry. Unviersity of St. Gallen, Switzerland. [in German] Fettke, P., & Loos, P. (2004). Reference modeling research. Wirtschaftsinformatik, 46(5), 331-340. [in German] Fuhry, G., Valdes, L., & Reinecke, N. (2002). Digital sourcing-purchasing in the next generation. Retrieved 5.7. 2004 from, www.digitaltransformation.de [in German] Gulati, R. (1998). Alliances and networks. Strategic Management Journal, 19, 293-317. Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic Management Journal, 21, 203-215. Hagel III, J. (1996). Spider versus spider. The McKinsey Quarterly, 1, pp. 5-18.
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Herman, J. (2002, July/August). Global value webs. Supply Chain Management Review, pp. 30-37. Hirschsteiner, G. (2000). Purchasing in the company. In S. Schötz (Ed.), Einkauf, methoden, werkzeug und arbeitshilfen für den industriellen einkauf (Chap. 3.2.1). Kissing: WEKA PraxisHandbuch. [in German] Houlihan, J. B. (1985). International supply chain management. International Journal of Physical Distribution and Logistics Management, 15(1), 22-38. Jahns, C., Middendorff, A., & Schober, H. (2001). Repositioning of the purchasing function . In K. Kohlhammer (Ed.), Beschaffung aktuell, materialwirtschaft, einkauf, logistik (Vol. 2/2001, pp. 38-43). Organ des Bundesverbandes Materialwirtschaft, Einkauf und Logistik e.V. [in German] Jarillo, C. J. (1988). On strategic networks. Strategic Management Journal, 9, 31-41. Jones, T., & Riley, D. (1985). Using inventory for competitive advantage through supply chain management. International Journal of Physical Distribution and Logistics Management, 5, 16-22. Kaufmann, L. (2002). Purchasing and supply management-a conceptual framework. In Handbuch industrielles beschaffungsmanagement (2. Auflage ed., pp. 3-33). Wiesbaden: Hahn, D, Kaufmann, L. (Hrsg.). Kopanaki, E., Smithson, S., Kanellis, P., & Martakos, D. (2000). The impact of inter-organizational information systems on the flexibility of organizations. Paper presented at the Proceedings of the Sixth Americas Conference on Information Systems (AMCIS), Long Beach, CA. Lambert, D. M., & Cooper, M. C. (2000). Issues in supply chain management. Industrial Marketing Management, 29(1), 65-83.
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Large, R. (1999). Management of strategic purchasing. Wiesbaden: Gabler. [in German] Malone, T. W., & Lautbacher, R. J. (1998, September-October). The dawn of the e-lance economy. Harvard Business Review, 145-152. Malone, T. W., Yares, J., & Benjamin, R. I. (1987). Electronic markets and electronic hierarchies. Communications of the ACM, 30(6), 484-497. McIvor, R., Humphreys, P., & McAleer, E. (1997). The evolution of the purchasing function. Journal of Strategic Change, 6(3), 165-179. Miles, R. E., & Snow, C. C. (1984). Fit, failure and the hall of frame. California Management Review, 26(3), 10-28.
Prahalad, C. K., & Gary, H. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79-91. Scheer, A.-W. (1999). Aris-business process modeling (2nd ed.). Berlin: Springer. Schifferer, S. (2001). Process oriented management of the purchasing organisation. Unpublished Dissertation, Technische Universität, München. [in German] Strache, H. (1983). How to purchase in monopolistic environments? Accurate purchasing behaviour for purchasing agents. Praxis für Materialwirtschaft und Einkauf, Volume 3, Nürnberg. [in German]
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This work was previously published in Reference Modeling for Business Systems Analysis, edited by P. Fettke and P. Loos, pp. 217-240, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.21
Virtual Logistics from Outsourcing Logistics Vladimír Modrák Technical University of Košice, Slovakia
IntroductIon The wide utilisation of information communication technology has significantly affected also a development of logistics services concepts. Consequently, research in the area of virtual companies including logistics services is developing. Presented visions are commandingly optimistic, even though sceptics are already gathering counter-arguments against those visions. As an important factor of strengthening, the abovementioned optimistic vision can be accounted for by a tendency of wider applications of outsourcing. Activities carried out by specialised external providers for a larger number of customers are usually cheaper, particularly because of fixed costs. Moreover, organisations that provide outsourcing bring into partnership their own know-how from optimisation of logistical activities. Cooperation in this field helps to eliminate or reduce unexpected idle periods in transport, such as long transport routes, reloading, customs clearing, and other. A higher form of outsourcing is the inclusion of lo-
gistical centers (LC) into a supply chain (SC). With the progressing globalization, the significance of integrated logistical centers is increasing. The aim of the article is to describe the concept of an integrated architecture of a logistic center reflecting progressive trends in logistic management. It also includes a model of features for a designing of a virtual logistical center and description of typical signs of virtual corporations.
bAcKground It is the paradox that information and communication technology (ICT) is from one side a precondition for modern business concepts and, on the other hand, is a significant barrier for their building. Especially, the problem of information incompatibility between companies prevents an effective deployment of ICT systems within the integrated supply chain (Hertz, 2001). The reason for the creation of integrated SC is in the establishment of close relationships and in the
creation of unified procedures aimed at increasing the effectiveness of the whole logistical chain. In these terms, SC can be characterized as a worldwide network of suppliers, factories, warehouses, distribution centers and retailers through which raw materials are acquired, transformed, and delivered to customers (Fox et al., 2000). Interest in the implementation of ICT in SCM has grown recently along with the change in the orientation of logistical management from internal attention to the overall company strategy focus, which was oriented to an integration of relations with suppliers and distributors (Meade, 1988). It led to gradual integration of logistical companies. Currently, increasing development in e-commerce and ICT is supporting this tendency. Important applications include, for example, Electronic Data Interchange (EDI) and Extranet. These information systems act as platforms for the integration of several of the phases (plan, source, make and deliver) of the supply chain with the objective of promoting open communication among partners (Gunasekaran & Ngai, 2004). Especially a phase of planning is critical in order to gain supply chain advantages, as companies need to exchange large amounts of planning and operational data (Edvards et al., 2001). Due to the onset of advanced ICT in SCM, development of virtual companies is relatively expanding. According to Davidov and Malone (1992), the virtual company of the future will look in the eyes of an observer as being almost limitless, with ever changing contact surfaces between the company, the supplier and the customers. Birchall and Lyons (1995) claim that, from the nineteennineties onwards, only intelligent organisations, which will not try to avoid new organisation forms, will survive. Kalakota and Robinson (2000) state that, “The design of a new model of business should be able to create alliances that emerge whenever a new type of response is necessary and most, or preferably all of a demanding, fickle customer’s rising needs can be satisfied.” In this sense can be seen also the perspective of virtual
manufacturing and logistics. Franke and Jockel (2000) define a term—“virtual logistics” —as a management process that consistently obtains and co-ordinates critical logistical resources provided primarily by virtual corporation members, but also by externals. Understandably, there are more views on virtual logistic centers, which are in this article one of the objects of interest. In concordance with the aim of this article, a virtual logistic center can be defined as an organization that consists of several logistics service providers and their facilities in a region (Meidute, 2004).
FroM logIstIc centers to vIrtuAl logIstIcs Infiltration of information and communication technology into manufacturing technologies and logistic tools is formulating new challenges for the creation and implementation of modern manufacturing and logistics concepts. In connection with that, in logistic management a positive shift in organisation of material flows from less effective—discrete material flows—to economically effectual—continual material flows—is registered. Discrete material flows in supply chain basically are caused by applying push system. By this strategy manufacturers push products to the customers in response to demand estimates but in quantities that minimise production costs. In general it results in excess inventory and the longer the lead-time. Continual flows in SC are resulted from the conditions of pull system, in which the goods are delivered to the customer with an agreed batch of material at a time and in a quantity that suits the supplier’s needs. There is no need of a stock between the supplier of materials and the production, and the stock of finished products can be reduced to an essential capacity, which buffers the flow from the production to the customer. The frequency of the flow increases, chains pass on smaller batches, the flow is smooth. To avoid transport problems
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due to an increased flow frequency, a segment for completion of goods and an aggregation of deliveries for customers is inserted into SC (see Figure 1a). Customers’ regular requests are directed right into the production, which should be capable to react promptly and individually to a change in orders that occurs in the course of the framework contracts fulfilment. A supply chain with a synchronous material flow is an ideal type of supply chain, where production and transport processes are completely adapted to flexible reactions to any change in a requirement. The material flow is balanced, smooth, without a stock (with the exception of a minimal backup stock). Inside of any element and on the way between chains there is only minimal quantity of raw materials or finished products that is precisely defined at a specific moment. That is possible through a parallel information flow, by which an information system operator of the whole logistical chain secures the processing of customers’ orders and simultaneously dovetails,
synchronises and optimises all processes in the supply chain. For that it has available real-time information from all partners and objects of partial supply chains. As another development factor in logistic approaches a wider application of outsourcing can be considered. Activities carried out by specialised external providers for a larger number of customers are usually cheaper, particularly due to fixed costs. Moreover, organisations that provide outsourcing bring into partnership their own know-how from optimisation of logistical activities. Unexpected idle periods in transport (reloading, customs clearing, and other) is possible to soften or eliminate by the inclusion of a logistical center into a supply chain (see Figure 1b), which will secure the reception of required supplies from specific customers, and carry out stock operations and stock records, including other logistics services (completion, packaging, marking, etc.). Sequentially, customers in the JIT mode take individual deliveries from the stock.
Figure 1. a) Insertion of completion and aggregation into SC; b) Inclusion of LC into SC
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Logistical activities for distribution of products have to contain all distribution, wholesale and retail elements of the supply chain, which means they should finish at the end customer—consumer. Logistical activities of LCs in a distribution and sale of products and purchasing and sales activities of wholesale and retail companies are usually not harmonised. Each of those organisations creates a partial supply chain according to their market interests and the relations between them are decided by their economic strength, not a common goal. The expanding logistics pushes on the concentration of branched stock networks by creating a minimal number of technically well-equipped so-called integrated logistical center (ILC) with regional and territorial coverage, which effectively resolves the conflicts between economical interests of producers and the retail market. Conflicts are resolved as follows (Modrák & Kiss, 2005): •
•
Product range conflict results from retail’s requirement of the supply of a wide product range, while the production supplies a more narrow range. This conflict is resolved by purchasing and completion in warehouses. Quantity conflict and time conflict is given by the request of frequent supplies in small
•
quantities against producers’ supplies in big quantities with a lower frequency. The conflict is resolved by keeping a stock of goods. Spatial conflict occurs as a result of misallocation of production and the center of consumption, and it is resolved by placing the warehouse into the place that is identical with an intermodal transport terminal. Parenthetically, ICL are accounted as key factor for transport intermodality improvement.
A model of the transition of logistics centers to integrated logistics centers is depicted in Figure 2. ILCs fulfill the primary function – to supply customers with goods in the required way and in the required range. Therefore they play the role of completion and expedition. The secondary function is given by keeping the necessary stock of goods. Another tendency of logistical approaches is the speeding up of international trade through e-commerce, which significantly influences the strengthening of the international character of logistic distribution chains. The trend in introducing e-commerce shifts from part ordering, materials scheduling and delivery into sales,
Figure 2. Transition from decentralized logistics centers to integrated logistics centers
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invoicing and receipts (Pawar & Driba, 2000). It means substantial re-evaluation of the logistical wholesale practice, from ensuring stock operations and the subsequent distribution towards complex logistical processes orientated on the satisfaction of needs of individual retail units and towards the increase of efficiency of the flow of goods in the interest of securing their competitiveness. Technical progress in the past years has allowed creating and using so-called intelligent logistical systems, which provide sophisticated services for customers, including the colorization, economization and safety of transport systems. Utilization of progressive ICT in the management of logistical systems results in intensive development of complex transport services, which are represented by virtual integrated service systems—named as virtual logistics centers (VLC). A wider concept of virtual integrated services constructed from further members like producers and retailers is characterized as a virtual corporation. According to Scott (2000), members of a virtual corporation will benefit from the assets that each of them contributes related to reputations, organizational structure and specialized dynamic capabilities. Another advantage of the a virtual corporation can be seen in electronic connectivity of members that will enable supply chain integration to execute
cross-enterprise activities and to coordinate the operations of collaborating firms. As a result, electronic connectivity will move firms from using enterprise-centric supply chains to synchronized electronically connected supply chains (Serve et al., 2002). The conceptual position and the role of virtual corporation in relation to ILCs is schematically demonstrated in Figure 3.
FeAtures oF vIrtuAl corPorAtIon And logIstIcs Technical solution of a virtual corporation is based on utilization of ICT, which is enabling virtualization of product manufacturing and ebusiness practice. A sense of business idea of a virtual corporation is prompt satisfying customer needs that are uncovered by marketing activities. Functioning of a virtual corporation in simplified manner is basically executed by the way described as the following. On the basis of a customer’s specific requirement, the virtual corporation initiates from the set of real manufacturing companies the supply network of cooperating partners, which in the sequence of the planned logistical chain meets the ordered requirement in the most effective way. It is supposed to also establish of network
Figure 3. The conceptual position of virtual corporation in relation to ILCs
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of ILCs, by interlinking, by which practically a multi-integrated architecture of logistics center is constructed. The advantage of a virtual corporation is that the offered logistics services do not depend on the building of new logistical capacities, demanding in terms of capital investment, but they depend on effectively managed cooperation of available capacities of members. It is important to point out that virtual corporations require a different management approach (Franke, 1999). For example, psychological preparedness for virtual work should be taken into account to competency, for both managers and employees (Jackson & Klobas, 2005). The sense of virtual logistics centers can be seen mainly in mutual sharing of resources, information, knowledge and best practice, which leads to cost reduction for everybody. When implementing the model of virtual logistics center, it is necessary to take into account the following obstacles: •
•
•
The current competitors, providing services of the same character, may have natural fears that they could lose their independence when contemplating an idea that they should cooperate in the interest of providing complex logistics services Mistrust of possible synergic effects that would be capable to support effectively the development of logistical activities of the participating partners Incompatibility of logistical information systems
The provision of integrated logistics services requires the use of capacities of diverse resources, which include buildings, machinery and equipment, as well as the workforce. Individual or group use of available capacities depends on the customer’s specific requirement and on the most effective way of meeting it.
The concept of VLC is usually based on a modular architecture. In this intent, the architecture of VLC may comprise more sorts of resource, such as: • • •
Stable resources (land, buildings and machines placed in individual locations) Organisational and management resources Mobile resources
Information systems of logistical companies and the whole communication infrastructure of individual locations, including the management and servicing potential, can be considered to be organisational and management resources, which are coordinated by an information system. Mobile resources are all machines and equipment, human resources and financial capital of companies that can be considered realistically in the structure of a VLC being created. It looks that stable resources even so further significantly influence the structure and architecture of the VLC model. With their technical and economic parameters, stable resources limit the extent and territorial coverage of the provided basic and supplementary logistics services. The designed spectrum of logistics services should include the possibilities of the creation of integrated services by allocating supplementary services to the basic ones. By an analysis of links between locations and characteristics of provided logistics services through stable resources, it leads to knowing that the concentration of services in various decentralised locations may result in the growth of transport volumes. On the other hand, the decentralisation of locations of a virtual logistics center will decrease of the load of transport routes by the dissipation of transport routes between individual locations and by the optimisation of transport chains.
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Future trends
conclusIon
To anticipate new trends in logistics management it seams to be pertinent to state a positive shift in the organisation of less effective discontinuous material flows into the area of economically effective continual and synchronised material flows. Another current tendency is the speeding up of international trade, which significantly influences the strengthening of the international character of logistical distribution chain and the prolonging of the distances they overcome. It means a substantial re-evaluation of the logistical practice of the wholesale, from securing storage operations and the subsequent distribution to complex logistical processes focused on the satisfaction of needs of individual retail units. The competitive advantage is manifested by the integration of logistics services and by the increase in the efficiency of material flows through virtual LCs. In relation with the term “virtual corporation,” it is possible to meet optimistic as well as pessimistic characteristics of that concept. If we start from visions of companies of the future, they are described as dynamically stable (Boynton, 1993). “Dynamically” in the sense that they are able to serve the widest range of customers and meet variable requirements for products. “Stable” in terms of the use of their long-term process capabilities and collective knowledge. The practice and theory of management offers a number of possibilities for the fulfilment of those attributes. They include cross-board organisational structures of companies and structures based on partnership in business with the related character of activities. According to the optimistic view, exactly those smaller forms will correspond with organisational structures that will be the most frequent ones in the future. From that point of view virtual corporations meet the requirement of a dynamic capability to meet variable requirements of the market.
Virtual reality signs in logistics bring with itself also some limitations, which are related with the key area of each company—the human resources. Conditions and factors that impact the crossdisciplinary learning in virtual teams have been addressed, for instance by Schaffer and Schmidt (2005). The disadvantage of the computer communication is that it does not allow the use of elements of non-verbal communication. Virtual teams are not allowed such a creative discussion as in the case of immediate communication, when inspiration for new ideas occurs on the principles of brainstorming. On the other hand, we can count with widening the number of contacts, but also with the decrease in the quality of the communication level. As a potential risk factor for the architectures of network organisations it is also necessary to consider computer terrorism. This problem is seriously being dealt with by software engineering, but it is not possible to eliminate it with an absolute certainty. It also outlines certain limitations of a virtual logistics centers. In a realistic view it is clear that the basis of virtual corporations are becoming intellectual capabilities, where traditional activities can be performed by an external supplier.
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reFerences Birchall, D., & Lyons, L. (1995). Creating tomorrow’s organization—Unlocking the benefits of future work. London: Pitman Publishing. Boynton, A.C. (1993). Achieving dynamic stability through information technology. California Management Review, 35(2), 58-77. Hertz, S. (2001), Dynamics of alliances in highly integrated supply chain networks. International Journal of Logistics; Research and Applications, 4(2), 237-256.
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Davidov, W.H., & Malone, M.S. (1992). The virtual corporation. New York: HarperBusiness. Edwards, P., Peters, M., & Sharman, G. (2001), The effectiveness of information systems in supporting the extended supply chain. Journal of Business Logistics, 22(1), 1-27. Fox, M.S., Barbuceanu, M., & Teigen, R. (2000). Agent-oriented supply-chain management. International Journal of Flexible Manufacturing Systems, 12(2/3), 165-188.
Meade, L. (1988). Strategic analysis of logistics and supply chain management systems using the analytical network process. Transportation Research Part E – Logistic and Transportation Review, 34(3), 201- 215. Meidute, I. (2004), The development and perspectives of logistics centers in Lithuania. In Proceedings of International Conference ReIStar ’04, Transport and Telecommunication Institute (pp. 323-327). Riga.
Franke, U. (1999). The virtual web as a new entrepreneurial approach to network organizations. Entrepreneurship & Regional Development, 11(3), 203-229.
Modrák, V., & Kiss, I. (2005). Information and communication technology in supply chain management. In M. Khosrow-Pour (Ed.), Advanced topics in information resource management (pp. 251-284). Hershey, PA: Idea Group Publishing,.
Franke, U.J., & Jockel, O. (2000). Virtual logistics: An exploratory case study (Working Paper SWP 3/00). Cranfield University, School of Management.
Moberg, C.R., Speh, T.W., &. Freese, T.L. (2003). SCM: Making the vision a reality. Supply Chain Management Review, 7(5), 34-39.
Fitzpatrick, W.M., & Burke, D.R. (2000). Form, functions, and financial performance realities for the virtual organization. SAM Advanced Management Journal, 65(3), 13-22. Gunasekaran, A., & Ngai, E.W.T. (2004). Virtual supply-chain management. Production Planning & Control, 15(6), 584-595. Jackson, P., & Klobas, J.E. (2005). Envisioning the virtual workplace: conceptualising virtualisation. In Proceedings of 13th European Conference on Information Systems: Information Systems in a Rapidly Changing Economy, Institute for Management of Information Systems, Regensburg, Germany. Retrieved from http://132.199.131.65/ ecis2005/chairs/PDF/261 Kalakota, R., & Robinson, M. (2001). eBusiness 2.0, Roadmap for Success. Reading, MA: Addison-Wesley.
Pawar, K.S., & Driva, H. (2000). Electronic training in the supply chain: A holistic implementation framework. Logistics Information Management, 13(1). Schaffer, S.P., & Schmidt, T.M. (2005). Crossdisciplinary learning in virtual teams. In S. Dasgupta (Ed.), Encyclopedia of Virtual Communities and Technologies (pp. 78-81). Hershey, PA: Idea Group Reference. Scott, J. (2000). Emerging patterns from the dynamic capabilities of Internet. Intermediaries Journal of Computer-Mediated Communication, 5(3). Serve, M., Yen, D.C., & Wang, J.C. (2002). B2B enhanced supply chain process: Toward building virtual enterprises. Business Process Management Journal, 8(3), 245-253.
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Key terMs Electronic Data Interchange: The electronic communication of business transactions, such as orders, confirmations and invoices, between organizations. Logistics Center: An area that is administrated by one company and allows other companies to lease warehouse space to carry out warehousing and logistics services. Logistics Management: A part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.
Supply Chain: A worldwide network of supplier, factories, warehouses, distribution centers and retailers through which raw material are acquired, transformed, and delivered to customers (Fox et al., 2000) Supply Chain Management: The integration of business process from end users through original suppliers that provides products, services, and information that add value for customers (Moberg et al., 2003). Virtual Corporation: An organization that is created from a network of suppliers, manufacturers and administrative services to accomplish specific objectives, such as flexibility and responsiveness (Fitzpatrick & Burke, 2000). Virtual Logistics: A management process that consistently obtains and co-ordinates critical logistical resources provided primarily by virtual corporation members, but also by externals.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik & M. Cunha, pp. 1805-1811, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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A Supplementary Framework for Evaluation of Integrated Logistics Service Provider Kwok Hung Lau Royal Melbourne Institute of Technology University, Australia Wun Leong Ma Royal Melbourne Institute of Technology University, Australia
AbstrAct As a result of globalization, supply chains of many large business organizations nowadays tend to cover wider geographic areas spanning across different countries and continents. The growth in length and complexity gradually replaces the traditional linear supply chains with extended supply networks comprising not only suppliers, manufacturers, distributors, and end customers, but also service providers. With the increasing use of third-party logistics (3PL) providers by international firms seeking integrated logistics services, many global 3PL providers are forming partnerships with large corporations to take care of the latter’s logistics operations in different regions. The selection of the right 3PL provider for alliance is therefore paramount to the success of global supply chain management. This article
investigates the significance of this subject and proposes a supplementary framework for evaluation of 3PL providers as global logistics partners for international firms. The framework focuses on the core competencies of 3PL providers and their abilities to attain economies of scale helping users achieve their outsourcing objectives.
IntroductIon Rapid advancements in information and communication technology (ICT) in recent years, coupled with the collapse of entry-to-market and other trading barriers, have changed significantly the way organizations operate in terms of business model and operating scale (Ritchie & Brindley, 2002). Globalization, lead-time reduction, customer orientation, and outsourcing are
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
some major changes contributing to an increasing interest in advanced logistics services and global supply chain management (Hertz & Alfredsson, 2003). Successful global logistics depends heavily on communication and transportation. Improved communication between different business partners through the use and sharing of real-time information facilitates the logistics of production and inventory over wider geographic areas. Efficient transport arrangement, such as volume consolidation and cross docking, makes possible the actual transactions between nodes (Bookbinder, 2005). Owing to the increased levels of resource requirement, complexity, and risk in running global logistics, many firms tend to outsource their logistics operations to third-party logistics (3PL) providers and focus on their core businesses. Successful management of global supply chains therefore requires radical changes in supply chain structure, business processes, and relationships with business partners particularly logistics service providers. Traditionally, supply chain is relatively linear in structure (Figure 1). A typical manufacturing supply chain involves a few tiers of suppliers, the manufacturer (the focal company), a few tiers of distributors (including wholesalers and retailers), and finally the end customers. Materials mainly flow from upstream to downstream (i.e., from suppliers to end customers) with a small reverse flow of returns while information tends to flow in both directions. Transportation is provided either in-house by the different parties
separately or outsourced to different 3PL providers (see for example Ballou, 2004; Bowersox, Closs, & Cooper, 2002; Chopra & Meindl, 2007; Coyle, Bardi, & Langley Jr., 2003; Wisner, Leong, & Tan, 2005). With globalization and disintermediation as a result of advancement in ICT, the linear supply chain model and the associated uncoordinated logistics operations can no longer meet the demand of customers for higher efficiency, shorter lead time, and wider geographic coverage. The supply chain tends to become networked (Figure 2) with the focal company as the hub and a major 3PL provider looking after the logistics operations of the whole supply chain for the focal company in different regions (Ritchie et al., 2002; Simchi-Levi, Kaminsky, & Simchi-Levi, 2003; Waters, 2003). The importance of logistics and supply chain management and the increasing use of 3PL providers are clearly indicated in the latest global third-party logistics survey conducted by Georgia Institute of Technology, Cap Gemini LLC, SAP, and DHL (Langley Jr., Allen, & Colombo, 2006). The 2006 survey findings show that 85% of the North American respondents, 89% of Western Europe, 88% of Asia-Pacific, and 95% of Latin America agree that “logistics represents a strategic, competitive advantage for our company” (p. 6). Across all the four regions surveyed, the most frequently outsourced services include transportation (90%), warehousing (74%), customer clearance and brokerage (70%), and forwarding (54%). The survey also reveals
Figure 1. A traditional linear supply chain model Information flow Material flow Suppliers' suppliers Suppliers' suppliers Suppliers' suppliers
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End customers Suppliers
Manufacturer
Distributors
End customers End customers
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
Figure 2. A networked supply chain model Information flow Material flow 1st-tier suppliers 2nd-tier suppliers
Wholesalers
Manufacturer 1st-tier suppliers
End customers Retailers
3PL provider Logistics service
a growing trend of outsourcing. The spending in 3PL services (2006 against 2009-2011) is projected to increase by an average of 8% from 48 to 56% in North America, 7% from 64 to 71% in Western Europe, 6% from 63 to 69% in AsiaPacific, and 8% from 39 to 47% in Latin America. Furthermore, there is a continuing trend of 3PL users to rationalize or reduce the number of 3PL providers they used suggesting that 3PL users are seeking integrated logistics services, i.e., services incorporating multiple logistics functions such as warehousing, transportation, and channel assembly offered as a package. This finding ties in with the frequent mergers, acquisitions, and consolidations in the 3PL sector in recent years leading to the emergence of “global 3PL providers.” Prominent examples include DHL and Exel; Kuehne & Nagel and USCO, UPS and Fritz and Menlo Forwarding, Deutsche Bahn and Bax Global, Uti Worldwide and Standard Corporation, and PWC Logistics and Geo-Logistics (Langley et al., 2006). There are many advantages in logistics outsourcing, which refers to the carrying out of a company’s logistics activities by a third-party operator. The most common benefits are saving in cost, reduction in risk, increase in capacity, and improvement in service quality. Others include time savings, cash infusion, freeing up in-house staff, focusing on core activities,
talent availability, access to specialists, business process re-engineering, greater flexibility, greater productivity, and bigger geographical coverage (Burdon & Bhalla, 2005; Embleton & Wright, 1998; Kakabadse & Kakabadse, 2002; Lau & Zhang, 2006). In theory, logistics outsourcing should enable firms to access their 3PL providers’ expertise and specialist skills. It should also bring cost savings to firms through economies of scale achieved by their 3PL providers via transaction bundling and volume consolidation (Beaumont & Sohal, 2004; Bhatnagar, Sohal, & Millen, 1999; Rabinovich, Windle, Dresner, & Corsi, 1999). In other words, firms are making use of their 3PL providers’ core competencies-generally refer to what a company is specialized in or good at (Javidan, 1998; Prahalad & Hamel, 1990)–and cost efficiencies through economies of scale–commonly refer to efficiency gained from increasing scale of operation (Campbell, 1990; Fleischmann, 1993; Jara-Díaz & Basso, 2003)--to achieve logistics outsourcing goals and objectives. This belief is supported by the study of five big European companies by Brandes, Lilliecreutz, and Brege (1997) on the reasons and process of outsourcing. Following this argument, core competencies of 3PL providers and their abilities to achieve economies of scale can therefore be regarded as two of the major critical determinants of logistics outsourcing success.
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Table 1 lists some of the major objectives of logistics outsourcing and the outcomes expected from the activity. It can be seen that the success of the first objective depends on the 3PL provider’s ability to achieve economies of scale for its user while the remaining ones rely on the expertise and capabilities of the 3PL provider. In short, the underlying assumption for successful logistics outsourcing is that the service provider is competent in its business. Providing logistics services should be the core competencies of the 3PL provider that supplement its user’s deficiency in this area. This is particularly significant for international firms in managing their global supply chains. Competent 3PL providers are able to pool skilled professionals and other useful resources at low costs and execute the same services repeatedly for their uses over the globe. The generation of cumulative experience through scale and scope economies resulting in better, varied, and faster services at lower costs is essential to efficient global supply chain management. Such accrual of advantages would not have been possible had the clients executed the activities in their own premises (Kedia & Lahiri, 2007).
In the light of the growing demand for integrated logistics services from international firms, this article aims to correlate the different logistics outsourcing relationships with the two major factors of success, namely core competencies and ability to achieve economies of scale. The importance of finding a compatible 3PL provider in the management of a global supply chain is also discussed and a supplementary framework for the selection of integrated logistics service provider is proposed. A longitudinal case study is used to examine the impacts of core competencies and economies of scale (or the absence of them) on logistics outsourcing. The findings provide generic parameters to help develop the supplementary integrated logistics service provider evaluation framework. Section 2 of the article reviews the literature in a few areas including vertical and horizontal logistics alliances, international outsourcing partnerships, and strategic development of 3PL providers, as well as the latest studies in the evaluation of 3PL providers. Section 3 describes the methodology employed for the research. A summary of the findings from the case study, a thorough analysis of the observations, and a discussion of the implications are provided in Sections 4 to 6. Section
Table 1. Major objectives of logistics outsourcing Objective of logistics outsourcing
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Expected outcome
To reduce costs of logistics operation
Reduction in capital investment in infrastructure, assets, human resources, and other related costs
To lower risk
Reduction in risk of inefficient capital investment
To reduce management time and resources for logistics operation
Release of management to focus on core business, reduction of human resources, and related administrative costs
To enhance reliability of delivery
Provision of on-time delivery and accurate order fulfillment to customers
To improve quality of customer service
Provision of better and higher quality of customer service than what was provided prior to outsourcing
To access best practices in logistics operation
Use of best practices and latest technologies in carrying out the outsourced activities
To enhance flexibility to changes initiated by changing customer demand and market condition
Provision of flexible service for varying scale of operation and change management capability to meet the need of customers
To achieve innovation and continuous improvement in logistics operation
Availability of IT technologies to enable coordination, synchronization and optimization of logistics operations
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
7 proposes a supplementary evaluation framework that builds upon the works of previous research and the current case study. It is hoped that the proposed framework can assist international firms in making better logistics outsourcing decisions through proper assessment of the core competencies of the potential 3PL providers and their abilities to achieve economies of scale. The article concludes in Section 8 with a discussion on the limitation of the study and the direction for further research.
lIterAture revIew As the 2006 global third-party logistics survey reveals, the use of 3PL providers by international firms will continue because of the ever-increasing globalization of their businesses. As a result, most 3PL providers desire to move their customers from a conventional customer-supplier relationship to a true “partnership” (Langley, et al., p. 5). Taking the definition by the European Commission, thirdparty logistics is defined as “activities carried out by an external company on behalf of a shipper [or client] and [they] consist of at least the provision of management of multiple logistics services. These activities are offered in an integrated way, not on a stand-alone basis. The co-operation between shipper and the external company is an intended continuous relationship [lasting for at least one year]” (as cited in Carbone & Stone, 2005, p. 496). For a global supply chain, the major 3PL provider can take over the entire logistics management as well as operations from its user. These include management, analysis, and design of activities associated with transport and warehousing (e.g., inventory management), information related activities (e.g., tracking and tracing), as well as value-added activities (e.g., secondary assembly of products and supply chain management) (Laarhoven, van Berglund, & Peters, 2000). As a result of globalization, the international market for logistics and transport services be-
comes larger and complex. International firms rely more and more on 3PL providers for logistics solutions. According to the 2006 global third-party logistics survey, 3PL users are sometimes frustrated with apparent differences in doing business with specific 3PL providers from one region to another. The use of a “global 3PL provider” not only rids the user of the management headache but also enables the user to capture local benefits such as low labour costs so as to help reduce the net landed cost of its products (Langley, et al., 2006, p. 16). Therefore, there is a growing trend of vertical logistics alliances in which the 3PL provider and the user maintain a long-term formal or informal relationship to render all or a considerable number of logistics activities. The 3PL provider sees itself as a long-term partner in this arrangement to provide a comprehensive range of services to the user (Bagchi & Virum, 1998). A vertical alliance includes planning and overseeing the inbound and outbound freight flows in the nodes of the logistics network. In the alliance, the 3PL provider looks for improvements to the service levels, inventories management, and order processing for the user company (Peters, Cooper, Lieb, & Randall, 1998). To acquire the necessary capabilities and a global presence required for vertical alliances, many 3PL providers pursue horizontal alliances through horizontal cooperation, merges and acquisitions. Horizontal alliance can be a means to spread costs and risks and to increase the scope of services. This practice is attractive when costs of developing new services and solutions for complex problems facing customers in dynamic markets are too high for a single 3PL provider (Carbone et al., 2005). Horizontal cooperation is defined by the European Commission (2001) as concerted practices between companies operating at the same levels in the market. Short-term horizontal alliances can be formed between 3PLs, IT consultants, and software vendors. The search for higher capability of offering “global consulting”
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in supply chain management is seen by some as evidence of evolution from 3PL to 4PL--a term coined by Accenture to refer to “a supply chain integrator that assembles and manages the multiple resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution” (as cited in Carbone et al., 2005, p. 506). Permanent horizontal alliances through merges and acquisitions enable the 3PL provider to have wider geographic coverage and control of major traffic flows through the creation of efficient transport chains. The alliances also provide sufficient size to cope with high investment cost in physical infrastructure and ITC for efficient operation. Economies of scale are also permitted through business process re-engineering and entry into new market segments. Through the acquisition of specialist capabilities, especially higher valueadded services, strategic and operational synergies can also be achieved (Plehwe & Bohle, 1998). With closer cooperation between 3PL provider and the user, the role of 3PL provider also changes from provision of standard logistics services to development of customer solutions. Based on the balance between general problem solving capability (GPSC) and the degree of customer adaptation (DOCA), Hertz et al. (2003, p. 141) propose four different development strategies for 3PL providers as follows: •
•
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Standard 3PL provider (relatively high GPSC and relatively high DOCA): The 3PL provider offers a highly standardized modular system to customers with relatively simple combination of standardized services such as warehousing, distribution, pick and pack, etc. Service developer (high GPSC and relatively high DOCA): The 3PL provider offers an advanced modular system of a large variety of services such as specific packaging, crossdocking, track and trace, and special security system, etc., and a common IT-system used for all customers.
•
•
Customer adapter (relatively high GPSC and high DOCA): The 3PL provider offers totally dedicated solutions involving the basic services for each customer. For example, the service provider might take over the customer’s total warehouses and the logistics activities. The 3PL provider is seen as a part of the customer organization. Customer developer (high GPSC and high DOCA): The 3PL provider develops advanced customer solutions for each customer by handling the entire logistics operations. Value-adding services and enhancement of knowledge are common and the role of the 3PL provider is more like a consultant.
In vertical alliances, the 3PL provider acts as a customer developer involving a high integration with the user often in the form of taking over its whole logistics operations. Its role is a logistics integrator to offer integrated logistics solutions to the user and share the risks and rewards of the logistics management with the user. Similarly, Kedia et al. (2007) also look at international outsourcing of service (IOS) as a form of partnership that can be classified into three different types: tactical, strategic, and transformational. With the increase of value proposition from low to high to highest and the involvement of provider from arm’s length to deep to intense, the IOS partnership moves from tactical to strategic to transformational. Tactical IOS partnership is basically transaction oriented aiming at cost reduction. Involvement of the service provider is rule-based and contract-oriented. Strategic IOS partnership emphasizes on value enhancement required to enable a company to remain locally responsive as well as globally integrative. It is usually achieved through building long-term relationships with a few best-in-class integrated service providers that possess cumulative experiences and scope of organizational learning for their users. In vertical alliances, a transformational IOS
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
partnership is the ultimate goal. From the user’s point of view, the partnership helps the user share its risk with the provider because of the reduced need for capital expenditure on infrastructure and manpower development. It also enhances the user’s flexibility as the logistical competencies of the provider assist in providing faster response in a globalized business environment. Finally, transformational IOS partnership provides opportunities for the user to redefine its businesses through transformation (i.e., changes of business model) or business process re-engineering (i.e., changes of practice). Transformational IOS partnership provides opportunities to enhance the user’s overall competitiveness through paradigm shift and is therefore wider in scope than mere business process reengineering, which is mainly to improve efficiency of certain logistic activity. The success of the relationship depends on the trustworthiness of partners and the culture distance between the two parties. As vertical alliance impacts significantly on successful global supply chain management, the selection of the right 3PL provider is of utmost importance. Studies in this regard are quite abundant (see for example Beaumont et al., 2004; Bhatnagar et al., 1999; Boyson, Corsi, Dresner, & Rabinovich, 1999; Langley, et al., 2006; Lynch, 2000; Razzaque & Sheng, 1998; Stock, Greis, & Kasarda, 1998). Jharkharia and Shankar (2007) reviewed the literature and summarized some of the most commonly used criteria for the selection of 3PL provider as follows: compatibility with the users, cost of service, quality of service, reputation of the company, long-term relationship, performance measurement, quality of management, information sharing and mutual trust, operational performance, IT capability, size and quality of fixed assets, delivery performance, financial performance, market share, geographical spread and range of services provided, and flexibility in operations and delivery. Among these criteria, many are related to the core competencies of the 3PL provider as well as its ability to achieve economies of scale and pass the cost savings back to the user.
In the light of the previous review, this research aims to investigate how core competencies of 3PL providers and their abilities to achieve economies of scale determine the type of partnerships they can enter with their users and how the two factors contribute to the success of logistics outsourcing.
Methodology This research is founded on a longitudinal case study of the outsourcing experiences of a global company focusing on the service providers’ core competencies and abilities to achieve economies of scale. In general, case studies are less vigorous than empirical studies. Furthermore, because of the use of small sample, the case study approach also faces a limitation in generalizing the findings to reflect the situation of the whole industry. Nevertheless, the approach is suitable for exploratory and explanatory research like the one described in this article to provide a preliminary in-depth investigation of a problem (Benbasat, Goldstein, & Mead, 1987; Walsham, 1995; Yin, 1994). The intention is not to generalize the findings but to use them to better understand the crux of a problem and to propose recommendations for solution as well as directions for further research. The global company in the case study provides information services to its clients all over the world. As its core activity is information gathering and dissemination, it relies on outsourcing to handle its non-core activities such as logistics operations. Between 1989 and 1999, the company changed three 3PL providers. The purpose of the case study is to unearth the reasons for the repeated outsourcing failures and investigate how they can be attributed to lack of core competencies and inabilities to achieve economies of scale. Through the logistics manager of the company who oversaw the entire outsourcing process and managed the three 3PL providers during the period, detailed first-hand information about the case was collected for analysis which helps determine if
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core competencies of the 3PL providers and any achievement of economies of scale existed. Table 2 shows the source and the usage of information in the case study. For reason of commercial confidentiality, pseudonymous names have been used. The parties involved in this case include the user company X and its three logistics service providers (A, B, and C). All the three freight forwarders used by X are international companies with global presence and local offices in Singapore (Table 3). As leading international information service provider supplying news and financial information to its clients worldwide, X installs computers and terminals
at its clients’ premises to provide the subscribed data and information. With regional headquarters set up in Singapore, X has outsourced its logistics operations to freight forwarders since 1989. In the 1980s, outsourcing practice in Singapore was still at its infancy. Many 3PL providers were actually freight forwarding companies. The services that X outsourced include warehousing, inbound and outbound logistics, inventory management, local transportation, international freight delivery, and regional distribution of subscriber equipment. X awarded the logistics service contracts to the 3PL providers on a “2+1”-year basis (i.e., two years initially with a scope for extension of one
Table 2. Source and usage of information in the case study Source of information
Usage of information in the case study
Use company’s logistics outsourcing analysis reports
To identify the logistics activities outsourced, the expectations of the user company from the 3PL providers, and the performance metrics employed in monitoring the logistics services provided.
Proposals submitted by the 3PL providers for the logistics outsourcing contracts
To understand the capabilities of the 3PL providers in providing the required logistics services, the cost figures, and other statistics provided by the 3PL providers for evaluation, the track records and the reputations of the 3PL providers in the industry.
User company’s evaluation reports for the selected 3PL providers
To understand why the 3PL providers were selected and determine if the user company had performed the standard evaluation procedure properly.
Performance records of the 3PL providers during their respective contract periods
To examine the performances of the 3PL providers against the expected targets and identify the problem areas and their causes.
Performance evaluation reports at the end of the contract periods
To review the user company’s overall comments on the performance of the 3PL providers during their respective contract periods and understand the reasons for the termination of contracts.
Table 3. Profiles of the 3PL providers in the case study 3PL name
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Country based
Contract period
Specialization
Service provided to X
A
UK public-listed company
1989 – 1995
International airfreight forwarding and local transportation
• Day-to-day management of X’s logistics activities including warehousing, inbound and outbound logistics, local transportation, international airfreight forwarding, and inventory management • Order processing and customer service
B
US public-listed company
1995 – 1997
International freight forwarding and heavy weight movement
Same as above
C
Singapore-based private company
1997 – 1999
International air and sea freight forwarding
Same as above
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
year). The contract required the 3PL provider to manage all the logistics operations of X including the provision of warehouse space, facilities, manpower, equipment and tools necessary for the activities. The service was charged at a fixed price (i.e., a lump sum) and a variable price scheme according to the type of service and activity performed. X hoped that it could reduce its investment in resources and achieve flexibility through logistics outsourcing. It expected the 3PL provider to deliver the subscriber equipment from the point of receipt to its clients in the most efficient and economic manner. In other words, X expected the 3PL provider to achieve economies of scale for its logistics operations and reduce its logistics expenditure. To facilitate analysis, an ideal situation of integrated logistics outsourcing (i.e., the 3PL provider) being a customer developer (Hertz et al., 2003) and the outsourcing relationship being transformational (Kedia et al., 2007), is used as a basis for comparison to gauge the performance of the three 3PL providers in the case. It is assumed that logistics functions such as transportation, inventory management, capacity planning, etc. should be coordinated and managed by the 3PL provider with logistical competency. Information and material flows should be streamlined and integrated by the 3PL provider to achieve economies of scale through consolidation of transactional and physical movement activities. Furthermore, the 3PL providers should be able to develop unique customer solutions and redefine business processes for its user through transformation or business process re-engineering thereby help its user gain efficiency and cost effectiveness. Through the comparison, it can be established whether core competencies of the 3PL providers and their abilities to achieve economies of scale for user existed.
FIndIngs Analysis of the case reveals that the three 3PL providers failed to bring efficiency gains to X as expected despite of a full outsourcing of logistics operations. Problems with the 3PL providers as listed in Table 4 show that they did not operate, coordinate, or manage X’s logistics activities as customer developers. Their IOS relationships with X were mainly tactical. Apart from C, the other two 3PL providers did not provide complete centralized coordination and management of logistics activities for X leading to duplicated effort and wasteful operation on some occasions. The lack of logistics information systems and other IT support from the 3PL providers also prohibited them from integrating and streamlining the material and information flows of X to achieve higher efficiency. These outcomes can be attributed to a few common practices. First, all the three 3PL providers did not invest adequately in resources to develop their capabilities and competencies. They did not possess their own warehouses to achieve economies of scale or logistics information systems to enable better planning, coordination, and management of logistics activities for X. Second, the quality of their staff was less than satisfactory (e.g., untrained staff) and their management of X’s logistics operations was ineffective (e.g., no quality or ISO9000 compliant process). Finally, they provided little or no IT support to manage X’s supply chain to maintain efficient information flow or to coordinate material flow. The lack of own warehouses and the reliance on leased facilities have limited the capabilities of the three 3PL providers to offer cost benefits to X through economies of scale. Since X spent a significant portion of its logistics cost in warehousing and related activities, its objective to reduce cost and to gain considerable savings through
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Table 4. Problems with the 3PL providers in the case study Area
Problems with A
Problems with B
Problems with C
Warehousing
• Did not possess own warehouse. Used leased private warehouse for X with no sharing of warehouse transaction cost to achieve economies of scale. • Cost of usage all charged to X and not shared among other customers. Did not achieve economies of scale. • Did not possess own WMS to optimize warehouse operation.
• Did not possess own warehouse. Used private warehouse especially leased for X (i.e., subcontracting). • X solely funded the leased warehousing and the related services. No consolidation of cargo with other customers of B or sharing of fixed cost to achieve economies of usage.
• Did not possess own warehouse. Used private warehouse especially leased for X (i.e., subcontracting). • Cost of usage all charged to X and not shared among other customers. Did not achieve economies of scale.
Staffing
• No pooling of staff from other business units to share the fixed staff cost of providing service to X. Temporary staff members were recruited to provide the manpower resources at the leased warehouse for X. • Inexperienced warehouse operation staff. X had to provide training to the staff of A to use its MRP II system. • Staff lacked basic logistics knowledge. X had to provide onthe-job training to the staff of A which had no in-house training program of its own. • High staff turnover rate (>40%).
• B’s logistics team for X comprised full-time and part-time staff with a 40% turnover that seriously affected service continuity and performance (e.g., 20% variance was found in annual stock take). • X had to provide training to the staff of B to use its MRP II system. • Much time was spent in re-training new comers and handing over job duties as a result of frequent staff changes.
• Staff either pooled from internal units or through external recruitment. However, there was no sharing of staff cost. • X had to provide on-the-job trainings on inventory management and order processing to the logistics team members of C. • High staff turnover of 50% occurred mainly at the supervisor level. Poor staff stability seriously affected day-to-day operation. Unsatisfactory performance and low customer service level were reported throughout the contract period (e.g., 10% variance was found in annual stock take).
Transportation
• Did not possess own vehicle fleet. Used subcontractors for delivery service. Little control and no economies of scale were achieved. • Did not possess own TMS for efficient scheduling and route planning. • Poor tracking system (used telephone only). Failed to provide a high level of on-time delivery service to customers as required by X.
• Used a combination of own and leased vehicle fleets. Economies of scale were achieved through consolidation of cargos for X and other customers of B. However, the benefit gained was not passed back to X as cost savings. • Did not posses own TMS for efficient scheduling and route planning. • No monitoring of performance of subcontractors to ensure they worked up to the service level required by X.
• Possessed own transport fleet and full-time staff to handle all transport activities with a dedicated team to serve X. However, capacity was not fully utilized and economies of scale were not achieved. • Possessed own TMS with GPS technology to track and trace its transport fleet resulting in faster turnaround time.
Management
•
• No major problems identified.
• No major problems identified.
• •
Not able to provide one-point solution to client’s problem. Vertical control in each department created unnecessary delays in communication and action. Lack of unity of control. Fragmented management of inventory and distribution resulted in duplicated effort and wasteful operation.
continued on following page
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Table 4. continued Area IT support
Problems with A • Service not provided.
Problems with B
Problems with C
• B possessed own team of IT professionals but failed to develop a logistics information system to integrate with X’s legacy system for end-to-end supply chain management as stated in its proposal submitted to X. • Technical complexity, prohibitive cost, and inadequate numbers of participating customers for cost sharing were the main causes of the failure.
• Did not possess own IT staff but hired external consultants for any IT system project. • In the outsourcing contract, C proposed to provide a low cost IT solution to replace X’s own MRP II system but the project had never taken off.
outsourcing was not realized basically. Apart from some bulk freight rate savings obtained through volume consolidation, the major benefit X enjoyed in the logistics outsourcing was a reduction in staff cost. However, the savings were offset by the poor and unsatisfactory service performance of the 3PL providers manifested by their high staff turnovers, incompetent management, and inefficient services.
•
AnAlysIs • X’s case unfolds the following common issues with the three 3PL providers which suggest that they did not actually possess core competencies in all the services they provided and they were not able to achieve economies of scale as expected: •
Performance of the 3PL providers was good in international freight forwarding but only average or even poor in other logistics activities. Apart from freight forwarding, the three 3PL providers acted more like a resource provider than an integrated logistics service provider with little capability to add value to their user’s supply chain. They were more like generalists providing little specialist skills or specialized equipment or systems for the outsourced services.
•
Workers of the three 3PL providers were incompetent due to poor training and high turnover rate. Many of them lacked the basic knowledge or skills to perform their jobs well. The main role of the three 3PL providers in most activities was to supply manpower resources. As a result, the three 3PL providers failed to reduce the management responsibility and time of their user because of ineffective communication and lack of problem-solving and decisionmaking skills. Owing to the lump sum payment arrangement for warehousing service, there was no cost benefit arising from economies of scale through the sharing of use of facilities. In general, the services were not provided across the whole customer bases of the 3PL providers and were charged at fixed price instead of a cost-sharing basis. The three 3PL providers were generally weak in IT capability to provide support to X. Their scale of operation and financial strength did not permit the provision and sharing of such service across all their users.
The above issues are all related to the amount of resources invested by the 3PL providers, the capabilities of utilizing their resources, the competencies in providing efficient logistics services,
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and the abilities to bring cost savings to their users through increasing scale of operation and size of customer base. They boil down to the 3PL providers’ core competencies and abilities to achieve economies of scale. The findings of the case study suggest that although the 3PL providers might have the resources and capabilities to offer different logistics services, they were not necessarily competent in all the logistics activities they performed. Core competencies developed in one area as a result of long establishment, large investment, accumulated skills, and cumulative experience did not automatically translate into core competencies in other areas of logistics operation. To the 3PL providers, core activities might be the businesses they could do best or make the greatest profit. To their users, however, the 3PL providers’ core competencies should be their unique expertise and experiences that could assist their users in conducting the outsourced logistics activities in the most efficient and cost effective manner. This mismatch became the root of the disappointment and the cause of the repeated outsourcing failures in the case of X. The issues previously identified are not necessarily specific to the case of X or a particular industry. In fact, the lack of resources, capabilities, or core competencies are common weaknesses of many companies to various extents. From a 3PL user’s perspective, however, the success of logistics outsourcing hinges on the condition that the 3PL provider will not be plagued by these problems. A logical conclusion is that these generic issues have to be thoroughly addressed in the selection of integrated logistics providers.
dIscussIon X’s case reveals the significance of examining the core competencies of the potential 3PL providers and their abilities in achieving economies of scale
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before making the final outsourcing decision. To a large extent, X should be responsible for its logistics outsourcing failures. The company has an obligation to understand what core competencies of the 3PL providers are required in order to achieve its outsourcing objectives. It should also establish that the selected 3PL providers actually possess the required competencies prior to signing the contracts. X might understand well its own logistics costs and level of customer service required. However, evidence suggests that it has not fully examined the 3PL providers’ capabilities and core competencies before requesting proposals. X selected its 3PL providers on the basis of price, range of services offered, and technical competency to provide facilities, equipment, and tools necessary for the running of its logistics operations. Using the Request for Proposal (RFP) approach, X aimed to shop for the best 3PL providers among its freight forwarders hoping that the 3PL providers could take over a wide range of its logistics functions at lower costs. However, most of the outsourcing benefits that X hoped for did not materialize because of a sharp disparity between X’s expectation and the actual performance of each of the three 3PL providers. In outsourcing its logistics functions, X did follow closely the standard procedures of outsourcing as outlined in Figure 3. The company conducted its competence analysis and mapping of activities properly (Stages 1 to 3) before requesting proposals from the 3PL providers (Stage 4). It also developed its own set of performance measures and cost parameters to evaluate the performance of the 3PL providers (Stages 5 to 7). The repeated termination of logistics outsourcing contracts (Stage 8) therefore suggests that simply following the standard procedures might not be adequate. More detailed guidelines would be required for the most critical stage (Stage 4) in which the eligible 3PL providers are evaluated and the most compatible one is selected.
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
Figure 3. Standard procedures of the logistics outsourcing process stage 1: competence Analysis Separate core and non-core competencies of the firm.
stage 2: outsourcing Analysis
stage 3: contract Preparation
Identify non-core activities to be outsourced.
Establish outsourcing goals and objectives for preparation of agreement.
stage 6: transfer and control
stage 5: contract negotiation
stage 4: request For Proposal (rFP)
Transfer, monitor and control the outsourcing activities.
Negotiate contract and measures of outsourcing performance.
Identify qualified 3PL providers and select the most compatible candidate.
stage 7: Performance evaluation
stage 8: contract renewal/termination
Evaluate performance of the 3PL provider and provide feedback.
Continue with existing outsourcing relationship or replace the 3PL provider.
Despite the fact that core competencies and ability to achieve economies of scale are critical to the success of logistics outsourcing, there are few studies in the literature on the selection of 3PL providers focusing on what the core competencies of 3PL providers are and how they can achieve economies of scale in practice for the benefit of their users. For example, Arnold (2000) proposes an outsourcing model with design alternatives for manufacturing firms combining transaction cost economics with a core competency approach. His main objective, however, is to develop a “de-materialized company” (p. 28) for optimizing outsourcing design and management. Similarly, Hafeez, Zhang, and Malak (2002) provide a structured framework for determining the key capabilities of a firm using the analytic hierarchy process. Nevertheless, the framework is used mainly for identifying competency gaps within the firm with a view that the result might facilitate the making of outsourcing decisions. Momme (2002) proposes a framework for outsourcing manufacturing in which competence analysis is the first of the six phases outlined. However, the analysis focuses more on identifying the client’s own core activities than that of the supplier’s. It appears that there is little attempt to explore the core competencies of the supplier, which are supposed to complement the client’s non-core business skills. Also, the issue
of economies of scale has not been addressed in the proposed framework. It has yet to be proven that economies of scale achieved by the supplier, if any, would bring cost savings to its client. Similarly, Vaidyanathan (2005) recommends a framework to establish a set of criteria for the selection of 3PL provider using IT as the focus to peruse the core functionalities of 3PL provider such as inventory management, transportation, and warehousing. Nonetheless, core competencies and economies of scale are again not at the centre of discussion. In view of the above inadequacy, this article attempts to fulfil the existing gap by proposing a supplementary evaluation framework for the selection of 3PL provider focusing on the two foregoing critical factors.
ProPosed FrAMeworK X’s case reveals that resources and capabilities of the 3PL providers are essential elements of their core competencies in providing logistics services to their users. This finding is in line with the competencies hierarchy proposed by Javidan (1998) in which he contends that core competencies of a firm build upon its competencies which, in turn, depend on its capabilities to utilize its resources. Javidan (1998) defines the four levels of his competencies hierarchy as follows (p. 62):
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• • • •
Resources are the inputs into the firm’s value chain; Capabilities refer to the firm’s ability to exploit resources; Competency is a cross-functional integration and coordination of capabilities; and Core competencies are skills and areas of knowledge that are shared across business units and resulted from the integration and harmonization of strategic business unit competencies.
The difficulty in rising from one hierarchy level to another (i.e., resources to capabilities to competencies to core competencies) increases with the ascent but the value to the firm also inflates in increasing magnitude. Javidan’s (1998) competencies hierarchy is a relatively simple and generic framework used mainly to relate a firm’s core competencies to building blocks like resources, capabilities, and competencies. The framework is not especially designed for identification of core competencies by itself. Instead, it is used to show the linkages between the building blocks and the firm’s strategic hierarchy comprising functional strategy, business strategy, corporate strategy, and mission statement. Nevertheless, the concept of competencies hierarchy, which is built upon resource-based view and theory (Barney, 1991; Grant, 1991; Peteraf, 1993; Wernerfelt, 1984), does provide a useful reference for an evaluation framework to access the core competencies of 3PL providers. The issues identified in X’s case presented in this article help define the dimensions of the array and supply the individual cell of the framework with ingredients. As X’s case reveals, quantity and quality of resources committed by the 3PL providers, capabilities to exploit the resources and directly control the outsourcing operations, and competencies in integrating and coordinating the logistics functions for users are critical determinants of success in maintaining the logistics outsourcing
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relationship. As such, some of the issues identified in the case study, such as the use of owned or leased assets, full-time to temporary employee ratio, staff turnover and stability, and the use of subcontractor and consultant, etc., can in fact be translated into generic criteria to evaluate and assess the core competencies of 3PL providers in general. Basically, a successful 3PL provider should process certain amount of resources and capabilities in order to attain core competencies in providing logistics services and to transfer cost benefits derived from economies of scale to users. These resources and capabilities include fully controlled assets such as warehouse and transport vehicle fleet, qualified personnel and well-trained staff, specialized handling equipment for service such as warehouse automated storage system, track-and-trace system, etc., and a large customer base with sufficient volume of transactions to enable cost sharing. Based on the previous discussion, this article proposes a supplementary 3PL provider core competencies evaluation framework as shown in Figure 4. The framework makes use of the findings of the case study to develop a list of generic evaluation items grouped under “resources,” “capabilities,” and “competencies”--the building blocks of core competencies--and use them to examine if the 3PL provider’s core competencies are present. The “competencies” building block in the proposed evaluation framework is akin to the “competency” building block in Javidan’s (1998) competencies hierarchy. While “competency” in Javidan’s (1998) hierarchy refers to a cross-functional integration and coordination of capabilities (p. 62), the “competencies” building block in the proposed evaluation framework refers to the availability of integrated processes that reflect the ability of the 3PL provider to make use of its resources and capabilities to develop best-of-class practices. The proposed framework is not meant to replace any existing 3PL provider evaluation models such as the ones proposed by Momme and Hvolby (2002) and Vaidyanathan (2005). In making logistics outsourcing decisions, there are many factors
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
Figure 4. A proposed supplementary framework for 3PL provider evaluation
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other than core competencies and ability to achieve economies of scale to consider. They include cost, quality, service, performance, strategic fit, compatibility of organization culture, and financial stability, among others (Beaumont et al., 2004; Vaidyanathan, 2005). Therefore, the proposed framework only attempts to supplement the evaluation process upon the completion of the normal assessment procedure at the RFP stage. In using the proposed supplementary framework to evaluate the available resources of a 3PL provider, it is recommended that staff qualification and training, staff turnover and stability, ratio of full-time to temporary staff, percentage of assets owned or leased, etc. should be examined. Similarly, to evaluate the service provider’s capabilities, it is necessary to consider whether the 3PL provider has IT capabilities developed in-house or by consultants, whether logistics is truly its core business or just the main source of revenue, and whether the 3PL provider is a recognized leader in the industry, etc. To evaluate the 3PL provider’s competencies, its ability to achieve economies of scale and to pass the benefits back to its users, the presence of quality assurance procedures, benchmarking, dedicated management team for client to coordinate activities, the capability to manage its subcontractors and use their competences as leverage, and the availability of flexible price model, etc. are some of the criteria. Presence of quality processes and dedicated management team enable the 3PL provider to deliver high level of service to the user’s customers. The use of subcontractors can provide the 3PL provider with greater flexibility in transport management and capacity planning. Nevertheless, effective use of subcontractors’ core competencies as a leverage to build up the 3PL’s own core competencies hinges on a good management of these subcontractors. Scale of operation and size of customer base usually affect a 3PL provider’s ability to help its user to cut cost through economies of scale. Although cost savings can be achieved through multiple offering of services to different users, order consolidation hence volume
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discount, and sharing of usage of resources and assets, users will not be benefited if the costs of usage of facilities are not shared across the 3PL provider’s customer base. Therefore, the availability of variable price model allowing the spreading of fixed costs across multiple users forms another evaluation criterion under the proposed framework. It is believed that a categorical item-by-item evaluation (i.e., checking against pre-determined parameters) using the proposed framework should help identify the 3PL provider as a resource owner or a resource provider, a specialist or a generalist, and a problem solver or only a process provider. This will enable the 3PL user firm to better understand what outsourcing relationship (i.e., tactical, strategic, or transformational) should be developed and what role the 3PL provider could play in the outsourced logistics activities (i.e., a standard 3PL provider, a service developer, a customer adaptor, or a customer developer). The categorization also helps determine the strengths and weaknesses of the 3PL provider in terms of its investment in resources and innovation, proven skills and knowledge, and ability to coordinate and integrate logistics processes. This will facilitate the 3PL user firm in checking whether the 3PL provider has the capabilities and competencies to actually meet its user’s logistics outsourcing needs, as well as the cumulative experience and scope for organizational learning that are necessary for forming vertical logistics alliance. Despite the fact that logistics is usually not the core business of 3PL user firms, the step-by-step approach proposed in the supplementary framework permits the recognition of the 3PL provider’s core competencies in a more systematic and objective manner. By applying the proposed evaluation framework at the RFP stage together with other evaluation processes to all the eligible 3PL providers, the outsourcing firm would be able to determine which provider could help the company achieve its logistics outsourcing goals and objectives and provide the best scope for long-term transformational IOS partnership through vertical logistics alliance.
A Supplementary Framework for Evaluation of Integrated Logistics Service Provider
conclusIon This article argues that “core competencies” and “economies of scale” are two critical factors, among others, that contribute to the success or failure of logistics outsourcing, which is paramount to modern-day global supply chain management. Core competencies of a 3PL provider build on the amount of resources it possesses, its capabilities to fully exploit these resources, and its competencies in utilizing the capabilities to provide efficient and cost effective integrated logistics services to users. The proposed supplementary evaluation framework presented in this article can assist logistics outsourcing firms to assess the core competencies of eligible 3PL providers at the RFP stage. The framework is meant to supplement the standard evaluation process instead of replacing any procedure. It provides a systematic method to determine if core competencies of a 3PL provider are present and whether they match with the firm’s logistics outsourcing needs. Through a categorical item-by-item evaluation process, the framework could assist outsourcing firms in determining what logistics outsourcing relationship should be formed and what role the 3PL provider could play in the partnership. The evaluation would not only help determine whether the 3PL provider could achieve the logistics outsourcing goals and objectives of its user but also reveal if there is scope for vertical logistics alliance that is critical to successful global supply chain management. As this study involves only one case with three 3PL providers to identify generic issues in logistics outsourcing, the findings might not be totally comprehensive although they have helped establish essential parameters for the proposed evaluation framework. To fully investigate the impact of core competencies and economies of scale on outsourcing success, more studies are needed to explore the current practices of 3PL providers in different industries and regions for comparison. This might be incorporated into annual global outsourcing surveys like the one
currently conducted by Georgia Institute of Technology, Cap Gemini LLC, SAP, and DHL (Langley, et al., 2006). The findings should be useful in improving or refining the proposed evaluation framework to extend its applicability to the practitioner community.
AcKnowledMent The authors of this article sincerely acknowledge the valuable comments and suggestions of the three anonymous reviewers, which have helped enhance the quality of the article over its earlier version.
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This work was previously published in International Journal of Information Systems and Supply Chain Management, Vol. 1, Issue 3, edited by J. Wang, pp. 49-69, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 2.23
Web Services and Service-Oriented Architectures Bruce J. Neubauer University of South Florida, USA
IntroductIon A review of the development of information systems can help in understanding the potential significance of Web services and service-oriented architecture (SOA) in the public sector. SOA involves the convergent design of information systems and organizational workflows at the level of services. The purpose of this chapter is to suggest a strategy for mapping the design of service-oriented architectures onto the complex patterns of governance including combinations of federalism, regionalism, and the outsourcing of functions from government agencies to nonprofit organizations. This involves the modeling of workflows and the identification of opportunities for the sharing of services among agencies and nonprofits. The structures of government agencies reflect political jurisdictions, legislative committee structures, areas of public policy, and geographical locations. Federalism creates situations in which multiple agencies (often at different levels of government) have similar responsibilities in
the same geographic areas. Metropolitan areas are complex mosaics of local governments and special districts. In addition, nonprofit organizations are also involved in strategic alliances with government agencies to provide services to citizens. The coordination of efforts among multiple organizations has been one of the major functions of public administrators acting through formal or informal networks of relationships within and across organizational boundaries. Web services and SOA can be used to help integrate the often costly and fragmented delivery of government services.
bAcKground Information systems were historically centralized. It is still common for departments within an organization to each have their own computer applications used to support accounting, payroll, or other specific responsibilities. Such applications and systems are sometimes referred to as “stovepipe” applications, suggesting the fact that
they stand alone. While such applications may well optimize specific functions, they may not be designed to support business process workflows that cut across departments. As a consequence, common business processes often require manually entering data multiple times and making adjustments for the different ways the same data are stored in multiple databases. Modern systems of applications are sometimes called enterprise systems or ERPs. The acronym ERP stands for enterprise resource planning. Examples of ERP solutions include SAP and Oracle applications. Such systems are designed at the scale of an entire organization. ERPs are modular in nature. An organization can purchase the modules it needs from the same vender and be assured that they are compatible with one another. The benefit of systems of computer applications designed at the enterprise level is an improved ability of the applications to support entire business processes. Many enterprise systems share one enterprise database. It should not be necessary to enter data into multiple stovepipe applications. The underlying database should provide top managers with one version of the truth rather than a collection of summaries gleaned from multiple databases within the organization. Electronic data interchange (EDI) is a similar technology for creating data communications between organizations. EDI solutions tend to be point-to-point connections between specific organizations for specific purposes. Government agencies can more easily coordinate their efforts and outsource responsibilities when they have modern information systems. ERP and EDI technologies are valuable and widely used. However, ERP solutions tend to be inflexible and EDI solutions may not support agile relationships among multiple organizations in networks of strategic alliances. Web services is a modern aspect of computer programming that facilitates the linking together of disparate legacy computer resources. SOA is an application
of design principles to both computer resources and organizational units that can facilitate the creation of agile relationships between departments within large organizations and among organizations working together. Early computer programmers worked in procedural programming languages such as FORTRAN and COBOL. The entire program usually ran on one machine and data were often managed by the software application itself rather than by the use of a separate database management system. Later, when programmers wrote procedural applications to run on networked computers, they sometimes used remote procedure calls to make use of subprocedures of code physically residing on another machine. The application would send a request across the network and wait for the subprocedure to run on the other machine and send data back to the application. This way of thinking evolved into object-oriented programming. A major benefit of this approach is reuse of the work required to create the subprocedure. Another benefit relates to loose coupling, meaning that the task of building a very large and complex application can be assigned to many individuals who can each build his or her own part of it without a detailed knowledge of what other programmers are doing (Kaye, 2003). As long as the interface between the part of the system and the rest of the system is agreed upon, how the part does what it does is not especially important to other programmers. To an object-oriented programmer, a use of a Web service is the invocation (calling) of structured code residing across a network on a Web server. To a business analyst, a Web service is an opportunity to reuse not just code but entire services provided by organizations. Service-oriented architecture involves the orchestration or choreography of multiple services. An orchestration involves one focal application calling one or more services as needed within the same organization. A choreography is a coordination of services between or among organizations. Having been
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asked to make the transition from procedural programming to object-oriented programming, computer programmers are now facing the challenge of working at the level of the design of services. The design of Web-based information systems can be very challenging (Andrew et al., 2006; Terrasse, Becker, & Savonnet, 2003). Modeling such systems in terms of services can help address that complexity while helping to bridge the traditional divide between organization design and the design of business processes. Some books on Web services and SOA are intended primarily for managers and executives (Barry, 2003; Bloomfield, Coombs, Knights, & Littler, 2000; Linthicum, 2004; Manes, 2003). Other sources not specifically written for managers are certainly approachable by people without technical backgrounds (Erl, 2004, 2005). Ties between workflow design and service-oriented architecture are addressed by Marks and Bell (2006) and Allen (2006). O’Toole (1997) has written that governments often seek to execute their efforts via structures of interagency collaboration, that the role of not-forprofit organizations is large and growing, and that the frequency and variety of links with for-profit
firms is impressive. There are many situations that present possibilities for managers to add or remove actors from the array of their activities involving networks with others (Brudney, O’Toole, & Rainey, 2000). With human oversight, Web services can be used to facilitate the assembly and reassembly of agile strategic alliances. Strategic alliances are held together by networks of human trust rather than by the compatibility of computer network protocols.
IMPleMentIng governMent web servIces And servIce-orIented ArchItectures Some Web services are relatively small units of functionality that can be accessed by software applications of various kinds. For example, currency exchange rates change frequently. It is inefficient to expect employees to find current rates of exchange each time the need for this information arises. This kind of activity can be automated and then either consumed or made available to others via a Web service (see Figure 1, where Activity B can
Figure 1. Simple Business Process Invoking a Web service
Activity A
Activity B
Activity C
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be to apply a currency conversion to an amount of money). By using Web services, it is entirely feasible for one organization (almost anywhere in the world) to continually update a database with currency exchange rates and expose that information as a service to the computer applications of other organizations using the Internet. The organization maintaining the data can expose a Web service by providing the necessary WSDL (Web Service Description Language) file at a Web address, and by publishing the availability of the service using UDDI (Universal Description, Discovery and Integration). In computer jargon, such a relationship between two entities is called client-server, meaning that the client entity always asks for something, and the server entity always acts in the role of a provider (please see “Key Terms” below for brief explanations of WSDL, UDDI, and other technical acronyms). What makes a service a Web service is its implementation across the Internet using XML (extensible markup language) and SOAP (Simple Object Access Protocol) standards. Humans may or may not be directly involved in the maintenance of the database containing exchange rates in the example above. When the request from a computer application comes in, the service hits the database and returns the needed information to the application across the Internet. The arrival of the request is not synchronized with the work required to keep the database updated. The work required to be done is not a factor of the number of requests received. Although it may be costly to continually update the database, there is little or no cost associated with making the information available to additional organizations. The major constraints on scaling up to serve large numbers of requests are bandwidth to and from the server providing the Web service, and the speed of the processor(s) on the server. Of course, if the Web server or the database fails or is taken off line for maintenance, the business processes of many organizations may be affected. One idea behind
UDDI is that the failure of a Web service could trigger an automated substitution of another Web service to assure the continuity-dependent processes. As a slightly more complex example, consider the business process of a city government responding to a request to renew a business license. Several activities may be required to make the decision regarding whether or not to renew the license. It may be necessary to verify the physical integrity of the building in which the business is housed. It may also be necessary to verify that property taxes have been paid and that there is no evidence that the business is being used for criminal purposes. In the past, each of these three activities may have been performed manually and in sequential order. As a result, it might have taken a month or more to issue each renewal. There is often no reason why multiple related activities cannot be initiated in parallel. For example, checking for taxes and crime reports can probably be automated and performed almost instantly. Within the organization, automated activities can be implemented using Web services or other means. If the city government has an intranet, it uses the same technologies as the Internet and it makes sense to automate selected services using Web services. As previously indicated, the design of Web services exposed only within one organization is called orchestration. The orchestration of Web services is a step toward the choreography of Web services involved in the business processes of multiple organizations. Figure 2 is a model of a business process that includes the parallel performance of activities and the outsourcing of two activities via Web services. Web services can be simple or very complex. An entire business process involving many activities and business rules can be nested inside a Web service and made available to others as a subprocess in a larger context. If real-time human intervention is required for the process triggered by the call to the Web service to be
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Figure 2. More complex business process invoking multiple Web services Activtiy A
Activtiy B
Activtiy C
Service
Activtiy D
Service
Activtiy E
completed, the calling process may have to wait until the secondary process is completed before going forward. Leymann, Roller, and Schmidt (2002) make a distinction between hierarchical patterns and peer-to-peer structures, noting that in many cases a mixture of hierarchical and peer-to-peer structures is used to realize complex multipartner business processes. In a hierarchical structure, the ultimate process transcends any of the organizations supporting its activities. The supporting organizations are each likely to have internal workflows independent of one another and choreographed at the level of the transcendent process. This arrangement can allow each organization to keep its secrets regarding how it performs its work internally and to protect contents of databases from unintended uses by others. In a peer-to-peer relationship between organizations (or between departments in one organization), each partner is both providing services and consuming services provided by others (see Figure 3). Each partner outsources what it is less well equipped to do and provides to its partners services it performs well.
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In a hierarchical architecture, each Web service supports a transcendent process, represented in Figure 4. A hierarchical architecture begs the question regarding who or what is responsible for the transcendent process. In the private sector, a transcendent process may be a supply chain that includes multiple companies such as a manufacturer, warehouse, shipper, and retailer. No one company owns the entire supply chain and yet all participate in it. Examples of transcendent processes in the public sector are not as obvious. Federalism tends to ensure that large processes are managed by state or national governments. Regional governance (as in a metropolitan area with many overlapping jurisdictions) provides opportunities for peer-to-peer service architectures and for hybrid architectures. State agencies can manage large processes, and city and county agencies (and special districts) may provide Web services to each other and in support of the larger processes managed by state governments. The same pattern exists at the next larger scale, meaning that there may be opportunities for state governments to share services as peers while also supporting larger processes managed at the na-
Web Services and Service-Oriented Architectures
Figure 3. Peer-to-peer relationship between organizations or departments exposing and consuming each other’s Web services
Figure 4. Hierarchal relationship between a transcendant process and Web services provided by organizations
tional level. The notion of transcendent processes may suggest an interpretation of the virtual state (Fountain, 2001). Relationships among organizations via Web services are negotiated by humans and should include service-level agreements that spell out the responsibilities of partners to one another. Agility does not suggest that working relationships among agencies and nonprofits should be brief encounters. Technical agility helps assume that technology will not impede substitution of
strategic partners or make changes in alliances difficult and costly. In a time of crisis, such as a natural disaster or terrorist event, the ability to quickly reassemble sets of strategic relationships among agencies may be very important (Harrald, 2006). In such circumstances, the possible automated substitution of Web services supported by UDDI may become valuable. The following is a list of suggestions and guidelines intended to help generalist managers steer their organizations toward acceptance and
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adoption of information technologies that include Web services and SOA. •
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Encourage employees to think about the organization in terms of sequences of activities that cut across functional areas (departments). Identify major business processes that the organization performs frequently, either to create value for citizens or for the organization’s own internal needs. Encourage IT professionals and other employees to begin thinking of activities and the computer software that support them as services. Encourage programmers and other IT employees to better understand what the organization does and the business processes that it performs, including business rules that affect the flow of work through activities within business processes. Help them realize that this is similar to ways they manage the flow of execution within computer applications. Try to create an organizational culture in which nontechnical employees do not blame IT professionals for their technical problems and in which IT professionals recognize and appreciate the knowledge and skills of end users. Create incentive systems that encourage employees to optimize processes rather than to maximize the interests of their own departments. Encourage programmers and other IT professionals to continue their educations by attending training in object-oriented analysis and design, modern programming languages, and emerging Web-based technologies. Accept the fact that there are limits to the ability of programmers to jump paradigms. Most large organizations need some programmers with legacy skills and others with more cutting-edge skills. Legacy special-
ists can help “wrap” older applications for inclusion in modern systems. Programmers who are experts in object-oriented programming are likely to be unable and unwilling to maintain legacy applications written in COBOL, for example. The most difficult aspects of implementing government Web services and service-oriented architectures are likely to be political and administrative issues. There are close relationships between the possession of information, political power, and administrative discretion. Employees are likely to resist change even if change does not threaten their employment. For budgetary reasons, political and administrative resistance to the introduction of Web services is likely to become greater at the level of the extension of workflows across organizational boundaries. Agencies may become smaller and more specialized as redundant activities are identified in multiple agencies. Government agencies have legal and ethical responsibilities for the protection of data about citizens. Administrators may rightly feel that their ability to assure proper handling of confidential data is compromised when data become accessible to other organizations via Web services. Other major issues involve relationships among agencies regarding federalism, relationships among agencies regarding regional governance, and relationships between sectors involving privatization and outsourcing. Almost any major e-government initiative today is likely to be implemented using Web services. Citizens and employees as users are not likely to see or realize that the resources of multiple departments and/or organizations are involved in making the system functional. The following are brief descriptions of several government projects in Europe and the United States, involving BEA and its partners, available on the Web in the fall of 2006. What is common to each of the following examples is the need to tap into multiple disparate IT systems in order to support either a busi-
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ness process or a complex visualization needed for monitoring or decision-making purposes. The National Institute for Agricultural Research (INRA) is a French public research body responsible for producing and distributing innovations relevant to agriculture, food, and the environment. INRA needed to transform its purchasing management system, rationalize its global ordering process, and analyze its expenses. INRA deployed an intranet purchasing program. As a result, INRA is able to more effectively manage its €100 million of annual purchases. Process automation has streamlined and enhanced many of INRA’s day-to-day processes. INRA has also benefited from a significant increase in productivity, largely due to the automation of complex tasks. Its managers now have a unified view of expenditures and purchasing decisions. Oslo is the capital of Norway and has a parliamentary model of government. Each city district has its own district administration, which administers multiple social and health services. In addition, there are approximately 40 departments and agencies with specific areas of responsibilities. In total, up to 55 operations offer more than 250 different services to the citizens of Oslo. The local government’s vision and strategic plan is to provide all relevant services online. More than 200 services were made available interactively in less than 1 year. Citizens can now apply online for a wide range of public-sector services, including building-construction permits, child care, and the payment of parking tickets. A United States Department of Agriculture (USDA) mainframe-based system known as STARS (Store Tracking and Redemption System) was the primary tool used by the agency to manage the Food Stamp Program. Technicians were unable to automate many key processes and the legacy system had become difficult to maintain. Systems integrator Ventera Corporation designed a new system named STARS II involving Web services and SOA. As indicated by the USDA’s
Privacy Impact Assessment Form available on the Web at the USDA site, the new system draws upon data from the treasury department and the Social Security Administration, and also from state agencies and third-party providers. The City of Chicago Public Housing Commission needed to link multiple legacy systems and provide a consistent view into project information for city executives, project managers, contractors, architects, and other personnel. The goal was to improve planning, expedite problem resolution, and reduce expenditures triggered by contract provisions regarding project deadlines missed. A company named Enterpulse designed and implemented a project management portal using a BEA portal. The resulting application enables improved project tracking and substantial cost savings by visually displaying data that enable administrators to prioritize project work efforts and avoid contract penalties.
Future trends Interest in the use of Web services in the public sector will increase as they become more widely used in corporations. The focus of governmental budgetary deliberations may shift toward business processes in continuing efforts to constrain costs and increase performance. Because Web services do not expose actual databases and other resources on legacy systems, it is possible to share services while also addressing concerns of agency administrators regarding the responsibilities of agencies for information security and the privacy of citizens and others. Over time, service orientation may gradually change our primary way of perceiving organizations. Information systems then become the mediator of what employees do, and Web services become a means by which activities and entire processes can be shared among organizations. Because different kinds of organizations have similar
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processes, distinctions between organizational sectors (government, nonprofit, and for profit) may become less apparent. Organizations may tend to become smaller and more specialized.
conclusIon The essential questions in designing processes based upon services are the following. How should activities be defined? When should an activity be made available to others and when should an activity be outsourced to others? Organizations (and departments within organizations) that are closest to the data should be responsible for capturing and managing that data. Organizations (and departments within organizations) whose employees have a specialized expertise should make that expertise available to others. These guidelines still leave a number of high-level design decisions open for discussion. The essential assertion of this chapter is that hierarchical SOA patterns can be used to support relationships among agencies at different levels of government (federalism) and that peerto-peer SOA patterns can be used to support relationships based upon regional governance and the outsourcing of functions from agencies to nonprofit organizations. In terms of hierarchical relationships, parent entities (i.e., states vis-à-vis local governments) may be more likely to share business processes with child entities, and child entities may be more likely to share access to data with parent entities using Web services. In other words, the states might share business processes with their political subdivisions as Web services. The federal government might share business services with state governments as Web services. Local governments might make data available to both state agencies and federal agencies using Web services. Also, the states might make data available to the federal government using the same technology. The sharing of Web services among local governments and special districts
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could become very complex given the variety of relationships involving overlapping jurisdictions and different policies. This chapter has proposed the application of modeling and design principles to the challenge of using service orientation to help government agencies and nonprofit organizations become more cost effective. Reports of implementation experiences with actual details of patterns of design including administrative, political, and technological implications are needed. In the design sciences, an evidence of maturity within a domain is the emergence of commonly observed patterns that become the building blocks for complex systems. SOA is a young and promising design science with the potential to significantly reshape the delivery of real services by government agencies and nonprofit organizations.
Future reseArch dIrectIons Opportunities for future research regarding SOA can be categorized into technical questions, political questions, and administrative questions. Regarding technical questions, because they depend upon Internet protocols, calls to Web services are relatively slow when compared to dedicated connectivity such as EDI. Attempts to address other technical challenges tend to lead to solutions that add additional overhead to making calls to Web services. Application performance may become an issue because the communications are based on SOAP, XML, and other Internet standards. Assuring that calls to Web services are chunky helps minimize the number of calls across networks. Nevertheless, Web applications may not scale well (i.e., serve increasing numbers of simultaneous users) because Web protocols and standards tend to be slow. Security, of course, is always important and a direction for future research. The encryption required to secure XML-based communications adds to the technical overhead that degrades the performance of Web services.
Web Services and Service-Oriented Architectures
Web services are usually stateless, meaning that the computer providing the service to other applications does not remember previous communications that may be part of the same transaction. That being the case, additional information regarding past events must often be included in subsequent calls to the same Web service. The management of transactions involving multiple Web services is especially problematic. Twophase and three-phase commit protocols that can be implemented when one organization owns or controls all parts of a distributed application cannot easily be implemented using Web services that are usually stateless. Web services are not likely to be widely reused unless they can easily be found. Automated discovery of available Web services may not satisfy the concerns of managers regarding security, privacy, and service-level agreements. The technical vision of distributed applications that can swap out Web services on the fly (perhaps to achieve load balancing) will not actually be fully implemented until managers of organizations can feel confident that they can safely delegate to software agents a variety of human concerns regarding who their partners are. Although these are essentially political and/or administrative concerns, any actual implementation of solutions will become technical concerns that may well call for technical research. Regarding political implications and the need for future research, Web services have the potential to substantially change the ways that organizations perform their work. The long-term implications involve the very design of organizations, including government agencies and nonprofits. While Web services are usually cast at the grain of activities rather than at the grain of the tasks of entire departments or missions of entire agencies, it is possible that Web services could lead to major changes in the ways agencies and nonprofits perform their work. The budgetary processes of governments often involve incremental adjustments from the previous fiscal year without regard for the possibility that technology may facilitate major changes
in workflows that might dramatically reduce costs. Even administrators who have positive attitudes toward the adoption of new information technologies may have political reasons to resist the adoption of distributed information systems that may make possible substantial reductions in necessary funding. SOA may also tend to compromise the ability of agency administrators to control information available to others. Research to better understand how agency and nonprofit administrators perceive Web services and SOA (as both threats and opportunities) might help assure that their organizations will not be unnecessarily penalized by the adoption of these technologies in budgetary and other political processes. It follows that a future research direction regarding administration is to better understand how Web services and SOA tend to affect existing business processes and relationships among organizations. There are opportunities to model and simulate knowledge-based workflows involving combinations of computer networks and human operators. Software like Arena and TechSmith’s Morae could be used to study not only the usability of computer-facilitated workflows, but also the identification of bottlenecks in selected workflow designs. As activities become broken out of the context of specific workflows and reused in multiple workflows, humans may lose their sense of understanding the meaning of their efforts in a larger context. This may tend to make work less satisfying. It may also lead to errors in judgment because the programmers who design distributed applications (including services provided by humans using technology) may not anticipate humans’ need to exercise judgment within meaningful contexts. A Web service involving human participation that one moment is used to select a good location for a new gas station and 10 minutes later is used to target a warhead may fail to provide human participants with necessary contexts required for the true exercise of judgment. Web services and SOA might be the next big step toward alienation
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of employees (life in the cubicles) and at worse a cruel exploitation of human minds harnessed to exercise judgments in the absence of knowing the consequences of related decisions. In light of globalization, Web services and SOA could be for knowledge work what outsourcing of production has been to industrial employment. The prospect that the mind might be reduced to a commodity is not attractive. Research regarding how employees regard their work experiences and their need for the context that provides meaning to their employment could inform the humanistic implementation of systems involving SOA. Research into the administrative implications of SOA can help assure that organizations and societies reap the benefits of this new technology while avoiding its use in ways that alienate employees and make inappropriate delegations of discretion to software systems.
reFerences Allen, P. (2006). Service orientation: Winning strategies and best practices. Cambridge: Cambridge University Press. Andrew, P., Conard, J., Woodgate, S., Flanders, J., Hatoun, G., Hilerio, I., et al. (2006). Presenting Windows Workflow Foundation, beta edition. Indianapolis, IN: SAMS. Barry, D. K. (2003). Web services and serviceoriented architectures. San Francisco: Morgan Kaufmann Publishers. Bloomfield, B. P., Coombs, R., Knights, D., & Littler, D. (Eds.). (2000). Information technology and organizations: Strategies, networks, and integration. New York: Oxford University Press. Brudney, J. L., O’Toole, L. J., Jr., & Rainey, H. G. (2000). Advancing public management: New developments in theory, methods, and practice. Washington, DC: Georgetown University Press.
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Erl, E. (2004). Service-oriented architecture: A field guide to integrating XML and Web services. Upper Saddle River, NJ: Prentice Hall. Erl, E. (2005). Service-oriented architecture (SOA): Concepts, technology, and design. Upper Saddle River, NJ: Prentice Hall. Fountain, J. E. (2001). Building the virtual state: Information technology and institutional change. Washington, DC: Brookings Institution Press. Harrald, J. R. (2006). Agility and discipline: Critical success factors for disaster response. The Annals of the American Academy of Political and Social Science, 614(1), 256-272. Kaye, D. (2003). Loosely coupled: The missing pieces of Web services. Marin County, CA: RDS Press. Leymann, F., Roller, D., & Schmidt, M.-T. (2002). Web services and business process management. IBM Systems Journal, 41(2), 198-211. Linthicum, D. S. (2004). Next generation application integration: From simple information to Web services. Boston: Addison-Wesley. Manes, A. T. (2003). Web services: A manager’s guide. Boston: Addison-Wesley. Marks, E. A., & Bell, M. (2006). Service-oriented architecture (SOA): A planning and implementation guide for business and technology. Hoboken, NJ: Wiley Press. O’Toole, L. J., Jr. (1997). Treating networks seriously: Practical and research-based agendas in public administration. Public Administration Review, 57(1), 45-52. Terrasse, M.-N., Becker, G., & Savonnet, M. (2003). Metamodeling architectures and interoperability of Web-enabled information systems. In A. Dahanayake & W. Gerhardt (Eds.), Web-enabled systems integration: Practices and challenges (pp. 1-18). Hershey, PA: Idea Group Publishing.
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Further reAdIng Agrawal, R., Bayardo, R., Jr., Gruhl, D., & Papadimitiour, S. (2002). Vinci: A service-oriented architecture for rapid development of Web applications. Computer Networks, 39(5), 523-539. Bieberstein, N., Sanjay, B., Fiammante, M., Jones, K., & Shah, R. (2006). Service-oriented architecture compass: Business value, planning and enterprise roadmap. Upper Saddle River, NJ: Pearson. Buschman, F., Meunier, R., Rohnert, H., & Sommerlad, M. (1996). Pattern-oriented software architecture: A system of patterns. New York: John Wiley & Sons. Cox, D. E., & Kreger, H. (2005). Management of the service-oriented-architecture life cycle. IBM Systems Journal, 44(4), 709-726. Datz, T. (2004, January 15). What you need to know about service-oriented architecture. CIO Magazine. Retrieved February 23, 2007, from http://www.cio.com/archive/011504/soa.html Debevoise, T. (2005). Business process management with a business rules approach: Implementing the service oriented architecture. New York: Business Knowledge Architects. Ferguson, D. F., & Stockton, M. L. (2005). Service-oriented architecture: Programming model and product architecture. IBM Systems Journal, 44(4), 753-780.
ibm.com/services/us/gbs/bus/pdf/g510-5060ibm-service-oriented-modeling-arch.pdf IBM Redbooks. (2004). Patterns: Serviceoriented architectures and Web services. White Plains, New York: IBM Corporation. Kragzig, D., Banke, K., & Slama, D. (2004). Enterprise SOA: Service-oriented architecture best practices. Upper Saddle River, NJ: Prentice Hall. Marks, E. A., & Bell, M. (2006). Service-oriented architecture (SOA): A planning and implementation guide for business and technology. Hoboken, NJ: Wiley Press. Marks, E. A., & Werrell, M. J. (2003). Executive’s guide to Web services (SOA, service-oriented architecture). Hoboken, NJ: Wiley Press. McGovern, J., Sims, O., & Jain, A. (2006). Enterprise service oriented architectures: Concepts, challenges, recommendations. New York: Springer. McKendrick, J. (2006, January 3). Ten examples of SOA at work, right now. ZD Net. Retrieved February 23, 2007, from http://blogs.zdnet.com/ service-oriented/?p=508 Nagaratnam, N., Nadalin, A., Hondo, M., McIntosh, M., & Austel, P. (2005). Business-driven application security: From modeling to managing secure applications. IBM Systems Journal, 44(4), 847-868.
Foster, I. (2005). Service-oriented science. Science, 308(6723), 814-817.
Newcomer, E., & Lomow, G. (2004). Understanding SOA with Web services. Reading, MA: Addison-Wesley Professional.
He, H. (2003, September 30). What is service-oriented architecture? O’Reilly XML.COM. Retrieved February 23, 2007, from http://webservices.xml. com/pub/a/ws/2003/09/30/soa.html
Papazoglou, M. P., & Georgakopoulos, D. (2003). Service-oriented computing. Communications of the ACM, 46(10), 25-28.
IBM Business Consulting Services. (2004). IBM service-oriented architecture and modeling. Retrieved February 23, 2007, from http://www-935.
Pulier, E., & Hugh, T. (2005). Understanding enterprise SOA. Greenwich: Manning Publications.
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Schmidt, M. T., Hutchison, B., Lambros, P., & Phippen, R. (2005). The enterprise service bus: Making service-oriented architecture real. IBM Systems Journal, 44(4), 781-798. Walend, D. (2006, April 4). Understanding service oriented architecture. Retrieved February 23, 2007, from http://today.java.net/pub/a/today/2006/04/04/understanding-service-orientedarchitecture.html Woods, D., & Mattern, T. (2006). Enterprise SOA: Designing IT for business innovation. Cambridge, MA: O’Reilly Media. Zimmermann, O., Krogdahl, P., & Gee, C. (2004). Elements of service-oriented analysis and design: An interdisciplinary modeling approach for SOA projects. Retrieved February 23, 2007, from http://www-128.ibm.com/developerworks/ webservices/library/ws-soad1/
Key terMs And deFInItIons Business Process: A business process is a sequence of purposeful activities frequently performed within an organization or by multiple organizations in a coordinated way. It creates value for citizens or customers, or fulfills an internal need of an organization. Workflow designs are models of business processes. Electronic Data Interchange (EDI): EDI is a commercial way to create and use an electronic connection between two computers or networks geographically distant from one another and often owned by different organizations. These connections can be secure and may be relatively costly and inflexible as compared to solutions based upon Web services. Extensible Markup Language (XML): XML is a way to mark up text-based content into a structure that can be interpreted by a computer application that has the schema necessary for interpretation.
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Object-Oriented Programming: Most modern computer programming languages are object oriented, meaning that conceptually the programming code consists of units (objects) that include both a data structure and an ability to do things. Some kinds of objects correspond to things that exist in the real world, such as citizens. Web services are an extension of this modular way of structuring programming code and designing programs that are distributed across computer networks. Service-Oriented Architecture (SOA): An SOA is a design by which multiple services are called in sequence or in parallel so as to implement the activities that compose a business process. Simple Object Access Protocol (SOAP): SOAP refers to an XML protocol used to provide a container in code for communications with Web services. The expression “SOAP envelope” is often used to describe the function of this technology. Strategic Alliance: A strategic alliance is a working association between two or more organizations, such as between a government agency and a nonprofit organization. Universal Description, Discovery and Integration (UDDI): A UDDI is a Web-based directory that lets organizations publish the availability of Web services they provide that are available to be used by software applications used by other organizations. UDDI is often compared to a telephone book or yellow pages. Web Service: A Web service is a service made available within an organization or between organizations at the level of computers connected by in intranet or across the Internet using specialized standards including WSDL, SOAP, and UDDI. Web Service Description Language (WSDL): A WSDL is a file on a Web server that is associated with a Web service that contains information about how a software application can
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talk to the Web service and what services the Web service is prepared to provide. WSDL files are intended to be read by computers. Because they are text files, they can be opened and read with Microsoft Notepad and other ASCII editors.
This work was previously published in Handbook of Research on Public Information Technology, edited by G. Garson and M. Khosrow-Pour, pp. 531-543, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 2.24
Is the Business Model Broken?
A Model of the Difference Between Pay-Now and Pay-Later Contracts in IT Outsourcing Eric Walden Texas Tech University, USA Param Vir Singh University of Washington, USA
AbstrAct This chapter seeks to evaluate the dominant IT outsourcing contracts model (pay-later) as compared to an alternative model (pay-now) in light of changing economic conditions. We integrate practitioner observations in the spirit of mathematical transaction cost problems to develop a conceptual economic model to compare these two types of contracts. We uncover three very important facts which suggest that pay-now contracts are always at least as good as pay-later contracts, and paynow contracts are better than pay-later contracts when economy is volatile. These findings provide a rich insight into the problem of failing IT outsourcing contracts since the prevailing poor state of economy. We further discuss the implications
of our findings and suggest that simply shifting the contract from a pay-later to a pay-now will fix the IT outsourcing business model.
IntroductIon In a recent Fortune magazine article, one of the interviewees, William Nygen of Oakmark funds, comments on outsourcer EDS’s business model. He brings up the possibility that “the business model is worse than we thought it was” (Loomis, 2003, p. 74). This chapter is an investigation of the business model not just of EDS, but of information technology (IT) outsourcers across the board. For a decade or more outsourcing has been hailed as the panacea for IT problems (Lacity
& Hirschheim, 1993). Some industry observers go so far as to claim that outsourcing is the payoff from IT (Kirkpatrick, 2002). However, the analysis provided in this work shows that there are fundamental problems with the traditional IT outsourcing arrangement. In short, the business model is broken. Fortuitously, the analysis also suggests an easy way to fix the problem. This work shows that the back-end loading of IT contracts results in misalignment between clients and vendors. This misalignment results in transactions, which should take place, failing to transpire, resulting in losses to both client and vendor. The findings presented here help explain why more than half of IT outsourcing contracts must be renegotiated (Caldwell, 1997; Lacity & Willcocks, 2001). The model also suggests that simply moving from a back loaded to a front loaded contract will fix the business model. The rest of the chapter is organized as follows. In the next section we briefly review the relevant literature on IT outsourcing. Following that, we present two models of how to structure an IT outsourcing contract and show how they result in different levels of value. We then derive three propositions for IT outsourcing based on these two models. Finally, we conclude with a discussion of the implications of this work and directions for future research.
lIterAture revIew Our background literature is a combination of practitioner observations and economic modeling. From the practitioner side we find three stylized facts. First, IT outsourcing contracts are typically back-loaded, with the vendor offering discounts early in the contract and receiving profits in the later periods of the contract. Second, a majority of IT outsourcing contracts have to be renegotiated before conclusion. Lastly, the cost for the baseline services is very close to the vendor’s
cost, but additional services command considerable margins. IT outsourcing contracts, and here we are speaking of the total outsourcing deals, usually begin with the vendor purchasing the assets of the client and hiring all of the client’s employees. Frequently, the vendor will overpay for the assets and in some cases offer loans to the client (Lacity, Willcocks, & Feeny, 1995). In fact, in a study of the top reasons for outsourcing, The Outsourcing Institute (1998) found that number ten was the cash infusion offered from vendor to client. However, like any pay-later deal, the bill eventually comes due and the vendor recaps the initial capital outlay by charging more in later periods. Interestingly, practitioner research indicates that more than half — 53% to be exact — of outsourcing contracts are renegotiated before running their full term (James, 2000). For example, less than two years after signing an IT outsourcing agreement with Computer Sciences Corp., health maintenance organization Oxford Health Plans Inc. canceled the deal (Rosencrance, 2002). Halifax bank of Scotland abruptly ended a 10-year contract with IBM after only two years (Arminas, 2002). Mony Insurance of New York canceled a $210 million contract with Computer Sciences Corp. less than half way through it (Caldwell, 1997). Chase Manhattan Bank paid $15 million to terminate its contract with Fiserv, and Zale Corporation terminated a 10-year contract with ISSC after only 5 years (Lacity & Willcocks, 2001). Why must so many contracts be renegotiated? One standard complaint is that the contract performs well for some time and then the costs of add-ons and additional services begin to overwhelm the client (Barthelemy, 2001). Even academic research shows that lack of flexibility, as defined by the cost of reacting to changes, is the prime source of contract failure in IT outsourcing (Lacity et al., 1995).
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The vendor essentially covers all of the transition costs up front, then to make up profit in later periods, charges a great deal for additional services. This frequently leads to contract failure. For example, in August of 2002, EDS reassured investors that earnings guidance was correct. Then in September, they revised guidance down by 80% (Loomis, 2003). The claimed reason for this miscalculation was that the bulk of profits were made from discretionary spending on additional services, which have much higher margins than baseline spending, and that discretionary spending failed to appear at the end of the quarter. Essentially, EDS’s (and most other vendors’) profit comes not from the contracted services, but from additional add-on services, which are overpriced in order to allow the vendor to recoup the transition costs. This discussion of practitioner observations suggests that problems in the original contract lead to outsourcing failures later in the relationship. Specifically, there are significant transition costs involved in moving control of IT services from the client to the vendor. The parties are faced with a decision on how to pay for these costs and usually decide to have the vendor pay for them. However, the vendor must recoup these costs in order to make a profit. This is accomplished by charging high margins for optional add-on services. Early in the relationship, when the client’s needs are very close to the baseline, the costs are well below what it costs the client to achieve internally and the bulk of the value from the relationship goes to the client. However, as the relationship develops and the client’s needs expand beyond the baseline services, more and more high margin add-ons are needed and the majority of the value then goes to the vendor. While the timing of payments is not a problem, it does create an imbalance in the relationship that results in loss to both client and vendor. To these stylized facts we add economic modeling. There is a class of economic problems
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including incomplete contract theory (Bakos & Brynjolfsson, 1993; Grossman & Hart, 1986; Hart & Moore, 1988), agency theory (Arrow, 1985; Eisenhardt, 1989) and double marginalization (Spengler, 1950; Tirole, 1990) that deals with failures of dyads. The goal of a dyad should be to maximize joint surplus first, then decide how to divide that surplus. However, problems arise because each economic agent maximizes, not the joint surplus, but the individual surplus. These can be classed as transaction cost problems. We model these practitioner observations in the spirit of mathematical transaction cost problems. We show that the traditional back-loaded outsourcing model results in significant transaction cost problems, when the demand for IT services is elastic. This elasticity issue is very important, because it explains why this problem has not been detected earlier. For the past decade or more, the demand for IT services has been very inelastic. IT has been a must-have and has been perceived as the driver of innovation. However, since the dotcom crash in 2000 and the slow economy of 2001 and beyond, IT expenditures have been more closely scrutinized. Thus, the expected discretionary spending does not occur and the model shows its weakness.
Model Practitioner observations suggests that IT outsourcing contracts can be broadly classified as pay-now or pay-later contracts based on the way transactions are conducted through the life of the contract. A pay-now contract is defined as an arrangement between the client and the vendor in which the client pays the vendor a lump-sum amount at contract inception and then all the IT needs of the client are provided at vendor’s marginal cost. A pay-later contract is defined as an arrangement between the client and the vendor in which the vendor pays the client a lump-sum
Is the Business Model Broken?
amount at contract inception (usually to cover transition costs) and then all the IT needs of the client are provided at client’s marginal cost. Practitioner research suggests that most of the contracts in practice today are pay-later contracts where the vendor initially buys the assets of the client and later charges him a higher price for service demanded. We develop a two period model to analyze the value of pay-now contract over pay-later contract and the effect of changes in economy over these contracts. We analyze this by deriving the lost joint surplus which could have occurred if a pay-now contract were signed over a pay-later contract. This lost surplus is called dead weight loss. Dead weight loss is the value of the transactions that are worth more to the client than they cost to the vendor, but that do not get executed because the contract price is too high.
AssuMPtIons We describe a two period game with two risk neutral firms — a client and a vendor. The firms wish to formalize an agreement in which the vendor supplies IT services to the client. In order to keep the model simple, we characterize IT outsourcing services as being described only by a single service. Clearly, in a real outsourcing arrangement, quantity would be a vector of various services, but the model is not significantly enhanced by considering multiple services. The client has a random demand curve depending upon a variety of exogenous factors. In the interest of parsimony we characterize this demand curve as D(q) = bd + mdq, where bd is distributed uniformly over the interval [bds,bdf]. Thus, the demand curve is linear and demand shocks shift the curve, without changing the slope. The vendor’s cost curve is given by Cv(q) = bv + mvq and the client’s by Cc(q) = bc + mcq. We assume bv < bc and mv < mc. Thus, the vendor
has lower cost and greater economies of scale at all positive values of quantity. Note that we have assumed the marginal cost curves to be linear functions of quantity q but in reality they may be better depicted by quadratic curves. However, using quadratic curves makes the calculations cumbersome without significantly enhancing our model.
Period one In period one, client and vendor negotiate for signing a pay-now or pay-later contract. If they sign the pay-later contract then vendor makes a lump-sum payment to the client in period 1, and the services demanded by client are provided at client’s marginal cost. If, instead, they sign a paynow contract the client makes a lump-sum to the vendor in period 1, and the services demanded are provided at vendor’s marginal cost. We further assume no discount rate as it does not enhance the meaning of the model or change its outcomes. The exact size of the lump-sum distribution depends upon the model of bargaining used. In a one-to-one bargaining situation, the Nash solution would be for firms to set a lump-sum that splits the joint surplus equally (Grossman & Hart, 1986). A competitive bargaining model would suggest that the share of the lump-sum given to the vendor would be infinitesimally less than the minimum size of a side payment the second best competitor could accept and still make a profit (Snir & Hitt, 2001). A variety of other bargaining mechanisms are possible. However, the nature of the bargaining and the size of the lump-sum distribution are not important to our outcomes and hence we do not delve into the question of how the bargaining proceeds. While the bargaining method is important to how the joint surplus is divided, it does not play a role in our model, which examines the size of the joint surplus. Thus, we leave bargaining considerations for future research and other scholars.
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Note that this scenario is a simplified explacAlculAtIng the exPected nation of pay-now and pay-later contracts but deAd loss Is the weIght Business Model Broken? 349 captures their essence. In actuality, in pay-later contracts, the services are provided at a higher Ideally, any contractual The exact size of the lump-sum distribution depends upon the modelarrangement of bargainingshould aim price than used. the price in a pay-now contract. This thewould joint be surplus (Williamson, In a one-to-one bargaining situation, at themaximizing Nash solution for firms higher price can be anything, but for keeping 1985). Joint surplus is the combined to set a lump-sum that splits the joint surplus equally (Grossman & Hart, 1986).profit made calculations we define these prices as would clifrom the arrangement bythe thelump-sum client and the vendor. A simple competitive bargaining model suggest that the share of ent’s marginal cost and vendor’s marginal cost, Though the client receives a given to the vendor would be infinitesimally less than the minimum size number of a sideof benefits respectively. like economic in IT, payment the second best competitor could accept and stillgains, make expertise a profit (Snir & and more To summarize, in period one of theother parties to Hitt, 2001). A variety bargaining mechanisms are possible. However, concentration on core-capabilities, research sugthe contract type — pay-now thedecide natureonofcontract the bargaining and the size of thethat lump-sum aremost not important gests economicdistribution benefits are the important our outcomes and hence we do not delve into thefirm question of how or pay-later — and to negotiated the appropriate reason for any client to consider outsourcing the bargaining proceeds. While the bargaining method is important to how the side payment. IT (Loh & Venkatraman, 1992; McFarlan & Nolan, joint surplus is divided, it does not play a role in Smith, our model, which examines1998). the Benefits 1995; Mitra, & Narsimhan, size of the joint surplus. Thus, we leave bargaining considerations for future Period two for the vendor are mainly economic (Chaudhary, research and other scholars. Nam, & Rao, 1995). Since our model discusses the scenario is a simplified of pay-now pay-later In period Note two, bthat is this realized, determining the explanation pay-later contract and theand pay-now contract from d contracts but The captures essence. in pay-later the client’s demand curve. clienttheir chooses the In actuality, an economic viewpoint,contracts, we will consider joint services are provided at a higher price than the price in a pay-now contract. This quantity of IT services to purchase based on the surplus in terms of economic benefits obtained higher canvendor be anything, but for keeping simple define these contract price andprice pays the the appropriate bycalculations the vendor and the we client. prices as client’s marginal cost and vendor’s marginal cost, respectively. price. The model can be illustrated graphically To compare a pay-now contract with a payTo1.summarize, in period one the parties tolater the contract on contract typesurplus in as in Figure contractdecide we compare the joint — pay-now or pay-later — and negotiated the appropriate side payment. Quantity demanded by the client depends upon two cases. As shown in the figure, the difference the type of contract signed as well as the demand between the joint surplus in pay-now and pay-later curve. As is shown in the figure the client pays contracts is the dead weight loss. Dead weight Period Two price C(later) for quantity Q(later) in the case of a loss incurred by signing a pay-later contract over pay-later contract whereas the client pays price a pay-now contract for a given demand curve is In period two,inbthe is case realized, determining the client’s demand curve. The client d Q(now) of a pay-now C(now) for quantity the area given by the shaded triangle in Figure 1. chooses the quantity of IT services to purchase based on the contract price and contract. Note that C(later) is more than C(now) and Because the intercept bd of the demand curve is pays the vendor the appropriate price. The model can be illustrated graphically Q(later) is less than Q(now). That is, in the case of the distributed uniformly, there are infinite numbers as in Figure 1. pay-later contract, client pays more per unit for of demand curves possible. For every demand fewer units as compared to a pay-now contract. curve there will be a different triangle. So the Figure 1. Comparison of pay-later pay-now contracts and pay-later contracts Figure 1. Comparison of pay-now and client's Mc => Pay-later
cost
client's demand
C(later)=P2
dead weight loss: Transactions worth more to the client than they cost to the vendor, but that do not get executed. vendor's Mc => Pay-now
∆bd (bdf + bds ) ∆bd (bdf + bds ) 1 − bc bv ∆bd − bv + bv 2 ∆bd bc 2 2 mv − md ∆bd (bdf + bds ) ∆bd (bdf + bds ) 1 − − bc 2 ∆bd − bv + bv bc ∆bd bc 2 2 mc − md 2 2 ∆bd (bdf + bds ) ∆bd (bdf + bds + bdf bds ) ∆bd (bdf + bds ) mc − mv bv − bc + − + bc bv ∆bd 3 2 2 (mc − md )(mv − md ) 2 2 m − m ∆bd (bdf + bds + bdf bds ) 2 ∆bd (bdf + bds ) c v − b c ∆bd − bc − (m − m )2 3 2 d c
=
1 1 2 ∆bd
(1)
where Δbd = bdf – bds expected dead weight loss is calculated over the entire possible set of demand curves. Expected dead weight loss incurred by signing a pay-later contract over a pay-now contract can be calculated as shown in Box 1.
mc > mv > 0
We now evaluate (2) based on the assumptions of the model. We find that: E(DWn-l) > 0.
evAluAtIng the exPected deAd weIght loss Incurred by sIgnIng A PAy-lAter contrAct over A PAy-now contrAct
(4)
(5)
This means that the expected dead weight loss of signing a pay-now contract over a paylater contract is positive. That is, the difference between the expected joint surplus of a pay-now contract and a pay-later contract is positive. This is expressed in Proposition 1.
The first question we address is to determine if the assumptions given above allow us to unambiguously determine which type of contract performs better. To evaluate (1) for finding the sign of E(DWn-l) we need to reiterate the underlying assumptions of the model. bd > bc > bv > 0,
(2)
md < 0, and
(3)
Proposition 1: The expected joint surplus achieved in a pay-now contract is greater than the expected joint surplus achieved in a pay-later contract. The pay-now contract enables additional transactions to occurs, which would not have occurred if it were a pay-later contract. In the real world, this would mean that in the case of a pay-now contract, the client would be able to obtain more
801
Is the Business Model Broken?
services at a lower per-unit cost compared to what it receives in a pay-later contract. Thus, we see that the fundamental problem with the pay-later contract is not the timing of the payment, but rather the way the pricing must be structured to allow the vendor to recoup the upfront costs of transition.
evAluAtIng the IMPAct oF chAnges In deMAnd elAstIcIty Services demanded by the client depend upon the IT demand curve of the client. During the long running, technology driven bull market of the 1990’s, firms tended to have very inelastic demand curves. That is to say, that the quantity of IT demanded was not very sensitive to the price of IT. However, after the dotcom crash and subsequent cool economy, firms became more sensitive to the price of IT. Again, citing the Fortune article on EDS, we find that EDS is currently suffering because clients are curbing discretionary spending more than they had in the past. Thus, it is interesting to examine the effect of changes in demand elasticity on the difference
in joint surplus between the traditional pay-later contract and the pay-now contract. The elasticity of demand can be measured by dq/dp × p/q. For a given price and quantity, dq/ dp is measured by the slope, md, of the demand curve. If demand becomes more elastic in response to environmental conditions, the effect of the change in elasticity is proportional to the effect of a change in md. To determine the effect of changes in demand elasticity we differentiate (1) with respect to md which yields the results shown in Box 2. This is an important implication of the model. It explains the fact that dead weight loss incurred by signing a pay-later contract over a pay-now contract increases as the client’s demand for IT services becomes more elastic. IT demand over the last decade has been very inelastic and hence the dead weight loss was negligible. Thus, it did not matter if the client and vendor signed a pay-now contract or a pay-later contract. On the contrary, since the dotcom crash and the poor state of the economy, the demand for IT has become more elastic, and, hence the dead weight loss problem has surfaced. This logic yields our Proposition 2.
From this, it can be shown that: ∂E ( DWl − n ) >0. ∂md
802
(7)
Is the Business Model Broken?
Proposition 2: As the client’s demand for IT services becomes more elastic, the pay-later contract becomes worse as compared to a paynow contract.
evAluAtIng the IMPAct oF deMAnd shIFts IT has a fluid environment where changes occur each day. IT is considered essential for strategic advantage and receives a major share of financial resources when the economy is strong but is first to face budget cuts when economy is poor. The demand for IT tends to vary over time. Firms in different industries and firms outsourcing different facets of their IT services are likely to face very different demand variability. Therefore, it is interesting to ask how the variability of demand influences the value of contractual choice. We measure the realized level of demand as a function of the intercept, bdf, of the demand curve. The greater the intercept the greater the increase in demand for IT services at all prices. To determine the effects of changes in the variability of demand we note that the variance of the uniform distribution is 1/12*(bdf – bds)2. By increasing the distance between the endpoints, we increase the possible range of demand realizations and the variance of demand. Thus, to examine the impact of demand variability on the value of contractual
choice we differentiate (1) with respect to bdf. This yields the results shown in Box 3. This gives us our third proposition. Proposition 3: As the variance of demand for IT services increases, the pay-later contract becomes worse as compared to a pay-now contract. This shows us that the greater the variance in demand the larger the difference between the pay-now and pay-later contracts. In other words, as the potential change in IT demand increases, the dead weight loss associated with the pay-later contract increases. This occurs because the relative difference between vendor and client capabilities increases as quantity increases. The vendor is more flexible and more able to respond to changing IT needs. Thus, if IT needs change dramatically, the loss associated with failing to take advantage of the vendor’s advantage increases. This is particularly problematic for rapidly growing, or rapidly technologizing firms.
dIscussIon The work presented here compared pay-now and pay-later contracts with an aim to figure out if one has any advantage over the other. The model compares the two types of contracts by evaluating (1) dead weight loss incurred by choosing
Box 3. 2 mc − mv ) ( ∂E ( DWn −l ) 1 bc mc − mv (2bdf + bds ) + = 2 2 (m − m ) (m − m ) . ∂bdf 2 2 (mc − md ) 3 d v d c
(8)
Given the assumptions it can be shown that: ∂E ( DWl − n ) >0. ∂bdf
(9)
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Is the Business Model Broken?
Table 1. Implications of contractual choice Summary
Logic
Proposition 1
A pay-now contract generates greater surplus than a paylater contract.
In order to recoup the upfront payment to the client, the vendor must charge a higher per unit price for IT services. This higher per unit charge means that some transactions in which the vendor’s cost to perform the duties is less than the client’s value of having the duties performed will NOT take place.
Proposition 2
The greater the client’s elasticity of demand, the more pronounced the difference between the pay-now and pay-later contracts
If a client is not sensitive to the cost of IT then the client will demand transactions even when the price is higher.
Proposition 3
The greater the variability of demand the more pronounced the difference between the pay-now and pay-later contract
Because the vendor has economies of scale over the client, the larger the quantity of IT services the more cost advantage the vendor has. Thus, more transactions meet the criteria of being between the vendor’s cost and the client’s valuation.
one contract over other, (2) impact of changes in demand elasticity, and (3) impact of demand shifts. The general propositions are summarized in Table 1. Our first proposition is that if a pay-later contract is selected over a pay-now contract, dead weight loss is incurred. If a pay-later contract is selected over a pay-now contract, fewer transactions take place, which leads to less joint surplus. This point is extremely important here because the aim of any outsourcing arrangement is to increase the joint surplus. This implies that signing a pay-now contract is beneficial for both the client and the vendor. However, very few large-scale outsourcing projects will actually save money in the first year because of significant transitions costs. The employees of the client must be shifted to the vendor, and these employees need to be retrained in the procedures of the vendor. Similarly, the vendor’s employees must be trained in the systems and processes of the client. Leases for both software and hardware must be transferred, and perhaps renegotiated. Significant legal and managerial fees in structuring the contract must be paid. Finally, some learning curve and adjustment to the new procedures must be overcome. All of this creates great expense that overshadows the benefits to outsourcing for the first year.
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Convincing clients to adopt a pay-now contract may be very difficult. In general, clients outsource to reduce costs and they expect clear cost savings immediately. Rather than offer a contract that increases IT costs, for instance, 10% in the first year and then saves 20% per year, vendors offer a contract that saves 30% the first year, then 20% the second year, then breaks even in the third year and actually costs in the forth year. This sort of contract is certainly appealing for a variety of psychological reasons, particularly if the people responsible for the outsourcing arrangement expect to be in different positions in a few years. Sadly, it comes at significant economic cost. Our second and third propositions are driven by the fluid nature of the IT environment, the changes in the state of economy over the past few years, and their effect on the attitude of firms towards spending on IT. To understand the difference between pay-now and pay-later contracts in regard to a changing economy, it is important to first understand how changes in the economy affect the attitude of a firm towards IT. Changes in economy combined with the fluid environment of IT affect the attitude of firms towards spending on IT in two ways: (1) overall spending on IT and (2) sensitivity towards spending on IT. Throughout the 1990s, the economy was growing and firms were spending on resources of strategic advantage. IT
Is the Business Model Broken?
was considered extremely important for strategic advantage, so IT gained a tremendous share of capital budgets during the past decade. During that phase, demand of IT was very inelastic. That is, firms wanted to gain all the IT resources available and at the same time remained insensitive to price. For example, to gain strategic advantage brick and mortar firms wanted to become click and mortar firms and spent millions of dollars to do so. Nonetheless, since the dotcom burst in 2000 and the prevailing poor state of the economy since 2001, firms’ overall attitude has changed from growth to survival. This shift in attitude has hit IT expenditures particularly hard. IT expenditures have been more closely scrutinized, and hence, the overall spending on IT has declined and the sensitivity towards spending on IT has increased. Now firms want to get only those IT resources or services that are essential. Consequently, spending on IT has declined considerably and now firms are less willing to devote large amounts of capital to IT than they were in the 1990s. Proposition two states that as the demand curve shifts from inelastic to elastic behavior, the paylater contract becomes worse as compared to a pay-now contract. This point is of consequence, because during the last couple of years the demand of IT has shifted from inelastic to elastic, but a shift in contracts has not yet been observed. As long as the client is insensitive to price, pay-later contracts work as good as pay-now, but as soon as the sensitivity towards price changes, the joint surplus in pay-later contract lags the joint surplus in pay-now contract. Earlier, clients considered IT as a must have and were not very considerate about the price, but now they are very considerate about the price. Slowing down of the economy has dried up the funds for IT spending. Therefore,
fewer and fewer transactions are taking place and hence, less and less joint surplus is being achieved. This means lesser individual surplus for both client and vendor. As a result, arrangements that follow pay-later contracts for IT outsourcing do not seem to be a profitable strategy anymore to both the parties. This is possibly one of the explanations as to why outsourcing contracts are failing with alarming regularity. This is depicted in Table 2. Proposition three states that as the variance of demand for IT increases, the pay-later contract becomes worse as compared to a pay-now contract. It should be noted that this phenomenon does not occur if the demand of IT is perfectly inelastic. If the demand of IT is perfectly inelastic then increase in demand has the same effect on a pay-later contract as on a pay-now contract. One of the chief forces that would tend to increase the variance of IT demand is the rate of technology innovation. This finding is particularly interesting for IS scholars, because it suggests that IT outsourcing contractual choice is sensitive to the rate of technological change. This is also an important finding for practitioners for two reasons. First, as the rate of technological advancement seems to increase over time, it suggests that the value of making the correct contractual choice will increase over time. Second, one of the often cited reasons for outsourcing is to be able to make changes quickly (Lacity et al., 1995). This implies that those firms that are outsourcing are specifically the firms with greater demand variability. Hence, the firms that are exploring outsourcing options are those that suffer the most from improper contractual choice. Therefore, special effort should be made in contract selection.
Table 2. How changes in elasticity interact with contractual choice Inelastic Demand
Elastic Demand
Pay-later
No Problem
BIG Problem
Pay-now
No Problem
Small Problem
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Changes in the IT environment and the state of the overall economy suggest the necessity of shifting IT outsourcing contracts from a paylater to pay-now. As shown by the model, under the prevailing state of the economy, a pay-now contract is better than a pay-later contract for both the vendor and the client. We showed that by just changing the type of contract from a front loaded one to a back loaded one, additional joint surplus can be generated. Such a shift in the type of contracts requires a shift in the thinking of the management, but the benefits are worth it.
reFerences Arminas, D. (2002). Bringing it all back home. Supply Management, 7(12), 16. Arrow, K. J. (1985). The economics of agency. In J. W. Pratt & R. J. Zeckhause (Eds.), Principals and agents: The structure of business (pp. 37-55). Boston: Harvard Business School Press. Bakos, J. Y., & Brynjolfsson, E. (1993). Information technology, incentives, and the optimal number of suppliers. Journal of Management Information Systems, 10(2), 37-53. Barthelemy, J. (2001). The hidden costs of IT outsourcing. MIT Sloan Management Review, 27(3), 60-69. Caldwell, B. (1997, September 29). Outsourcing backlash. InformationWeek, 650, 14-16. Chaudhary, A., Nam, K., & Rao, R. (1995). Management of information systems outsourcing: A bidding perspective. Journal of Management Information Systems, 12(2), 131-159. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74.
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Grossman, S. J., & Hart, O. D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. The Journal of Political Economy, 94(4), 691-719. Hart, O., & Moore, J. (1988). Incomplete contracts and renegotiation. Econometrica, 56(4), 755-785. James, G. (2000, October 30). How companies court disaster in outsourcing deals. Computerworld, 34(44), 41. Kirkpatrick, D. (2002, December 27). Finally a productivity payoff from IT? Fortune.com. Retrieved May 30, 2006, from http://archives. cnn.com/2002/TECH/ptech/12/18/fortune.ff.it. productivity/index.html Lacity, M. C., & Hirschheim, R. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86. Lacity, M., & Willcocks, L. (2001). Global information technology outsourcing. New York: John Wiley & Sons. Lacity, M., Willcocks, L., & Feeny, D. (1995). IT outsourcing: Maximizing flexibility and control. Harvard Business Review, 73(3), 84-93. Loh, L., & Venkatraman, N. (1992). Determinants of information technology outsourcing: A cross-sectional analysis. Journal of Management Information Systems, 9(1), 7-24. Loomis, C. J. (2003, February 17). I own this problem. Fortune, 147(3), 72-76. McFarlan, F. W., & Nolan, R. L. (1995). How to manage an IT outsourcing alliance. Sloan Management Review, 36(2), 9-23. Outsourcing Institute, The. (2003, April 30). Executive survey: The Outsourcing Institute’s annual survey of outsourcing end users. Jericho, NY. Retrieved May 30, 2006, from http://www. outsourcing.com/content.asp?page=01b/articles/ intelligence/oi_top_ten_survey.html
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Rosencrance, L. (2002, May 13). Oxford health pulls plug on pact, will move IT in-house. Computer World, 36(20), 14.
Spengler, J. J. (1950). Vertical integrations and anti-trust policy. Journal of Political Economy, 58(2), 347-352.
Smith, M., Mitra, S., & Narsimhan, S. (1998). Information technology outsourcing: A study of pre-event firm characteristics. Journal of Management Information Systems, 15(2), 61-93.
Tirole, J. (1990). The theory of industrial organization. Cambridge, MA: MIT Press. Williamson, O. (1985). The economic institutions of capitalism. New York: Free Press.
Snir, E. M., & Hitt, L. M. (2001). Vendor screening in information technology contracting with a pilot project. Journal of Organizational Computing and Electronic Commerce, 14(1), 61-88.
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To summarize, in period one the parties to the contract decide on contract type — pay-now or pay-later — and negotiated the appropriate side payment.
Period Two
Is the Business Model Broken?
In period two, bd is realized, determining the client’s demand curve. The client chooses the quantity of IT services to purchase based on the contract price and pays the vendor the appropriate price. The model can be illustrated graphically APPendIx as in Figure 1.
Calculations for the Expected Surplus Benefits of Signing a Pay-Now Contract over a Pay-later contract Figure 1. Comparison of pay-now and pay-later contracts client's Mc => Pay-later dead weight loss: Transactions worth more to the client than they cost to the vendor, but that do not get executed.
Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.
Cc = b c + m c q
(1)
Vendor marginal cost curve: Cv = bv + mvq
(2)
Demand curve: D= bd + mdq
(3)
The expected surplus of signing a pay now contract over a pay later contract for a given demand curve is the area given by the shaded triangle above. There are infinite numbers of demand curves. For every demand curve there will be a different triangle. So the expected surplus benefit (difference in surplus of signing a pay now contract over a pay later contract) over the entire possible set of demand curves will be the sum of areas of all such triangles multiplied by their probabilities. In the Appendix figure, Area of triangle = (1/2) Base * Height = (1/2)(P2 – P1)(Q2 – Q1)
(4)
Q1 is quantity where demand curve and client cost curve intersect. Q1 =
bd − bc mc − md
Similarly, Q2 is the quantity where the demand curve and the vendor curve intersect.
808
(5)
Is the Business Model Broken?
Q2 =
bd − bv mv − md
(6)
P1 is the price given by the vendor curve corresponding to quantity Q1 P1 = bv + mv Q1 = bv + mv
bd − bc mc − md
(7)
P2 is the price given by the client curve corresponding to quantity Q1 P2 = bc + mc Q1 = bc + mc Area of triangle =
Area = Area =
(8)
1 (P2 − P1 )(Q2 − Q1 ) 2
(9)
bd − bc b − bc bd − bv b − bc 1 − bv − mv d − d bc + mc mc − md mc − md mv − md mc − md 2
bd − bc bd − bc − (mc − mv ) mc − md mc − md
1 (A − B + C − D ) 2
b − bv A = (bc − bv ) d mv − md
(10) (11) (12)
1 2 = (bc bd − bc bv − bv bd + bv ) m m − d v
(13)
b − bc 1 2 B = (bc − bv ) d = (bc bd − bc − bv bd + bv bc ) mc − md mc − md
(14)
2 mc − mv (bd − bd bv − bc bd + bc bv ) = (mc − md )(mv − md ) b − bc bd − bc mc − mv 2 b − bc ) D = (mc − mv ) d = 2 ( d mc − md mc − md (mc − md ) Expected surplus benefit over the entire range of possible is given by: b − bc bd − bv C = (mc − mv ) d mc − md mv − md
2 + bds2 + bdf bds ) mc − mv ) ( (m − m )2 (m − m ) 3 d v d c 2 bv − bc ) ( bv bc S4 = (bv − bc ) − (bv − bc ) = − − mv − md mc − md m m m m ( )( ) v d c d 2 df
mc − mv S5 = bc bv (mc − md )(mv − md ) m −m 2 c v b S6 = (m − m )2 c d c
(34)
(35)
(36)
(37)
To find out the sign of E(DWn-l) we have to follow these underlying assumptions of the model: b d > b c > bv > 0
(38)
md < 0
(39)
mc > mv > 0
(40)
Following the assumptions: S1 > 0
(41)
S2 = 0
(42)
S3 > 0
(43)
S4 > 0
(44)
S5 > 0
(45)
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Is the Business Model Broken?
S6 > 0
(46)
Putting these values in Equation 31 we get, E(DWl-n) > 0
(47)
Following Equations 31-37, we have: 2 2 2 (mc − mv ) 1 (bdf + bds ) mc − mv (bdf + bds + bdf bds ) bc + 2 2 (m − m ) (m − m ) (m − m ) 2 2 3 d d v d c c 2 m −m 2 (bv − bc ) mc − mv c v + b + + b b (mv − md )(mc − md ) (mc − md )(mv − md ) c v (m − m )2 c d c Differentiating Equation 8 wt md
Following the underlying assumptions of the model (Equations 38, 39, 40) we fid that: ∂E ( DWl − n ) >0 ∂md
(50)
Differentiating Equation 48wrtbdf 2 mc − mv ) ( ∂E ( DWl − n ) 1 bc mc − mv (2bdf + bds ) = + (m − m )2 (m − m ) ∂bdf 2 2 (mc − md )2 3 c d v d Following the underlying assumptions of the model (Equations 38, 39, 40) we fid that:
∂E ( DWl − n ) >0 ∂bdf
(51)
(52)
This work was previously published in Outsourcing Management Information Systems, edited byA. Schniederjans, D. Schniederjans, & M. Schniederjans, pp. 339-362, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Section III
Tools and Technologies
This section presents extensive coverage of the tools and technologies that both derive from and inform IT outsourcing. These chapters provide an in-depth analysis of the use and development of innumerable devices and tools, while also providing insight into new and upcoming technologies, theories, and instruments that will soon be commonplace. Within these rigorously researched chapters, readers are presented with examples of the tools that facilitate and support continued developments and advancements in outsourcing research. In addition, the successful implementation and resulting impact of these various tools and technologies are discussed within this collection of chapters.
815
Chapter 3.1
Innovative Technological Paradigms for Corporate Offshoring Tapasya Patki GGSIP University, India A. B. Patki Department of Information Technology, India
AbstrAct Internet technology has impelled us to develop faith in the modern practices of business, commerce, and trade. Offshoring has been viewed as a global phenomenon on the economic frontier. While new technologies need to be framed, stopgap arrangements in the form of transient solutions to upgrade the current systems are also desired. Newer regulations and multi-jurisdictional compliance have profound impacts on the growth of outsourcing projects. The development of new technological solutions must challenge the myth that legislation and statutory practices are the only possible mechanisms to counter the unscrupulous activities in the context of outsourcing. A change in the outlook toward such methodologies is essential to shed away the technological inertia and latency. This article opens up discussion issues in the perspective of hardware and software requirements for efficient offshoring. The aim is to achieve
higher precision, protection, and throughput by applying core-computing techniques to the existing practices of outsourcing.
IntroductIon The information and communications technology (ICT) revolution has triggered the economic development at collaborative and cooperative levels. Internet-based infrastructure provided impetus for outsourcing projects to hubs such as India, China, and the Philippines. Bednarzik (2005) indicates that due to its emerging nature, there is no universally accepted definition of offshoring. While the industry professionals use outsourcing and offshoring terms interchangeably, IEEE and ACM believe that when a U.S. company gives work to companies in other nations like India, it is outsourcing (and not offshoring). A general business expansion trend, including an outreach
Innovative Technological Paradigms for Corporate Offshoring
program, is to explore potentials of other nations for widening an organization’s horizons (Friedman, 2005). Considering this general view, offshoring, outsourcing, and subcontracting need to be distinguished. A report of the ACM Job Migration Taskforce (Aspray, Mayadas, & Vardim, 2005) looked at the issue from a global perspective, as compared to a country-centric one in the context of rapid globalization of IT and the migration of jobs resulting from outsourcing and offshoring. The report clearly defines the following two terms: • •
Outsourcing refers to having work for a company done by another organization. Offshoring refers to having this work done in another country, whether or not it is done by part of the same company.
This leads to a partially overlapping definition of outsourcing and offshoring. Transferring a part of the workload from a host location to another adjunct destination can broadly represent the meaning of these two terms. Predominantly, the host and the destination locations are in different countries. The authors explore the possibility of such situations from the previous perspective, that is, not adhering to a fixed definition. Such an approach is necessary for a global outlook, wherein the participation of developed and developing nations is at equal stake levels (Farrell, Kaka, & Sturze, 2005). Both subcontracting and
offshoring/outsourcing have impact on work force realignment. The fears, however, are disjoint. Subcontracting may result in a partial relocation of the workforce with ensured job security. Such a possibility is absent in offshoring/outsourcing. In this context, the theory of comparative advantage, propagated by the economics of offshoring cannot be applied to subcontracting. With the introduction of business models in the developing nations for managing the available workforce and the infrastructure, the ICT industry paved the way for the foundation of first generation outsourcing oriented corporate
816
models (FG-OOCM) for expanding commerce. The FG-OOCM has opened up various issues for outsourcing-based research, and a need for deploying technological solutions to offshoring activities is being felt. For example, consider a situation where Mexican, Indian, Chinese, and American people work together in an outsourcingbased system. In such cases, knowledge management is a challenge and a need for introducing technological solutions is felt. Although distinct units, rules, and documents of each participating organization can be considered as explicit knowledge, these do not make knowledge for the entire outsourcing system. Information and knowledge are interdependent, but information per-se contains no knowledge. Some of the issues of knowledge management in software engineering (Desouza, 2003) are applicable to outsourcing. In general, outsourcing system operations are performed by outside contractors, and the terms of understanding between the client and the contractor for outsourced services are defined based on distribution of responsibility, liability sharing, and performance monitoring. These issues require managing of electronic records and evidence, impose legal compliance requirements, and need to be viewed from the perspective of technology as opposed to that of mere administration.
Internet Technology Framework Outsourcing is a multistage phenomenon involving individual (usually management/technical positions), functional (knowledge and responsibility orientated), and process (flow of product or services) level activities (Greaver, 1998). Depending on the process requirements, outsourcing can be classified as tactical, strategic, and transformational (Brown & Wilson, 2005). The mindset of considering tactical outsourcing for reducing financial costs is assuming new dimensions to make business capabilities portable on a global basis. Detailed analysis of case studies in a research-based manner establishes the suc-
Innovative Technological Paradigms for Corporate Offshoring
cess pattern using transformational outsourcing (Linder, 2004). Conventional outsourcing approaches that focus on incremental cost savings have outlived and business process offshoring (BPO) as well as emerging knowledge process offshoring (KPO) are the likely next generation outsourcing activities. At present, the Internet technology-based computing deployed for Web services and outsourcing comprises of a broad range of processors, communication networks, and information reservoirs. The trustworthy computer systems encompassing a spectrum of information processing technologies will play a major role in the impressive growth of the BPO sector. The technology to support next generation outsourcing is likely to witness large scope computing instead of large scale computing to withstand attacks and to ensure greater security, dependability, and reliability. Multimedia, multilingual network operating software (MISNOS) supports large scope computing permitting application semantics (Ban-
dyopadhyay, 1996). It has potential for contextsensitive and secure OS architectures to facilitate e-services needs of conventional and emerging ubiquitous embedded systems deployed in BPO sectors. Outsourcing, in the past, has evoked a response, which is a combination of excitement for corporate management and fear/worries like loss of jobs for employees in the host country. In addition to these social issues, the technological issues like data thefts, privacy protection, and timely deliveries have been concerns in the past few years. Figure 1 depicts problems triggered by outsourcing. The Internet must also provide substantive benefits to the various stakeholders of outsourcing business community as opposed to merely offering traditional subcontracting disguised with technology. The early managementoriented outsourcing studies focused on employment issues instead of productivity aspects. The job losses due to direct impact of offshoring and indirectly due to productivity enhancements are
Figure 1. Problems triggered by outsourcing A Typical View of Problems Triggered by Outsourcing
Issues at the Destination Location
Issues at the Souce Location
Job Loss
Data Theft, Breach of Privacy
Increasing Crime Rate
Poor Health Due to Odd Working Hours
Economic Disparity in the Society
Solutions Framework Technology Domain
Absorption into the e-Service Sector for Outsourcing
Concurrency Control and Security Web based services
Governace GovernanceDomain Domain
Health Care Schemes and Stress Relieving Excercises During Office Hours
Govt. to take initiatives to bridge the gap by creating more opportunities
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Innovative Technological Paradigms for Corporate Offshoring
concerns of transient nature (Bednarzik, 2005). Lo (2005) has demonstrated using a mathematical approach that the international outsourcing trade and technology improvements have potentials to make the world better off with higher real wage and more product variety. Outsourcing failure is termed as a situation when a deal is either terminated or re-negotiated (Brudenall, 2005). High rate of outsourcing failure is attributed to factors like poor planning, choice of partner, or lack of proper strategy. The importance of identifying short-term and long-term goals to prevent outsourcing failures is discussed in the context of vendor selection and cultural match (Chandrasekar, 2005). Lee, Huynh, Chi-Wai, and Pi (2000) identify key research areas for deeper understanding on outsourcing as a two-phase exercise. Evolution of several identified outsourcing issues from motivation, performance angle, to management control has been the focus of first phase. The second phase describes partnershipbased outsourcing trend. A management checklist (Kobayashi-Hillary, 2004) focuses on preparation as a critical part of transition and redundancy process for managerial commitments. However, the preference of the “touch-and-feel” factor over the impersonal virtual environment and the lack of adequate security systems to safeguard strategic information may limit the extent and pace of outsourcing. A need to structure and equip the outsourcing business community for content sharing and control has arisen in the Internet technology framework. With the continued globalization and technology push, outsourcing is seen as the growth engine of the global economy (Roger, Smith, & Kidd, 1999). The IT infrastructure currently available to small- and medium-sized enterprises (SMEs) does not provide sufficient integration amongst different application components of business to support trustworthy inter-organizational outsourcing process. As a stopgap arrangement to improve trustworthiness, we suggest an eservice-oriented methodology for outsourcing
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for addressing trustworthiness concerns. The approach suggested in the section on establishing concurrency control and security is on the lines of TIOBE programming community index that is updated once a month (TIOBE, n.d.). Flexibility in arranging trans-organizational BPO is a key requirement for a common middleware. Shifting of skill set up the value chain is useful (Fowler, 2005). As a long-term goal, underutilized skill sets arising out of job losses due to outsourcing must be deployed for assessing global methodologies for benchmarking BPO/KPO infrastructure on the lines of supercomputer ranking initiatives (Top 500 supercomputer Sites, n.d.) that are updated half yearly. Technological approaches suggested in this article are useful from this perspective.
status of Initiatives taken by developing nations to support outsourcing In order to gain economic benefits of the BPO boom, a number of developing nations responded in a multipoint fashion. This included focus on the science and technology policy, introduction of cyber legislation, the creation of supportive legal infrastructure, and reforming academic/ educational courses (Matsuura 2002; NASSCOM & BCG, 2001; Patki, 2004). Outsourcing principles and practices never addressed the cybernetic angle of the process. Issues of the cyber-legislative status and the cyber-crime rate of the outsourced/ outsourcing nation were not given due attention. Community centers, Internet kiosks, cyber cafés, cyber marts that are the Internet access points in metropolitan cities, and townships are the objects of attack (Matsuura, 2002). The profile of cyber café usage, types of browsers used, and time of day vis-à-vis the physical locations are among the major criteria for assessing cyber crimes through the potentially floating user population. In the present form, cyber forensic tools concentrate merely on electronic records and need to extend their scope to network forensics. This is one issue
Innovative Technological Paradigms for Corporate Offshoring
that is an impediment in the growth of the BPO industry, and needs to be handled at the research and implementation levels. While statistical data on the quantum of business of BPO sector are published to encourage investments, no data are readily available in open source for assessing legislative potential prior to the commencement of any outsourcing contract-based project. The print media offers some basic narrative information and completely overlooks the analytical and technological aspects of outsourcing. These areas call for further detailing and need to be addressed at the national and international levels. Previous studies related to offshoring have concentrated on a developed nation (primarily U.S.) offshoring to a developing nation (India/China), resulting in an economically win-win situation for both the participating nations. The ACM report (Aspray et al, 2005), has, to some extent, succeeded in overcoming such constraints by addressing broader issues from both national and company perspectives, including the globalization of research, and educational changes. Thus, the initial concept of establishing an offshoring base in a developing nation needs to be altered for the sustained growth, especially for partnership-based outsourcing.
way for new avenues using high-speed computation and DBMS. All through, the Boolean-logic based data items continued to be a basic micro unit and the concepts of raw data, processed data, raw information, and processed information were implemented at application-level instead of CPU hardware (instruction set level) or system software level. This mindset resulted into OS commands of delete type for removal of data as well as information. However, the information weeding is much different than simply deleting a file or the contents of a directory from a computer system. Subsequently, algorithms were developed for data compression to overcome storage, transmission, and retrieval problems. With the introduction of information transfer through the Internet (video graphics, sound, and images), the data compression algorithms grew more popular. Such patchwork approach was acceptable for in-house, networked IT installations. However, the lack of built-in cognitive supports at computational/operational levels adversely influenced outsourcing. It has led to situations of outcry toward outsourcing ranging from labour dissatisfaction to data thefts, forcing countries to resort to legislation. The authors identify the limitations of the current outsourcing technologies and focus on using soft computing based solutions.
technologIcAl Issues Reifer (2004) brings out the views of both sides of the outsourcing debate and highlights that in order to succeed in outsourcing, it is necessary to avoid conflict arising out of lawyers and contract administrators. In this article, we discuss the technology aspects (viz. hardware/software) to avoid the conflict. The present day information systems designed on von Neumann philosophy and the applications tailored for such architectural platforms are successfully running on various hardware/software platforms. Electronic data processing (EDP) was the sole purpose of the early generation of computers. Their extensions to scientific and commercial applications paved the
cognitive support for data Processing With the availability of Internet, EDP-oriented methodology has been directly extended to the BPO sector for establishing dedicated application-oriented servers (e.g., ftp, mail, and dbms) to preclude the intermixing of data and information. However, concept modeling as per the user specifications and requirements is not incorporated in these dedicated servers. Unlike the EDP applications of the bygone century, the future information systems will require computers with capabilities to handle imprecise and partial information, approximate reasoning, and
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Innovative Technological Paradigms for Corporate Offshoring
learning, both for scientific and commercial applications. Capturing and representing knowledge and inferencing are major challenges in classical computing techniques due to the imprecise or gray nature of real-life decisions. Since computer programming is the ultimate vehicle for the practical realization of outsourcing plans, it is necessary to cater to imprecision and context through software construction approach (Hunt & Thomas, 2003; Patki, 2004). Fuzzy logic (Zadeh, 1965, 1976) techniques allow system modeling using linguistic hedges for handling imprecision, partial truth, uncertainty, and approximations. The focus should be on reducing the cognitive load of the end user leading to the simplification and ease of use of the data processing framework. We provide a brief review of the basic concepts of fuzzy logic (FL) next.
a = sup µF (x) = 1 The membership function can be generated with the help of mathematical equations. Typically, it can be in trapezoidal, triangular or in the form of S or π - curve. The support of a fuzzy set, F, S(F) is the crisp set of all x ∈ X such that µ (x) >0. The three basic logical operations of intersection, union, and complementation can be performed on fuzzy sets. 1. The membership µC (x) of the intersection C = A ∩ B satisfies for each x ∈ X, µC (x) = min {µA (x), µB (x)} 2. The membership µC (x) of the union C = A ∪ B satisfies for each x ∈X,
Fuzzy logic µC (x) = max {µA (x), µB (x)} The theory of binary logic is based on the assumption of crisp membership of an element to a certain set. An element x thus either belongs to (i.e., has a membership value of 1) or does not belong to (i.e., has a membership value of 0) a particular set X. Conventional logic systems can be extended to encompass normalized values in the range of [0,1]; thus introducing the notion of partial membership of an element to a particular set. The variable in a fuzzy system is generally described linguistically prior to its mathematical description, as it is more important to visualize a problem in totality to devise a practical solution. A fuzzy set F, on a collection of objects, X, is a mapping µF (x): X → [0,a] Here, µF (x) indicates the extent to which x ∈ X has the attribute F, thus it is the membership function. In general, we use a normalized fuzzy domain set, for which
Innovative Technological Paradigms for Corporate Offshoring
call support utilities etc., can be incorporated. For real time response, software approaches are not adequate and there is a need for fuzzy hardware support. Although, add-on cards for computing hardware have been suggested, the practical solution calls for instruction set based processors with hardwired or micro-programmed implementations (Patki, 1997; Watanabe, 1991).
Machine Intelligence Quotient In the past, the performance of computing systems was judged purely by its constituent hardware. Thus, MIPS (million instructions per second), GFLOPS (giga floating point operations per second), and Gibson mix were the metrics for the computer performance assessment. Subsequently, with the developments in the fields of artificial intelligence and fuzzy logic, the software performance index like FLIPS (fuzzy logic inferences per second) appeared in the hardware dominated era to determine the combined hardware and software (i.e., integrated technological performance). FLIPS did not become as popular as MIPS since there were not many occasions to benchmark fuzzy logic hardware/software systems. MIPS rating for benchmarking computing hardware is slowly being replaced with machine intelligence quotient (MIQ) and is likely to have potential impact on offshoring. MIQ permits the understanding of any machine through multiple perspective analysis (Jamshidi, Titli, Zadeh, & Boveriv, 1997). Any numerical or linguistic index/ structure indicating the degree of autonomy of an intelligent system module can be regarded as MIQ. Although it is difficult to obtain an absolute measure of MIQ in the strictest sense, a relative value based on a comparison of the system with an existing baseline machine in use can be determined. This allows us to rate a particular system with respect to an already established machine in use, thus, allowing us to determine its efficiency and effectiveness that can be deployed to tackle a certain problem.
MIQ differs significantly from indices like control performance, reliability, fault-diagnosis (Park, Kim, & Lim, 2001). MIQ has been defined as the measure of autonomy and performance for unanticipated events. The MIQ approach can link the infrastructural needs of an offshoring/ outsourcing institution with its throughput. Issues regarding the measurement of MIQ have been discussed by analyzing human-machine cooperative systems. MIQ (M) can be considered as a union of machine control intelligence (MC) and machine interface intelligence (MF). M = MC + MF Engineering systems or products that are said to be intelligent have been analyzed and a threedimensional construct space representation as entities has been suggested (Zeungnam, Bang, Kim, & Han, 2002). In order to determine the numeric value of MIQ, Sugeno fuzzy integral and Choquet fuzzy integral have been adopted. An important characteristic of the future outsourcing information systems will cater to a situation in which information needs are not defined precisely at the time of the system design and awarding the contract. This brings the focus on dynamically integrated intelligent information systems instead of the computer hardware and software as disjoint infrastructure entities for service sectors. In the near future, when we consider outsourcing, we shall also encompass the broad category of information producing and information lending industries that are likely to usher in a new type of global market. Thus, MIQ will occupy special significance since the outsourcing contract awarding and project-executing organizations will be part of same MNC where current trend of country-oriented legislation will serve no purpose. Example: The offshoring procedure poses an operational threat in deploying commercial off-the-shelf
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Innovative Technological Paradigms for Corporate Offshoring
(COTS) product procuring strategies for building IT based critical infrastructure. Such a view is expressed (Aspray et al., 2005) in the context of source and application code of COTS products procured through offshoring. This situation can be improved by introducing MIQ evaluation of subassemblies/assemblies using individually certified COTS products. Recommended methodology could include in-depth research in introducing the concept of MIQ authorization and type approval of the COTS products and the evaluation of the host and the destination companies by an international agency.
can be applied for assessing CCI. Independent agencies should be setup centrally that provide a Web-based portal for these parameters and also provide periodic updates on a regular basis for assessing cyber trustworthiness. The data access to such an e-service must be standardized so that processing of requests for proposals (RFPs) is more effective. •
establishing concurrency control and security As brought out in the previous sections, there is a strong need to assess the figure of merit from the security point of view for any city-based infrastructure in an outsourcing/outsourced nation where the project is being executed. The infrastructure does not merely refer to the physical hardware/software setup; but also encompasses dynamic parameters like the cyber crime index (CCI), customer satisfaction rate (CSR), and civil infrastructure status (CIS). These parameters are extremely important to compute cyber trustworthiness of a particular service unit, and to assess how far the unit succeeded in reaching its targets. This approach calls for a technological development and is not possible by merely adhering to standards and/or certification practices like the ISO. The CCI, CSR, and CIS term set has been briefly described next, as elaborate explanations are beyond the scope of this article. This methodology is on the lines of TIOBE programming community index, which is updated every month (TIOBE, n.d.). However, unlike TIOBE, the trustworthiness assessment requires online project data collection based on inherent cognitive styles prevailing in offshoring. In order to illustrate a cognition-based approach for such situations, we discuss how rough set theory (RST)
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•
•
Cyber crime index (CCI): It is the cumulative measure of the various cyber crimes that occur at a particular service unit in a city where the outsourcing infrastructure has been installed and involves inter-nation as well as intra-nation successful illegal attempts that have taken place in the time period of observation. The term illegal attempt is based on a cognitive factor and cannot be determined directly. Customer satisfaction rate (CSR): It determines the percentage-based value of the number of satisfied customers per unit time (this time is the time-period of observation). The CSR value determines the reliability and the serviceability of the infrastructure unit. Weekly project progress of the targets as per the PERT chart serves as an important parameter. This value is fuzzy in nature as it is used to plot a membership function of CSR with the help of parameters like satisfied and dissatisfied. Furthermore, hedges like moreorless and very can be applied to these values. This membership curve can be used to determine the efficiency and the effectiveness of a service center unit. Civil infrastructure status (CIS): This is a value that is computed from the join of various other factors like the present population of the city, the administrative status of the city, the present need and urgency of a request, and several such related factors. This factor uses type-II fuzzy sets representation. This is a highly variant quantity and it generally fluctuates with parameters
Innovative Technological Paradigms for Corporate Offshoring
like the current climate/season, the socioeconomic condition of the city, the language and culture of the people, the percentage of academicians in the city, the business base of the city etc. This is a very important value as it determines the usability and accessibility of a service unit for offshoring, and needs to be consulted before investing in a particular location prior to the finalizing of the outsourcing project. In the context of the previous discussions, when we talk of outsourcing at the most fundamental level, we refer to a collection of operations that form a single logical unit that need to be executed to perform a specified task to fulfill a particular request. This collection of operations is referred to as a transaction. Transaction management (TM) and concurrency control (CC) are thus evolving issues in outsourcing. To support such schemes, technological solutions have to be provided in the form of cognition-based protocols for TM and CC. Some important considerations with regard to TM include atomicity, consistency, isolation, and durability, popularly referred to as ACID properties. When several transactions take place simultaneously, the isolation property may not necessarily be preserved and to ensure that it holds, a separate CC algorithm must be designed to control the interaction between simultaneous transactions. Serialization of transactions is one such method to establish CC. We can do this by the use of protocol-oriented techniques. Techniques such as lock-based, timestamp-based, graph-based, and validation-based protocols have been previously employed for database systems (Elmasri & Navathe, 2004; Silberschatz, Korth, & Sudarshan, 2002). However, these techniques fail to deliver a good output, as they are not based on the real-life problems. A major limitation of these protocol-oriented solutions is that they have been founded on the grounds of example situations, and they do not by any means address
the grass-root reality of outsourcing/offshoring setup, as they cannot take intelligent decisions. In order to develop more practically efficient solutions, we have to move to the soft-computing based options (Kapoor, Patki, & Khurana, 2005). Proposed TM could be implemented using rough set theory (RST) approach, which also supports the powerful concept of information systems (IS). We provide a brief introduction to RST (Pawlak, 1982, 1984) as well as IS in this article and then discuss how these can be applied for security and concurrency control.
Information Systems A system that is capable of storing information for archival and reference purposes can be thought of as an IS. It is quite similar to a relational database (Silberschatz et al., 2002) in terms of its physical structuring. The difference lies in the powerful concepts of reduction and abstraction that it uses. It can also perform the task of a decision making system, allowing us to select a few attributes as decision parameters. The attributes can also be classified as relevant and irrelevant. Mathematically, an IS is defined as a 4-tuple system (Marek & Pawlak, 1976; Pawlak, 1984) S = {U, D, V, ρ} where U is a non-empty finite set of objects known as the Universe of Discourse; D is a non-empty finite set of attributes or descriptors used to represent the objects; V is the set of values, such that for every a∈D, we associate a set Va, called the domain of attribute a; and ρ is the mapping function such that ρ : U x D → Va
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Rough Set Theory Rough set theory, as the name suggests, is based on the concept of roughness or approximation of the crisp sets. It extends the conventional set theory to include a concept known as an approximation space, which can be defined mathematically as an ordered pair, A = (U, R) where U refers to the universe of discourse, and R refers to a binary relation over U, also called the indiscernibility relation of the IS (Marek et al., 1976; Pawlak, 1984). We assume R to be an equivalence relation, thus broadly classifying R as reflexive, symmetric, and transitive. Thus, if an ordered pair (x, y) ∈ R, we say that x and y are indiscernible or indistinguishable in A. Equivalence classes of relation R are often called elementary sets or atoms in rough set theory. An empty set (i.e., φ) is assumed to be the elementary set for every A. When the union of elementary sets for a set X is finite, we say that the set X is definable or composed. Essentially, for a quantifiable set X, we can talk of two approximations in general, a lower approximation (LA or A), which refers to the greatest definable set in A of which X is a superset, and an upper approximation (UA orA), which refers to the least definable set in A of which X is a subset. The positive region is the union of the lower approximations (Pawlak,
1982). The boundary of X in A is mathematically the set difference of the upper approximation and the lower approximation. Thus, BND (X) = A – A. Figure 2 illustrates these operations. The negative region (or NEG (X)) is the difference between the universe of discourse and the positive region. A set can also be referred to as definable when its LA and UA represent the same set, i.e., when A = A. In all other cases, the set X is said to be undefinable. Undefinable sets in a given approximation space A are of the following four types: Roughly Definable: When for a given set X, A ≠ φ and A ≠ U Externally Undefinable: Whenforagiven set X, A ≠ φ and A = U Internally Undefinable: When for a given set X, A = φ and A ≠ U Totally Undefinable: When for a given set X, A = φ and A = U Example: RST can be effectively applied for determining and analyzing the CCI. To find CCI, we need to follow up a given service unit and approximate its illegal activities/attempts. This approximation can be done in a suitable time frame, which depends on the traffic load of that particular unit. In case of
Figure 2. Basics of rough sets
BND(X)
POS(X) or A Set (X) Universe of Discourse, U
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Innovative Technological Paradigms for Corporate Offshoring
a heavy traffic, we can approximate the attempts every half-an-hour; and in case of low traffic, the procedure can be carried out every 12 hours. The approximated results would give us a rough idea of the illegal attempts that are taking place. We can thus formulate two extreme limits, given by the upper and the lower approximations. These limits can be overlapped in a cumulative fashion to gather information about that particular service unit. The number of successful illegal attempts can also be determined. This value however, will not be an approximated value, as the number of crimes that have actually taken place, i.e. the number of successful illegal attempts can be determined finitely. The CCI can then be computed by considering the ratio of these two values. RST can also be applied in case of the security of transactions that are taking place in a service unit on an outsourced enterprise. This is done through the development of an intrusion detection system (IDS) for protection of a networked link (Peng, Yun, Douglas, & Dingbang, 2004). An IDS evaluates suspected intrusions and signals an alarm once a suspected intrusion happens. It also watches for attacks that originate from within the setup. The basic process extracts predictive features from the raw data stream being monitored to produce formatted data that can be used for detection. Following this, a detection model determines whether the data is intrusive. RST based methods for the development of IDS is promising in terms of detection accuracy, requirement of training data set and efficiency. In a classical RST based approach, the new attack records are combined with the original training data, and a process of rule generation is employed. The rules generated are used for detection and analysis of further similar attacks. However, this process is not very practical as the entire existing knowledge base has to be re-examined. To solve this problem, an incremental learning procedure is required to approximate the attacks in a more efficient manner in a real-time environment (and not in a post-mortem style of cyber forensics’ analysis). A
rough set based incremental knowledge acquisition algorithm requires that whenever a new attack type or a new variation of attack appears, the rule generation process with the entire training data need not be repeated. The only computation required is that new rules should be generated from the new attack records and these should be used in conjunction with the existing rules. This algorithm has higher speed and recognition rate and can be appropriate for processing huge amounts of data/transactions. Handheld portable gadgets for cyber police patrolling have already been proposed based on the previous ideas (Patki, Patki, Khurana, & Sivasubramanian, 2005).
lIMItAtIons oF exIstIng soFtwAre PrActIces Offshoring operations are heavily dependent on networked computer systems, making it essential to address software and hardware issues. The existing software practices, their limitations, and the scope for improvements are rarely studied in this context. Methodologies focused on producer/ consumer philosophy for software development, upkeep, and maintenance are no longer adequate for outsourcing as they lack of monitoring flexibility. Outsourcing practices have requirements for frequent cognitive interactions. In the absence of technological solutions, retrofit measures in the form of management and administrative directives are adopted. We broadly classify and discuss software issues in order of their immediate significance: operating systems, file systems, database management systems, and computer programming languages.
Issues at the operating system level The traditional approaches to OS focus on memory management (paging/segmentation/overlays),
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Innovative Technological Paradigms for Corporate Offshoring
process scheduling, multiprocessing environment, and networking (Stallings, 2004). Not only for offshore work assignments, but also in general, OS is considered to be an extension of computer hardware, and as an interface to the users. This has led to an agglomeration of system level calls in OS implementations, to cater to each requirement. The batch processing and multiprogramming oriented approaches need to be modified to support and strengthen outsourcing. In the strictest sense, there is no accepted universal practice for measuring the performance of an OS in an outsourcing environment. On the lines of reduced instruction set computing (RISC) philosophy of microprocessors, OS will have to shed off some of its existing burden onto hardware. Some of the salient points in the context of outsourcing are presented below. •
•
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Emergence of application specific processor architecture (ASPA) that permits dynamic loading, configuring and remote monitoring of the software environments by the originator on the outsourced contractor’s infrastructure, should be supported by OS. Thus, the concept of information disposal arising out of this will open up issues like weeding of information records (text, graphics, images, video clips, movies, audio sounds, program code--both source and binary executables). Information weeding is different from the delete commands of OS or the data compression methods for storage and retrieval as viewed by cyber forensic professionals. The cognitive aspects of raw data, processed data, raw information, and processed information will gain special significance in outsourcing to overcome today’s data theft problems and associated legislation practices. The conventional approach adopted for servers for different purposes (e.g., application-oriented servers providing ftp, mail, and database will undergo transformations
using concept modeler techniques both at hardware/software modules). This will call for generation of information, determining its contents using fuzzy information inference, and processing of partial/imprecise information. Today’s OS shell programming does not permit such constructs. Thus, if we have to execute an iterative loop for few times, there is no context available or created by programming environment to map the fuzzy term few. We have to state the quantity explicitly--loop 100 times. In an outsourced scenario, to avoid misuse of resources (user’s data is also a resource for unscrupulous people as they can misuse or abuse it), resource aware programming support requires to be incorporated for OS shell programming itself, instead of library support since either deliberately or inadvertently, library support can be switched off in an outsource job processing infrastructure.
Issues at the File system and database levels Outsourcing at the primary level is data-dependent and calls for efficient information systems, which can endorse search and information mining operations. Traditionally, partial information systems were adopted and configured for outsourcing resulting into situations leading to conflict management (Reifer, 2004). File system organization and databases are linked up and we describe them from the perspective of problems associated with data-theft in outsourcing. We suggest a fuzzy logic-based approach to overcome the existing lacuna. Two mechanisms for file systems have been proposed next: 1.
The files can be grouped fuzzily in a dynamic manner according to guidelines inherent to the system installation (or configured by the
Innovative Technological Paradigms for Corporate Offshoring
user), taking into account security policies. Membership function values and fuzzy relations can be computed using following considerations. a. Files open at the same time or in the same session by a single user will be strongly related. b. User as well as system profiles (including privileges) in multi-user systems deployed in BPO installations. c. File extensions and categorization like .cpp, .exe, .jpeg in the case of non-compilatory tasks. 2. The user will specially create types of directories with certain crisp (or fuzzy) attributes for all the files associated with the directory, so that these may be updated dynamically as per the previous principle.
In the existing directory structure, organizational policies may lead to complex access restrictions as well as wastage of disk storage. The present software practices handle such situations and protect information through password-based authorization schemes, which make the system prone to attacks bordering on hacking/password cracking. Generally, there exist fuzzily definable relationships between files like pathological data and medical insurance; hence, a model based on the role theory (Kandel & Lee, 1979) must be employed to handle the complexities. Consider the case of five fuzzily related directories (D1 to D5), having degrees of association ranging from 0 to 1 (membership values), which have been listed in Table 1. A degree of association with the value unity indicates self and direct hierarchical subdirectories, while any real value less than unity means informal influence. Similar maps of associations may be generated among the users of the system logged on during a particular session. Such a session must be dynamically updated in accordance to the logging in and logging out of any user. Matrices to map the relationships between (a) directory/subdirectory, (b) directory/user, and (c) group/user are created in the system to analyze the attribute-value domains. Then, with
Example Consider the directory structure in Figure 3. The directory Medical_data_papers under MrX\Restricted contains laboratory investigations examined by pathologist DrY. Although it is desired that DrY may share rights to access MrX\Restricted\Medical_data_papers, the files under MrX\Restricted\Insurance are not to be shared with DrY.
Figure 3. Directory structure for example Root Directory
Mr. X
Dr. Y
Mr. Z
Public Public
Private
Restricted Public
Insurance
Private
Medical_data_ papers
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Table 1. Degrees of association amongst various directories D1
D2
D3
D4
D5
D1
1
0
1
0.6
0.9
D2
0
1
0.4
0.2
0.5
D3
0
0
1
0.5
0.4
D4
0.5
0.6
0
1
0.1
D5
0.8
0.4
0
0.7
1
the help of fuzzy equations and recursive matrix operations, the influence of different users on each other as well as influence of different directories on the users and system is computed. The time and date of creation in fuzzy format will enable processes to make inferences by considering hedges regarding the file being new, very new, old, moreorless old, etc. This is useful for detecting tampering of files and assessing the damage due to unauthorized access using fuzzy role theory (Kandel et al., 1979). Unlike the text-oriented databases of the current decade, future information systems would primarily use multimedia and non-multimedia databases. The current efforts in the multimedia databases have been restricted to audio, video, and textual stimuli. In order to give them true power of expression, a concept mapping system needs to be viewed as a core, instead of considering these objects merely as collection of symbols, bitmaps, or audio signals. With provision for open ended queries comprising of textual and an ordered group/ring/field-based composition of audio/ image/video clippings as language symbols displayed on the small screen of an optical keyboard (Bandyopadhyay, 1997), multimedia database systems can play a significant role in providing information for the masses (Bandyopadhyay, 1996). It is envisaged that for building large-scope information systems using outsourcing methodology, the data entry, query, and retrieval nodes would naturally be distributed. The data in the form of textual reports, audio/video clippings,
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and images arriving in all these information reservoir nodes would be un-modeled raw data. The existing password-protected schema view methods of SQL/DBMS environments can be modified to incorporate encryption and decryption methodologies operative through ASPA for sensitive data. Software tools would be required to analyze and aid modeling using raw data for concept generation.
Programming language considerations The conventional programming languages from the era of FORTRAN/LISP to the present day C/C++/Java are based on the following building blocks: • • • •
Iterative statements ( for loop, do loop). Conditional and non-conditional executions (If-then-else, Goto). Recursion oriented structures (Stack oriented). Assignments with associated enhancements (i= i +1, c+= 5).
Innovative Technological Paradigms for Corporate Offshoring
encompasses programming languages as one of the building blocks around which other modules for monitoring information disposal, fraudulent attempts, resource aware, and context-based data collections are dynamically configured. In order to facilitate ASPA to load instruction set modules to improve trustworthiness of outsourcing projects, object-oriented programming systems (OOPS) need to include synthesis support. The existing programming languages are more in the form of large suite of tools (with associated integrated development environment IDE), which support algorithmic methodology constructs like iterative loops, multiple branch (switch-case), and conditional controls (if-then-else). These languages emphasize algorithmic programming using an iterative philosophy instead of design using synthesis approach. At present, the existing programming languages used in information systems design do not support synthesis constructs prevailing in the hardware engineering design practice like VHDL for digital VLSI circuit design. This calls for introducing basic primitive modifications at object-oriented programming languages. Ruby programming language has attempted to bring programming closer to the application space of the user (Thomas, Fowler, & Hunt, 2004). Ruby’s object-oriented features are designed to add an instance during runtime, allowing this instance of a class to behave differently from the other instances of the same class. This feature is useful in combination with ASPA loaded partial instruction set to monitor security concerns and prohibit data thefts in real time environment at outsourcing infrastructure. However, Ruby does not address features required for outsourcing. In order to address issues ranging from sharing code development across the globe to asynchronous interactions amongst developers and/or supervisors, it is essential to deploy cognition-based algorithms. We illustrate a case of document support in programming language for outsourcing environment.
The debugger and documentation capabilities of object-oriented programming languages (e.g., Java) are not much useful after the softwaretesting phase is over. Program understanding and documentation, which is useful for software designers, code developers, and testing personnel keeps the end-user out of loop. This bottleneck leads to conflict creation, which should be avoided (Reifer, 2004). The information retrieval and documentation approaches in the past had been traditionally configured for isolated activity and had never been considered for a group activity like outsourcing. The scope for utilizing document features is very limited in the software maintenance and practically no scope exists for its usage by the end users who use such software at their computer installations. We should concentrate on group performance in the outsourcing environment (Damian & Eberlein, 2000). Since existing documentation is not tailored for multiple perspectives, there is no provision to configure the documentation application module on a user selection basis. An end user in an outsourcing scenario rarely uses the software documentation supplied with the systems since it does not provide any cognitive assistance. Thus, OOPS should provide application semantic support on documentation so that cognitive assistance is provided individually to every category of user community consisting of management controllers, cyber forensic analysts, security supervisors, and client managers. Thus, existing broadcasting modes of documentation should be replaced by an interactive categoryspecific mode for users. Intelligent software agents can help to simulate such studies. Support documentation for outsourcing infrastructure should answer cognitive queries and not function as help menus or FAQs. The text analysis orientation in traditional documentation retrieval leads to the situation that two words with same underlying meaning/stem refer to the same concept for indexing, e.g. neutron and neutralize. The index terms
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that are derived from the text of the document use pre-coordinate or post-coordinate principles. The controversy about index language for document retrieving (Farradane, Russell, & Yates-Mercer, 1973) is primarily due to text analysis approaches adopted and can be overcome using synthesis principle. Conventional documentation retrieval techniques do not address mid-operation support and the scope of fuzzy logic and rough set techniques is promising (Bandyopadhyay, 1996; Goguen, & Lin Kai, 2000). A fuzzy logic-oriented documentation support system for programming language that will permit offshoring community to develop a dynamic view of the same output from multiple perspectives like software code obfuscation, trustworthy computing, and forensic examinations to improve the overall group performance has been proposed (Patki & Khurana, 2006). By using the lower and upper approximation techniques of rough set theory, along with fuzzy relational data view, different projections of the same information are feasible for different information consumers (Kapoor et al., 2005). This capability is a must for efficient outsourcing to restrict and partially overcome the data thefts and similar problems.
MultIPlexIng oF bPo InFrAstructure At present, BPO infrastructure is being used in absolute terms with respect to the consumer community. There is a need to think on the lines of relative BPO houses where scheduling of jobs is carried out in a manner corresponding to the demands as well as the feedback of the user. Multiplexing of infrastructure on the basis of geographical locations to provide and serve a larger user community to the fullest extent is a novel idea. Such a scheme may use a three-schema architecture at the grass root level, comprising of a physical (internal) schema, a conceptual (logical) schema, and an application (external)
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schema. This architecture will aid the development of secure systems and will thus revolutionalize the concept of data protection and safe transfer. The OSI reference model for the TCP/IP network protocol can be extended to accommodate such multiplexed BPOs. Resource allocation should be carried out using platform independent integrated development environment (IDE). This will also cater to the increasing traffic through the network at the peak hours due to the availability of efficient resources, resulting into the optimal utilization of the BPO infrastructure. In order to provide a makeshift arrangement to incorporate concept modeling as per the client requirements, we introduce the concept of an inter-dialoguing processor (IDP). The IDP infrastructure could be based on a simple microcomputer, which takes in machine level inputs (instructions as well as data packets). The IDP acts as a transfer-establishing a resource link between the service center and the customer interface array dynamically. The main task of the IDP is to merge and route the traffic of the N service centers via a single transfer path to the customer interface array, which is responsible for interactions with the actual customer. The CCI value is computed for each service center. This value is used for handling the security issues. At the IDP level, the CIS value is calculated. The customer interface array uses the CIS value for routing information to various customers. It is also responsible for finding the CSR with the help of user feedback. Such an arrangement is depicted in Figure 4. The arrangement shown here is very fundamental in nature and is not necessarily a final solution to the multiplexing concept. It can however be used as a makeshift pattern in this transient phase of offshoring. Since some special customized hardware needed for such a system is not yet available, this section of the article may be considered as a precursor. Refinements of this design are expected. We discuss fuzzy logic-based algorithm for BPO multiplexing in the following subsection.
Innovative Technological Paradigms for Corporate Offshoring
Figure 4. Multiplexing architecture SC 2
SC 1 Network link 1
SC N
Network link 2
Network link N
IDP 1 (N:1 MUX, 1:N Demux) Information Transfer
CCI Det. Level
CIS Det. Level
User Feedback (CSR)
Customer Interface Array Legend: 1. 2. 3. 4. 5
Algorithmic steps for bPo Multiplexing 1.
2.
3.
4.
Create a global FMAP of service centers available to the customers, mapping customers to the multiplexed infrastructure based on the membership function value. FMAP is a resource relation that allows customers to determine which service center stores or caches which files. The structure of a typical FMAP is given in Table 2 where customer interface array (CIA) index of figure 4 is used. Manage metadata through proxy servers that reference the locations where data blocks of different files are placed in an encrypted format. Maintain a cache block so that some permitted, registered requests can be handled without accessing the machine disks and resources directly. Maintain cache consistency metadata (i.e., version information so that no writes can be done on obsolete data) however, read requests for this data are permitted.
SC: Service Center IDP: Inter-Dialouging Processor CCI Det. Level: Cyber Crime Index Determination Level (Misuse/Abuse) CIS Det. Level: Civil Infrastructure Status Determination Level CSR: Customer Satisfaction Rate
The control-system-managing module of inter-dialoguing processor (IDP) of BPO multiplexer acts as a load balancer and changes the FMAP by increasing the membership value of lesser-used BPO infrastructure machines and reducing those of heavily loaded machines. This representation and replication (FMAP is globally replicated and present in different machines with different entries) of FMAP enables the customers to be serviced with minimum number of network hops using BPO multiplexing, by taking into account parameters like link speed, bandwidth, and load status when assigning membership values in the FMAP. This helps in preventing network congestion. As and when a new machine joins the multiplexing infrastructure, the FMAP of the closest link is read, and the system-updating module of IDP modifies its own map accordingly. Updating of FMAPs takes place synchronously. The system can also be expanded using multiple fuzzy variables like distance between client and BPO, cyber trustworthiness, and cost factor to provide other advantages. Such an approach helps in reducing the cognitive load. It is important to observe that the conventional von Neumann architecture is not efficient for handling fuzzy
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Table 2. Fuzzy control for BPO multiplexing CIA Index
Service Center I
Service Center II
0X00
0.5
0.9
0X01
1
0
….
..
..
0XFF
0
0
logic processing and IDP can be only simulated in software environment for demonstrating the effectiveness. ASPA based instruction sets can be introduced for modeling such a system. Instead of general-purpose processors, digital fuzzy hardware is required for acceptable real-time performance. In the absence of such dedicated fuzzy hardware, either the limited scaled down software solutions will be used or the approach may be abandoned altogether, as it requires very high fuzzy inference speeds (Alag et al., 1996; Hung, 1995; Patki 1996; Watanabe, 1991).
conclusIon In the past, computing technologies were framed by developed nations and were deployed domestically as well as internationally. This view of technology producers and consumers must be understood in the context of offshoring by integrating consumer experiences rigorously. Data collected at the outsourced infrastructure destinations will be a useful technology driving parameter. This is now feasible as many MNCs have set up their own infrastructure units in various countries, which are routinely undertaking outsourcing work. Thus, the trend will focus on the transformation of human resources, ethics, practices, and motivations into software intelligent agents involving cognitive processing. The present practice of isolated country specific solutions needs to be replaced with global initiative, as
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…
Service Center N 0 0.1
..
.. 0.5
outsourcing is emerging as new trade and commerce vehicle for world economic growth. The exploratory and development work carried so far has validated the initial assumption that better integration using MIQ approach at hardware and software module level along with the multiplexing of BPO infrastructure is central to the next generation offshoring technology. Soft computing techniques such as the fuzzy logic and the rough set theory are vital to the expansion of such ideas. The recent announcement of the National Science Foundation of planning an effort to fundamentally re-engineer the Internet and overcome it’s shortcomings, and thus creating a network more suited to the computerized world of the next decade, indicates the willingness to redesign the net for future. The technological paradigms suggested in this article can be thought of as a stepping-stone in this direction.
AcKnowledgMents Authors wish to acknowledge their discussions with industry representatives, academic community, and government policy makers. The experimental work undertaken by various students has been the driving force to consolidate the issues to face the challenges of outsourcing technological revolution. Interactions with Mr. Mahesh Kulkarni, Group Coordinator, Center for Development of Advanced Computing (CDAC), Pune and Mr. S. Sivasubramanian, Scientist-E,
Innovative Technological Paradigms for Corporate Offshoring
Department of Information Technology, New Delhi, have been enlightening. Suggestions from editors have been useful in shaping the article effectively.
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2004-Jan 2005. Damian, D., & Eberlein (2000). The effect of communication media on group performance in RE. In Proceedings of the 4th International Conference on Requirements Engineering (ICRE 00) (pp. 91), IEEE CS Press. Desouza, K. C. (2003). Barriers to effective use of knowledge management systems in software engineering. Comm. ACM, 4691, 99-101. Elmasri, R., & Navathe, S. B. (2004). Fundamentals of database systems. PearsonEducation. Farradane, J., Russell, J. M., & Yates-Mercer, A. (1973). Problems in information retrieval: Logical jumps in the expression of information. Information Storage and Retrieval, 9, 65-77. Farrell, D., Kaka, N., & Sturze, S. (2005). Ensuring India’s offshoring future, The McKinsey Quarterly, 2005 Special Edition: Fulfilling India’s Promise. Fowler, C. (2005). My job went to India. Pragmatic bookshelf Publisher. Friedman, T. L. (2005). World is flat: Brief history of the globalized world in twenty-first century. London: Penguin. Goguen, J. A., & Lin, K. (2000). Web-based multimedia support for distributed cooperative software engineering. In Proceedings of International Symposium on Multimedia Software Engineering (pp. 25-32), December 11-13, 2000. Greaver II, M. F. (1998). Strategic outsourcing: A structured approach to outsourcing decisions and initiatives. American Management Association. Hung, D. L. (1995, August). Dedicated digital fuzzy hardware. IEEE Micro, 15(4), 31-38. Hunt, A., & Thomas, D. (2003). Preparing the raw material. IEEE Software, 20(5), 97-98.
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Jamshidi, M., Titli, A., Zadeh, L. A., & Boveriv, S. (1997). Applications of fuzzy logic—towards high machine intelligence quotient systems. NJ: Prentice Hall. Kandel, A., & Lee, A. (1979). Fuzzy switching and automata. Crane Russak, New York. Kapoor, A., Patki, T., & Khurana, S. (2005). Part-I: Analytical methodologies in soft computing, Part II: Exposure to cyber forensic software tools. Technical Report Submitted to DIT, New Delhi. Kobayashi-Hillary, M. (2004). Outsourcing to India--The offshore advantage. Berlin: SpringerVerlag. Lee, J., Huynh, M. Q., Chi-Wai, K. R., & Pi, S. (2000). The evolution of outsourcing research: What is next issue? In Proceedings of the 33rd Hawaii International Conference on Systems Sciences-2000. Linder, J. C. (2004). Outsourcing for radical change. American Management Association. Lo, C. (2005). International outsourcing and intraindustrial trade. International Journal of Applied Economics, 2(2), 69-82, September 2005 Marek, V. W., & Pawlak, Z. (1976). Information storage and retrieval system. Mathematical Foundations, Theoretical Computer Science, 1(4), 331-354. Matsuura, J. H. (2002). Security, rights, and liabilities in e-commerce. Artech House. NASSCOM, & BCG. (2001). e-commerce opportunities for India Inc. Study Report prepared by NASSCOM and The Boston Consultancy Group Report. Park, H. J., Kim, B. K., & Lim, K.Y. (2001). Measuring the machine intelligence quotient (MIQ) of human-machine cooperative systems. IEEE Transactions on Systems, Man, and Cybernetics— Part A: Systems and humans, 31(2), 89-96.
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Patki, A., Lakshminarayanan, S., Sivasubramanian, S., & Sarma, S. (2003b). Cyber crime information system for cyberethics awareness. In Proceedings of the International Conference on Cyberworlds (pp. 46-52), Singapore. Patki, A.B. (2004). Offshoring and outsourcing opportunities. Lecture Notes for Engineering Student Internship Programme, Department of Information Technology, New Delhi. Patki, A. B. (1996). Fuzzy logic based hardware: Some experiences. In Proceedings of the 1st International Discourse on Fuzzy Logic and the Management of Complexity (FLAMOC’96) (Vol. 3, pp. 247-251), January, 15-18, 1996, Sydney, Australia. Patki, A. B., Kulkarni, M., Sivasubramanian, S., & Patki, D. D. (2003a). Technology development trends for cyber civilization. In Proceedings of the International Conference on Cyberworlds (pp. 40-45), Singapore. Patki, A. B., Patki, T., Khurana, S., & Sivasubramanian, S. (October 17-19, 2005). Product development for female cyber police programme. In Proceedings of Conflux, 2005, New Delhi, India. Patki, A. B., Raghunathan, G. V., & Khurshid, A. (1997). FUZOS—Fuzzy operating system support for information technology. In P. K. Chawdhry, R. Roy, & R. K. Pant (Eds.), Soft computing in engineering design and manufacturing (pp. 131140), Springer. Patki, T., & Khurana, S. (2006). Software cost estimation and software obfuscation: A fuzzy logic perspective. Technical Report Submitted to Department of Information Technology, New Delhi. Patki, T., Khurana, S., & Neha (2005b). Cyber civilization: Advantages and shortcomings. VISION MSIT, New Delhi.
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Pawlak, Z. (1984). Rough classification. ManMachine Studies, 469-483. Pawlak, Z. (1982). Rough sets. International Journal of Computer and Information Sciences, II(5), 342-356. Peng, N., Yun, C., Douglas, R., & Dingbang, X. (2004). Tools and techniques for analyzing intrusion. ACM Transactions on Information and System Security, 7(2), 273-318, May 2004. Reifer, D. J. (2004). Seven hot outsourcing practices, IEEE Software, 14-16. Roger, J. Y., Smith, B., & Kidd, P. T. (1999). Business and work in the information society: new technologies and applications. IOS Press. Silberschatz, A., Korth, H.F., & Sudarshan S. (2002). Database system concepts. NY: McGraw-Hill. Sivasubramanian, S., & Patki, A. B. (1996). Software industry intelligent information system. Electronics Information and Planning Journal, 23(9), 513-518. Stallings, W. (2004). Operating systems (4th ed.). Pearson Education.
TIOBE Programming Community Index. (n.d.). Retrieved September 15, 2006, from http://www. tiobe.com/tpci.htm Thomas, D., Fowler, C., & Hunt, A. (2004). Programming ruby: A pragmatic programmer’s guide (2nd ed.). O’Reilly Media Inc. Top 500 supercomputer Sites. (n.d.). Retrieved September 15, 2006, from http://www.top500. org Watanabe, H. (1991). Some consideration on design of fuzzy information processors--from a computer architectural point of view. In Proceedings of Fuzzy Engineering Towards Human Friendly Systems, IFES’ 91 (pp. 387-398). Zadeh, L. A. (1976). A fuzzy-algorithmic approach to the definition of complex or imprecise concepts. International Journal of Man-Machine Studies, (8), 249-291. Zadeh, L. A. (1965). Fuzzy sets. Information and Control, (8), 338-353. Zeungnam, B., Bang, W., Kim, D., & Han, J. (2002). Machine intelligence quotient: Its measurement and applications. Fuzzy Sets and Systems, 127(1), 3-16.
This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 57-76, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 3.2
Hybrid Offshoring:
Composite Personae and Evolving Collaboration Technologies Nathan Denny University of Arizona, USA Shivram Mani University of Arizona, USA Ravi Sheshu Nadella University of Arizona, USA Manish Swaminathan University of Arizona, USA Jamie Samdal University of Arizona, USA
AbstrAct Inspired by round-the-clock manufacturing, the 24-Hour Knowledge Factory endeavors to transform the production of software and other intangibles into a process of continuous development. While the concept of offshore software development is well established, few enterprises are currently able to develop the same code artifacts around the clock. We discuss the benefits of applying the 24-Hour Knowledge Factory to
software development. We also present a representative scenario highlighting the problems of asynchronous communication in current offshore software development practices. Further, we introduce the notion of composite persona as a potential collaboration model within the 24-Hour Knowledge Factory and explain its ability to mitigate problems arising from communicating across cultures, languages, and time zones. Finally, we present a suite of new collaboration tools and techniques that are being developed specifically
for use by composite personae in the 24-Hour Knowledge Factory.
IntroductIon Inspired by the paradigm of round-the-clock manufacturing, the concept of 24-Hour Knowledge Factory endeavors to transform the production of intellectual property and intangibles into a process of continuous development (Gupta & Seshasai, 2007). More specifically, we envision a 24-Hour Knowledge Factory as an enterprise composed of multiple sites that are evenly distributed around the globe. As the sun sets on one site, it rises on another; like an ongoing relay race chasing the sun, the day’s work is handed off from the closing site to the opening site. The benefits of implementing a software development enterprise as a 24-Hour Knowledge Factory are several. We expect to realize gains from significant compression in development schedules, faster turnaround time for localization and customization of existing products, and bug fixes and critical security patches released with greater celerity. However, we also admit that the challenges of establishing a 24-Hour Knowledge Factory are significant. More specifically, we anticipate technical challenges arising from asynchronous communication, which will likely be exacerbated by cultural and linguistic differences (Seshasai & Gupta, 2007). Non-technical challenges may grow from political and legal circumstances, and from difficulties in managing and operating in such a nontraditional business environment. In this article, we discuss the current state of offshored and globalized software development and some of the underlying difficulties. Next, we introduce the concept of the composite persona. Finally, we discuss evolving collaboration technologies that support the concept of composite personae in the context of hybrid offshoring.
globAl soFtwAre develoPMent Software development projects that involve multiple international sites have been a reality since the 1960s (Carmel, 1999, p. 17). However, those early efforts were relatively rare compared to the near ubiquity of contemporary global software development (GSD) (Gupta, 2007). By the year 2000, 200 of the Fortune 500 companies relied upon global software development teams or outsourced development to firms that use them (NASSCOM, 2000). Our vision for the 24-Hour Knowledge Factory for software development is not synonymous with currently accepted GSD methods. Rather, the 24-Hour Knowledge Factory is a special case of GSD that has several unique properties while inheriting most of the problems of GSD. Subsequently, we present a brief survey of contemporary GSD methods to better define the problem of software development in the 24-Hour Knowledge Factory.
convention and Practice Engineering is the process of designing systems to solve problems. The activity of software engineering produces software systems to solve problems. Like nearly all engineering disciplines, software engineering advocates that large problems be recursively decomposed into smaller sub-problems and their corresponding sub-system solutions. Decomposition proceeds recursively until the problem-solution pair is tractable in both understanding the sub-problem and the resulting complexity of the sub-system. In modern parlance, the ultimate result of decomposition is a set of modules and classes (expressed in an object-oriented language such as Smalltalk, C++, or Java), where each class can be more-or-less completely understood by one person. These modules and classes are then assigned to developers who then own that artifact throughout
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the process of coding, unit testing, and possibly even maintenance. Each module or class has one owner, and only that individual may alter that artifact. Ownership confers the benefits of accountability for defects and preserves the continuity of the actual state of the artifact with the expected state of the artifact. Although a few software practices advocate otherwise, single ownership is the most generally accepted practice (Nordberg, 2003). Ideally, sub-problems can be solved in complete isolation from lateral, sibling sub-problems. This allows for sub-systems to be viewed as black boxes: entities that have defined behavior and state, and whose inner workings are not visible to those outside of its development. With respect to coding and implementing, black boxes confer autonomy on the developer and permit development to proceed concurrently. If the problem was initially well defined, with complete knowledge of the domain of interest, and there is little change in the environment in which the software is to be deployed, then there should be little lateral communication between implementers of subsystems. It is, most unfortunately, a rare case where these perfect conditions exist. More typical is the case where, during the process of development, the problem is more complex than what was originally believed or conditions external to the project have changed. Either case causes alteration to the requirements which were used to produce the original design. Software, like a machine, requires that all of its components operate in harmony. Changes in the requirements and subsequent behavior of one subsystem propagate to those sub-systems with which it interacts, creating a rippling wave of secondary changes in those sub-systems, and so on. The result of this phenomenon is a need for lateral communication between sub-system developers. In the context of GSD, lateral communication between sites often introduces delays, costs, and risks. As an illustration, consider the following fictional, yet representative, scenario.
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A typical scenario in gsd Yankee Software, Inc. is developing a new clientserver application for clinical use by physicians in hospitals and other high-tech treatment centers. The new software is to be marketed internationally and must conform to local laws and standards. After thoroughly studying the problem, consulting many potential customers, the architects at Yankee Software develop a design and subsequently produce the models and documents that will be used by the programmers to implement the software. In order to reduce coding costs and leverage significant experience and talent with coding for highly reliable networking software, Yankee Software is partnering with Muscovite Technologies in Russia. Yankee Software will develop the end user client, workflow engine, and validating rules, while Muscovite Technologies will develop the database, cache, and network server system. After the design phase and an initial kick-off meeting where both parties sign off on the design, coding begins. The designers had anticipated several risks; key among these known risks was the vulnerability of the validating rules. These rules localize the software for operation in the various legal and standards frameworks in which each potential customer must operate. During development, this risk becomes realized in a change in record keeping standards in the United Kingdom’s National Health Service. The change is significant enough to necessitate an adjustment in both validating rules and database structure. At this stage of the project, such a change will be quite costly in terms of redesign and coding. However, the market potential for the NHS is second only to the domestic U.S. market, and Yankee Software does not want to lose such an opportunity. Consequently, the requirements are altered and parts of the system undergo redesign. Several weeks later, Kathy, a programmer for Yankee Software in San Jose (California, USA)
Hybrid Offshoring
comes across an ambiguous condition in the specification for the software. It appears to her that there is a conflict in how the server handles errors. The prior documentation, before the NHS redesign, and the posterior documentation issued after the redesign disagree in several cases. Since the affected server component has already been coded, Kathy decided to contact the owner of that code. Following is an outline of the (fictional) discussion that these two developers might have. (Note that Moscow is 11 hours ahead of San Jose.) On Day 1, Kathy discovers the ambiguity. She consults with a few co-workers at her site in San Jose and decides to e-mail the owner of the component, a developer named Feodor in Moscow, Russia. Kathy puts further development of her component on hold and continues with other work. When Feodor logs in to read his e-mail at the beginning of Day 2, he sees the message from Kathy asking for clarification. The problem is complex, English is Feodor’s second or perhaps even third language, and Kathy’ writing style is not very expressive. Feodor is confused as to the exact meaning of Kathy’ query and sends a reply asking for more details and further clarification. Later in Day 2, after Feodor has signed off, Kathy logs in and reads Feodor’s reply. She takes a few minutes to think of a better way of explaining what she had found and what she was asking, citing the specific sections of the documents in conflict and including a fragment of the code. She sends the improved, clarifying question to Feodor. It is Day 3 and Feodor logs in to find Kathy’s question easier to understand. Feodor believes he understands the problem and takes a few minutes to compose the reply. Later that same day, Kathy reads Feodor’s response and believes that she understands Feodor’s answer. However, Feodor accidentally replied with a double-negative, and since this potential defect may be harmful to their market in the UK, Kathy composes another question for Feodor to verify his answer.
On Day 4, Feodor logs in to read his e-mail. He shakes his head for a moment, amused at his own mistake and writes a response agreeing with Kathy’s statement and verifying his own prior e-mail. After the sun has set in Moscow, Kathy reads Feodor’s response and alters the client-side code that she is developing to be in harmony with the server-side code that Feodor has already written. In the preceding story, Kathy and Feodor, separated by an 11-hour time zone difference and speaking across languages and cultures, spent four days solving a problem. Had the two developers been co-located, this problem would likely have been solved within a few hours.
coMPosIte PersonAe The pressure to collaborate has increased with the use of offshoring, in which developers need to be addressed at different locations, according to Booch and Brown (2003). About 70% of a software engineer’s time is spent on collaborative activities (Vessey & Sravanapudi, 1995). As demonstrated above, this need for communication can confound software development when the distributed teams span multiple cultures, languages, and time zones. As a mechanism to correct for asynchronous communication lag and ambiguity introduced by cultural and linguistic differences, we introduce the notion of composite persona. A composite persona (CP) is a highly cohesive micro-team that, like a corporation, has simultaneous properties of both individual and collective natures. That is, a composite persona to an external observer has a unique name and acts as a singular entity, even though it is the composition of several individuals. With respect to CPs, each site is a mirror of the other, having exactly the same CPs as each other site. (Note that this does not imply that
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each site has the same number of staff, as one developer may belong to more than one CP.) As the world turns and sites turn on and turn off, each CP remains active, but the “driver” of each CP changes with each site. Using CPs, development proceeds in the same manner as in a more traditional, local process. Problems are decomposed into modules and classes as they are when only single developers are assumed. However, when modules and classes are assigned ownership, the owner of each artifact is no longer an individual developer but rather a CP. Similarly, in the process of conflict resolution, discussion, and debate, each CP contributes as a single entity. In the following subsection, we present three scenarios that exemplify what we anticipate will be common interactions within a CP and between CPs.
A composite Personae scenario For the purposes of illustration, we assume three development sites: Tucson (USA), Wroclaw (Poland), and Sydney (Australia). We will focus on two CPs: CP Mercury and CP Minerva. CP Mercury will be composed of Tom (USA), Grzegorz (Poland), and Molly (Australia). CP Minerva is staffed by Rachel (USA), Sylwester (Poland), and Jack (Australia). Furthermore, our scenario will take place in early November. Tucson is at GMT-7, while Wroclaw is at GMT+1. November is in Austral Summer. When the residents of Sydney set their clocks ahead at the end of October, they are at GMT+11.
Forward Communication and Handoff The most basic operation in the context of CPs is the handoff, depicted in Figure 1. This occurs at the change of every shift, when the current driver signs off and the new driver, as the next site turns on, signs on and takes over responsibility
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Figure 1. Handoff
for the CP. Our prototype handoff procedure is inspired by the daily stand-up meeting used in the Scrum agile process (Schwaber & Beedle, 2002). Scrum daily stand-up meetings, for co-located developers, are done first thing in the morning. All attending are asked to briefly summarize what they accomplished the previous workday, what problems they encountered, and what they expect to accomplish today. We think this to be a very succinct set of questions to be used as a basis for the handoff from one driver to the next. Following is brief story that demonstrates a handoff. It is nearly 15:35 GMT, 25 minutes before Grzegorz’s shift ends at his office in Wroclaw. He looks up at the clock and decides to wrap up his work for the handoff to Tom. Grzegorz opens up the handoff tool and begins filling in template forms and following a scripted workflow. At 15:50 GMT, Grzegorz completes the last of the handoff forms and officially ends his workday. At 15:55 GMT, Tom signs on and becomes the driver for CP Mercury. He takes several minutes to read what Grzegorz accomplished and finds that Gzegorz has found what he thinks is a bug in a class owned by CP Minerva. He recommends
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to Tom that he query CP Minerva and continue working on a couple of troublesome methods of a class owned by CP Mercury. Tom agrees and sets about his day, accordingly. At 22:05 GMT, Tom gets an instant message from Molly. It is just after 9:00 a.m. DST in Sydney and she is beginning her day. She and Tom chat online to divide up the work recommended by Grzegorz. Tom is still driving CP Mercury and has checkout priority for any code artifacts owned by CP Mercury. At 23:30 GMT, Tom walks through his handoff report and submits it at 23:50 GMT. Since there are still a few minutes of overlap, he sends an instant message to Molly. She sends an instant message back to Tom informing him that his handoff report is understood and wishes him a good evening. At 23:57 GMT, Tom signs off and Molly becomes the driver for CP Mercury. The hand-off process transfers knowledge from the driver signing off to the driver signing on. This transfer is unidirectional from past to present and forms the forward dimension in the two-dimensional communications that are possible with CPs.
Resolving a Simple Problem with Lateral Communication Many simple problems can be resolved by real-time communication between drivers. In co-located software development, these small problems are often resolved by a phone call or a quick chat over a cup of coffee. There is no appropriate analog in GSD, where even simple problems can result in significant delay as rounds of conversation ensue over e-mail (Herbsleb, Mockus, Finholt, & Grinter, 2003). Even when developers work off-hours to make real-time contact with other sites, the communication channels available carry less information than co-located face-to-face interaction. Consider the following example from Figure 2: At 21:10 GMT, Tom, driving for CP Mercury, gets an instant message from Rachel. Rachel is currently driving CP Minerva. One of the components owned by CP Minerva is using a component owned by CP Mercury. Rachel asks Tom for an example of how to use a certain feature of CP Mercury’s component. Tom thinks about it
Figure 2. Lateral communication
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for a moment and then sends a reply with a code fragment for her to study. She thanks Tom for the example. This form of communication is lateral between CPs and is orthogonal to the forward communication dimension. The third communication pattern is established when information is flowing along both dimensions.
Resolving a Complex Problem Using Both Communication Dimensions For the purpose of clarification, we will define a complex problem as a problem that involves two or more CPs and cannot be solved within a single working shift. This problem must therefore be handed off from one driver to the next. A complex problem that can be handled completely internal to the CP can be resolved in much the same way as development. (Writing code is somewhat equivalent to solving a long and complicated problem.) At 13:10 GMT, Grzegorz reads an e-mail sent to CP Mercury about a test that had failed and indicating a fault in a component owned by CP Mercury. Fortunately, the message contained a trace of the code that created the fault as well as the parameters of the test. Grzegorz finds that the problem seems to arise only in test cases where the component owned by CP Mercury is used by a component owned by CP Minerva. Grzegorz contacts Sylwester via instant messenger and they begin the work of tracking down the bug. At the end of their shift, each of them completes their respective sign-off procedures and ends the day hoping that Tom and Rachel will be able to find the solution. Tom and Rachel sign in within a few minutes of each other. Tom, seeing that Rachel is also at work, sends her an instant message, and they agree to continue working on the problem. Each takes a few minutes to catch up on the notes from their counterparts. Grzegorz and Sylwester have done most of the work, and it does not take much
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longer before Tom and Rachel find the source of the fault and have it corrected.
Benefits of CPs in the 24-Hour Knowledge Factory We anticipate several benefits of applying the composite personae strategy in the context of the 24-hour Knowledge Factory.
Smooth Transition The process of decomposition, design, and assigning ownership is essentially the same whether development is done by individuals or by CPs. The introduction of CPs augments the body of engineering knowledge and does not deprecate anything. Furthermore, during migration from current practices to one that incorporates CPs, an enterprise is able to mix and match as needed. Some artifacts may be owned by individuals, others by CPs.
Increased Trust Trust is notoriously difficult to establish in GSD projects (Handy, 1995; McDonough, Kahn, & Barczak, 2001) but essential for success (Sarker et. al., 2001). Humans in collective efforts work best in teams where each member of the team shares the common goal of the team, and members trust the intentions and efforts of each other member. Here we are looking for the jelled team described by DeMarco and Lister (1987). As group size increases and the frequency and expressiveness of communication decreases, trust within the team suffers greatly (Carmel & Bird, 1997). CPs are very small, typically comprising of three or four individuals, and trust is easier to establish between these few members than it would be within a larger group. Although most communication will be done asynchronously, communication between members of CPs will be frequent and informative. While asynchronous
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communication is much less expressive than synchronous communication (Sproull & Kiesler, 1991), we expect that such persistent, frequent communication will lead to greater trust than is common in contemporary GSD projects (Jarvenpaa, Knoll, & Leidner, 1998; Javenpaa & Leidner, 1999; Maznevski & Chudoba, 2001).
Convergence At this conceptual stage of our development of the CP, we believe that communicating the changes made by each driver to the other members will require less costly communication than associated with current global software development practices. We expect that after working on the same artifact for some time, the knowledge held individually by each member of a CP will converge. That is, we expect that developers within the same CP will, after some warm-up period, have essentially the same concept of the problem domain, solution options, and the utility space of those options. For a given question about some code artifact, each member of the CP that owns the artifact is likely to give very similar answers. Consequently, between members of a CP, communicating the purpose of incremental changes and the overall state of the artifact will become increasingly efficient as their mutually shared experience grows with time. Here we can draw upon the experience of Extreme Programming (XP), from which our CPs are inspired (Beck, 1998, 1999). XP advocates collective ownership of code, allowing anyone in the project to alter any artifact. This is made possible by creating mutual experience and shared knowledge through pair programming: the process of having two people work on the same artifact, simultaneously, using the same workspace. While XP is not without controversy, especially for larger projects and distributed development, we believe our CP method to be an especially useful balance for the 24-Hour Knowledge Factory. CPs prevent surprises and preserve accountability as per the
single ownership model, yet enable many other collective ownership benefits that are discussed here.
24-Hour Access to Owner The practice of single ownership of code artifacts works well when all development is done in the same time zone. However, for sites that have very little or no overlap in work schedules, the single ownership model becomes a hindrance. For instance, in the coding phase of the linear development model, bug fixes are typically routed through the owner of the artifact. In this way, the owning programmer is knowledgeable of any changes made to the artifact and understands how those changes alter the behavior of the artifact. If we assume only one owner and three nonoverlapping development sites, then 16 of the 24 work hours in a day are done by centers which do not have direct, synchronous communication with the owner. Necessary changes must wait until the owner’s site turns on, creating a bottleneck for related work in the other two centers. Accordingly, by our method of assigning ownership to CPs, each piece of code artifact can be modified at almost any time.
Higher Truck Number So-called from the imagined worst-case scenario where a project member gets struck by a runaway truck, the truck number of a project is an amusing but useful metric for expressing vulnerability to the loss of critical talent. The collective code ownership model and consequent degree of redundancy of knowledge about any given artifact increases the truck number of the project and decreases development risks introduced by the possibility of losing critical talent and specialized knowledge (Nordberg, 2003). With three-member CPs, a CP could lose a single member and the enterprise will still retain two people that have intimate knowledge over the
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artifacts owned by that CP. While productivity may decrease for the period that the CP remains understaffed, the project survives. When a new member is brought into the CP, the new member has the project artifacts and notes from the previous developer; in addition, (s)he has direct and frequent access to the two remaining members in the CP. This feature may be particularly important when including labor from nations where worker turnover is high. Indeed, some recent observations imply that high employee turnover in offshore companies often is a significant risk in contemporary offshoring strategies (Carmel & Agarwal, 2002; Lewin & Peters, 2006; Offshoring Times, 2006). This makes the higher truck number inherent to CPs to be a major advantage over current offshore development practices.
Localizing Lateral Communication In a case study done by Herbsleb et al. (2003), little difference was found in the number of lateral communication delays incurred by a local development project and a GSD project. However, the GSD project experienced longer delays. In this particular study, the mean delay time for the locally developed project was 0.9 days, while the mean delay time for the GSD project was 2.4 days. Our own work on studying communication in technical USENET conversations (Denny, 2007) suggests an average delay of between two and five days. With each CP represented at each site, lateral communication is now mostly local. Consider a question by CP Minerva about a code artifact owned by CP Mercury. If the Tucson site is on, then Tom will be answering a question by someone else co-located at his site. If Tucson is off and Sydney is on, the Australian driver for CP Minerva will be asking Molly instead. Further, since each site is relatively mono-cultural (with respect to the entire enterprise), lateral communication will be nearly free of ambiguity introduced
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by differing linguistic and cultural norms. That is not to say that communication will be completely unambiguous, but the prevailing ambiguity will be resolved more easily by synchronous conversation between the drivers of the CPs engaging in active, spontaneous dialog. We have not completely done away with asynchronous communication, but have instead moved into a different realm. Each member of a CP must have nearly equivalent knowledge of the artifacts owned by the CP. If the current driver modifies a code artifact owned by his CP, then the next driver must be familiar with that alteration. So within the CP there will be significant communication, almost all of which will be asynchronous in nature.
evolvIng collAborAtIon technologIes DeSanctis and Gallupe (1987) described a space and time classification framework in a 2x2 matrix (see Figure 3) that classifies tools based on the temporal characteristics of activities and location of the teams. The 24-Hour Knowledge Factory paradigm fits into the 4th quadrant. More sophisticated tools than available asynchronous communication tools are needed to tap and effectively transfer tacit knowledge. In distributed collaboration software development, tools that seamlessly enable communication without loss of tacit knowledge are critical. The communication methods that were successful in multi-site transfer of knowledge, particularly when dealing with remote or global teams, included teleconferencing, videoconferencing, chat, e-mail, and document exchange. While some of these methods are not necessarily effective for most of each shift in the 24-Hour Knowledge Factory system (those involving real-time communication), they might be particularly important during the handoff between each shift in order to
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Figure 3. Tool matrix
convey a large amount of information in a short amount of time. Synchronous handoff is shown to be successful in the following tools. Microsoft’s NetMeeting (2006) facilitates the social interaction required for sharing tacit knowledge. IBM’s Workplace Collaboration Services provides a full range of integrated communication and collaboration tools (IBM, 2005). Integrated development environments (IDEs) such as Eclipse are useful collaborative software development tools. Collaber is a collaboration framework that is built on Eclipse Software and includes features such as task management and group discussion. Eclipse goes a step further by its integration of JAZZ (Cheng, Hupfer, Ross, & Patterson, 2003), an awareness tool that allows developers to initiate and archive synchronous communication from the IDE in the code context. In all these distributed collaboration environments including the tools mentioned above, the developers rarely have a time overlap and hence synchronous communication tools are of no avail. The tools required for a 24-Hour Knowledge factory using the CP model necessitate not only distributed remote collaboration, but are also limited to an asynchronous mode. Wiki (Cunningham, 2001) is a Web-based collaborative tool to use the strength of collective intelligence. MASE
(Chau & Maurer, 2004) extends the wiki concept into the realm of agile software processes, and can be used for knowledge sharing by both colocated and distributed teams. The limitations with such tools are that users have to explicitly store documents and there is little to no context from which decisions can be analyzed by succeeding shifts. Furthermore, there is a strict dependency on the exact terminology in order to relate different content in the repository, which is a weak data mapping model. Distributed document management is also critical in a collaborative development environment. There are many configuration management systems such as CVS (Berliner, 1990), IBM’s ClearCase (Allen et al., 1995), and Subversion (Collins-Sussman, 2002). These do a good job in defining mechanisms for managing different versions of their work products. In such tools, the developers tend to get inundated with notification/ updates of the various control events. Allowing the developers to configure their artifacts of interest is of good value as it reduces the information overload on the developer. Software tools such as CVS Watch (Berliner, 1990) allow the developers to define their artifacts of interest for which they get automatically notified on any access or modification. WorkSmart.net (2007) is a hosted
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asynchronous collaboration service that provides the ability to configure a set of events whenever any action is taken. For example, an event may be triggered when a new folder is created, a document is deleted, or a new version of a document has been checked in. Most of the commercial collaboration tools that have been built are either add-ons to existing tools or those that integrate several existing tools tuned to a synchronous mode. These tools rely significantly on user-initiated annotation and documentation, and do not address the project handoff from one user to another in an efficient manner. The free flow of information and assistance is vital to the 24-Hour Knowledge Factory environment. All of these needs have created an environment that requires innovative and more useful processes and tools.
cPro: composite Personae software Process Software processes typically aim to improve quality and productivity. Quality and productivity are measured in terms of cost, effort, delivery schedules, and defects. However, many of these processes like PSP (Humphrey, 1995) assume single ownership of code. Extreme Programming (XP) (Nagappan & Williams, 2003) supports multiple ownership of code and assumes horizontal decomposition of work, with more than one developer sitting together working on the same task. This is no longer the case where CPs are collaborating in the 24-Hour Knowledge Factory. This work model poses many more challenges in terms of estimation, work allocation, knowledge transfer, and defect control. To overcome these problems and to facilitate offshoring in the 24Hour Knowledge Factory model, we have come up with a software process that we call CPro.
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Planning When an overall schedule of the CP to complete a task needs to be obtained, one developer cannot estimate for the whole CP. This is because more than one developer present in the CP share the same task, and productivity can vary greatly from one programmer to the other. This has long been observed to be quite wide (Sackman, Erickson, & Grant, 1968; Humphrey, 1995). Due to a variety of factors, we can know a priori neither the subtask allocation within the CP nor the exact productivity of each member on any given task. Therefore, in CPro each developer gives his or her own estimates for all of the subtasks within a task. A schedule caster then executes a Monte Carlo simulation on the possibilities for productivity and project evolution. The result is a probabilistic schedule that project managers can use to estimate the delivery date of project artifacts within a specified degree of confidence.
Knowledge Transfer and Defect Control Defect reduction is one of the primary goals of any software process that aims at improving quality and productivity. In the CP model, since tasks are vertically decomposed among drivers of the CP, each driver changes the state of the task. In the absence of a structured handoff procedure, defects may also occur due to lack of understanding of the current state of the task. Therefore, many of the current defect-reduction techniques cannot be utilized as is. CPro makes use of the existing project artifacts as implicit handoff documents. This by itself not only conveys the work done in the previous shift, but also provides input to the current driver in the form of a project artifact. When the current driver reads the artifact to continue the work, he would be equipped with the knowledge of the job done by the driver in the previous shift. While reading the artifact, the developer in the current
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shift would in effect review the artifact and could give suggestions and other feedback. To achieve this, we suggest the use of TestDriven Development (Williams, Maximilien, & Vouk, 2003). Test cases for some methods are written by one driver, which would act as a unit test document for that method. This also would serve as a handoff document. In this way, the current driver who codes on the method receives input from the previous driver in the form of unit test casesthe effect of this being that any discrepancies in understanding the design are clarified at this stage. Test cases must be machine interpretable and consequently lack the ambiguity of natural language. The developer in the second shift would then code the method defending the unit test cases, and the CP peer in the next shift would review the code. In this way, all three members of the CP would be aware of the code artifact in good detail, and extra communication in the form of status e-mail or documents are avoided.
Software Processes
MultiMind
Objects and events relevant to the project are posted and logged into a monotonically increasing persistent database along with a time stamp. This database, sometimes called a Lifestream (Freeman & Gelernter 1996), allows human users and intelligent agents to create a local or comprehensive view of the state of the project at any given time. This capability is central to justify decisions made by one user to a different user that is trying to understand why a particular decision was made and the original acting user cannot be contacted in real time. Towards facilitating the driver’s understanding of the current state of the task, we have designed a study tool which draws inspiration from Activity theory. This is, of sorts, a decision support system in reverse: a decision justification system that justifies the decisions made by the previous workers. The integrated project knowledge base (Lifestream) is mined for relevant knowledge objects (project artifacts, speech acts, events) that were consumed by the previous worker during
Suchan and Hayzak (2001) found that a semantically rich database was useful in creating a shared language and mental models. MultiMind is a novel collaboration tool under development and experimentation which aims to provide a semantically rich environment for developers collaborating using the CP method. MultiMind aims to improve upon DICE (Sriram, 2002) and other collaborative engineering tools. Our initial implementation efforts have focused on providing a proof of concept for the 24-Hour Knowledge Factory model. Based on feedback from the initial users, we plan to judge the efficacy of the model and tune our development efforts accordingly. MultiMind is founded on the following technologies.
MultiMind is process-aware and guides the CP members along the CPro process. In addition to CPro, MultiMind also incorporates concepts from XP and Scrum. The tool automates some of the Scrum process, keeping developer intervention to a minimum. More specifically, the responsibility of creating work summaries has been offloaded from the developers to the embedded project management system. A templated scrum-style system is incorporated which, on sign-out, gathers quick statements about the anticipated future state of open tasks. On sign-in, during the subsequent shift, a scrum report is automatically generated by synthesizing information from the previous scrum entry and the state of various archived project artifacts. Figure 6 depicts the usage of Scrum and CPro processes during handoff.
Lifestream
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Figure 4. Handoff process in MultiMind
the course of his action. The aim is thus, to supply the driver with only relevant and condensed knowledge objects.
Speech Acts Theory Speech Acts (Austin, 1963; Searle, 1975), used in linguistics, are acts of communication. The Speech Act theory systematically classifies communication messages into various acts, thereby establishing a common ontological base by which agents can communicate and understand each other. Both KQML (Knowledge Query Manipulation Language), developed by DARPA (Finin et al., 1993), and ACL (Agent Communication Language), developed by FIPA (O’Brien & Nicol, 1998), rely on the Speech Act theory for their protocol for communication between software agents in knowledge-based systems. In the CP model, Speech Acts assist in synthesizing relevant information based on the high-level semantic nature of communication events. Existing asynchronous communication mechanisms that use free text lack significant semantic structure, making it impractical for a
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tool to classify the communication type or do meaningful analysis. In the MultiMind tool, the communication entity is embedded as a conversation panel and it appears in the context of every project artifact. The conversation panel provides the facility to post messages based on a communication act, and these messages are logged to the Lifestream.
vocal Annotations in Program source code The best scenario for transferring code from one programmer to the next is to have the first programmer sit with the next programmer to go over the code line by line, and have him or her explain what the program does and why it was designed and implemented the way is was (Chiueh, Wu, & Lam 2000). This is not likely in the 24-Hour Knowledge Factory. In the absence of appropriate documentation, maintenance of the code becomes a nightmare and grows worse over time (Miller, Johnson, Ning, Quilici, & Devanbu, 1992). Dekleva (1992) cites in these surveys that lack of documentation is one
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of the biggest problems people who maintain the code have to face. She takes the survey one step further and uses the Delphi technique to ask system maintainers what their largest obstacles are. The Delphi technique consists of three rounds of surveys where the consensus increases with each survey round. In all three rounds that were conducted, system documentation was in the top four issues seen by system maintainers, and it ended up tied for third when the survey was over. Raskin (2005) explains the need for the thorough use of internal code documentation, not only for improving code understandability but also improving reusability and productivity. Literate programming, introduced by Knuth (1984), is a methodology that combines the programming language with documentation language. The most well-known languages of literate programming are TeX, Cweb, and METAFONT (by Knuth himself). The most apparent drawback is that it necessitates a competent writing ability to be an effective literate programmer. Fletcher (1997) describes how dictation becomes a more relaxed process since the user can now concentrate on the content of what is being dictated instead of the process of getting the text into the computer. Combining code documentation and voice recognition may be a good way to use an established technology to solve a problem that is continuing to grow in the software industry. The prototype developed takes audio comments, translates them to text, and displays the text comments in the code. It also has the feature that the audio comments can be played back so if the translation is incorrect or not comprehended by the next programmer, he can playback the audio comment and hear exactly what was said.
eclipse extensions While e-mail is a commonly used asynchronous communication method, the knowledge-sharing requirements of the 24-Hour Knowledge Factory
make any one-to-one communication methods a poor choice for project communication. However, in order to convince software developers to move away from this method of communication, a convenient alternative that makes information available to the entire team must be provided. Project communication is not always technical in nature. Often, target dates, requirements decisions, priorities, and even team member schedules must be shared such that an entire team, regardless of where they are located, must be able to quickly assimilate. The solution under development proposes integrating tools into a common development environment. The Jazz project at IBM (Cheng et al., 2003) is a recent initiative that begins to address these concerns by providing a framework for distributed collaboration that is also processaware and combines technical and managerial tasks into the development environment. This framework is built as an extension to the Eclipse Development Environment and provides many tools that are ideal for supporting the 24-Hour Knowledge Factory. What Jazz does not provide is an alternative to e-mail that functions as a team-based project communication method. One solution may be discussion forums. Forums allow informal communication to be stored in a structured format that is accessible by all team members. Therefore, work is being done to study the existing functionality of the Jazz platform that would work well in the 24-Hour Knowledge Factory and to create appropriate plug-ins that integrate discussion forums into the Jazz platform.
conclusIon As long-term strategic offshore partnerships evolve into the 24-Hour Knowledge Factory, new methods of work must be employed (Gupta, Seshasai, Mukherji, & Ganguly, 2007). Here, we have introduced the Composite Persona, a long-lived micro-team that has simultaneous in-
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dividual and collective characteristics. CPs have the potential to resolve much of the difficulty in contemporary offshore development by mitigating the cultural, linguistic, and time zone differences between partners. Modern groupware technologies cannot fully realize the possibilities made available by the 24-Hour Knowledge Factory and the CP method. Here, we have presented a new software process (CPro) customized for use by developers organized into CPs. MultiMind, our new groupware tool and framework, builds upon a variety of novel technologies to aid software developers that employ CPro, and automates many management and process functions in order to reduce the need for explicit cooperation between the collaborating developers. Furthermore, we are experimenting with speech recognition technology as it can be applied to vocal annotation of project artifacts in distributed and international development. On the near horizon, we are also preparing extensions to the popular Eclipse integrated-development environment that will provide a smooth path for moving from contemporary offshore development methods into the 24-Hour Knowledge Factory. Beyond technology, we have created an international partnership. With aid from the University of Technology–Sydney and the University of Wroclaw, we can test theory and tools and move closer to the 24-Hour Knowledge Factory.
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This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 89-104, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 3.3
Best Practice in Leveraging E-Business Technologies to Achieve Business Agility Ehap H. Sabri University of Texas at Dallas, USA
AbstrAct This chapter explains the best practice in implementing e-business Technologies to achieve business cost reduction and business agility. Many companies started to realize that gaining competitive advantage is no longer feasible by only managing their own organizations; it also requires getting involved in the management of all upstream supply organizations as well as the downstream network. E-business technologies present huge opportunities that are already being tapped by several companies and supply chains. Although the benefits of implementing e-business technologies are clear, enterprises struggle in integrating e-business technologies into supplychain operations. The author illustrates the strategic and operational impact of e-business technologies on supply chains and explains the performance benefits and challenges firms should expect in implementing these technologies. Also,
the author provides the best-practice framework in leveraging e-business applications to support process improvements in order to eliminate nonvalue-added activities and provide real-time visibility and velocity for the supply chain. Finally, this chapter presents the future trends of using e-business in transformation programs.
IntroductIon Executives realized that producing high-quality products is not enough in today’s competitive environment; the new challenge is to get products to customers when and where they need them, exactly the way they want them, with a competitive price and in a cost-effective manner. Many factors are making this challenge more complicated; globalization, increased complexity of supply chains (SCs) with outsourcing and the move to mass customization and build-to-order
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(BTO) environments, the need for a shorter time to market to gain competitive advantage, and the shift from vertical to horizontal supply chains make an efficient integration with suppliers and customers more critical. E-business technologies address the above challenges by enabling enterprises to collaborate with their internal and external suppliers and customers, providing visibility, automating the paperdriven business processes, and interconnecting inventory, logistics, and planning systems. The way to survive the competition in today’s business world is to stay ahead of competitors. Leveraging e-business technologies effectively is key to staying competitive and achieving business agility. Although the benefits of implementing e-business technologies are clear, enterprises struggle with integrating e-business technologies into supply-chain operations. Decision makers find themselves asking the most fundamental questions. How can we do it? What is the best practice? Does it apply to us? Does technology add value? If so, what is the best way to quantify it and then maximize it? Since many have failed in achieving value, how can we make sure that we will not be one of them and will be able to minimize the risk? What does senior management need to do to support transformation initiatives? This chapter gives powerful tools for answering these questions. This chapter addresses the strategic and operational impact of e-business technologies on supply chains and explains the performance benefits and challenges firms should expect in implementing e-business technologies. Also, it provides the best-practice framework in leveraging e-business technologies to support process improvements in order to achieve cost reduction and velocity for the supply chain. This framework includes a practical and effective return-on-investment (ROI) model to calculate the benefits of e-business transformation programs.
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The objectives of this chapter can be summarized as follows. • • • •
Provide a good understanding of the challenges in today’s business environment Identify the impact of e-business technologies on enterprise processes Highlight the benefits of implementing ebusiness technologies Provide guidelines and a framework for implementing e-business technologies successfully
The concepts in this chapter are presented in an easy-to-understand manner that is intended for any reader interested in learning about e-business technologies. Because e-business can be leveraged by several functions within the organization, this chapter has been written for the wide audience that is interested in learning how to leverage e-business techniques in improving processes and slashing waste. This chapter provides strategies for senior managers to use in planning for transformation programs, and also provides middle mangers with tools to effectively manage and implement the best practice. Graduate students can use this chapter to gain an excellent understanding of how e-business technologies work, and then use this knowledge to either extend the research in this field or implement the concepts learned from this chapter in the industry.
bAcKground Valencia and Sabri (2005) stated that the widespread use of the Internet has turned the eyes of many companies to the numerous solutions that the Internet provides. E-business technologies have helped many companies in improving their overall processes and performances.
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On the other hand, Handfield and Nichols (2002) mentioned that integrated supply-chain management (SCM) is now recognized as a strategy to achieve competitive advantage. When pressed to identify how to achieve this strategy, however, the path forward for executives is not clear. Numerous solution providers offer the “silver bullets” to supply-chain integration, yet the results are never guaranteed.” Devaraj and Kohli (2002) mentioned that executives are concerned that even when there is promise of a payoff, the assumptions may change and payoffs may never be realized. Rigby, Reichheld, and Schefter (2002) mentioned that, in a survey conducted by a CRM (customer-relationship management) forum, when asked what went wrong with their CRM projects, 4% of the managers cited software problems, 1% said they received bad advice, but 87% pinned the failure of their CRM projects on the lack of adequate change management. Any transformation program should encompass three specific phases: initial enablement, followed by implementation, and finally ongoing support and maintenance. An effective transformation plan must support these three phases and address all the challenges around selecting the right strategy, change management, and software provider; maintaining upper management buy-in; managing by metrics; and rolling out a maintenance strategy. Valencia and Sabri (2005) mentioned the several guidelines that are important to consider when e-business technologies are implemented. These guidelines can be grouped as follows. •
Initial enablement: Synchronize e-business objectives with corporate initiatives Use e-business as a driver for significant process improvement Identify operational and financial benefit metrics
•
•
Clearly identify the process and the scope of the transformation program Obtain consensus from all process stakeholders Implementation: Simplify processes by eliminating nonvalue-added activities Deploy in small phases with compelling ROI Consider proactive enforcement of tobe processes in the solution Enable exception-based problem resolution Ongoing support and maintenance: Define the ongoing process for capturing, monitoring, and analyzing metrics data
E-Business Definition E-business can be defined as the use of the Internet to facilitate business-to-business (B2B) or business-to-consumer (B2C) transactions and includes all operations before and after the sale. E-business can also be defined as the adoption of the Internet to enable real-time supply-chain collaboration and integration of the planning and execution of the front-end and back-end processes and systems. E-business has already impacted the industry significantly by providing important benefits like cost reduction, visibility improvement, lower inventory, streamlined processes, better response time, faster time to market, better asset utilization, higher shareholder value, fulfillment lead-time reduction, flexibility improvement, revenue increases by penetrating new markets, improvement in customer satisfaction, and better standards of living. E-business, or the Internet computing model, has emerged as perhaps the most compelling enabler for supply-chain integration. Because it is open, standard based, and virtually ubiquitous, businesses can use the Internet to gain global vis-
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ibility across their extended network of trading partners and respond quickly to changing business conditions such as customer demand and resource variability. The Internet is considered to be the enabler for e-business technologies, while e-business is the enabler for supply-chain collaboration and integration. E-business technologies can support different environments: business to employee (B2E), B2C, and B2B. The B2E environment links the ERP (enterprise resource planning), SCM, warehousing, shipping, and human-resources systems together into a Web-based system. B2E focuses on the internal transactions of a company and affects the internal supply-chain process. The B2C environment allows customers to place, track, and change orders online, and allows sellers to gather information about the consumer in real time. B2C is sometimes referred to in the literature as e-commerce. Other literature differentiates between the direct business customer and the end customer (consumer). The B2B environment links B2E and B2C to the systems of the suppliers and affects the external supply-chain processes. The best practice is to have all of the three environments (B2E, B2B, and B2C) under one portal for seamless information transfer between them. E-business technologies can also be divided into two types: (a) process-focused technologies like online auctions and (b) infrastructure-focused technologies like Web services (XML [extensible markup language], SOAP [simple object access protocol], UDDI [universal description, discovery, and integration], and WSDL [Web service description language]), the wireless application protocol (WAP), the global positioning system (GPS), bar coding, and radio-frequency identification (RFID) to transmit the data into computer applications. Web services are built on platform-independent standards that enable e-business applications to share information over the Internet between internal and external systems.
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XML provides the best way for companies to pass data and coordinate services over the Internet. In essence, XML is a file format that allows users to include definitions of terms and processing rules within the same file (Harmon, 2003). SOAP and UDDI are additional software protocols, where SOAP is a protocol that enables one computer to locate and send an XML file to another computer, and UDDI is a protocol that allows one company to query another company’s computers to determine how certain kinds of data are formatted. WSDL is the language in which the UDDI protocol is implemented. There are still issues to be resolved, and many groups are working on middleware and security standards to make XML more flexible and secure (Harmon).
todAy’s busIness chAllenges Executives face many challenges today in every aspect of their operations and enterprise integration. The following are considered to be the top 10 challenges. • •
•
•
The need to be customer oriented and at the same time manage cost more efficiently Information delay, which is considered to be a typical concern. Since the processes are the ones that realize the information flow between partners, enterprises need to redesign their business processes to address this challenge. Globalization, which intensifies the competition and makes competitive advantage crucial The increased complexity of supply chains and the growing need for a tighter control of over it. The supply chain can be defined as a network of facilities (manufacturing plants, assembly plants, distribution centers,
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•
•
•
•
•
warehouses, etc.) that performs the function of the transformation of raw materials into intermediate products and then finished products, and finally the distribution of these products to customers. The increased complexity may result from the involvement of one company in multiple supply chains, the growing complexity of products, the growing complexity of managing information flows, and the increasing trends of thirdparty logistics and subassembly (contract) manufacturers. Long and unpredictable product life cycles. It is important to shorten the product-introduction cycle and be faster to react to the market needs to gain competitive advantage. The shift from vertical integration to horizontal supply chains, which calls for more efficient collaboration with suppliers and customers. The new trend is for companies to buy out competitors in the same business or merge with them (consolidation) instead of buying their suppliers (i.e., to expand vertically instead of horizontally); this requires the synchronized addressing of collaboration, planning, and procurement issues. Outsourcing and having suppliers across the world. Companies nowadays outsource assembly work, information-systems management, call centers, service-parts repair and management, and product engineering to contractors. The bigger challenge is to decide what to outsource, and how to make sure that customer satisfaction, delivery service, or quality are not impacted. Expensive cost structure, especially when companies are facing intensified competition. Related to this is the increase in shipping costs due to outsourcing. The disruption to the supply chain from demand and supply mainly caused by the supply-chain dynamics.
•
Supporting the redesigned processes with leading-edge technology that is easy to integrate, cheap to maintain, fast to achieve results, and low in risk
In order to address the previous challenges in today’s environment, companies should look for certain key enablers to implement in their operations. These key enablers can be grouped as follows. 1.
2.
3.
4.
Cross-organizational collaboration: This can reduce lead time, improve efficiency, reduce quality risk, and streamline processes. Flexibility: Flexibility should be built into product designs and manufacturing processes to become more customer oriented and mitigate the challenge of supply and demand fluctuations by providing the ability to change plans quickly. Flexibility is measured based on the ability to shift production load (flexible capacity), change production volumes and product mix, and modify products to meet new market needs. It is important to mention that cost-reduction initiatives usually inversely impact flexibility. Visibility: Real-time visibility reduces the uncertainty and nervousness in the supply chain, reduces safety stock (i.e., reduces cost), and increases customer satisfaction (i.e., increases revenue) by presenting the real picture and providing the ability to solve potential problems ahead of time. It will also reduce the impact of disruption to the supply chain caused by demand and supply. Process innovation: This enabler addresses the following types of questions. How can companies reengineer their processes to increase speed when introducing new products? What supply-chain-process improve-
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5.
6.
ments and tools should companies invest in to gain competitive advantage? How can companies restructure their supply chains to reduce cost and increase profitability across their total global network? How can companies reduce their supplier base? Risk management: This enabler addresses the new risks related to product quality and service delivery that arise from outsourcing, locating supply-chain activities across the world, and the acceleration of new product introductions. It also addresses the security concerns after September 11, 2001. Technology: Technology should be adopted to enable and support the new or modified processes, and reduce the supply-chain complexity.
E-business is the major driver to implement the first, third, and last enablers, while best practice is the major driver for the rest of the enablers. These two drivers (e-business and best practice) will be discussed later in this chapter. The following section will provide the benefits of implementing the best practice, which is enabled by the right e-business technology.
the IMPAct oF e-busIness technologIes on scM, crM, & srM suPerProcesses The e-business technologies available through the Internet, combined with ongoing advances in advanced planning and scheduling (APS) software development, have given SCM an enormous boost and helped in maximizing business agility. APS is a constraint-based planning logic that emerged in the early 1990s, and it is considered to be the major breakthrough after MRP (material resource planning) logic. SCM is defined as the process of optimizing the flow of goods, services, and information along the supply chain from supplier
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to customer. It is also the process to strategize, plan, and execute business processes across facilities and business units. It focuses on the internal supply chain, which is under the direct control of the enterprise. Information at all points along the supply chain is captured and well presented by e-business technologies (in a B2E environment), enabling better decision making in SCM businesses processes, especially regarding maintaining appropriate inventory levels and the efficient movement of products to the next production or distribution process, and supporting sales and operations planning (S&OP). E-business has replaced excess inventory with accurate, inexpensive, and realtime information. Also, real-time information about the supply and the ability to collaborate with customers on the forecast have helped producers to balance and match supply with demand. All the above have enabled many companies to transform their supply operations from build to stock (BTS) and mass production to BTO and mass customization. Anderson (2003) defined build to order as the on-demand production of standard products, while mass customization is the on-demand production of tailored products. Supplier-relationship management (SRM) is the process of supporting supplier partnerships in the supply chain, and coordinating processes across product development, sourcing, purchasing, and supply coordination within a company and across companies. CRM is the process of covering all customer needs throughout the phases of customer interaction. CRM is also defined as the process of allocating organizational resources to activities that have the greatest return on profitable customer relationships. Since the best practice of SRM and CRM are built around supply-chain integration, e-business is considered as the enabler for these superprocesses. The B2B environment is typically leveraged for SRM, while the B2C environment is typically leveraged for CRM.
Best Practice in Leveraging E-Business Technologies to Achieve Business Agility
Organizations utilize e-business solutions (a solution is a combination of best-practice processes and enabled technology) in the SRM area to eliminate paperwork, streamline shipment and payments, reduce the cycle time of finding and acquiring suppliers, easily monitor contract terms, leverage spend consolidation by supplier and part rationalization, increase supplier awareness during the design and production phases, and automate the procurement process. On the other hand, organizations utilize ebusiness solutions in the CRM area to automate order receiving; to capture, analyze, and leverage customer information; and to reduce order-todelivery cycle time and expediting costs. We will drill down in the next section to detail the SCM, SRM, and CRM business processes and highlight the impact e-business has on them. We will mention the related pain points and show the potential benefits of addressing them using e-business technologies in addition to several success stories in this area. SRM, SCM, AND CRM business processes; Pain Points; benefits of adopting e-business technology; and success stories
Each superprocess (like SCM, SRM, and CRM) consists of several business processes. Each key business process is defined (see Table 2), and typical challenges in the current practice (as-is process) are highlighted. The chapter shows how e-business technology and its different application levels can address these challenges, and finally typical benefits resulting from adopting e-business technology are mentioned.
Key business Processes Table 2 shows the key business processes in each superprocess of SCM, SRM, and CRM. Although the name and scope of these processes may vary across different industries, this table and the following process definitions give companies a good idea on how to map their business to this table and understand the impact of e-business on their own processes. The criteria used to link certain business processes to the appropriate superprocess are the following. •
If a business process has a direct relationship with suppliers based on the best practice, it would belong to the SRM superprocess.
Table 2. Business-Process Distribution SCM
CRM
Strategic
Strategic Sourcing
Supply-Chain Design
Marketing Management
Tactical
Product Design
Sales & Operations Planning
Selling Management
Operational
Level
Superprocess SRM
Procurement
Order Fulfillment
Customer-Service Management
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•
•
•
If a business process has a direct relationship with customers based on the best practice, it would belong to the CRM superprocess. If a business process has a direct relationship with neither suppliers nor customers, and it helps in balancing supply and demand, it would belong to the SCM superprocess. If a business process is in the gray area where it spans across two superprocesses, its own subprocesses should be evaluated, and the business process will be linked to the corresponding superprocess to which the majority of the subprocesses belong to.
a long-term relationship with suppliers. One of the major challenges (pain points) in this process is the inability to identify and manage the total supplier spend and demand because of complex, disconnected purchasing systems. Another disconnection is between the engineering and purchasing systems, which causes the lack of visibility to the design engineers of the approved vender list (AVL). Another related challenge is the inability to consider supplier performance during sourcing decisions by design engineers or purchasing analysts.
Product design In the second dimension of Table 2, the criteria that have been used to decide the level a certain business process belongs to are as follows. •
•
•
If a business process is used mainly to generate strategies to run the business, it would belong to the strategic level. If a business process is used mainly to generate a plan to operationalize the strategies, it would belong to the tactical level. If a business process is used mainly to execute the plans to realize the strategies, it would belong to the operational and execution level.
The strategic level is considered to be the long-term process, the tactical level is the midterm process, and the operational level is the short-term process, which includes execution (for simplicity). Going up the levels from the operational to the tactical to the strategic, the percentage of cost savings goes up and the impact of decisions on the success of the organization is higher.
Strategic Sourcing Strategic sourcing is defined as the process of identifying the best sourcing strategy to reduce cost and raw-material supply risk, and to achieve
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Product design is the process of collaboration among companies, partners, and suppliers to share product design, schedules, and constraints to arrive at a single bill of material for a finished product effectively. It is a critical process due to its ability to facilitate bringing innovative and profitable products to the market quickly, and to ensure product quality. The product design consists of three phases: concept, development, and pilot. It also includes product-engineering changes (product revisions) as a subprocess. These changes can be due to component-cost change, product improvements, process change, quality corrective actions, material shortages, or product obsolescence. Product revisions involve design engineers, procurement, suppliers, manufacturing and process engineers, contract manufacturers, and service support. Product design is tightly integrated with PDM (product-definition management), which is the database for all designed parts. Product design has several challenges like intensified competition, which increases the need to introduce new products to the market more quickly; complex products, which make optimizing the design more challenging; frequent design changes, which increase prototype-part cost due to the late involvement of suppliers in the design
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phase; and the inability to identify the right products to launch or fund, the right suppliers to collaborate with during the design, and the right standard items to reuse. Also, subcontracting and outsourcing extends the need for real-time collaboration with partners and suppliers.
Procurement Procurement is the process of executing the selected sourcing strategies by performing a request for quote, reverse-auction, bid-analysis, and contract-processing work flows to select the source of supply, and then managing all daily activities of procurement with the selected suppliers. It is also the process of managing two-way real-time communications with suppliers regarding the part or raw-material supply to achieve and execute a synchronized procurement plan. There are three key pain points for this process. First is the lack of intelligent visibility and consistent supplier performance throughout the life cycle of the purchase order. This results from the inability to conduct reliable bid analysis considering different criteria in addition to the price, the lack of early problem detection for the inbound material and mismatch-resolution framework, a costly and difficult-to-maintain EDI (electronic data interchange) because different versions of the software may result in transmission errors, and the inability to capture supplier performance data. The second key pain point is the many nonvalue-added and time-consuming (paper-based) activities in this process, like manual RFQ and contracting processes, the checking of shipment status, and paper invoices. The high cost of both expedition and mismatch resolution between the receipt and the invoice is the third key pain point.
Supply-Chain Design SC design is a long-term planning process to optimize the supply-chain network or configuration
and material flow. The primary objective of this process is to determine the most cost-effective SC configuration, which includes facilities; supplies; customers; products; and methods of controlling inventory, purchasing, and distribution on one hand; and the flow of goods throughout the SC on the other hand. Sabri and Beamon (2000) mentioned that strategic supply-chain design concerns are the location of facilities (plants and distribution centers), the allocation of capacity and technology requirements to facilities, the assignment of products to facilities, and the distribution of products between facilities and to customer regions. The major pain points or challenges of this process are the inability of the inflexible supplychain configuration to react efficiently to the variability in demand and supply, or to the introduction of new products into the market. The shift from mass production to customized products forces companies to rethink about their physical SC configurations, and nonrepeatable and manual processes.
Sales and Operations Planning The APICS (American Production and Inventory Control Society) dictionary defines sales and operations planning as “a process that provides Management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of the supply chain.” The main objective of this process is to balance demand and supply, which is not an easy exercise due to the dynamic nature and continuous fluctuation of demand and supply. Historically, supply and demand balancing has been done reactively by sales, marketing, and operations teams allocating constrained products to customer orders, expediting product shipments, or reconfiguring products to create the required models. This business process consists of several subprocesses like
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demand forecasting, inventory planning, master planning, and revenue planning. Some of the major pain points of this process are the inability to generate a unified demand plan and to reach consensus across multiple departments, demand and supply volatility, the lack of historical data related to supply and transportation lead-time variability, and the lack of visibility downstream and upstream the supply chain after unexpected events happen.
Order Fulfillment Order fulfillment is a process of providing accurate, optimal, and reliable delivery dates for sales orders by matching supply (on-hand, in-transit, or planned inventory) with demand while respecting delivery transportation constraints and sales channels or distribution centers’ allocations. It is the process of promising what the company can deliver, and delivering on every promise. It is tightly integrated with the selling-management process under CRM. The major pain points for order fulfillment are the inability to provide visibility across the supply chain to ensure on-time delivery to the customer, and the inability to provide flexibility in meeting customer’s expectations. The Internet market forces companies to deal with small shipment sizes more frequently, and changes the destination of deliveries to residential areas.
Marketing Management Marketing management is the process of creating effective marketing programs to increase revenue, and to increase demand for the products in profitable market segments. It is also the process of generating new customers in a profit-effective manner and providing the best mix of products and services. The marketing process is an input to the demand forecasting subprocess to communicate the projected demand upstream for
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planning and forecasting purposes. The traditional marketing process is company centric, where phone or face-to-face meetings are the primary marketing media. In the past, manufacturing controlled the market by determining the price, quality, specifications, and delivery parameters of their products. Company-centric organizations were organized as isolated departments, each dedicated to specific fulfillment functions along the supply chain (Curran & Ladd, 2000). The other main pain points for this process are the inability to identify appropriate market segments for incentives and promotions, the inability to create effective marketing programs to achieve revenue and profitability objectives while considering supply-chain constraints, and lost revenue due to ineffective new-product launches.
Selling Management It is the process of helping and guiding the customer to decide on what to buy, and providing accurate and reliable information on the price, delivery, and configuration options. Selling management is the trigger point for sales order processing, which is a subprocess under order fulfillment. The main pain points in the current practice are the inability to match offerings to customer needs profitably through intelligent pricing, the configuration and availability checking, and the inability to provide the sales agents with guided selling, pricing, and order-promising information to ensure accurate order generation and provide the best product-service bundle to the customer. Sabri (2005) summarized the challenges that the retail industry faces in the area of selling management. 1. 2.
Managing the complicated pricing process Managing the growing product catalog with the challenge of limited space
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3. 4.
5.
The need for speed in the complex supply network of short-life products Managing promotions and discounts effectively, and the need for markdown optimization Managing product assortments, phasing out products, and seasonality
Customer-Service Management Customer-service management usually starts through the signing up of a service agreement with the customer, which includes several contract items like discounts on replacement parts, guaranteed response time, technicians’ hourly rates, and support time (Curran & Keller, 2000). This process consists of service planning and scheduling, service contract management, service order processing, replacement-part delivery, damaged-part recycling or returns, call centers, and billing. The call center or help desk is the traditional channel for receiving the service order notification, which represents a request for a customer-service activity that can be used to plan
specific tasks related to the usage of spare parts and resources, allocate resources to the service task, monitor the performance of the conducted service tasks, and settle service costs. Some of the CSM-process pain points are the complexity of today’s products, which makes managing this process more difficult; customer dissatisfaction due to service-part shortage; inaccurate forecasting for service parts that are considered of high-dollar value, and slow-moving items; and the fact that customer service is becoming a competitive advantage due to the intensified competition and the need to compensate for revenue losses in a flat economy.
e-business Application levels and Benefits Application Levels of E-Business Before discussing how e-business can address the aforementioned pain points and provide benefits, let us first discuss the different application levels of e-business technology as shown in Figure 1.
Figure 1. Application levels of e-business Key Enablers
Improvement
Process Innovation
New Innovative Processes
Drastic Improvement
Wisdom Flexibility
Integrated SC Planning
Major Improvement Knowledge
Cross-Collaboration
Workflow Automation
Modest to major Improvement in efficiency and productivity Information
Visibility
SC Visibility (Information Sharing)
Modest Improvement Data
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There are four application levels of e-business as shown in Figure 1. The higher one goes in the pyramid, the more impact these levels have on the success of the organization and business agility. It is important to mention that achieving the higher levels depends on mastering the lower levels. In Level 1 (the base of the pyramid), information is extracted from data. Then, knowledge is extracted from information in Level 2, and wisdom is obtained in Level 3; this enables companies to accelerate to Level 4.
Level 1: SC Visibility SC visibility refers to sharing data across different participants of the supply chain, and presenting the needed information extracted from data to all participants, depending on their roles, online and on a real-time basis. Some examples of data include forecast data, inventory pictures, capacity plans, promotion plans, shipment schedules, and production schedules. SC visibility addresses the challenge of supply and demand uncertainty by providing visibility to supply events like supplier shortages, and demand events like changes to customer orders. SC visibility provides several benefits like forward (proactive) visibility, early problem detection, and increased productivity and efficiency. E-business software providers like i2 Technologies support several important capabilities for this level, like a centralized view into critical supply-chain information, and multiple modes of notification (e-mail, e-mail digests, pagers, or cell phones). Savi Technologies is an example of a company that makes use of RFID technologies to track individual products, containers, and transportation vehicles as they move through the supply chain. The information is put on the Internet so that real-time visibility of movements can be obtained (Lee & Whang, 2001). Another example for providing visibility to in-transit products and for improving the order-
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fulfillment process is of a contract trucking company that uses a two-way mobile satellitecommunication and position-reporting system to monitor the location of its trucks in order to improve performance under just-in-time programs (Ballou, 2004).
Level 2: Work-Flow Automation Work-flow automation refers to the automation and streamlining of activities between supply-chain participants. For example, the request for a quote (a subprocess of procurement) and the related activities between buyers and suppliers can be automated and tightly coupled to increase productivity and reduce cycle time. Another example is the automation of the request for information (a subprocess of product design) between engineers in the buying organization and suppliers; here, productivity and quicker-time-to-market gains are achieved. In Level 2, shared information (from Level 1) is taken one step further by collaborating on it or resolving mismatch problems (exceptions). In this level, exceptions are prioritized so that the most important supply-chain disruptions are dealt with in the quickest and most optimal manner; this provides the SC partners the ability to respond to problems in real time to minimize the impact of disruptions on the supply chain, which means cost-effective, speedy, reliable, and almost-errorfree SC activities. The automation of critical (core competency) business processes should be done after improving the as-is process by eliminating nonvalue activities, simplifying and streamlining processes, and removing barriers (disconnects) between processes or functions. This means the automation should be done for the redesigned modified to-be process, and the software needs to be customized to follow and support the process to maintain the competitive advantage. On the other hand, automating noncore competency processes can be done by either using out-of-the-box work flows provided by software companies by which such
Best Practice in Leveraging E-Business Technologies to Achieve Business Agility
processes are changed accordingly (no value in tailoring the software to fit the process), or by outsourcing the management of these processes to a third party. A good example of work-flow automation is the application of electronic exchange portals in the area of procurement, such as Covisint for the automobile industry, e2open for the electronics industry, and Transora for the grocery industry.
Level 3: Integrated SC Planning The integrated-SC-planning level allows companies to respond quickly and effectively to unplanned supply and demand events that may disrupt information and material flow in the supply chain as one unit. It allows a company to plan based on real-time execution data, and execute based on an up-to-date plan. Integrated SC planning provides a process-centric view coordinating different business subprocesses like product introduction, forecasting, replenishment, manufacturing, fulfillment, and procurement with suppliers and customers, while enabling event management. For example, it supports event-triggered planning and replanning. This level blends information gathered from users using collaboration in Level 2 and multiple transactions and planning systems to allow the exchange of knowledge by the SC partners and create synchronized plans and one global view of the supply chain. Each supply-chain member (buyer, supplier, carrier, third-party logistics, contract manufacturer, etc.) often operates independently and only responds to immediate requirements. If the Internet is integrated with the SC planning process, SC members can share needed information on a real-time basis, and react quickly and efficiently to changes in demand, material shortages, transportation delays, and supplier inability to replenish. One example is the collaborative planning, forecasting, and replenishment (CPFR) initiative.
McDonald’s Japan is a good example of the successful use of CPFR. McDonald’s Japan established a process around the Internet whereby stores, marketing, distribution centers, and suppliers would communicate and collaborate via the company’s Web site to agree on order sizes and supply-replenishment delivery schedules (Ballou, 2004). TaylorMade (a large golf supplier) leveraged integrated SC planning to improve the orderfulfillment process. TaylorMade adopted Provia Software as the warehouse-management system and integrated it smoothly with i2’s planning and fulfillment systems to prioritize orders based on service level, order volume, promised delivery date, and transport mode (Bowman, 2002).
Level 4: New Innovative Processes Once companies master e-business application levels, they start to think of adopting new strategies and models for conducting business, seeking not only incremental improvements, but drastic ones. They might seek to reengineer (redesign) their processes to leverage the most out of e-business technologies. Sometimes, companies start to define new processes, seeking new business opportunities or trying to penetrate new markets and customer segments that were neither apparent nor possible prior to the e-business. Companies seek the new-generation business models to achieve competitive advantage and significant benefits. One example is what Dell Computer did when it adopted the build-to-order strategy and provided flexible configuration capability for customers online. The following are examples that show the range of possibilities for companies that pioneered in these areas.
Example 1: Mass Customization The Internet and e-business technologies facilitate mass customization and allow customers to
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configure specific order options tailored to their preferences. Mass customization is the centerpiece of a strategy that woke the big golf supplier TaylorMade and propelled it ahead of the competition in terms of agility and innovation. Today, TaylorMade can customize virtually any aspect of a club. The results to date are impressive (Bowman, 2002).
Example 2: Public Marketplaces The Internet and e-business technologies helped many companies do business online using a secured specialized Web site. One example is World Chemical Exchange, providing a global market for chemical and plastic manufacturers and buyers. More than 2,500 members can now conduct around-the-clock trading of chemicals and plastics of all types (Lee & Whang, 2001).
Example 3: Supply-Chain Redesign A good example is what many remote discount computer-hardware and -supply houses did to compete with local retail stores. Many of them used the Internet technologies as a strategy to compress the order cycle time and improve the order-fulfillment process: A customer enters the order through the company’s Web site, the inventory and payment are checked, and the order is filled from the warehouse and shipped using UPS, FedEx, or other carriers directly to the end customer.
Example 4: Value-Added Replenishment Programs Companies as part of lean initiatives are trying to focus on value-added activities to cut waste in the supply chain and reduce overhead cost. Therefore, manufacturers are moving away from making products to stock and sell them later. They
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are moving away from procuring based only on forecast. Vendor-managed inventory (VMI) is a replenishment program that helps companies achieve their objectives. VMI delays the ownership of goods until the last possible moment and delegates managing the stock to the supplier. Western Publishing is using a VMI program in its Golden Book lines. It develops a relationship with its retailers in which these retailers give Western point-of-sale data. Ownership of the inventory shifts to the retailer once the product is shipped (Ballou, 2004). Kanban replenishment is another program in which replenishing parts is based on part consumption. It avoids the inaccuracy in forecasting and eliminates the need for inventory.
Example 5: Online Retailing Amazon.com understood e-business technologies very well. It has based its business model around it. Amazon.com depends on its efficient supply chain to satisfy customer needs worldwide. It mastered the selling-management process by improving the Web shopping experience through providing quick and reliable promises, and suggesting product bundles, among many other features. This makes Amazon.com one of the biggest and early adopters of e-business technologies.
Benefits of Adopting E-Business Application Levels Tables 3, 4, and 5 illustrate how the four application levels of e-business can address the challenges of SCM, SRM, and CRM business processes that were mentioned in the beginning of this section. These tables also show the potential benefits of adopting e-business strategies. Tables 3, 4, and 5 show the operational and financial benefits of adopting e-business application levels. The operational benefits can be grouped under inventory reductions, cycle-time
Best Practice in Leveraging E-Business Technologies to Achieve Business Agility
Table 3. The impact of e-business application levels on SRM processes SRM Business Processes E-Business Application Levels
Procurement
Benefits
Real-time visibility on engineering change requests (ECRs)
Sharing supplier and shipment information, real-time exception visibility, audit-trail notification, alerts, and tracking
Capturing log records for every visit of a user in the Web servers’ log file, including pages visited, duration of the visit, and whether there was a purchase, demand collaboration with customers
Product configuration, quotation processing
Service order logging, billing of services
• Better prediction of customer demand • Improving response time • Improving productivity
Integrated SC Planning
Considering the supply-chain constraints while executing the marketing campaigns, providing customer profiling and segmentation
Supporting different channels for order capturing (Web based, call center, EDI, phone, e-mail, or personnel meeting)
Warranty check, service order processing, integrating the call center
• Increasing revenues and profit • Creating new market/ distribution channels • Accurate promising date
New Innovative Processes
Real-time profiling that tracks the user click stream, allows the analysis of customer behavior, and makes instantaneous adjustments to the site’s promotional offers and Web pages
Online flexible configuration and real-time promise date
Dealing with products and services as one package during selling
• Long-term relationship and trust with the customer • Gaining competitive advantage
reductions, productivity increase, supplier performance improvement, and customer-service-level increase. The financial benefits are driven from the operational benefits and can be grouped as follows. •
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Cost reduction due to cost savings. The tight integration of supply-chain processes reduces the cost and time needed to exchange transactions and allows efficient procurement, which helps the purchasing
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Customer-Service Management
Benefits
staff to focus more on strategic activities like building supplier relationships than managing day-to-day transactions. Revenue growth and profit increase due to increased customer satisfaction by delivering on every promise and responding quickly to customer needs, and the ability to penetrate new markets. Better asset utilization by replacing inventory with real-time visibility
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•
Higher shareholder value due to growing profit.
The next section will provide the needed guidelines to implement e-business technologies successfully. Finally, a case study will be presented.
A FrAMeworK For successFul IMPleMentAtIon oF e-busIness technologIes Many companies are struggling with implementing e-business technologies and achieving the promised value or ROI. In addition, companies are looking for guidelines and strategies for ongoing operational management and support after the go-live, which includes rolling more customers, suppliers, and new business units when implementing e-business solutions to improve SRM, SCM, and CRM superprocesses.
According to a survey of 451 senior executives, one in every five users reported that their CRM initiatives not only had failed to deliver profitable growth, but also had damaged long-standing customer relationships (Rigby et al., 2002). Currently, there is uncertainty and doubt among organizations regarding the new Internet technologies, and although the appeal for best practice and the benefits of implementing e-business technologies are clear, enterprises struggle in integrating them into supply-chain operations because they are encountered by many challenges like the inability to master change management, the need for new skills to support processes that span across suppliers and partners, the need for e-business strategy and continuous upper management support, the lack of comprehensive metrics and continuous monitoring, and the inability to select the right software-providing partner. Figure 2 is proposed to address these challenges and provide best-practice guidelines to implement e-business program transformation successfully.
Figure 2. Framework for implementing e-business transformation programs
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e-business strategy and goals A clear strategy is the first step for a successful transformation. Executives need to understand the big picture, the interactions between all the processes, and the e-business applications to help them in creating an e-business strategy.
benchmarking Benchmarking is the process of comparing and evaluating a firm or a supply chain against others in the industry to help in identifying the gaps and areas of improvement. Benchmarking is used to validate the potential benefit and gain in performance measures from implementing e-business applications.
Process Analysis The purpose of process analysis (also called design and requirements) is to use modeling (process mapping) methods to analyze “as-is” business processes, capture the existing challenges and pain points in the current process and the supply chain, design and validate the to-be process improvements against best-practice benchmarks, determine the extent of process and technology changes possible in the currently existing systems, and identify the additional software (application) capabilities that are required to support the to-be process that cannot be supported by the existing systems. This requirements list will be the base for selecting the new software.
Select the Right E-Business Software As a best practice, organizations need to identify the best-of-breed solution that is most suitable for the required functionality for their business, taking into consideration software-technology maturity and sustainability. Supporting leading industry standards for e-business technology like
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Java, XML, Linux, and Web services is crucial during the selection process.
cost and Benefit Analysis Cost and benefit analysis is the process that determines the potential benefits from implementing the combination of the best-practice process and the new application or software. It addresses questions like the following. What is the potential value of increasing the loyalty of our customers when new marketing-management software is implemented? What is the cost of implementing the new solution?
Adopt a value-driven Implementation Methodology Adopting a value-driven approach to conduct the e-business transformation programs like Six Sigma is very critical. An effective transformation program typically takes 2 to 5 years, with several intermediate checkpoints (go-lives) to achieve the value needed to pay for the rest of the program.
Performance-Management system A performance-management system consists of two phases. The first phase is to establish a consistent metrics-tracking and -publishing process, and this phase should finish before the implementation of the transformation program. The second phase is to continue measuring the benefits and ROI, which should start during and after the implementation. Since the performance-management system depends mainly on monitoring the metrics (KPIs), it is critical to spend enough time on defining these metrics. The performance-management system should manage and coordinate the development of these metrics. Melnyk, Stewart, and Swink (2004) mentioned that metrics provide the following three basic functions.
Best Practice in Leveraging E-Business Technologies to Achieve Business Agility
• • •
Control: Metrics enable managers to evaluate and control the performance of the resources. Communication: Metrics communicate performance to internal and external stakeholders. Improvement: Metrics identify gaps (between actual performance and expectation) that ideally point the way for intervention and improvement.
Sabri and Rehman (2004) provided guidelines for identifying and maintaining metrics based on best practice, recommended to capture all operational metrics because improvement in one area could be at the expense of another, and suggested to summarize benefits in six key areas: revenue increase, cost reduction, process lead-time reduction, asset reduction, customer benefits, and supplier benefits.
and compliance. The lack of a defined and clear plan for maintenance and rollout might impact the whole transformation program negatively. The ongoing maintenance and rollout process should include adding new SC organizations and removing existing ones as necessary. It includes training programs and process compliance by monitoring related metrics. It also includes the identification and description of all user groups, and the process of adding new users, making changes to user authorization levels, maintaining profiles, and deleting users. Finally, contingency plans should be reviewed periodically to make sure its readiness. Contingency plans represent predefined courses of actions to be followed in case of the occurrence of a drastic event like when the sources for inbound information go down.
case study
Effective change management for e-business transformation programs should consider gaining and keeping executive sponsorship. Without executives’ buy-in and support, a transformation program would be much closer to failure than success. It should also involve all SC partners in developing the new to-be process, and should establish a benefit-sharing and incentives mechanism.
This case study is based on an article published in October 2004 by Reuben Slone in Harvard Business Review (HBR), which is about the supply-chain turnaround by Whirlpool in the last 4 years. Whirlpool makes a diverse line of products like washers, dryers, refrigerators, dishwashers, and ovens, with manufacturing facilities in 13 countries. This case study is a real-life example of a company that adopted many of the bestpractice guidelines of implementing e-business applications that were highlighted previously in this section.
Maintenance, support, and rollout
Strategy
Although companies acknowledge the importance of ongoing operational management and support, few of them think ahead of time and allocate the right resources for it. Once the e-business application links are in place, companies find themselves with an urgent need to manage the ongoing maintenance and rollout. Ongoing monitoring and maintenance are necessary to ensure 100% uptime
Whirlpool needed a strategy that not only addresses the current needs, but also anticipates the challenges of the future. Whirlpool wanted a strategy that can optimize supply-chain performance at minimum cost, and include new ebusiness technology, processes, roles, and talents to achieve competitive advantage. Its strategy was to focus on customer requirements first and
change Management
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proceed backward. Therefore, Whirlpool and Sears as a customer studied consumers’ desires with regard to appliance delivery. They found that consumers are asking for accurate promises as a first requirement: “Give a date, hit a date.”
Benchmarking and Process Analysis Whirlpool benchmarked its competitors and obtained cross-industry information and competitive intelligence from AMR, Gartner, and Forrester Research. Then it mapped out what is considered best-practice performance along 27 different SC-capability dimensions. This exercise helped identify areas of improvement.
Cost and Benefit Analysis The program transformation team had to build a compelling business case to get the buy-in from upper management. They had to justify their program wholly on expense reductions and working capital improvements.
Effective Transformation Plans Effective transformation plans include a valuedriven implementation methodology (Six Sigma), performance-management system, change management, and rollout plans. Whirlpool started with improving the S&OP process. Its current process was inadequate with Excel spreadsheet feeds. Now, Whirlpool is able to generate synchronized long and short plans that consider marketing, sales, finance, and manufacturing constraints or requirements. Then, it launched a CPFR pilot to share forecasts using a Web-based application and to collaborate on the exceptions, which enabled it to cut forecast accuracy error in half within 30 days of launch. In January 2002, Whirlpool implemented a suite of software products from i2 to reduce inventories while sustaining high service level. By May 2002,
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a blind Internet survey showed Whirlpool to be “most improved,” “easiest to do business with,” and “most progressive” in the eyes of their trade partners. It segmented its products and followed a different strategy for each product group. For high-volume SKU like dishwashers, refrigerators, and washing machines, it used the build-to-stock replenishment technique with its customers. For smallest volume SKUs, they followed the pull replenishment technique with the more flexible build-to-order process. The inventory savings on the small-volume SKUs can balance out the costs of stocking up on the high-volume SKUs. Whirlpool also started to move away from having one service level across all products, recognizing that some products are more important or more profitable than others and should have higher service levels. Recently, there has been a focus on systemto-system transactions, in which the Whirlpool system talks directly to a customer’s system for purposes of transmitting purchase orders, exchanging sales data, and submitting invoices and payments. At the same time, customers can check availability and place orders via the Internet. Whirlpool is also looking to implement an event-management capability that provides a notification whenever an action in the process has taken place. A couple things were absolutely critical to keep the transformation program schedule on track: a highly disciplined transformation program office and an effective management system. The key was to think big but focus relentlessly on near-term deadlines. Whirlpool organized the change effort into 30-day chunks, with three new capabilities or business releases rolling out monthly, some on the supply side and some on the demand side. The main job of the program transformation office, which adopted Six Sigma methodology, was to ensure the completion of projects on time, on budget, and on benefit.
Best Practice in Leveraging E-Business Technologies to Achieve Business Agility
The transformation program office contracted Michigan State University and the American Production and Inventory Control Society to develop a competency model that can outline the skills and roles required in a top-tier organization. Whirlpool also expanded the compensation system to allow employees to be rewarded for increasing their expertise even if they are not being promoted into supervisory roles. It also put a huge emphasis on developing employees’ management skills and used a model developed by Project Management Institute (PMI) as a standard for evaluating and enhancing the organization’s project-management capabilities. Finally, it assembled a supply-chain advisory board to provide guidance and assess the transformation program results and direction. To summarize, Whirlpool followed the best practice in leveraging e-business technologies, and in return, it has much to show for its transformation efforts. Today, its product-availability service level is more than 95%. The inventory of finished goods has dropped from 32.8 to 26 days. In one year, it lowered its working capital by almost $100 million and supply-chain costs by $20 million with an ROI equal to 2.
conclusIon E-business technologies present huge opportunities that are already being tapped by many companies and supply chains. Leveraging e-business technologies effectively is key to gaining competitive advantage, streamlining processes, slashing waste, and eventually achieving business agility, which is significantly needed in the new age of globalization and intensive competition. More companies will start to realize that gaining competitive advantage is no longer feasible only by managing their own organizations. They need to get involved in the management of all upstream organizations that are responsible for the supply, as well as the downstream network
that is responsible for delivery and the after-sales market. The challenge for companies for the rest of this decade is synchronization across supply-chain processes, from product design and procurement to marketing and customer-service management, in order to be more responsive to customer needs. The new trend of mergers and acquisitions will continue to rise, and big companies that are buying out smaller ones will grow even bigger in the complexity of their supply chains. This will increase the need for e-business technologies to streamline the process of collaboration between the different entities. Therefore, in the next few years, we will see the explosion of e-business-applications use as companies utilize e-business to redefine supplychain processes that span across suppliers and customers, which will result in a significant improvement in efficiency and will help companies achieve competitive advantage. Companies that do not come on board will realize that they are losing ground and customers soon. The widespread use of e-business will lead to new options for improving business-to-business and business-to-consumer collaborations like multitier collaborations and root-cause analysis for exceptions in the supply-chain performance. In addition, it will open new ways of integration between supply-chain partners like system-tosystem integration using Web services (e.g., integrating one firm’s inventory-control system and another’s logistics-scheduling environment), the use of wireless devices, and the tight integration of the Web site with the back-end systems of supply-chain partners. Eventually, e-business technologies will replace electronic data interchange, the benefits of which never materialized for midsized companies because of its high cost. We also expect SMEs (small and medium-sized enterprises) to realize the importance of e-business and to follow one of the following arrangements in adopting e-business technologies depending on the business requirements and cost factors.
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Microsoft arrangement: Easy to implement due to wide familiarity with the product and its selling process through partners, cheap license, cheap maintenance, and tight integration with other Microsoft products like Excel Public Web-enabled arrangement: Prebuilt solution by a Web-enabled applications provider at a fixed monthly cost, no need for software to be present on the company’s internal network, no maintenance fees, and lower risk due to almost zero-down investment
Intelligent performance-management systems that can capture negative performance trends and select the correct resolutions are expected to come into widespread use in the next few years. To summarize, we will witness, for the rest of this decade, what is called a tightly integrated environment in which supply-chain interactions involve tightly integrated databases and applications; processes are significantly redesigned and streamlined to eliminate redundancies and nonvalue activities.
reFerences Anderson, D. M. (2003). Build-to-order & mass customization. Cambria, CA: CIM Press.
Curran, T. A., & Ladd, A. (2000). SAP R3 business blueprint: Understanding enterprise supply chain management (2nd ed.). Upper Saddle River, NJ: Prentice Hall. Devaraj, S., & Kohli, R. (2002). The IT payoff: Measuring the business value of information technology investment. Upper Saddle River, NJ: Prentice Hall. Handfield, R. B., & Nichols, E. R. (2002). Supply chain redesign: Transforming supply chains into integrated value systems. Upper Saddle River, NJ: Prentice Hall. Harmon, P. (2003). Business process chain: A manager’s guide to improving, redesigning, and automating processes. San Francisco: Morgan Kaufmann Publishers. Lee, H., & Whang, S. (2001). E-business and supply chain integration. Stanford Global Supply Chain Management Forum, 1-20. Melnyk, S. A., Stewart, D. M., & Swink, M. (2004). Metrics and performance measurement in operations management: Dealing with the metrics maze. Journal of Operations Management, 22, 209-217. Rigby, D., Reichheld, F., & Schefter, P. (2002). Avoid the four perils of CRM. Harvard Business Review, 1-9.
Ballou, R. H. (2004). Business logistics/supply chain management (5th ed.). Upper Saddle River, NJ: Prentice Hall.
Sabri, E. (2005). Value chain management to achieve competitive advantage in retail industry. Paper presented at the Middle East Retail Conference, United Arab Emirates.
Bowman, R. J. (2002). TaylorMade drives supply-chain efficiency with 24 hour club. SupplyChainBrain.com. Retrieved December 10, 2004, from http://www.supplychainbrain.com/ archives/10.02.TaylorMade.htm?adcode=5
Sabri, E., & Beamon, B. (2000). A multi-objective approach to simultaneous strategic and operational planning in supply chain design. OMEGA: The International Journal of Management Science, 28(5), 581-598.
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Sabri, E., & Rehman, A. (2004). ROI model for procurement order management process. Paper presented at the Lean Management Solutions Conference, Los Angeles.
Valencia, J. S., & Sabri, E. H. (2005). Ebusiness technologies impact on supply chain. Paper presented at the 16th Annual Conference of POMS, Chicago.
Slone, R. E. (2004). Leading supply chain turnaround. Harvard Business Review, 1-9.
This work was previously published in Enterprise Service Computing: From Concept to Deployment, edited by R. Qiu, pp. 356-287, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 3.4
Open Source and Outsourcing: A Perspective on Software Use and Professional Practices Related to International Outsourcing Activities Kirk St.Amant East Carolina University, USA
AbstrAct
IntroductIon
This chapter examines the role of open source software (OSS) in international outsourcing practices that involve the transfer of knowledge work from one nation to another. Included in this examination are discussions of the benefits and the limitations of OSS use in outsourcing. The chapter also presents organization-specific and industry-wide strategies for effective OSS use in outsourcing situations. The chapter then concludes with a discussion of areas of international outsourcing where OSS might have important future applications or effects. The purpose of such an examination is to provide readers with the knowledge and the insights needed to make effective decisions related to the use of OSS in international outsourcing situations.
International outsourcing now includes the distribution of knowledge-based work to employees in other countries. Much of this work, however, requires the use of software either to perform a task or to provide the technologies that allow clients and outsourcing providers to interact. Conventional “proprietary” software can, however, be prohibitively expensive to outsourcing employees in developing nations. Open source software (OSS) might offer a solution to this problem, for OSS is often free to use and is relatively easy to modify or to update. Yet open source software also brings with it a new series of problems related to product consistency, user support, and digital piracy. While the relationship between outsourcing and software (particularly OSS) has been known for some time, it has received relatively little attention in terms of social and economic implications both
for those who outsource work and for those who perform outsourced work. Knowledge of these issues, however, is essential to understanding both current and future outsourcing practices and the socio-economic development of nations that engage in outsourcing. The purpose of this chapter is to provide readers with a foundational knowledge of how OSS use could affect international outsourcing practices. After reading the chapter, individuals will understand the relationship between software and outsourcing practices in terms of the opportunities and the limitations it creates for client companies and for outsourcing employees in developing nations. This chapter also presents strategies organizations can employ to use OSS more effectively in international outsourcing situations. The chapter then concludes with an overview of how global computing and OSS use is poised for significant growth and the implications this growth could have for different organizations.
The push to adopt BPO has to do with the perceived benefits related to such practices. Perhaps the most publicized of these benefits is savings related to the cost of skilled labor. Much of today’s knowledge work is being outsourced to skilled employees in developing nations — employees who can perform most technical tasks for far less than what counterparts in industrialized nations would charge. For example, gaming developers in Russia earn roughly $100 U.S. a week, while middle managers in mainland China earn roughly $9,000 a year (Weir, 2004; Nussbaum, 2004). Such wage-based savings, however, are not the only advantage related to offshoring. Rather, proponents of outsourcing note it also offers the benefits of
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bAcKground the growth of International outsourcing In international outsourcing — or offshoring — situations, companies in one nation transfer the responsibility for completing a task to workers in another country (Bendor-Samuel, 2004). Originally, this transfer of responsibility focused on manufacturing and the production of physical products such as clothing or footwear. The global spread of online media, however, has given rise to a new kind of international outsourcing that involves the export of knowledge-based work. Known as business process outsourcing — or BPO — this practice encompasses everything from computer programming to call center staffing and medical transcription. While such BPO practices have existed on a relatively limited scale to date, they are poised to expand rapidly in the future.
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Improved quality of service: Research indicates overseas outsourcing employees often provide better quality service than “domestic” workers who perform the same jobs (Reuters, July 182004; Farrell, 2004; Hagel, 2004). Certain call centers in the Philippines, for example, take 25% less time to handle incoming calls and receive higher rates of caller satisfaction than do U.S. counterparts (Hagel, 2004). Effective management practices: Because managers are paid less in developing nations, organizations can easily justify the use of more in-country managers to oversee outsourcing activities (Nussbaum, 2004; Hagel, 2004). This increase means managers have more time to answer employee questions and to provide employee training — factors that contribute to the improved quality of work or service perceived by many consumers (Hagel, 2004; Lewis, 2003; Hagel, 2004). Reduced employee turnover: Secure employment is often rare in many developing nations, and outsourcing jobs tend to be among the better paying ones. Therefore, outsourcing workers in developing nations tend to stay with employers for longer periods
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of time (Reuters, July 18, 2004; Farrell & Zainulbhai, 2004). As a result, these longterm employees tend to have more experience performing their jobs while reducing the need for and the cost of new employee training. Reduced production time: By using online media to distribute work to employees in different nations and time zones, organizations can keep operations going 24 hours a day, seven days a week. Such continual production means that processes and products can be completed more quickly than if done exclusively in one country (Friedman, 1999; Baily & Farrell, 2004; Bierce, 1999; “America’s pain,” 2003). Increased access to international markets: In many developing nations, marketplace success is often a matter of knowing someone in that region (Rosenthal, 2001). Companies that provide outsourcing services can provide such an “in,” as well as provide advice on how one should proceed with business interactions in a particular nation or region (Rosenthal, 2001).
The manifold benefits of offshoring have prompted many companies to adopt it as a part of their core business strategy. At present, it accounts for $10 billion U.S. in worth and engages the services of some 500,000 workers in India alone (Baily & Farrell, 2004; Rosenthal, 2004b). Moreover, some researchers believe offshoring will grow by 20% a year through 2008, and by 2015, some 3 million business processing jobs will be performed by outsourcing employees (Rosenthal, 2004b; Baily & Farrell, 2004). Some critics expect this number to be much higher and claim at least 5 million international outsourcing jobs will emerge in the next five to 10 years (Garten, 2004). The perceived benefits of international outsourcing have resulted in such practices spreading to a number of countries and to a variety of
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industries. French companies, for example, have begun working with French-speaking developing nations such as Senegal and Morocco on a variety of outsourcing projects, and these relationships have met with good results (Reuters, July 18, 2004). Similarly, German firms have begun exploring outsourcing relationships with Easter European nations, while the Netherlands has begun using call centers located in South Africa where Dutch-based Afrikaans is spoken (Farrell, 2004; “Sink or Schwinn,” 2004; Baily & Farrell, 2004; Rosenthal, 2004c). Additionally, markets in Spain, combined with the growth in the U.S. Spanish-speaking population, have meant more work is now outsourced to Mexico and to Latin America (Rosenthal, 2004a). Even India, the one time center for international outsourcing, is now outsourcing work to China and to Sri Lanka, where it can be done for less money (Reuters, September 2, 2004). The majority of BPO practices, however, are reliant on software. Aspects related to software use can thus affect if and how organizations realize the advantages related to the offshoring of knowledge work. For this reason, decision makers in the public and the private sectors need to understand the differences between proprietary and open source software — as well as the limitations and advantages of each — in order to make informed choices related to international outsourcing. Only through such informed decision-making can organizations benefit from the advantages related to offshoring.
MAIn thrust oF the chAPter software, cost, and International outsourcing Activities Software is essential to international BPO practices for two key reasons. First, it provides the mechanism for sharing materials and for interacting with others online (e.g., browsers and email
Open Source and Outsourcing
systems). Without the software needed to engage with others quickly, easily, and directly via the Internet, many of the cost, time, and quality benefits associated with the international-outsourcing of knowledge work would not exist. Second, production-related software (e.g., Microsoft Word or Adobe Illustrator) is essential to performing most knowledge-based programming, customer support, and IT tasks efficiently and effectively. Again, without the software needed to perform tasks, the time, cost, and quality benefits of international outsourcing cannot be realized. Unfortunately, the makers of software products have traditionally produced proprietary programs that require individuals to purchase them in order to perform a given activity. The for-profit nature of proprietary software has, however, made it unavailable to large segments of the world’s population — particularly in developing nations where high purchase prices are often associated with such materials (Warschauer, 2003). This restriction, in turn, affects online access and thus outsourcing activities in those regions. One solution to this situation would be for companies to supply prospective international outsourcing providers with free or inexpensive software products that would allow them to participate in outsourcing activities. Such an approach, however, would contribute to a second major software problem — copyright violation. In many developing nations, copyright laws are often weak (if not non-existent) or governments show little interest in enforcing them. As a result, many developing nations have black market businesses that sell pirated versions of software and other electronic goods for very low prices (Balfour, 2005). Such software piracy reduces consumer desire to purchase legitimate and more costly versions of the same product, and thus affects a company’s profit margins within that nation. In fact, global software piracy in 2004 accounted for some $33 billion U.S. in lost profits (“One third,” 2005). Further compounding this problem is the
fact that it is often difficult for companies to track down who is or was producing pirated versions of software products in order to stop that offender. Thus, while the distribution of cheap or free digital materials can help contribute to outsourcing activities, that same strategy can undermine an organization’s ability to sell its products abroad. Open source software (OSS) can offer a solution to this situation.
open source software and International outsourcing Software, in essence, is programming code — or source code — that tells a computer’s operating system how to perform a certain action (Still, 2004). The source code of Microsoft’s software program Word, for example, tells the related operating system how to transfer keystrokes into letters on a page and how to edit or to print that page. In theory, if an individual knows what programming/source code is needed to make a computer perform such activities, then that individual can simply retype that source code into his or her operating system, and the computer will respond as desired — the exact same way the original software would. Accordingly, if and individual can see how someone else programmed software to work (see the underlying source code), all that person needs to do is copy that programming/source code, and he or she no longer need to buy the related software. Rather, that person can now achieve the same action on his or her own. For this reason, many software companies “close” their source code in order to prevent users from seeing the underling programming that allows the software to work (Still, 2004). In these situations, users need to work through an interface that allows them to activate certain commands indirectly within a software program’s underlying source code. Closed software that prevents users from seeing the underlying code is know as proprietary
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software, for only the creator of that software is allowed to open or to see and to copy or to manipulate the underlying source code. Open source software is a polar opposite in terms of access to source code/programming. That is, the developer of a piece of software creates it in manner that is “open” and permits any and all users to access, copy, and modify the underlying source that allows software to work (Still, 2004). A classic example of such open source programming is the HTML coding that allows Web pages to be displayed on browsers. The coding of these pages is open for anyone to review and copy; all the user needs to do is view a page’s underlying source code by using the “View source” — or related option — in his or her browser. This openness means individuals do not necessarily need to buy open source software in order to use it. Rather, they can directly access and copy the underlying source code in electronic format, or they can re-code/re-type the programming code and create a free copy of the related software. Such openness also means individuals can alter the underlying source code to make a software program perform different functions. So, in theory, a copy of the underlying source code from one kind of software could be modified into a variety of programs — each of which performs a different task. Updating software, moreover, becomes a matter of copying new/updated code versus purchasing the newest version of a product. In the case of international outsourcing, OSS can provide individuals with access to affordable software that allows them to work within outsourcing relationships. Moreover, the flexibility permitted by OSS means outsourcing workers could modify the software they use to perform a wide variety of tasks and reduce the need for buying different programs in order to work on different projects. As the software it is produced by the outsourcing employee and not the client, concerns related to copyright and proprietary materials are no longer stumbling blocks to outsourcing relationships. Thus, it is perhaps no
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surprise that the use of OSS is growing rapidly in many of the world’s developing nations (“Open source’s,” 2003).
the Problems of open source software in International outsourcing While the free and flexible nature of open source software allows it to contribute greatly to international outsourcing situations, OSS also brings with it limitations that could affect the success of BPO relationships. First, because OSS is open for the user to modify as he or she sees fit, it is easy for each individual to use the same programming foundation/source code to develop a different kinds of non-compatible software or other digital products. Such divergence is know as forking code, for each programmer can take a different “fork” in the programming “road,” and such forking code has long been considered a major problem in OSS use (Still, 2004). These prospects for divergence mean international outsourcing situations are open to a variety of problems related to compatibility. Such problems include
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Employees might generate software or other materials that the related client company cannot use due to compatibility issues. Software products might not work as desired or work in unexpected ways/ways not compatible with the client company’s intentions. Employees working on different parts of the same project might produce component parts that cannot be integrated into the same whole or do not work together correctly or as intended within that same whole due to compatibility issues. Addressing compatibility issues either among international work groups or between offshoring workers and clients could take more time and cost more than if the product had been produced domestically.
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Thus, the freedom that allows one individual to operate software might also prevent others from making use of digital materials. Additionally, any or all of these factors could contradict the advantages of reduced cost, quicker production time, and increased quality that encourage organizations to use international BPO. Some OSS companies, such as LINUX, have successfully addressed the problem of forking code through focused oversight processes that govern programming practices (Hamm, 2005). The result has been successful and relatively stable software products that work effectively with other systems. The same kind of management, oversight, and standardization, however, becomes more complicated in an international outsourcing situation where a variety of employees can be working in different nations and different time zones A second problem involves the kind of technical support available to OSS users — both outsourcing employees and consumers using OSS products. Because no individual or organization really owns an open source software product, there is often no formal or standardized mechanism for providing technical support to OSS users. Rather, technical support often comes in the form of a loose network of OSS programmers/developers who interact informally — and sometimes haphazardly — in online contexts such as chat rooms or listservs (Still, 2004). The idea is that a user who is experiencing software difficulty posts a query to one of these online forums and waits for a member of that forum to read the posting and respond to it. A major problem in such an informal system is that technical support/answers are not readily available. Rather, individuals who experience “glitches” related to time-sensitive OSS projects could find themselves missing or offsetting deadlines as they wait for some random programmer to respond to a request for help. Unfortunately, such a response could take anywhere from minutes to days depending on who is reading what lists or
who is posting when. In the fast-paced environment of global business, such delays could have a major effect on production schedules, profits, and access to international markets. These delays also counteract one of the key benefits of and reasons for using international outsourcing — quicker production times. Equally problematic is the fact that such support systems are open for anyone to respond to, regardless of a person’s technical skills or understanding of the situation (Still, 2004). Thus, the quality of the advice related to such a support system can be haphazard, inconsistent, or even wrong. Moreover, different individuals might offer varying suggestions/solutions to the same situation. Thus, requests for assistance could introduce the similar problem of forking/diverging source code into situations where different individuals encounter problems when working on the same project. As a result of these limitations, materials created using OSS could be incompatible, inconsistent, or even non-functional depending on the kind of “help” one received. Finally, open source software creates interesting and often unintended problems related to copyright. Most proprietary operating systems (e.g., Microsoft Windows) and proprietary software programs (e.g., Microsoft Windows Media Player) work by opening digital materials loaded into a computer system. That is, Windows Media Player opens the video files on a DVD or the audio files on a CD so that individuals may view or listen to films or music stored on those DVDs or CDs. This approach means the individual is able to access materials while maintaining the copyright related to such items. Open source software allows users to access the same kinds of files in a very different way. Rather than simply opening files located on a DVD or CD, OSS programs often automatically make a copy of such digital products, store that copy on the hard drive of the user’s computer, and then open that copied file so the user can view or can listen to it (Zoellick, 2001). This automatic
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copying process, known as ripping, means that users of OSS materials automatically violate copyright just by trying to access or to use certain digital products. These unauthorized copies are available for anyone with access to the related computer — an important problem in outsourcing situations where more than one employee often uses the same terminal for work. Such ripped copies, moreover, can easily be replicated and sold in black market exchanges — a situation of particular importance as such illegal activities are well established and difficult to monitor in many of the world’s premier outsourcing locations (e.g., the People’s Republic of China). As a result, the copyright — or piracy — problems OSS could solve in terms of misuse of proprietary software could affect different products should
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The original client company needs to provide outsourcing employees with proprietary digital materials in order to perform certain outsourced tasks. The original client company sells OSS products resulting from outsourcing work to different customers who can now use such products to make illegal copies of digital materials.
Thus, the use of OSS in BPO can be a double edged sword. Yet, the use of OSS in international outsourcing is a situation that must be addressed if organizations wish to succeed in the global business environment of the 21s t century. For this reason, organizations must find ways to strike a balance between OSS’s benefits and detriments in offshoring situations. Such a balance can be established through the development and the use of various organizational and industry-wide practices and policies.
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strategies for using oss effectively in International outsourcing While OSS use in outsourcing creates a complicated situation, these complications can be addressed successfully through approaches that create standards for design and for use. What follows are ten strategies that can create an effective foundation for using OSS in international BPO.
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Strategy 1: Create a programming standard all outsourcing employees will use when working with OSS. By creating and sharing standards for how one should program with OSS, organizations that outsource activities can provide overseas workers with guidelines that impose consistency on the programming process. These guidelines would instruct outsourcing OSS users on what programming choices to make during different points in an overall process. Such instructions would help reduce the prospects of forking code and increase compatibility across employees. Standards should also be created to address the coding of comments — or the bits of verbal explanation that appear within the coding of a program. These comments allow users and clients to know why a particular programming decision was made and to know the effects that decision could have on the operation of the related digital product. By creating standards for when and for how to create such comments, companies that use outsourcing create a built-in mechanism for reviewing materials produced by overseas workers. To make sure that such standards are followed by outsourcing employees, the related client company should suspend all or part of final payment until it has had time to review the final product, and its related comments, in order to confirm standards were followed. While such monitoring could initially slow production, as outsourcing
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employees become aware of the fact their work is being monitored, they will spend more time adhering to standards. In so doing, these employees will create a better product. Thus, over the long term, the time spent monitoring OSS processes would decrease while the quality of products would increase. The increase in quality resulting from such practices would therefore eventually offset any initial slowdown in production caused by the introduction of monitoring procedures. Strategy 2: Require outsourcing workers to identify themselves as OSS users and require those users to complete organizational training programs in standard OSS practices. Such identification and training — which can be completely online — would allow organizations to provide outsourcing workers with instruction in how to follow a particular organization’s standards for OSS use and coding. It would also allow companies to identify which standards seem most problematic for individuals (via automatically reviewed online tests). Organizations could then provide follow-up online training to help individuals address their particular problem areas related to OSS. Initial expenses dedicated to the development and the delivery of such training can contribute to increased later profits in the form of more efficient, more effective, and more standard uses of OSS by outsourcing employees. Strategy 3: Develop an organizational support mechanism for helping outsourcing OSS users. To make sure that outsourcing employees using OSS get consistent and accurate answers to technical questions, organizations should develop their own OSS online support lists or Web sites. Such Web sites would be free access, but they would require individuals to enter a username and password (supplied by the organization) to gain access to such resources. Such a
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measure would cut down on non-employees taking advantage of this resource and thus diverting attention away from the help given to an organization’s actual workers. This resource would be staffed by employees who have a high degree of proficiency in OSS use, and these “help” persons would be “on call” 24 hours a day to accommodate queries from outsourcing employees in different nations and time zones. These help employees would also be given access to an online database of the kinds of projects being worked on by different outsourcing employees. Help workers could then use this information to determine the prospective problems (and related best solutions) affecting different outsourcing workers. Such help workers would also record all comments and suggestions in a central online database that would cross-reference those suggestions with the names of all outsourcing workers involved in the same project. Such crosslisting would allow other help providers to offer consistent advice (and germane suggestions) to all outsourcing employees working on a project. Strategy 4: Establish a peer-mentoring program for outsourcing workers who use OSS. The effective use of OSS in a business environment is part understanding programming processes and part understanding the culture and the goals of the organizations using those programs. For this reason, the more outsourcing workers know about an employing organization’s culture, goals, and objectives, the more effectively they can use OSS to engage in processes or develop products that address those factors (Clement, 1994; Tan, 2000; Sandholm, 2004). That is, if the outsourcing employee knows how a given OSS product will fit into a company’s objectives, that employee will have a better idea of how to program to meet those objectives (Clement, 1994; Tan, 2000; Sandholm,
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2004). Similarly, if the outsourcing employee is aware of the importance of copyright and proprietary products to a company, that employee is less likely to make unauthorized copies — either inadvertently or intentionally. By pairing outsourcing employees with a peer mentor from the client company, organizations provide such outsourcing employees with someone who can provide an introduction to the organization’s culture and its objectives. This mentor could make the outsourcing employee feel more a part of the overall organization. Such a peer could also familiarize outsourcing employees with company standards for OSS use and copyright policy (as well as the consequences for violating such a policy). In so doing, the mentor creates a mechanism for accountability, for the outsourcing employee is no longer a “faceless” worker who exists as a mere payroll number. Such a peer mentor should also have a background in OSS so he or she can provide the outsourcing worker with advice on how to best address a particular programming/ software situation. The mentor could similarly introduce the outsourcing employee to corporate training materials and support services and review programming work to check its quality. Work with such a peer mentor could be made an essential part of the training process associated with outsourcing workers. The mentor’s evaluation of that worker’s progress could likewise serve as an important resource when making the decision to continue using a particular outsourcing employee. Strategy 5: Create protocols for sharing or for forwarding work among international outsourcing employees. In many cases, work that is outsourced to one overseas employee is shared or forwarded to another international outsourcing employee work-
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ing on the same process (Freedman, 1999). Within such contexts, effective information sharing is essential, for the more time it takes an individual to determine what a predecessor has done and expects that individual to do, the less efficient the international outsourcing process is. For this reason, outsourcing employees need to use a standard mechanism for listing what they have done/how they’ve used or programmed OSS so colleagues can understand this work. Outsourcing employees also need to provide standard directions on how the recipient of that information should use OSS to continue with work on that project. By developing standards ways of reporting such information to colleagues, organizations decrease the chances that confusion or a programming inconsistency will occur. These comments should also be shared with/downloaded to a database controlled by the client company. This database can help organizations anticipate or backtrack to locate prospective problems related to OSS use in outsourcing. Such a database should also be accessible to any individuals providing help in such outsourcing situations. The information in this database could allow help providers to better understand and address prospective problems encountered by one of more of the outsourcing employees working on forwarded materials (Strategy 3). Strategy 6: Require all international outsourcing relationships to be long-term contracts. Many of the disaster stories associated with international outsourcing occurred because of short-term relationships (Goolsby, 2004). In such relationships, neither party feels particularly invested in the long-term success of the other, so the desire to conform to standards or respect copyright is low. Moreover, such short-term relationships often mean that the employment of the outsourcing worker ends just as
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he or she finally begins to understand and feel comfortable with a client’s expectations. By requiring international outsourcing employees who use OSS to contract for longer times, client organizations can retain experienced employees who are accustomed to working according to a company’s OSS programming guidelines. Such long-term relationships also improve accountability in outsourcing, for outsourcing employees are more likely to conform to programming standards and to respect copyright if they wish to maintain long-term business relations with the client (Atwood, 2004). Thus, long-term contracts enhance accountability in international outsourcing situations. Within such long-term relations, client companies should conduct regular audits of outsourcing employee work to make sure programming and comment guidelines are being followed and that the copyright of materials is respected. Strategy 7: Hire in-house (domestic) employees who are proficient in OSS or train in-house (domestic) employees to be proficient in OSS. Such employees will be essential to an organization, for they can serve as the peer mentors and the trainers of international outsourcing workers. They can also serve as the individuals who provide online support to outsourcing employees and as the individuals who will audit OSS work in long-term contract situations. By having trained OSS employees in house, organizations can rapidly respond to a variety of OSS crisis situations, easily develop new OSS coding practices, and readily share information about new OSS processes. Organizations can also adapt mentoring, training, support, and auditing activities to conform to new computing and business developments. Finally, such in-house employees can help client organizations understand different developments in, successes of, and problems
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related to OSS when used in an international outsourcing context. Strategy 8: Develop a list of “copyrightfriendly” outsourcing locations and refer to this list whenever considering international outsourcing. To protect materials from piracy, organizations need to make sure they send such materials to nations that will acknowledge and enforce copyright laws and treaties. Such laws and treaties would provide organizations with a method for stopping such piracy if it happens in another nation and provide a method of recourse for curbing sales of and profits made from pirated materials. For these reasons, organizations can benefit from regularly updated listings that overview what international outsourcing destinations offer the best copyright protections. Such listings should include the following information:
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If a convention or a treaty on copyright protection exists between the nation of the client organization and that of the outsourcing employee; a sample listing of such copyright-based treaties involving the Unites States can be found at www.copyright.gov — the Web site for the U.S. government’s Copyright Office What laws a particular nation has to guarantee copyright protection and how enforceable those laws are, for some nations have copyright agreements that are either not enforced or enforced haphazardly (Doyle, 2004; Orr, 2004) How the client organization should file a grievance or petition according to a particular convention or treaty, or according to the laws of a certain nation With which government agencies — both in the client organization’s own
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nation and the outsourcing employee’s nation — such a grievance or petition should be filed What actions to expect in response to filing such a grievance and if any losses can be recovered according to international agreements or national laws
By consulting such a listing in advance of distributing work to overseas outsourcing workers, companies can reduce the risks that copyright violations will occur through restricting the distribution of materials only to employees in nations that provide effective copyright protection. Strategy 9: Develop an industry standard for OSS use. While an individual corporate standard can address compatibility issues related to one organization, the OSS-based products created by that organization might be used by other companies within an overall industry. At this level, the compatibility of OSS products again becomes an issue. To avoid compatibility problems across overall industries, the members of those industries should work together to develop an industry-wide standard for how to code, record comments, offer help, and record suggested solutions to programming problems. These standards could then be shared via an online database available to all members of a given industry. As computer programming practices are continually evolving, such a site should also have a “recent developments” section in which member organizations share new information and practices, innovations, or responses to previously unconsidered problems. Industry members should also meet regularly (annually or bi-annually) to share experiences and to update the related standards for OSS use in international outsourcing practices.
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Strategy 10: Establish and maintain an industry-wide database of individuals and organizations that have violated copyright or violated coding standards in international outsourcing relationships. Several outsourcing experts have noted that the fear of lost employment — and thus lost money — is one of the few ways to force international outsourcing workers to comply with industry standards and procedural (legal) guidelines (Atwood, 2004). The problem with international outsourcing is that an individual might violate the standards or the guidelines of one organization without fear. That is, individuals could think they can simply go to work for a different organization and that new employer would be unaware of an outsourcing worker’s past. In this situation, the fear of reprisal through lost income remains low as the international outsourcing employee can easily move on to other clients. To counter this practice, organizations within an industry should establish a list of outsourcing offenders who have either failed to conform to OSS programming guidelines or who have used OSS to violate copyright. The idea would be to create an easy-access registry (e.g., a Web site) in which companies could record the names of the outsourcing providers with which they worked. Included in such a registry would be a listing of who the violator is, what the nature of the violation was, what the client did in response to this violation, and what results came from this action. Such a registry could help companies avoid working with “disreputable” outsourcing providers as well as offer effective strategies for addressing violations that occur in outsourcing relationships. These industry-wide registries mean that a large number of companies might now avoid “suspect” outsourcing providers
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and greatly affect their profits by creating a boycott situation. This fear of boycott could be a powerful incentive for outsourcing providers to abide by data processing practices required by client organizations (Atwood, 2004). Such a site should also allow users to provide a synopsis of the effectiveness with which they felt an outsourcing provider performed work. For such a registry to be effective and open to the widest range of users, it should be online and allow users to perform internal searches for different outsourcing providers. It should also be updated regularly. Perhaps the best organization to oversee such a registry would be industry oversight bodies or the chamber of commerce or the Better Business Bureau in states where a large number of companies engage in international outsourcing. These registries would need to provide users with effective instructions on how to report concerns and locate data on outsourcing providers. They would also need to provide different kinds of information to different companies depending on the size of the company (small business or multinational conglomerate) and the related industry. Such registries could also be made effective by having frequently asked questions (FAQ) sheets or online help functions that facilitate use and provide information on how to address problems related to international outsourcing. Each of the afore-mentioned strategies is crucial to maintaining consistency and protecting ownership in outsourcing situations involving OSS. This list, however, is by no means comprehensive. Rather, it is a starting point that addresses some of the more fundamental aspects of OSS use in international outsourcing. For this reason, organizations might wish to address new developments in or particular uses of OSS in international outsourcing relationships.
Future trends At present, international OSS use might seem to be a peripheral topic related to a limited number of activities. Certain trends in business practices and international markets, however, indicate that organizations need to explore their OSS practices now, in order to prepare for and effectively address these trends.
the Projected demand for computing and It use in International outsourcing Among the areas expected to experience the greatest growth in BPO are finance, accounting, and medicine, and all of these areas of growth have one thing in common — data processing that involves computers and information technology. Many managers and bankers in the United States, for example, see international outsourcing as an effective way to address different accounting practices — particularly those related to information technology (IT). This push is in part due to the Sarbanes-Oxley Act of 2002 — section 404 of which requires chief executive officers and chief financial officers of public companies to review their internal controls over financial transactions (“404 tonnes,” 2004). The costs and time associated with all of the data crunching related to such activities are massive,1 and IT could greatly help with the compiling of information and the coordination of related activities. One way to curb costs, maximize time, and focus on computing in processing would be to outsource such activities. After all, the outsourcing of accounting and of IT work is not new and could address a lack of needed and costly domestic employees in both IT and in auditing2 (“Relocating the back office,” 2003). Given the costs related to such activities and the fact that more complex accounting practices are being outsourced, it seems reasonable to expect that some section 404 activities would be prime candidates for international outsourcing.
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New U.S. healthcare legislation also seems poised to increase the international outsourcing related to IT work and data processing. The driving force behind this trend is the Health Insurance Portability and Accountability Act (HIPAA), which requires that all of an individual’s medical information be placed in electronic format so it can be easily shared via computer systems (Goolsby, 2001b; Goolsby, 2001c). Under HIPAA, print medical records must be processed into a digital format — a task that is time consuming, costly, and monotonous — and maintained via an IT system for sharing such information. The projected result of such processing is massive IT costs for all health care organizations such as hospitals (Goolsby, 2001a; Goolsby, 2001c). These factors make HIPAA-related tasks, such as medical transcription and IT development and oversight, ideal candidates for international outsourcing. They also make the development and the monitoring of related IT systems prime areas for international outsourcing, especially as most healthcare providers are relatively new to such systems and their operations (Goolsby, 2001a; Salkever, 2004; “Sink or Schwinn,” 2004). As so much of this financial and medical related work involves computers, it would be safe to assume that some — or many — of the outsourcing employees working on such projects would be using OSS. For this reason, the development of standard OSS practices becomes essential, not only to achieving organizational objectives, but to meeting legal requirements.
the value of oss in International Marketing OSS also has important implications for how businesses access markets in developing nations. Until quite recently, the majority of individuals within these regions had little or no access to the online environment. That factor of access, however, has changed markedly in recent years, due in large part to a mixture of public and private sector programs
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designed to increase global Internet use. In China, for example, the number of Internet users grew from 2.1 million in 1999 to a projected 96 million by the end of 2004, and some experts expect this number to balloon to over 200 million users by 2007 (“Wired China,” 2000; “China’s coming,” 2004). In Africa, the United Nations and private companies have undertaken initiatives to increase online access across the continent, and Africa’s number of dial-up Internet connections has grown by some 20% in the past two years while the sales of laptop computers remain strong in this part of the world (“Tapping in to Africa,” 2000; Kalia, 2001; Reuters, 2002; “Laptop sales,” 2004). In Latin America, Brazil has seen its number of online users grow by 430,000 in recent months, and Global Crossings Ltd. has recently completed a project that uses fiber optics to give, “multinational companies the ability to communicate with Latin America as efficiently as with any other region” (“Active Internet users,” 2004; “Tying Latin America together,” 2001, p. 9). Additionally, the number of individuals going online in Eastern Europe is expected to climb from 17% to 27% by 2006, and laptop sales in the region remain strong (“IDC research,” 2003; “Laptop sales,” 2004). As a result of these developments, companies can now use online media to market goods, supply, and services, and even sell and distribute digital products on an unprecedented scale in the developing world. This concept of scale, moreover, is no small matter, for the poor in many developing nations have a large combined purchasing power. The collective buying power of Rio de Janeiro’s poorest residents, for example, is estimated to be some $1.2 billion (“Beyond the digital divide,” 2004). The value of such aggregate overseas markets is perhaps the reason that certain companies have started developing online communication technologies that could provide the “less well off” citizens of the world with affordable online access (“Beyond the digital divide,” 2004; Kalia, 2001). They have also begun developing inexpensive
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hubs for online access in nations such as India, Ghana, Brazil, and South Africa (Warschauer, 2003; “Beyond the digital divide,” 2004). Interaction via the Internet and the Web, however, requires the use of software (e.g., a browser) that allows a wide range of individuals to navigate the online environment. For this reason, the only way companies would be able to effectively tap these poorer overseas markets would be through the use of free or inexpensive open source software. If, however, each prospective consumer in developing nations used a different kind of OSS to interact online, then the ability of companies to tap those markets in a mass, and thus a profitable, manner is lost. The development of standards in OSS programming and use provides a mechanism for avoiding such problems. Moreover, by introducing such standards early on and to the more technologically savvy individuals engaged in international outsourcing, organizations can improve the chances that such standards will either “trickle down” or spread throughout an overall region. Thus, the development of international OSS standards has important financial implications that can extend far beyond international outsourcing.
conclusIon International outsourcing offers a variety of cost, time, and quality advantages to those organizations that use it effectively. In relation to the international outsourcing of knowledge work, such effectiveness often involves access to and uses of software. While open source software can provide a distinct advantage in international outsourcing situations, such uses of OSS must be guided by both client companies and overall client industries. Fortunately, uses of OSS in international outsourcing are still relatively new. For this reason, organizations have some time to develop the standards, protocols, resources, and relationships essential to effective OSS use
in outsourcing contexts. The ideas presented in this chapter provide the reader with a foundation for exploring such developments. By understanding, employing, and building upon these ideas, organizations can improve the success with which they engage in international outsourcing practices both today and in the future.
reFerences 404 tonnes. (2004, December 16). The Economist. Retrieved December 27, 2004, from ht t p:// www.economist.com/displaystory.cfm?story_ id=3503931 Active Internet users by country, August 2004. (2004, September 22). ClickZ. Retrieved October 6, 2004, from http://www.clickz.com/stats/ big_picture/geographics/article.php/3410261 Atwood, M. (2004). The art of governance. Outsourcing Center. Retrieved December 27, 2004, from http://www.outsourcing-requests.com/center/jsp/requests/print/story.jsp?id=4616 Baily, M. N., & Farrell, D. (2004, July). Exploding the myths of offshoring. The McKinsey Quarterly. Retrieved November 11, 2004, from http://www.mckinseyquarterly.com/article_print. aspx?L2=7&L3=10&ar=1453 Balfour, F. (2005, February 7). Fakes! BusinessWeek Online. Retrieved May 31, 2005, from http://www.businessweek.com/@@ISYAAIQQjU40VAkA/magazine/content/05_06/b39 19001_mz001.htm Bendor-Samuel, P. (2004). Lou Dobbs: Here’s why you’re wrong! Outsourcing Center. Retrieved December 20, 2004, from http://www. outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=4565 Beyond the digital divide. (2004, March 13). The Economist: Technology Quarterly Supplement, 8.
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endnotes 1
Weir, L. (2004, August 24). Boring game? Outsource it. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/ print/0,1294,64638,00.html Wired China. (2000, July 22). The Economist, 24-28. 2
Zoellick, B. (2001). CyberRegs: A business guide to Web property, privacy, and patents. Boston: Addison-Wesley Professional.
General Electric, for example, spent some $30 million in extra payments to auditors to review such documents, while J. P. Morgan Chase has 130 full-time employees working on this project, and PriceWaterhouse Coopers has spent some $40 million in training 9,000 U.S. employees to perform these functions (404 tonnes, 2004). There do not appear to be enough trained U.S. auditors available to meet current demands, and as a result, this lack of supply has driven up U.S. auditor pay by some 10-20% (Byrnes, 2005).
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 229-247, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 3.5
Instrumental and Social Influences on Adoption of Collaborative Technologies in Global Virtual Teams Andre L. Araujo College of William & Mary, USA
AbstrAct Recent advances in Web-based technologies along with investments in international outsourcing and offshore locations have unquestionably increased the importance of global virtual teams. However, because global virtual teams have their members dispersed in different countries and rely extensively on electronic communication to exchange information, complete tasks, and coordinate activities, their implementation is accompanied by challenges beyond those found in traditional teams whose members often meet face-to-face in the same cultural context. One such challenge has to do with cross-cultural collaboration. Although there is a sense that collaborative technologies offer the essential tools for supporting collaboration, it is unknown whether virtual members will actually adopt collaborative technologies in a cross-cultural setting. To gain knowledge about this potential endemic aspect of cross-
cultural teamwork, one needs to examine the factors that influence the adoption of collaborative technologies in global virtual teams. Drawing on the work of organizations, cognitive theory, and information systems researchers, this study offers a framework that describes the key components underlying collaborative technology adoption in global virtual teams by integrating both social and instrumental aspects of group work.
IntroductIon Recent advances in Web-based technologies along with investments in international outsourcing and offshore locations have unquestionably increased the importance of global virtual teams. This flatter and more team-based form of organizational work allows managers of globally dispersed teams to assemble individuals of differing expertise who are not physically and locally
Instrumental and Social Influences on Adoption of Collaborative Technologies
available. However, because global virtual teams have members dispersed in different countries and rely extensively on electronic communication to exchange information, complete tasks, and coordinate activities, their implementation is accompanied by challenges beyond those found in traditional teams whose members often meet face-to-face and in the same cultural context (Kankanhalli, Tan, & Wei, 2007; Maznevski & Chudoba, 2000). One such challenge has to do with cross-cultural collaboration. When working in global virtual teams, cultural values, beliefs, and behaviors of team members may be so different and disparate that they can hurt cooperation and ultimately result in lowered levels of collaborative technology adoption. Thus, although there is a sense that collaborative technologies offer the essential tools for supporting globally distributed teamwork, it is unknown whether virtual members will actually adopt such technologies (Munkvold, 2005; Quresha et al., 2006; Rutkowski, Vogel, van Genuchten, Bemelmans, & Favier, 2002; Saunders, Van Slyke, & Vogel, 2004). This study addresses some of these issues. Drawing on the work of organizations, cognitive theory, and information systems researchers, this study offers an integrated framework that describes the key components underlying the adoption of collaborative technologies in global virtual teams by integrating both the social and instrumental aspects of teamwork. The framework advances research by examining the following question: What are the factors that influence collaborative technology adoption in global virtual teams? The next section discusses the background of this research. Then, the following section presents the focus of the paper followed by a discussion of the framework and its propositions. The final section discusses the main contributions of this study.
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reseArch bAcKground Organizational theorists (e.g., March & Simon, 1957; Rogers, 1995) and MIS scholars (e.g., Daft & Lengel, 1984; Fulk, Schmitz, & Steinfield, 1990; Karahanna, 1999; Zmud, Lind, & Young, 1990) have long been concerned with the understanding of IT adoption. Two major schools of thought have offered alternative views on this topic: a) the instrumental school and b) the social constructionist school. Typically, models rooted in the instrumental school suggest that technology directly and positively influences organizational productivity as long as people objectively (or rationally) evaluate and select the technology best aligned to their skills and the requirements of the task. While this view has yielded extensive literature on IT adoption, the social constructionist school argues that such technological determinism fails to recognize that “behavior occurs in a very social world which is far from neutral in its effects” (Fulk et al., 1990, p. 117). In other words, IT adoption is not always as simple and rational as it could be because it is a complex, subjective, and evolving process that is subject to social influences. The social constructionist view suggests that people’s subjective interpretations of their work, the organization, and technology help determine IT adoption. While each of these two schools offers important analytical tools with which to examine technology adoption in organizations, recent theorizations suggest that, in the real world, both instrumental and social aspects of teamwork coexist, making them difficult to distinguish (Fulk, 1993). In other words, social behaviors and subjective interpretations, as much as objective perceptions of technology, help determine IT adoption in organizations. The model developed in this study integrates both instrumental and social views in an effort to examine the adoption of collaborative technologies in global virtual teams. Specifically, the model includes users’ perceptions of self-efficacy, which is an indicator of the instrumental view and
Instrumental and Social Influences on Adoption of Collaborative Technologies
cultural differences, which is in turn an indicator of the social view. Global virtual team refers to a group of people who work on interdependent tasks guided by a common purpose across space, time and organizational boundaries with extensive support of collaborative technologies to communicate and interact over the Web. Examples of collaborative technologies include Web-based systems such as instant messaging, group calendars, video-conferencing, email, and knowledge-management repository systems. In the following section, I will present a research model that explains the impact of such views on global virtual teams.
MAIn Focus oF the PAPer the Instrumental view of collaborative technology Adoption Self-efficacy refers to an individual’s belief in his or her own capability to perform a specific behavior (Bandura, 1986) and is a critical predictor of future intentions (Bandura & Cervone, 2000; Fernandez-Ballesteros, Diez-Nicolas, Caprara, Barbaranelli, & Bandura, 2002; Marakas, Yi, & Johnson, 1998). Recent work in the MIS area defines computer self-efficacy along two dimensions: 1) General computer self-efficacy, which is “an individual’s judgment of efficacy across multiple computer application domains,” and 2) Task-specific computer self-efficacy, which
refers to “an individual’s perception of efficacy in performing specific computer-related tasks” (Marakas et al., 1998, p. 128). The first dimension captures an individual’s experiences developed over time within a diverse domain of computerrelated tasks, whereas the latter is an assessment of an individual’s perception of his or her skills in performing a task using specific computer-related applications. There is strong empirical support for the influence of general computer self-efficacy on decisions involving computers and IT adoption (e.g., Agarwal, Sambamurthy, & Stair, 2000; Compeau, Higgins, & Huff, 1999; Hsu & Chiu, 2004; Igbaria & Iivari, 1995, Marakas et al., 1998). For example, when observing almost 400 IT users over a one-year interval, Compeau et al. (1999) found strong support for the significant influence of self-efficacy on individuals’ reactions to information technology. In another study, Marakas et al. (1998) indicated that users who have had negative general computer-related experiences are likely to hesitate to use new computer applications. Conversely, individuals who perceive themselves as capable of managing IT across multiple computer domains are more inclined to adopt new technologies. Furthermore, Agarwal et al. (2000) found a significant positive relationship between software-specific self-efficacy and software usage. Finally, recently, Hsu and Chiu (2004) have empirically shown that general Internet self-efficacy—an indicator of general computer self-efficacy—plays an important role in shaping
Figure 1. Collaborative technology adoption in global virtual teams GENERAL COMPUTER SELF-EFFICACY
TASK-SPECIFIC COMPUTER SELFEFFICACY
CULTURAL DIVERSITY
COLLABORATIVE TECHNOLOGY ADOPTION
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an individual’s positive attitude towards adoption of e-services. Taken together, these studies suggest that general computer self-efficacy is positively associated with IT adoption. Hence: Proposition 1: General computer self-efficacy is positively related to the adoption of collaborative technologies. Prior studies have indicated the positive impact of task-specific self-efficacy on technology adoption (Eastin & LaRose, 2000; Hsu & Chiu, 2004; Thompson, Meriac, & Cope, 2002). Thompson et al. (2002) found that task-specific self-efficacy positively influences online search performance. Similarly, when examining the adoption of ecommerce activities, Eastin and LaRose (2000) found that Internet self-efficacy helps predict online shopping. Finally, Hsu and Chiu (2004) found that Web-specific self-efficacy—an indicator of task-specific self-efficacy—directly and positively influences individuals’ attitudes and intentions towards the adoption of Internet-based services. Thus, the more people believe they are capable of performing a task-specific technology, the greater the likelihood of technology adoption. Hence: Proposition 2: Task-specific computer self-efficacy is positively related to the adoption of collaborative technologies. The above propositions capture the instrumental view of collaborative technology adoption. This view suggests that people’s judgments about IT adoption primarily are guided by cognitive evaluations of how capable they are of effectively using a specific technology to accomplish a given task. However, as discussed earlier, decisions toward technology adoption also are influenced by social aspects of group work (Barling & Beattie, 1983; Lent, Brown, & Larkin, 1987; Stumpf, Brief, & Hartman, 1987; Taylor, Locke, Lee, & Gist, 1984). The following section discusses the mediating role
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of culture—an indicator of the social view—in collaborative technology adoption.
the social view of collaborative technology Adoption Culture has been studied in various areas including marketing (Aaker & Maheswaran, 1997; Clark, 1990; Tse, Lee, Vertinsky, & Wehrung, 1988), international business (Bhagat, Kedia, Harveston, & Triandis 2002), and management (Hosfstede, 1991). According to Hofstede (1980), culture is the collective programming of the mind that builds on shared norms and values. Thus, it is a mechanism of collective sense-making that binds individuals in groups and distinguishes one group of people from another. While several classification schemes have been proposed to study culture (e.g., Adler, 1993; Hall, 1976), most of the cross-cultural research has adopted Hofstede’s (1980, 1991) taxonomy. It categorizes national cultures along five dimensions. 1) Individualism/ collectivism refers to the value of an individual’s rights, characteristics, and identity. It describes whether the common values and beliefs of a society emphasize the need of an individual or the need of a group. 2) Uncertainty avoidance refers to the degree of tolerance of the ambiguous, unknown, and unfamiliar. 3) Power distance refers to the degree of tolerance for social hierarchy and class structure. 4) Masculinity refers to the degree of competition and assertiveness in a society, and 5) Confucian dynamism emphasizes long-term plans over short-term goals and strategies. Recent studies have applied such a framework to examine IT adoption in cross-cultural contexts (e.g., Hewett, Money, and Sharma 2006). The link between self-efficacy and culture has been supported in a number of empirical studies in organizational areas (e.g., Earley, 1993; Hampton & Marshall, 2000; Schaubroeck, 2000), including recent work in the MIS field (e.g., Hardin, Fuller, & Davison, 2007). For
Instrumental and Social Influences on Adoption of Collaborative Technologies
example, Earley (1993) found that individuals from individualist cultures reported a positive relationship between self-efficacy and individual performance conditions, while individuals from collectivist cultures reported a positive relationship between collective efficacy and in-group conditions. In another study, Schaubroeck (2000) reported that individuals from different cultural backgrounds exhibited varying behaviors when working in teams. Extending these notions to the study of globally dispersed teams, Hardin et al. (2007) found that individualist cultures reported higher values of team efficacy in comparison to collectivist cultures. Taken together, these studies suggest that higher levels of cultural diversity are likely to influence the link between self-efficacy and IT adoption. Hence: Proposition 3: Cultural diversity will moderate the relationship between self-efficacy and adoption of collaborative technologies. The three aforementioned propositions suggest that self-efficacy (defined in terms of general computer self-efficacy and task-specific computer self-efficacy) positively influence collaborative technology adoption. That is, individuals make decisions on whether or not to adopt a technology based on the extent they perceive themselves capable of using that technology to work on the task (i.e., the instrumental view). When examining these relationships in cross-cultural settings, however, cultural background (i.e., the social view) influences the strength of the link between self-efficacy and IT adoption. The next section discusses both the theoretical and practical contributions of this study.
Future trends Investments in IT infrastructures and international outsourcing initiatives have unquestion-
ably increased the availability of IT technologies worldwide; however, much of the literature on the use of collaborative technologies deals with teamwork in a single country. This study develops a theoretical framework distilled from the work of organizations, cognitive theories, and information systems to explain the forces underlying collaborative technology adoption in teams with globally dispersed members who rely extensively on technology-mediated tools to communicate, interact, and transact business. This is a critical issue because a number of nations are increasingly becoming main destinations for offshore IT investment. As the number of offshore locations increases, managers need to know how to maximize the benefits of global virtual teams by appropriately assessing workers’ skills and the cultural aspects of offshore destinations. In an attempt to explain the challenges and issues of global e-collaboration, we have suggested an integrative model that includes both instrumental and social processes likely to influence collaborative technology adoption in global virtual teams. This approach is of utmost importance to management scholars and practitioners alike. From a theoretical view, prior research has primarily relied on models that emphasize individuals’ cognitive decision-making processes and organizational structural factors at the expense of social aspects (such as culture) that may be equally relevant in the process of technology adoption in a cross-cultural setting. For example, Dasgupta, Granger, and McGarry (2002) have suggested that an individual’s decision to adopt a technology is dependent on their perceived ease of use and the perceived usefulness of that technology. Thus, although their model incorporates individual cognition, it does not account for the social mechanisms through which cognitive limitations lead to technology adoption and acceptance. In another study, Bajwa, Lewis, Pervan, and Lai (2005) examined the impact of organizational sides, centralization of decision-making, degree
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of integration, and infrastructure connectivity on collaborative technology adoption behavior. In other words, they have focused on organizational structural factors and IT structural attributes rather than the social factors inherent in team working relationships. Collectively, these studies have not included the social fabric of teamwork, which reflects the actions and interactions that take place between people situated in culturally diverse settings. In a Web-based environment, where individuals from different nationalities are brought together to work on a common project, cultural differences are critical in that individual cognitions and behaviors—through which decisions about adoption necessarily occur—are shaped by social influences—that is, by the attitudes and behaviors of others with whom they work. This study incorporates these social aspects. For managers who need to assemble international teams whose members are located in different countries, I have illustrated that different personal values, beliefs, and behaviors among virtual team members may eventually affect their willingness to cooperate with one another, thereby influencing collaborative technology adoption. Therefore, managers of global virtual teams may benefit from a deeper investigation of the cultural factors that moderate the influence of self-efficacy highlighted in this research. The explosive growth of the World Wide Web has undoubtedly enabled a number of technologies (i.e., Web-based systems, computer mediated communication tools, video-conferencing systems, etc.) to change the way people work, communicate, and coordinate their activities across companies and countries. To the best of our knowledge, this research is the first attempt to offer a set of propositions that capture the effects of self-efficacy along with culture on collaborative technology adoption in global virtual teams.
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conclusIon My aim in this article has been to provide a theoretical model that explains collaborative technology adoption in global virtual teams. The model advances research by explicitly incorporating both the instrumental and social aspects of group work. In terms of the model described above, if only self-efficacy and the instrumental view primarily govern the IT adoption process, parties are likely to guide their behavior based on how well the collaborative technology matches their skills and the requirements of the task. However, because they operate in a globally dispersed context where team members are likely to exhibit different personal values, beliefs, and attitudes, cultural diversity can fundamentally change the impact of self-efficacy on collaborative technology adoption. I hope this study will help academics and practitioners interested in examining the critical aspects of global e-collaboration.
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Instrumental and Social Influences on Adoption of Collaborative Technologies
Key terMs Asynchronous Collaborative Technologies: Allow geographically dispersed teams to work on a common task but at different points in time. These technologies are particularly useful tools for teams located in different time zones and include Web-based collaborative tools such as email systems (e.g., gmail, hotmail, and yahoo), document management technologies, knowledgemanagement repository systems, intranets, listservs, group calendars, and newsgroups. Collaborative Technologies: Technologies that support collaborative efforts among multiple geographically dispersed teams when carrying out their tasks and social needs over the Web. They can be synchronous or asynchronous. Culture: The collective programming of the mind that builds on shared norms and values (adapted from Hofstede, 1980). General Computer Self-Efficacy: “An individual’s judgment of efficacy across multiple computer” (adapted from Marakas, et al., 1998). Global E-Collaboration: The process of information sharing, communication, and coordination between geographically dispersed teams in two or more countries working together toward a common goal using collaborative technologies over the Web.
Global Virtual Team: A group of people who work on interdependent tasks guided by a common purpose across space, time and organizational boundaries with technology-supported communication substantially more than face-to-face meetings (adapted from Maznevski & Chudoba, 2000). Typically, these teams are located in two or more countries. Synchronous Collaborative Technologies: Allow teams to communicate and exchange information in a real time fashion. Examples of synchronous collaborative technologies include Web-based tolls such as chats, instant messaging, electronic meeting systems or group decision support systems (GDSS) that support same time meetings, voice over IP, and videoconferencing systems. Task-Specific Computer Self-Efficacy: Refers to “an individual’s perception of efficacy in performing specific computer-related tasks” (adapted from Marakas, et al., 1998).preconum diu estient ienium idio vir in veres co est conductum inius consupp linatilis re isum claris. Lem deescerum tam tum omnequitis adessendite, sed cla ia? At quam intem perentilius iliis pritis imus opubliq uemulere, nos detimus...
This work was previously published in Handbook of Research on Electronic Collaboration and Organizational Synergy, edited by J. Salmons & L. Wilson, pp. 400-408, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 3.6
Improving Employee Selection with Online Testing Jeffrey M. Pollack Virginia Commonwealth University, USA
IntroductIon
bAcKground
Advances in technology now enable employers to utilize computers to administer online employee selection tests, which result in lower costs, increased efficiency, and fewer transcription errors (Richman, Kiesler, Weisband, & Drasgow, 1999; Tippins et al., 2006). Additionally, online employment testing software can effectively and efficiently assist in identifying individuals best suited to an occupation, reducing poor person-job fit, lowering turnover rates, decreasing training costs, and minimizing errors in hiring (Bingham, Ilg, & Davidson, 2002; Mooney, 2002). This article addresses issues related to online employment testing software including types of tests available, validity and reliability, proctoring, and social desirability. Additional terms are defined and implications and future directions for research are discussed.
For decades, the similarities and differences between written tests and computer-based tests have been assessed (Epstein & Klinkenberg, 2001). Early research investigated how a computerbased medical records keeping and interview system impacted patients (Slack & Van Cura, 1968; Slack, Hicks, Reed, & Van Cura, 1966). Additionally, research in this era investigated the use of computers as data gathering instruments (Evans & Miller, 1969; Vinsonhaler, Molineaux, & Rodgers, 1968). However, it is not until the 1990s that we see a research trend that begins to examine the equivalence of computer-based tests vs. conventional tests in an organizational setting (Donovan, Drasgow, & Probst, 2000; McHenry & Schmitt, 1994). As technology has evolved, tests previously administered in a paper-and-pencil format have been changed to online versions. These tests include
clinical measurements, personality tests, attitude scales, cognitive ability tests and training inventories (Mead & Drasgow, 1993). Further examples of computer-administered assessments include medical admissions data, psychiatric evaluation exams, and consumer preference evaluations (Kiesler, Walsh, & Sproull, 1992; Richman et al., 1999; Synodinos & Brennan, 1988; Synodinos, Papacostas, & Okimoto, 1994). The most simple and widely used type of computer-based test is computer assisted testing (CAT). These tests display a question on a computer screen and the respondent enters their response (Epstein & Klinkenberg, 2001). Computer assisted tests enable the online format of a test to very closely resemble the paper-and-pencil version and make the testing situation as similar as possible to a written one (Rozensky, Honor, Rasinski, Tovian, & Herz, 1986). Another type of CAT program uses computer adaptive testing. Adaptive testing settings are different from assisted ones in that adaptive tests allow the computer to “go beyond a simple page turning function” (Epstein & Klinkenberg, 2001, p. 298). Adaptive tests allow a computer to receive a response, score it, and then choose the next appropriate question, either easier or harder based on a respondent’s answer (Green, Bock, Humphreys, Linn, & Reckase, 1984). In adaptive tests, which Epstein & Klinkenberg (2001) assert are similar to most non-computerized intelligence tests, there are multiple types that can “individualize” the testing experience and narrow the number of questions needed to assess the underlying trait (Burke, 1993; Weiss, 1985). There are multiple options when using adaptive formats. A “two-stage” adaptive test is one in which a participant is given an initial pre-test called a routing exam. Based on his or her score on the routing exam, a test is then administered, which corresponds to their knowledge of the content (Epstein & Klinkenberg, 2001, p. 298). Other tests similar to the “two-stage” include the “pyramidal,” “flexilevel,” “stradaptive,” and
“countdown” approaches (for reviews see Butcher, Keller, & Bacon, 1985; Epstein & Klinkenberg 2001; Weiss, 1985). More recent advances include test types called generating examples (GE) and are found described in reviews by Bennett (1999), Bennett et al., (1999) and Bennett, Steffen, Singley, Morley, and Jacquemin (1997). Potential administrators of online tests must consider two main factors. First, the content area of the test must be identified. Whether it is desirable to test hard skills (e.g., proficiency in software or programming) and/or basic knowledge (e.g., ability to solve problems, communication skills) is the key consideration (Mooney, 2002). Second, online test administrators must consider who will compose the test. Many testing service companies will offer “authoring software” that enables users to compose their own questions as an alternative to the standard “menu” of tests available for various job classifications (Mooney, 2002). The authorship issue brings up questions of reliability and validity. This is especially true considering that the “in-house” development of tests may be the lower cost, but less reliable and valid option (Mooney, 2002). Companies often charge more per test administration for tests directly off the “menu” vs. charging a fee for test development but lowering the per test charge if it is modified by the end user (Mooney, 2002). It is important to note that most authoring software only allows for the creation of yes/no and true/false questions (Mooney, 2002). Additional considerations for potential administrators of online tests include the creation of user id’s, whether to use a timed test, whether respondents are proctored, whether respondents can backtrack to previous responses, and how to notify participants of results.
the AcAdeMIc And FInAncIAl bottoM lIne The bottom line is that, in most cases, online employment testing saves companies money and
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reduces the recruitment cycle time (Bingham et al., 2002). As the field of online employment testing software evolves, it will be important to keep in mind the following concerns. Critics of online testing procedures bring up issues such as lack of computer familiarity, computer anxiety, lack of equivalency, as well as issues related to proctoring and social desirability as ways in which CAT is not an optimal testing method (Hofer & Green, 1985; Honaker, 1988). Regarding the issue of computer anxiety, research indicates that there exist few correlates of age and gender with computer-based anxiety and that these are generally state, and not trait, characteristics (Chua, Chen & Wong, 1999). Furthermore, with brief mentoring sessions, computer-phobic individuals become easily and quickly more comfortable with the medium (Wilson, 1999). The bottom line with computer anxiety is not that individuals will score differently on the computer-based tests, but rather individuals who are computer-phobic will avoid taking the tests. This could limit or reduce the applicant pool for employers. Along these lines, a new and interesting area of research is evolving regarding high tech testing and organizational justice. This research focuses on how a testing situation is perceived by an applicant in terms of fairness, procedural ease, and appropriateness of testing method (Bauer et al., 2001; Truxillo, Steiner, & Gilliand, 2004). Many employers, for the time being, may still consider the option to offer an alternative to internet testing for certain jobs in order to not limit the potential applicant pool, even though the cost to administer written tests can be substantially higher than the online version (Mooney, 2002; Richman et al., 1999). Another criticism, equivalence, falls into two main types: measurement equivalence and relationship equivalence. Measurement equivalence relates to how similar online testing compared to conventional paper-and-pencil testing assesses an underlying trait (Donovan at el., 2000). Alternatively, relational equivalence refers to how
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similarly the two test versions (online vs. conventional) relate to other variables the same way (Donovan et al., 2000). The following discussion focuses on measurement equivalence, and not relational equivalence, based on the prevalence of research on the former. Research indicates that there is no difference in respondent attitude or perception of tests in CAT settings vs. conventional tests (Richman-Hirsch, Olson-Buchanan, & Drasgow 2000). Measurement equivalence and reliability and validity have also been shown on various predictor scales such as the job descriptive index (Chang, 2005; Donovan et al., 2000; Layne, DeCristoforo, & McGinty, 1999) as well as through meta-analytic methods (Mead et al., 1993). The bottom line regarding equivalence is who designs the test. If it is in a company’s best financial interest, due to cost, to design a test on its own it will likely do so. However, the lower cost option may not always be the option which affords the highest level of equivalence, reliability, or validity. Another consideration in administering online testing is the implication of using proctored tests vs. unproctored testing. When a test is taken in an unproctored setting, it is generally not possible to verify the test taker’s identity, to know if they received help or assistance, or to count how many times the test content was accessed before completion of the instrument (Tippins et al., 2006, p. 195). Generally, it is recommended that unproctored tests be used in low stakes testing situations only. Possible solutions such as encrypted software and password protection do not seem to alleviate the issues associated with unproctored testing. It is assumed, in unproctored high stakes testing situations, that the respondent may behave unethically and that the content of the test may be compromised. Issues related to cheating and security are not alleviated by simply utilizing an unproctored pencil-and-paper test. The bottom line in determining whether to use proctored or unproctored testing comes down to the financial resources of a company. Ideally, a company would
Improving Employee Selection with Online Testing
monitor all participants in testing situations. However, when it is not financially feasible to do so, outsourcing the process or leaving the applicants unproctored are options as well. The final consideration is how socially desirable responses compare in computerized settings vs. conventional settings. Data are varied, yet ultimately conclusive. Some research finds that computer-based testing increases the propensity for a respondent to give socially desirable answers (Finegan & Allen, 1994; Lautenschlager & Flaherty, 1990; Potosky & Bobko, 1997). However, most research indicates that either there is no difference in social desirability or that computerized tests elicit less socially desirable distortion (Booth-Kewley, Larson, & Miyoshi, 2007; Feigelson & Dwight, 2000; Wilkerson, Nagao, & Martin, 2002). Computer-based testing elicits fewer socially desirable responses when respondents are alone and can backtrack to previous questions (Martin & Nagao, 1989; Richman et al., 1999). Thus, the key consideration is not whether online testing formats elicit fewer socially desirable answers but what testing format and design is used. The concern is that employers will assume that computer-based testing is more efficient at eliminating socially desirable answers when in fact there are other issues more important to consider such as proctoring or test-design.
Future trends Practitioners and academics can benefit from research along the following lines: ethical behavior, relational equivalence, organizational surveys, and the three market-based issues described below. The topic of ethical behavior in testing situations can benefit from research comparing the similarities and differences between computer-based proctoring vs. human proctoring. For instance, can companies or test vendors conserve time and/ or money by utilizing computer-based monitor-
ing systems? In what ways would an individual behave differently if a computer were monitoring their activities and verifying their identity vs. if a human were doing the same job? Answering this question and quantifying how much money, if any, could be saved may prove to be a worthy practical and theoretical line of inquiry. Much attention has been directed towards measurement equivalence. However, future research should look to verify the relational equivalence of online testing software vs. conventional tests. As Donovan et al. (2000) note, the issue of relational equivalence is an important concept and is onehalf of the equation when considering equivalence between online and paper-and-pencil test. One potential overlooked benefit of online testing software is the ability for companies to gather data internally for employee satisfaction, customer satisfaction, and evaluation of personnel and procedures. Limited research has examined organizational surveys in terms of who responds to internal online surveys, how confidential the surveys are considered, and how ratings differ between online and paper versions (Rosenfeld, Booth-Kewley, & Edwards, 1993; Thompson, Surface, Martin, & Sanders, 2003). Additional research may prove beneficial in answering questions of who responds, and why, so as not to “inadvertently silence important segments of the workforce” (Thompson et al., 2003, p. 226). Finally, three market-related issues need attention. First, little if any regulation exists in the test vendor marketplace. Vendors often need no proof of the validity or reliability of a test or measure, and sadly, most employers do not know to ask for such evidence. Second, there is the issue of who owns the data. Test vendors use data they collect to provide proof of their testing preparation methods and ease of use of their instruments. However, there are issues of confidentiality and consent related to the use of the data. Third, as demand for online employment testing software grows, so may the prices associated with these services. Increased prices may prohibit smaller firms from
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Improving Employee Selection with Online Testing
utilizing the more efficient and effective methods. Instead, in this situation small firms may return to less effective and less efficient pencil-and-paper tests, or in a worst case scenario they may utilize in-house instruments, which could be considered inaccurate, at best.
conclusIon Advances in technology will enable the further proliferation of online employment testing software. Academics and practitioners must provide consistent assessments regarding the validity, reliability, practical utility, and credibility of online testing formats as these processes and procedures evolve. Though the many benefits of online testing such as lower costs, increased efficiency, and fewer transcription errors may be tempting for employers, these benefits must not be traded for reduced reliability and validity of the testing instrument.
reFerences Bauer, T. N., Truxillo, D. M., Sanchez, R. J., Craig, J. M., Ferrara, P., & Campion, M. A. (2001). Applicant reactions to selection: Development of the selection procedural justice scale (SPJS). Personnel Psychology, 54(2), 387-419. Bennett, R. E. (1999, Fall). Using new technology to improve assessment. Educational Measurement: Issues and Practice, 5-12. Bennett, R. E., Morley, M., Quardt, D., Rock, D., Singley, M. K., Katz, I. R., & Nhouyvanisvong, A. (1999). Psychometric and cognitive functioning of an under-determined computer-based response type for quantitative reasoning. Journal of Education Measurement, 36(3), 233-252. Bennett, R. E., Steffen, M., Singley, M. K., Morley, M., & Jacquemin, D. (1997). Evaluating
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an automatically scorable, open-ended response type for measuring mathematical reasoning in computer adaptive tests. Journal of Education Measurement, 34(2), 162-176. Bingham, B., Ilg, S., & Davidson, N. (2002). Great candidates fast: Online job application and electronic processing. Public Personnel Management, 31(1), 53-64. Booth-Kewley, S., Larson, G. E., & Miyoshi, D. K. (2007). Social desirability effects on computerized and paper-and-pencil questionnaires. Computers in Human Behavior, 23, 463-477. Burke, M. J. (1993). Computerized psychological testing: Impacts on measuring predictor constructs and future job behavior. In N. Schmitt, W. C. Borman, & Associates (Eds.), Personnel selection in organizations (pp. 203-239). San Francisco: Jossey Bass. Butcher, J., Keller, L., & Bacon, S. (1985). Current developments and future directions in computerized personality assessment. Journal of Consulting and Clinical Psychology, 53, 803-815. Chang, T. (2005). The validity and reliability of student ratings: Comparison between pencil-paper and online survey. Chinese Journal of Psychology, 47(2), 113-125. Chua, S. L., Chen, D., & Wong, A. (1999). Computer anxiety and its correlates: A meta-analysis. Computers in Human Behavior, 15, 609-623. Donovan, M. A., Drasgow, F., & Probst, T. M. (2000). Does computerizing paper-and-pencil job attitude scales make a difference? New IRT analyses offer insight. Journal of Applied Psychology, 85(2), 305-313. Epstein, J., & Klinkenberg, W. D. (2001). From Eliza to Internet: A brief history of computerized assessment. Computers in Human Behavior, 17, 295-314.
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Evans, W. M., & Miller, J. R. (1969). Differential effects on response bias of computer vs. conventional administration of a social science questionnaire: An exploratory methodological experiment. Behavioral Science, 14, 216-227. Feigelson, M. E., & Dwight, S. A. (2000). Can asking questions by computer improve the candidness of responding? A meta-analytic perspective. Consulting Psychology Journal: Practice and Research, 52, 248-255. Finegan, J. E., & Allen, N. J. (1994). Computerized and written questionnaires: Are they equivalent? Computers in Human Behavior, 10, 483-496. Green, B., Bock, R., Humphreys, L., Linn, R., & Reckase, M. (1984). Technical guidelines for assessing computerized adaptive tests. Journal of Education Measurement, 21, 347-360. Hofer, P., & Green, B. (1985). The challenge of competence and creativity in computerized psychological testing. Journal of Consulting and Clinical Psychology, 53, 826-838. Honaker, L. (1988). The equivalency of computerized and conventional MMPI administration: A critical review. Clinical Psychological Review, 8, 561-577. Kiesler, S., Walsh, J., & Sproull, L. (1992). Computer networks in field research. In F. B. Bryant, J. Edwards, S. Tindale, E. Posavac, L. Heath, E. Henderson, & Y. Suarez-Balcazar (Eds.), Methodological issues in applied social research (pp. 239-268). New York: Plenum. Lautenschlager, G. J., & Flaherty, V. L. (1990). Computer administration of questions: More desirable or more socially desirability? Journal of Applied Psychology, 75, 310-314. Layne, B. H., DeCristoforo, J. R., & McGinty, D. (1999). Electronic versus traditional student ratings of instruction. Research in Higher Education, 40(2), 221-232.
Martin, C., & Nagao, D. H. (1989). Some effects of computerized interviewing on job applicant responses. Journal of Applied Psychology, 74, 72-80. McHenry, J. J., & Schmitt, N. (1994). Multimedia testing. In M. G. Rumsey, C. B. Walker, & J. H. Harris (Eds.), Personnel selection and classification (pp. 193-232). Hillsdale, NJ: Erlbaum. Mead, A. D., & Drasgow, F. (1993). Equivalence of computerized and paper-and-pencil cognitive ability tests: A meta-analysis. Psychological Bulletin, 114(3), 449-458. Mooney, J. (2002). Pre-employment testing on the Internet: Put candidates a click away and hire at modem speed. Public Personnel Management, 31(1), 41-52. Potosky, D., & Bobko, P. (1997). Computer versus paper-and-pencil administration mode and response distortion in noncognitive selection test. Journal of Applied Psychology, 82, 293-299. Richman-Hirsch, W. L., Olson-Buchanan, J. B., & Drasgow, F. (2000). Examining the impact of administration medium on examinee perceptions and attitudes. Journal of Applied Psychology, 85(6), 880-887. Richman W. L., Kiesler, S., Weisband, S., & Drasgow, F. (1999). A meta-analytic study of social desirability distortion in computer-administered questionnaires, traditional questionnaires, and interviews. Journal of Applied Psychology, 84(5), 754-775. Rosenfeld, P., Booth-Kewley, S., & Edwards, J. (1993). Computer-administered surveys in organizational settings: Alternatives, advantages and applications. American Behavioral Scientist, 36(4), 485-511. Rozensky, R., Honor, L., Rasinski, K., Tovian, S., & Herz, G. (1986). Paper-and-pencil versus computer-administered MMPI’s: A comparison
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of patient’s attitudes. Computers in Human Behavior, 2, 111-116. Slack, W. V., & Van Cura, L. J. (1968). Patient reaction to computer-based medical interviewing. Computers and Biomedical Research, 1, 527-531. Slack, W. V., Hicks, G. P., Reed, C. E., & Van Cura, L. J. (1966). A computer-based medical history system. New England Journal of Medicine, 274, 194-198. Synodinos, N. E., & Brennan, J. M. (1988). Computer interactive interviewing in survey research. Psychology and Marketing, 5, 117-137. Synodinos, N. E., Papacostas, C. S, & Okimoto, G. M. (1994). Computer administered versus paperand-pencil surveys and the effect of sample selection. Behavior Research Methods, 26, 395-401. Thompson, L. F., Surface, E. A., Martin, D. L., & Sanders, M. G. (2003). From paper to pixels: Moving personnel surveys to the web. Personnel Psychology, 56(1), 197-227. Tippins, N. T., Beaty, J., Drasgow, F., Gibson, W. M., Pearlman, K., Segall, D., & Shepherd, W. (2006). Unproctored Internet testing in employment settings. Personnel Psychology, 59(1), 189-225. Truxillo, D. M., Steiner, D. D., & Gilliand, S. W. (2004). The importance of organizational justice in personnel selection: Defining when selection fairness really matters. International Journal of Selection and Assessment, 12(1/2), 39-53. Vinsonhaler, J. F., Moilneaux, J. E., & Rodgers, B. G. (1968). An experimental study of computeraided testing. In H. H. Harman, C. E. Helm, & D. E. Loye (Eds.), Computer-Assisted Testing Conference Proceedings, November 1966, Princeton, NJ: Educational Testing Service.
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Weiss, D. (1985). Adaptive testing by computer. Journal of Consulting and Clinical Psychology, 53, 774-789. Wilkerson, J. M., Nagao, D. H., & Martin, C. L. (2002). Socially desirable responding in computerized questionnaires: When questionnaire purpose matters more than mode. Journal of Applied Social Psychology, 32, 544-559. Wilson, B. (1999). Redressing the anxiety imbalance: Computer phobia and educators. Behaviour and Information Technology, 18(6), 445-454.
Key terMs Computer Adaptive Tests (Tailored Tests): Adaptive tests allow a computer to receive a response, score it, and then select a next question (either harder, easier, or similar) based on the respondent’s knowledge or expertise. Computer Assisted Testing (CAT): A setting in which a respondent views a selection instrument, or analysis measure, on a computer screen is considered a computer assisted test. Conventional Tests: Paper-and-pencil tests, or tests not computer-based, are considered conventional tests. High Stakes Testing: A testing situation where the consequences may impact people other than the respondent. Examples of high stakes testing situations include, but are not limited to, testing for selection, hiring or, promotion. Low Stakes Testing: A testing situation where the consequences likely do not impact people other than the respondent. Examples of low stakes testing situations include, but are not limited to, testing for training purposes, continuing education, or self-diagnosis.
Improving Employee Selection with Online Testing
Proctored Testing: A testing situation in which an individual is monitored by a human test administrator.
screening for applicants, interviewing, doing background checks, hiring, and negotiating salary and/or benefits.
Recruitment Process Outsourcing: When an employer contracts with a vendor to handle some, or all, of the selection and hiring process including the initial stages of data gathering,
Un-Proctored Internet Testing (UIT): A setting in which a respondent is not monitored by a human test administrator when completing an assessment.
This work was previously published in Encyclopedia of Human Resources Information Systems: Challenges in e-HRM, edited by T. Torres-Coronas & M. Arias-Oliva, pp. 504-509, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 3.7
Why First-Level Call Center Technicians Need Knowledge Management Tools Joe Downing Southern Methodist University, USA
AbstrAct This chapter argues that first-level call center technicians are the new knowledge workers of the 21st century. As such, these technicians are ideal candidates for knowledge management tools. The objective of the chapter is to introduce these technicians to the IT community and, by way of a case study, show how decision-tree-type help tools can increase technicians’ productivity. The chapter ends with recommendations for IT practitioners who are interesting in implementing these tools in their call centers.
IntroductIon The goal of this chapter is to introduce readers to first-level call center technicians who staff the phones for countless banks, financial institutions,
credit card companies, and help desks around the world (Datamonitor, 2003). The intense knowledge demands required of first-level technicians make them ideal candidates for knowledge management tools. Knowledge management tools refer to communication technologies that index and structure an organization’s “corporate memory” (Walsh & Ungson, 1991; Yates & Orlikowsky, 2002). This chapter is structured as follows. First, I provide a brief historical overview of the call center industry, including the outsourcing trend that began in the late 1990s. Next, I describe why first-level technicians must have knowledge tools to perform their jobs effectively. Then, I discuss two popular types of help interfaces that are used in call center environments. I conclude the chapter with my recommendations and by noting future trends that I see will affect the industry.
Why First-Level Call Center Technicians Need Knowledge Management Tools
bAcKground
reducing labor costs
Until the late 1980s, most organizations handled their customer service and technical support functions in-house. First-level call center technicians who staffed the phones were often full-time employees who handled only a single product or service (Bagnara & Marti, 2001). However, organizations soon realized it was cheaper, and often more effective, to outsource these support functions to third-party call center providers. The global call center industry was born.
Over the past 20 years, U.S.-based call center providers have struggled to reduce their growing labor costs and to curb the high employee turnover that plagues their industry. According to a study conducted by researchers from Purdue University’s Center for Customer-Driven Quality, annual turnover in U.S. centers averages 26% for full-time technicians. Further, call centers incur one year’s salary to replace each technician who leaves the company (Hillmer, Hillmer, & McRoberts, 2004).
call centers: From the help desk to the sales center Until recently, call center providers had distinct goals for their inbound and outbound operations. Inbound operations focused mainly on resolving customers’ product or service issues. Conversely, organizations used their outbound (telemarketing) operations to attract new customers. In the last five years, though, consumer hostility towards telemarketing practices has increased. According to a study commissioned by the American Teleservices Association (2002), about 40% of U.S. consumers subscribe to a caller ID service. Between 2003-2004, U.S. consumers also registered more than 64 million telephone numbers with the Federal Trade Commission’s National Do Not Call Registry. The negative public sentiment against telemarketers has led some providers to move away from their outbound call center operations. Instead, these organizations use their call centers to generate revenue from existing customers (Lieber, 2002; McDaniel, 2006). Turek (2002) reported that in certain financial sectors, approximately 70% of all upselling and reselling transactions in the United States now take place through one of these centers.
outsourcIng cAll center technIcIAn PosItIons to IndIA In the late 1990s, call center providers addressed these rising labor costs by outsourcing part or all of their operations to India (McDaniel, 2006). India was a popular destination because of the country’s highly educated workforce (Fairell, Kaka, & Stürze, 2005). Also, nearly three million English-speaking college students graduate from India’s universities every year (Ebsco, 2005a). Initially, organizations found that relocating their call center operations to India reduced their operating costs. However, these same multinational companies soon experienced problems attracting and retaining qualified technicians. Across India’s call centers, employee turnover now approaches 50% a year (Clarke, 2006). Privacy laws in India are less strict than in the United States (Ebsco, 2005a). This has resulted in a series of widely publicized public relations snafus involving India’s outsourcing community. For instance, in March 2004, Capital One canceled its telemarketing contact with Wipro, one of India’s largest call center providers, when an internal investigation found technicians had misled U.S. consumers by providing them unauthorized promotions to sign up for credit cards (Krebsbach, 2004).
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Most troubling to U.S. companies, though, has been the rising number of customer service complaints directed at overseas technicians. In 2004, Call Center Magazine, a key industry trade publication, surveyed call center providers from countries that included both India and the Philippines (Dawson, 2004). Managers in these centers reported that achieving “higher customer satisfaction” was the single most important metric (75%) they used to gauge success in their business (p. 18). Further, the outsource providers estimated that 65% of their customers went away “highly satisfied.” Consumers, however, reported they were “highly satisfied” only 22% of the time (p. 16). Chief among their complaints: technicians who were poorly trained and unable to resolve their problem (Dawson, 2004, p. 18). Customers have also reported issues understanding technicians. These communication barriers are most problematic in certain regions of India where English-speaking technicians have thick accents (Fairell et al., 2005).
From outsourcing to nearsourcing Some multinational corporations responded to customers’ complaints by moving their technical support operations out of India. In the most publicized case, Dell Inc. pulled two of its business product lines out of a Bangalore, India, call center and relocated the operation back to the United States (Chittum, 2004; Edwards, 2004; Heller, 2004). Other companies have moved their centers from India to the Philippines because English-speaking Filipino technicians have accents closer to individuals who live in the United States (Fairell et al., 2005). The current trend is for multinational corporations to adopt a nearsourcing strategy where they open centers in Canada, Mexico, and Latin America (Beasty, 2005). Datamonitor, a leading industry research firm, reported that three Latin American countries—Argentina, Brazil,
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and Chile—offer call center providers the most qualified applicant pool at the lowest possible wage (Ebsco, 2005b). Whether this nearsourcing strategy will be effective remains to be seen.
cAll center technIcIAns As the 21st Knowledge worKer As I have argued, the knowledge demands of call center work are intense. Technicians who once provided support for a single product line increasingly field calls for multiple clients. As product development cycles shrink, there is also increased complexity within the products or services firstlevel technicians’ support. The challenge facing call center management is how to keep these low-paid, rather unskilled first-level technicians up to date on the rapidly changing technologies they support. A related problem is that individuals who apply for these first-level technician positions often lack the necessary computer skills and requisite product or service knowledge to address customers’ issues effectively. In response, call center providers spend millions of dollars each year to train these new first-level technicians (Downing, 2004). However, even the best designed training curriculum rarely provides incoming first-level technicians with the details they will need to correctly diagnose, and then answer, their customers’ questions. Consequently, technicians, like any knowledge worker, use various strategies to search for the information they need to perform their jobs effectively. In most centers, management has developed formal knowledge tools, also called online help systems, for this purpose (Das, 2003). The quality of these knowledge management tools varies widely across the industry. This helps explain the surprising results from a recent study conducted at Consumer Reports’ National Research Center. In that study, researchers found that only 55% of consumers who contacted their
Why First-Level Call Center Technicians Need Knowledge Management Tools
computer manufacturer for technical support had their problem resolved (Consumer Reports, 2006). There are several possible reasons why this could happen; however, I will address two of the most likely scenarios. First, it is possible technicians failed to use the knowledge tools management had made available to them. Instead, they relied on more interactive search strategies such as face-to-face communication with colleagues or participating in chat room sessions. Second, even if call center management mandates the use of such tools, the tools simply may have been too difficult for first-level technicians to use.
the Problems Associated with technicians Asking colleagues for the Answer When customers call with questions first-level technicians cannot immediately answer, technicians’ natural tendency is to ask their colleagues who sit nearby if they know the answer (Downing, 2004). It is usually easier for employees to ask someone they know and trust a question rather than rely on printed manuals or to call someone outside their immediate communication network (Holman, Epitropaki, & Fernie, 2001). In a call center environment, customer satisfaction depends, in large part, on how quickly technicians can solve customers’ problems. The first problem with technicians’ asking their colleagues for answers is it requires first-level technicians to place their customers on hold. This, in turn, increases talk time on the call. Low talk time is important since customers placed on hold are up to 25% less likely to repurchase a product or service from the company (Clegg, 2004). The call center management also evaluates its first-level technicians on whether they can successfully answer customers’ questions on the first call (high first-call resolution rate). First-call resolution, along with talk time, are both positively related to increased customer satisfaction on an
account (Feinberg, Kim, Hokama, de Ruyter, & Keen, 2000). Yet another issue associated with asking colleagues for help is that there is no guarantee they will provide a correct solution to the customer’s problem. If this proves to be the case, the customer will have to contact the center again to resolve the issue. This, in turn, negatively affects first call resolution scores.
Alternative strategies First-level technicians use to Find solutions Sometimes call center management will develop interactive channels that allow technicians to share knowledge. For example, in a synchronous chat room environment, first-level technicians can request help from their more experienced colleagues who are second-level technicians. Using Microsoft Chat or a similar technology, technicians can either talk to the entire community of technicians that are logged on to the system or they can whisper to individual users. Second-level technicians also can monitor first-level technicians’ talk times. If a first-level technician’s talk time reaches a critical threshold, experienced second-level technicians can jump in to ask if the technician needs help with the call.
Knowledge MAnAgeMent tools In cAll centers Instead of having first-level technicians’ ask their colleagues for answers or developing “informal” knowledge tools like chat rooms, call center providers are better off developing formal knowledge tools that their first-level technicians will voluntarily adopt. A formal knowledge management tool is viable in a call center environment since roughly 80% of the support calls first-level technicians field have already been answered by another technician on the account (Hollman, 2002). As I argued in the previous section, if these tools are already in place but technicians have
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Why First-Level Call Center Technicians Need Knowledge Management Tools
chosen not to use them, one likely culprit is that the tools are too difficult to use. Indeed, researchers (Davis, 1989; Rogers, 1995) have long argued that for a new technology to be successfully adopted in the workplace, the technology must not only be easy to use (perceived ease of use), but employees also must see how using it will help them perform their jobs more efficiently (perceived usefulness). Thus, a new knowledge tool must help first-level technicians meet their performance metrics, which include achieving high first-call resolution scores and low talk and average handle times. (Average handle time is the average amount of talk time a technician spends with his or her customer, including any time customers’ spend on hold.) The problem, as we shall soon see, is that traditional (Web-based) knowledge tools in use at many call centers fail to meet this criterion.
(2001) argued that novice users have difficulty using this type of help interface because they lack the requisite technical knowledge and cognitive complexity to enter “correct” keywords into the search box. To illustrate, Juniper Research, a market research firm, surveyed more than 2,700 consumers and found that among the 80% of respondents who had used this type of knowledge tool, fully 46% had difficulty constructing their search queries (Daniels, 2003). After the tool searches the database, it returns the title and often a brief abstract of technical documents that match the keywords. Users can then click on the hyperlink to receive the full text of the document. A second and related problem with this type of interface is it returns too many documents to be helpful to the user (Daniels, 2003).
two types of Formal Knowledge tools
Decision-Tree-Type Help Interfaces
Online Help Tool with a Search Box Query Most knowledge tools use a Web-based interface that requires users to enter a keyword query directly into the tool’s search box. The tool then searches for documents housed in its help database that match these keywords. Microsoft’s Online Help (support.microsoft.com) provides an example of this type of knowledge tool. A knowledge tool’s effectiveness is related to the accuracy and comprehensiveness of the documents that software engineers have selected to populate the tool. Typically, product engineers, technical writers, and learning design specialists create this technical documentation. Interestingly, first-level technicians often use the same help tool the client makes available for free to its consumer end user. Both first-level technicians and consumers share a common trait: both are novice users. Tsoukas and Vladimirou
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Software designers also can develop an alternative knowledge tool for call center technicians that use a decision-tree-type help interface. As with the other tool, first-level technicians ask their customers to describe the symptom(s) of the problem they are experiencing with the product or service. Technicians then type the symptom into the tool. After technicians hit Enter, the software application that drives the tool directs technicians to ask their customers a series of questions, one symptom-related issue at a time. This serves to narrow down the likely cause of the problem. Initially, the scope of these questions is broad. However, the tool uses case-based logic—also called a decision tree—to narrow down possible solutions to the customer’s problem. At the end of this deductive process, the tool interprets the probability level of its proposed solutions. In his recent study, Downing (in press) reported how ClientLogic, a global call center provider based in the United States, worked with one of its clients to develop a knowledge tool that incorporated a
Why First-Level Call Center Technicians Need Knowledge Management Tools
decision-tree-type help interface. The new tool replaced an existing search box interface ClientLogic technicians already used on the account. Approximately 600 first-level ClientLogic technicians used the new knowledge tool for four months. ClientLogic officials then applied internal performance metrics (average handle time and first-call resolution) to compare the decision-tree-type interface with the more traditional search box tool. At the end of four months, average handle time on the account decreased by 2%. Further, over the course of the study, issue resolution rates increased by an average of 1% a week. Downing concluded that a decision-treetype interface holds special promise in call center environments because of the limited knowledge required of first-level technicians to use this type of tool properly.
Keeping Knowledge tools up to date Regardless of what type of knowledge tool first-level technicians’ use, they will still field non-routine calls from their customers. Since the answer to a customer’s problem is not yet included in the tool, first-level technicians will have to escalate the call to second-level technicians who support the account. The second-level technician, in turn, may have to conduct outside research to find a solution to the customer’s problem. Call center management must have a process in place where second-level technicians take this (often tactic) knowledge and make this knowledge explicit. Only then can this knowledge later be added to the tool. Further, management also must gather information from chat room transcripts, e-mails, and other material collected through informal search procedures, catalog it, and then index the information so it can later be incorporated into the system.
the Importance of securing buy-In from second-level technicians An important success criterion is for second-level technicians to participate in the decision-making process to adopt any new knowledge tool that is brought into the center. In many call center environments, second-level technicians earn the esteem of their first-level colleagues because of the specialized knowledge they have learned on the job. A formal knowledge tool tries to codify this specialized knowledge and include its contents in the tool. Once first-level technicians discover that the tool contains this knowledge, second-level technicians’ informational power can dissipate quickly. Second-level technicians, then, often have the most to lose if a knowledge tool is implemented in their center. This creates a paradox for center management. Second-level technicians’ technical savvy and expertise position them as excellent candidates to be early adopters of new technologies in the center. At the same time, how these opinion-leaders frame the new tools to their firstlevel technician colleagues will go a long way to determining if the knowledge tools will reach a critical mass of users within the center.
Incentives for First-level technicians to use the tools For call center management to implement a tool that will achieve this critical mass, management needs to understand the incentives that drive employee behavior. Unfortunately, little is known about first-level technicians’ subjective experience with knowledge management tools. However, IT scholars have published many empirical studies that investigate why employees choose to adopt different technologies in the workplace. Earlier, I argued that perceived usefulness and perceived ease of use of a new innovation (Yi, Fiedler, & Park, 2006) are perhaps the two most critical factors in this adoption decision. In a call center,
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Why First-Level Call Center Technicians Need Knowledge Management Tools
a knowledge tool that takes too long to answer a customer’s question, and worse, does not include relevant knowledge for this purpose, is unlikely to be used by technicians (Downing, 2004). Moore and Benbasat (1991) have claimed that to be successfully adopted in an organization, employees’ use of the new innovation must be visible to others in the company. Thus, the adoption will be successful to the extent it strengthens employees’ social status in their work group (Venkatesh & Davis, 2000). Another interesting line of research seeks to understand why employees voluntarily adopt a new technology. For instance, the perceived enjoyment employees’ gain from using the innovation, Chin and Gopal (1995) argued, helps explain why a particular technology succeeds or fails in the workplace. A related research area that holds much promise is studying how the structure of a particular job task—in this case, the use of a knowledge tool— invites employees to become immersed in the task. Csikszentmihalyi (1997) calls this state of total attention to the task at hand flow. To achieve flow, employees must undertake job tasks that include clear and achievable goals. Further, employees must receive immediate and relevant feedback about how they have achieved these goals. Employees’ individual skill levels must also meet the cognitive demands of the task. Tasks must be demanding enough to challenge the employee, but not so demanding that completing the job task leads to increased employee stress. A productive line of future study for call center researchers will be to study how the structure of a particular knowledge tool—that is, using an online help tool with search box vs. a decision-tree-type help interface—affects first-level technicians’ feelings of personal accomplishment to solve their customer’s problems. Further, researchers must continue to study how differences across cultures (Heijden, 2003; Igbaria, Livari, & Maragahh, 1995) affect first-level technicians’ decisions to adopt and continue to use online knowledge tools in call centers.
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recoMMendAtIons For multinational organizations to attract and retain their call center operations, companies must develop knowledge tools technicians can quickly and accurately use to answer their customers’ issues. Call center research is in its infancy; as a result, few empirical research studies have investigated this phenomenon. Indeed, most call center research consists of individual case studies. Clearly, more longitudinal research is needed on this topic. Nevertheless, the following three recommendations can help ensure this process flows as smoothly as possible: 1.
2.
3.
Ask key opinion-leaders to participate in the decision to adopt the knowledge tool. Second-level technicians who participate in the process are also more likely to later contribute knowledge into the tool (Klein & Ralls, 1995). Develop a tool that is easy for technicians to use and that provides technicians with a quick solution to their customer’s problem. Management also should consider using a decision-tree-type help interface, not a traditional search box tool, if first-level technicians on the account lack the technical knowledge needed to enter the “correct” keywords into the tool. If the tool takes too long for first-level technicians to use, they may regress to the more informal search process, where customers are placed on hold and technicians ask colleagues who sit nearby if they know the answer to the customer’s problem. Design a formal reward and recognition system that acknowledges those technicians, especially second-level technicians, who often contribute new information into the tool. If users are allowed to “sign” their contributions to the knowledge tool, they may be more motivated to share their information.
Why First-Level Call Center Technicians Need Knowledge Management Tools
Future trends And conclusIon The U.S. Department of Labor, Bureau of Labor Statistics (2005) expects customer service positions, which include call center technicians, to grow by 18-26% by 2014. To decrease costs, call center providers are investigating online support channels like e-mail and chat—both of which are less expensive than having a technician speak with a customer on the phone (Hollman, 2002). Regardless of what form the communication takes, first-level technicians will still have to use some type of formal knowledge tool to answer their customers’ questions. In many ways, the key to building a successful knowledge tool is tied to innovations in natural language search protocols (Daniels, 2003). Natural language search will allow technicians to construct a search query using their own vocabulary and will not require technicians to learn the complex technical lexicon that is needed to use most of the knowledge tools in use today. In this chapter I have argued how formal knowledge tools can help first-level call center technicians perform their job more effectively. Technicians who work in these centers offer researchers a different type of “knowledge worker” relative to the engineers, consultants, and other types of “professional” knowledge workers that most researchers study. As such, call center environments hold promise for researchers interested in how knowledge workers use help tools to perform their jobs more efficiently.
reFerences American Teleservices Association. (2002). Consumer study. Retrieved February 17, 2006, from http://www.ataconnect.org/IndustryResearch/ ConsumerStudy2002.html
Bagnara, S., & Marti, P. (2001). Human work in call centers: A challenge for cognitive ergonomics. Theoretical Issues in Ergonomic Science, 2(3), 223-237. Beasty, C. (2005). Outsourcing south of the border. Customer Relationship Marketing, (April), 13. Chin, W., & Gopal, A. (1995). Adoption intention in GSS relative importance of beliefs. Data Base, 26(2/3), 42-63. Chittum, R. (2004). Call centers phone home. Wall Street Journal, (June 9), B1. Clarke, T. (2006). Why Indian summer is drawing to a close. PrecisionMarketing, (May 12), 14-15. Clegg, C.H. (2004). Best practices in telephone customer service. Portland, OR: Portland Research Group. Consumer Reports. (2006). Computer technical support survey. Consumer Reports, (June), 21. Csikszentmihalyi, M. (1997). Finding flow: The psychology of engagement with everyday life. New York: Basic Books. Daniels, D. (2003). Self-service: Creating value with natural language search. Call Center Magazine, 16, 8-9. Das, A. (2003). Knowledge and productivity in technical support work. Management Science, 49(4), 416-431. Datamonitor. (2003). Call centers in the United States. Industry profile. New York: Author (reference code: 00720758). Davis, F.D. (1989). Perceived usefulness, perceived ease of use, and user acceptance of information technology. MIS Quarterly, 13, 319-340. Dawson, K. (2004). Customers: Not as happy as you think. Call Center Magazine, 17, 16-22.
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Downing, J. (in press). Using customer contact center technicians to measure the effectiveness of online help systems. Technical Communication. Downing, J. (2004). ‘It’s easier to ask someone I know:’ Call center technicians’ adoption of knowledge management tools. Journal of Business Communication, 41(2), 166-192. Ebsco. (2005a). Busy signals. Economist, (September 9), 60. Retrieved March 3, 2005, from http://www.ebsco.com Ebsco. (2005b). Offshore contact centers. MarketWatch: Global Round-Up, 4(October), 229-230. Retrieved February 15, 2006, from http://www. ebsco.com Edwards, L. (2004). Overseas call centers can cost firms goodwill. Marketing News, (April 15), 21. Fairell, D., Kaka, N., & Stürze, S. (2005). Ensuring India’s offshoring future. McKinsey Quarterly, 74-83. Feinberg, R.A., Kim, I., Hokama, L., de Ruyter, K., & Keen, C. (2000). Operational determinants of caller satisfaction in the call center. International Journal of Service Industry Management, 11, 131-141. Heijden, H. (2003). Factors influencing the usage of Web sites: The case of a generic portal in The Netherlands. Information & Management, 40, 541-549. Heller, M. (2004). Outsourcing. Workforce Management, 83, 95-97. Retrieved May 17, 2006, from http://www.ebsco.com Hillmer, S., Hillmer, B., & McRoberts, G. (2004). The real costs of turnover: Lessons from a call center. Human Resource Planning, 27(3), 34-41. Retrieved February 17, 2006, from http://www. ebsco.com Hollman, L. (2002). The power of knowledge management software. Call Center Magazine, 15(1), 30-38.
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Holman, D., Epitropaki, O., & Fernie, S. (2001). Understanding learning strategies in the workplace: A factor analytic investigation. Journal of Occupational and Organizational Psychology, 74, 675-681. Igbaria, M., Livari, J., & Maragahh, H. (1995). Why do individuals use computer technology? A Finnish case study. Information & Management, 29(5), 227-238. Klein, K.J., & Ralls, R.S. (1995). The organizational dynamics of computerized technology implementation: A review of the literature. In M.W. Lawless & L.R. Gomez-Media (Eds.), Advances in global high-technology management (pp. 31-79). New York: JAI Press. Krebsbach, K. (2004). Lessons from the dark side: Avoiding mistakes in overseas outsourcing. Bank Technology News, (May), 31, 54. Lieber, R. (2002). ‘Operator, I demand an automated Menu.’ Wall Street Journal, (July 30), D1. McDaniel, C. (2006). 2006 call center employment outlook. Available from M.E.R. Inc., 866991-3555. Moore, G., & Benbasat, I. (1991). Development of an instrument to measure the perceptions of adopting an information technology innovation. Information Systems Research, 2(3), 192-222. Rogers, E.M. (1995). Diffusion of innovations (4th ed.). New York: The Free Press. Tsoukas, H., & Vladimirou, E. (2001). What is organizational knowledge? Journal of Management Studies, 38, 973-993. Turek, N. (2002). Call centers: Here, there, and everywhere. InformationWeek, (October 23), 168-174. U.S. Department of Labor, Bureau of Labor Statistics (2005). Customer service representatives. Retrieved February 17, 2006, from http://www. bls.gov/oco/ocos280.htm
Why First-Level Call Center Technicians Need Knowledge Management Tools
Venkatesh, V., & Davis, F.D. (2000). A theoretical extension of the Technology Acceptance Model: Four longitudinal field studies. Management Science, 46(2), 186-204.
Yates, J., & Orlikowski, W. (2002). Genre systems: Structuring interaction through communicative norms. Journal of Business Communication, 39, 13-35.
Walsh, J.P., & Ungson, G.R. (1991). Organizational memory. Academy of Management Review, 16, 57-91.
Yi, M.Y., Fiedler, K.D., & Park, J.S. (2006). Understanding the role of individual innovativeness in the acceptance of IT-based innovations: Comparative analyses of models and measures. Decision Sciences, 37(3), 393-426.
This work was previously published inStrategic Knowledge Management in Multinational Organizations, edited by K. O’Sullivan, pp. 53-62, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 3.8
Application Service Providers Sathasivam Mathiyalakan University of Massachusetts Boston, USA
IntroductIon Technological changes within the last decade have dramatically changed the business climate. The use of Internet by firms has lead to global production, consumption, and competition. Electronic commerce, or e-commerce, “is a modern business methodology that addresses the needs of organizations, merchants, and consumers to cut costs while improving the quality of goods and services and increasing the speed of service delivery” (Kalakota & Whinston, 1996, p. 1). The benefits of e-commerce include cost savings, direct and quick interaction with the (potential) customer, competitive advantage through business intelligence, digital production sales and distribution, collaborative development with partners, new product development, direct sales, marketing and advertising, publicity, customer service and enhanced customer relationship, and communication.
Small businesses play an important role in the nation’s economy. They are the fastest growing segment of all business types. The importance of small businesses to the U.S. economy can be gauged from the following statistics provided by U.S. Small Business Administration (SBA): •
• •
Small businesses represent 99.7% of all employers, employ 50% of all private sector employees and account for 44.3% of total U.S. private payroll; Small businesses generate 60 to 80% of net new jobs annually; and Small businesses are employers of 39% of high-tech workers.
Researchers have argued that the use of Internet has created a level playing field whereby a small business can compete effectively against larger competitors. Studies have shown that larger firms have made significant progress in e-commerce.
But, the same cannot be said of small businesses. In a 2001 report, SBA noted that less than 2% of Internet use is directed at e-commerce. The lack of progress in e-commerce adoption by small businesses has been cited in several studies (Mathiyalakan, 2002, 2004). Small businesses face numerous e-commerce technology adoption barriers and as a result the pace of adoption has been slow. In addition to capital and access to latest technology, employees’ knowledge, expertise, and experience is an important determinant of technology adoption (Kwon & Zmud, 1987; Rogers, 1983). To overcome the technological and skill limitations identified above, several strategic options are available for small businesses. These include the use of external consultants, outsourcing, and the use of ASP amongst others. The focus of this article is on examining issues related to the use of ASP by small businesses. This article is organized in terms of five sections. After this introduction, we provide a background to ASP. Thereafter, we identify and discuss issues that are pertinent to the use of ASP by small business. This is followed by a discussion on future trends and our concluding remarks.
bAcKground to APPlIcAtIon servIce ProvIders The roots of ASP go back to the concept of “time sharing.” A review of literature on ASP definition (see Table 1) indicates that there exists a multitude of definitions of ASP. Although all researchers agree that ASP provide software applications and services exist, a consensus does not exist on other key features of ASP. Although some have stressed that ASP is akin to a rental agency (ASPstreet. com, 2005; Bennett & Timbrell, 2000), others advocate a broader and management oriented role (Deloitte Research, 1999; Webopedia.com). A common theme across many of the definitions is the use of the Internet to distribute the software applications (ASPstreet.com, 2005; Bennett & Timbrell, 2000, p. 196; Brian, 2005; Kern et al., 2002) who reviewed other definitions of ASP in an attempt to distinguish them from outsourcing note “it is difficult to distinguish a modern ASP from the 1963 Payroll Bureau Service provided by Ross Perot’s Electronic Data Systems to Frito Lay and Blue Cross.” The ASP uses the Internet to make applications available to firms. It is essentially delivers and
Table 1. Definitions of ASP Source
Definition
Benett and Timbrell (2000)
A form of selective outsourcing where a third-party organization rents generally available packaged software applications and related services.
Kern, Kreijger, Willcocks (2002)
These are service firms that provide on contractual basis, rental based or ‘pay-as you-use’ access to centrally managed applications made available to multiple users from a shared data centre over the Internet or other networks.
Smith and Kumar (2004) ASPstreet.com Brian (2005) Deloitte Research
A single point of contact for all telecommunications, hardware, software, and consulting services necessary to deploy, run, and maintain hosted applications remotely. Offer individuals or enterprises access to software applications and related support services over the internet. Companies that supply software applications and /or software-related services over the Internet. A service firm that deploys, hosts, and manages application solutions for rent to businesses residential customers.
Information Technology Association of America
An Application Service Provider, or ASP, is any company that delivers and manages applications and computer services to subscribers/clients remotely via the Internet or a private network.
Webopedia.com
A third-party entity that manages and distributes software-based services and solutions to customers across a wide area network from a central data center.
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Application Service Providers
manages the applications and services through the Internet and other networks. Examples of applications that can be used through ASP are payroll, travel and expense accounting, desktop productivity, messaging & collaboration services, information distribution, e-commerce, product configuration, sales force automation, manufacturing, logistics, and supply chain management.
(a) drivers within the business environment that precipitate the need for the use of ASP, (b) firm resource base, (c) ASP value proposition, (d) ASP business model, (e) ASP selection, and (f) Organizational outcomes and ASP evaluation. Next, we discuss each of these issues in detail.
drivers Present in the business environment
Issues In the use oF AsP by sMAll busIness
Rapid developments in the global marketplace, including technological advances, mushrooming consumer demands, new products, escalating globalization, and the implications of corporate reengineering and the restructuring, have fundamentally transformed the contemporary business climate. To compete in this changing business and
In Figure 1, we present our framework. We use this framework to identify issues of concern to both academics and small business managers. The noteworthy features of our framework are:
Figure 1. Model for ASP selection, use, and evaluation
AsP value Proposition Advantages
Disadvantages
Focused offerings
Outside dependency
Immediate access to latest technology
Lack of IT staff motivation
IT expertise, knowledge, & support
Security, privacy, and loss of control of strategic data
Increased productivity
High switching cost
evaluation
Financial flexibility
Organizational Outcomes
Suitable for mobile employees Security & reliability
AsP selection business environment
Use ASP?
Business Drivers Technology Drivers
• Finance • technology • reliability • service
Firm resource base • Technology • Skill set • Knowledge Base • Monetary
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AsP business Model • Revenue strategy • Offerings
Profitability Productivity Culture Satisfaction Trust Usage ASP Service & Support Appearance Attitudes Customization Features Network Capabilities Reliability Responsiveness
Application Service Providers
technology environment, small businesses are constantly revising strategies to better manage their businesses. ASP are seen as a way for a small business to overcome its technology, knowledge, and monetary limitations and compete with much larger firms.
Firm resource base: why use AsP? Larger businesses have a greater access to capital (money, material, employees, technology, and knowledge) and have greater freedom to engage in new technology adoption. Larger firms can easily overcome their technical expertise limitations by hiring additional staff, using consultants, or using third-party vendors. Small businesses are different from large businesses in many areas such as capital availability, access to capital markets, technical capabilities and availability of professionals. In small businesses, very few people or possibly an individual may function as the IT staff. Premkumar and Roberts (1999) asserted that firms without the required employee skills may not be aware of new technological innovations or may fear the risk associated with adoption of such technology within their organization. Lack of access to education and training within small business may affect their willingness to adopt new technology (Fariselli, Oughton, Picory, & Sugden, 1999). Hiring suitably qualified personnel or motivating them to work within a small business setting may be a daunting task for a small business decision maker. For developing a home page or for other less knowledge and/or capital-intensive task, a small business may make use of off the shelf books, software, and tutorials. Small businesses with restricted technical expertise may require the use of external expertise or personnel in the form of consultants, vendor support, outsourcing, or the use of ASP.
AsP value Proposition: Advantages and disadvantages of using AsP Prior to using ASP, a small business decision maker who faces technical and skilled personnel limitations needs to decide on whether to use ASP to avail the opportunities in the marketplace. Both the advantages and disadvantages must be carefully considered and evaluated prior the decision on ASP use is made. The advantages of using ASP are as follows: •
• •
•
•
•
ASPs are aimed primarily at small business (Paraskevas & Buhalis, 2002) and thus the ASP can have more focused offerings. A small business (or a startup) can have immediate access to the latest technology. A small business has the access to the same technology that their large counterparts have and thereby levels the playing field. ASP provides IT expertise and eliminates the need for a large and technically capable IT department to deal with support, maintenance, and upgrades. By using ASP, small businesses can focus on using the applications immediately to support their business activities and eliminate the learning curve and the time and cost associated with installing and managing applications. A small business does not have to expend time and money in software development and thereby the small business can increase its IT productivity. Rather than purchasing hardware and software, and acquiring relevant personnel (new or trained) which necessitates in capital outlay, small businesses can “rent” ASP and thereby decrease initial capital requirements, lower the total cost of ownership, and provide financial flexibility. Further, as managing
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Application Service Providers
•
•
•
and supporting the applications and services falls within the purview of the ASP, small businesses do not have to provide extensive IT staff training. ASP provides viable solutions for a small business with mobile and or distributed employees as the applications are hosted on remote servers. There is a reduced risk for technology obsolescence as small businesses are renting the applications. There is a greater provision of security and reliability.
The disadvantages of using ASP are as follows: •
•
•
By depending on outside parties, small businesses face the risk of high switching costs, access to organizational strategic asset by external parties, lack of security and privacy, and potential collapse or downfall of their ASP. By depending on external IT staff, small businesses face the risk of alienating internal IT personnel who may feel that they are relegated to performing routine mundane tasks with no avenue for career advancement or for learning new technology. A small business decision maker may fear that perhaps due to their lack of or limited IT knowledge ASP may pursue their own agenda (Yao, DeSouza, & Watson, 2004).
AsP business Models A business model specifies how a firm will generate money to sustain its operations and to generate the desired rate of return. Business models usually specify how the firm will generate revenue and the specific tactics it will use to operate within the industry. An ASP generates a revenue stream either through monthly fees or
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through per user fees. Based on target markets and products, ASP may be classified into Enterprise ASP, Local/Regional ASP, Specialist ASP, Vertical Market ASP, and Volume Business ASP (ASPnews.com). Enterprise ASP deliver high-end business applications such as enterprise resource planning software, e-commerce applications and supply chain management applications. Local/ Regional ASP supply wide variety of application services for smaller businesses in a local area. Specialist ASP provides applications for a specific need, such as Web site services, human resources, customer-relationship management software. Vertical Market ASP provides support to a specific industry, such as healthcare, finance etc. Volume Business ASP supply general small and medium-sized businesses with prepackaged application services in volume.
AsP selection It is important that ASPs are selected after a careful study of the needs and requirements and the capabilities. A small business decision maker must carefully consider issues related monetary, technological, reliability, and service during the section of the ASP. Focacci, Mockler, Gartenfeld, and Dologite (2003) provide 10 guidelines that can form the basis for ASP selection. These 10 guidelines deal with business strengths of the ASP, capabilities and certification of ASP personnel, architecture, data center and infrastructure analysis, recovery and backup plans, security, service and support, scalability, pricing, guarantees on system availability. Grover, Teng, and Cheon (1998) suggested that as ASP possess more technical knowledge than a typical small business manager they may play a dominant role during negotiations leading to a lower degree of control by the small business. Such a loss of control could result in incomplete or inflexible contracts (Kern et al., 2002). Yao et al. (2004) pointed out that such a lack of control could lead to ASP pursuing its own agenda.
Application Service Providers
organizational outcomes and AsP evaluation It is important that periodic evaluation be made both of the organizational outcomes and services and support provided by the ASP. Given the newness of the ASP concept, there exists a dearth of studies that have as their primary focus the evaluation of services and support provided by the ASP (Ma, Pearson, & Tadisina, 2005). There is also no agreement among researchers on the ways to define and operationalize quality (Reeves & Bednar, 1994). However, a good starting point is the study of Ma et al. (2005) who identified seven dimensions (features, availability, reliability, assurance, empathy, conformance, and security) for evaluating the service quality of ASP. Trust is also an issue that may affect ASP choice and usage (Seltsikas, Currie, & Tebbourne, 2002). The task of a small business decision maker is to ensure that the use of the ASP results in net positive outcomes. In addition to quantitative factors such as performance, productivity and usage, we argue that a small business decision maker must use nonquantifiable measures such as culture, satisfaction (with both the process and outcomes) and trust to assess the impact of the ASP.
Future trends The research firm of IDC expects the ASP market to by 92% over the 5-year period 1999 to 2004 to an estimated $7.8B in 20041 . However, this forecast represents a drastic reduction from the earlier estimate of Gartner Research Group, who predicted that the market would be around $22B (Mears, 2003). While there are many different estimates on ASP spending, it should be noted that all of them have revised their estimate downward from the projections made in late 1990s. A possible reason for the downward revision of ASP spending could be due to the crash of
many dot-com firms in early 2000. In late 1990s, many firms entered the ASP market with a lot of fanfare and with the expectation that the premise behind their business model of customers renting software applications over the Internet would hold true. However, the collapse of the dot-com firms in part has lead to the demise of many ASP. Those that do remain can be considered as the survivors. This second generation ASP have altered their business model and have changed their tactics to provide more and high quality offerings and superior service.
conclusIon Small businesses face resource limitations. Both academics and practitioners have suggested that ASP can be used to overcome financial and technical limitations experienced by small businesses. However, it should be noted that ASP should not be thought of as panacea for all the problems experienced by small businesses. A small business decision maker must carefully consider the value proposition offered by the ASP prior to engaging its services. Performance requirements must be carefully specified prior to the start of the contract and constant monitoring and evaluation is necessary. In this study, we presented a framework that may be of use to both academics and practitioners in identifying issues and considerations in use of ASP by small businesses. There are several opportunities for additional research. It would be interesting to develop a profile of firms that use ASP and the applications they use. Information, education, training, and supplier incentives have a positive effect on adoption (Deeter-Schmelz, Bizzari, Graham, & Howdyshell, 2001) and thus studies should also focus on how the small business decision maker characteristics impacts ASP use. Studies should focus on identifying ASP usage barriers. Mathiyalakan (2004) found that as the
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size of the firm increases, the knowledge about ASP also increases. But this knowledge does not get translated into use of ASP possibly suggesting the existence of barriers other than knowledge. There may be several reasons for the lack of use of ASP by small businesses (Mathiyalakan, 2004). First, a small business decision maker may be concerned with security, privacy, and loss of control associated with ASP usage. Second, a small business decision maker may fear that perhaps due to their lack of or limited IT knowledge, ASP may pursue their own agenda (Yao et al., 2004). Third, a small business decision maker may not believe in an ASP’s value proposition as evidenced by Roberts (1998), who found that many small businesses have problems in using computers and translating IT investments into business value. Therefore, future research should focus on whether additional barriers to ASP usage exist and the ways to overcome such barriers. We also note that there is a need for research that is longitudinal in nature as technology adoption and implementation is often an ongoing process.
reFerences ASPstreet.com. (2005). Retrieved December 9, 2005, from http://www.aspstreet.com/resources/ faq/d.taf#qal1760 Bennett, C., & Timbrell, G. T. (2000). Application service providers: Will they succeed? Information Systems Frontiers, 2(2), 195-211. Brian, M. (2005). How ASP work. Retrieved February 11, 2005, from http://computer.howstuffworks. com/asp.htm Deeter-Schmelz, D. R., Bizzari, A., Graham, R., & Howdyshell, C. (2001, Winter). Business-tobusiness online purchasing: Suppliers’ impact on buyers’ adoption and usage intent. The Journal of Supply Chain Management, 4-9.
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Deloitte Research. (1999). The Internet-based ASP marketplace: Renaissance of the on-line value added network. Retrieved December 9, 2005, from http://www.aspforum.nl/data/files/ f66_The_ASP_Market.pdf Fariselli, P., Oughton, C., Picory, C., & Sugden, R. (1999). Electronic commerce and the future for SMEs in a global market-place: Networking and public policies. Small Business Economics, 12, 261-275. Focacci, L., Mockler, R. J., Gartenfeld, M. E., & Dologite, D. G. (2003). How to choose an ASP: Selection guidelines. Information Management and Computer Security, 11(2), 67-73. Grover, B., Teng, J. T. C., & Cheon, M. J. (1998). Towards a theoretically based contingency model of information system sourcing in IS outsourcing. In L.P. Willcocks & M.C. Lacity (Eds.), Strategic sourcing of information systems: Perspectives and practices (pp. 79-102). New York: Wiley. Kalakota, R., & Whinston, A. B. (1996). Frontiers of electronic commerce. Reading, MA: AddisonWesley. Kern, T., Kreijger, J., & Willcocks, L. (2002). Exploring ASP as sourcing strategy: Theoretical perspectives, propositions for practice. Journal of Strategic Information Systems, 11, 153-177. Kwon, T. H. & Zmud, R. W. (1987). Unifying the fragmented models of information systems implementation. In R. J. J. Borland & R. A. Hirschhiem (Ed.), Critical issues in information systems research (pp. 253-270). New York: Wiley. Ma, Q., Pearson, J. M., & Tadisina, S. (in press). An exploratory study into factors of service quality for application service providers. Information and Management, 42(2), 1067-1080.
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Mathiyalakan, S. (2002, November 23-26). An empirical investigation of Web use and capabilities of small businesses. Proceedings of the 33r d Annual Meeting of the Decision Sciences Institute, San Diego, CA.
Vertical Industry Report: Opportunities within financial services, healthcare, & telecommunications. (2001). (Cherry Tree & Co Research Report). Retrieved December 9, 2005, from http://www. itaa.org/itserv/ctvertical.pdf
Mathiyalakan, S. (2004, November 20-23). Are small businesses on the ASP bandwagon? Proceedings of the 35t h Annual Meeting of the Decision Sciences Institute, Boston.
Wainwright, P. (2001). Industry basics: Application service providers. Retrieved December 9, 2005, from http://www.aspnews.com/strategies/ asp_basics/article.php/769151
Mears, J. (2003). Application service providers still alive and kicking. Retrieved February 10, 2005, from http://www.nwfusion.com/ news/2003/0922carrspecial focus.html
Webopedia.com. (n.d.). Retrieved from http:// www.webopedia.com/TERM/A/Application_ Service_Provider.html
Paraskevas, A., & Buhalis, D. (2002). Outsourcing IT for small hotels. Cornell Hotel and Restaurant Administration Quarterly, 43(2), 27-39. Premkumar, G., & Roberts, M. (1999). Adoption of new information technologies in rural small business. Omega: The International Journal of Management Science, 27, 467-489. Reeves, C., & Bednar, D. (1994). Defining quality: Alternatives and implications. Academy of Management Review, 19(3), 419-445. Roberts, J. (1998). Small business IT hang-ups. Computer Reseller News, 774(2), 19. Rogers, E. M. (1983). Diffusion of innovations. New York: The Free Press. Seltsikas, P., Currie, W. L., & Tebbourne, D. E. S. (2002). Strategic alliances in application service provision. Proceedings of the 2002 Information Resource Management Association (IRMA) International Conference, Seattle, WA. Smith, M. A., & Kumar, R. L. (2004). A theory of application service provider (ASP) from a client perspective. Information and Management, 41(8), 977-1002.
Yao, Y., DeSouza, K. C., & Watson, E. (2004). The role of application service providers in the development of small and medium sized enterprises. In N. A.Y. Al-Qirim (Ed.), Electronic commerce in small to medium-sized enterprises: Frameworks, issues, and implications. Hershey, PA: Idea Group Publishing.
Key terMs Application Service Providers: “These are service firms that provide on contractual basis, rental based or ‘pay-as you-use’ access to centrally managed applications made available to multiple users from a shared data centre over the Internet or other networks” (Kern, Kreijger, & Willcocks, 2002, p. 154). E-Commerce: “Is a modern business methodology that addresses the needs of organizations, merchants, and consumers to cut costs while improving the quality of goods and services and increasing the speed of service delivery” (Kalakota & Whinston, 1996, p. 1). Enterprise ASP: Deliver high-end business applications such as enterprise resource planning software, e-commerce applications and supply chain management applications (Wainwright, 2001).
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Local/Regional ASP: Supply wide variety of application services for smaller businesses in a local area (Wainwright, 2001). Specialist ASP: Provides applications for a specific need, such as Web site services, human resources, and customer relationship management software (Wainwright, 2001).
Volume Business ASP: Supply general smalland medium-sized businesses with prepackaged application services in volume (Wainwright, 2001).
endnote 1
Vertical Market ASP: Provides support to a specific industry, such as health care, finance, and so forth (Wainwright, 2001).
http://www.itaa.org/asp/about.htm
This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 7-12, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 3.9
Enterprise Application Service Model George Feuerlicht University of Technology, Australia Jiri Vorisek University of Economics, Czech Republic
IntroductIon Following the recent changes in the global business environment, many organizations are reevaluating their approach to delivering enterprise applications and are looking for more effective ways to control IT costs. There is growing evidence of reluctance to fund large-scale implementation projects, and of tighter budgets forcing more careful cost-benefit analysis to justify IT investments. It is becoming increasingly clear that the traditional model for delivering enterprise applications that involves the implementation of licensed software such as ERP (enterprise resource planning) applications within end-user organizations is not suited to the fast-evolving business world of the 21s t century. Almost invariably, situations in which organizations own and maintain their entire IT infrastructure lead to very high costs of ownership, and consequently high levels of IT spending, which can detract from the core busi-
ness in which the organization is engaged. This has led to a situation in which some businesses doubt the benefits of IT (Carr, 2003), and some observers even contend that productivity improvements, once assumed to be the result of IT, are more likely to be the results of other factors such as longer working hours (Nevens, 2002). This backlash that followed the IT boom at the end of the last century has forced software vendors to seek more cost-effective models for the delivery of enterprise applications, and has led to the reemergence of the ASP (application service provider) model as an alternative to licensed software. Today, the ASP model (or software-as-a-service model) is a part of a more general trend toward utility computing, where the service provider delivers highly scalable application services to a large population of end-user organizations in a reliable and cost-effective manner, typically from a remote data center. Utility computing aims to supply application services on demand, similar
to other utility services (e.g., gas or electricity), and relies on new technologies and architectures that enable the virtualization and sharing of resources across a large number of users in order to minimize costs and maximize utilization. The use of advanced service-oriented architectures (SOAs), grid computing, cluster technologies, and failure-resistant configurations enable the delivery of highly scalable application services in a reliable manner to a large population of users. These technological advances distinguish utility computing from the earlier ASP and outsourcing models, and will ultimately result in significant reduction in the costs of enterprise software solutions and wide adoption of the software-as-aservice model. Major IT vendors including IBM, Microsoft, Sun, Oracle, and HP are promoting utility computing, albeit under different names (e.g., on-demand computing, etc.), and are investing vast resources into the construction of data centers and related facilities (Abbas, 2003). Others, such as Salesforce.com, have been successful with providing hosted services for CRM (customer-relationship management) and other related types of applications, validating the ASP model and further confirming the trend toward utility computing. As the enterprise application software market matures, major ERP vendors are changing their revenue model to decrease their reliance on new software licenses toward income generated from software-license upgrades and product support (Karpecki, 2004; Levy, 2004). This change combined with the fact that most organizations spend as much as 80% of software-related costs on software maintenance and related activities (Haber, 2004) creates a situation in which licensed software is de facto rented. It is precisely this high level of ongoing costs that motivate many organizations toward alternatives such as outsourcing and the ASP model. In this article we first examine the business drivers for the ASP model and contrast the software-as-a-service model with the traditional
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software-as-a-license approach. We then discuss future enterprise computing trends, focusing on the reemergence of the ASP model for enterprise applications and the likely impact of the wide adoption of this model on the IT landscape. In conclusion, we summarize the main arguments in this article.
bAcKground The economic downturn at the beginning of this decade resulted in organizations dramatically reducing IT budgets, leading to scaling down existing projects and in some cases discontinuing projects altogether. In this section, we consider the background of these developments and the main business drivers that are forcing the transition to a new model for the delivery of enterprise applications as services.
high cost of It Projects Problems of controlling the costs associated with IT projects are well documented. Notwithstanding the long experience that the IT industry has with the implementation of enterprise applications, costs of many projects significantly exceed their original budgets. According to a study of ERP implementation projects of 117 U.S. companies, 25% exceeded their budgets, 20% were abandoned before completion, and 40% failed to achieve business objectives (Cooke, Gelman, & Peterson, 2001). There have been other studies of this type that clearly demonstrate that the traditional model that involves the in-house implementation and maintenance of enterprise applications is associated with significant risks that are not being addressed by new, improved implementation methodologies and more technologically advanced software platforms. Equally, there is ample evidence that the outsourcing of the implementation and support of enterprise applications to a third party does not always bring the anticipated ben-
Enterprise Application Service Model
efits (i.e., cost savings, improved responsiveness to new requirements, etc.); this is most likely because the implementation methodologies and technology architectures used by outsourcing organizations are essentially the same as those used by end-user organizations.
Fast rate of technology change Another significant risk factor associated with enterprise applications is the rapid development of underlying technologies, often necessitating the time-consuming reengineering of applications and costly upgrades. There is growing evidence that end-user organizations are no longer able to keep pace with new technological developments as delivered by IT vendors. New technology platforms and new versions of enterprise applications are often mandated by vendors who are reluctant to support older versions of their products, delivering no direct business benefit to end-user organizations.
high demand on It skills The traditional licensed-software model is associated with the high demand on IT skills needed to implement enterprise applications. Many small and medium-size enterprises (SMEs) cannot justify the cost of retaining their own internal IT staff with the appropriate expertise. Another contributing factor is that the expertise of IT specialists employed by end-user organizations and third-party consulting companies is not fully up to date and often significantly lags behind the expertise available from technology vendors. This factor leads to poor implementation results and is a major cause of the high rate of failure of IT projects.
complexity of enterprise Applications Enterprise applications are becoming increasingly more sophisticated and complex. This complexity is particularly evident in large (horizontal) ERP application systems that provide comprehensive functionality designed to address requirements across a range of end-user organizations irrespective of the industry and the needs of individual businesses. While providing a complex and comprehensive solution, the actual utilization of the overall functionality of an ERP system by individual end users is relatively low. Customization to suit the needs of individual client organizations requires a high level of expertise and often involves the setting up of a large number of configuration parameters. Limited knowledge of the client’s business processes by third-party consultants is another key factor, according to recent studies, that inhibits the successful implementation of ERP systems (Karpecki, 2002). ERP systems are characterized by high complexity of operation, even in situations in which the corresponding business process is relatively simple, and that leads to a high cost of end-user training. Because of the increasing size and complexity of new software versions, there is a corresponding growth in the demand on hardware resources. All these factors lead to increased implementation costs of enterprise applications that the client organizations are no longer willing to accept.
globalization of the business environment Globalization impacts enterprise applications in two important ways. First, as a result of globalization and the formation of regional economic blocks with standardized business practices and regulations, ERP applications can be used across a larger (international) user base without extensive customization to suit individual countries. For example, in the European Union, with the
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growing number of member countries using similar business laws and regulation, enterprise applications are becoming standardized across the entire region. Second, the global deployment of enterprise applications is becoming a growing trend. Many large, multinational companies implement global applications across the entire enterprise, in some cases using a single centralized data center and centralized applications accessible via the company’s intranet. This simplified environment, with standardized business practices across the entire global organization, is highly suited to implementation using the software-asa-service model.
Increased Acceptance of Alternative Models for enterprise Application delivery Over the last 5 years, there has been an increase in awareness of alternative models for the delivery of enterprise applications, in particular, the outsourcing model. Given the highly competitive global business environment, organizations are becoming aware of the need to focus on their core business and avoid devoting resources to ITrelated activities. This leads to the willingness to consider outsourcing noncore business functions, including the implementation and support of ERP applications to external providers.
Table 1. Comparison of the software-as-a-service vs. software-as-a-license models Key Differentiator Design Approach
Architecture
Upgrade Cycle
ASP Model (Software-as-a-Service Model) Designed for delivery as Internet-based service for a large number of customers. It includes specific HW and SW architectures, and business model. Multitenant service-oriented architecture enables support of thousands of users from different user organizations on a scalable basis. Frequent (3-6 months) upgrades. The same version of the application is running for all users.
Traditional Model (Software-as-a-License Model) Designed for implementation by specialists and for customers to operate and maintain. Architecture suitable for deployment by individual company on a dedicated IT infrastructure.
Infrequent upgrades (12-24 months). Individual clients using different versions of the software. High costs of version management. Short feedback cycle. Procedures enable almost immediate Problem solving is often indirect via intermediaries (VARs, SIs, Problem and etc.). Patches and upgrades are implemented at individual feedback. Support staff can directly identify and fix Change customer sites. Costly and unreliable, as customers often delay problems. Fixing a problem for one customer fixes it for Management installation of patches and upgrades. everyone, which reduces support costs. Procedures Start-Up Short start-up implementation cycle. Long start-up implementation cycle. Typically involves complex Implementation implementation of hardware and software resources and knowledge transfer. Scalability T he volume of the service (i.e., number of users, number of Configuration needs to support peak requirements and cannot be transactions) can be scaled on demand. scaled down. Customization Typically limited. Extensive customization possible, but expensive. Functionality Often limited functionality. Application typically designed Can provide extensive functionality. Often only small part of the for narrow vertical market. available functions is used. Required Only limited client resources are needed. Most of the Extensive internal resources used for IT support. Resources company resources are dedicated to core business. Resource IT resources (hardware, software, IT specialists, etc.) are IT resources are dedicated to a single organization. Utilization shared across all clients. Provider has advantages of economies of scale. Cost Predictable ongoing operating costs. Typically no initial Both investments and operating costs involved. The costs investments required. Costs correlate with the volume of generally do not correlate with the volume of service. services. Service Agreement SLAs are widely used. SLAs used occasionally. Required Expertise Only minimal IT expertise needed. Wide spectrum of IT knowledge and expertise needed.
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the MAIn FeAtures oF the soFtwAre-As-A-servIce Model The software-as-a-service model has recently evolved into a sophisticated model for the delivery of enterprise applications that substantially differs from the traditional approach (Feuerlicht & Vorisek, 2003; Levy, 2004; McCabe, 2004; Vorisek, Pavelka, & Vít, 2003; Wainewright, 2004). Table 1 summarizes the key differentiators between the software-as-a-service and softwareas-a-license models, identifying the features of the software-as-a-service model that benefit organizations in addressing today’s IS and IT issues. The comparison table includes a number of compelling arguments that are likely to make the software-as-a-service model a preferred solution for enterprise application delivery in the future. Many of the benefits listed are results of recent technological advances combined with the increasing sophistication of service providers and the ability to configure suitable architectures for the delivery of enterprise application services. There is little doubt that standardized applications such as CRM can be delivered more effectively using the software-as-a-service model than by using the traditional approach. While such applications are good candidates for delivery as services, it is doubtful that the benefits extend to all application types and scenarios, necessitating the careful evaluation of candidate applications. For example, the software-as-a-service model may not be suitable for the following. •
•
Mission-critical core business applications: These types of applications are typically not available from external providers, and the critical nature of these applications dictates in-house implementation and control. Highly customized and specialized applications: Providers cannot achieve economies of scale as the number of clients using such applications is relatively small.
•
Applications with extensive integration requirements: Such applications have close dependencies on other enterprise applications and cannot be effectively managed externally.
Future trends The ASP model emerged toward the end of the 1990s with often-exaggerated claims of advantages for client organizations, in particular for SMEs. Notwithstanding many perceived advantages, the ASP approach did not gain wide acceptance as the new model for the delivery of enterprise applications. Many of the early ASP providers have not been able to establish a viable business model and have discontinued ASP services or went out of business altogether. Perhaps the most important factor contributing to the demise of early ASP providers was the lack of a suitable technological infrastructure for hosting a large number of complex enterprise applications in a scalable and secure manner. Customization capabilities and support for integration with other enterprise applications were also lacking. As a result of these shortcomings, early ASP providers failed to deliver cost savings to their customers, resulting in poor acceptance of the ASP model by the marketplace. Recently, however, a number of important IT vendors have reconfirmed their commitment to the ASP model in the context of the new utilitycomputing approach, and have made significant investments in infrastructure for the delivery of application services (Dubie, 2004). The main idea of utility computing is that IT services are supplied on demand (i.e., as required by the enduser organization) via a grid of interconnected, dynamically configurable, highly reliable and scalable computing resources (i.e., servers, data storage, and application resources). Enterprise computing grids are widely regarded as providing
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a suitable architecture for application services with the ability to host a large number of enterprise applications in a scalable and reliable manner. Resource sharing, resulting in improved utilization of hardware and software associated with grid-computing architectures, provides a more cost-effective solution for hosting enterprise applications than a set of independent servers each dedicated to a specific application. The availability of low-cost commodity components such as storage devices and CPUs enable the construction of large clusters of servers, storage arrays, and other resources, and create virtual resources on demand as required by enterprise applications. A number of infrastructure-technology vendors (IBM, HP, Oracle) are in the process of building large data centers with the view of moving toward the utilitycomputing model (Eriksen, 2003). Investment in infrastructure on this scale clearly demonstrates a strategic commitment to utility computing and more specifically to the software-as-a-service model as the new outsourcing model for enterprise applications. Another key trend favoring the software-asa-service model over the traditional softwarelicensing model is the emergence of service computing. In addition to supporting business processes within a given organization, most enterprise applications today have a requirement to interoperate across enterprise boundaries to support electronic business (e-business). Serviceoriented computing and more specifically Webservices standards and technologies are playing a key role in the implementation of e-business applications and are likely to become the dominant enterprise computing approach in the future. There is a close relationship between the ASP model and service-oriented computing. The wide adoption of Web-services standards across various computing environments (i.e., .Net, J2EE) makes Web services an ideal solution for application integration, and for externalizing business functions of complex enterprise applications. Web services can be regarded as the enabling technology for
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the integration of ASP applications, and for the delivery of low-granularity application services (Ferguson, 2004). The emergence of the software-as-a-service model as the new paradigm for the delivery of enterprise applications will have a major impact on the IT landscape, creating new opportunities and challenges for both the providers and client organizations. The reduction in the size of the traditional software-license market, reduced demand for on-site implementation, and the corresponding increase in demand for application services will lead to further rationalization of the IT vendor market (Cohen, 2004). The shift toward the software-as-a-service model is likely to take several years to be fully realized, but the impact on the IT industry as a whole, and the software vendors and third-party consulting organizations in particular, is likely to be dramatic, leading to the restructuring and realignment of the major industry players that will favor large software vendors that already have significant penetration in the ASP market and proven track records in successfully delivering application services to end-user organizations. Consulting organizations whose main activity is implementing ERP systems and similar applications for client organizations will need to refocus their business activities as there are not likely to be very many large-scale implementation projects of this type in the future. The software-as-a-service model will be associated with new business and pricing models that are likely to dramatically reduce the cost of ownership of enterprise applications. The reduction of demand for in-house IT specialists will lead to the restructuring of the IT labor market, and will demand important changes from user organizations that will need to implement a suitable management structure and an IT architecture that enable effective participation in the world of service-oriented computing. Adoption of the software-as-a-service model will also demand a change in the culture of client organizations, including the redistribution of responsibilities
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for IT costs and benefits to ensure the successful introduction of this new model of enterprise computing.
Eriksen, L. (2003). Will the real utility computing model please stand up. Retrieved from http://www. utilitycomputing.com/news/342.asp
conclusIon
Ferguson, R. B. (2004, October 5). SAP sets its sights on SOAP. Retrieved May 5, 2004, from http://www.eweek.com/print_ article/0,1761,a=126512,00.asp
The business and technological factors discussed in this article have created a situation in which the delivery of enterprise applications in the form of services becomes both technically possible and economically desirable. The software-asa-service model provides a viable alternative to software licensing for many application types today, and it is likely to become the dominant method for the delivery of enterprise applications in the future. This will have a major impact on enterprise computing over the next 5 years, finally tipping the balance from licensed software toward software delivered as a service.
reFerences Abbas, A. (2003). A new wave of utility computing acquisitions. Retrieved April 22, 2004, from http:// www.utilitycomputing.com/news/450.asp Carr, N. G. (2003). IT doesn’t matter. Harvard Business Review, 81(5), 14-41. Cohen, P. (2004). Twelve technical and business trends shaping the year ahead. Retrieved from http://www.babsoninsight.com/contentmgr/showdetails.php/id/687 Cooke, D., Gelman, L., & Peterson, W. (2001). ERP trends. Conference Board Inc. Retrieved from http://www.conferenceboard.ca/documents. asp?rnext=869 Dubie, D. (2004, December 3). Vendors make the utility computing grade. Network World Fusion. Retrieved May 5, 2004, from http://www.nwfusion.com/news/2004/0322 dellsummit.html
Feuerlicht, G., & VoYíšek, J. (2003). Key success factors for delivering application services. Proceedings of “Systems Integration 2003” Conference (pp. 274-282). Haber, L. (2004, January 30). ASPs still alive and kicking. Retrieved May 5, 2004, from http://www. aspnews.com /trends/article.php/3306221 Karpecki, L. (2002). Analýza koncového trhu: Aktuální stav a trendy 1999-2001. INSIDE, 2 pp. 22-32. Levy, A. (2004, February). What do enterprises want from ASPs? Retrieved May 5, 2004, from http://www.aspnews. com/analysis/analyst_cols/ article.php/2217411 McCabe, L. (2004). A winning combination: Software-as-services plus business consulting and process services (Summit Strategies market strategy report). Retrieved from http://www.summitstrat.com/store/3ss07detail Nevens, M. (2002, March). The real source of the productivity boom. Harvard Business Review, 80(2), 23-24. Oracle. (2003). Oracle financial reports. Retrieved from http://www.oracle.com/corporate/investor_relations/analysts/ SAP. (2003). SAP financial reports. Retrieved from http://www.sap.com/company/investor/reports/ Vorisek, J., Pavelka, J., & Vít, M. (2003). Aplikaní sluzby IS/IT formou ASP: Pro a jak pronajímat informatické sluzby. Praha, Czech Republic: Grada Publishing.
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Wainewright, P. (2004, February). Secret weapons of ASPs. Retrieved May 5, 2004, from http:// www.aspnews.com/analysis/analyst_cols/article. php/3090441
Grid Computing: Grid (network) of computing resources designed to provide computing and storage to applications in a scalable and reliable manner, ensuring high levels of utilization.
Key terMs
Outsourcing: IT resources are managed by an external provider who delivers IT services to the end-user organization.
ASP (Application Service Provider): A provider of application services over the Internet or an intranet. CRM (Customer Relationship Management): Application system that allows a company to manage its relationship with a customer, including sales, marketing, customer service, and support. ERP (Enterprise Resource Planning): System designed to support and automate business processes for manufacturing, distribution, payroll, and finances for an enterprise.
Utility Computing: Computing services are provided on demand by a provider organization that uses its computers and facilities. Customers access the computers via a private network or over the Internet and are charged according to resource usage. Web Services: Web-based application that uses standard Internet protocols and languages (SOAP, XML [extensible markup language]) to interact with other applications.
This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 431-436, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 3.10
Role of Wireless Grids in Outsourcing and Offshoring: Approaches, Architectures, and Technical Challenges Ashish Agarwal Carnegie Mellon University, USA Amar Gupta University of Arizona and MIT, USA
AbstrAct The growing incidence of outsourcing and offshoring of professional applications is motivating increasing interest in the use of grid computing and grid topologies for meeting the infrastructure requirements. A Wireless Grid facilitates the exchange of information and the interaction between heterogeneous wireless and wired devices. Depending on the nature of the interactions among the constituencies served by the wireless grid, various layouts can be envisaged to provide ubiquitous services. A wireless grid is similar to the wired grid in terms of its distributed nature, the requirement for standards and protocols, and the need for adequate Quality of Service. In addition, a Wireless Grid has to deal with the complexities of the limited power of the mobile devices, the limited bandwidth, and the increased dynamic nature of the interactions involved. The ability of the grid models to address outsourcing
needs is contingent upon the efficient resolution of multiple technical challenges.
IntroductIon Many of the outsourcing and offshoring initiatives require ubiquitous access to computing resources (Gupta, 2008; Crk, Sorenson, & Mitra, 2008; Mitra & Gupta, 2008). Vendors providing these services have to deliver on promised service level agreements. However, they may face cost constraints and may not have the initial capability to provide the desired level of services. Vendors face a similar challenge while introducing a new service that may have inadequate initial customer base to justify investment in costly infrastructure. These challenges are compounded when the customers demand 24x7 access to applications and support. In order to achieve this requirement, one needs a globally distributed work environment in which members of the global team work on a project
Role of Wireless Grids in Outsourcing and Offshoring
around the clock, possibly by establishing multiple collaborating centers at strategic locations around the globe (Gupta & Seshasai, 2007; Seshasai & Gupta, 2007; Denny, Mani, Sheshu, Swaminathan, & Samdal, 2008; Denny, Crk, & Sheshu, 2008). Further this setup should be responsive to the dynamic business environment in order to facilitate agility and innovation (Mitra & Gupta, 2007; Mitra & Gupta, 2005). Two important drivers of decisions related to outsourcing are: improving the quality of information technology; and gaining access to new and proprietary technology. However, these drivers also introduce technical risk for the concerned outsourcing initiatives (Ross & Westerman, 2004). One way to mitigate some of these challenges is to pool resources across different initiatives and multiple vendors. In this environment, grid computing is becoming popular among service providers (Network World, 2006). Based on these developments, we explore the growing role of using a Wireless Grid for outsourcing initiatives that require ubiquitous access to computing services. Foster (2002) offers a checklist for recognizing a “grid”. A grid allows: • • •
Coordination of resources that are not subject to centralized control; Use of standard, open, general-purpose protocols and interfaces; and Delivery of non-trivial qualities of service.
In order to be classified as a grid, all three criteria must be met. The Wireless Grid meets all these criteria and is fueled by technological advances in grid computing and wireless technology. The ultimate vision of the grid is that of an adaptive network that offers secure, inexpensive, and coordinated real-time access to dynamic, heterogeneous resources, potentially traversing geographic boundaries but still able to maintain the desirable characteristics of a simple distributed system, such as stability, transparency, scalability
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and flexibility. The technologies originally developed for use in a wired environment are now being augmented to operate in wireless situations. The development of the wireless technologies such as 802.11, GPRS and 3G has extended the reach of wireless services to more individuals. With the ubiquity and indispensability of wireless technologies established, these technologies are now making inroads into grids. In the following sections, we describe the drivers of the wireless grid technology, the grid architecture and topology, and finally the challenges that need to be addressed in order for these wireless grids to be extensively deployed in offshoring applications. For the remainder of this paper, a grid implies a Wireless Grid (unless expressly denoted otherwise).
Key chArActerIstIcs driving Forces The development of the wireless grid technologies is governed by three driving forces: •
•
•
New User Interaction Modalities and Form Factors: Traditional applications that can exist on the Wired Grid need to expand their scope by extending the interactions to mobile devices through adapting the user interface to small screens, small keyboards, and other I/O modalities such as speech. The mobile access interface needs to address the issue of connectivity of mobile devices. Limited Computing Resources: Wireless applications need to share the resources and provide access to additional computational resources to mitigate the constraints imposed by limited storage, computational capability, and power of mobile devices. Additional New Supporting Infrastructure Elements: New applications, especially ones involving dynamic and unforeseen
Role of Wireless Grids in Outsourcing and Offshoring
events, need to be addressed through the rapid provisioning of major amounts of computational and communications bandwidths. For example, the occurrence of an urban catastrophe could trigger a dynamic adaptive grid network to allow disaster recovery.
grid resources A Wireless Grid must provide a virtual pool of computational and communications resources to consumers at attractive prices. Various grid resources are described below: •
•
•
•
Computing Power: Wireless devices possess limited computation power. Wireless grids can overcome this limitation by distributing the computational tasks across multiple power-constrained devices. But this raises the need for establishing appropriate collaborative processes between these geographically distributed tasks. Storage Capacity: Wireless devices possess limited storage capability. Grids can overcome this limitation by distributing the data storage over multiple devices. Data can be recombined into a single entity and then made available to the users. However, this creates the need to enable data access and update to occur simultaneously and to avoid contention through the application of advanced synchronization techniques. Communications Bandwidth: Wireless grids can harness the power of wireless technology to allow remote access. At the same time, the grid infrastructure should be robust enough to ensure high Quality of Service (QoS). Multiplicity of Applications: Wireless Grids should allow the users ubiquitous access to a wide variety of applications. However, one needs to overcome the need to
install these applications on separate mobile devices.
grId lAyout Drawing upon the paradigm of wired grids (Gentzsch, 2001; Ong, 2003; Tiang, 2003), various layouts of wireless grids are possible. The classification schemes can be based on the architecture or on the function of the grids1.
Classification by Architecture One way to characterize the architecture of the wireless grid is by the degree of heterogeneity of the actual devices and the level of control exercised over each device from an administering perspective (Figure 1). It can vary from a simple network of homogeneous devices bound by a single set of policies and rules to a complex network of heterogeneous devices spread across multiple organizational, political and geographical boundaries, as categorized below: •
Local Cluster or Homogeneous Wireless Grid: This simplest form involves a local collection of identical or similar wireless devices that share the same hardware architecture and the same operating systems. Because of the homogeneity of the end systems, the integration of these devices into the wireless grid and the consequent sharing of resources become much easier. Today, this type of organization is more likely to occur when managing computing requirements in a single division of an organization where one single administrative body exercises control over all the devices. An example is a network of mobile handheld devices for coordinating personnel in an organization such as medical staff in a hospital or field service representatives of a telecommunication service provider.
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Role of Wireless Grids in Outsourcing and Offshoring
Figure 1. A simplified depiction of the 3-tier wireless grid architecture (adapted from Ong, 2003) Local Clusters
Intra-Grid
Inter-Grid
Warehouse Company A
Warehouse
Distribution Network Mobile Sales Network
Mobile Sales Network
Distribution
Company C
Network Company B
Company A
Company A
Local wireless cluster deployed Merging Cluster Grids into an Intra-Grid Merging Intra-Grids of many comon a departmental/divisional basis that is within a company panies into an Inter-Grid that spans within a company. multiple organizations
•
•
940
Wireless Intra-Grids: An intra-grid encompasses devices that are used by multiple divisions or communities within an actual organization (AO). The divisions may be located in different geographies and maybe governed by a separate set of policies, but there exists a level of trust and oversight so that “ground truth” may be known with respect to identity and characteristics. An AO is the point where resolution can occur between the virtual presence of a wireless entity and its actual name and location. AOs tend to be persistent in time, and become the point of composition among other AOs. An example of an intra-grid would be a wireless grid that simultaneously supports the mobile sales force of a company and the networks of wireless sensors used by the manufacturing division for tracking inventory. One can expect detailed interactions among the constituents of an intra-grid due to tighter interaction in the business processes. Inter-Grid: An inter-grid encompasses multiple AOs and transcends greater amounts of geographical, organizational, and other types of differences, such as ones related
to intellectual property rights and national laws. Multiple AOs may come together to form Virtual Organizations (VOs) where they can share resources and manage their costs in a better way. The relationship can be long-term or short-term (Ong, 2003). Resource management and policy integration issues (security, authentication, and data management tasks) attain greater complexity due to the scalability requirements. To move beyond mere ad hoc composition of AOs, a (potentially) universally accepted method for the composition of declarative policies must be proposed and accepted. Additionally, there must be commonly accepted semantics for the expression of policy. This could be rendered through on-line—available references to expressions and ontologies that would be used by policy—composition and enforcement processes. Without such semantic agreements and without mechanisms of composition, arbitrary membership in a protected (and trusted) inter-grid set of relations would be impossible. An example of an inter-grid interaction would be a scenario involving an
Role of Wireless Grids in Outsourcing and Offshoring
American tourist visiting Japan and trying to conduct a local e-commerce transaction using his or her cell phone. The transaction involves a handshake between the traveler’s cell phone service provider, traveler’s credit card company, the Japanese wireless service provider, and the e-commerce vendor. The scope of such interactions would be limited due to the loose connections between the constituents of the inter-grid.
Classification by Usage Pattern Wireless grids can be classified by usage patterns as summarized in Table 1. •
•
Computational Grid: In a computational grid, the need for creating the wireless grid is driven primarily by the need to borrow computational resources from others. This arises, in part, from the power constraints on mobile devices, which in turn limits their computational capability. The computational grid may be cooperative or parasitic (Barabasi et. al, 2001). One example is a wireless sensor network used to monitor conditions for predicting natural calamities like earthquakes or volcanoes. Data Grid: In this case, the need for creating the wireless grid is dictated primarily by the need to provide shared and secure access to distributed data. Since data can be presented in various contexts on various systems, reconciling the underlying semantics continues to challenge evolving technology.
•
One example involves an urgent search for donors with a rare blood type. A hospital would issue a query to the medical history databases in the region through its mobile network. The mobile service providers will notify potential donors through the alert messages transmitted to their respective mobile devices, and the resulting responses would be processed and reconciled. Utility Grid: Here the motivation for the wireless grid is derived from the need to provide ubiquitous access to specialized pieces of software and hardware. Users can request resources when needed (on-demand) and only be charged for the amount being used. This model can subsume both Computational Grids and Data Grids. For example, users might tap Wireless Utility grids for information such as the traffic conditions and routing, and for making instantaneous transactions related to commercial products and services.
grId toPology A number of researchers have evaluated the topology and configuration of mobile networks (Nesargi & Prakash, 2002; Vaidya, 2002; Mohsin & Prakash, 2002; Weniger & Zitterbart, 2004). However, these ad hoc systems are standalone in nature. We believe that commercial wireless grids will possess some access to the wired Internet infrastructure and thereby follow a hybrid model (Figure 2). It will consist of Mobile Ad-hoc Net-
Table 1. Wireless grid usage patterns Grid Type
Possible Architecture
Mainly Provides
Computational
Cluster, Intra, Inter
Computational Power
Data
Cluster, Intra, Inter
Data Access and Storage
Utility
Intra, Inter
On-demand Access to All Kinds of Resources
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Role of Wireless Grids in Outsourcing and Offshoring
Figure 2. A hybrid wireless network
works2 (MANET) type systems with multiple-hop paths between mobile nodes and access points to the wired network. An application of this hybrid setup has been the Mesh Networks (Bruno et al. 2005). At a high level, one needs to support the critical role of the management and composition of subnets and arbitrary collections of wireless members. There must be a Root Station (RS) present in some form as well as a Base Station (BS). The RS maintains cognizance over a set of wireless devices, and serves as the final mapping agent of logical to physical devices. The BS manages and enforces policy within and among groups. A grid layout can include a root station for a community or an actual organization (AO) of wireless nodes (Figure 3). A RS will maintain up-to-date information about its own network and the associated nodes as well as serve as the gateway to the wired network. Multiple organizations may come together to form a virtual organization (VO). Note that an AO can belong to multiple VOs. A base station (BS) can be envisaged for a VO. A base station will maintain information about networks for various organizations and the associated root stations. For a homogeneous grid, the same server can perform both the RS and BS functions. In case of an inter-grid that can span multiple virtual organizations, several BSs are needed to coordinate to maintain the inter-grid information. Redundancy can be maintained by
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having secondary servers to perform the RS and BS functions. Both RS and BS should not be resource-constrained devices. Instead, the RS and the BS could each be a simple PC, a workstation, or a server equipped with an appropriate interface to communicate with the edge nodes such as sensor nodes and other mobile nodes.
technIcAl chAllenges Among the spectrum of challenges related to wireless grids, one needs to first overcome the following set of initial technical challenges: •
•
Dynamic Configurability: Wireless grids are characterized by changing topology due to the mobile nature of the grid components. Grids should provide self-configuring and self-administering capability to allow these dynamic changes for all possible grid layouts. This includes configuring the addresses, providing name to address resolution for the grid components, and maintaining the state information. Grids should address the issues related to weak transmission signals, message losses, and crashing of the power constrained nodes. Routing Plasticity: Efficient routing protocols are required to address the power limitation of the end devices along with the
Role of Wireless Grids in Outsourcing and Offshoring
consideration for stable wireless connectivity, route optimization and efficient use of the limited bandwidth. Data will need to flow across the grid using a combination of Mobile IP (Perkins, 2002), Mobile IPv63, and ad-hoc routing protocols such as Dynamic Source Routing Protocol (DSR) (Hu, Perrig & Johnson, 2005) and Ad hoc On-Demand Distance Vector Routing (AODV) (Perkins and Royer, 1999; Papadimitratos & Haas, 2005). Discovery Semantics and Protocols: Service description protocols are needed to describe the services provided by various components of the wireless grid. Once the services are published, a discovery protocol is needed to map the mobile resources to the services. The notion of grid service (Foster et. al 2001) can be extended to the wireless grids. Work has been performed towards providing the naming service for MANET systems (Adjie-Winoto et. al, 1999, Zhu et al, 2003, Sharmin et al., 2006). The mobile nature of the wireless grid components makes it challenging to provide for discovery mechanisms across virtual organizations.
•
•
The grid owners have to come together to define the common set of protocols and meta definition of the services to aid discovery of the available services. Security: Because of the inherent nature of the wireless connection, the diversity of the link quality, the potential unreliability of the end-devices, the power constraints of the mobile device, and the enforcement of security and privacy policies are all factors that present major challenges in the wireless grid environment. Effective security requires adequate computational power to execute the security algorithms in acceptable times. In addition, sufficient radio power is required to achieve an effective signal-tonoise ratio (in the face of encrypted signaling streams) and to close the link. This suggests a careful husbanding of access points and the hand-over process in order to ensure that the minimum possible power is required from each of the wireless devices. Policy Management: Since the end-devices or nodes can be power constrained, one cannot assume that the devices are capable of running complex protocols such as Light-
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Role of Wireless Grids in Outsourcing and Offshoring
weight Directory Access Protocol (LDAP) or Common Open Policy Service (COPS). Grid architecture designers need to address policies that govern the usage, privileges, access to resources, sharing level agreements, quality of service, and the composability and the automated resolution of contradictory policies among organizations; this is in addition to the other technical issues mentioned above.
The degree of availability of these functions will dictate the ultimate ability of the wireless grids to meet the requirements at the enterprise, partner, and service levels for various types of outsourcing and offshoring configurations and also enable the 24-Hour Knowledge Factory concept to be utilized for tasks of growing complexity over time (Gupta, 2008; Gupta, Seshasai, Mukherji, & Ganguly, 2007).
AcKnowledgMent conclusIon Based on their ability to provide seamless wireless extensions to the wired grid and to enable individuals to perform work from virtually anywhere in the world, wireless grids are poised to play a pivotal role in improving the quality of outsourcing and offshoring services that require ubiquitous access. Possible layouts include homogenous grid, intra-grid, and inter-grid. These can be deployed to provide data, computing, and utility services in geographically distributed environments, such as ones involving the use of the 24-Hour Knowledge Factory paradigm. These layouts can be handled using a grid topology that includes a combination of nodes, Root Stations and Base Stations. The topology and the architecture should address relevant technical challenges including those related to configuration, routing, discovery, security, and policy management. These capabilities are needed to meet the full array of requirements for a globally distributed work environment. The establishment of mobile nodes in a wireless grid can help in the endeavor to provide ubiquitous low-cost access to a broad array of outsourcing and offshoring services. The dynamic configuration of these nodes and the dynamic discovery of the grid services can provide the agility needed to foster innovation. Further, a robust security and policy infrastructure can ensure that high quality standards are maintained in delivering the services.
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The authors thank Hongfei Tiang, Szei Hwei Ong, and Madhav Srimadh for their valuable assistance.
reFerences Adjie-Winoto, W., Schwartz, E., Balakrishnan, H., and Lilley, J. (1999). The Design and Implementation of an Intentional Naming System. Proc. 17th ACM SOSP, Kiawah Island, SC, Dec. Barabasi, A-L., Freeh, V. W., Jeong, H., and Brockman, J. B. (2001). Parasitic Computing. Nature, Vol. 412, 30 August. Bort, J. (2006). Advanced Managed Services. Network World, 23(25), p 63. Bruno, R. Conti, M. and Gregori, E. (2005). Mesh Networks: Commodity Multihop Ad Hoc Networks. IEEE Communications Magazine, 43(3), 123-131. Crk, I., Sorenson, D., and Mitra, A. (2008). Leveraging Knowledge Reuse and System Agility in the Outsourcing Era. Journal of Information Technology Research, April-June. Denny, N., Mani, S., Sheshu, R., Swaminathan, M. and Samdal, J. (2008) Hybrid Offshoring: Composite Personae and Evolving Collaboration
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Technologies. Journal of Information Technology Research, January-March.
Military Communications Conference (MILCOM 2002), 2(10), 856-861.
Denny, N., Crk, I., and Sheshu, R. (2008). Agile Software Processes for the 24-Hour Knowledge Factory Environment. Information Resources Management Journal, January-March.
Mitra, A., and Gupta, A. (2005). Agile Systems with Reusable Patterns of Business Knowledge: A Component Based Approach. Artech House Press, Massachusetts.
Foster, I. (2004). What is the Grid? A Three Point Checklist. Argonne National Laboratory, http:// www-fp.mcs.anl.gov/~foster/Articles/WhatIsTheGrid.pdf.
Mitra. A., and Gupta, A. (2007). Creating Agile Business Systems with Reusable Knowledge. Cambridge University Press.
Foster, I., Kesselman, C., and Tuecke, S. (2001) “The Anatomy of the Grid: Enabling Scalable Virtual Organizations, International J. Supercomputer Applications, 15(3). Gentzsch, W. (2001). Grid Computing: A New Technology for the Advanced Web. White Paper, Sun Microsystems, Inc., Palo Alto, CA. Gupta, A. (2008). Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy. Information Science Reference, Hershey, Pennsylvania. Gupta, A., and Seshasai, S., (2007). 24-Hour Knowledge Factory: Using Internet Technology to Leverage Spatial and Temporal separations. ACM Transactions on Internet Technology, Vol. 7 (3), August, pp 1-22. Gupta, A., Seshasai, S., Mukherji, S., and Ganguly, A. (2007). Offshoring: The Transition from Economic Drivers toward Strategic Global Partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, Vol. 5 (2), April-June, pp 1-23. Hu, Y. C., Perrig, A., and Johnson, D. B. (2005). Ariadne: A Secure On-Demand Routing Protocol for Ad Hoc Networks. Wireless Networks, 11(1), p.21 Mohsin, M., and Prakash, R. (2002). IP Address Assignment in a Mobile Ad Hoc Network. IEEE
Mitra, A., and Gupta, A., (2008) Knowledge Reuse and Agile Processes: Catalysts for Innovation. IGI Global, Hershey, Pennsylvania. Nesargi, S., and Prakash, R. (2002). MANETconf: Configuration of Hosts in a Mobile Ad Hoc Network. Proceedings of INFOCOM’02, 1059-1068. Ong, S. H. (2003). Grid Computing: Business Policy and Implications. Master’s Thesis, MIT, Cambridge, MA. Papadimitratos, P., and Haas, Z. J. (2005). Secure Routing for Mobile Ad Hoc Networks. Advances in Wired and Wireless Communication, IEEE/ Sarnoff Symposium, 168-171. Perkins, C. E. (2002). Mobile IP. Communications Magazine, IEEE, 40(5), 66-82. Perkins, C., and Royer, E. (1999). Ad Hoc OnDemand Distance Vector Routing. i2nd IEEE Workshop on Selected Areas in Communication, 2, 90–100. Ross, J.W., and Westerman, G. (2004). Preparing for utility computing: The role of IT architecture and relationship management. IBM Systems Journal, 43(1), 5-19. Seshasai, S. and Gupta, A. (2007). The Role of Information Resources in Enabling the 24-Hour Knowledge Factory. Information Resources Management Journal, Vol. 20 (4), October-December, pp 105-127.
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Sharmin, M., Ahmed, S., and Ahamed, S. I. (2006), Proceedings of the Fourth Annual IEEE International Conference on Pervasive Computing and Communications, March, pp 6. Tiang, H. (2003). Grid Computing as an Integrating Force in Virtual Enterprises. Master’s Thesis, MIT, Cambridge, MA. Vaidya, N. H. (2002). Weak Duplicate Address Detection in Mobile Ad Hoc Networks. MIBIHOC2002.
endnotes 1
The illustrative examples explain the application of different architectures or functions. The infrastructure in all these situations can be managed by a set of service providers.
2
http://www.ietf.org/html.charters/manet-charter. html
3
http://www.ietf.org/rfc/rfc3775.txt
Weniger, K, and Zitterbart, M. (2004). Mobile ad hoc networks – current approaches and future directions. Network, IEEE, 18(4), 6-11. Zhu, F., Mutka, M., and Mi, L. (2003). Splendor: A secure, private, and location-aware service discovery protocol supporting mobile services. Pervasive Computing and Communications, March, 235–242.
This work was previously published in Journal of Information Technology Research, Vol. 2, Issue 2, edited by M. Khosrow-Pour, pp. 1-10, copyright 2010 by IGI Publishing (an imprint of IGI Global).
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Chapter 3.11
Web-Based Data Collection in China Robert M. Davison City University of Hong Kong, Hong Kong Yuan Li University of Southern California, USA Carol S. P. Kam Yahoo! Holding (HK) Ltd, Hong Kong
AbstrAct In the last few years, Web-based surveys have received increased attention given their potential to cut the costs and time associated with paper-based surveys. In this exploratory study, we consider the feasibility of using the Web as a data collection medium in China, which has a current Internet population of 103 million. Following a review of the literature regarding the design, implementation, and application of Web surveys, and the current state of data collection in developing countries in general and China in particular, we describe how we developed a Web-based survey instrument focusing on the ethical values of IT professionals. We e-mailed 5,000 IT professionals in China, inviting them to participate in the survey. Thirty-seven percent of those contacted visited the Web site and 5.8% submitted the survey. The survey data, both qualitative and quantitative, is analysed and discussed with a view to drawing up instructive guidance for researchers interested to use the Web
as a data collection tool in China, as well as developing countries more generally. The Web-based survey has great potential in these contexts, if sensitively designed and implemented. We consider the implications of this research and identify areas where future research is necessary.
IntroductIon Empirical research in China has traditionally applied a variety of research methods. Key amongst these have been surveys of various sectors of the population. Some of these surveys have relied on secondary data (e.g., from government sources) but the paper-based questionnaire has also been frequently deployed. The toolbox of survey techniques has recently been extended with the development of Web-based surveys — surveys that reside on Internet Web sites and are completed online. In this exploratory study, we report on an ongoing project that involves the collection of survey data in China
with a Web-based survey instrument and provide initial answers to the question “Is it feasible to use the Web to collect survey data in China?” In order to engage in research that would be valuable from both content and methodological perspectives, we decided to investigate the ethical reasoning of IT professionals in China. Through this investigation, we aimed both to develop our knowledge about Web-based surveys in China, and specifically with respect to a professional target population, many of whom can be expected to have access to the Internet, and to develop our knowledge about the ethical reasoning of an important set of participants in the national economy. Much concern has been raised about ethical values in general around the world in the wake of various corporate scandals. There are parallel concerns in China in academia (Ding, 2002) as well as in the business sector (Huang & Snell, 2003; Steidlmeier, 1999; Su, 2001). This concern extends to the IT sector, given the extent to which our society depends on effective and efficient IT. Nevertheless, the sensitivity of this topic clearly creates challenges for any kind of data collection procedure. However, we believed that a sensitively designed Web-based survey would provide potential respondents with a high level of confidentiality when they submitted their responses, a confidentiality that would be hard to replicate with face-to-face or paper-based survey techniques. The main thrust of this article is a methodological one, given our research question. However, we do make reference to ethical issues on occasion as they relate to the instrument that we used to collect data. Following this introduction, we concisely review a number of literatures germane to this study, viz.: Web-based surveys, data collection in developing countries in general, as well as in China in particular; and the Chinese experience with Web-based surveys. We then explain the precise methodological approach used in this study, with a detailed description of the way we operationalised the research instrument on the Web, and the procedures associated with ensuring the rigor of the
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research design. The survey results follow, with a particular emphasis on the methodological issues, which are then discussed before we conclude with key findings and directions for future research. We do not report on or discuss the ethical reasoning employed by IT professionals in China, since this is not the focus of this article.
lIterAture revIew In order to review the literature on Web-based surveys in a systematic fashion, we followed the following protocol. Firstly, we reviewed the literature on Web-based surveys in general (i.e., without any restriction to China or other developing countries), in order to identify current practices as well as the broadly recognised advantages and disadvantages of this adaptation of the paper-based survey method. Secondly, we looked at current data collection methods in developing countries: we considered paper-, e-mail- and Web-based surveys. These two areas of literature were not restricted to the information systems or information management domains. Next, we focused our literature search on the specific case of data collection in China, and the use of Web-surveys in that context. At this stage of the search process, while we searched the English language databases, we also looked at Chinese language databases, which cover publications in Chinese that are published inside China. Finally, we summarise the relevant literature findings in a short section.
web-based surveys In the early years of the Web (i.e., the mid-1990s), most Web sites were relatively static entities that only provided a one-way information dissemination channel. However, as Thompson, Surface, Martin, and Sanders (2003) observe, it was quickly realised that Web sites had a great potential to receive and process information, which would significantly enhance their value. This view is supported by Dill-
Web-Based Data Collection in China
man (2000, p. 400) who observes that Web-surveys are poised to be the next significant development in the survey methodological tradition (after random sampling in the 1940s and telephone interviews in the 1970s) as “no other method of collecting data offers so much potential for so little cost.” Given this potential, Web programming techniques were developed to enable such online data entry (see Dennis & Gambhir, 2000, for a general overview of the technology). While there is a considerable comparative literature on the relative efficacy of paper vs. fax vs. e-mail surveys (Cobanoglu, Warde, & Moreo, 2001), until recently there has been a dearth of published academic research assessing the reactions of respondents (or potential respondents) to Web-surveys (Thompson et al., 2003; Tingling, Parent, & Wade, 2003). Web-based surveys offer significant advantages over traditional paper-based surveys, not least in terms of cost and time: once an instrument has been developed, it can be located on a databaselinked Web site and completed by respondents with essentially no additional resource implications beyond the cost of hosting the survey on the Web site and the subsequent analysis of data (Lazar & Preece, 1999). Furthermore, as data is entered in digital form, neither is there a need to transcribe data from paper forms, nor should there be a need for data cleaning (Lazar & Preece, 1999). Webbased surveys can include a variety of interaction opportunities, ranging from check boxes and rank order mechanisms to text boxes and drop-down lists. Respondents can access Web-based surveys by clicking on a link in an e-mail message and submitting their response immediately — there is no postal delay. Notwithstanding these opportunities to create a more varied interaction experience, some scholars caution that Web pages should be simple, consistent, and easy to use, since fancy or complex pages can cause a significant reduction in response rates (Dillman & Bowker, 2001). It is thus best not to assume that potential respondents have access to more than the most primitive and
unsophisticated browsing and downloading environment (Bowker & Dillman, 2000). Where response rates are concerned, the expectation that Web-based surveys should generate higher rates has not been consistently substantiated, with some reports indicating higher rates than other forms of surveys and others lower or equal (Dillman, 2002; Thompson et al., 2003). Indeed, it is hard to measure response rates on the Web unless you know in advance the precise size of the population you are sampling. When a link to a Web-based survey is placed on one or more Web sites (Ngini, Furnell, & Ghita, 2002), it is impossible to be sure how many people saw the link. Some studies use a mix of Web- and paper-based surveys, but don’t always distinguish the sources of data in the results (Mbarika, Meso, & Musa, 2004). One way to be sure of the population size sampled is to contact each potential respondent by e-mail. However, concerns may still exist about the way in which the individual potential respondents are identified. Pimchangthong, Plaisent, and Bernard (2003) indicate a 64% response rate, but they carefully selected and then personally invited people to participate — this was not a random sample of the population. The availability of Web-based surveys has propelled new growth for market research as well as commercial, government and academic research (Birnbaum, 2000; Buchanan & Smith, 1999). However, the potential efficiency of conducting Web-based surveys causes some authors to raise concerns about the scientific underpinnings of quality research. Large numbers of responses do not exclude the possibility of sampling or coverage errors (Dillman, 2002; Dillman & Bowker, 2001; Granello & Wheaton, 2004). Furthermore, there are a number of weaknesses associated with Webbased surveys (Cobanoglu et al., 2001; Couper, 2000; Thompson et al., 2003), including: issues of respondent access to the Internet; the difficulty of providing effective online financial incentives (such as vouchers, lotteries or charitable donations)
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(Deutskens, De Ruyterm, Wetzels, & Oosterveld, 2004); computer/Internet literacy; the possibility that individual respondents may make multiple submissions (Tingling et al., 2003); the extent to which (potential) respondents are prepared to trust the Web as a medium for the submission of personal information; the extent to which respondents perceive that their anonymity can be guaranteed and their privacy protected; and the risk that e-mails inviting participation in the survey are never actually read, either because potential survey participants didn’t see the invitation, or treated it as junk e-mail (Saxon, Garratt, Gilroy, & Cairns, 2003), or even because it was incorrectly screened out by spam detection/removal systems. Recent research shows that up to 20% of e-mail may be false-positively identified as spam and autodeleted by e-mail servers without the recipient being aware of the fact (Morrissey, 2003). Chinese Internet users, for instance, report that they receive, on average, 7.9 spam e-mail messages per week, compared to 4.4 non-spam messages received (CNNIC, 2005).
data collection in developing countries Research into Information Systems in Developing Countries represents a fairly new trend, with most mainstream IS journals publishing only a handful of papers over the last two decades. The emergence of journals, such as the Journal of Global Information Management, and more recently the Electronic Journal of Information Systems in Developing Countries, has increased the number of papers published substantially. In order to gain an understanding of the methods (both Web-based and paper-based) used to collect data in developing countries in general, we searched the ProQuest and Emerald Insight online databases, as well as scholar.google.com, using keywords such as: Webbased, online, data collection, developing countries/ country. We also searched scholar.google.com for “Web-based survey + (Developing Country Name)”1 for a selection of 50 “sample” developing
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countries around the world, in order to identify studies about specific countries that did not use the term “developing country” as a keyword. We also specifically targeted three journals for this search: the Journal of Global Information Management, the Journal of Global Information Technology Management, and the Electronic Journal of Information Systems in Developing Countries. Through this process, we identified 20 items of potential relevance to this study. From this search, we noted that while there is an increasing tendency to use case studies (Khalfan & Gough, 2002 [Kuwait]; Mosse & Nielsen, 2004 [Mozambique]), many articles rely on survey data. However, the vast majority of these involve paper-based surveys (Brown & Licker, 2003 [South Africa]; Grandon & Pearson, 2003 [Chile]; Lertwongsatien & Wongpinunwatana, 2003 [Thailand]), with only a handful using e-mail surveys (Ahmed, 2002 [Bahrain, Saudi Arabia, Kuwait, Oman, UAE, Qatar]; Wresch, 2003 [Nicaragua, Pakistan, Senegal, Ghana, Kenya, Nepal, Tanzania, Sudan, Mozambique]), or Web-based surveys (Gandsas et al., 2001 [Global]; Ngini et al., 2002 [Global]; Pimchangthong et al., 2003 [Thailand]). A variation to the online data collection method was explored by Al-Saggaf (2004 [Saudi Arabia]) who conducted interviews through a Web-based virtual community.
data collection Issues in china Research essays on and scholarly critiques of data collection in China generally concur that it is inappropriate to engage in the mere transfer of Western research practice to China without any form of adaptation to the local context, which is perceived to be a unique phenomenon (Manion, 1994; Roy, Walters, & Luk, 2001). Not all scholars agree about the uniqueness of the research context in China, but nevertheless there is agreement that the contextually and culturally sensitive application of research methods is essential if those methods are to have any explanatory power (Shenkar & Von
Web-Based Data Collection in China
Glinow, 1994). With specific reference to the collection of data, Roy et al. (2001) document a number of concerns including the ability of researchers to gain the official permissions needed for data sampling, the use and value of secondary data, the tendency of local research contacts to engage in self-censorship, the design and implementation of survey instruments and the analysis and interpretation of data. A further concern relates to the designation of some possibly innocuous information as “secret” or “classified.” This kind of situation was exemplified by the case of a Hong Kong-based economics researcher who, as a result of his data gathering activities, was accused by the PRC of spying for Taiwan (Cheung, 2002).
the Potential for web-based surveys in china: Practical and demographic Issues There is growing attention to the usage of the Web as a medium to collect survey data in China. In order to obtain an overview of how the Web-based survey has been researched among Chinese scholars, in addition to the literature search described earlier, we conducted a search in the Chineselanguage China Journal Fulltext Database. To our surprise, we found more than twenty journal articles that are specifically related to the examination of Web-based surveys. The topics of these articles cover a wide array of issues ranging from detailed presentations of the software that can be used to implement Web-based surveys, discussions of technical issues in designing, monitoring, and controlling the survey process (Mi, 2001; Yu, Zheng, & Zhang, 2000) and careful delineations of different ways of using the Internet to collect survey data (Ke, 2001a, 2001b), to analyses of the advantages and constraints of using the Web as a medium to administer surveys (Kang, 2001; Tang, 2002; Wang & Zhang, 2001), questions related to instrument design and the conduct of statistical analyses (Zhang, 2003), and issues related to the establishment of policies and rules associated with
the regulation of Web-based surveys in China (Lin & Yin, 2001; Su, 2000). We consider that at least three factors contribute to the rising enthusiasm for Web-based surveys in China. First, the population of Internet users has grown rapidly during the past few years. According to the China Internet Network Information Centre (CNNIC), a non-profit organization associated with the Ministry of Information Industry that conducts semi-annual surveys on the development of the Internet in China, the number of Chinese Internet users (not including those in Taiwan, Hong Kong and Macau) has grown from 62,000 in 1997 to 103,000,000 in July 2005 (CNNIC, 2005), approximately 7.9% of the total population of 1.3 billion. More detailed statistical data about China’s Internet population is presented in Tables 1-6. For comparison with other countries, see Appendix 1. The rapid expansion in the number of Internet users has important implications for Web-based survey research, since there is the indication that the online population is becoming more representative of the urban population as a whole, as well as specific sub-populations such as college and high school students, people educated to high school level, and certain occupations such as government officers, engineers, management personnel and teachers. Second, commercial market research and consulting firms are becoming more involved in conducting Web-based surveys. In October 1999, Beijing Horizon Research and Sohu created the first independent company specializing in Webbased surveys (Gao, 2002). Subsequently, many other research and consulting firms have developed Web-based survey systems. Third, research institutions are increasingly interested in exploring the possibility of utilizing the Web to undertake surveys in China. Traditionally, the survey has been the most popular technique utilized in social science research in China (Deng & Feng, 2000; Li, 2000). As the population of Internet users increases, the Web-based survey can be considered as a viable alternative to traditional survey media such as paper-based questionnaires
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and telephone interviews. Several conferences on Web-based research methods have been organised, which is an indication of the growing interest in this new medium. In 2000, the Chinese Academy of Social Sciences held a conference titled “Methodological and Application Issues Associated with Using the Internet to Conduct Survey Research,” while the Chinese Information Association held a conference titled “Research Methods and Practice of IT Marketing” (Ke, 2001a, 2001b). The most frequently discussed issues among Chinese scholars concern the potential advantages of using the Web to collect survey data as compared to traditional methods, the reliability and objectivity of this method, and the constraints involved in terms of the technical infrastructure and target populations. While most scholars notice the advantages in efficiency and low cost on the part of the researcher, they also note some factors that constrain the development of Web-based surveys in China. First, the technical infrastructure is still relatively underdeveloped outside the larger cities. Second, the cost of using the Internet is still nontrivial (while 31.2% of Internet users spend less than 50 RMB/month on Internet access, a further 62.7% spend between 50 and 200 RMB/month (CNNIC, 2005). Income levels vary considerably, with 28% of Internet users earning less than 500 RMB/ month and 46.4% earning between 500 and 2000 RMB/month (CNNIC, 2005). Internet access costs are thus likely to represent a significant fraction of net incomes. As a result, Internet users cluster around a particular population of which young and educated urban professionals and college students constitute the majority. Issues of reaching out to potential respondents, providing online incentives, and preventing multiple submissions have also gained attention. Less attention has been paid to the investigation of individuals’ privacy concerns and the trust relationship between the respondents and the Web medium. Zhang, Wang, and Chen (2001), in a comparison of the willingness of Chinese and U.S. online consumers to participate in Web-based surveys, observed that Chinese consumers tend
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to be more willing than their U.S. counterparts to provide personal information. However, within the Chinese population, female respondents were less willing than their male counterparts to provide information. Moreover, while working professionals were more likely to provide information online simply out of goodwill, students needed to be lured with incentives. Despite the constraints facing Web-based survey research in China, it has become an important alternative to traditional survey methods. The most salient advantages it has over traditional survey methods may be the anonymity it provides to respondents and the confidentiality it inspires, as well as the control that it enables researchers to exert during the survey administration process. Some scholars point out that the Web-based survey is particularly suited to research into sensitive issues such as social problems and private behaviour (Sun & Cai, 2000; Xiang, 2001, 2002). They argue that because surveys on the Internet provide better guarantees for the protection of individual identities, people are more likely to express their true opinions on sensitive issues. Related to this, the responses should be more reliable since researchers have more control over the collection of data. For paper-based surveys, there is always the risk that the return of the questionnaire to the researchers may be disrupted, whether by postal delays or questionnaire loss by respondents. Using the Web to collect data enables the researcher to obtain the data directly from respondents, thus eliminating potential threats to the reliability of the responses, though it must be admitted that the technology itself is unlikely to be foolproof, given the potential for server crashes.
literature review summary While surveys are undeniably a popular research methodology, the vast majority of surveys conducted today are traditional, in the sense that they are paper based. In recent years, there has been a trend first to develop e-mail-based surveys,
Web-Based Data Collection in China
and more recently to use Web-based surveys. The potential that Web-based surveys offer the researcher is considerable, in terms of cost, time, and accuracy of data. However, there are concerns about the ability of potential respondents to access Web sites, and indeed about the complexity of those Web sites from a browser perspective. While some respondents users may prefer a more fancy and graphically attractive Web-based survey, that uses a variety of interaction methods such as drop down boxes, radio buttons, rank order responses, etc., other respondents may not have browsers or indeed connections capable of processing these Web-pages effectively. Incentives (vouchers, cash, etc.) are sometimes provided to survey respondents to motivate their participation, but this is much less easy to operationalise in the online world, raising concerns about how to motivate people to participate in Web-based surveys, particularly once the novelty effect has worn off. In the developing country context, Web-based surveys are fairly rare at the time of writing and there is no clear evidence of their universal applicability. This is not entirely surprising since until recently, very few people in developing countries have had sufficiently reliable Internet access to make Web-surveys a sensible proposition. However, this situation is changing slowly, particularly in professional groups of employees such as Doctors, Managers, Students, Teachers, Engineers, etc. This is certainly the case in China, where some 7.9% of the total population (103 million people) now have Internet access, including well over one million in the IT industry. The Web-based survey is the subject of considerable interest in China, with national conferences being devoted to it, as well as start-up companies being formed in response to an anticipated demand for online surveying. China is not without significant hurdles to the use of the Internet for research purposes, including notably the cost of access, and questions about the representativeness of any sample.
InstruMent develoPMent And reseArch oPerAtIonAlIsAtIon In order to assess the feasibility of conducting Web-based surveys in China, in this study we implemented a Web-based survey of the ethical values of IT professionals in China. Concerns have been raised about the extent to which potential survey respondents can access Internet based resources (Saxon, Garratt, Gilroy, & Cairns 2003). In China, this is certainly a valid concern, yet as we are interested in the ethical values of IT professionals, including engineers and managers, it does not seem unreasonable to expect that they, of all people, should have access to the Internet. The survey instrument was initially developed in English. It includes 20 substantive items (each is a different kind of ethical dilemma designed to be relevant to the IT profession), as well as eight demographic items and four open-ended text items designed to collect data about respondents’ attitudes towards Web-based surveys in general. Each of the twenty substantive items consists of the first half of a sentence and is associated with seven possible actions, each of which can complete the sentence. For example, item 18 and its associated actions reads as follows: “I believe that as an IT Professional, I should…(1) do whatever I like irrespective of other people; (2) cut corners in order to get a job done in a way that maximises my personal benefit; (3) do my best, but not worry if my work is imperfect; (4) fulfil the minimum requirements of a job; (5) promote good practice and high standards in my work; (6) help to develop new standards for professional work; (7) constructively challenge the fundamental values that the IT profession holds as important.” The original English version of the instrument was first translated into traditional Chinese2 (by two translators located in Hong Kong and Taiwan respectively) and then back-translated into English by a third translator in Hong Kong who was not otherwise associated with the project. All the
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translators engaged on this project were native Chinese, who regularly use both English and Chinese at work. The back-translation was compared with the original English version. Inconsistencies between the versions were discussed at length by the researchers and translators and the traditional Chinese version was modified in order to address ambiguities, such as the differences in the traditional Chinese used in Taiwan and Hong Kong. When agreement on the traditional Chinese version was achieved, it was translated into simplified Chinese by a fourth translator, a native of the PRC, who was familiar with both traditional and simplified Chinese, as well as English. This translator preferred to create the simplified Chinese version from the traditional Chinese version, while also referring back to the original English version so as to ensure consistency of meaning. The wording of the simplified Chinese version differs from the traditional Chinese version in a few minor respects (e.g., where the characters used in Hong Kong and Taiwan to represent certain English words are different from those used in the PRC). For example, the word computer is written with two characters (電腦) in traditional Chinese but with three characters (计算机) in simplified Chinese. The three language versions of the instrument were then implemented on a Web site located at the Department of Information Systems, City University of Hong Kong. Each version was preceded by a sample question, which illustrated how to complete the survey. Potential respondents who accessed the Web site were invited to read a short introduction to the project (in each of the three language versions) and then to select a language version to complete. Buttons were used to enact this choice, with the language clearly specified on the button. When the survey was submitted by a respondent, the data was captured in a database for subsequent analysis. As recommended by Duffy (2002), counters were used to track (a) the number
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of introductory page hits, (b) the number of survey page hits, and (c) the number of surveys submitted. In addition, the date and time of each submission were recorded in the database. In order to identify an appropriate population of IT professionals who would have access to the Internet and thus the survey instrument, we employed the services of the China Centre for Information Industry Development (CCID). We paid CCID RMB0.20 (approx. US$0.025) per e-mail to contact 5,000 randomly selected IT professionals from the 1.2 million in their membership database. A comparison between the CCNIC (2005) statistics on general Internet user characteristics and the CCID (2004) members is made in Tables 1-6. This comparison clearly indicates that CCID members are better paid (Table 1) and educated (Table 2) than the population at large, though this is hardly surprising as they are predominantly professionals. For the same reason, there are fewer students in the CCID sample than the CNNIC survey (Table 3). The industries where CCID members work are broadly comparable with those represented in the broader population (Table 4). CCID indicate that approximately 90% of their members work directly in the IT field, with the remainder having a personal interest in the area. CCID members are typically older than the typical Internet user, with 51.7% of CNNIC survey respondents under 25 compared to 27.9% in the CCID database (Table 5). Finally, the CCID membership is much more male dominated than the overall Internet user population in China, but it should be remembered that IT jobs in China have traditionally been a male preserve (Table 6). This contact e-mail was sent directly from CCID (not from the researchers) and was written in Simplified Chinese. The text of the e-mail explained the nature of our study, the identity of the researchers, and indicated the URL where the survey instrument is located. Both the e-mail and the Web page indicated our willingness to provide feedback to any respondents who requested it.
Web-Based Data Collection in China
Table 1. Personal income of Internet users (%)
CNNIC (2005)
CCID (2004)
< 2000
80.6
40.4
2000-2999
10.7
3000-4999
5.8
5000>
2.9
Table 2. Educational profile of Internet users (%) CNNIC (2005)
CCID (2004)
College or below
39.3
27.1
27.7
Undergraduate
27.6
58.7
15.4
Masters Degree
2.7
12.1
16.5
Doctoral Degree or above
0.4
2.1
Table 3. Job title/position of Internet users (%)
CNNIC (2005)
CCID (2004)
Gov’t Officer
7.4
Senior Manager
4.8
Enterprise Manager
9.3
Dept Manager
10.3
Engineer
12.6
Project Manager
6.9
Teacher
7.0
Professional/Technician
32.8
Business/Service Worker
9.4
General Staff
16.2
Student
32.4
Student
18.0
Table 4. Industry where Internet users work (%)
Education & Scientific Research
CNNIC (2005)
CCID (2004)
13.9
14.8
Government Bodies & Public administration
11.9
11.0
Finance & Insurance
4.5
4.6
Manufacturing
14.6
12.9
IT / Computer / Internet / Telecoms
16.4
21.9
Consulting
1.2
1.7
Energy & Resources
4.9
5.6
Commerce & Trade
6.7
3.0
Others
25.9
23.5
Table 5. Age of Internet users (%)
CNNIC (2005)
CCID (2004)
<18
16.4
2.2
18-24
35.3
25.7
25-30
17.7
27.5
31-35
11.4
18.7
36-40
7.6
10.7
41-50
7.6
8.4
51-60
2.9
3.9
>60
1.1
2.8
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Table 6. Gender of Internet users (%)
CNNIC (2005)
CCID (2004)
Male
60.4
81.8
Female
39.6
18.2
results demographic data Of the 5,000 individuals to whom we e-mailed an invitation to participate, 1,717 visited the Web page where the instrument was located within 10 days and a further 152 did so during the following 12 days, a rate of 37.4%. Of these 1,869 visitors, 1,617 (87%) proceeded to one of the language versions of the instrument, 1,611 (99%) of these choosing a Simplified Chinese version. However, of these 1,617, only 337 (20.8%) actually submitted the survey. Of these 337 submissions, 15 were entirely empty of data (i.e., the submit button was clicked without any data being entered), 5 were duplicate submissions and a further 27 were incomplete. This left 290 valid responses, an overall response rate
of 5.8%. Figure 1 indicates how many submissions were received over the course of the six days following the distribution of the e-mail invitation on September 25th, 2003. Of the 290 responses, 155 (53%) were submitted on September 26th. In the first two weeks of October, five or fewer responses were submitted per day. Demographically, the data indicates that the majority of respondents are young males (Table 7), with less than 10 years of working experience (Table 8) and at least a Bachelor’s Degree (Table 9), the majority of whom work in Computing and IT Services (45%) or Communications and Media (17%) (Table 10). These statistics are consistent with the profile of CCID’s members (CCID, 2004). A total of 37 people who submitted the survey (12.8%) requested feedback from the researchers by providing their e-mail addresses. Where the job titles of the respondents are concerned, a huge variety is evident. Some 88 job titles are identified by respondents from the more technical programmers and network managers through sales and marketing personnel, clerical staff and presidents of organisations. Indeed, 97 (33%) of our respondents identify themselves as being of managerial level or above (including IT and technical managers), while 42 (14%) are Engineers and a further
Figure 1. Response rates during the first six days 180 160 140 120 100 80 60 40 20 0 25/09/2003
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26/09/2003
27/09/2003
28/09/2003
29/09/2003
30/09/2003
Web-Based Data Collection in China
59 (20%) occupy other positions that are often associated with the IT profession (e.g., analysts, programmers, network, and security specialists). Table 11 indicates the number of responses for the most commonly indicated job types.
Qualitative data In addition to the demographic characteristics of the respondents presented earlier, we also asked the respondents for their thoughts on the viability of using the Web to collect data. The specific questions we asked were:
• • • •
What motivated you to participate in this Web-based survey? How do you feel about participating in this Web-based survey? Would you encourage your friends or colleagues to participate in a Web-based survey in the future? Why or why not? How could we make this survey more attractive to potential respondents such as yourself?
Answers to these questions varied considerably and defy easy categorisation. Virtually all of the answers were submitted in simplified Chinese. We have translated or paraphrased the responses here. Where motivation is concerned, the most frequently identified reasons include “interest,” “curiosity,” “a desire to know the result,” and “a sense of professional IT responsibility to participate.” Other responses include “seeking to learn more about my own work values,” “the opportunity to offer an opinion,” and also “I feel like it” or “I want to help.” The vast majority of responses here are positive, some touchingly so, for example “I have an affection and trust for CCIDnet” and “I care for, love and pay attention to the development of this industry. I am even more concerned about the psychological condition of people.”
Where the feelings of respondents about participating in this survey are concerned, a similar variety of responses is evident, though here there is a greater contrast of positive and negative comments. Thus, some respondents feel that there are too many questions, others too few, others that the number is just right. Some commented that the design is nice and clear, others suggest that the design is poor with questions that are strange or obscure. A few respondents noted that the survey includes questions that are not only realistic but that also challenge one’s understanding and practice of work-related values. Others consider the survey to be either troublesome or a complete waste of time. The third qualitative question asks whether respondents would encourage their friends or colleagues to participate in a Web-based survey in the future. This question serves as an independent measure of the respondents’ attitude towards Webbased surveys in general. Of the 207 people who answered this question, 122 (59%) of responses are positive, indicating that they would encourage their friends/colleagues to participate, 49 (24%) are negative and 36 (17%) are undecided. Although there is a self-selection bias at play in answering this question — those who voluntarily participated in this survey are more likely to support survey research as respondents — we are still pleased to see that over half of the respondents may encourage their friends or colleagues to participate in a Web-based survey in the future. For those who responded positively to this question, many used the words “meaningful,” “valuable,” or “inspiring” in their answers. Specifically, we note some factors that may be of importance to our understanding of the IT professionals. First, the need for mutual understanding and communication is salient in the answers. One respondent emphasized the importance of communication: “Nowadays, communications between person and person, corporation and corporation, industry and industry, and country and country are far
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Table 7. Age and gender of respondents (N)
Table 8. Years of working experience of respondents (N)
Below 30 years
197
Male
230
0 – 10 years
249
30-50 years
82
Female
60
11 – 20 years
32
Over 50 years
11
21+ years
9
Table 9. Education level of respondents (N)
Table 10. Industry sector where respondents
work Secondary School / High School
29
Diploma
3
Bachelor’s Degree
197
Master’s Degree
46
PhD
9
Other
6
Communications and Media
50
Health Care
4
Computing and IT Services
130
Logistics
2
Consumer Sector
6
Manufacturing
23
Education
15
Telecommunications
14
Engineering
15
Travel / Transportation
5
Financial Services / Insurance
7
Utilities (Electricity, Gas, Water)
2
Government
9
Other
8
Table 11. Most frequently indicated job titles of respondents CEO/President
7
CIO/CTO/Vice-President
18
Managers and Directors
72
Engineers
42
Technician & Programmer
11
Other IT related staff
59
more important than productivity improvement.” An enthusiasm towards participation is also very explicit in some responses. Through participating in surveys, it is hoped that proper standards can be established for the IT industry, better solutions for social problems can be identified, and social progress may be attained. In sum, we note a personal attachment to the IT profession and a sense of belonging to the IT community. For those who responded negatively to this question, we found that in most cases, this refusal was not targeted at the questionnaire itself, but was rather an expression of an emphasis on individual free will: for instance, “I would do whatever I like, I don’t want to influence others.” There was also the
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indication that it took too much time to complete the questionnaire. Those who are indifferent or unsure about whether they would encourage others to participate in surveys mentioned that it depends on whether the survey is relevant to their profession or whether the topic is interesting. Respondents also provide useful suggestions to our last question. We coded the answers and classified them based on content, style, format, and action. More than 50 respondents suggested that interesting, meaningful topics can attract people to participate in the survey. They said that they welcome questionnaires that have rich, deep, and meaningful content which can make them think deeply. They also emphasized that the content
Web-Based Data Collection in China
should more closely reflect the real life. A few respondents raised questions about the style of the questionnaire, pointing out that the questions should be simpler, more direct, and concrete. A similar number of respondents suggested revisions to the format of the questionnaire and the design of the Web page. A beautiful, visually impressive, and easy-to-operate Web page may attract more people to respond. As expected, a number of respondents suggested that some kind of incentive (whether monetary or “in kind”) may help improve the response rate. Among these actions, offering gifts, cooperating with the media to increase publicity, and providing the results to respondents were regarded as crucial.
dIscussIon This objective of this research project involved assessing the feasibility of using the Web to collect data in China. We were heartened to see that over 37% of the 5,000 people to whom invitational e-mails were sent were sufficiently motivated at least to click on the link in the e-mail message and visit the Web page where the survey instrument was introduced. We are unable to assess how many of the 5000 initial e-mail addresses were invalid as the invitation e-mail was sent by CCID, who did not report on e-mailed that bounced back as undeliverable. Nevertheless, CCID informed us that if an account could not receive an e-mail on three consecutive occasions, it would be removed from their database. Of these 1,869 people, the vast majority (87%) appear to have been further motivated to click on a button taking them to the survey instrument itself. However, a much smaller number, only 337, actually submitted the survey and when empty, duplicate or incomplete responses are eliminated, only 290 usable responses remain — an overall response rate of 5.8% of the original 5,000 invited participants. Similar drop-out rates were experienced by Tingling et al. (2003), with more than 60% of those who started a Web-based
survey failing to complete it. The data cleaning that proved necessary as we analysed the dataset was not entirely unexpected, despite the suggestion that it might be unnecessary with digitally entered data (Lazar & Price, 1999). Nevertheless, it proved relatively easy to accomplish since the data can be sorted in a spreadsheet on any field and so missing or duplicate responses were quickly identified. The demographic data indicates a predominantly young, male and well educated population, most of whom work in the IT industry. This appears to confirm the validity of our selection of CCID as a suitable intermediary for contacting our target population — people who either work in the IT industry or can otherwise be considered to be IT professionals. Clearly, such people do have ready access to the Internet and therefore are able to access survey instruments such as the one discussed in this article. The qualitative comments received from over 75% of respondents on their perceptions towards the survey are of great interest because they provide a good indication as to how we could make surveys such as this one more attractive in the future. Where motivational issues are concerned, many respondents indicated either a personal or a professional interest in the survey and in the questions that it asked them. Several indicated that they found it meaningful to participate as it helped them to reflect on their own work practices. It also appears that respect either for IT researchers or for CCID played a significant motivational role: in this sense, we are borrowing respect from CCID and attempting to use it so as to persuade potential respondents to participate in the survey. In the main, this seems to have been a successful strategy, if only because 37% of those invited actually visited the survey’s introductory Web page. Nevertheless, it is necessary to distinguish between a survey of a relatively homogeneous population, such as IT professionals, and a general survey of consumers, for instance, who may be far more heterogeneous in character. We suggest that identifying a motivational focus that can be used
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to leverage participation in a survey may be critical to achieving a high response rate. The discrepancy between the number of introductory page visitors, the number of survey page visitors and the number of survey submitters is perplexing. There is a very strong correlation between the first two of these: 1,689 people visited the main instrument page and 1,617 of them visited a survey instrument. This suggests that these 1,617 were sufficiently motivated by both the e-mail invitation and the short introductory text on the introductory page at least to attempt to reach a survey. However, just over 20% of these motivated individuals actually submitted the survey. Several possible reasons can be identified, all of which can be tested in future research. Firstly, as many respondents noted, the survey may well be too long, with 20 substantive items and 12 additional demographic or textual items. Associated with the issue of physical length is the issue of file size: the Simplified Chinese version of the instrument is approximately 300kb. This is a large file to download, especially for respondents with limited bandwidth. It may well be that many potential respondents either were unable to download the entire survey or gave up waiting for it to download. Apart from the amount of time needed either to download or to complete the survey, potential respondents may have experienced difficulties understanding the questions. The instrument was developed in English and was then translated into Chinese (both Traditional and Simplified). We took considerable care with the translation process, ensuring that native speakers/writers of Traditional Chinese were engaged on the Traditional Chinese version and similarly that a native speaker/writer of Simplified Chinese was engaged in producing the Simplified Chinese version. All translators were instructed to assess their translations for readability bearing in mind the audience for whom the instrument was being developed. A Traditional Chinese version was developed both so as to offer choice to respondents in the PRC and because we are separately collecting data in Hong
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Kong and Taiwan with the same instrument. The translators also compared their Chinese versions with the English version and engaged in extensive discussions with the author of the English version of the instrument. Pilot testing of the Traditional Chinese and English versions of the instrument was undertaken before the survey reported in this study was conducted. This pilot test did not reveal any significant problems of comprehension. Indeed, in the spirit of the work of Michael Bond and his associates (Chinese Culture Connection, 1987), the separate development of an instrument by Chinese scholars based on Chinese values and concepts would constitute an effective line of inquiry. This is supported by the words of one respondent who commented: “Different people from different places have different values. Your survey uses a view point from Hong Kong to look at the IT professionals. It relates more to the moral standard, but the mainland IT professionals are not necessarily the same. They have other concerns.” We asked respondents if they would encourage their friends/colleagues to participate in online surveys in the future. A little over half of all responses were in the affirmative, but many of the negative responses involved a dislike for causing trouble or disturbance to others. This is an interesting finding that deserves further attention, perhaps in the context of research into individual personal privacy. Many of the positive responses were very enthusiastic, respondents apparently gleaning substantial enjoyment from their participation. Finally, we asked how the survey could be made more attractive. Some of the responses here focused on the physical appearance of the survey, with suggestions that it be made more attractive or easy to read, while others focused on issues more closely associated with incentives: one respondent for instance suggested that we offer a free notebook computer! It appears that the issue of topic complexity is also important, though responses here are bipolar, with some preferring a simpler style of question, others preferring more complex questions that need deep thinking.
Web-Based Data Collection in China
Future reseArch, lIMItAtIons, And conclusIon In this study, we have explored how a Web-based survey instrument can be used to collect data in China. A high initial response rate (37%) was achieved, though only 5.8% of respondents followed through to submit the survey. We suggest that reasons associated with survey length, question complexity and comprehensibility, and file size may be associated with this low submission rate, fruitful domains for future research. Nevertheless, in this study we have demonstrated that cooperation with a professional society in a developing country such as China can be a viable method of identifying potential respondents and so gathering data. We expect that a similar approach could be used to contact professionals in other developing countries, on the assumption that professional societies exist and are willing to participate in this kind of research. It also appears that professionals in China are willing at least to contemplate completing a survey online, especially if they feel that the survey questions are relevant to their life and work, meaningful, interesting and thought provoking, though there are also suggestions that the questions need to be simple and easy to understand. This willingness is significant in the light of earlier studies suggesting that people in China are risk averse and distrustful of non-kin members (Cheung & Chow, 1999; Fuller & Peterson, 1992; Hofstede, 1980). There are several avenues for future research that have been opened up by this study. Firstly, we suggest that it may be valuable to compare survey length and complexity. This can be done by assessing responses to survey instruments of varying lengths and degrees of complexity. Findings from such research would be valuable to survey research designers, though our own inclination is to provide respondents with a choice, given the fact that some will prefer to provide an immediate reaction to a simple question and others will prefer to think more carefully about their response to a more complex
question. Where the “invitation to participate” process is concerned, we suggest that while the efficacy of paying a professional organisation to contact its members directly through e-mail can be tested further, other methods for inviting participation in Web-based surveys should be considered, such as the use of banner or pop-up advertisements on Web pages (Ngini et al., 2002), bearing in mind the implications that such methods have for accurately calculating the response rate. The population surveyed in this study was intentionally restricted to IT professionals in China. This limits the generalisability of any of the findings to other populations in other countries, though from a motivational perspective, we anticipate that similar response rates could be achieved from other professional groups in China assuming that they have a similar level of Internet access, and indeed from professional groups in other developing countries, if the same assumption holds true. For instance, Gandsas et al. (2001) received responses to their Web-survey from general surgeons located in a number of developing countries including Brazil, Egypt, India, Saudi Arabia, Thailand and Venezuela. Given that the number of people in China who have Internet access is increasing rapidly, so the population of potential respondents for future Web-based survey research is also growing. In summary, and by way of instructive guidance, we suggest that researchers interested in applying the Web-based survey method in developing countries, including China, should consider the following issues: • Identify a motivational focus which can both encourage participants to trust the intentions of the researchers and leverage consequent participation in the survey. • This can be more easily achieved on the Web if the motivational focus can be in some way related to the specific nature of the target population, the manner in which participation is invited or the incentives that can be offered.
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Web-Based Data Collection in China
•
• • • •
• •
•
• •
Information on the researchers can be offered (e.g., a link to their Web sites and their e-mail address(es)). Ensure that the amount of time needed to download the instrument (over a low bandwidth line), complete and submit it is reasonable. Provide the survey in as many language versions as needed. Pay careful attention to issues of translation and comprehension. Provide instructions on how to complete the survey. A worked example is useful, particularly on the Web where survey respondents may not be familiar with the medium. Offer incentives that are appropriate to the population — and ensure that you deliver! Incentives may involve gifts, prizes, vouchers, lotteries, donations to charities, links to resources that respondents might find useful, the offer of feedback on the survey results. Count how many people participate in the different stages of the data collection process. Include a time/date stamp on each submission. This is easy to automate on the Web and provides information that can be used to address questions of non- (or late) response bias. Ensure that data is submitted to a database controlled by the researchers. Expect that some data cleaning will be necessary due to invalid submissions.
Overall, we recommend the Web-based survey research method to researchers interested to explore new avenues of data collection in China, as well as in other developing countries. We believe that this research method has the potential to revolutionise the way we undertake surveys in China: target populations can be identified and contacted with ease; participants can choose a language version dynamically; data can be collected quickly; data cleaning is necessary, but simple to undertake; feedback can easily be provided to participants.
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AcKnowledgMent The work described in this article was partially supported by a grant from City University of Hong Kong (Project No. SRG7001266).
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endnotes 1
Tingling, P., Parent, M., & Wade, M. (2003). Extending the capabilities of Internet-based Research: Lessons from the field. Internet Research, 13(3), 223-235. Wang, J., & Zhang, Y. Y. (2001). Characteristics, problems, and solutions of Internet research in China. Journal of Ji Nan University, (2), 49-52.
2
3
The countries include: South Africa, Namibia, Zambia, Zimbabwe, Uganda, Ethiopia, Eritrea, Togo, Benin, Nigeria, Ghana, The Gambia, Cameroon, Tanzania, Kenya, Egypt, Algeria, Morocco, Libya, Mauritania, Argentina, Brazil, Chile, Paraguay, Venezuela, Colombia, Panama, Nicaragua, Ecuador, Peru, India, China, Nepal, Malaysia, The Philippines, Thailand, Indonesia, Bangladesh, Pakistan, etc. Traditional Chinese is used as the written language in Hong Kong and Taiwan, whereas Simplified Chinese is used in China. Source: http://www.internetworld stats.com
This work was previously published in Journal of Global Information Management, Vol. 14, Issue 3, edited by F. Tan, pp. 3958, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Section IV
Utilization and Application
This section introduces and discusses the ways in which outsourcing has been used to revolutionize the modern face of business and proposes new ways in which services, goods, and systems can be outsourced. These particular selections highlight, among other topics, sourcing decisions in small companies, outsourcing in the healthcare industry, and virtual environments. Contributions included in this section provide excellent coverage of today’s global environment and insight into how the study and implementation of outsourcing projects impacts the fabric of our present-day global village.
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Chapter 4.1
Real-Life Case Studies of Offshore Outsourced IS Projects: Analysis of Issues and Socio-Economic Paradigms Subrata Chakrabarty Texas A&M University, USA
AbstrAct The primary purpose of this chapter is to present descriptive real-life case studies of different offshore-outsourced custom software development projects (that the author has actually worked for). The first case study discusses the practical issues in two fixed-term/fixed-price custom software development projects that were offshoreoutsourced. The second case study discusses the practical issues in the offshore-outsourcing of a time and materials custom software development project to multiple vendors, which involved simultaneous insourcing, onshore-outsourcing and offshore-outsourcing. Furthermore, the observations and issues from these case studies are analyzed by comparing them with the paradigms of socio-economic theories that have been adopted extensively in the academic IS outsourcing literature (namely the agency theory, transaction
cost theory, innovation diffusion theory, social exchange theory, and power-politics theory).
IntroductIon Companies worldwide are under increasing pressure to cut costs. The price of associated software is often the deciding factor on whether to upgrade to newer and better alternatives. Every company wants to use the best software — not just to beat the competition, but sometimes to remain in the competition. The lure of low costs and the desire for high software quality has forced companies in advanced economies to look across the horizon. Case study-1 discusses the issues in two fixedterm/fixed-price custom software development projects that were offshore-outsourced. Case study-2 discusses the issues in the offshore-
Real-Life Case Studies of Offshore Outsourced IS Projects
outsourcing of a time and materials custom software development project to multiple vendors, which involved simultaneous insourcing, onshore-outsourcing and offshore-outsourcing. The two case studies explain two very different approaches to offshore outsourcing of custom software development, and attempt to be of practical significance to managers and software professionals by analyzing the issues involved. The case studies provide insights into the practical and real life strategies adopted by managers to solve issues and problems in offshore-outsourcing and hence will be of value for the readers. The observations and issues from these case studies are further analyzed by adequately comparing them with the paradigms of socio-economic theories that have been adopted extensively in the literature to study IS outsourcing. To achieve this objective, extensive literature review has been provided both in the introductory sections of this chapter and also in the later sections where the case-studies are related to the theories and paradigms. Hence, an earnest attempt has been made by the author to relate the practical real-life experiences of working in offshore-outsourced projects to the paradigms in the academic literature. This chapter can also be used for instructional purposes for teaching cases in offshore-outsourcing of custom software development projects. It is assumed that the reader has sufficient knowledge about the fundamental concepts of insourcing, outsourcing and offshoring, and hence before we review the literature for socio economic theories and before we analyze the case studies, we proceed to only briefly describe the reasons behind the growth in offshoring of IS work, and also the primary factors that influence the choice of whether to insource or outsource.
Our assessment is that growth will continue in sourcing IT work offshore for a number of years to come. While the growth rate slowed somewhat in 2001-2002, corporate pressures to reduce costs remained strong. However, putting a figure on the global offshore picture is difficult. Adventis, a research firm, estimates that U.S. firms will spend some $7 billion on third-party offshore IT work in 2002. Narrower figures give more guidance: Forrester, a U.S. research firm, found that 44 percent of U.S. firms with more than $1 billion in revenues performed IT activities offshore in 2001, and Forrester estimates that percentage will grow to 67 percent by 2003 (for comparison purposes, a Fortune 1000 firm has $1.2 billion in revenue). Note, though, that these estimates do not include offshore sourcing to wholly owned facilities. Furthermore, offshore sourcing is but a small slice of the global market in IT outsourcing (both domestic and offshore), which is estimated to be more than $100 billion (and again, this figure does not include insourcing).
discovering new lands: the Move to offshore
1.
Overall there is a bright outlook for offshore sourcing of IS functions. Carmel and Agarwal (2002, p. 73), note the following: 968
In the same vein, Dibbern, Goles, Hirschheim and Jayatilaka (2004, p. 90) note the following: Even the popular press (Business Week, 2003; USA Today, 2003) have reported on this issue noting that as much as 50% of IT jobs will be offshored to India and other off- and near-shore destinations in the next 10 years. Such change it is argued is nothing more than the natural progression of first moving blue-collar work (manufacturing, textile production, etc.) overseas followed by white-collar work. Offshore sourcing of IS will continue to grow for the following reasons: Modular design of certain IS tasks: Modular design of certain IS tasks (e.g., software production) aid the offshore sourcing phenomena due to reduced transactions costs (cost of coordinating work activities
Real-Life Case Studies of Offshore Outsourced IS Projects
2.
3.
4.
5.
6.
between two or more parties) and because synchronization, communication, travel, supervision, feedback, and enforcing of contracts are easier (Carmel & Agarwal, 2002, p. 66). Modern technologies: The latest technologies allow management and coordination of work across geographic distances (Carmel & Agarwal, 2002, p. 66). The Internet has greatly helped the phenomenon of IS sourcing, by allowing interested parties to easily share information. Communication technologies such as emailing, teleconferencing, videoconferencing and instant-messaging allows better coordination in spite of the geographic distances. Technical, managerial and quality capabilities: The technical and managerial capabilities of both offshore vendors and offshore subsidiaries of onshore firms have improved (Carmel & Agarwal, 2002, p. 66). For example, India is reported to have over 150 software development and maintenance firms that have attained the Software Engineering Institute’s ‘Capability Maturity Model’ (SEI CMM) level 4 or level 5 (Dibbern et al., 2004, p. 90). High cost savings: Lower cost of offshore outsourcing in comparison to domestic outsourcing (primarily due to lower salary levels of offshore personnel) is a big driver behind offshore outsourcing (Carmel & Agarwal, 2002; Sobol & Apte, 1995; Apte & Mason, 1995, p. 1252). Skilled labor pool: There is sizable supply of qualified labor in many offshore destinations like India (Carmel & Agarwal, 2002; Apte & Mason, 1995, p. 1252). Scalability: The sizable supply of qualified low-cost personnel allows offshore vendors to have a certain number of personnel in the “waiting mode”, that is, waiting to be assigned to projects, and are used to quickly ramp-up projects when the need arises. Hav-
7.
8.
ing a number of personnel in the “waiting mode” for being assigned to projects is also known as “bench strength,” and allows the vendor to respond to client requirements in a very short cycle. Fastest time to market by working round the clock: Potentially all 24 hours of the day can be devoted to any task, by globally distributing the work across multiple time zones. This for example can lead to a faster cycle time for software production (Apte & Mason, 1995, p. 1252), allow continuous monitoring of critical IS functions and infrastructure, and allow 24x7 operations (needed for customer service, etc.). Entry to large markets with high growth potential: Many of the favorite locations for offshore sourcing like China and India are also large and growing markets. It might be strategically important to establish an early presence in such developing countries which have a higher growth potential than the relatively mature developed countries (Apte & Mason, 1995, p. 1252).
However there are some concerns about offshore sourcing which include problems of communication and coordination, cultural differences, lack of trust, difficulties in arranging visas/work-permits, offshore-unit’s lack of domain knowledge, lack of control over quality and schedule, possible violation of intellectual property rights, unclear government attitude towards cross border data flow and trade-in services, inadequate infrastructure in the vendor’s home country, and possibility of an unstable economic, political, or social environment (Carmel & Agarwal, 2002, p. 68; Sobol & Apte, 1995, p. 271; Apte & Mason, 1995, pp. 1252-1253).
the choice between Insourcing and outsourcing Costs (as indicated by relative efficiency in carrying out IS activities) and strategic importance 969
Real-Life Case Studies of Offshore Outsourced IS Projects
have been the primary drivers behind the decision on whether to insource from an internal IS department or to outsource to a vendor. The strategic importance and the relative efficiency in carrying out an IS activity in-house determines the choice between insourcing and outsourcing (Apte & Mason, 1995, p. 1258; Dibbern et. al., 2004, p. 33):
•
•
•
•
Insourcing is the best option when both the strategic importance and the relative efficiency in carrying out the IS activity in-house are high. Outsourcing should be preferred when both the strategic importance and the relative efficiency in carrying out the IS activity in-house are low. The option would be to either build a strategic partnership or to invest in acquiring the necessary capabilities, when the strategic importance is high but the relative efficiency is low. The establishment of a profit center (subsidiary) to offer IS functions in the marketplace should be considered when there is high relative internal efficiency.
Figure 1. Agency theory: Principal agent relationship
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the socio-economic theories Since this book deals with the socio-economic perspective, the economic theories and social/ organizational theories and the relevant literature will be later used to analyze the case studies. We briefly describe the economic theories such as agency theory and transaction cost theory and also the social/organizational theories like innovation diffusion theory, exchange theory, and power-politics theory that have been applied in IS outsourcing literature (Dibbern et al., 2004, pp. 99-102). The adoption of these theories in the relevant IS outsourcing literature, and their linkage with the case studies to be presented, will be adequately dealt with in a later section that comparatively analyzes the practical case-studies with the academic paradigms in literature.
Agency Theory The agency theory or the theory of ownership structure considers the firm to be a complex process in which the divergent interests of individuals are brought into equilibrium within a legal framework of contractual relations (Jensen & Meckling, 1976, p. 311). This is illustrated in Figure 1.
Real-Life Case Studies of Offshore Outsourced IS Projects
Jensen and Meckling (1976, p. 308) define an agency relationship as: “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent,” and have further introduced agency costs as the sum of monitoring costs, bonding costs and residual loss costs incurred by the principal. It is assumed that there is always divergence and conflict of interests between the principal and the agent, which can be limited by the principal by establishing appropriate incentives and by incurring costs. In the IS outsourcing scenario, the principal may be assumed to be the client, while the agent may be assumed to be the vendor. Monitoring costs are incurred by the principal to restrict he aberrant behavior of the agent, and
includes efforts to measure, observe, and control the behavior the agent. Bonding costs are incurred by the principal to guarantee that the agent will not act in a disadvantageous or harmful way, and in the case that the agent does take such aberrant actions the principal will be compensated. Residual loss costs is the monetary equivalent of the reduction in welfare experienced by the principal due to divergence between the agent’s decisions and those decisions that could have ideally maximized the welfare of the principal (Jensen & Meckling, 1976).
Transaction Cost Theory When goods or services are transferred across a technologically separable interface such that one activity phase terminates and another begins, a
Figure 2. Transaction cost theory: Analogy
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“transaction” is said to have occurred (Williamson, 1981, p. 552). Hence, a transaction involves transfers or exchanges between parties (for example, clients and vendors in an outsourcing relationship) across an interface. A transaction occurs smoothly if the interfacing between the involved parties is trouble free. However, if the parties operate in a non harmonious manner, with misunderstandings, disputes, disruptions, failures and delays, it results in a “transaction cost” to manage the disharmony between the interfacing parties. The transaction cost is the expense borne out of accommodating, monitoring and supervising the transaction between parties, and is proportional to the difficulty of mediating the interfacing parties. Williamson (1981, p. 552) gives the analogy of meshing of gears, which certainly helps in the understanding of costs due to “frictions” (see Figure 2) between clients and vendors in an IS outsourcing relationship: In mechanical systems we look for frictions: do the gears mesh, are the parts lubricated, is a there needless slippage or other loss of energy? The economic counterpart of friction is transaction cost: do the parties to the exchange operate harmoniously, or are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other malfunctions?
Innovation Diffusion Theory Organizations, countries and various social systems have to often incorporate innovative new technologies or processes. The IS outsourcing process has been considered to be an innovation, which needs to be adopted, and diffused (Loh & Venkatraman, 1992b; Hu, Saunders, & Gebelt, 1997). Adoption of innovations involves the conscious decision to accept and use such new technologies and processes, and diffusion involves the process of spreading them into the social system (Daft, 1978, pp. 195-197; Rogers,
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1983, as cited in Dibbern et al., 2004, p. 19). This is illustrated in Figure 3.
Social Exchange Theory Blau (1964, as cited in Dibbern et al., 2004, p. 19) defined social exchange as the “voluntary actions of individuals that are motivated by the returns they are expected to bring and typically do in fact bring from others” (see Figure 4). The IS outsourcing relationship can be considered to be a social exchange between clients and vendors. Emerson (1972, as cited in Dibbern et al., 2004, p. 19) noted the following social exchange attributes, which are highly applicable to the outsourcing scenario where the clients and vendors are the parties involved in the social exchange:
• • •
Reciprocity: A mutual exchange as a result of the need to reciprocate the benefits received. Balance: There is an equilibrium or equality in distribution due to mutual dependence between each of the actors in an exchange. Cohesion: When one or both actors in the exchange run into a conflict involving the exchange.
Figure 3. Innovation diffusion theory
Real-Life Case Studies of Offshore Outsourced IS Projects
Figure 4. Exchange theory
•
Power: The amount of monetary influence one can exercise on the other.
Power Politics Theory Markus (1983, pp. 442) states the following about power and politics: Intraorganizational power is an attribute of individuals or subgroups, such as departments, within the organization; it can be defined as the ability to get one’s way in the face of opposition or resistance to those desires. There are a number of ways by which an individual or subgroup can come to have power in an organization, including personal characteristics, such as being an expert or being charismatic, but position in the formal structure of the organization often provides greater access to specific power resources and the legitimacy required to use them. Organizations have people that wield power, that is, they posses a controlling influence and the qualities needed to get things done as per their
wishes. The presence of entities with differential power in social relations results in politics. Exercising power often involves maneuvering social relations to gain control and politics is the process of exercising power in human decision-making. Not surprisingly, power and politics play a big role in IS outsourcing relationships.
cAse study-1: oFFshore outsourcIng oF FIxed-terM, FIxed-PrIce custoM soFtwAre develoPMent ProJects This real-life case study gives descriptive accounts of the business scenario, personnel distribution and project life-cycle for two custom software development projects that were offshore-outsourced by a client. (Though this is a real life case, the actual names of the firms and projects have been replaced with fictitious names.)
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Figure 5. Case study-1: Offshore outsourcing - Business scenario
business scenario, relationship Issues and strategies
tions company based in both UK and U.S.A. that acquired ‘Old-Client’.
The Stakeholders
The Information Systems to be Custom Developed
‘Vendor’ is a large India based CMM level-5 software service provider. ‘Old-Client’ was a small UK based telecommunications company. ‘New-Client’ is a relatively larger telecommunica-
‘Vendor,’ had developed a “sales and commission management” software system for ‘Old-Client’ in Year-1, which was very well received by
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‘Old-Client’ and an excellent relationship was established between the two. ‘New-Client’ later acquired ‘Old-Client’ and other companies, and had therefore ended up with diverse software systems from different companies (see Figure 5). ‘New-Client’ decided to consolidate its various customer care related IS applications. Parts of the initiative were two projects - (1) CRMEurope: a new Customer Relationship Management (CRM) software system needed for their Europe operations and (2) CRM-NA: a new CRM software system needed for their North America (NA) operations. Each of the CRM systems were designed to replace the current legacy systems and to provide a Web-based front-end for call centers having customers in Europe and North America respectively. For each continent, the respective CRM system would be used to maintain customer data, track all customer interactions and provide a standard look and feel. The guiding principles were data consolidation and application consolidation. To provide users with rapid access to better quality data, efforts were made to consolidate multiple data sources into one database. Interfaces were developed for the few other databases that had to remain independent and could not be consolidated (for example, it was decided to keep the billing database independent of the consolidation program). The CRM software would call these interfaces to read/write data from/to these few remaining independent databases. Similarly, to give users access a reliable one-stop application, the multiple legacy applications would be replaced the CRM application software. Each of the new CRM systems were deployed in a three-tier architecture where data was stored on the database server, the application containing business logic was stored and run on the application server, and access to information was provided from an user-interface (Internet browser) that runs on desktop machine.
The Contractual Negotiations and Relationship Building Issues After going through a bidding process, ‘Vendor signed a contract with New-Client to develop the new CRM-Europe software system. The fact that ‘Vendor had done a good job for ‘Old-Client’ was one of the positive factors that helped Vendor bag the deal. This new relationship between ‘Vendor’ and ‘New-Client’ was not always comfortable primarily due to the very strict deadline for project completion, and the client’s inexperience with offshore-outsourcing. The project was however delivered within budget and in time by cutting down on a few difficult but relatively unimportant functionalities (reducing scope of the project), and went live into production during the early part of Year-3 (see Figure 5). For the contract for CRM-NA, there were extensive negotiations between ‘New-Client’ and ‘Vendor’. The ‘New-Client’ contended that the new CRM-NA system should be cheaper since the ‘Vendor’ could re-use much of the code already developed for the CRM-Europe system that had similar business functionality, and similar look and feel. However, the ‘Vendor’ contended that though the overall look and feel of the user interface was similar, the database schema was drastically different and larger, the number of validations and error checks were much higher, the number of interfaces were greater, and the business functionality was much more complicated for the proposed CRM-NA project. ‘Vendor’ further added that though a lot of helpful domain knowledge was gained from the Europe scenario, there is no valid case for re-use of code due to the mentioned factors. The deal was finally signed at price higher than that of CRM-Europe, but it was much lower than what the vendor had estimated for CRM-NA. On a mutually positive note, ‘NewClient’ offered a more realistic deadline for project completion, when compared to the stringent CRM-Europe deadline. This second project executed by ‘Vendor’ for the North American operations of ‘New-Client’, 975
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Figure 6. Case study-1: Offshore outsourcing: Personnel distribution onshore (NEW-CLIENT SITE: EUROPE/NORTH-AMERICA) Client personnel
client Manager (s) Project tracking, business direction, change management , negotiation
Coordination, understanding & rapid support for design / development issues
vendor Is team (10 – 15 nos.) Detailed design , development , Integration , testing, support
Case study-1: Offshore Outsourcing - Personnel distribution (- Subrata Chakrabarty)
was a more complicated system with a different database schema. Both ‘Vendor’ and ‘New-Client’ had learned their lessons from their experience and this time the mutual relationship was very comfortable. The project was delivered well within budget and in time, with additional innovative functionalities that made ‘New-Client’ very happy with the performance of ‘Vendor’. All the contracts signed by ‘Vendor’ were of the “fixed-term, fixed-price” (Currie, 1996, pp. 232-234) kind, where the deadlines were set, and the price for the entire project was fixed. However if there was a change in the scope of the project (change in design/requirements) then the vendor could charge additionally for it in proportion to the additional effort required. From the client’s point of view, an advantage of “fixed-price, fixed-term” contract is that the 976
cost is known and agreed even before the project starts. However, the disadvantage is that the project can get tied down to the contracted price and any change, for whatever reason, may require a timeconsuming negotiation with the vendor where every change can increase the time & money required to complete the project. All such changes are formalized in a written “Change Order” or “Change Request” document.
Personnel distribution Issues and strategies The personnel distribution for both CRM-Europe and CRM-NA projects were similar. The total number of personnel required for CRM-NA was only slightly higher than that for CRM-Europe, and we consider both these projects in unison (see Figure 6).
Real-Life Case Studies of Offshore Outsourced IS Projects
Personnel Distribution at Client Site At the client site (onshore), vendor personnel are present to coordinate effectively with the client personnel. The client managers track projects, give direction to future business strategies, negotiate, and handle both technological and organizational change management. In the context of the CRM projects, the client’s IS Team, that is, the client’s internal IS department gather and structure requirements, design systems, and develop interfaces. The onshore vendor manager is the principal coordinator and negotiator. The onshore vendor team takes pains to understand the client needs, communicates the client needs to offshore, and provides rapid support for design & development issues.
Personnel Distribution at Vendor Site At the offshore vendor site, the project manager has module leaders reporting to him. The offshored project is broken down into smaller manageable modules and each module is managed by a module leader. The vendor’s IS team is similarly distributed within each of these modules, where they take care of tasks like low-level (detailed) design, development, integration, testing and post deployment support. The project manager and module leaders coordinate with the client and vendor personnel at onshore and offshore, to make sure that the project is right on track.
Personnel Interaction and Movement Sometimes the client may decide to send its coordinators (who are generally mid-level managers) to the vendor’s offshore site for a few weeks or even months. This is different from the usual client visits to offshore that last only a few days. The client coordinators spend time discussing the high-level design with the vendor personnel, keep track of the project progress, and proactively assess and guide the vendor to ensure smooth project execution. Sending such client coordina-
tors to offshore for weeks and even months are actually rare. However in this scenario, the client coordinators were more than willing to come & stay at offshore, since the offshore country also happened to be their country of birth.
Project life-cycle Issues and strategies Though the project life-cycle for both the CRMEurope and CRM-NA projects were similar, the outcomes were different. The CRM-Europe project was successful in terms of meeting the budget and time, however it was a failure in terms of keeping the client happy and matching their non-budget & non-cost expectations. The CRMNA project was not just successful in terms of cost of time; it also delighted the customers with its smooth execution, value additions to the software and the overall feeling of bonhomie. We will first discuss the similar aspects of the both the project life-cycles and then discuss the intricate differentiating factors between the two projects.
Requirements Analysis and Design ‘New-Client’ always tried to complete the requirement analysis, architecture design, database design and high level application design before engaging ‘Vendor’. If done properly, this an excellent practice since it shows that the client is sure of what it wants. The life-cycles for the projects executed are shown in Figure 7. As soon as the vendor enters the project, it sends its personnel to the client site (onshore) to understand the requirements and design, and if anything is found undoable then they are encouraged to negotiate and offer alternative solutions. Design documents are also sent offshore, where the offshore vendor personnel study them in depth, and ask for clarifications to the vendor personnel at onshore, who in turn discuss the same with the client personnel if needed. Once the offshore vendor team has significant comprehension of the requirements, architecture, 977
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Figure 7. Case study 1: Offshore outsourcing - Project life-cycle
database design, and high level application design, it starts to work on the low-level (detailed) design documents that delve deep into the design and sometimes even go to the extent of specifying the programming logic to be adopted.
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Meanwhile, the client’s IS team works on the interfaces that will be used by the application to be developed by the vendor, and this involves the design, development, testing and documentation of the interfaces. These interfaces will be used
Real-Life Case Studies of Offshore Outsourced IS Projects
by the CRM software to read from and write into various other databases used by the client’s multiple systems, and also to send commands to various network devices. Around this time, client coordinators may go to the offshore vendor site, to discuss the design, assess and guide the offshore vendor personnel.
Programming, Integration, Testing and Delivery After the low-level design has been completed, the vendor starts the process of programming, integrating and testing. The vendor delivers the system to client in an iterative fashion that comprises of intermediate phased deliveries or iterations; that is the system is segmented into “builds” and each build is delivered in a phased iterative manner (see
Figure 8). This way the client can continually test and give feedback on the system being developed, and also keep track of the project progress. This also allows the client’s IS team that was developing interfaces for the CRM system to test the effectiveness of their interfaces. Delivering important system functionalities in early iterations is an effective risk management strategy by the vendor. Hence, instead of having just one final delivery of completed code, the delivery of tested code is made iteratively to the client. Each such iterative delivery of code activates some significant aspect of the software being developed, which can now be tested by the client. Once the vendor finishes coding and testing the entire application, it is delivered to the client for user acceptance testing (UAT), where the prospective users of the system test it and report
Figure 8. Case study-1: Offshore outsourcing - iterative delivery
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defects and desired changes. Once the vendor addresses all the issues reported during UAT, the application is ready to go live into production. After the deployment of the system, vendor teams at both onshore and offshore, work on the real time problems being reported by the users.
successful vs. very successful: A comparative Analysis of Issues As we know, the CRM-NA project was more successful CRM-Europe in terms of the extent to which it pleased the customers with its smooth execution, value additions to the software and the overall feeling of bonhomie. The reasons for these are intricate, and are not apparent on the surface of these two projects.
Maturity of Relationship Over Time The CRM-Europe project started off with the client’s considerable mistrust & apprehensions about offshore-outsourcing, primarily borne out of their inexperience in handling such scenarios. ‘New Client’ was motivated to go for offshore outsourcing primarily because of its sudden need for high quality skills to develop the system at a low cost, and was inspired by the good experience of ‘Old-Client’; however, the mistrust & apprehensions existed. After the CRM-Europe project achieved its budgeted cost and time goals, the client became more comfortable with the process of offshore-outsourcing, which in turn had a positive affect on the execution of CRM-NA.
Defining the Project Scope and Requirements The scope of CRM-Europe project was not well defined. The requirements could be interpreted many ways. Often, a seemly innocuous requirement had more hidden requirements within. The client’s interpretation of the desired need was often a flashy complicated one, while that of the vendor
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was a simple easy-to-code one. The client found it difficult to state what it exactly wanted, and the vendor in its efforts keep the client happy often accepted such vague requests without protest. However, when matters reached a stage where the vendor could no longer accommodate such requests without incurring substantial extra costs, resultant negotiations got messy. The client would negotiate based on its flashy (costly) interpretation of a requirement, while the vendor would negotiate based on its easy-to-code interpretation of a requirement. Another problem was that the seed data provided by the client to test the system being developed were of a different format in comparison to the actual confidential data used by the client. This led to the system functioning erratically in a real time testing environment. Comparatively, the scope of CRM-NA project was well defined with fewer hidden requirements. For the CRM-NA project, the vendor insisted for a more formal and documented protocol to negotiate change requests and possible multiple interpretations of requirements, and also requested the client for prototypes, extensive data models, and quality seed data at the earliest possible stage of the life-cycle.
Verification of Requirements and Design In CRM-Europe, the vendor would blindly assume the client’s requirements and design to be perfect and carry on with the development only to discover flaws at a much later stage. But in CRM-NA the vendor would spend considerable time early on (before coding) to find possible flaws the client’s requirements and design. This approach of searching for flaws in the client’s design at an early stage, led to a relatively risk free execution of the project.
lessons learned and trends Both the offshore-outsourced projects were successful, and the degree of delight associated with
Real-Life Case Studies of Offshore Outsourced IS Projects
the success increased with greater experience, maturity and better management from both the client and the vendor. In “fixed-term, fixed-price” projects, where the deadlines, the price and the scope for the entire project is fixed, it is important to use maximum rigor in defining and verifying the requirements and design. All procedures and processes need to well planned and executed with the cooperation of all stakeholders. The “fixed-term, fixed-price” offshore-outsourcing of projects is a preferred option when the client is very sure of its costs estimates, schedule estimates, and project requirements and can effectively document the same in its contract and project requirement/design documents. As the software project cost and schedule estimation methodologies and tools improve, and as software architects gain more experience with confidently defining and documenting project requirements, the usage of “fixed-term, fixed-price” contracts for offshore outsourcing may increase.
cAse study-2: oFFshore outsourcIng oF custoM soFtwAre develoPMent to MultIPle vendors under tIMe And MAterIAls contrAct This real-life case study gives a descriptive account of the business scenario, personnel distribution and project life-cycle of a custom software development project that involved simultaneous insourcing, onshore-outsourcing and offshoreoutsourcing. (Though this is a real life case, the actual names of the firms and projects have been replaced with fictitious names.)
business scenario, relationship Issues And strategies The Stakeholders ‘Client’ is one of Europe’s leading providers of telecommunications services. Its principal ac-
tivities include local, national and international telecommunications services, broadband and Internet products and services. Vendor-1 is a very large offshore (India) based CMM level-5 service provider. As stated earlier, it started off with an onshore role & now also has a very significant offshore role. Vendor-2 is an onshore (Europe) based service provider and also a product seller. In fact, all the vendors use Vendor-2’s network management software tools/ products. Vendor-3 is a small onshore (Europe) based service provider. Vendor-4 is a joint venture between the ‘Client’ (in Europe) and an offshore partner (in India); however, their role in this project is purely onshore. All teams work both cooperatively and competitively for the project as one large unit.
Relationship Building Between ‘Client’ and ‘Vendor-1’, and the IS Projects The business scenario is illustrated in Figure 9. ‘Client’ started its engagement with Vendor-1 with two projects: NMS (Network Management software System) and VVT (Verification, Validation and Testing). NMS was an ongoing evolutionary project where Vendor-1 was the new entrant, while the three other vendors (Vendor-2, Vendor-3 and Vendor-4) were already working for the same project. The NMS project had started and the first version had gone live into production around three years before Vendor-1 entered the project at onshore. ‘VVT’ was a new project with Vendor-1 as the sole vendor, and it involved the verification, validation and testing of the various software technologies & applications being developed by the client. The first project to be offshored by the client to Vendor-1 was VVT, and expectations were high as future business deals were at stake. Despite tough times, the VVT project led the way in enhancing the “offshoring” image of Vendor-1, and gave the client the confidence to try Vendor-1’s offshore capabilities even further. For NMS, Vendor-1 initially started the engagement by sending six
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Figure 9. Case study-2: Offshore outsourcing - Business scenario
of its software professionals to the onshore clientsite, and soon the client’s positive experience in offshoring VVT project gave it the confidence to try offshoring of NMS project, too. Vendor-1 was the only team in the NMS project that grew, and also increased its work portfolio to include various levels of development, design and testing. In a matter of nine months the total number of offshore Vendor-1 personnel for NMS increased from 0 to 25, while the total number of onshore vendor personnel (inclusive of all vendors) remained stagnant. For the NMS project, the total number of offshore personnel was now greater than the total number onshore personnel. Encouraged by the offshoring experience with Vendor-1, the client then decided to try offshoreoutsourcing of some of its product development work too. PRM, a Product for Resource Management that was conceptualized by the client was offshore-outsourced. Vendor-1 will carry out development work at offshore over the next
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three years to productize PRM for the client. The client will give the necessary domain knowledge, requirements and design to the vendor. The client will then sell it to the market, by capitalizing on its own esteemed standing in the telecom industry. Vendor-1 has created an enhanced visual experience of the PRM prototype and also worked on redesigning the PRM database. In this case study we will concentrate on NMS project, which is an interesting case of simultaneous insourcing, onshore-outsourcing and offshore-outsourcing.
Contractual Specifications All the contracts signed by the client for the NMS project were of the “time and materials” (Currie, 1996, pp. 232-234) kind, where the project is seen as a continuum and is open to change, with the payments being made at pre-specified time intervals on the basis of the amount of vendor
Real-Life Case Studies of Offshore Outsourced IS Projects
resources being used by the client. For example, the vendor bills the client for each of its software professionals on the project on an hourly basis, irrespective of the scope of the project work. From the client’s point of view, an advantage of a “time and materials” contract is that the task details can be worked out as the project progresses, and unforeseen changes are an expected part of the process. However, since the final costs are proportional to the utilization of vendor resources by the client, there is very little opportunity for the client to negotiate a bargain or a package deal.
Personnel distribution Issues and strategies Reporting Structure at Onshore and Offshore As shown in Figure 10, the vendor teams at onshore report directly to the client manager.
Also, Vendor-1’s offshore project manager leads the team at offshore and directly reports to the onshore client manager(s).
Cooperation and Communication Issues within Vendors There is a significant challenge here for Vendor-1, who is a new entrant in the NMS project. The Vendor-1 personnel have to work with other established competitors like Vendor-2, Vendor-3 and Vendor-4; all fighting for the same piece of cake, and all working together in a team! Vendor-2 & Vendor-4 personnel are onshore based vendors and consider the offshoring trend to be a serious threat to their own growth. As discussed earlier, Vendor1’s offshore team was the only team in the NMS project that grew, while all the other vendor team sizes remained stagnant. There is also a concern that at some point the vendor team sizes at onshore may actually be reduced, and
Figure 10. Case study-2: Offshore outsourcing - Personnel distribution
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both existing & new work may be sent offshore to take advantage of the availability of low-costhigh-quality skills. Hence consciously or unconsciously other vendors are often non-cooperative towards Vendor-1.
Issues with the Client’s Multiple-Vendor Sourcing Strategy — Introducing Competitiveness In fact, the client induces such competitive spirit among the vendors as a shrewd tactic. By inducing such competition among vendors, the client manages to derive maximum effort and dedication out of the vendors, who all want to prove themselves as the best to get more business from the client. Also, this strategy of having multiple vendors working together for a project prevents the client from being overly dependent on any one vendor. However such competition can also have negative consequences. The competitive atmosphere among vendors motivates them to sometimes be selfish and non-cooperative. The vendor personnel may not always act with the best interests of the project in mind. There is often a desire to show the other vendors in bad light, while trying to gain maximum self credit for at every conceivable opportunity. This causes serious teamwork issues within the NMS project unit, and client management often steps in to douse the fire, and tries to make the competition among the vendors more positive than negative, for example, the client appraises a vendor’s performance on its cooperative attitude and teamwork skills. Vendor-1 on the other hand, is trying to gain maximum cooperation from other vendors by simply being highly polite, highly cooperative and professional, and has been quite successful at it.
Project life-cycle Issues and strategies Issues with the NMS Project Large systems like NMS have a long lifetime. The telecom industry is changing fast with newer technologies being adopted at a rapid pace. The NMS system must evolve continually to meet the changing requirements. The NMS system has been changing dramatically during its lifetime in response to the rapidly changing telecom environment, and hence the latest evolution of the NMS system has little resemblance to its first version.
The Evolutionary Approach to Custom Software Development As shown in Figure 11, the market and user needs are first evaluated, and the possible “increments” that need to be added to the software are estimated. The requirements for the increments/ enhancements are analyzed, engineered, validated and then structured into small modules or work packages. Each such module or work package can be considered as small a mini-project that needs to be designed, have its design verified, developed, tested and finally integrated into the NMS. The NMS with the latest module integrated is now verified, validated, and tested, and defects (if any) are reported. Each reported defect is tracked, and the latest NMS system is installed only after the defects have been fixed. The users can operate the NMS system with the new features (i.e., the modules), and report any problem back to the testing team, or request further enhancements.
lessons learned and trends Companies sometimes form relationships with multiple vendors as a risk mitigation measure
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Figure 11. Case study-2: Offshore outsourcing - Project life-cycle
(Chaudhury et al., 1995; Cross, 1995). The client has taken up the challenge outsourcing to multiple vendors, inducing competition among the vendors, encouraging cooperation amongst competing vendors, and not being too dependent on any particular vendor. They have been successful at it. Also, as a new entrant, Vendor-1 convinced the client of the possible low-cost-high-quality advantages of offshoring by its good performances and hence managed to turn the tide in its favor. The “time and materials” contracts combined with the incremental-evolutionary model of offshore-outsourcing custom software develop-
ment projects is a preferred option when the client is not very sure of its costs estimates, schedule estimates, or project requirements. The client has the liberty to change the requirements, cost estimates, schedule estimates as and when the market or the users demand a change, and implement them in the evolving software system as modularized increments. In a volatile business and technology environment where market, customer and end-user needs are unstable and can changeable, the time and materials contracts combined with incremental-evolutionary model of software development are a feasible offshoreoutsourcing option.
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coMPArAtIve AnAlysIs oF Issues In cAse studIes wIth socIo-econoMIc PArAdIgMs In lIterAture offshore-outsourcing is a Feasible Alternative As explained in the earlier section “discovering new lands — the move to offshore,” offshore outsourcing does have many advantages despite the many hurdles it faces. The real life case studies (the CRM-Europe/NA and NMS projects) highlighted that despite various difficulties, offshore outsourcing does work. In both the cases, various problems had to be overcome by the vendor:
• • •
Communication, coordination and cultural issues were sorted out, and these improved over time Degree of mutual trust increased over time, especially since the vendor was able to prove its worth to the client Though the vendor was initially a bit weak in client specific business knowledge, with the support of the client the vendor was able to quickly to grasp and gather new knowledge
The client also took various initiatives and derived various advantages from offshore-outsourcing in each of the cases:
•
•
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By breaking up the bigger tasks into modular chunks, the client was able to distribute and allocate work better. The client also had the flexibility to scale up or scale down the project personnel size depending on the demands of the project, since the vendor could provide manpower on demand. Coordination and cooperation were aided by better use of modern communication technologies. It was also accepted that even the best communication technologies cannot beat the effectiveness of direct face-to-face communication, and hence executives from either the client of vendor firms traveled to their respective counterpart’s sites when needed.
•
The client got access to a highly skilled workforce at low cost.
Let us now compare the issues and observations from each of the case studies with those in the literature. Combinations of both economic and social/organizational theories have been used in IS outsourcing literature (Dibbern et al., 2004, pp. 99-102). Gallivan and Oh (1999) had analyzed the economic, strategic, and organizational issues involved in IT outsourcing for four classes of outsourcing relationships: (1) simple outsourcing relationships (one client, one vendor), (2) multivendor relationships (one client, many vendors), (3) co-sourcing relationships (many-clients, onevendor), and (4) complex relationships (many clients, many vendors). The first case study in this chapter that studied the CRM-NA and CRMEurope projects dealt with simple outsourcing relationships (one client, one vendor), while the second case study that studied the NMS project involved the a multi-vendor relationship (one client, many vendors). As highlighted by these case studies, each of the offshore outsourcing arrangements were very contextual in nature and the nature of implementation varied to a great degree depending on the context. Hence, both client and vendor managers should delve deep into their own individual contexts and carry out extensive planning and preparation before taking up offshore-outsourcing initiatives (Gallivan & Oh, 1999). Hancox and Hackney (1999) employed four conceptual frameworks of: (1) core competencies, (2) agency theory, (3) transaction cost economics and (4) partnerships, to assess IT outsourcing arrangements in the public and private sectors, and suggested that high transaction costs were a dampener on outsourcing initiatives, and that private firms were more open to outsourcing than public organizations. The case studies in this chapter of course focused on private firms, who were more open to outsourcing risks and were effective in
Real-Life Case Studies of Offshore Outsourced IS Projects
risk management. In the CRM-Europe/NA and NMS projects presented in this chapter, the private enterprises prevented potential conflicts by negotiating resolutions, were committed to derive the beneficial fruits of offshore-outsourcing, and were mutually accountable and responsible. However, the transaction costs and agency costs are dampeners on most outsourcing relationships (Hancox & Hackney, 1999), and this held true for the CRM-Europe/NA and NMS projects too, though the benefits seemed to have overshadowed the numerous difficulties and issues faced. It would be beneficial to analyze the IS outsourcing literature which have adopted the economic theories such as the agency theory and the transaction cost theory, and the social/organizational theories like the innovation diffusion theory, exchange theory, and the power-politics theory (Dibbern et al., 2004, pp. 99-102), and compare and contrast them with the issues highlighted in the case-studies presented in this chapter.
Agency theory The Agency Theory and the Case Studies When viewed from the perspective of the agency theory, and as highlighted in the case studies, the outsourcing relationship may be considered to be a complex process in which the divergent interests of the clients and vendors are brought into equilibrium within the framework of contractual relations (Jensen & Meckling, 1976, p. 311). CRM-Europe/ NA projects involved “fixed-term, fixed-price” (Currie, 1996, pp. 232-234) contracts, while the NMS project involved the “time and materials” (Currie, 1996, pp. 232-234) contract. These contracts suited the individual contextual scenarios of each of the projects. In the NMS project the task details had to be worked out as the project progressed, and changes and evolution in the system being developed was a necessity. Whereas, in the CRM-Europe/NA projects, major
changes in the scope (that is changes in design/ requirements) were not expected, the deadlines were set, and the price for the entire project was fixed. The client-vendor relationships in the CRMEurope/NA and NMS projects behave like agency relationships, where the client can be assumed to be the principal that engages the vendor (assumed to be the agent) to perform some service, and where the agency costs (which is a summation of the monitoring costs, bonding costs and residual loss costs) is incurred by the client (Jensen & Meckling, 1976, pp. 308-310).
Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The agency theory has been successfully adopted to understand IS outsourcing (Dibbern et al., 2004, pp. 99-102). In a conceptual paper, Sharma (1997) presented a framework outlining four types of restraints on potential opportunistic behavior of professional agents: (1) self-control, (2) community control, (3) bureaucratic control, and (4) client control, and suggested that the vendors at times are the more powerful ones in the relationship with clients. In the NMS project, the client certainly had upper hand by cleverly manipulating the competitiveness within multiple vendors. In the CRM-Europe/NA too, the client had an upper hand on account of it being the buyer of the vendor’s services and its promises of future business contracts. The vendors in both cases were smart and experienced enough to deal with clients; however, they were never the more powerful ones in the relationship. Hence, though Sharma (1997) believes that vendors at times are the more powerful ones in the relationship, in the case studies in this chapter the clients remain the most powerful. Sridhar and Balachandran (1997) in a mathematical paper, distinguished an internal employee from an outside vendor on four different
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informational dimensions: (1) an outside vendor is assumed to be informed of the task environment less often than an internal employee, (2) the principal observes the information set of the internal employee more frequently than that of the outside vendor, (3) the principal is able to control the flow of certain production related information to an internal employee better than to an outside vendor, and (4) the principal may share the details of the outside vendor’s contract with the internal employee but not vice-versa. It was further noted that the agency costs and intensity of information required for project execution had a negative impact on the client’s willingness to outsource. All the four informational dimensions and the observations of Sridhar and Balachandran (1997) hold true for the CRM-Europe/NA and NMS projects. Wang, Barron and Seidmann (1997) analyzed the nature of custom software development agreements that can be reached between the user and developers, compared the valued of using internal and external developers, and suggested the inability to measure or predict costs can hamper outsourcing initiatives. In the CRM-Europe/NA projects the costs could be predicted and measured, and hence the “fixed-term, fixed-price” contract was successfully adopted. However, as opposed to the analysis of Wang et al. (1997), the inability to accurately measure or predict costs did not hamper the outsourcing initiatives for the NMS project. The client simply adopted the “time and materials” contract for the NMS project which allowed the project task and cost details to be worked out as the project progressed. Chalos and Sung (1998) presented an agency model in which outsourcing dominates insourcing, where it was argued that a firm outsources to improve managerial incentives resulting from anticipated reduction in overall costs, and to reduce the number of tasks that an overloaded manager executes; however, this approach often ignored the possibility of increase in communication and coordination overheads after outsourcing. The
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analysis of Chalos and Sung (1998) hold true for the CRM-Europe/NA and NMS projects, where though the big responsibility of executing the large projects were transferred from the client managers to the vendor managers, the client had to still spend time and effort coordinating and communicating with the respective vendor.
transaction cost theory The Transaction Cost Theory and the Case Studies Adopting a transaction cost theory to an outsourcing relationship, involves the realization that clients and vendors “interface” with each other. It is across this assumed interface that services are delivered by the vendor to the client in the projects CRM-Europe/NA and NMS. In other words, “transactions,” exchanges or transfers between the clients and vendors occur across this interface. As highlighted by the case studies, the interfacing between the clients and vendors needs to be well planned and executed in order to harmonious. Otherwise, the frictions (misunderstandings, disputes, disruptions, failures and delays) may result in dampening the outsourcing relationship, which would lead to a “transaction cost” needed to accommodate, monitor and supervise the transactions (Williamson, 1981).
Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The transaction cost theory has been applied to IS outsourcing by various researchers (Dibbern et al., 2004, pp. 99-102). Jurison (1995) developed a model derived from the two streams of transaction cost theory and modern financial theory, and aimed to assist in the insourcing versus outsourcing decisions (for a particular IS function and in the comparison of competing vendor proposals).
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They suggested that outsourcing is a “risk” that may lead to a client’s loss of control over its resources and also difficulties in monitoring the vendor. Loh and Venkatraman (1995) performed an empirical study to show that technical/business benefits from outsourcing favor outsourcing initiatives, while risks due to loss of control over outsourced work, opportunism, and inability to control vendors negatively affect outsourcing initiatives. Aubert, Rivard and Patry (1996) used the transaction cost approach to investigate the influence of asset specificity and measurement problems on the choice of outsourced activities, and on the terms/management of the contract. Heisekanen, Newman and Similä (1996) used a process model approach to observe contract negotiations and to explain the forms and evolution of relations between the involved parties; they suggested that the vendor’s capability to understand the client’s business needs would help in making the relationship more productive. Ang and Straub (1998) simultaneously examined the constructs of production cost, transaction cost, and financial slack to understand what influences the outsourcing decision and concluded a client’s large asset size and high transaction costs in an outsourcing relationship can hamper outsourcing initiatives. Duncan (1998) adopted a resourcebased view to examine outsourcing contracts and risk, and believed that a loss of control and access over resources, and the threat of knowledge loss hampered possibilities of outsourcing. Loh (1994) constructed and tested an integrated governance model of IT outsourcing in the cost domains of bargaining costs, influence costs, management costs, and decision information costs and concluded that while possible financial benefits and need for access to skills encouraged outsourcing, there were risks of poor vendor behavior/control and difficulties in resolving contracts. Cheon, Grover, and Teng (1995) synthesized four theoretical models (resource based theory, resource dependence theory, transaction cost theory and agency theory) to develop a contingency model,
and indicated that agency and transaction costs hampered outsourcing while a client’s need for access to greater IS skills and resources encouraged outsourcing. Poppo and Zenger (1998) suggested the integration of transaction cost, knowledge-based, and measurement reasoning for make-or-buy decisions in information services and believed that the need for IS skills encouraged outsourcing, though highly client specific assets/knowledge/resources, uncertainty over technologies, and problems in measurability discouraged outsourcing. The observations from the CRM-Europe/NA and NMS project case studies presented in this chapter seem to be agreeable to the above theories about what promotes outsourcing and what doesn’t. Nelson, Richmond and Seidmann (1996) used field data to support the contention that the two dimensions of software acquisition, that is, custom versus package and insource versus outsource are interrelated at several levels. The CRM-Europe/NA and NMS projects highlight that when project tasks can be modularized, common custom-software development can certainly be outsourced to offshore-based vendors. Nam, Rajagopalan, Rao, and Chaudhury (1996) explored the impact of organizational, environmental and economic factors on two dimensions of outsourcing decisions: (1) initial outsourcing decision, and (2) intention to continue the relationships, and concluded that the vendor’s need for client specific knowledge and resources hampered outsourcing, while the heterogeneity of IS functions and the strategic importance encouraged outsourcing. This is true for the CRM-Europe/NA and NMS projects, where the client modularized the bigger tasks into smaller ones, thereby increasing heterogeneity for more effective outsourcing. Further, the lure of future business contracts was a major motivator for the vendor during both the projects. Also, vendor’s partial lack of client specific knowledge might have hindered the initial CRM-Europe project, however, with increased experience, maturity
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and knowledge the CRM-NA project was more successful.
Innovation diffusion theory The Innovation Diffusion Theory and the Case Studies Growth in offshore outsourcing of IS work is a recent phenomena (Carmel & Agarwal, 2002), and this phenomena may be considered to be an organizational or administrative “innovation” process, that is now being adopted and practiced by various clients and vendors. In both the CRMEurope/NA and NMS projects, the adoption of the offshore-outsourcing innovation involved the conscious decision by the clients and the vendors to accept and use new processes, and diffuse these process their relationship and respective organizations (Daft, 1978, pp. 195-197).
Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The usage of the innovation diffusion theory in IS outsourcing literature led to an interesting clash between the research results of Loh and Venkatraman (1992b) and Hu et al. (1997). Loh and Venkatraman (1992b) treated “IT outsourcing as an administrative innovation,” and explored the sources of influence in the adoption of this innovation. Using diffusion modeling Loh and Venkatraman (1992b) showed that the adoption of IT outsourcing is motivated more by internal influence (such as communication with peers and managers of other organizations) than external influence (such as the media). Hu et al. (1997) in a repeat of the Loh and Venkatraman (1992b) study tested four diffusion models: internal influence, external influence, and two mixed influence models, and found no support for the conclusions of the Loh and Venkatraman (1992b) on the primacy of internal influence. The study
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by Hu et al. (1997) instead suggested that the mixed combination of both internal and external influence helped in the adoption and diffusion of outsourcing, and rejected the primacy of any one (internal or external) source of influence. After assessing these two research studies, one might be tempted to consider the answer to the problem of “primacy of sources of influence in the adoption of the outsourcing innovation” to be inconclusive. The same holds true for the case studies presented in this chapter.
social exchange theory The Social Exchange Theory and the Case Studies The CRM-Europe/NA and NMS projects involved clients and vendors whose actions were motivated by the returns they expected, and their exchanges were mutually reciprocated and balanced, though power-play was evident (with the client exerting its monetary influence and decision making rights over the vendor). The social exchange theory can hence be aptly used to study offshore-outsourcing relationships.
Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature Klepper (1995) and Kern (1997) adopted the social exchange theory for understanding IS outsourcing (Dibbern et al., 2004, pp. 99-102). Klepper (1995) selected the Dwyer, Schurr and Oh (1987) model of partnership development, and applied it on two case studies of IS partnership development to conclude that vendor characteristics and relationship attributes (such as communications, procedures, expectations, and balance of power) influenced outsourcing. Kern (1997) developed a model that is based on exchange theory and contract law, and that captures both the outsourcing relationship’s contractual, social, and economic characteristics,
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and additional elements that have relevance in practice. It was concluded that various exchange characteristics (services/ products, information, and financial) and relationship characteristics (vendor behavior and communication) influence the outsourcing process. The observations from the CRM-Europe/NA and NMS project case studies are congenial to the above propositions by Klepper (1995) and Kern (1997).
Power Politics theory The Power Politics Theory and the Case Studies The offshore-outsourcing relationships described in the CRM-Europe/NA and NMS projects had client organizations which wielded considerable power, and they possessed a controlling influence over the project and the vendor and wanted to get things done as per their wishes. At the same time, the vendors in both cases were large CMM level-5 software services firms, the managers of which had considerable experience in dealing with (both cooperative and uncooperative) clients from all around the world. This differential power in the outsourcing relationship resulted in politics, where both the clients and the vendors tried to maneuver and gain control over their respective projects (Markus, 1983).
Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The power-politics theory was adopted by Willcocks and Kern (1998) to explore IS outsourcing in the context of a case study, three critical dimensions: what is outsourced, the contract, and the relationship dimension. The observations from the CRM-Europe/NA and NMS project case studies are conformable to the conclusions of the Willcocks and Kern (1998) study, which states that various relationship characteristics (services/
products, information, staff, asset and financial exchanges; vendor behavior, communication, trust, cooperation, flexibility and social/personal relations) influence the outsourcing process. Lee and Kim (1999) used both the social exchange theory and the power politics theory, proposed a conceptual theoretical framework for outsourcing partnership based on a social rather than an economic perspective, examined the impact of partnership quality on outsourcing success, and established the importance of relationship characteristics (such as commitment, trust, business understanding, and risk sharing) in outsourcing. The conclusions of the Lee and Kim (1999) study about importance of relationship characteristics are again concordant with the observations from the case studies in this chapter.
Future trends Offshore outsourcing is taking the benefits and risks of outsourcing to its extremes. With offshore outsourcing one can reach out the best skills at the lowest costs. At the same time the intensity of the outsourcing risks like challenges in coordination, communication and control are being tested to the maximum due to the distance and cultural divergences. Many vendor companies in India like TCS (http://www.tcs.com), Infosys (http://www.infosys.com), Wipro (http://www.wipro.com), and Satyam (http://www.satyam.com) seem to have made an art out of providing offshore-outsourcing services, and are hence giving a tough fight to the traditional bigwigs like EDS (http://www. eds.com) and Accenture (http://www.accenture. com). In recognition of the offshoring trend, EDS and Accenture have also set up base in countries like India to take advantage of its low-cost and highly skilled professionals. Successes are being realized not just in offshore-outsourcing, but also offshore-insourcing.
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NewScientist, a premier science and technology magazine did a cover story on India titled “India: The next knowledge superpower”, and one article named “India special: The silicon subcontinent” (Cohen, D., 2005) states the following: Some of the biggest names in IT are heading towards Bangalore once more, and this time round its not cheap labour they are looking for. They are hunting down the brightest, most inventive minds in India to populate a swathe of cutting-edge research facilities. The work being done in these labs rivals any in the U.S. and Europe. The article goes on to list companies like Hewlett-Packard, Texas Instruments, General Electric, Google, Microsoft, and IBM that have set up research labs in India to take advantage of its skilled professionals. They come for the cost, and stay for the quality.
conclusIons “They come for the cost, and stay for the quality” seems to be an apt summary for the offshoring and outsourcing trend that is not only growing but also maturing. Offshoring and outsourcing is truly about delivering software that’s value for money. The case studies provided insights into the practical and real life strategies adopted by managers to solve issues and problems in offshore-outsourcing. This chapter summarized the usage of socio-economic theories to understand outsourcing of IS, and focused on providing and analyzing the issues in the two very different and descriptive real-life case studies that have the common thread of offshore-outsourcing of custom software development . Most of the paradigms in literature resulting from the adoption of socio-economic theories for IS outsourcing research concurred with the observations in the case studies. 992
reFerences Accenture. (n.d.). Services. Retrieved January 27, 2005, from http://www.accenture.com/xd/ xd.asp?it=enweb&xd=services\services_home. xml Ang, S., & Straub, D. W. (1998). Production and transaction economies and IS outsourcing: A study of the U.S. banking industry. MIS Quarterly, 22(4), 535-552. Apte, U. M., & Mason, R. O. (1995). Global disaggregation of information-intensive services. Management Science, 41(7), 1250-1262. Aubert, B. A., Dussault, S., Patry, M., & Rivard, S. (1999). Managing the risk of IT outsourcing. Proceedings of the 32nd Annual Hawaii International Conference on System Sciences, 7. Aubert, B. A., Patry, M., & Rivard, S. (1998). Assessing the risk of IT outsourcing. Proceedings of the 31st Annual Hawaii International Conference on System Sciences, 685-691. Aubert, B. A., Rivard, S., & Patry, M. (1996). A transaction cost approach to outsourcing behavior: Some empirical evidence. Information & Management, 30(2), 51-64. Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 1(2), 65-78. Chakrabarty, S. (in press). The journey to new lands: Utilizing the Global IT workforce through offshore-insourcing. In P. Yoong & S. Huff (Eds.), Managing IT professionals in the Internet age. Hershey, PA: Idea Group Publishing. Chalos, P., & Sung, J. (1998). Outsourcing decisions and managerial incentives. Decision Sciences, 29(4), 901-919. Chaudhury, A., Nam, K., & Rao, H. R. (1995). Management of information systems outsourcing:
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Cheon, M. J., Grover, V., & Teng, J. T. C. (1995). Theoretical perspectives on the outsourcing of information systems. Journal of Information Technology, 10(4), 209-210.
Gallivan, M. J., & Oh, W. (1999). Analyzing IT outsourcing relationships as alliances among multiple clients and vendors. Proceedings of the 32nd Annual International Conference on System Sciences, Hawaii.
Cohen, D. (2005, February 19). India special: The silicon subcontinent. NewScientist. Retrieved February 20, 2005, from http://www.newscientist. com/special/india/ Currie, W. L. (1996). Outsourcing in the private and public sectors: An unpredictable IT strategy. European Journal of Information Systems, 4(4), 226-236. Currie, W. L. (1998). Using multiple suppliers to mitigate the risk of IT outsourcing at ICI and Wessex Water. Journal of Information Technology, 13(3), 169-180. Currie, W. L., & Willcocks, L. P. (1998). Analyzing four types of IT sourcing decisions in the context of scale, client/supplier interdependency and risk mitigation. Information Systems Journal, 8(2), 119-143. Daft, R. L. (1978). A dual-core model of organizational innovation. Academy of Management Journal, 21(2), 193-210. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Duncan, N. B. (1998). Beyond opportunism: A resource-based view of outsourcing risk. Proceedings of the 31st Annual Hawaii International Conference on System Sciences, 675-684. Earl, M. J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26-32. EDS. (n.d.). Industries index. Retrieved January 27, 2005, from http://www.eds.com/industries/ index/
Grover, V., Cheon, M. J., & Teng, J. T. C. (1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89-116. Halarnkar , S. (2004, December 04). Bangalore crumbling. The Indian Express. Retrieved February 10, 2005, from http://www.indianexpress. com/full_story.php?content_id=60231 Hancox, M., & Hackney, R. (1999). Information technology outsourcing: Conceptualizing practice in the public and private sector. Proceedings of the 32nd Annual Hawaii International Conference on System Sciences. Heiskanen, A., Newman, M., & Similä, J. (1996). Software contracting: A process model approach. Proceedings of the 17th International Conference on Information Systems, 51-62. Hu, Q., Saunders, C., & Gebelt, M. (1997). Research report: Diffusion of information systems outsourcing: A reevaluation of influence sources. Information Systems Research, 8(3), 288-301. Infosys. (n.d.). Industries. Retrieved January 27, 2005, from http://www.infosys.com Infosys. (n.d.). Quick facts. Retrieved February 10, 2005, from http://www.infosys.com/about/ quick_facts.asp Infosys. (n.d.). Services listing. Retrieved January 27, 2005, from http://www.infosys.com/services/ default.asp Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs
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and ownership structure. Journal of Financial Economics, 3(4), 305-360. Jurison, J. (1995). The role of risk and return in information technology outsourcing decisions. Journal of Information Technology, 10, 239247. Kern, T. (1997). The Gestalt of an information technology outsourcing relationship: An exploratory analysis. Proceedings of the 18th International Conference on Information Systems, Atlanta, Georgia. Klepper, R. (1995). The management of partnering development in I/S outsourcing. Journal of Information Technology, 10, 249-258. Lacity, M. C., & Willcocks, L. P. (1995). Interpreting information technology sourcing decisions from a transaction cost perspective: Findings and critique. Accounting, Management and Information Technologies, 5(3/4), 203-244. Lee, J.-N., & Kim, Y.-G. (1999). Effect of partnership quality on IS outsourcing success: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29-61. Loh, L. (1994). An organizational-economic blueprint for information technology outsourcing: Concepts and evidence. Proceedings of the 15th International Conference on Information Systems, Vancouver, Canada, 73-89. Loh, L., & Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the Kodak effect. Information Systems Research, 3(4), 334-358. Loh, L., & Venkatraman, N. (1995). An empirical study of information technology outsourcing: Benefits, risks, and performance implications. Proceedings of the 16th International Conference on Information Systems, Amsterdam, The Netherlands, 277-288.
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Markus, M. L. (1983). Power, politics, and MIS implementation. Communications of the ACM, 26(6), 430-444. Markus, M. L., & Robey, D. (1988). Information technology and organizational change: Causal structure in theory and research. Management Science, 34(5), 583-598. Michell, V., & Fitzgerald, G. (1997). The IT outsourcing market-place: Vendors and their selection. Journal of Information Technology, 12, 223-237. Nam, K., Rajagopalan, S., Rao, H. R., & Chaudhury, A. (1996). A two-level investigation of information systems outsourcing. Communications of the ACM, 39(7), 36-44. Nelson, P., Richmond, W., & Seidmann, A. (1996). Two dimensions of software acquisition. Communications of the ACM, 39(7), 29-35. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64(1), 12-40. Poppo, L., & Zenger, T. (1998). Testing alternative theories of the firm: Transaction cost, knowledgebased, and measurement explanations for makeor-buy decisions in information services. Strategic Management Journal, 19, 853-877. Sharma, A. (1997). Professional as agent: Knowledge asymmetry in agency exchange. Academy of Management Review, 22(3), 758-798. Sobol, M. G., & Apte, U. M. (1995). Domestic and global outsourcing practices of America’s most effective IS users. Journal of Information Technology, 10, 269-280. Sridhar, S. S., & Balachandran, B. V. (1997). Incomplete information, task assignment, and managerial control systems. Management Science, 43(6), 764-778.
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Wang, E. T. G., Barron, T., & Seidmann, A. (1997). Contracting structures for custom software development: The impacts of informational rents and uncertainty on internal development and outsourcing. Management Science, 43(12), 1726-1744. Willcocks, L., & Lacity, M. (1998). Strategic sourcing of information systems. Chichester: Wiley. Willcocks, L. P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland revenue. European Journal of Information Systems, 7(1), 29-45.
Williamson, O. E. (1981). The economics of organization: The transaction cost approach. American Journal of Sociology, 87(3), 548-577. Wipro. (n.d.). IT services. Retrieved January 27, 2005, from http://wipro.com/itservices/services. htm.
note The author may be contacted at schakrabarty@ tamu.edu or [email protected].
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 248-281, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.2
The Use of Outsourcing as a Business Strategy: A Case Study
Ram B. Misra Montclair State University, USA
AbstrAct
IntroductIon
In this chapter, we discuss how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both the short-term tactical goals as well as the longterm strategic goals. We present a framework consisting of seven factors that should be used by companies using outsourcing as a business strategy. This framework was used to analyze the outsourcing practices used by this company. The framework includes the driving forces for offshore outsourcing, the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. We also present the challenges of making these things happen, what worked well, and the lessons learned.
Today’s global business environment has put companies ever so more under pressure to have competitive advantage over its competitors. The competitive advantage can be manifested in many ways such as reducing the cost, having a unique product, being able to meet changing marketing (customer) needs quickly, and achieving operational excellence. Operational excellence means doing more work with less resources. In this age of lean production (Just-in-time), companies are forced to become lean in keeping their internal resources, both capital as well as human resources. This has forced companies to look outside to get access (often temporary) to resources of other companies. They are looking for outsourcing arrangements, collaborations, and partnerships with other companies. Outsourcing has become a common phenomenon in the IT world. With the power of high-speed telecommunications, it is now possible to access skills for almost everything, from answering the telephone to
developing computer systems, at a fraction of the costs in the USA It should be mentioned that IT outsourcing has been practiced in the USA since the lateeighties. Some of the notable examples are Kodak’s outsourcing its IT functions to IBM and GM outsourcing its IT functions to EDS. This wave of outsourcing was driven more by the strategic goals (outsourcing the functions that were not part of core competency of the client company) and less by the operational goals such as cost savings. The current round (mostly over the last 5 years) of outsourcing has been both strategic and operational (tactical). Such is the case with Telcordia Technologies, a leading supplier of telecommunication network management systems in the USA. It has undergone through an upheaval in the last 4 to 5 years. It is into its fourth CEO and third vice president of software systems division. Simply put, it is fighting for survival. This chapter analyzes how Telcordia Technologies has used outsourcing as a business strategy and how its outsourcing strategy has evolved during this period. In doing so, we not only focus on strategic issues, but also operational issues that are essential to achieving success in outsourcing.
bAcKground InForMAtIon: telcordIA technologIes Telcordia Technologies is a leading global provider of telecommunications software and services for IP, wireline, wireless, and cable networks. The company delivers flexible, standards-based solutions that optimize complex network and business support systems, enabling customers to manage, transform, and grow their businesses. Telcordia is headquartered in Piscataway, N.J., with offices throughout the United States, Canada, Europe, Asia, Central and Latin America. On March 15, 2005, Providence Equity Partners and Warburg Pincus announced completion of their acquisition of Telcordia Technologies from Science Applications International Corporation.
Formed out of Bell Labs, AT&T, and Western Electric as the central service organization (CSO) at the time of the Bell System Divestiture in 1984 to provide research and development support to the seven Regional Bell Operating Companies (“Bell Bells”), it was named the Bell Communications Research (Bellcore) in 1985. Bellcore, consisting of 3,000 employees, was owned by the RBOCs. In 1995, Bellcore’s revenue was $1B out of which $650M was from software sales and $350M was from professional services. Between 1984 and 1995, Bellcore established itself and was renowned for research and development that led to: ADSL, ATM, Frame Relay, SONET, AIN, ISDN, a generic open switch interface (a predecessor of the international V5 interface), and so forth. After the Telephone Reform Act of 1996, when the Baby Bells started competing with each other and the joint ownership of Bellcore was considered not viable, they sold it to SAIC in November 1996. From 1996 to 2000, Telcordia saw a tremendous growth; its revenue grew to close to $2B with over 8,500 employees. Since 2001, with the slowdown in the telecom industry due to overcapacity and competitive pressures from cable and voice-over-IP, Telcordia has been under tremendous pressure and has been fighting for survival. Telcordia’s Web site shows its annual revenues (in 2006) of $800 million USD with 2,900 employees worldwide. Telcordia Technologies has also sought to increase its presence in India. The original model of outsourcing development work to Wipro, an Indian outsourcing company, has evolved to opening its own branch (Telcordia Technologies India) in India. At this time, Telcordia is on record to be following the relational model (Dyer & Singh, 1998) for outsourcing. Its partners are Accenture, Wipro, and Nokia. Telcordia has partnered with Wipro, an Indian IT company, since 2003 for its software development offshore contracts. The partnership with Nokia and Telcordia is designed to help mobile operators support 2G, 2.5G, and 3G mobile services via Telcordia software systems.
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PrevIous relAted reseArch A search in the scholarly journals (ABI/INFORM database) on ‘Outsourcing as a Business Strategy” yielded 29 PhD thesis references, but no publications in scholarly journals. A secondary search on business strategy and competitive advantages yielded tons of scholarly papers. However, we are going to focus on only a few scholarly works that are directly relevant to the current discussion. Davidow and Malone (1992) reported a twodimensional matrix comparing a company’s internal capabilities to perform various activities (in relation to its competitors) with their potential competitive value. This matrix was the result of a joint work by a team of academics, corporate executives, and consultants in the context of studying the functioning of a virtual corporation. The team was chartered to recommend steps to be taken by a corporation when deciding whether to develop internally or use outside resources. Insinga and Werle (2000) have refined this methodology and attempted to link it to management theories, thus, making it theoretically sounder. They argue that their methodology is grounded in two management theories, resource driven and relational driven. The resource driven view (Barney, 1991) maintains that a company’s survival depends on achieving competitive advantage by having resources that cannot be imitated. The relational view (Dyer & Singh, 1998) argues that a company can achieve competitive advantage by getting access to outside resources by establishing good relationship with other firms that have those resources. The recognition here is of the fact that the sources of achieving competitive advantage may lie (and often they do) outside a company. In this age of global economy, the challenge for a corporation is how to balance these two views. Another outsourcing phenomenon that has been observed for some industries (McClellan, Marcolin, & Beamish, 1995) is the outsourcing of functions considered to be core for the industry. This was observed for the banking industry. This
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is contrary to the current outsourcing theories. One explanation is that banks are displaying imitation behavior, the so-called theory of imitation behavior, we must do what our competitors are doing to stay competitive. Various aspects of outsourcing and related issues have been discussed in the leading trade (IT) magazines (Information Week, MIS, etc.), financial sections of leading newspapers (Financial Times, WSJ, NYT, etc.) and IT journals (Optimize, for example). Aron (2003) discusses the importance of right light on sourcing; Goolsby (2003) makes the case for outsourcing to keep business strategy on track; Funk, Sloan, and Zaret (April) warn the users of outsourcing about its dangers; Moran (2003) discusses the promise of savings on distant horizons; Raynor and Littmann (2003) suggest not to outsource core values; and Skapinker (2003) presents a skeptical view of outsourcing, and suggests questioning of the benefits of outsourcing. The framework used in this chapter for analyzing Telcordia’s outsourcing activities is a comprehensive view of the factors discussed by these authors.
MAIn thrust oF the chAPter The first and foremost is the framework (model) that was used to collect the data and perform the analysis.
the Framework The framework used in this chapter to analyze the use of outsourcing by Telcordia Technologies consists of examining (1) the driving forces for outsourcing, tactical vs. strategic, (2) the process used to decide what to outsource, (3) selection of the operational model, interworkings of the in-house staff and outsourced-staff, (4) the process to select vendors, (5) the quality of contract negotiations, thoroughness, risk analysis, and contingency planning, (6) quality of execution
The Use of Outsourcing as a Business Strategy
and program management, team formation, transition, knowledge transfer, work and relationship management, (7) and the quality of results, service level agreements (SLAs) conformance, customer satisfaction, and so forth. 1.
2.
Driving forces: Strategic and/or tactical. There are two types of driving forces that motivate a company to outsource, strategic and operational (tactical). Strategic goals include ability to react to market conditions quickly, ability to bring a product (a Telephony Operations Support System in Telcordia Technologies’ case) in a short interval, ability to compete for new business (IP telephony for example). Operational goals include reduction of costs, increased margins, and control of products while ensuring the quality of work. Often companies who are fighting for survival must focus, in a short term, on operational goals such as lower costs, as well as be strategic. Telcordia Technologies is doing both. Process of deciding what to outsource. Fundamentally, a company ought to outsource what it cannot do well or can get it done cheaper or what will bring new, more profitable business in-house. The first has to do with the lack of core-competency; the second has to do with the inefficiency of in-house operations; and, the third is a byproduct of partnering with the outsourcing vendor. Closely related to this is to determine what work not to outsource. One should almost never outsource processes or functions that involve interactions with customers. If you give the impression that customer issues are not important enough to warrant your attention, customer will sooner or later find someone who does. This is contrary to current practices of outsourcing call centers or product support functions. If one must (for cost savings), companies ought to have an overseas captive center that is an extension
3.
of the company as opposed to an outsourced center. Also, you should not outsource your core competencies. If you do, your core competencies would start eroding and eventually make you less competitive. One ought to examine all the functions of a system development life cycle (SDLC) from two angles, the potential relative (to in-house) value created if outsourced and the relative higher risk that outsourcing brings to the table. The functions that yield most value and present least risk are the candidates for outsourcing. Typically, in the software industry, software coding and testing functions fall in this category. Selection of the operational model. This is one of the most neglected parts of planning for outsourcing, often relegated to the time when for all practical purposes, decision to outsource to a particular company has been made. Current practices can be grouped into three models, autonomous operations, partial autonomous and staff extension model. In the first model, the vendor is doing all or majority of the phases of a project, and there is very little interference from the client company (that outsourced the project). The pros of this model include reduced need for local (in-house) staff and shifting of the risk for project overruns to the vendors. The cons are loss of control and loss of knowhow. In general, this model is suitable for non-strategic final stages of the life-cycle projects. In the second model, some project phases are outsourced while others are being done in-house. This model requires a great deal of cooperation between the two staff as well as a high quality of knowledge transfer. Proper documentation and training are a must for the success of this model. The pros and cons of this model are similar to the first model on a varying scale. This model is suitable for well-defined projects whose components have well-defined interfaces.
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Figure 1. Risk, value, and degree of outsourcing Risk of Failure due to outsourcing
High
Value that Outsourcing creates
Risk or Value
Low Low
High Degree of Outsourcing
Figure 2. Staffing operational model
High Staff Extension Model: Suitable for Strategic Projects
Strategic Value
Low
Semi-autonomous Model: Suitable for well defined projects
Autonomous Model: Suitable for routine jobs
In the last model, vendor staff works as an extension of in-house staff. This poses its own challenges in terms of accountability and manageability of work. The pros of this model are that it keeps the knowledge base at home. It is easier to adapt to rapidly changing
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4.
requirements and it is less threatening to the local staff. This model is more suitable for strategic projects. Process to select outsourcing vendor(s). Simply stated, the vendor must have a track record of demonstrating core competency in
The Use of Outsourcing as a Business Strategy
5.
the functions you want to outsource. It must have a stable, skilled work force. It must be economically viable, its survival cannot depend on just one or two projects. It must understand the business and customer issues (even though it may not be directly involved with your customer). It must understand the client company’s culture. Its employees must demonstrate the sensitivity to local staff’s feelings (which can be often hostile, as some of them might be losing their jobs. The vendor must be from a region that is politically stable, has an ample supply of highly trained workers. It is a good practice to issue an RFI (Request for Information) that seeks this kind of information about a potential vendor. Caution here is not just for the lowest cost vendor, but to look at the total picture with a special eye for identifying the risk (of not getting things done, of company going into bankruptcy, of company not being able to hold on to its skilled staff, etc.) Quality of contract negotiation. Literature is abundant on this topic. In addition to a well-defined statement of work (SOW) that should include the normal governance (management) process, one must put contingency (handling of the unexpected) clauses and risk mitigation clauses. The contingency clauses ought to include an immediate upper management (from both companies) review, right to obtain outside expert assistance, and step-in rights that include potential termination of outsourced work and taking over by the in-house staff. It is a good idea to talk about termination rights in the beginning while both parties are in a spirit of cooperation. If work needs to be terminated before completion, for whatever reasons, the client company must ensure that the works gets completed without putting the company in a financial jeopardy. Under risk mitigation, the contract must address no compete
6.
7.
clause, intellectual property protection, data integrity, security, and employee turnover issues. Quality of execution and program management. All wonderful planning and contract negotiations go to waste if they are not executed properly by both parties. Key requirements for successful execution are putting a top-notch management team on both sides (program/project managers, technical managers, and technical leads), selecting the people with the right skills, transition activities that kick-off the outsourced work, insuring that knowledge transfer is taking place, and finally, making sure that things are happening, or finding out quickly when they are not (happening). A common mistake companies make that team members are selected based on their organizations rather than their skills. The overall program manager has to be from the client company. He or she must have visibility in the outsourcing company so that the right people are selected in the teams. Also, the team members must be trained in cultural sensitivities, more so to be able to communicate effectively. Quality of results. The challenge here is how to see quality (or the lack of it) from a distance. As part of quality planning (quality by design), the program manager must insure that the outsourced company follows quality processes such as those based on ISO9001 or CMM5. Do not just depend on the fact that the company has these certifications. Ask for a quick audit. Also, define service level agreements (SLAs) for each stage of the project (initiation, interim, and final), defect density, response time, and defect fix time thresholds. Monitor the intermediate milestones and above all, have periodic operational reviews.
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data collection The data was collected mainly through informal unstructured and semistructured interviews. Interview participants were two technical mangers and one business manager. One manager made his material available to us that he used during outsourcing. The second technical manager was the author of this case. The interview with the business manager was oral, but an e-mail exchange was made on the summary. The time period covered in this case is from 1998 to 2003.
data Analysis Approaches as outlined by Creswell (1988) and Yin (1994) were used in conducting this qualitative study in which data analysis was integrated with data collection. The analysis focused on classifying data (information about outsourcing) into appropriate framework dimensions and relating the findings to existing strategy literature. This process of data collection and analysis allowed us to organize new insights into the practice of outsourcing.
dAtA collectIon And AnAlysIs Time period 1998-2000. At the peak of dotcom frenzy and unparalleled projected high growth of broadband services, Telcordia Technologies faced, like many other software companies, the shortage of high quality domestic software developers. Its customers, the network and service providers, were planning to deploy newer network elements and the new generation network management systems. There was a general shortage of people and the expertise needed. The Y2K projects had sucked all the development (programming) resources not only within the company, but also within the U.S. software industry. Telcordia Technologies managers were encouraged to think out of the box to find solutions. Cost savings was not the issue, but meeting the customer needs was.
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A Telcordia Technologies manager, a RussianAmerican, paid a visit to his homeland to explore offshore outsourcing. He signed a contract with a small Russian company to develop the software. This was the first time Telcordia Technologies had outsourced any work. The company did not have any outsourcing strategy. It was just a local effort. The main criteria used in selecting this Russian company were the technical expertise and the infrastructure (secure and reliable high speed lines used for downloading the software from Russia). No other criteria mentioned in the framework in the previous section were used. According to the outsourcing contract, the Russian company was going to develop software based on the requirements provided by Telcordia Technologies. The Russian company will test the software to ensure that there are no bugs and that it meets the requirements. Integration testing will be done at Telcordia Technologies by its staff. Any quality issues discovered during the integration phase related to the Russian company developed software will be fixed by them within the time specified in the contract. The management structure for managing and controlling the outsourced work consisted of one manager from each company communicating with each other on as needed basis. This was a learning experience for the company. The language issue became paramount. Engineers of the two sides could not communicate with each other. Russian engineers, though superb in programming, could not hold conversation in English. Miscommunication could result into misinterpretation of the requirements and that could affect the quality of the software. Soon, some cultural issues were identified. These programmers were taking “artistic liberty” in interpreting the written requirements supplied by Telcordia Technologies. If a programmer thought of a “cuter” way (a better way in their opinion) of showing some information on a screen or on a report they would do so, and in doing so, they would ignore the requirements. They did not
The Use of Outsourcing as a Business Strategy
treat the requirement document as a baselined frozen document that cannot be changed without going through the change control procedure that was in place (and was part of the contract.) The management structure had to be changed. It was decided that a lead Russian engineer who knows English (write, read, and speak) be located at the premises of Telcordia Technologies. This person would report to the Telcordia Technologies development manager. This change fixed some of the issues, but increased the cost of the project. Also, the turnover in the Russian company was becoming a problem. People once trained were finding more lucrative jobs elsewhere in other Russian companies. Time period 2001-2003. The dotcom balloon has busted. The Telecom industry is in big trouble; barely breathing. The Client Companies of Telcordia Technologies have cut down the spending. Cost savings is a big issue. Telcordia Technologies’ cost structure is on the high end of the industry. The company must reduce its cost to be competitive to get new business. It has just hired a new vice president of Software Systems Division who is big on outsourcing. The company is beginning to develop a company-wide outsourcing strategy. A senior manager has been appointed to look at outsourcing, possibly to some Indian companies. An analysis has been done to determine what to outsource. A contract is signed with a leading Indian IT outsourcing company to perform some limited functions for a legacy network management system. Telcordia Technologies client companies, its main revenue base, are not very happy to learn that Telcordia Technologies might outsource some of their work. There are two concerns, the quality of products, and quality of support. Also, if Telcordia Technologies is going to get work done cheaper overseas, they (the Client Companies) should not have to pay Telcordia Technologies at the old rates. They are now demanding Telcordia Technologies to reduce the maintenance cost of the legacy (network management) systems widely
deployed in their networks. The turmoil within Telcordia Technologies is still going on. Downsizing is continuing. The work that was outsourced to the Indian company is not going well. Telcordia Technologies is now reexamining its outsourcing strategy. There is a new senior manager, an IndianAmerican, in charge of this task. The previous manager has left the company. In a post analysis, it was discovered that there were gaps in communications here too, but they were of different nature. This had to do with the culture than the language. “Politeness” of Indian staff was often (mis)understood by their American counterparts in Telcordia Technologies as consent. However, Telcordia Technologies faced two problems that were more significant. One was technical and the other was political. From its own value analysis and the pressure to reduce the maintenance costs (of mostly legacy systems that were written in the languages of the eighties that were not obsolete), Telcordia Technologies wanted to outsource the legacy system maintenance work. But, that expertise was nowhere to be found in the fresh computer science graduates either in the USA or in India. Training became a big issue and it took longer to train. The second problem was political. Its client companies wanted to pay less for maintenance, which means lower profitability, something that was not acceptable to its parent company. In the absence of new business, Telcordia Technologies had only one choice, to downsize at a faster rate, even to the point of losing the legacy expertise that was needed to train the Indian company staff. To make the matter worse, the company was very tight-lipped about the specifics of what work would be outsourced, and so forth. Even though the Indian company was given the outsourcing work, there were no announcements about this. Morale of people was low. Even though back in 1998, Telcordia Technologies outsourced development (coding) of a new system to a Russian company more for strategic reasons, its later outsourcing was driven by
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Table 1. Analysis of Telcordia’s outsourcing practice against the framework Framework Dimension
Period 1998-2000
Driving Force: Strategic and/or Tactical
Strategic: looking for the technical competencies outside (in-house resources not available) to shorten the time to introduce a new product in the market
Tactical: looking to outsource the work to reduce the cost; it can be called a strategic move also as the company is fighting for its survival.
Process Used to decide what to outsource
Value-based process; All SDLC phases outsourced except for requirements formulation and integration testing.
Process used to identify higher savings and lower work: mainly maintenance and testing functions outsourced:
Selection of Operational Model
The Staff Extension Model
The Semi to Fully Autonomous Model
Process Used to Select Outsourcing Vendors
Combination of Competency Needed and The Personal Contact: The technical manager was Russian who knew this Russian Company.
Strategic Long-Term Relationship; SAIC, the owner of Telcordia, had signed a partnership relationship with an Indian Company.
Quality of Contract Negotiations
Telcordia has a long history of doing a quality job of negotiating a contract. It lists what is included and what is not included in the Statement of Work (SOW). However, since the company was a small company, not enough contingency safeguards were put in the contract.
Telcordia has a long history of doing a quality job of negotiating a contract. It lists what is included and what is not included in the Statement of Work (SOW).
Quality of Execution and Program Management
Cultural Issues A lot of emphasis on Metrics MORE ON THIS IN THE NEXT SECTION.
Cultural Issues A lot of emphasis on Metrics MORE ON THIS IN THE NEXT SECTION.
Quality of Results
Some surprises; developer’s creativity, “ We thought this would be nice.”
Quality issues were raised by the customers.
cost reduction, which, in a way is also strategic because Telcordia Technologies must reduce its costs to continue doing business with its client companies. Telcordia Technologies has decided to outsource to an Indian company the majority of testing and development functions for a legacy system, while keeping the functions of program/ project management, systems engineering, installation, deployment, and customer service center. In doing so, Telcordia Technologies has learnt from its previous outsourcing experiences, and is prepared to put the right kind of program management team, along with the Service Level Agreements that will insure the success of the outsourcing effort and above all, to meet the needs of its customers. Telcordia Technologies hopes to convert this partnership with the Indian company into a strategic alliance that will result into the growth of Telcordia Technologies’ business in the future.
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Period 2001-2003
MAnAgeMent oF outsourced worK by telcordIA technologIes It should be pointed out that Telcordia Technologies was originally formed to provide professional services and develop application software systems (operations support systems) to a group of telephone network/service providers (the client companies). Telcordia Technologies was also owned by these Client Companies. Telcordia Technologies was like an outsourced development center (ODC) for these client companies. Not surprisingly, many of the issues encountered in outsourcing are similar to those faced by Telcordia Technologies and the client companies in their interworkings. Telcordia Technologies has used various metrics to manage its outsourced work. As part of using outsourcing to achieve its business goals, Telcordia Technologies outsources only selective pieces.
The Use of Outsourcing as a Business Strategy
This is very similar to what Lacity and Willcocks (1998) identified in their work as the first best practice, that is, selective outsourcing decisions had higher success rates than total outsourcing or total insourcing decisions. As part of service contracts with Telcordia Technologies for the maintenance of the software systems, client companies have defined service level agreements (SLAs) for Telcordia Technologies to meet. As part of these SLAs, Telcordia Technologies is required to have a customer service center open 24 hours a day and 7 days a week. The reason for this SLA is the mission critical operations support systems (service assurance systems) that run around the clock. The customer service center has a 24-hour hot line where a live person must answer the phone call from the RBOC personnel who are managing these systems in the field (spread all over the USA). The client companies can either call Telcordia Technologies or enter the trouble report directly into the trouble record system (a software system dedicated just to this function). Other SLAs that have been defined are related to the turnaround time taken to resolve a customer trouble report (TR). Depending on the nature of the trouble (crash causing, service affecting, or just a nuisance), the turnaround time varies. In order to execute these SLAs, there is a process in place to classify the trouble reports into severity 1
(most serious), severity 2 (next most serious), and severity 3 (least serious but needed to be done). The specific criteria for each of these severities have been defined and agreed upon with the client companies. The first SLA regarding the trouble reports that Telcordia Technologies has to meet is the response time (the time taken to acknowledge the submitted trouble report). The range for this SLA is from the average of 15 minutes (for Severity 1 TR) to 3 hours (for Severity 2 TR). Another SLA is for problem identification. The average time for identifying the problem (root cause) is 12 hours. Another SLA has to do with the system restoration time. If a system is down, it has to be bought back in operation within 24 hours. If a problem requires a software release, that must be done within 15 days. These are just a few examples of many SLAs that Telcordia Technologies has to meet for client companies. The other types of metrics (Table 2) that Telcordia Technologies uses have to do with the quality of the software that either it develops inhouse or outsources. There is a direct impact of these metrics on the trouble reports in the field. Telcordia Technologies is an ISO 9001 and CMM5 company. It has some very rigorous quality metrics and process checks in place throughout the software development life cycle phases: planning, requirements formulation, design, development, product testing, deployment, and maintenance.
Table 2. Examples of metrics for a software development project Phases
Metrics
Planning
The proposal win rate, Over-price margin
Requirements Formulation
The number of changed milestones, the number of change controls, and the number of defects in the requirements.
Design
The number of issues in design reviews
Development
Unit testing results (# test executed), Multi-unit testing (# test executed)
System (Product) Testing
# test executed and passed, # test passed first time, Defect tracking charts (graphs), Defects being fixed, defect fixed, defects in test
Deployment, and Maintenance
Cutover time, surprises, # severity 1, #severity 2
Overall Performance/Productivity
The number of new lines of code The number of changed lines of code
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Telcordia Technologies requires the outsourcing companies to meet the same metrics and SLAs that it meets for its clients. Its SLAs and metrics are keyed to its business goals. Recently, when the Client Companies wanted Telcordia Technologies to lower the maintenance cost, Telcordia Technologies negotiated a new set of SLAs that were relaxed compared to the old ones and can be achieved at lower costs. Thus the SLAs can be important to remain competitive.
conclusIon This chapter discussed how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both short-term tactical goals as well as the long-term strategic goals. Next, we discussed the driving forces for offshore outsourcing, the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. Finally, the chapter presented the challenges of making these things happen, what worked well, and the lessons learned.
Future reseArch dIrectIons For the future directions of this research, we will watch if Telcordia Technologies stays with their current outsourcing strategy. It just (January 2007) got yet another CEO, and the vice president incharge of outsourcing (and setting up a branch in India) is gone. If Telcordia Technologies stays with its current strategy, discussed in this chapter, and implements it, we will keep track of its success and whether indeed it helps the company
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become competitive, and hence, survive and grow. As fellow researchers look at other companies that faced similar opportunities and challenges, we will gain the ability to make in-depth cross comparisons.
reFerences Aron, R. (2003). Sourcing in the right light. Optimize, June. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Jounal of Management, 39, 32-36. Creswell, J. W. (1998). Qualitative inquiry and research design: Choosing among five traditions. London: Sage Publications. Davidow, W. H., & Malone, M. S. (1992). The virtual corporation. New York: Harper Business. Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23, 660-679. Funk, J., Sloan, D., & Zaret, S. (2003). Beware the dangers of outsourcing, Optimize, April. Gardner, W. D. (2003). Outsourcing’s benefits too much to ignore. TechWeb News, October 31, 2003. Goolsby, K. (2003). Outsourcing bears the freight of keeping business strategies on track. Outsourcing Journal, June. Insinga, R. C., & Werle, M. J. (2000). Linking outsourcing to business strategy. Academy of Management Executive. Lacity, M. C., & Willcocks, L. P. (1998). An emperical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3).
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McClellan, K., Marcolin, B. L., & Beamish, P. W. (1995). Financial and strategic motivations behind outsourcing. Journal of Information Technology, 10, 299-321. Moran, N. (2003). Looking for savings on distant horizons. Global Outsourcing Overview, FT. Special Report on Outsourcing, July 2. Raynor, M. E., & Littmann, D. (2003). Outsource IT, not core value. Optimize, February. Skapinker, M. (2003). Much to question on outsourcing. FT Special Report on Management, June 30, 2003. Yin, R. K. (1994). Case study research: Design and methods. Thousand Oaks, CA: Sage Publications.
AddItIonAl reAdIngs The reader is advised to the following references for further information related to the success of outsourcing engagements:
Goth, G. (1999). The ins and outs of IT outsourcing. IT Professional (IEEE), 1, 11-14. Heeks, R., Krishna, S., Nicholson, B., & Sahay S. (2001). Synching or sinking: Global software outsourcing relationships. IEEE Software, 18(2). Karabulut, Y., Kerschbaum, F., Massacci, F., Robinson, P., & Yautsiukhin, A. (2007). Security and trust in IT business outsourcing: A manifesto. Electronic Notes in Theoretical Computer Science (ENTCS), 179, 47-58. Lindskog, H. (2005). SOTIP as a model for outsourcing of telecom services for the public sector. In Proceedings of the 38th Annual Hawaii International Conference on System Sciences, 3(6), 261-261. Verhoef, C. (2005). Quantitative aspects of outsourcing deals. Science of Computer Programming, 56(3), 275-313. Wentges, P., Brandes, H., Lilliecreutz, J., & Brege, S. (1997), Outsourcing—Success or failure? Findings from five case studies. European Journal of Purchasing and Supply, 3(2), 63-75.
This work was previously published in Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy, edited by A. Gupta, pp. 167-178, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.3
Global Integrated Supply Chain Implementation:
The Challenges of E-Procurement Margaret L. Sheng Hamline University, USA
AbstrAct
IntroductIon
Supply chain functions must operate in an integrated manner in order to optimize performance. However, the dynamics of the organization and the market make this challenging. In particular, the procurement function is a crucial link between the sources of supply and the organization. With most organizations spending at least one-third of their overall budget to purchase goods and services, procurement holds significant business value. Emerging technologies, especially e-procurement, are promising to change the picture of traditional procurement processes. However, the implementation of e-procurement is facing significant reengineering and change management challenges. This study identifies four main challenges in e-procurement implementation: business process integration, technological issues, value creation, and change management. The major challenge among them is change management. Critically, leadership is one of the primary requirements to make the change successfully.
The supply chain is a network of suppliers, factories, warehouses, distribution centers, and retailers through which raw materials are acquired, transformed, and delivered to the customers. Supply chain management is the strategic, tactical, and operational level decision making that optimizes supply chain performance. The strategic level defines the supply chain network (i.e., selection of suppliers, transportation routes, manufacturing facilities, production levels, warehouses, etc.). The tactical level plans and schedules the supply chain to meet actual demand. The operational level executes plans. Tactical and operational level decision-making functions are distributed across the supply chain. In order to optimize performance, supply chain functions must operate in an integrated manner. However, the dynamics of the organization and the market make this challenging; materials do not arrive on time, production facilities fail, workers are ill, customers change or cancel orders, and
so forth, causing deviations from the plan. In particular, the procurement function is a crucial link between the sources of supply and the organization. With most organizations spending at least one-third of their overall budget to purchase goods and services, procurement holds significant business value (Killen & Kamauff, 1995; Zenz & Thompson, 1994). Emerging technologies, especially Internet-based procurement, are bringing the promises to change the picture of costly, time-consuming, and inefficient procurement processes by enabling major improvements in terms of lower administrative overhead, better service quality, timely location and receiving of products, and increased flexibility. Meanwhile, growing pressures from increasingly competitive markets all around the world reinforce the need to reorganize and streamline inefficient procurement procedures. The corporate procurement traditionally has been separated along two dimensions: the direct or production-oriented procurement and the indirect or non-production-oriented procurement. Direct procurement generally refers to the purchasing of items that immediately enter a manufacturing process, such as the parts that are assembled into a car or computer. Indirect procurement includes everything that is not covered by direct procurement; for instance, maintenance, repair, and operations (MRO) supplies that are consumed in the production process and required to keep up the manufacturing process. Indirect procurement also includes items as diverse as office supplies, computer equipment, promotional material, travel, and other services (Segev, Gebauer & Farber, 2000). Other researchers also include items in the indirect category such as training materials, accessories, temporary staff, public relationships, entertainment (Croom, 2000), and contract workers and consultants (Moozakis, 2001). The direct procurement has been emphasized and treated differently than indirect procurement.
Compared to direct procurement, indirect procurement covers a wider range of products and services that typically are involved with a larger number of buyers (possibly every employee) and is much less predictable with respect to buying volume and frequency. It often is not regarded as strategic relevance but rather as a clerical function. Thus, it comes at no surprise that businesses processes typically are not well standardized, most paper-based, and, as a result, inefficient and non-transparent (Gebauer & Segev, 2001). Incidentally, the difference between direct and indirect procurement also shows in organizational charts; direct procurement often reports to a vice president of supply chain operations (or similar), while indirect procurement might fall into the responsibility of the finance function. The line of management for both areas only meets at the level of the chief executive officer. In the literature, the indirect products and services have received little attention, as by far the dominant focus of the purchasing literature has been the management of production item procurement. However, a multinational company may spend millions of dollars of expenditure on indirect goods and services. Much of them may be carried out locally or divisionally, bypassing central guidelines. For example, a large manufacturer bought office supplies from as many as 300 suppliers regularly, more or less. Nobody was in control of the overall process, and each business unit had its own procedures in place. From a corporate perspective, the fragmented procurement resulted in slow and expensive processes and excessive product costs due to poor leverage of buying power (Nelson, Moody & Stegner, 2001). According to PricewaterhouseCoopers, a 10% reduction in purchase costs easily can lead to a 50% rise in profit margin. IT-based tools have been introduced to support production procurement and supply chain operations. However, procurement activities in the nonproduction items have long been underestimated
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on an organizational level as well as with respect to the use of IT. Because of little process automation and a majority of manual activities, the nonproduction procurement is often an uncoordinated and non-valued activity (Croom, 2000; Gebauer & Segev, 2000). Available IT systems usually do not cover the full process or are very expensive to set up. Internet and Web-based applications promise alternatives that are less expensive and easier to set up. The new systems (i.e., e-procurement) allow employees to order goods directly from their PCs, either through an Intranet or a Web site. Orders are channeled automatically to suppliers, often via a hub that acts as a host for their online catalogs. The catalogs hold the companies negotiated prices as well as authorization rules that ensure the right people buy only what they are allowed to. When employees put the job out to tender, it will come back with a list of three or four suppliers. Operators of procurement hubs increasingly will scour the world for new low-cost suppliers in order to offer a better service for their purchasing customers. They will check out these suppliers for quality and integrity; if necessary, build catalogs for them; and plug them into their systems. E-procurement also allows employees to combine catalogs from several suppliers, check the availability of items, place and track orders, and initiate payment over the Internet. It does not mean just putting purchasing decisions online, but it also means linking suppliers into the purchasing network and broadening the range of employees who can carry out transactions. Therefore, eprocurement is not an example of computerizing the old manual process but of reengineering the process itself. As a result of significant impact from the Internet, the traditional purchasing function is now facing substantial reengineering and change management challenges. The purpose of this study is to identify the challenges of e-procurement implementation, therefore enhancing its success.
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lIterAture revIew Procurement vs. Purchasing Procurement is distinct from purchasing. Procurement includes all activities involved in obtaining materials, transporting them, and moving them toward the production process (Segev, Gebauer & Beam, 1998). Purchasing is the act of buying and services, and represents a core element of procurement. Procurement processes take on many different forms in reality. Considering the types, uses, and value of the goods purchased, three categories of procurement have been distinguished (Hough & Ashley, 1992; Zenz & Thompson, 1994). •
•
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Procurement of raw material and production goods usually is characterized by large quantities, high frequencies, and important and unique specifications; just in time is often critical. Procurement of maintenance, repair, and operation (MRO) supplies is characterized by low unit cost and high variety, but relatively high frequency; examples include office supplies. Procurement of capital goods means dealing with goods of high value at low frequency (e.g., new factories) and/or procuring items outside the regular purchasing process, often because of convenience or speed requirements.
Close supplier relationships are particularly relevant for direct procurement (raw materials or production goods), where the quality and availability of suppliers can be of critical importance (Lutz, 2001). A company typically spends several years establishing the relationship and ensuring that the supplier meets the high quality standards. The unknown suppliers are unthinkable in this
Global Integrated Supply Chain Implementation
context. For indirect procurement (MRO and capital goods), efforts to consolidate the supply base and to establish relationships with preferred suppliers often consider cost rather than quality and availability (Cousins, 1999). Buying firms expect better product prices and less cost to manage the supplier base. These three types of procurements also involve three main categories of costs (Gebauer & Zagler, 2000). In the first category, the cost of procurement of raw materials is the product cost (and quality). To ensure consistent quality, the pre-selection of suppliers and active supplier management are critical activities of the sourcing cycle. The involvement of suppliers in target-costing activities and collaborative design has proven useful to limit total project cost. In the second category, the cost of procurement of MRO items is the process cost. In this category, the process costs may equal or even exceed the product cost. The third category is the technology cost for capital goods. Typically, the characteristics of capital goods are high complexity, innovation, and strategic relevance. Therefore, the range of available supplies is typically very limited (Brown, 2000). Procurement activities also can be categorized: long-term-oriented strategic and short-termoriented transactional activities (Segev, Gebauer & Beam, 1998). Long-term-oriented strategic tasks include sourcing activities, identifying vendors, and establishing and managing supplier relationships, as well as contract negotiation and management, but also the design and implementation of buying procedures and financial and asset management. Activities are long-term-oriented, and the resulting supplier relationships often last for many years. Short-term-oriented transactional tasks are mostly clerical order-related activities. Many purchasing organizations distinguish between activities of sourcing and buying tasks (Dobler & Burt, 1996). Sourcing processes cover more than just one or a few individual buying operations and include market intelligence, demand forecast and planning, identification of
suppliers, requests for quote and bidding, negotiation of terms of contract, selection of sources and finalizing of contract, and supplier management. Buying processes typically refer to single transactions only and include activities such as selection of product and supplier from catalog or other sources, submission of internal requests and management approval, submission of purchase orders to pre-approval supplies, delivery and payment, after-sales support, and customer service.
the development of Internet-based Procurement systems With procuring processes typically involving a large amount of information processing and communication, procurement is well suited for IT support and automation throughout all its steps. Early initiatives to introduce Internet-based technologies to support procurement concentrated on the automation of highly structured processes. Desktop purchasing systems (DPS) extend traditional EDI systems with user-friendly, browser-based interfaces, increased flexibility, and automated workflow, which are well suited to facilitate end-user empowerment and self-service. Based on electronic catalogs as a central data repository, these systems are readily available and well suited to automate highly repetitive activities, as they prevail in the category of process costoriented procurement (low-unit value and highvariety items purchased at high frequencies, such as MRO items). In many cases, the operational gains from reduced process costs and lead times allowed procurement departments to reduce their administrative workloads, free time, and resources for strategic sourcing activities. Recent developments are most prevalent in the area of Internet-based exchange, be they horizontal or industry specific (Kaplan & Sawhney, 2000; Phillips & Meeker, 2000). While horizontal exchanges connect market participants of the same function, such as automotive industry, exchanges provide information and services to
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all members of a particular industry. The other examples of trade exchange include MetalSite, e-STEEL, MetalSpectrum, GlobalNetExchange, WorldWideRetailExchange (retail), and E2Open (electronics). Although the boundaries are usually indistinct, exchanges tend to provide less automation than DPS but cover a wider area of products, typically procured at low frequency with a focus on product cost and quality. Also, solutions oftentimes support only a few aspects of the procurement process, such as supplier identification (supplier directories) or obtaining access to product information.
supply chain Management Supply chain management (SCM) has been used to partner with suppliers and to integrate logistics functions and transportation providers to efficiently and effectively manage the value chain. Most of the recent literature on supply chain management focuses on manufacturers’ attempts to integrate processes and form alliances with suppliers to more efficiently and effectively manage the purchasing and supply function. The supply chain management philosophy expands the internally focused integrating activities of logistics by bringing multiple organizations along the supply chain, together with the common goals of efficiency and end-consumer satisfaction (Harwick, 1997). SCM creates a virtual organization of independent entities to efficiently and effectively manage the movement and transformation of materials, components, products, and services along the supply chain until final delivery to the end user (Croom, 2000). Thus, SCM integrates a number of key functions, including purchasing, demand management, manufacturing planning, and materials management throughout the supply chain. The short-term objective of SCM is primarily to increase productivity and reduce inventory and cycle time. To realize this objective, all strategic partners must recognize that the purchasing func-
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tion is an important link between the sources of supply and the organization. Indeed, the origin of SCM can be traced back to efforts to better manage the transportation and logistics function. In this respect, SCM is synonymous with integrated logistics systems that control the movement of goods from the suppliers to end customers (Ellram & Billington, 2001). Integrated logistics systems seek to manage inventories through close relationships with suppliers and transportation, distribution, and delivery services. A goal is to replace inventory with frequent communication and sophisticated information systems to provide visibility and coordination. In this way, merchandise can be replenished quickly in small lot sizes and arrive where and when it is needed (Handfield, 1994).
collaborative commerce The concept of collaborative commerce is defined as multiple companies working together to achieve better results than they could together. Clearly, the Internet is the key enabler of that. Corporate purchasing has been shaken by those collaborative activities. A new category of buy-side software from vendors like Ariba and CommerceOne appeared on the scene. This software allows companies to automate and streamline the purchase of indirect, everyday supplies that are not used in products. Then came net markets with their tantalizing promise of even greater cost saving in the purchase of direct products—the raw materials that actually go into a product. Recently, several hundred independent exchanges have opened for business and announced plans to build their own Web-based marketplaces. These online markets create new ways of doing business in traditional industries, such as papers and chemicals, where the process is buying and selling commodity-like products. Buyers and sellers can meet on a virtual trading floor and transact quickly and efficiently.
Global Integrated Supply Chain Implementation
We see that the first wave of Internet-enabled collaboration focused on the supply chain, as companies collaborated with their customers, suppliers, and intermediaries (Bowles, 2000). But the second wave is extending to enterprises with which a company previously had no relationship. Collaborative commerce rapidly is becoming the norm. Over the next years, increased business process integration will lead companies to a big payoff—a more synchronized supply chain that yields better customer service, higher quality products, lower inventory, and faster delivery.
transaction cost theory Economists have classified transaction among and within organizations as (a) those that support coordination between multiple buyers and sellers; that is, market transaction and (b) those that support coordination within the firm as well as the industry value chain (i.e., hierarchical transactions) (Wigand, 1997). Marketing hierarchy progressing from manufacturer to wholesaler, retailer, and consumer is associated with transaction costs. Transaction costs include the costs of searching, bargaining, coordinating, and monitoring, whicht companies incur when they exchange goods, services, and ideas (Benjamin & Wigand, 1995; Wigand, Picot & Reichwald, 1997). The major force driving electronic commerce is the ability of networks to reduce transaction costs (Auger & Gallaugher, 1997; Garcia, 1997). Capitalism depends on information to allocate resources efficiently. When businesses can access the best available information at the most appropriate moment, they can reduce their costs and enhance their productivity. Similarly, when buyers and sellers can easily locate one another and have a good idea of what they can expect in terms of quality and prices, they are more likely to engage in trade. The ever-increasing and innovative use of the Internet or the Web to conduct business is a clear example of firms’ desires to reduce transaction costs. Thanks to information
technology, the evolution from separate databases within the firm to linked databases among firms to shared databases among firms, transaction costs, indeed, are falling rapidly (Wigand, 1997). Malone, Yates, and Benjamin (1987) also suggested that the communication effect via information technology and a tighter electronic linkage between buyers and sellers may lead to reduced transaction costs.
strategic networks Strategic networks are defined as the long-range, deliberate, cooperative, and goal-oriented organizational forms among distinct but related organizations that enable such network member organizations to sustain competitive advantage vis-à-vis their competitors outside the network (Jarillo, 1993). Wingand, Picot, and Reichward (1997) emphasized strategic networks as a distinct organizational form; that is, separate from hierarchy and market. Networks optimize communication, and a more efficient exchange of information becomes possible. As Powell (1990) stated, information passed through networks is less thick than information obtained in the market (since the price mechanism tends to treat information as a commodity and thus tries to make it as scarce as possible) and freer than communication in a hierarchy (since information is not filtered as clearly through power relationships). Therefore, network organizations combine the advantages of hierarchies, such as better control and coordination of actors, with the advantages of small, independent companies, who have more innovative abilities, tend to be in closer contact with the market and more flexible, with smaller staffs, fewer intermediaries, and lower overhead. Malone et al. (1987) believe that the development of interorganizational electronic networks would increase the number of buyers and sellers. The use of open information systems may be seen to provide greater levels of information to
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buyers, thereby opening up greater competitiveness among providers. In addition, they argued that the use of electronic communication links between firms could reduce both the costs of coordinating economic transactions and the costs of coordinating production. As a result, the lowered coordination costs would encourage more outsourcing, enabling firms to buy goods and services less expensively than by producing them in house (Malone et al., 1987, 1989).
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This study addresses the challenges of e-procurement implementation, thereby providing significant information to executives and operational managers in industry to play a proactive role in global integrated supply chain processes. Overall, four main challenges come from business process integration, technology issues, value creation, and change management.
business Process Integration The premise of business process integration is that the rapid redesign of critical process of a company will generate improvements on the performance of the company and create the competitive advantage in the global marketplace. •
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Convergence Between Direct and Indirect Goods. The division between direct and indirect goods is blurred. E-procurement encourages commoditization (brand details often are stripped from the catalogs), which means they will be ideal for standard production items (nuts, bolts, paper clips, etc.) as well as non-production, indirect goods. The real distinction is between purchases that can be commoditized and those that cannot. Traditionally, direct and indirect procurements have been separated. Convergence between them is a big change for an organization.
Back-Office Integration. E-procurement systems need to integrate with purchasing, inventory, warehousing, invoicing, and the planning requirement departments. Also, the buyers and suppliers must determine the business process for document exchange, including product requisition, selection of order, issuance of RFQ, purchase order acknowledgement, evaluation of proposal, negotiation/award of contract, issuance of purchase order, fulfillment of orders, and payment of order. Supply Base Reduction. Small supplier bases go in reverse. This does not happen for critical components, where the need for ever-closer collaboration continues to shrink supplier numbers. But, if you are buying paper clips, why not cast your search as wide as possible? Reverse auctions allow you to spread the net far more widely, and the Internet is excellent at handling complexity. This is not to say that the end buyer will deal necessarily with more suppliers but will be dealing with a bigger supplier base. Organizations hope to spend less to manage many suppliers. The challenge appears in the consolidation of suppliers.
technology Issues Organizations are utilizing technology to integrate business processes. There are still several issues in information technology. •
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Security Concerns. The issue of security is a major concern, especially in the context of electronic payments. The capability of any system to provide secure data transfer was regarded as a major criterion for both existing and potential users of e-procurement systems. Inefficiencies in Locating Information. This lack of interoperability and the lack of standards make it difficult to pull all
Global Integrated Supply Chain Implementation
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buyers and suppliers together into a single protocol or a few market spaces for buying and selling. Despite its steady growth, the current use of Internet-based technologies has not yet reached critical mass. Catalog Content Management. The company must make sure that catalogs are properly maintained in a timely, accurate, and updated manner. Besides that, another challenge the buy-side community faces is when suppliers are not willing to share the information openly with all members of the supply chain by providing all information in the e-catalog. A buyer many be trapped in a situation when he or she compares products costs without knowing the details in the quality specification as well as a good delivery time option. E-Bidding. Writing up an electronic request for quote and submitting it to the electronic market space becomes easy for buying organizations. Suppliers are able to contact each other electronically, negotiate a team-based approach, and automatically respond to the request for quote. The challenge arises from multiple levels of negotiations on the Internet. E-Auction. The new generation MRO, electronic auctions, starts to play an important role. A prospective purchaser could dial in and see the spot price of paper, chairs, or office supplies and determine whether to purchase. In the future, next generation auctions also will feature more complex items and allow matching of supply and demand, not only with respect to price, but also for features such as service, quality, or speed of delivery.
available anywhere, anytime, and by any means. Simplification, transparency, standardization, and automation of procurement processes always are challenging. •
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Empower Employees. Now employees can check price, availability, and delivery time from their desktop. They can handle the entire procurement process by themselves. From a perspective of human resource, e-procurement can reduce training requirements. Because employees can purchase anytime and anywhere, crews’ relocation also will be reduced. In addition to freeing up the procurement department, the finance, manufacturing, and logistics personnel also need to do more value-added activities by pushing purchasing decisions back to end users. Increased Procurement Control. A variety of MRO items consider difficulty in terms of developing specialist knowledge regarding product and service technical characteristics and supply market conditions. The ability to consolidate and categorize suppliers, services, and MRO goods is seen as an enabler in the move toward greater professional contribution to MRO procurement. In addition, the centralized purchasing function was able to exert greater control over sources of supply, purchase price, and inventory policy. Organizations should manage their MRO items in a more strategic manner through such actions as the establishment of single-source arrangements, consolidation of commodities and services, and increased buying power over the supply base.
change Management value creation The e-commerce world is value creation competition. More values created by e-procurement are toward faster, simpler, cheaper, more convenient,
This is an age of accelerated changes characterized by the globalization of markets, ubiquitous presence of information technology, and integration of business process and enterprises. It
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will not be the brightest or the strongest who will survive, but those who are most adaptive to change. E-procurement implementation needs several changes. •
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Role Change in Purchasing Department. There will be changes to business practices and organizational structures over the next years, as e-commerce solutions become more mature and more widespread. As a general development, we see the role change between end users and purchasing departments (i.e., new procurement system continues either to automate purchasing operations or to help push them down to the end user, allowing the purchasing department to concentrate more on strategic and managerial tasks, such as partnership relationships and long-term supply contract). Since employees can purchase directly through their Web access, purchasers no longer need to process orders, invoices, or chase delivery. As a result, purchasing departments become composed of mostly managers and less of clerks, secretarial staff, and administrative support. Additionally, the determining factor of geography reduces, freeing organizations to obtain the best deal and the most appropriate products from anywhere around the globe. Staff Resistance. The purchasing staff resists online solutions because, although not unreasonable, they detect a threat to their job security. Organizations no longer rely extensively on interpersonal communication (telephone, face-to-face negotiation, fax, etc.). In fact, their roles change dramatically, because they are freed from burdensome clerical labor that takes up 70% of their time in manual systems, and they are allowed to put their real skills into practice by negotiating contracts, monitoring supplier performance, and building relationships.
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Lack of Top Management Support and Vision. This is understandable, because not even researchers and market analysts are sure yet of the exact direction in which electronic procurement will move. There is a long road from friction-free e-procurement to reality. However, successful e-procurement is a topdown process that requires a champion and a visionary at the board room table, who can grasp the strategic potential of the procurement issue. Technology changes rapidly. To create sustainable competitive advantage, organizations need to consider their Internet plan as part of a larger strategy-oriented picture. Revolutionary changes happen much more slowly than anticipated, as many hurdles have to be overcome. Being aware of these hindering factors is just as essential as knowing about the opportunities that new technologies present.
Future trends The consolidation of suppliers shows that increasing integration will continue within organizations and among enterprises. Existing evidence in increasing new generations of e-auction and e-bidding at the industry level also indicates that increases in investment in information technology are associated with a decline in the average firm size and a rise in the number of firms. It may be expected that greater information availability will lead firms to encourage their level of outsourcing or global sourcing. As a consequence, an increase in the proportion of bought-out goods and services will place an increased strategic emphasis on the purchasing process. With the widespread wireless, the future trend will involve mobile e-procurement. Substantial investments have been made to advance mobile technologies and applications, and already there are signs that developments have progressed
Global Integrated Supply Chain Implementation
more slowly than anticipated (e.g., the bidding for UMTS licenses in Europe that still have to pay off telecommunications companies). To date, mobile technologies primarily have been applied in consumer-oriented areas, while the business world still awaits large-scale usage. At present, the use of mobile technologies primarily concerns voice communication rather than the wireless transfer of data, thus effectively replacing (wired) telephone lines rather than desktop computers.
conclusIon In spite of the value that e-procurement creates, the challenges of implementing this application do exist. Lessons learned from a few companies that have embarked on the e-procurement endeavor indicate that factors such as incompetent infrastructure, human resistance to change, and conflicting policies and standards pose immense pressure for the companies to move forward. The biggest challenge among them is change management. E-procurement is not about the introduction of software; it is about the change of business processes and the change of human habits. Moving people from their comfort zones means moving from the familiar, secure, and controllable to the unfamiliar, insecure, and uncontrollable. Sometimes, it is about the shifts in power and influence, such as loss or change of roles in the organization. The applications were easy; the people issues were tougher. Essential elements such as preparing the organization for change, developing a sense of the scope of the change, communicating the motivation and need to change, and training are much more difficult to accomplish than finding technology that works and getting it all plugged in and interfaced (which is not to say technology integration is easy). The hard parts are management tasks. Building organizational support is harder than building identification and communication systems. It is really tough to do, unless manage-
ment gets involved. Initiating change from the top creates a culture that embraces change and a shared vision that energizes the organization. The major organization transformation is not the job of middle management. Rather, the CEO and senior management team need to establish the context of change. Change, therefore, is primarily about leadership. A senior management team needs to communicate the vision of change throughout the organization. A frequent and consistent manner is a key component of that communication. While change initiatives often arise out of crisis and are driven by dedicated leaders, research indicates that change also can be triggered in response to opportunity and organization growth. Change is not just about reducing costs or improving profitability but about the invention of strategies and management processes. Performance evaluations, rewards, career management, and operations all must change. Starting with standardized goods, especially MRO procurement, letting employees shop on their own will leave the procurement department to focus on strategic tasks (i.e., establishing and maintaining close relationships with suppliers and business partners, eventually leading to streamlined processes and leveraged buying power. Also, the company has employees participate in the software upgrade; the company is able to combine training with installation. Employees felt really empowered by the experience and were much comfortable with new interface and software. Furthermore, two organizations have created flatter structures with more empowered employees who are trusted more, expected to conform to shared values, and encouraged to be more entrepreneurial and innovative. Those accelerate change processes. Selling generates revenues; buying right generates profits. E-procurement needs to be viewed as a way of doing business, not as a set of software applications that need to be installed and run. That is why the organization must be prepared for change. The demise of companies will come from a lack of competitive adaptiveness; essen-
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tially, most of these companies will not survive, because they are too slow to keep up with the pace of change.
reFerences Auger, P., & Gallaugher, J.M. (1997). Internetbased sales presence for small business. The Information Society, 13(1), 55-74. Benjamin. R., & Wigand, R. (1995). Electronic markets and virtual value chains on the information superhighway. Sloan Management Review, 36(2), 62-72. Bowles, J. (2000). E-procurement. Forbes, 166(3), 189-216. Brown, R. (2000). Bechtel’s approach to eprocurement. Berkely: Haas School of Business, University of California, Berkeley. Brynjolffson, E., Malone, T., Gurbaxani, V., & Kambil, A. (1993). Does information technology lead to smaller firms? Cambridge, MA: MIT. Cash, J.I., & Konsynski, B.R. (1985). IS redraws competitive boundaries. Harvard Business Review, 2, 134-142. Cousins, P.D. (1999). Supply base rationalization: Myth or reality? European Journal of Purchasing and Supply Management, 5(3/4), 143-155. Croom, S.R. (2000). The impact of Web-based procurement on the management of operating resources supply. The Journal of Supply Chain Management, 36(1), 4-11.
Garcia, D.L. (1997). Networked commerce. The Information Society, 13(1), 9-41. Gebauer, J., & Segev, A. (2000). Emerging technologies to support indirect procurement: Two case studies from the petroleum industry. Information Technology and Management, 1, 107-128. Gebauer, J., & Segev, A. (2001). Changing shapes of supply chains—How the Internet could lead to a more integrated procurement function. Berkeley: Haas School of Business, University of California, Berkeley. Hammer, M. & Champy, J. (1993). Reengineering the corporation: A manifesto for business revolution. New York: Harper Business. Handfield, R. B. (1994). U.S. global sourcing: Patterns of development. International Journal of Operations and Production Management, 14(6), 40-51. Harwick, T. (1997). Optimal decision-making for the supply chain. APICS-The Performance Advantage, 7(1), 42-44. Hough, H. E. & Ashley, J. M. (1992). Handbook of buying and purchasing management. Englewood Cliffs, NJ: Prentice-Hall. Jarillo, J. C. (1993). Strategic networks: Creating the borderless organization. Jordan Hill, UK: Butterworth-Heinemann. Johnston, H. R. & Vitale, M. R. (1988). Creating competitive advantage with Inter-organizational information systems. MIS Quarterly, 12(2), 153165.
Dobler, D.W., & Burt, D.N. (1996). Purchasing and supply management. New York: McGraw Hill.
Kaplan, S. & Sawhney, M. (2000). E-hubs: The new B2B marketplaces. Harvard Business Review, 78(3), 97.
Ellram, L., & Billington, C. (2001). Purchase leverage considerations in the outsourcing decision. European Journal of Purchasing and Supply Management, 7, 15-27.
Killen, K. H. & Kamauff, J. W. (1995). Managing purchasing: Making the supply team work. New York: McGraw Hill.
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Lutz, J. (2001). Procurement strategies for eBusiness. Haas School of Business, University of California, Berkeley. Malone, T. W., Yates, J., & Benjamin, R. I. (1987). Electronic markets and electronic hierarchies. Communication of the ACM, 30(6), 484-497. Malone, T. W., Yates, J., & Benjamin, R. I. (1989). The logic of electronic markets. Harvard Business Review, 67(3), 166-170. Moozakis, C. (2001). E-procurement for servicesTexas Instruments uses Clarity to better manage contract workers. InternetWeek, 876, 17-18. Nelson, D., Moody, P. E., & Stegner, J. (2001). The purchasing machine: How the top ten companies use best practices to manage their supply chains. New York: Free Press. Phillips, C. & Meeker, M. (2000). The B2B Internet report: Collaborative Commerce. Powell, W. W. (1990). Neither market or hierarchy: Network form of organization. In B. M. Staw & L. L. Cummings (Eds.), Research in organizational behavior (vol. 12, pp. 295-336). Greenwich, CT: JAI Press Inc.
Ramsdell, G. (2000). The real business of B2B. McKinsey Quarterly, (3), 174. Segev, A., Gebauer, J., & Beam, C. (1998). Procurement in the Internet Age-Current practices and emerging trend. Haas School of Business, University of California, Berkeley. Segev, A., Gebauer, J., & Farber, F. (2000). The market for Internet-based procurement systems. Haas School of Business, University of California, Berkeley. Wigand, R. T. (1997). Electronic commerce: Definition, theory, and context. The Information Society, 13(1), 43-54. Wigand, R. T., Picot, A., & Reichwald, R. (1997). Information, organization and management: Expanding markets and corporate boundaries. Chichester, UK: Wiley. Zenz, G., Thompson, G. H. (1994). Purchasing and the management of materials (7th ed.). New York: Wiley & Sons.
This work was previously published in Global Integrated Supply Chain Systems, edited by Y. Lan; B. Unhelkar, pp. 83-96 copyright 2006 by Information Science Publishing (an imprint of IGI Global).
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Chapter 4.4
Environments for VE Integration Maria Manuela Cunha Polytechnic Institute of Cávado and Ave Higher School of Technology, Portugal Goran D. Putnik University of Minho, Portugal
IntroductIon Most definitions of virtual enterprise (VE) incorporate the idea of extended and collaborative outsourcing to suppliers and subcontractors in order to achieve a competitive response to market demands (Webster, Sugden, & Tayles, 2004). As suggested by several authors (Browne & Zhang, 1999; Byrne, 1993; Camarinha-Matos & Afsarmanesh, 1999; Cunha, Putnik, & Ávila, 2000; Davidow & Malone, 1992; Preiss, Goldman, & Nagel, 1996), a VE consists of a network of independent enterprises (resources providers) with reconfiguration capability in useful time, permanently aligned with the market requirements, created to take profit from a specific market opportunity, and where each participant contributes with her best practices and core competencies to the success and competitiveness of the structure as a whole. Even during the operation phase of the VE, the configuration can change to assure
business alignment with the market demands, traduced by the identification of reconfiguration opportunities and constant readjustment or reconfiguration of the VE network to meet unexpected situations or to keep permanent competitiveness and maximum performance (Cunha & Putnik, 2002, 2005a, 2005b) The implementation of the VE model should assure reconfiguration dynamics, which is dependent of (1) the reduction of reconfiguration costs and effort, that is, requires a balancing between reconfiguration dynamics and reconfiguration time and costs, and (2) the capability to preserve the firms’ private knowledge on products or processes. Considering that the VE concept aims to represent a new organizational paradigm for enterprises in general and, in that way, permeating virtually the whole economy and even society (through the concept of virtual organizations), we could talk about the social costs of ineffective
and inefficient integration of VE. However, many authors recognize that the present solutions for VE integration are either inexistent or insufficient. Therefore, there is a need for further effort by the community towards satisfactory and competitive solutions. In the article, we introduce some of the most recent developments and environments to cope with the VE requirements, such as the electronic marketplaces, including the recent generation of collaborative electronic marketplaces, breeding environments, virtual clusters, and so forth, and present the market of resources as a tool for managing, controlling, and enabling networking and dynamics in VE integration.
envIronMents For ve IntegrAtIon Value chains have been supported by a wide variety of technologies to communicate, but the pace of competition requires more intelligent and effective information and communication systems and technologies. The literature suggests that “traditional” Internet-based tools (such as WWW search engines, directories, e-mail, electronic marketplaces, etc.), can support some activities of VE integration, helping from procurement processes until the search of partners for a partnership, including electronic automated negotiation, electronic contracting, and market brokerage (Cunha & Putnik, 2003a; Dai & Kauffman, 2001; Dogac, 1998; Hands, Bessonov, Blinov, Patel, & Smith, 2000; O’Sullivan, 1998; Wang, 2001). Several authors (Carlsson, 2002; Martin, 1999) infer that the new VE paradigm claims for intelligent support for transactions, new effective methods for finding partners, intelligent support to virtual teams, knowledge management support systems, reliable decision support in VE/network design/configuring, effective tools for information filtering and knowledge acquisition, and support in the identification of the best alternatives to
keep the network aligned with the market, that is, competitive. Several supporting infrastructures and applications must exist before we can take advantage of the VE organizational model, such as electronic markets of resources providers, legal platforms, brokerage services, efficient and reliable global and intelligent information systems, electronic contractualization and electronic negotiation systems, and decision support systems and tools. This section introduces some examples of the recent generation of electronic marketplaces, the collaborative e-marketplaces, and introduces the recent concept of breeding environments, virtual clusters, electronic institutions, and the market of resources. We dedicate a separated section to the market of resources, a solution proposed by the authors, to fully support VE implementation, operation, and management, which is documented in depth in Cunha and Putnik (2006).
electronic Marketplaces To contribute to the reduction of search time in procurement and engineering, and to reduce transaction costs, manufacturers in several industries created electronic marketplaces (e-marketplaces) to pool their purchasing power and to develop technology platforms to exploit networked technologies. Electronic markets, like Covisint (http:// www.covisint.com) in the auto industry, Elemica in the chemicals industry, (http://www.elemica. com), or ManufacturingQuote (http://www. mgfquote.com) in the engineering domain, in general, provide environments to help collaboration, networking, and, to a certain extent, VE dynamics. Elemica was founded in August 2000 by 22 of the world’s largest chemical firms. It was the premier global neutral information network built to facilitate order processing and supply chain management, offering an integrated suite of product solutions that enable buyers and sellers of chemicals to streamline their business processes
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and to collaborate to achieve savings (Elemica, 2005). Its core business is an interoperable data exchange service capable of routing messages (such as purchase orders and shipping notices) between participants. In 2003, Elemica was able to connect up the chemical industry by offering integration of participants’ ERP systems into a hub-and-spoke network (Metcalfe, 2004). Elemica is an example of a collaboration e-marketplace; that is, it emphasizes interaction services. Collaboration e-marketplaces are expected to benefit participants by reducing the costs and increasing the quality of multiparty information exchange (Christiaanse & Markus, 2003). Covisint, officially announced in December 2000 as an independent company created by Ford, Chrysler, General Motors, Renault, Nissan, and a number of development partners, was projected to be a one-stop shop for the automotive supply chain, supporting buying, selling, and collaboration on a global platform: buyers can access all their suppliers on one site and, the same way, suppliers can have all their clients on one site, all sharing common procedures and processes. Covisint consists of a virtual supplier network specifically created for the automotive industry. Its extension to other industries by strategic partnerships was planned since their creation; at present, Covisint is applying its industry operating system to the health care sector. The Covisint (2001) project scope includes three major areas: •
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Procurement: It hosts a global market place where industry participants can purchase and sell a wide range of items and services via the Internet. Product development: It provides customers the ability to develop products via real time collaboration and strengthen global integration among partners creating a secure environment.
•
Supply chain: It allows individual organizations to see the current and future status of their supply chain inventory levels, material flows, and capacity constraints via Internet.
The service encompasses the complete interaction between suppliers or suppliers and their customers and includes procurement transactions, preproduction collaborative engineering, and exchange of information during production or for supply chain management. The neutral e-marketplace, Manufacturing Quote (http://www.mfgquote.com), was founded in 1999 and facilitated its first online sourcing transactions in February 2000. It is an online sourcing management system with automated supplier discovery and a global network of independent participating suppliers. MfgQuote uses its proprietary technology to intelligently connect buyers with suppliers of manufacturing services while facilitating the collaboration, quoting, due diligence, and analysis processes. This technology supports the request for quotations or proposals process, supplier discovery, engineering data exchange, revision control, collaboration, due diligence, analytics, and supplier management. Buyers using MfgQuote are typically original equipment manufacturers (OEMs) requiring the services of contract manufacturers and job shops. As a general rule, if an item needs to be manufactured in accordance with a drawing, computer aided design (CAD) model, or technical specification, it is appropriate to be sourced via MfgQuote. Another crucial example of an e-marketplace is given by the European Union through EURES— European Employment Services (http://europa. eu.int/eures/home)—and its project called The European Job Mobility Portal, especially as 2006 was the European Year of Workers’ Mobility. The service is portended as “the easy way to find
Environments for VE Integration
information on jobs and learning opportunities throughout Europe,” where both jobseekers and employers can meet and personalize the service according to their individual needs. EURES offers a human network of advisors to provide the information required by jobseekers and employers through personal contacts. In March 2006, there were about 700 EURES advisors across Europe. This field of intervention is also fundamental when we are addressing VE dynamics. The SEEMSeed project, funded by the European Commission Information Society Directorate-General in the frame of the “Policy-orientated Research” priority, pretends to contribute to a Single European Electronic Market (SEEM) “accessible and affordable to all businesses, organisations and individuals of any nature, size and geographic location, with no technological, cultural or linguistic restraints” (SEEMseed_Consortium, 2005). The SEEM will allow the dynamic creation and operation of collaborative structures to trade goods, services, or work in a peer-to-peer manner in the knowledge economy. The SEEM concept is driven by the changing work paradigms in business. The IST vision is based on ambient intelligence, which will be available in the near future. But making use of it requires not only technological development but also development of business models and behavioral models adapted to the new situation. In fact, several technologies and valuable applications have been developed that can support activities of the VE model such as the emarketplaces; however, they do not cope with the requirements of the VE model; that is, they do not implement the indispensable functionalities to assure the fast reconfigurability requirement.
virtual clusters A virtual industry cluster (VIC) consists of an aggregation of companies from diverse industries with well-defined and focused competences with
the purpose of gaining access to new markets and business opportunities by leveraging their resources (Molina & Flores, 1999). The intention of the formation of VIC is to enable search and selection of partners for the formation of VEs. VE brokers are intermediaries that possess is the ability to look for core competences in a virtual industry cluster and to integrate the competences of partners into successful VE (Molina & Flores, 1999).
electronic Institutions An electronic institution is a framework that, based on communication network, enables automatic transactions between parties, according to sets of explicit institutional norms and rules, ensuring the trust and confidence needed in any electronic transaction (Rocha, Cardoso, & Oliveira, 2005). The Electronic Institution is a meta-institution, which is a shell for generating specific electronic institutions for particular application domains. The meta-institution includes general modules related to social and institutional behavior norms and rules, ontology services, as well as links to other institutions (financial, legal, etc.). The main goal of a meta-institution is to generate specific electronic institutions through the instantiation of some of these modules that are domain dependent according to the current application domain (Cardoso & Oliveira, 2005; Rocha et al., 2005).
breeding environments The virtual organization breeding environment represents a long-term cluster/pool of organizations that are supported and facilitated for the establishment of virtual organizations and other forms of dynamic collaborative networked organizations (Camarinha-Matos & Afsarmanesh, 2004). If traditionally, such clusters were established in a given geographic region, having a common business culture and typically focused on a specific sector of the economical activity of
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that region, today, the challenge is the replacement of these clusters by a new “support-environment” called by the authors as a breeding environment. This environment is supposedly based in effective information and communication infrastructures to provide common grounds for collaboration, facilitation of the establishment of virtual organizations, and assisting with the operation of virtual organizations (Camarinha-Matos & Afsarmanesh, 2004)
Market of resources for virtual enterprise Integration The market of resources is already presented in a broad way in this encyclopedia, namely, its
functional structure and operation. A complete definition can also be found in Cunha and Putnik (2006).
A PrototyPe For the MArKet oF resources From the several functionalities offered by the market of resources to its users, we have chosen the Client Request for VE Creation to illustrate this service. In the prototype of Figure 1, we partially represent the Negotiation of VE Creation Request, where in the first step, the overall aspects of the required project are defined, client search
Figure 1. Request negotiation for VE creation: Step 1 (Cunha & Putnik, 2006)
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Environments for VE Integration
constraints, overall negotiation parameters, and a first attempt to fit the project in one or more focused markets (to facilitate the identification of a broker). In the second step (Figure 2), the broker is allocated. At this phase, the client could require an estimation of the cost of the service he is requiring, but the exact cost can only be calculated after the conclusion of the VE design.
The Request for VE Creation continues with the VE design, where, for each of the required resources, in two steps, the client specifies the requirements for resources selection and negotiation parameters (Figure 3) followed by a corresponding validation face to the grammar associated to the resources representation language (Figure 4). It is intended that the broker can chat with the client to
Figure 2. Request negotiation for VE creation: Step 2 (Cunha & Putnik, 2006)
Figure 3. VE design: Step 1 (Cunha & Putnik, 2006)
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Figure 4. VE design: Step 2 (Cunha & Putnik, 2006)
Figure 5. VE request formalization (Cunha & Putnik, 2006)
provide guidance in the design process. After the request for validation, the client receives a list of errors detected on the overall project evaluation, until de VE project is fully designed and valid. Finally, after the validation of the project, the request for the service of creating a VE according to the project can be formalized (Figure 5).
conclusIon The full potential of the VE model can only be achieved through supporting environments, such as those presented in the chapter. A study undertaken by the authors to validate the ability of the market of resources to support the high dynamics intrinsic to the VE model, based on an analytical cost and effort model and on the prototype of the market of resources, revealed its high performance when compared with the tra-
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ditional Internet-based solutions such as WWW search engines and directories and traditional electronic marketplaces. Results and discussion of this validation can be found in Cunha and Putnik (2003b, 2003c) and also in this encyclopedia. The market of resources revealed the ability to support higher reconfiguration requirements than the traditional tools (due to the more reduced reconfiguration time and cost it allows) and its suitability increases with product complexity (traduced by the number of required resources). Traditional tools only support simple products (one at each time) and do no support dynamics. By reducing reconfiguration time and cost, the market of resources is an enabler of reconfiguration dynamics and an enabler of dynamic organizational models as the virtual enterprise one. Obviously, dynamic organizational models are not general and “all-purpose” solutions. This model represents and adequate solution for
Environments for VE Integration
highly customized products with small series in highly competitive and changing environments where permanent business alignment is crucial, that is, situations where partnership stability is low (sometimes very low), dependency between partners is very weak, and reconfiguration dynamics should be as high as possible, given the permanent monitoring of the structure to traduce the most competitive solution at every moment of the product life cycle.
reFerences Browne, J., & Zhang, J. (1999). Extended and virtual enterprises: Similarities and differences. International Journal of Agile Management Systems, 1(1), 30-36. Byrne, J.A. (1993). The virtual corporation: The company of the future will be the ultimate in adaptability. Business Week, pp. 98-103. Camarinha-Matos, L.M., & Afsarmanesh, H. (1999). The virtual enterprise concept. In L.M. Camarinha-Matos & H. Afsarmanesh (Eds.), Infrastructures for virtual enterprises (pp. 3-14). Porto, Portugal: Kluwer Academic Publishers. Camarinha-Matos, L.M., & Afsarmanesh, H. (2004). The emerging discipline of collaborative networks. In L.M. Camarinha-Matos (Ed.), Virtual enterprises and collaborative networks. Kluwer Academic Publishers. Cardoso, H., & Oliveira, E. (2005). Virtual enterprise normative framework within electronic institutions. In M.-P. Gleizes, A. Omicini, & F. Zambonelli (Eds.), Engineering Societies in the Agents World V: 5th International Workshop (LNCS 3451, pp. 14-32). Heidelberg, Germany: Springer Berlin. Carlsson, C. (2002). Decisions support in virtual organizations: The case for multi-agent support. Group Decision and Negotiation, 11, 185-221.
Christiaanse, E., & Markus, M.L. (2003). Participation in collaboration electronic marketplaces. In Proceedings of the 36th Hawaii International Conference of Systems Sciences (HICSS). Covisint. (2001). Retrieved October 26, 2007, from http://www.covisint.com Cunha, M.M., & Putnik, G.D. (2002). Discussion on requirements for agile/virtual enterprises reconfigurability dynamics: The example of the automotive industry. In L.M. Camarinha-Matos (Ed.), Collaborative business ecosystems and virtual enterprises (pp. 527-534). Boston: Kluwer Academic Publishers. Cunha, M.M., & Putnik, G.D. (2003a). Agile/virtual enterprise enablers: A comparative analysis. In D.N. Sormaz & G.A. Süer (Eds.), Proceedings of Group Technology/Cellular Manufacturing: World Symposium 2003 (pp. 243-247). Columbus, OH: Ohio University. Cunha, M.M., & Putnik, G.D. (2003b, June 10-13). Market of resources versus e-based traditional virtual enterprise integration (Part I: A cost model definition). In G.D. Putnik & A. Gunasekaran (Eds.), Proceedings of the First International Conference on Performance Measures, Benchmarking and Best Practices in New Economy (pp. 664-669). Guimarães, Portugal: University of Minho. Cunha, M.M., & Putnik, G.D. (2003c, June 10-13). Market of resources versus e-based traditional virtual enterprise integration (Part II: A comparative cost analysis). In G.D. Putnik & A. Gunasekaran (Eds.), Proceedings of the First International Conference on Performance Measures, Benchmarking and Best Practices in New Economy (pp. 667-675). Guimarães, Portugal: University of Minho. Cunha, M.M., & Putnik, G.D. (2005a). Business alignment in agile/virtual enterprise integration. In M. Khosrow-Pour (Ed.), Advanced topics in information resources management (vol. 4, pp. 26-54). Hershey, PA: Idea Group Publishing. 1027
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Cunha, M.M., & Putnik, G.D. (2005b). Business alignment requirements and dynamic organizations. In G.D. Putnik & M.M. Cunha (Eds.), Virtual enterprise integration: Technological and organizational perspectives (pp. 78-101). London: Idea Group Publishing. Cunha, M.M., & Putnik, G.D. (2006). Agile/virtual enterprise: Implementation and management support. London: Idea Group Publishing. Cunha, M.M., Putnik, G.D., & Ávila, P. (2000). Towards focused markets of resources for agile/ virtual enterprise integration. In L.M. Camarinha-Matos, H. Afsarmanesh, & H. Erbe (Eds.), Advances in networked enterprises: Virtual organisations, balanced automation, and systems integration (pp. 15-24). Berlin: Kluwer Academic Publishers. Dai, Q., & Kauffman, R. (2001). Business models for Internet-based e-procurement systems and B2B electronic markets: An exploratory assessment. Paper presented at the 34th Hawaii International Conference on Systems Science, Maui, HI. Davidow, W.H., & Malone, M.S. (1992). The virtual corporation: Structuring and revitalising the corporation for the 21st century. New York: HarperCollins Publishers. Dogac, A. (1998, March). A survey of the current state-of-the-art in electronic commerce and research issues in enabling technologies. Paper presented at the Euro-Med Net 98 Conference, Electronic Commerce Track. Elemica. (2005). Elemica overview. Retrieved October 26, 2007, from http://www.elemica.com Hands, J., Bessonov, M., Blinov, M., Patel, A., & Smith, R. (2000). An inclusive and extensible architecture for electronic brokerage. Decision Support Systems, 29, 305-321.
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Martin, C. (1999). Net future. New York: McGrawHill. Metcalfe, D. (2004). Surging elemica signals the rise of the networks (Brief). Forrester Research. Retrieved October 26, 2007, from http://www. forester.com Molina, A., & Flores, F. (1999). A virtual enterprise in mexico: From concepts to practice. Journal of Intelligent and Robotic Systems, 26, 289-302. O’Sullivan, D. (1998). Communications technologies for the extended enterprise. International Journal of Production Planning and Control, 9(8), 742-753. Preiss, K., Goldman, S., & Nagel, R. (1996). Cooperate to compete: Building agile business relationships. New York: van Nostrand Reinhold. Rocha, A.P., Cardoso, H., & Oliveira, E. (2005). Contributions to an electronic institution supporting virtual enterprises’ life cycle. In G.D. Putnik & M.M. Cunha (Eds.), Virtual enterprise integration: Technological and organizational perspectives (pp. 229-246). London: Idea Group Publishing. SEEMseed_Consortium. (2005). Report of the Seemseed Workshop held at the European Commission in Brussels on May 30, 2005: SEEMseed Consortium. European Commission: Information Society Directorate-General. Retrieved October 26, 2007, from http://www.seemseed.org/default. aspx Wang, C.X. (2001). Supply chain coordination in B2B electronic markets. In Proceedings of the 32nd Annual Meeting of the Decision Sciences Institute, San Francisco, CA. Webster, M., Sugden, D.M., & Tayles, M.E. (2004). The measurement of manufacturing virtuality. International Journal of Operations & Production Management, 24(7), 721-742.
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Key terMs Breeding Environments: The virtual organization breeding environment represents a long-term cluster/pool of organizations that are supported and facilitated for the establishment of virtual organizations and other forms of dynamic collaborative networked organizations. Collaboration E-Marketplaces: Collaboration e-marketplaces are focused in helping interaction services, benefiting participants by reducing the costs and increasing the quality of multiparty information exchange. Their objective is to establish and support long-term relationships between parties for information exchange and collaboration instead of simply mediate transactions. Electronic Institutions: An electronic institution is a framework that, based on communication network, enables automatic transactions between parties, according to sets of explicit institutional norms and rules, ensuring the trust and confidence needed in any electronic transaction. The electronic institution is a meta-institution, which is a shell for generating specific electronic institutions for particular application domains. Market of Resources: An institutionalized organizational framework and service assuring the A/VE dynamic integration, reconfiguration, and business alignment. The operational aspect of the market of resources consists of an Internet-
based intermediation service, mediating offer and demand of resources to dynamically integrate in a VE, assuring low transaction costs and the partners’ knowledge preservation. Brokers act within the market of resources as the intermediation agents for agility and virtuality. Its implementation is as an independent organization/company, independent both from the offer and the demand sides of VE integration, that is, independent from the market participants, in order to assure impartiality, fairness, and trust, being able to monitor the activity of all the participants (including brokers) and to enforce the accomplishment of contracts between parties. Virtual Industry Clusters: Consists of an aggregation of companies from diverse industries with well defined and focused competences with the purpose of gaining access to new markets and business opportunities by leveraging their resources and enlarging the universe for partners’ search and selection. Virtual Enterprise (VE): A dynamically reconfigurable global networked organization, networked enterprise, or network of enterprises, sharing information and/or knowledge, skills, core competencies, market, and other resources and processes, configured (or constituted) as a temporary alliance (or network) to meet a (fast changing) market window of opportunity, presenting as main characteristics agility, virtuality, distributivity, and integrability (see Putnik, 2000).
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik; M. Cunha, pp. 499-507, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.5
Enterprise Architecture within the Service-Oriented Enterprise Scott J. Dowell Shirnia & Dowell LLC, USA
AbstrAct In his best selling book The World is Flat, Thomas Friedman proclaims “We are entering a phase where we are going to see the digitization, virtualization, and automation of almost everything … the real information revolution is about to begin” (Friedman, 2005). Certainly, the prevalence of high-speed connectivity has eliminated the barriers of doing business around the world. Lower cost and talented workforce in India and China are now easily if not transparently accessible and online. To thrive in the global economy, CEOs are using outsource, in-source, and offshore models to create strong partner-networks throughout the value chain. Technology leader Intel Corporation states in a recent whitepaper, “businesses are enjoying increased agility that allows them to rapidly respond to changing market needs and opportunities” (Intel Corporation, 2005). Enter a new paradigm called the “service-oriented enterprise” (SOE). In the SOE model, an organization views itself as a set of “business services” supported by adaptable, scalable, and reliable
technology. Early-adopters of this model are benefiting through global collaboration, real-time business responsiveness, and productive mobile work forces. By grasping this paradigm shift, enterprise architects can guide organizations in building agility model and compete in the global economy.
IntroductIon Something has changed in our world. In an interesting twist to “who moved my cheese,” the era of a single, integrated “enterprise architecture” is disappearing. The demand to increase efficiency, decrease costs, reduce time to market, and expand revenue streams are causing business leaders to evaluate and re-think their execution models. Collaboration is becoming increasingly important. Martin Brodbeck, Director, Global Application Architecture at Pfizer, Inc. states “… it’s about connecting business processes in a much more horizontal fashion … having a federated infrastructure that provides an architecture
Enterprise Architecture within the Service-Oriented Enterprise
and security foundation to be able to run these components consistently across your enterprise.” Both public and private sector organizations are moving to a model where the “enterprise” crosses partner boundaries to deliver services within the value chain. In financial markets, investors refer to this business model as a “platform company,” that is, one where knowledge capital is the differentiator and execution is through a set of service providers—each specializing in a particular segment of the value chain. Those that refine their role in the value chain and establish the right complimentary partner-networks deliver faster, cheaper, and better—trumping those who use standalone models. To better understand this paradigm shift, let us review the trends occurring in public and private sector organizations as well as how technology vendors are addressing the emerging model. In the public sector, organizations within U.S. Federal Government are creating internal partner networks by embracing “line of business” (LOB) with supporting centers of excellence (COE). This shift began in 2001 when the Hon. Mark Forman, former administrator of information technology and e-government at the Office of Management and Budget instituted the shared services model to support the Presidents Management Agenda and the eGovernment act. This model allows the Federal Government, a traditionally bureaucratic institution, to act as a private sector organization. Enterprise architecture is the key enabler as agencies strive to eliminate redundant, disparate solutions and create COEs that provide common, commodity services within an LOB. To become a COE, an agency establishes a best practice that can be selected, controlled, and evaluated for efficiency, cost effectiveness, and quality. When an agency is selected to become a COE, it can then “supply” services for a fee to fellow “demanding” organizations. Much like private sector organizations, control and trust are addressed using Service Level Agreements (SLAs) as a form of binding contract. Today, LOBs include case management,
human resources, financial management, grants management, geospatial, and IT infrastructure. Using this model, agencies can focus on delivering core competencies of the Federal Government value chain such as land management, housing, tax collection, or border security while relegating common, commodity services to the appropriate COE partner. Savings from this approach in terms of eliminating redundancy, increasing efficiency, and improving quality are estimated to be in the billions of dollars. Private sector organizations such as Toshiba, UPS, Pfizer, and FedEx are using in-source, outsource, and offshore models to address costs, efficiency, and quality in what they deliver to customers. Thirty percent of the world’s largest 1000 firms are sending work offshore. This percentage is expected to increase in accordance with the expected growth rate (20-30%) for offshore industries in India and China. Outsource and offshore models are prevalent, but let’s look at how organizations use in-sourcing to exploit the partner-network model within a value chain. An example cited by Friedman (2005) in the World is Flat is a good one. Consider the Toshiba/ UPS partnership where UPS has established a computer and printer repair hub in Louisville, Kentucky. Toshiba customers are told that if their laptop needs repair to send it in via UPS. When picked up, the laptop travels to the UPS hub, where UPS employees fix it, and ship it back to the customer. No longer does the laptop need to take the extra trips to a Toshiba center, nor does Toshiba need to dedicate resources to a lower value-add service. By understanding laptop repair can be a commodity service, it can be relegated to a partner and the resulting Toshiba value chain streamlined. According to Friedman (2005), UPS has invested $1 billion dollars in creating supply chain management expertise and is an integrated service provider for such companies as HP, Nike, Jockey, and even Papa Johns Pizza. It is doing more than delivering packages, it is moving into the value-chain of its complementing network of
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partners. In the private sector, agility is the new mantra and using a partner-network creates a flexible value chain that can be tweaked to address changing market needs, competitive threats, and new opportunities. Technology thought-leaders quickly began acting on the service-oriented paradigm shift. In 2003, Bill Coleman recognized the convergence of applications, computer resources, and widespread communications leading to a dynamic infrastructure fabric and formed Cassatt Corporation. In 2005, Intel Corporation published a whitepaper on its Web site stating, “This is a fundamental shift to a set of innovative business processes supported by a very modular, manageable IT infrastructure” (Intel Corporation, 2005). Leading vendors such as BEA, Cassatt, EMC, IBM, and Intel are delivering tools to create a modular, manageable IT infrastructure fabric supporting what is termed as the service-oriented enterprise (SOE). These solutions virtualize hardware, network, and storage resources to reduce complexity, lower costs, and increase flexibility of the IT infrastructure. Tools, such as Collage from Cassatt Corporation, extend infrastructure virtualization to support service level automation. Through service level automation, organizations use policy-based optimization to dynamically adjust computing capacity (adding, allocating, and removing infrastructure components) to meet defined service levels. Service levels can be managed in real-time in accordance to the needs of the organization. IT is experiencing a greater role in business transformation. With the maturity of virtualization and service level automation, organizations are adopting IT services management (ITSM) framework to form an “IT as a service” model. This model allows organizations to correctly position IT services within the value chain. Enterprise architects need to be aware of these changes in business and the technology that has sped the SOE adoption in both public and private sector organizations. Moving to SOE introduces
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new concepts and changes to the organization to include business services, service-oriented solutions, infrastructure services, and IT organization. Each area is briefly described below: •
•
•
•
Business services: Are meaningful functions provided in response to a business need within the value chain. They are managed using service level agreements that stipulate performance metrics and measured using financial and quality benchmarks. In SOE, they are classified as core (differentiators) and commodity (non-differentiator). Service-oriented solutions: Enable the business services of the organization through automation. Two popular trends are “software as a service” and service-oriented architecture. They are characterized as component-based architecture that can be orchestrated to solve a business service. Acting as plug-n-play components, the solutions can be constructed and re-constructed based on service level to enable the agility aspects of the SOE. Infrastructure services: Are the underlying hardware, software, storage, and network resources of an organization. This infrastructure creates a “fabric” containing pools of compute resource capability. This fabric will span the enterprise providing the ability to dynamically scale (up or down) to satisfy the business needs using service level automation. IT organization changes: The people aspects and business model of IT operations are changing focus to act as a business within the organization. IT organizations will be adopting the information technology services management to increase efficiency and contribution to the organization.
In this chapter, we discuss key areas of which enterprise architects should be mindful as they address the SOE business model. Beginning with
Enterprise Architecture within the Service-Oriented Enterprise
an overview of the SOE, the chapter addresses changes in IT strategy, solutions, infrastructure, and the IT organization.
the servIce-orIented enterPrIse The SOE differs from the traditional enterprise in several ways. A recent article in the IBM Systems Journal highlighted the differences in the two models in terms of business ecosystem, business process, and organizational issues. The comparison is shown in Figure 1. As we see, IT plays a strategic role in transforming the organization to the service-oriented
model. Enterprise architecture and its understanding of people, process, and technology is central to its success. Let’s review what else is different in the two models. SOE emphasizes forming and managing a strong partner-network to create and sustain value. Today, the scope of the value chain typically remains within a single enterprise under strict control of the business executives. In the SOE, real-time information will move among cooperating organizations to facilitate relationships among partners. The logical separation of business need (service consumption) from fulfillment (service provision) will use multiple providers to create value. Partners are continually measured and monitored using service level agreements
Figure 1. Comparison of a traditional enterprise with a service-oriented enterprise (Cherbakov, Galambos, Harishankar, Kalyana, & Rackham, 2005) Traditional Enterprise
Service-Oriented Enterprise
IT role in business (business/IT alignment)
IT has supporting role (“enabler” of business activity). Business organization has the challenge to ensure that IT understands and supports business requirements.
IT plays a strategic role in business transformation, including creation of new sources of business revenue. IT systems mirror the attributes of the business they enable.
Business value creation
Value is created in each phase in the value chain (e.g., from raw goods to finished products). Business value is created mostly within the enterprise.
Real-time information moves across the value net among cooperating businesses, facilitating dynamic relationships among partners. The business value is created through services provided by participants.
Business requirements/ fulfillment coupling
Business requirements are often generated and fulfilled by the same business unit/ enterprise.
Logical separation of business need (service consumption) from fulfillment (service provision). The same business need can be fulfilled by multiple providers.
Process flow and composite services
Process flow is often sequential; value creation is cumulative and based on the value chain. Composition of services is limited.
Process flow is net-like, through composition and enhancement (and often parallel execution) of existing services provided by participants in the business ecosystem.
Process design
Static, sequential flow with decision points in predefined sequence. Modeling is focused on decomposition.
Dynamic, based on execution results of subprocesses. Nearly real-time dynamic orchestration.
Organizational structure
Hierarchical
Horizontal, network-like structure based on service consumer-service provider relationship.
Intermediaries
Limited applicability
Service intermediaries are needed to accelerate negotiations and facilitate switching providers.
Common interpretation of service definitions
Limited applicability
Essential in the service-oriented environment.
Business Ecosystem
Business Process
Organizational Issues
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(SLAs). In this model, the enterprise will expand in scope across partner boundaries, extending its traditional organizational boundary scope. Business process flow and design is different in the SOE as well. In the SOE, process flow is less sequential and uses “net-like” patterns. Processes become somewhat autonomous services that are dynamic in nature, orchestrated to execute, and execute based on real-time results. Enterprise architects will be responsible for expressing the organization as a set of business services that are responsible for delivering goods and services in alignment with business goals and objectives. The efficacy of a business service will be measured using financial data such as capital and operational expenses as well as performance and quality metrics found in comparative industry benchmarks. Enterprise architects will be responsible for determining the best method to satisfy the business service. They will advise executives in selecting from a variety of techniques including internal provider, partner collaboration, outsource, or moving offshore using a lower cost workforce. Managing services using SLAs, executives can readily evaluate costs, quality, and performance within each segment of the value chain. The traditional enterprise structure is typically hierarchical, whereas the SOE structure is more horizontal or network-like to enable the service consumer-service provider relationships. In this regard, we may see changes in reward and recognition systems. Enterprise architects addressing organization change may need to structure programs based on service level achievement where internal and external service providers alike meet service level commitments in order to be rewarded. As such, they will likely become increasingly focused on how they best deliver value. In the SOE, the role of IT becomes more prominent in achieving business transformation. As the SOE technical architecture comprises infrastructure and applications as a set of malleable components that can be dynamically constructed and re-constructed to support the value chain.
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Organizations are becoming dependent upon IT to support the partner-network and monitor service delivery. The resulting infrastructure must be flexible, scalable, and reliable where capacity is dynamically adjusted based upon service level requirements. IT has greater responsibility in managing delivery throughout the value chain. As we can see, the SOE and traditional organization differ in structure, flow, and execution. In this new model, IT plays a significant role in business transformation. Enterprise architects shape the SOE of the future. They must correctly apply this paradigm in defining a successful strategy and the services, solution, and infrastructure that serve its execution.
ForMIng the soe strAtegy Transforming an organization begins with strategy. The elements of the strategy should address where the organization can maximize value. Its contents include vision, goals, objectives, critical success factors (CSFs), and business drivers that link to strategic outcomes through value chains. In this section, we address the linkage from strategy to measurable outcomes using a strategy map. Strategy maps, developed by Kaplan and Norton (2004), are closely aligned with the balanced scorecard—successful in many public and private sector organizations. The model emphasizes the cause-and-effect relationship of goals, objectives, and outcomes that comprise a value chain. It provides a uniform and consistent way to describe the strategy so that objectives and measures can be established and managed through execution. A strategy map is a four-perspective model provides a common language that executives can use to discuss the direction and priorities of their organization. It is used to link vision and strategy to strategic outcomes While the definition of the perspectives slightly differs between public and private sec-
Enterprise Architecture within the Service-Oriented Enterprise
Figure 2. Strategy map The Mission
The Strategy Financial Perspective
Financial Perspective
customer Perspective
If we succeed, how will we look to our donors?
To achieve our vision, how must we look to our customers?
If we succeed, how will we look to our shareholders?
customer Perspective
Internal Perspective To satisfy our customers and financial donors, which business processes must we excel at?
learning & growth Perspective To achieve our vision, how must our organization learn and improve? Strategy Framework for Public-Sector and Nonprofit Organizations Robert Kaplan and David Norton
tor organizations, the concepts and application are the same. The model uses linkages between financial, customer, internal, and learning and growth perspectives to align strategy to measurable outcomes. Through this linking, enterprise architects identify core and commodity services lie within the value chain. As an overview in applying the model, the first two perspectives, financial and customer, are closely aligned in defining value outcomes. The second two perspectives, internal and learning and growth, are linked to the execution processes. All four perspectives work together to form a living strategy. Let us take a look at a map using an example of “laptop repair.” In the financial perspective, an organization describes what they hope to achieve in traditional financial terms such as ROI, shareholder value, profitability, and revenue. Here we align objectives with a balance of short-term results such as cost reduction with long-term profitable gains in
To achieve our vision, how must we look to our customers?
Internal Perspective To satisfy our customers, which processes must we excel at?
learning & growth Perspective
To achieve our vision, how must our organization learn and improve? Strategy Framework for Private Sector Organizations Robert Kaplan and David Norton
revenue growth. Financial outcomes show how well the strategy is succeeding or failing. They typically address increasing sales or reducing costs. An example financial value statement for a personal computer manufacturer may be focused on improving laptop repair services. Creating a statement to “reduce laptop computer repair and maintenance costs by 50%” indicates value in addressing efficiency and quality services. The outcome will attack cost structure and possibly promote revenue growth by addressing a customer requirement for quick turn-around when using the laptop repair service. With this statement in place, the next step is to align it with the remaining perspectives. Satisfying customers is the way organizations sustain value. The customer perspective identifies targeted consumer segments and the value proposition to satisfy them. If the targeted base value is reliable, quality products, then skills, systems, and processes that result in quality products and
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services are of obvious importance to the organization. An example customer value statement is “If my laptop breaks, promptly repair it for me in 3 days or less”. If during the course of using a quality product the customer has an issue, it should be a seamless, painless process to have it back in working order. A continual alignment of goals to the customer perspective and internal efficiencies will reveal core business services of the organization. While financial and customer perspectives describe outcomes, effective and aligned internal processes determine how value gets created and sustained. The internal perspective identifies the efficiencies that are critical in achieving the outcomes listed in financial and customer perspectives. This perspective is where value chain elements and business services are identified. Outcomes may link to partner-network solutions. For example, if the organization wishes to increase the value of its fix and repair service by reducing costs and turn-around time, it may decide a relationship with UPS is the best method to perform the repair service, as Toshiba did. The internal perspective is linked with learning and growth as organizations must determine how solutions impact valuable intangible assets of intellectual and human capital. The learning and growth perspective identifies which positions, systems, and working environment are needed to create the value creating internal processes. These elements represent the most critical elements of an organization, its human and intellectual capital. In responding to the internal process of using an in-source solution with UPS, the learning and growth perspective determines the impact to the intangible assets of the organization. How much intellectual capital is lost in repairing laptops? How much must be retained if the business service is performed by the partner? To be successful, the organization must sustain the knowledge, culture, and leadership while balancing financial, customer value. In this perspective, the organization will confirm core business services. 1036
The strategy map is an easy way to meaningfully link strategy formulation and strategy execution. It helps organizations consider how partnerships can satisfy objectives financial terms, customer value, internal efficiency, and learning and growth. The model works well in the SOE as organization can define the business services within the value chain and the events that govern them. For further understanding of this model, the text Strategy Maps by Kaplan and Norton is an excellent study.
deFInIng busIness servIces In the SOE, the ability to construct and reconstruct business scenarios to meet changing business environment is critical. To do so, the organization should be viewed as a set of business services working together within a value chain to deliver a strategic outcome. With the strategy map in place, enterprise architects shift focus to defining core and commodity business services measured using comparable industry benchmarks such as competitive analysis. Business services comprise process, organization, information, application, and technology elements that fulfill segments of the value chain. To be effective, the enterprise architect needs a consistent method to define and communicate business services and their role in fulfilling strategic outcomes. In this section, we discuss using a supply/demand framework to define and communicate business services. In the SOE, business services act as providers or consumers working together in fulfilling a strategic outcome. For those familiar with objectoriented methodology, the model is relatively straightforward in that a provider contributes a service whereas a consumer uses it in its processing to produce a desired result. However, the SOE model extrapolates this theory several notches to that of partnerships within the value chain. While we understand the business service concept, teams may struggle with communicat-
Enterprise Architecture within the Service-Oriented Enterprise
Figure 3. Supply demand framework service oriented Architecture Foundation Patterns ed-soA-F.1: soA Foundation elements DEMAND SIDE
custoMer:
SUPPLY SIDE
coMPonent:
servIce:
A meaningful function A tangible consumer of services provided for a customer by that lead to results a component.
A tangible provider of services
Results Customer
Service
Customers require services that are provided at satisfactory performance and quality levels
ing and modeling it in a consistent manner. A framework developed by Gordon Babcock of Computer Sciences Corporation (CSC) for the Department of Education (Computer Sciences Corporation, 2005) is a very good way to model business services. The model uses a business perspective to ensure the organization gets the results it needs absent of technology bias. It uses a consistent language to describe concepts from strategic to implementation level. In this model, a customer consumes a service that leads to results. A service is a meaningful function provided by a component for a customer. A component is a tangible provider of services. Results desired by the customer create a demand for a service in the form of requirements for functionality delivered at satisfactory performance and quality levels. A component, which is ultimately constructed with tangible resources (especially technology and people) and which is capable of delivering a service that meets the customer’s service requirements, provides the service for the customer. In so doing, the component is the supplier of the service that meets the customer demand. The
Component
Components must be capable of providing services at satisfactory performance and quality levels
framework provides a set of patterns that reflect typical transaction types within an organization. These patterns use the same modeling constructs in greater and greater levels of detail. In the process of defining business services, enterprise architects should identify those that are considered “core” and key differentiators from the competition. Most organizations find that 25% of their services are “core” and allow them to differentiate themselves from competition. Typically, organizations will find commodity services in the following areas: •
•
Supply chain: Companies like FedEx and UPS have embedded themselves within partner-networks to support product delivery to consumers. China has significant manufacturing resources and processes working today. Human resources: Firms have moved recruiting, benefits management, and payroll to business process outsource firms who specialize in these areas. Delivering these services better, faster, and cheaper than internal functions. 1037
Enterprise Architecture within the Service-Oriented Enterprise
•
•
Information technology: Application development has been moved offshore to India or to popular system integration companies like Accenture, EDS, CSC, and IBM. Customer service: Call centers and help desk functions are sent offshore from the U.S. to be supported by companies primarily located in Europe and India. Because of widespread, high-speed connectivity, this service can be provided without regard to location.
When defining the business service, be sure to collect measurements that are comparable to industry and competitive benchmarks. In the U.S., a good source is the Bureau of Economic Analysis (BEA) as it provides time-series data on a variety of U.S. macroeconomic variables. In general, the business services data collection should include answers to the following: • • • •
What are the costs to execute the business service? Is there a way to measure and compare to industry benchmark standards? Can partners deliver the service at same level, quality, and lower cost? Is the service so efficient that it constitutes a new business offering?
By answering these questions, the organization will understand what areas provide greatest value to the business. The goal of any SOE solution is the ability to change and adapt based on business need. From a strategic perspective, business services are implemented using internal processing or by a partner using in-source, outsource, offshore model. Most organizations have expertise in core aspects and have other areas that are non-differentiating or commodity operations. The reason a business wants a partner to perform a particular business service is because the partner is considered an expert in that particular area. Consuming a service
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is usually cheaper and more effective than doing the work internally. Organizations must be able to easily employ a partner to perform non-core, commodity services in a more cost effective manner with the same or better service levels. Using the strategy map framework, enterprise architects can link strategy to strategic outcomes and identify which business services are critical to the organization. They will identify where the business services fit into the value chain and define sets of strategic and tactical initiatives that will have significant return on investment and deliver the business vision. Using the framework enterprise architects will be able to quickly define and communicate the role of a business service within the value chain. With business services defined, organization is in the position to link its business services with best of breed capabilities provided internally or by external partners. This component-based structure, a business is able to recognize change as it is occurring and react appropriately, ahead of the competition, and keep pace with the demands of its customers, partners, and employees.
servIce-orIented solutIons From a CIO perspective, the key managing to service-oriented solutions is in understanding, defining, and measuring service level achievement to meet strategic outcomes. The enterprise architect understands that in the service-oriented world business services are susceptible to change and as such they are good candidates to be implemented using a plug-and-play, component-based model. In this manner, they too can be ostensibly constructed and re-constructed based on the needs of the organization in a close to real-time manner. As creating and managing SLAs are much discussed in other texts, the contents of this section briefly address considerations in selecting an approach service-oriented software solutions.
Enterprise Architecture within the Service-Oriented Enterprise
Today, industry is touting two options satisfying service-oriented needs. The first option is employing the software as a service (SaaS) model where an organization subscribes to software offerings from a partner provider. Popular offerings include SalesForce.com delivering CRM; employees delivering HR; and NetSuite delivering financials. The second option is service-oriented architecture (SOA). While SOA is not a new concept, its popularity has recently increased with the advent of Web services, orchestration, and infrastructure virtualization. Enterprise architects should understand that it is the service-oriented concepts, not just technology, that instills the component-based framework and orchestration necessary to drive the SOE. It is the ability to freely subscribe, use, and release a service for a specific business purpose that makes the architecture so valuable. With the prevalence of communication bandwidth, companies can offer software applications as a service to those organizations who do not want the infrastructure. The key architectural principle for selecting a SaaS solution is ensuring a single instance of the software runs on the provider environment—and all users log into that instance. Releasing organizations from managing servers, version control, and disaster recovery, Providers have made SaaS a feasible model for the SOE. These products, once considered only viable for small-to-midsize businesses, are now used by the large corporations as well. They enable organizations to be up and running faster, better, and cheaper. The enterprise architect can find these offerings for most back office functions— those that are typically considered commodity services. The SaaS selection should be based upon standard evaluation criteria as well as the ability to extend the information model and possibly personalize the application to meet unique operational needs. With SaaS, the organization can define service levels for application performance execution while continuing to perform the service in-house. In some cases, organizations are fearful
to fully move service to a partner. However, the next logical step is to find the provider that can perform the same business service with better quality at a lower cost. For commodity services, the move is inevitable. SOA represents many things to many people today. In this discussion, it is considered a loosely coupled architectural strategy that is technology and vendor agnostic. The SOA concept naturally fits the SOE paradigm with its separation of presentation, business logic, and data tiers, orchestration, and asynchronous messaging. Using a range of technologies, architects designate applications services at an elementary-level. Because they are at the elementary level, the application services can be orchestrated, into a series of steps, to reflect how a particular business service will execute based upon a given event or result. Abstraction is a key mechanism to de-constructing and re-constructing components and integrating partner solutions without interruption to business. In this approach, the application and data are abstracted from its implementation, so its provider is transparent to the customer. Like SaaS, the consumer does not need to know if the application service is housed internally or subscribed from a provider. In December 2005, Michelson of the Patricia Seybold Group attended the SOA InfoWorld Conference and stated in her review that: Enterprises are using SOA to provide both agility and productivity for business and IT. The secret is to approach SOA as an architectural strategy. In such, make decisions based on your business, technology portfolios, and people. Don’t be misled by vendors who claim SOA can be bought in a box. Don’t be misled by technology snobs who claim SOA is Web Services. Remember loosecoupling, well-defined interfaces, and standards based messages. (Michelson, 2005) This is sage advice for all enterprise architects to follow. While service-oriented solutions are viable today, some gaps still exist in reliability, legacy 1039
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support, and data semantics. These gaps will be remedied soon, but the architect must be mindful of them while defining solutions. In terms of reliability, the best service will only be as strong as its weakest link or slowest performing component. This means, we need the correct infrastructure, one that can ensure adequate performance and compute resources that are continually available to the service. In terms of legacy support, there will be tightly-coupled, domain-specific applications supporting business services like finance, payroll, or marketing. Oftentimes, these applications and infrastructures are stovepipes of hardware, software, connectivity, and license fees. This implementation is expensive, encourages hardware/OS/SW disparity, and prohibits easy growth in accordance with the demand of the business. In the SOA model, the first step is to define how these applications can offer services for consumption by other applications or providers. They need standard interface points or consumption mechanisms to integrate with external services and support partner collaborations that require access. In terms of data semantics, the architect should create a data model that can be considered the single source of key naming terms, definitions, and relationships. To implement the SOA correctly, the data model is used as a reference point where services only message each other rather than exchange specific logic. As application services support business services, they too are measured through SLAs directly tied to business requirements. The SLAs define performance, financial, and qualitative metrics and are regularly measured to industry benchmarks or competitive analysis data. If the SLA is not being met, it should go under review and a new solution selected.
Case Study: Pfizer Global Pharmaceuticals (Manasco, 2005) Pfizer Global Pharmaceuticals (PGP) is one of the world’s largest drug companies. In the com-
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petitive pharmaceutical marketplace, leveraging technology to its fullest value is mandatory. In 2005, Pfizer examined how the services oriented approach could be leveraged to improve business capability. The following case study was found on Information week (www.informationweek. com). PGP needed an enterprise-wide servicesoriented architecture to make application integration operational. Key business data from line of business applications reside in differing business units, on differing computing platforms, located in differing geographies, must be shared. Shared services comprise both technical and business services, and must be leveraged by multiple lines of business (LOB) across the world, regardless of disparate technologies. The key functional objectives of the shared services strategy included leveraging existing data across a wide number of processes, supporting flexibility in business processes, establishing consistent standards for IT systems, and preserving the value of their existing IT assets. PGP wanted to maintain and enforce consistent policies across their computing infrastructure—deemed critical to making shared services usable enterprise-wide. The PGP technical architecture includes Web services that are security aware with business process management, content management, and XML firewalls as important elements of their new integration infrastructure. Brodbeck, Application Architecture Director of PGP, states, “Most technology investments made in the past five years have driven efficiencies in vertical processes (e.g., order process). Pfizer’s opportunity with SOA is to drive efficiency in processes that match Pfizer’s strategic needs across multiple groups within the company—either line of business, geographic, or technical group—and have an impact on unique elements of the business (e.g., clinical trials). The products must be standards-based and actually service-oriented themselves. Just putting a Web services interface on a monolithic product only gets you so far.” The goal for PGP is to alter the
Enterprise Architecture within the Service-Oriented Enterprise
competitive dynamics within the pharmaceutical industry. At PGP, the Enterprise SOA Fabric™ provides the potential to accelerate the core processes around Pfizer’s drug discovery and clinical trials while greatly reducing the cost of this enabling infrastructure. As Pfizer is successful at driving efficiencies in areas like drug discovery, clinical trials, and drug marketing, they will garner a substantial and defensible competitive advantage. PGP is altering the operating dynamics of IT by redefining their infrastructure capabilities. Working with Blue Titan’s Network Director and Cassatt Collage, the company leveraged existing technologies and platforms across operating units and lines of business. PGP developed a shared services strategy that now enables it to draw on existing data from a wide array of processes, establish consistent standards for IT systems, and enforce IT policies across infrastructure. Shared services have made it possible for developers to roll out and deploy applications much more quickly. The PGP approvals portal, the first productivity driving application of its SOA efforts, is a single place for executives to gain approvals for project expenses and invoices by providing access to 20 systems on the back-end. The solution condensed employee training from one week down to one day and help desk costs related to project management were cut by 50%.
InFrAstructure servIces In SOE, the key principle is easily changing all components of the enterprise. This principle applies to the supporting infrastructure layer as well. Infrastructure comprises the hardware servers, network, storage, and software configuration items managed by IT in support of application services. In the SOE, the infrastructure must be reactive, flexible, and scalable to continually meet the demands stipulated in the business service levels. Today, technology vendors are creating
tools that apply virtualization, compute resource pooling, and service level automation to make infrastructure compatible to the service-oriented concept. Infrastructure costs a lot. A 2004 IDC study found nearly $95 billion dollars was applied to managing infrastructure in North America. The report estimated that 57% of the IT budget is attributed to rote maintenance and administration tasks such as patch management. Most data centers are over provisioned with servers running at 15%20% of peak utilization levels. Applications are stove piped into segregated hardware, software license, data resources, and network elements. This architecture is in-flexible and costly and does not support the SOE concept. Instead, it stymies the organization as it cannot quickly shift computing resources to where they are needed. It requires the business to purchase licenses for each CPU where the specific software will run—not per utilization or transaction load associated with a particular service level. This view of infrastructure must change to implement the SOE. Enterprise architects will solve this dilemma by establishing a principle stating infrastructure must be “on-demand” and applying infrastructure virtualization. While virtualization has become a broad term that refers to the abstraction of resources, in the infrastructure context we are referring to network, servers, and storage resources. Combining virtualization and service level automation creates an infrastructure that can continually change and self-manage. Selfmanagement tasks include server failover, server image provisioning, hardware provision, operating system provision, and software provision, supporting application services. In service level automation solutions, the infrastructure components are dynamically managed using business rules that are defined based upon the SLAs of the business service. Software license fee structures will change. With infrastructure virtualization, organizations can shift license fee models from “pay per CPU”
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structure to that of a “usage based” structure. Because the infrastructure will constantly and dynamically react to service level demands, servers can no longer be tracked as static entities with assigned software components. Instead, software components (such as Web server, application server, operating system, etc.) are “in-use” when dynamically added into the infrastructure or “not used” when dynamically removed from the infrastructure. For license management, the infrastructure will track usage (number of CPUs, time, transactions) during a specified usage period. The IT department, enterprise architect, and vendor will negotiate the period—monthly, quarterly, yearly—to apply the cost of licenses and the maintenance fee. This approach is more in-tune with the service-oriented model. Several technology vendors offer infrastructure virtualization solutions. While companies such as IBM, EMC, and Sun have interesting tools, Cassatt Corporation appears to have the best approach. Cassatt Collage is technology agnostic and uses network, data, and compute resource virtualization to make the infrastructure flexible and dynamic to the needs of the business. It automates many of the daily system administration tasks such as patch management and hardware provisioning. Its application of service level automation ensures the infrastructure meets commitment levels specified in the business service.
case study: cassatt corporation Cassatt Collage combines goal-driven automation and virtualization control to respond to change and drive higher service levels. In Collage, business priorities and service-level agreements are used to create simple policies for balancing resources across applications. Drawing from a common resource pool, Collage assigns resources to meet service level requirements and automatically reassigns them as conditions change. Sharing peaks and valleys in capacity drives higher utilization
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rates and thus reduces hardware and associated maintenance costs. Where traditional management software focuses on physical resources such as servers and networks, Collage manages both physical and virtual entities. Collage enables this transformation of IT functions using existing, offthe-shelf hardware, operating systems, network switches, and applications. The tools comprise three areas: Goal driven automation, virtualization control, and infrastructure management. Each area is briefly described next. Goal-driven automation is used to optimize resource allocation by taking existing policies, priorities, and service level agreements and mapping them to goals. Based on these goals, an optimization engine automatically responds to critical events. If the optimization engine analysis determines that an application does not meet its service levels, it applies best-fit algorithms to determine the optimal course of action to bring the application into compliance. Virtualization control is used to deliver unified control of all the application components required to deliver the appropriate service levels. Collage leverages a variety of virtualization technologies, including virtual machine managers (VMM), Java virtual machines (JVM), virtual local area networks (VLAN), and its own virtualized image deployment, the image delivery service. Managing the environment includes defining policies and detailing application resource requirements. An activity reporting facility tracks which servers are running, which software, and when changes were applied for billing, auditing, and compliance. In addition, Collage provides management tool integration APIs to interface with various enterprise management systems. The features of Cassatt Collage represent the infrastructure toolset of the SOE. Through these tools, enterprise architects can establish a lower cost, efficient environment that is managed dynamically using SLAs specified in the business service.
Enterprise Architecture within the Service-Oriented Enterprise
Cassatt at Pfizer To explain how virtualization is making headway in the private sector, Information Week reported the progress made at Pfizer Pharmaceuticals in the March 2006 issue. The article shows how Cassatt Collage is supporting the Pfizer PGP architecture and its range of technology platforms. The article includes a brief comparison to other companies supporting the infrastructure virtualization space. Pfizer’s core business unit, Pfizer Global Pharmaceuticals, plans to virtualize more of the company’s middleware, particularly its BEA Systems’ WebLogic application servers, and use them as a flexible, dynamically allocateable resource. In this initial foray into infrastructure virtualization, Pfizer planned to make 14 WebLogic application servers (running on 14 hardware servers in the data center) into a single virtualized resource using Cassatt Collage software and its Web Automation Module (WAM). Using WAM, the Pfizer business applications are no longer constrained by a specific physical application server, but will be virtualized to acquire compute resources and application server services from underutilized servers within the infrastructure. With Cassatt Collage and Web automation, Module Pfizer can “manage our WebLogic environment as if it were one machine,” even though it’s spread across multiple servers, says Richard Lynn, VP of global applications and architecture. As the first phase is completed, Pfizer plans to add another 86 servers into the Cassatt management environment by the end of 2006. Pfizer plans to have 500 servers under virtualization by 2007 using a combination of Cassatt and VMware technology. Plans include extending virtualization to include portal servers and portal applications as well as Oracle DBMS, IBM DataStage for ETL, and Microsoft Windows Server applications. The benefit of managing servers using virtualization is obvious now. “We would need at least double the 500 servers if we weren’t running Collage and VMware,” reported Lynn.
The Collage software management is based upon SLA or other built-in performance rules to provision servers based on utilization levels. With WAM, the WLS software is separated from the hardware servers on which they run, and as such, are treated as a pool of resources. This is different than “load-balancing” on clusters as it understands the middleware component and its relationship to the overall goal of the SLA. Treating middleware independent of hardware and applications offers greater operational flexibility and efficient use of hardware resources. In contrast, the WebSphere Extended Deployment can also virtualize application server resources. It creates many small virtual machines in logical partitions on IBM servers and allocates JVMs and application server units as demand increases. This solution is software platform dependent, unlike the hardware resource approach of Cassatt. Using the Cassatt software over a three-year period, Pfizer plans to save “several million dollars” by reducing operations and software costs. The savings stem in part from higher server usage levels as Lynn estimated the WebLogic servers will go from about 40% utilization to more than 75% utilization. This is important as most data center servers run at approximately 15%-30% utilization—tying up unnecessary costs within the infrastructure (Babcock, 2006).
It orgAnIzAtIon chAnges The SOE means changes to people, processes, and technology. We discussed the changes from a strategy perspective with creating business services; application perspective with SaaS and SOA; and an infrastructure perspective with virtualization and service level automation. This section discusses how the IT organization will change to execute “as a business” in the role of service provider for such things as service level management, application management, capac-
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Figure 4. ITSM framework
ity management, security management, infrastructure management, and problem resolution. To make this change, private and public sector organizations are adopting the de-facto standard of information technology services management (ITSM) to run their operations in a common, structured manner. ITSM and the IT infrastructure library (ITIL) combine to provide a framework of common IT processes and services. Emphasizing alignment of IT and business objectives, ITIL comprises a library of best practices and processes to support management and delivery of IT services to the organization. By implementing the ITSM/ITIL processes, organizations have a standard means to measure efficiency and cost effectiveness of their IT services as compared to industry benchmark. The ITSM Forum is a standards body that has categorized the ITIL processes into several modules matching the activities and duties of a common IT Organization. Each module is briefly described below: •
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Service delivery: This module includes the processes associated with planning and delivery of quality IT services. It focuses on strategic processes required with improving the quality of the IT services delivered. Activities under service deliver include service
•
•
•
•
level management, capacity management, financial management, availability management, and continuity management. Service support: This module describes the processes used in day-to day support and maintenance activities associated with provisioning IT services. Service support activities include configuration management, change management, release management, incident management, and problem management. ICT infrastructure management (ICT IM): This module describes all aspects of infrastructure management to include identification of business requirements through the tendering process, to the testing, installation, deployment, and ongoing operation and optimization of the components and IT services. Planning to implement service management: This module examines the issues and tasks involved in planning, implementing, and improving service management processes within an IT organization. The module addresses cultural and organizational change, developing vision and strategy, and the method of approach. Application management: This module describes processes to manage applications
Enterprise Architecture within the Service-Oriented Enterprise
•
from the initial business need, through all stages in the application lifecycle including application retirement. It focuses on the alignment of IT projects and strategies to the business. Security management: This module describes the process of planning and managing levels of security for information and IT services. The scope includes all aspects associated with reaction to security Incidents. The module also addresses the assessment and management of risks, vulnerabilities, and countermeasures.
IT departments in both the public and private sector are adopting ITSM but are struggling with creating the best procedures to manage its services. Because data centers often vary in structure from plan and attack to chaos and react, the adjustment to standard processes is difficult. To operate as a business, IT organizations must change the way they execute to reflect a set of services with measurable service levels. ITSM and ITIL are becoming the de-facto standard for IT processes within private and public sector alike. By developing a set of standard services based upon the ITSM/ITL framework, corporations have a measurable way to gauge how effective their organization is operating. Industry experts report that IT organizations can reduce their annual IT operating costs by as much as 30% by adopting these best practices.
case study: wipro technologies The following article found in the January 2006 itSMF Research paper at www.itsmf.org describes the benefits of applying ITSM in one of the largest offshore development companies located in India—Wipro Technologies. The study attributes a dramatic improvement in service delivery and service management from applying the ITSM framework to its operations. Wipro Technologies doesn’t just adhere to the
principles of ITIL, it shares them with customers worldwide. One of India’s largest IT services vendors, Wipro, began implementing ITIL best practices in 2001 as part of an enterprise-wide quality initiative aimed at lowering costs and improving efficiencies in the company’s technology infrastructure services (TIS) unit. TIS operates Wipro’s Global Command Center (GCC), which manages IT services for nearly 300 global customers. In the highly competitive services industry, “We need to remain at the top as a quality service provider,” says Viswanathan Sankara, manager of mission quality in Wipro TIS. “ITIL is the world’s de facto standard for best practices around managing IT infrastructure.” Wipro’s challenge: How could it create a flexible, reliable management system to support the scores of incidents the GCC handles daily? Ultimately, Wipro improved internal operations through better workflow automation, better response time, and ITIL best practices. As a result, most of Wipro’s clients have seen direct benefits. One has seen an estimated 35% cost savings, mainly from automating tasks, which have helped reduce the support team’s headcount from 46 to 35, an effort savings of 24%, response time, which has improved from an average of two hours to 30 minutes, and global sourcing, co-locating the support team onsite in the UK and offshore in India, where labor costs are significantly lower. Sankara also cites several soft benefits as well. “ITIL, as a framework helps marry IT and business needs. It reminds us, for example, that our users view e-mail not as a technology, but as a critical business tool.” To achieve such success requires a top-down management commitment to excellence. That commitment is held with Chairman Azim Premji, whose mantra is: “Quality, like integrity, is nonnegotiable” (itSMF, 2006).
conclusIon In conclusion, the move to the service-oriented enterprise model is inevitable. With the accep-
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tance of capitalism in India and China and availability of high-speed connectivity, the scope of the “enterprise” is dramatically extended. Using strategy maps to link strategy to strategic outcomes, organizations can identify key business services that impact the value chain. Private and public sector organizations are stronger and more efficient through adoption of the partner-network model and the ability to adjust to a changing global market. Private sector organizations find competitive advantage based by understanding how they best contribute to the value chain and relegating commodity services to partners. Public organizations too find value by embracing SOE and promoting shared services in the context of centers of excellence. From a technology perspective, application services now support the service-oriented paradigm as well. Organizations can choose to enable current software into loosely coupled, message-based environment or make agreements with SaaS partners. Technology vendors like IBM, Cassatt, EMC, and others are providing infrastructure virtualization tools that enable storage, servers, and network to be reactive, scalable, and manageable through service level automation. IT organizations are adopting the service-oriented paradigm using ITSM and running IT as a business. Enterprise architects are the primary resource in implementing the SOE within the public and private sector organizations of the future. In this role, they must understand direction, strategy, and differentiator segments of the value chain of the organization. They will help executives determine which business services are differentiators and which are considered a commodity. For each business service, enterprise architects will select the correct model—internal, in-source, outsource, or offshore—to deliver the best solution in alignment with business direction. Success in execution will be measured using SLAs and industry benchmarks. The enterprise architecture team will monitor the ability of each business service in meeting the service
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level commitment. They will institute change as necessary. While SOE does not equal SOA, the emergence of service-oriented applications allows teams to create component-based solutions that are adaptable to changing business needs. Using such technologies as Web services and orchestration tools, a plug-and-play environment can be established to facilitate reuse and exploiting partner relationships. In terms of infrastructure, virtualization and service level automation tools from thought-leading companies like Cassatt Corporation allow IT departments to manage capacity and compute power based on SLAs. These tools remove the costly stove-pipe and over provisioned server hardware found in many data centers around the world. The ability to ratchetup or ratchet-down compute resources based on service level demands reflects the service-oriented of the global business. From a people perspective, organizations are embracing a service-oriented culture where focus is in delivering quality service to the enterprise. Roles will somewhat change in both business and IT organizations when moving to the serviceoriented enterprise. Personnel must understand how the action they take affects the overall ability to deliver on agreed upon service levels. Changes to reward and recognition systems will include how well teams meet service levels and quality of service requirements. Communication strategies must include messaging that reflects the importance of services and service level achievement of the organization. In this world of interchanging parts, the IT organization and their business operations brethren must adopt the service-oriented perspective. Adopting ITSM, the IT department is able to act as a service within the organization. ITSM helps IT teams define common services executed by the department. Using SLAs, organizations will measure the effectiveness of the IT department and make changes to increase value. When the business is viewed as a set of services that can
Enterprise Architecture within the Service-Oriented Enterprise
be coupled or de-coupled at will—then all must understand their value to the corporation. People must understand how their work affects the business and its components or they risk being replaced by a vendor that can do it better, faster, and cheaper. Today, the service-oriented concept impacts the business, organization, application, and technology domains of the enterprise architecture model. This important trend should be embraced by any enterprise architect who wishes to remain viable in the next decade. Prepare for enterprise architecture within the service-oriented world of the future.
Kaplan, R. S., & Norton, D. P. (2004). Strategy maps. Boston: Harvard Business School Press.
Babcock, C. (2006). Virtualization’s next stage. Retrieved March 20, 2006 from http://www. informationweek.com/showArticle.jhtml;jsessio nid=1YDF1RNVNUYZCQSNDBECKH0CJU MEKJVN?articleID=183700351
Manasco, B. (2005). Pfizer’s SOA strategy. Retrieved February 21, 2006, from http://blogs.zdnet. com/service-oriented/?p=215
Cherbakov, L., Galambos, G., Harishankar, R., Kalyana, S., & Rackham, G. (2005). Impact of service orientation at the business level. IBM Systems Journal of Service-Oriented Architecture, 44(4).
Friedman, T. L. (2005). The World is flat. New York: Farrar, Straus, and Giroux. Intel Corporation. (2005). Service-oriented enterprise—The technology path to business transformation. Retrieved April 3, 2006, from http://www.intel.com itSMF. (2006, January). itSMF USA research letter Volume 2 Issue 1: Wipro ITIL gains. Retrieved May 16, 2006, from http://data.memberclicks. com/site/itsmf/Research_Newsletter_-_January_2006_Issue.pdf
Michelson, B. M. (2005). Best practices, lessons learned, and takeaways from enterprise SOA practitioners. A Report from InfoWorld’s SOA Executive Forum. Retrieved March 26, 2006.
This work was previously published in Handbook of Enterprise Systems Architecture in Practice, edited by P. Saha, pp. 382399, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.6
Telecommunications Management Protocols Katalin Tarnay University of Pannonia, Hungary
AbstrAct In this chapter, the fundamentals of communication protocols are presented, and then a special application area, the telecommunications management is introduced. The main part of this chapter deals with the telecommunications management protocols. First, the model for Telecommunication Management Network is explained, and then the most widely used protocol, the Simple Network Management Protocol (SNMP), is introduced. This is followed by a discussion on the open system management protocols and the mobile Internet management protocols for Authentication, Authorization and Accounting (AAA), their comparison and evaluation. Subsequently, the expected trends are presented. The conclusion part summarizes the content of this chapter emphasizing the main ideas.
IntroductIon The Internet and the Internet services have become an essential part of our everyday life. The importance of IP-telephony, voice over IP and IPTV
is growing year by year. Mobility has become a buzzword of Internet services. It is quite difficult to answer whether user mobility, device mobility or vehicle mobility is more important. All of these are supported by different network services which meshes our business and private life. To fulfill all these complex services, the network should be reliable under variable circumstances, and it must be simply available. The users and the service providers equally require high quality services. While the network operations are continuously changing, the Quality of Services (QoS), the time constraints and the simplicity of the network resources should remain unchanged. The telecommunications management itself is responsible for the unchanged network operations under variable circumstances. To summarize, the telecommunications management system monitors, controls and coordinates the network resources, while the telecommunications management protocols are the fundamental tools to fulfill these requirements. The objective of this chapter is to present the main protocols of this field. This chapter consists of five sections followed by references and key terms. The first section discusses the necessity of telecommunications man-
agement protocols and summarizes the structure of them. The next section provides the background information on protocols and telecommunications management, and justifies why this particular method was selected. The next section focuses on the main telecommunications management protocols divided into four parts. The first part explains the Telecommunications Management Network (TMN) model and its architecture. The next part describes the operation of the Simple Network Management Protocol (SNMP), which is the most widely used management protocol. The third part deals with the Open System Interconnection (OSI) protocols, while the fourth part presents the AAA (Authentication, Authorization and Accounting) protocols. The next section forecasts the future trends by elaborating on what kind of new services and protocols are expected. The last section summarizes the main ideas of the chapter. At the end of the chapter, the references and the glossary of key terms are provided.
bAcKground This section provides an overview of the basics of communication protocols and the telecommunications management. The communication protocols can be compared to dialogues. A simple protocol specifies the rules of a message exchange between the network nodes fulfilling some communication task. The rules are applicable to three areas: the message format, the message exchange and the time assumptions. The message is similar to a word in a human dialogue, where the message format is the correctly spelled word. The message exchange means the phrase or sentences told to each other. The correct message exchange has some goal, e.g. inquiring some information. In a network this could be the task of monitoring a network resource. Monitoring needs a request to read a parameter value and a response with the value of that. The response time is limited. It is similar to a human dialogue, i.e. asking a question and waiting for the answer.
The communication protocols are standardized. This worldwide standardization enables the extension of the network. The network nodes have a layered structure, either the five layer of TCP/ IP net, or the seven layer architecture according to the Open System Interconnection (OSI) standards. A protocol specifies the message exchange between peer layers of two different nodes. The telecommunications management protocols are generally application layer protocols. A protocol message has typically two parts, a header part and a data part (see Figure 1). Figure 1 shows the general message structure composed of the header and the data. The header contains the message identifier, the identifier of the source and destination nodes. Sometimes an indication of priority is also included. The presence of other fields in the header depends on the function of the message. Some fields contain values that are constant, others values are variable. The header is followed by the data or information part .The exchange of protocol messages realizes the steps of the protocol operation (see Figures 2 and 3). Figure 2 presents a generic message structure of the message header that includes a message type identifier and a sequence number. The header is followed by information sent to the destination node. Figure 3 illustrates a dialogue that may take place between a service user and a service provider (Tarnay, 1991; König, 2003). The main purpose of telecommunications management protocols is the monitoring, controlling and coordinating the network resources to ensure high quality, reliable and error free network operation. The telecommunications management is composed of the telecommunications management station, the Management Information Base, the telecommunications management protocols Figure 1. A protocol message
Header
D a ta
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Telecommunications Management Protocols
Figure 2. A message example h e a d er
PDU type
Sequence num ber
A gent address
data
P riority
D estination
V alue
N am e
Figure 3. A time sequence diagram: a dialogue between a service user and a service provider time
Service user
Service provider
service R E QUE ST service INDICA T ION
service R E SPONSE service CONFIR MA T ION
and the managed objects which are representing network resources. Such a system realizes some management functions. The management functions may be divided into two groups: the basic management functions, which are the fault, account, configuration, performance and security management, and the advanced management functions, which are the authentication, authorization and accounting management. The advanced solutions ensure approximately equal Quality of Services level in the whole network (Garg, 2002; Stallings, 2002). The Quality of Services (QoS) deals with resource reservation rather than the achieved service quality. The packet-switched networks and computer networking in general need protocols supporting QoS. In the field of telephony, an important subset of QoS is the Grade of Services (GoS) which is the ration of lost and sent packets. While majority of other discussions only deal with one protocol, our presentation familiarizes
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the reader with all important telecommunications protocols by comparing and evaluating them. The other key feature of our method of discussion is to first of all consider the protocols from the aspects of telecommunications management.
MAIn Protocols oF telecoMMunIcAtIons MAnAgeMent the telecommunications Management network (tMn) The Telecommunications Management Network (TMN) is a protocol model for managing open systems. It is a part of the International Telecommunication Union Telecommunication Standardization Sector (ITU-T) recommendations M-series and is based on OSI management specifications in the ITU-T series X.700. TMN provides a
Telecommunications Management Protocols
framework for achieving interconnectivity and communication across heterogeneous systems and telecommunication networks. To achieve these goals, TMN defines a set of interface points which perform the communication task (e.g. call processing). The standardized interface element allows the cooperation of elements from different manufacturers using a single management control. TMN can be used in the management of ISDN, B-ISDN, GSM and ATM networks. TMN has four layers modeling the management of business, service, network, and element. The business management performs functions related to business aspects, analyzes trends and quality. It also provides a basis for billing and other financial reports. The service management performs functions for handling services of the network, like administration and the charging of services. The network management performs functions for distribution of network resources: configuration, control, and supervision of the network. The element management contains functions for handling individual network elements, like alarm management, handling of information, logging and maintenance.
simple network Management Protocol (snMP) SNMP was the first management protocol used in Internet management. The reason for its rapid spreading was its simplicity. However, this simplicity had also disadvantages, namely it did not support any accounting mechanism. To compensate the lack of these services, the second version of SNMP, SNMPv2 was developed. Currently the most up-to-date version of SNMP is the third version, SNMPv3, which is commonly used in wireless networks. SNMP is not tied to any particular set of data structures. It refers to a collection of tools used in analyzing network information; the protocol itself is part of this suite. SNMP operates on a collection of related objects identified in a Management
Information Base (MIB). Objects in a MIB are identified according to a naming scheme, which is based on Abstract Syntax Notation One (ASN.1) and which uses a hierarchical naming structure. The SNMP model includes a management station, a management agent, a MIB and a network management protocol. In this particular meaning, the management agent is the managed object, however, the terms ‘user agent’ and ‘software agent’ is also often used in telecommunications. Generally, the term ‘agent’ describes a software abstraction, an idea or a concept. The software agent is a piece of a computer program that acts for a user in a relationship of agency, while the user agent is the client application used with a particular network protocol. In SNMP, the object identifier is used to refer to a single MIB object. The object identifier is a sequence of non-negative integers that represents a traversal of an object tree. This tree starts with the root, while the branches of the object tree are referred to as subordinates. In SNMP, objects are identified by writing the path that leads to get to a specific device. The protocol operation is divided into two parts: the normal mode and the trap mode. In normal mode the state of managed objects and the parameter values are queried, answered and in some cases, the value is changed. In trap mode the possible errors are detected and collected, and some actions are initialized to inform other management stations to prevent dangerous or even harmful inferences. During normal operations, the management station sends messages to the management agent, the agent responds to the management station and the management station sends messages to another management station. From a functional perspective, these messages could be reads and writes. Three message types belong to the read function: ‘getRequest’, ‘getNextRequest’ and ‘getBulkRequest’. These message types are sent by the management station to the agent. The agent answers with the ‘getResponse’ message. To write,
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Telecommunications Management Protocols
Table 1. Comparison of SNMP versions SNMPv1
SNMPv2
SNMPv3
Standards
RFC-1155,1157,1212
RFC-1441,1452 RFC-1909,1910 RFC-1901 to 1908
RFC-1902 to 1908 + 2271 to 2275
Publication year
1988
1993
1998
Structure of Management Information (SMI) -specific data types
simple: integer, octet strings, object IDs application-wide: network addresses (only 32-bit IP addresses), counters (32 bit), gauges, time ticks, opaques, integers, and unsigned integers
New: bit strings Changes: other types of network addresses, counter (64 bit)
SNMPv3 uses SMIv2 standard from SNMPv2
simple request/response protocol protocol operations: Get, GetNext, Set, and Trap
Similarity: Get, GetNext, Set Changes: Trap message format New protocol operations: GetBulk and Inform
SNMPv3 uses SNMPv2 protocol operations and its PDU message format
SNMPv2 is incompatible with SNMPv1 in two key areas: message formats and protocol operations. Solution: RFC 1908 defines two possible SNMPv1/v2 coexistence strategies: proxy agents and bilingual network-management systems
SNMPv3 is compatible with SNMPv2
SNMPv2: Party-Based security SNMPv2u: User-Based Security (1995) SNMPv2*: User-Based Security (1995) Internet draft only SNMPv2c: Community names (Plaintext strings)
User-Based Security and View-Based Access Control
Protocol Operations
Interoperability
Security Features
Community names (Plaintext strings)
the ‘setRequest’ message is used by the management station, which is answered in dialogues by ‘getRequest’ and ‘getResponse’ messages. Read and write messages have well-defined formats composed of fields or group of fields. The first field defined in the message format is the message type. The message types are also referred as Protocol Data Units (PDUs). The next field contains the request identifier, and then the error status and the error index are represented. The variables to be queried, which belong to the ‘getRequest’ and ‘setRequest’ PDUs, are the names and the values. These are enumerated in a predetermined order.
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RFC 1902 (SMIv2)
In trap mode, the protocol operates with trap messages. The first field of the trap message is the PDU type, the second group of fields determines the location the agent (enterprise and agent address), and the third group of fields is the error type, the error code and the timestamp. The last group is the list of names and values of the parameters, called the trap information (Case, et al., 1989; McGinnis & Perkins, 1996; Simoneau, 1999; Zeltserman, 1999). Table 1 compares the three existing SNMP versions. The first version has a simple, but adequate operation ensuring the ‘read’ and
Telecommunications Management Protocols
‘write’ functions with ‘get’, ‘getNext’ and ‘set’ messages, and it also supports a simple error detection mechanism with the ‘trap’ function. Version two is intended to be used in big collections of data in a table format using the ‘getBulk’ message and for mutual exchange of information between different management stations using the info messages. Version three is similar to version two in its data representation, which is based on structures of management information specific data types (e.g. SNMPv2 has bit strings or counter fields similar to SNMPv3). SNMPv1 only uses a plain text string as a community value. Finally, the higher versions have better security solutions using user-based security.
open system Interconnection Management Protocols Open System Interconnection (OSI) is a network model where communications are based on seven layers. Each layer has three interfaces: One interface is the protocol which defines the rules of operations between peer network entities, and the other two interfaces are connected to layers above and below through service elements. The protocol is always created in order to provide some communication functions. If the purpose of this communication function is to manage a telecommunications network, then the protocol is called a telecommunications management protocol. The first developed telecommunications management protocol for the OSI network model is the Common Management Information Protocol (CMIP). CMIP is quite complex, therefore it requires expertise to manage CMIP-based networks. This is the main reason why TCP/IP devices support SNMP instead of CMIP. Although CMIP has been around for more than a decade, it has only a few implementations, mainly in the telecommunications sector. TCP/IP networks and IEEE 802 LANs both have CMIP specifications, described as CMIP over TCP/IP (CMOT), and CMIP over
Logical Link Control (CMOL or LAN/MAN Management Protocol, LMMP). In CMIP, similar to SNMP, the management application also exchanges information via managed objects, where these objects are attributes of the managed devices. With the use of the managed objects, these devices can be monitored, controlled and their parameters can be modified. Implemented by CMIP, defined in the Common Management Information Service Element (CMISE) the following services are available: ‘ACTION’, to select an action, ‘CREATE’, to create a copy of a managed object, ‘DELETE’, to delete a copy of a managed object, ‘GET’, to query a value of a copy of a managed object, ‘CANCEL_GET’, to terminate a running query process, and ‘SET’, to set a value of a copy of a managed object. In the opposite direction, the agent can report an occurrence of an event with the ‘EVENT_REPORT’ message to the management application (see Figure 4). Figure 4 presents an illustrative dialogue showing how an event report is requested and answered. The time sequence diagram provides a better understanding of the timing of different steps. To transfer management information between open systems, associations need to be established in the appropriate Open System Interconnection (OSI) layers. Previously the following services were used in the Common Management Information Service to establish associations: ‘INITIALIZE’, to establish association with another CMISE, ‘TERMINATE’, to terminate an existing association, and ‘ABORT’, to terminate an association under unusual circumstances. Later, these services were handed over to the Association Control Service Element (ACSE), which is capable of supervising the authentication to establish associations between OSI-method applications. In addition, in CMIP implementations, the Remote Operations Service Element (ROSE) may be used. ROSE is an application layer protocol, which allows entities to perform remote operations in distributed environments.
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Telecommunications Management Protocols
Figure 4. A characteristic dialogue as a time sequence diagram. CMISE Service user
CMISE Service user
CMISE service provider (CMIP)
M – E V E NT – R E POR T req
M – E V E NT – R E POR T ind
(II, M, MOC, MOI, E ty, E ti, E I)
(…) M – E V E NT – R E POR T resp (II, MOC, MOI, E ty, CT , E R , E )
M – E V E NT – R E POR T conf (…) M – CA NCE L – GE T req
M – CA NCE L – GE T ind
(II, GII)
(…) M – CA NCE L – GE T resp (II, E )
M – CA NCE L – GE T conf (…)
Table 2 shows the comparison of SNMP and CMIP. CMIP is more secure, but very complex and this has a notable drawback: more complexity means more sophisticated handling. The fundamental difference between SNMP and CMIP is how the devices are defined. CMIP uses an objectoriented method to define the devices individually, while SNMP uses a variable based method, where every variable has its own type identifier. CMIP uses event reports, while SNMP operates with TRAP messages. In conclusion, CMIP offers more opportunities than SNMP, but due to its complex handling methods, today it is rarely used (International Telecommunication Union, 1992; Black, 1995; Raman, 1998).
Mobile Internet Management Protocols remote Authentication dial-in user service (rAdIus) RADIUS (Remote Authentication Dial-In User Service) is an AAA (Authentication, Authorization and Accounting) protocol. Originally it was developed for Internet service providers to identify and authorize their users. The server running RADIUS not only controls the user authentication, but authorizes and / or bans the access to the terminal. RADIUS also logs the events of connection and disconnection of the users, making the protocol suitable for billing purposes. The authentication method depends on the location of
Table 2. Comparison of SNMP and CMIP.
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Simple Network Management Protocol (SNMP)
Common Management Information Protocol (CMIP)
Standardized organization
IETF
CCITT Recommendation X.711, ISO/IEC 9596
Model
TCP/IP
OSI (CMOT is the variant of CMIP for TCP/IP model)
Security
+
+++
Complexity
+
+++
Protocol level
application
application
Network traffic
-
---
Telecommunications Management Protocols
the data required. Under simple circumstances the data is stored on the RADIUS server itself. While under ideal circumstances, the information required for authentication is stored on a LDAP (Lightweight Directory Access Protocol) domain controller or on a database server running Simple Query Language (SQL). Using an access point (AP), the authentication technique is as follows: after the client has reported its intent to connect to the AP, it sends the user name and the password. Until the client has not been identified, it can only use an Extensible Authentication Protocol (EAP). The AP forwards the data (still using EAP) to the RADIUS server. RADIUS sends the login information to the domain controller and also converts the EAP messages to RADIUS format. The domain controller compares the data collected by RADIUS with its own data and responds to RADIUS. Finally, if everything matches RADIUS grants access to the AP. RADIUS-MIB (RADIUS Management Information Base) is an extension to the MIB used by the Simple Network Management Protocol (SNMP). This fact makes the RADIUS-MIB suitable for the handling of objects to implement the AAA process (as described previously). The RADIUSMIB has two parts: the client side objects and the server side objects (Rigney, et al., 1997)
lightweight directory Access Protocol (ldAP) LDAP is a directory service mainly used to access a hierarchical database. Unlike the most widely implemented relational databases, it uses a tree graph. LDAP databases are optimized for reading and searching, therefore it is most commonly used when data access and read are more important than data modifications. It can store all kinds of data, as long as they are organized into a tree hierarchy.
extensible Authentication Protocol (eAP) EAP is a transfer protocol, a framework for the actual authorization methods. There are five most notable EAP variations. EAP-MD5 (Message-Digest algorithm 5) supplies the fundamentals of security requirements based on user name and password. It leaves a digital fingerprint on every package it addresses in the data flow. It does not require any kind of client-side Public Key Infrastructure (PKI) certification; therefore the EAP-MD5 is not secure, but it is fast because of its simple structure. This protocol can also be used in wired networks. EAP-TLS (Transport Layer Security) maintains a high protection level for both the client and the server. The user name and the password are still required, but this protocol also uses a TLS session and requires PKI certifications on both sides. This fact is also the disadvantage of EAP-TLS, because the two-sided certification puts a significant load on the client. EAP-PEAP (Protected Extensible Authentication Protocol) is also called a protected EAP. The aim of this protocol is to establish a secure transfer agent via an encoded TLS tunnel for the other EAP versions. It does not support authorization by user name and password, but requires confidence between the client and the server in creating and transferring the TLS key. This is a significant difference between EAP-PEAP and the older versions. EAP-TTLS (Tunneled Transport Layer Security) was developed as an alternative to PEAP. As EAP-PEAP, this protocol also uses an encoded TLS tunnel for the transfer, but clients can also be authenticated by user name and password. EAP-TTLS (unlike EAP-TLS) only requires certification from the server during the authentication process. As this protocol can maintain a high security level without mutual certifications, it is considered to be one of the best solutions for wireless networks.
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The Lightweight Extensible Authentication Protocol (LEAP) was developed by Cisco and completely proprietary to Cisco, therefore it is only compatible with Cisco products. It requires a two-side authentication: first, the client identifies itself to the authenticator, then the authenticator identifies itself to the client. Only after this procedure can a network access be established. Similar to EAP, the authorization is made by user name and password, and does not require complex PKI certifications. Considering its security level, LEAP is somewhere between EAP-MD5 and EAP-TLS.
Figure 5. The basic model of COPS.
common open Policy service (coPs)
diameter Protocol
COPS is an application layer protocol over TCP (Transmission Control Protocol). In wide area networks, COPS also provides Quality of Services (QoS) at an approximately equal level. From the point of view of COPS, the network has a simple client-server structure, where the client is the Policy Enforcement Point (PEP) and the server is the Policy Decision Point (PDP) (see Figure 5). The client and the server are connected through COPS, which is used to communicate policy information. The PEP can initiate a connection and sends keep-alive messages in case of no information exchange is presented. If the connection is lost, the PEP tries to establish the connection again, if it does not succeed, it tries to reach another PDP. There is a number of COPS messages, for example the ‘In Interface’ message, which defines the source location of the message, the ‘Out Interface’ message, which defines the destination of the message, and the ‘PDP Redirect Address’ message, which defines the next PDP address where the message has to be forwarded in case of former rejection. COPS has two operational models, the outsourcing and the provisioning model. In the outsourcing model, PEP delegates the decision making step to the PDP (Durham, et al., 2000; Mallenius, 2000). In the
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network device PE P
L PDP
PDP PE P: Policy E nforcement Point PDP: Policy Decision Point L PDP: L ocal Policy Decision Point
provisioning model, PEP creates a fixed policy setting before any traffic is initialized. PDP can modify this predefined policy as required.
The Diameter protocol provides the Authentication, Authorization and Accounting (AAA) framework for Mobile IP, delivers attribute value pairs, which carry specific information for AAA, security and configuration. Diameter is extensible through addition of new commands (e.g. can define new accounting or authorizing applications), it has a built-in error notification function and it is capable to negotiate the capacity of the resources with managed objects. Diameter is fully compatible with RADIUS. A Diameter session consists of commands and exchanges of attribute value pairs between authorized clients and servers. The base protocol provides the minimum requirements for AAA, mobile IPv4 or remote network access applications. In Diameter operation, any node can initiate a request, which makes Diameter a peer-to-peer protocol. The message format includes the message type, the version number and the application type. Table 3 contains the comparison of the main AAA protocols, SNMPv3, COPS, RADIUS and Diameter. All the four AAA protocols are application layer protocols. SNMPv3, COPS and RADIUS are based on client-server structure, while Diameter has a peer-to-peer architecture. Each of these four protocols has advantages from
Telecommunications Management Protocols
different points of view. SNMPv3 has the strength of security, COPS can ensure the Quality of Services, while RADIUS and Diameter have good AAA capabilities (Calhoun, et al., 2003; Hosia, 2003; Carnegie Mellon Software Engineering Institute, 2007).
Future trends In the near future, only small steps are expected in protocol development. To answer questions regarding long term trends is not easy. It seems to be clear that two seemingly different points of view will dominate: the user-centric and the service provider requirements. User-centric solutions ease the user’s effort to access and use the network. Service providers and users are both interested in high quality transmission, reliable operation and adequate accounting. The most important requirements are equally important for users and service providers. One of these requirements is security. The telecommunications management protocol messages carry a lot of important information about the message route
and its environment; therefore it is a necessity to ensure security. In the near future, the strength of cryptography is expected to be increased, for instance identity based cryptographic methods and new message syntaxes are being developed. As for service providers, routing is an important issue. There are trends dealing with telephony routing over IP, and also the application of IPv6 is under consideration (Boyen, 2007; Devarapalli, 2007; Housley, 2007; Carlberg & O’Hanlon, 2008). Another interesting new direction is the application of telecommunications management methods for other networks. For example, a sensor network is composed of sensors measuring the temperature changes. The management station monitors the temperature in a predefined order and compares the values. This sensor network can be considered as a mobile ad hoc sensor net. Still, probably the most important future trend is the network convergence, also called the media convergence. It means the coexistence of telephone, video and data communication within a single network. User requirements and consumer demands equally focus on network convergence, especially in the world of the Internet. It is impor-
Table 3. Comparison of AAA protocols SNMPv3
COPS
RADIUS
Diameter
Publication year
1998
2000
1997
2003
Main standard
RFC-2271
RFC-2748
RFC-2058
RFC-3588
Standardized organization
IETF
IETF
IETF
IETF
Functions
Collect and set management information on network
exchanging network policy information between a PDP in the PEPs as part of overall Quality of Service
AAA applications
AAA + congestion control
Security
optional IPsec
optional IPsec or TSL
optional IPsec
Always use IPsec or TSL
Transport layer protocol
default UDP, optionally TCP
TCP
UDP
SCTP or TCP
Reliability
+
++
++
+++
Robustness
+
+
++
+++
Architecture
client-server
client-server
client-server
peer-to-peer
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tant to note that sending text based information, ‘surfing’ on the Web, and sending voice messages at the same time demand the significant increase of bandwidth. Also, more sophisticated applications require more effective network resources. Data exchange of increasingly rich contents requires new technologies. Therefore, the network convergence plays an important role in the telecommunications management.
conclusIon This chapter presented the main telecommunications management protocols. First, the general concepts of protocols were briefly discussed, and then the basics of telecommunications management were outlined. The main protocols were classified according to three groups: SNMP, OSI protocols and AAA protocols. The section for future trends was based on ideas for new requirements which should initiate the development of new protocols. The ideas of this chapter can be summarized as: The telecommunications management protocols have a great importance, but despite of them being well developed even today, candidates for new protocols are expected. The telecommunications management methods will appear in many application areas of ebusiness. These applications will have an impact on telecommunications. Simplicity, security and openness are the keywords of the future telecommunications management protocols.
AcKnowledgMent Special thanks to Dr. Maria Toeroe, PhD (Senior Researcher, Ericsson Canada, Inc., Montreal) and to Dr. József Harangozó, PhD (Associate Professor, Budapest University of Technology and Economics, Budapest) for their useful suggestions. The author is also grateful to Dr. János Miskolczi, PhD (Senior Consultant, Ericsson Hungary, Ltd.,
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Budapest), Tibor Dulai, Dániel Muhi and Szilárd Jaskó (Assistant Professors, University of Pannonia, Veszprém) for their continuous support and brilliant ideas.
reFerences Black, U. (1995). Network Management Standards: SNMP, CMIP, TMN, MIBs, and Object Libraries. New York: McGraw-Hill Companies. Boyen, L. M. (2007, December). RFC 5091 Identity-Based Cryptography Standard (IBCS). Calhoun, P., Loughney, J., Guttman, E., Zorn, G., & Arkko J. (2003, September). RFC 3588 Diameter Base Protocol. Carlberg, K., & O’Hanlon, P. (2008, January). RFC 5115 Telephony Routing over IP (TRIP). Carnegie Mellon Software Engineering Institute (2007). Common Management Information Protocol (CMIP). Retrieved January 2008, from http:// www.sei.cmu.edu/str/descriptions/cmip_body. html Case, J. D., Fedor, M., Schoffstall, M. L., & Davin, J. (1989, April). RFC 1098 Simple Network Management Protocol (SNMP). Devarapalli, V. (2007, December). RFC 5096 Mobile IPv6 Experimental Messages. Durham, D., Boyle, E. J., Cohen, R., Herzog, S., Rajan, R., & Sastry, A. (2000, January). RFC 2748 The COPS (Common Open Policy Service) Protocol. Garg, V. K. (2002). Wireless Network Evolution, 2G to 3G. New Jersey: Prentice Hall. Hosia, A. (2003). Comparison between Radius and Diameter (T-110.551 Seminar on Internetworking). Helsinki, University of Helsinki, Department of Computer Science.
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Housley, R. (2007, November). RFC 5083 Cryptographic Message Syntax (CMS) AuthenticatedEnveloped-Data Content Type. International Telecommunication Union (1992). Management Framework for Open Systems Interconnection (OSI) for CCITT Applications. Retrieved January 2008 from http://www.itu.int/ rec/T-REC-X.700-199209-I/en König, H. (2003). Protocol Engineering (in German). Weisbaden, B. G. Teubner Verlag. Mallenius, S. (2000). The COPS (Common Open Policy Service) Protocol (Research seminar on IP Quality of Service). Helsinki, University of Helsinki, Department of Computer Science. McGinnis, E., & Perkins, D. (1996). Understanding SNMP MIBs. New Jersey, Prentice Hall.
Key terMs Accounting: Accounting means the tracking of network resources by users. The typical information gathered in the accounting process is the identity of the user, the level of the services delivered, and the time interval in which the services were being used. Authentication: Authentication means that a user who is requesting services is a valid user of the network services requested. Authorization: Authorization means that a user can access some services based on its authentication, but the access in only provided for a given amount of time. Therefore authorization is a kind of limitation of the authentication rights.
Raman, L. (1998, March). OSI Systems and Network Management. IEEE Personal Communications, 36, 46-53.
Outsourced Policy: Outsourced policy is a model where a policy enforcement device issues queries to delegate a decision for a specific policy event to another component external to it.
Rigney, C., Rubens, A., Simpson, W., & Willens, S. (1997, January). RFC 2058 Remote Authentication Dial In User Service (RADIUS).
Policy: Policy is the ability to define conditions for accepting, rejecting and notifying routes according to the actual information.
Simoneau, P. (1999). SNMP Network Management. New York: McGraw-Hill Companies.
Provisioned Policy: Provisioned policy is a model where network elements are pre-configured, based on policy, prior to processing event. Provisional policy is contrasted with outsourced policy.
Stallings, W. (2002). Data and Computer Communications. New York: Macmillan Publishing Company. Tarnay, K. (1991). Protocol Specification and Testing. New York: Plenum Press. Zeltserman, D. (1999). A Practical Guide to SNMPv3 and Network Management. New Jersey: Prentice Hall.
Quality of Services (QoS): Quality of Services refers to an ability to deliver network services according to the parameters specified in a service level. Quality of Services is also an agreement containing service availability, delay, throughput and packet loss ratio, and the ability to provide different priority to different applications, users or data flows.
This work was previously published in Handbook of Research on Telecommunications Planning and Management for Business, edited by I. Lee, pp. 502-514, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.7
Strategic Outsourcing:
Opportunities and Challenges for Telecom Operators Varadharajan Sridhar Management Development Institute, India
AbstrAct Telecom operators have a wide variety of functions to perform including marketing of telecom products and services, managing their networks, providing after-sales customer service, and innovating new products and services in tune with fast changing technologies. Though until recently the telcos have kept their core network management functions in-house, there are recent announcements of large scale outsourcing of network management functions. As operators, especially those providing mobile services, have evolved from offering voice services to advanced data and video services, the Information Technology (IT) services required for appropriate management of these vale added service offerings have also become complex. Some carriers have also outsourced their IT functions to large IT services vendors. In this chapter we deliberate the reasons for strategic outsourcing such as core competency, production economies, and transaction costs as presented in the literature and
analyze these in the context of outsourcing model pioneered by an Indian mobile operator. We also explain vulnerabilities and risks associated with these outsourcing contracts and measures to be taken by the firm to mitigate their effects.
IntroductIon Outsourcing is defined as the process of commissioning part or all of an organization’s assets, people, and/ or activities to one or more external service providers (Lee, 2006). Lee (2006) further points out that since outsourcing can make organization either agile and proactive, or sluggish and reactive, it is just not an operational decision but a strategic one with far-reaching consequences. Quinn & Hilmer (1994) point out the following two strategic outsourcing approaches used by chief managers of organizations: 1.
Concentrate the firm’s own resources on a set of “core competencies” where it can
achieve definable preeminence and provide unique value for customers. Strategically outsource other activities— including many traditionally considered integral to any company—for which the firm has neither a critical strategic need nor special capabilities.
By doing the above, firstly, the firms maximize return on internal resources. Second, well developed core competencies provide formidable barriers against future and present competition. Third, the firms that outsource are able to fully utilize the external supplier’s investments, innovations and specialized professional capabilities to their advantage. Fourth, this joint strategy decreases risk, shorten cycle times, lowers capital and operating expenditures for the firm. Through out 1990s, large firms in the United States first began outsourcing non-core information technology (IT) services to large companies domestically, preferring to have these services provided securely and reliably from outside, rather that building up in house expertise. Outsourcing work mainly included software application development and maintenance. Typically the IT services and their associated processes tend to be human intensive and are traditionally outsourced to countries where the labor costs are lower and from where the services could be delivered remotely without sacrificing quality and efficiency (Sridhar & Bharadwaj, 2006). Referred to as offshoring, the organization’s products and services in this case are provisioned from locations in other countries (Davis, et al.,2006). Examples of such offshore outsourcing areas include customized software development, package software implementation, software product testing, customer care support services, IT infrastructure management and back office operations. US companies expanded off-shoring through partnership, acquisitions and local subsidiaries. Thus they followed a less risky and more strate-
gic approach of alliances by keeping the control with them. Their sourcing strategy more closely resembled the “in-sourcing” strategy of traditional offshore investments for global manufacturing. Sridhar & Bharadwaj (2006) discuss details on the model of growth of IT and IT Enabled Services outsourcing industry.
strategic outsourcing Models Following are the three different outsourcing strategies pursued by firms (Lee, 2006):
Independent Outsourcing Strategy In an independent strategy, relationships with external providers are tenuous, with interactions lasting for a very brief period of time. In this strategy, firms acquire resources externally but manage them internally. Firms develop indigenous competency thus minimizing dependence on external entities for critical organizational resources. This approach pursues a minimal outsourcing, buy-in contract and short-term duration strategy to gain outsourcing benefits by redirecting the business in to core competencies.
Arm’s Length Outsourcing Strategy An arm’s length approach is based on non-idiosyncratic relationships with the presumption that sellers are interchangeable. These relationships commence with a detailed specification of each party’s obligations. The control of unspecified obligations are vested on the provider. In order to minimize the exposure to provider opportunism, such relationships are loosely coupled, and long-term commitments are avoided. The outcome of such relationships is typically cost efficiency through the competitive pricing of services. In summary, this strategy focuses on improving the business’ financial position by pursuing a selective outsourcing, fee-for-service contract, and medium-term approach.
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Embedded Outsourcing Strategy Embedded arrangements are superior in their ability to facilitate knowledge transfer and acquisition. The strength and stability of the relationships are derived in large part from both parties being committed to a long-term relationship. Opportunism is curtailed by the anticipated cost of foregoing a long-term relationship. Personal ties and emergent trust prevail and partners undertake joint problem solving. Hence the objective of this outsourcing strategy consists of comprehensive outsourcing, partnership, and long-term relationship to strengthen resource and flexibility in technology service that underpins the firm’s business direction. Though there are a number of studies on IT outsourcing as pointed out by Sridhar & Bharadwaj (2006), there is a dearth of studies of IT outsourcing practiced in different industry verticals such as manufacturing and telecom. In this chapter, we look specifically at the strategic outsourcing in the telecom industry. Telecom operators have a wide variety of functions to perform including marketing telecom products and services, managing their networks, providing after-sales customer service, innovating new products and services in tune with fast changing technologies. Though until recently the telcos have kept their core network management functions in-house, there are recent announcements of large scale outsourcing of network management functions. As operators, especially those providing mobile services have evolved from offering voice services to data and video services, the IT services required for appropriate management of these value added service offerings have also become complex. Some carriers have also outsourced their IT functions to large IT services vendors. In this chapter, we discuss the motivations behind such outsourcing contracts, taking examples from a mobile service provider in India. In the next section, we discuss trends in outsourcing by telecom operators. Subsequently we discuss rea-
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sons for outsourcing by telecom operators citing examples from the Indian telecom industry on outsourcing contracts. We also discuss vulnerabilities of outsourcing and imitations effects. We conclude with future research directions.
trends In outsourcIng by telecoM oPerAtors Following are the three different areas of outsourcing being pursued by the telecom operators: 1.
2.
3.
Network operations and management: Network capacity planning and deployment, integrating network equipment, network maintenance, installation and fault repair, deployment of new network services. IT Management: IT infrastructure management, desktop and server management, Operational Support Services (OSS), Billing Support Services (BSS), customer relationship management software development and implementation, deployment of new IT services. Customer Relationship Management: Call centre services.
However, the nature and complexity of the above operations differ across different types of services (viz. mobile, fixed) offered by the telecom operators. The amount of outsourced work differs depending on the following models adopted by the telecom operators: 1.
Full Outsourcing: The contracting partner takes full responsibility for the functions and services. Typically this involves transferring both staff and assets by the operator to the contracting partner. Examples include Redstone which outsourced its entire UK operations to BT Wholesale, Hutchison “3” in Italy and the UK.
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2.
3.
4.
Out-tasking: In this model, the telco borrows skilled engineers and other resources from the contractors. However it retains full control and management of network operations and services. Examples include Movistar in Puerto Rico which out tasked the technical support functions to Lucent. Build Operate and Transfer: The contractor takes responsibility for designing, building and deploying the network. After the services are commenced, the assets are transferred to the operator. This model is typically used for green field projects such as network build-out by new entrants or new network services such as 3G/4G by the incumbent operators. Examples include the technology upgrade of Eurotel of the Czech Republic. Managed Capacity: The contractor takes responsibility to provide the operators with capacity to provide various service offerings. Examples include Bharti Airtel in India outsourcing capacity management to Nokia-Siemens and Ericsson.
Indian Mobile Market Quick deployment, competition, advancement in technologies, and reduced cost of access has propelled the growth of mobile services in India much like in other emerging countries. Indian mobile subscriber base continues to grow and has reached about 225 million in December 2007 from about 142 million a year ago. Figure 1 illustrates the exponential growth of mobile services in India. India currently has the world’s third largest mobile subscriber base in the world, and is slated to exceed that of the US by the end of this year to become the second largest in the world, next only to China. The compounded annual growth rate of mobile subscriber base has been 84.2 percent over the last five years. Revenue from cellular mobile services touched $12.5 billion for the fiscal year ending March 2007 (Voice & Data, 2007).
Figure 1. Growth of mobile services in India
However, Sridhar (2007) points out that intense competition, very low prices, very low Average Revenue Per User (ARPU), and high regulatory levies are characteristics of the Indian mobile industry. These have forced Indian telecom operators to adopt innovative methods to improve productivity and efficiency and reduce expenses.
outsourcing by bharti Airtel In 2003, Bharti Airtel, the largest private telecom operator in India outsourced its network management and IT operations. In March 2003, Bharti outsourced its data centre operations, billing support systems, application development, and customer relationship management valued at $750 million in a 10-year contract with IBM (Singh & Dubey, 2004). Bharti’s agreement with IBM was based on revenue sharing. Over a period of ten years, IBM would design, build up, and maintain Bharti’s IT network in a full outsourcing model in exchange for a portion of Bharti’s revenues (Martinez-Jerez, & Narayanan, 2006a). During the contract period, IBM would operate Bharti’s data centre, its disaster recovery site at Chennai, India, and the billing that Bharti does in its licensed service areas around the country, its Customer Relationship Management programme, all applications development, as well as the IT help desk. IBM would also handle over 80% of Bharti Airtel’s current programme and project management.
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Bharti followed this with outsourcing network management to Ericcson (in 14 license service areas) and Nokia Siemens (in 7 license service areas) for a 3-year $724 million contract. During this period, Ericsson and Nokia Siemens would manage base stations (antennae, switches, routers, transmitters and receivers) within their areas of operation, deploy new base stations as required, roll out new networks and applications, and take on board roughly 800 of Bharti Airtel staff. They would also add new staff dedicated to Bharti Airtel as the network and business of Bharti expanded. As a result of these outsourcing contracts, Bharti Airtel would now just handle a few things: marketing, sales and distribution. Apart from that, it would just monitor its vendors, see that they stick to the parameters of the contracts, and make sure that they deploy and build only the best systems and networks for Bharti’s operations (Singh & Dubey, 2004). While the IBM outsourcing deal followed the full outsourcing model, the network management was on a managed capacity model. The success of this outsourcing model is explained in detail in Martinez-Jarez & Narayanan (2006b). We discuss the reasons for the outsourcing contract (for details on Bharti Airtel, the reader is referred to Appendix I).
for IT related outsourcing were cost control and reduction, focusing on core competencies, access to new expertise and technologies and improved flexibility. Way back in 1989, when Kodak announced outsourcing data center operations to IBM, telecommunication services to the Digital Equipment Corporation, and PC support to Business Land, it created quite a stir in the IT Industry. Never before had such a well known organization, where IS was considered to be a strategic asset, turned it over to third party providers (Applegate & Montealegre, 1991). Kodak appears to have legitimized outsourcing, creating what is known as “The Kodak Effect.” A number of high profile multi-billion dollar “mega-deals” were signed increasing the awareness of outsourcing.
What is Core for Bharti? The Indian mobile industry is highly fragmented with as many as 6-9 operators in most of the service areas. Figure 2 illustrates the amount of competition and market power as indicated by the Herfindahl Hirschman Index (HHI). (viz. lower the HHI, more is the competition). With more than 85% of mobile subscribers being pre-paid, Bharti decided that acquiring and retaining customers is a very important core activity in which it should concentrate its energy and resources. Hence Bharti
reAsons For strAtegIc outsourcIng core Areas of the Firm Companies consistently make more money than their competitors only if they can perform some activities—which are important to customers— more effectively than anyone else. The argument of focusing on core competency is cited by many researchers (Lacity, et al, 1996; Mcfarlan & Nolan, 1995; Prahalad & Hamel, 1990; and Willcocks, et al 1995). In a qualitative research, Pinnington & Woolcock (1995) have found that the drivers
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Figure 2. Competition in mobile services in India
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Figure 3. Growth of mobile subscribers of Bharti Airtel
in its outsourcing strategy kept marketing, sales and distribution activities to itself so that they can dominate over their competitors in customer acquisition and retention. Most of the telcos still consider their networks to be core to their business. This is especially true of government operators who consider networks to be their property and have been managing their erstwhile monopoly network operations by themselves. Though Bharti entered in to the telecom services market in 1995, the chief managers of the firm did not have the fixated idea of managing the network by them selves. Bharti created something akin to the “Kodak effect” in telecom outsourcing as it was watched by many operators world over for the success of it (Martinez-Jerez & Narayanan, 2006a). The shift in focus to concentrate resources on customer facing core activities seems to have paid of for Bharti. This is reflected in the growth in subscriber base of Bharti since 2003 as illustrated in Figure 3.
Maintaining competitive Advantage Quinn & Hilmer (1994) point out that the key strategic issue in insourcing versus outsourcing is whether a company can achieve a maintainable competitive edge by performing an activity, usually cheaper, better, in a more timely fashion or with unique capability on a continuous basis.
They further pointed out that Ford Motor Company found that many of its internal suppliers’ quality practices and costs were nowhere near that of external suppliers when it began its famous “best in class” worldwide benchmarking quality studies. However outsourcing entails contractual risks such as vendor bankruptcy, vendor’s inability to deliver, and contract breach by the vendor. To mitigate these, the firm engages in screening the vendor ex-ante and monitoring vendors ex-post. In screening, the firm’s goal is to identify a potential vendor who is best suited for providing a certain service. Through proper screening, firms can reduce the risk of opportunism and adverse selection (Vitharana & Dharwadkar, 2007).
How Bharti Chose its Partners and Managed them? Bharti chose Ericsson and Nokia Siemens, the top two mobile network equipment manufacturers for network management. Further, Bharti decided to partner with the best-in-class in managed IT services so that the technical aspects of developing and managing various IT services are also outsourced. IBM, the global leader in managed IT services, was selected to provide Bharti with complete and comprehensive end-to-end management of all of Bharti’s hardware, software and applications requirements along with expert management of the IT infrastructure. Even while IT companies in India were going after large export IT off-shore contracts, IBM won the major domestic contract from Bharti due to expertise and world leadership (Sridhar, 2008). Telecom technologies change rapidly and risk of technology obsolescence is very high in the industry. Outsourcing network management and capacity planning to equipment vendors like Ericsson and Nokia-Siemens, Bharti transferred the technology obsolescence risk to the vendors. With constant growth in the market, Bharti was finding it difficult to recruit and train skilled man-
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power for its IT and network functions. However, large vendors such as IBM, Nokia-Siemens and Ericsson had huge skilled technical manpower and were in much better position to do the corresponding functions more efficiently than the telecom operators such as Bharti (Martinez-Jarez & Narayanan, 2006a). The success of outsourcing is related to the service quality (Grover, et al, 1996). With highly trained manpower, the vendors of both IT and telecom were able to provide the much needed quality of services to Bharti.
Production economies Neoclassical economics regards any business organization as a production unit motivated by profit maximization. Williamson (1981) argues that a firm justifies sourcing options based on production economies. In the context of telecom and IT, a firm will choose to outsource or in source based on the comparative costs of internalizing the functions versus the price it has to pay vendors for the services (Saarinen & Vepasalainen, 1994). The propensity to outsource exists due to reduction in production cost as cited by Lacity, et al. (1996), Loh & Venkatraman (1992a), McFarlan & Nolan (1995). Although the reports in press and media tend to inflate the potential savings (Lacity & Hirschheim, 1993), the comparative cost advantages offered by vendors are a major factor in outsourcing services (Ang & Straub, 1998). Loh & Venkatraman (1992b) have empirically supported a positive relationship between IT cost structure and outsourcing. It is hypothesized by Ang & Straub (1998) that the higher the production cost advantage offered through IT outsourcing, the greater the degree of outsourcing. Thus the key compelling force driving the companies to outsource is savings due to reductions in direct wage costs and other operating expenses. Murray & Kotabe (1999) have shown a negative relationship between asset specificity and internal
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sourcing of supplementary services. The result suggests that unlike product sourcing strategy where asset specificity and internal sourcing are positively related, supplementary services tend to be sourced externally to reduce fixed investment and increase operational flexibility.
How did Bharti Achieve Production Economies? In both network and IT outsourcing contracts, Bharti transferred its employees who were performing the functions outsourced to the payroll of the contracting partners. Soon after the outsourcing contract was signed up to 1000 engineers were transferred from Bharti to the vendors. According to one of the chief managers of Bharti these engineers were happier working for the technology companies than with the service providers. This apart from decrease in wage costs, improved efficiency of operations as well. The managed capacity model with network vendors allowed Bharti the flexibility to pay the vendors on Erlang basis as and when the network capacity was up and running and was used. This avoided excess capital expenditure by Bharti on its network infrastructure deployed in anticipation of future demand. This also allowed Bharti a window of credit period and hence rationalized the capital expenditure in tune with the actual demand. The focus of the Indian mobile operators was switching from plain vanilla voice to value added services. Indian operators had to adopt 2.5G and 3G services to provide these services which required large capital expenditure (Martinez-Jarez & Narayanan, 2006a). The managed capacity model followed by Bharti protected it against such large expenditures. Due to capacity based payment to network vendors, it was estimated that the capital expenditure of Bharti declined by as much as $730 million in 2007 (Singh & Dubey, 2004).
Strategic Outsourcing
transaction costs
it up with continuing personnel development and infrastructure management.
Quinn & Hilmer (1994) discuss that while outsourcing, analysts must include both internal transaction costs as well as those associated with external outsourcing. External transaction costs refer to the effort, time, and costs incurred in searching, creating, negotiating, monitoring and enforcing a service contract between buyers and suppliers (Mahoney 1992). These transaction costs can erode comparative advantages in the production costs of vendors. However Ang and Straub (1998) have shown that both production cost and transaction costs are important in decision while outsourcing, however production costs are the overwhelming dominant factor, about six times as large as that of transaction costs. Considerable reduction in production cost with only marginal increase in transaction cost increases propensity to outsource. If the products and services were to be internal, firms must back
How did Bharti Reduce Transaction Costs? Due to high growth in mobile services, Chief Managers of Bharti were tendering, negotiating and working with the vendors every six months for network expansion. This resulted in (i) huge management bandwidth being spent on follow-up and other non-innovative, non-customer oriented activities and (ii) delays in deploying networks in a very competitive market place and (iii) unpredictable business models (Singh & Dubey, 2004). Quinn & Hilmer (1994) argue that one of the great gains in outsourcing is the decrease in executive time for managing peripheral activities—freeing top management to focus more on the core of its business.
Table 1. Example SLAs Bharti had with Network Outsourcing Partners (Banerjee, 2008). Areas of Measurements 1
Target
Lower Control Limit
Upper Control Limit
No Reward Limit
Network Availability
1.1
Network Availability of Switch
>99.95%
<99.93%
>99.97%
<99.5%
1.2
Network Availability of Radio Access
>99.2%
<99%
>99.4%
<98.5%
2
Available Network Capacity
2.1
Switch Network Utilization
<70%
>55% &<65%
>80%
2.2
Peak Processor Load during 24 hours
<70%
<60%
>80%
2.3
Cells having utilization >=90%
<10%
<5%
>15%
3
Network Accessibility
3.1
Successful Call Rate
95%
<92%
>98%
3.2
Random Access Success Rate
95%
<92%
>98%
3.3
Call Handover Success Rate
90%
<87%
>93%
95%
<93%
>97%
4 4.1 5
<88%
Voice Quality Percentage of cells having SQI samples between 16-30
<88%
Customer Satisfaction Index
5.1
No. of Network Related Complaints per 1000 Subscribers
<3
<2
>4
5.2
Percentage of Network Related Complaints Resolved Within SLA
>90%
<85%
>95%
<80%
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Bharti achieved this through well defined long term contracts with its vendors. However, managing and monitoring of the external partners required innovation in Service Level Agreements (SLAs). Detailed SLAs covering every aspect of outsourcing (for both IT and telecom) with associated penalties for non-conformance provided a framework for monitoring (Singh & Dubey, 2004). Examples of SLAs for the outsourced network management activities are included in Table 1. As is shown in the table, if any of the measurements fall below/ above certain threshold levels as indicated, there are penalties/ rewards as appropriate. Along with SLAs, Bharti also defined Key Performance Indicators (KPIs) through which the performance of vendors were monitored and measured. By going for long term partnerships with select vendors of repute with detailed SLAs and KPIs, Bharti reduced the explicit transaction costs with the external vendors, thus making it a viable business model. It should be noted that the IT outsourcing with IBM was a full outsourcing model with corresponding set of SLAs. A list of over 100 SLAs were designed, implemented, measured and monitored by Bharti and IBM every month. The broad domains of SLAs included disaster recovery, infrastructure, projects, security and support (Details of some of the SLAs are provided in Martinez-Jerez & Narayanan, 2006b). Thus, by monitoring the SLAs and KPIs, Bharti ensured that the vendor fulfilled its obligations and guarded itself against potential vendor opportunism.
vulnerabilities to outsourcing Quinn & Hilmer (1994) point out that there are vulnerabilities in outsourcing for the buyer as well. They point out, both the buyer (the firm) and the seller (the outsourcing contractor) entail some risks with respect to price, quality, time or other key terms of the contract. When there are many suppliers and mature market standards, a
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potential buyer is unlikely to be more efficient than the best available supplier. Another form of vulnerability is the lack of information available in the marketplace or from individual suppliers. For example, the seller might hide its inability to offer services due to lack of resources and/ or knowledge until it is too late for the customer to go elsewhere.
how did bharti Manage vulnerabilities? Though the supplier market is matured for voice services, billing and operational support, advanced data offerings, and 3G services are still evolving and thus poses a risk for Bharti. However, Bharti minimized this vulnerability by outsourcing to the best-in-class such as IBM, Nokia Siemens and Ericsson who had enough resources to supply their respective products and services. After the outsourcing deal, Nokia Siemens moved its global Network Operations Centre to Chennai, India to deliver quality service. IBM today has one-fifth of its workforce in India accounting for the largest employee base next only to the US (Sridhar, 2008). Another important vulnerability is the lack of buyers’ competency to either assess or monitor sellers. The detailed SLAs along with Bharti’s management expertise to monitor both the telecom and IT vendors’ performance levels mitigated this vulnerability.
degree of sourcing control There is a constant trade-off between flexibility and control in outsourcing engagements. One of the main purposes of the network management outsourcing was to have suppliers assume certain classes of investments and risks, such as demand variability. However, at the same time, by outsourcing the core network management activities, Bharti faced “loss of control” over its services and the assets (both network and
Strategic Outsourcing
manpower). Quinn & Hilmer (1994) highlights that the outsourcing strategy can vary depending on the amount of control needed and degree of flexibility the buyer needed in responding to the market place to maintain competitive edge. As outsourcing grew in popularity, debate shifted from whether or not to outsource to how much to outsource (Lacity & Hirschheim, 1993). Concerns during this stage of outsourcing evolution included whether outsourcing should be total or selective, service or asset, long or short term, involve single or multiple vendors. Bharti chose “long-term contracts” to have relatively high flexibility and lower control. Long term contracts also kept the suppliers interested in their services, thus minimizing the above mentioned vulnerabilities.
Adoption by competitors Firms see success of outsourcing contracts of competitors and imitate. Described as “jump on the bandwagon” (Lacity & Hirschheim, 1993) or “Kodak Effect” (Loh & Venkatraman, 1992a), such imitating behavior results in more companies going for outsourcing. Loh & Venkatraman (1992b) used diffusion modeling, in which there are two basic types of influences (internal and external) that drive the adoption of an innovation by members of a social system. They found evidence for internal sources of influence (outsourcing behavior of other firms) being better predictors for the observed distribution of outsourcing events than external sources (mass media reports and vendor sales figures) or mixed sources of influence (both external and internal). The internal influence model is structurally equivalent to the imitation model of Mahajan & Peterson (1985) which states that impetus for diffusion is an emulation of prior adopters by potential adopters. Literature provides evidence to support that mimetic and normative institutional pressures lower governance and monitoring costs. When a firm realizes that most of its competitors outsource,
it tends to adopt similar outsourcing practices in order to achieve legitimacy among its customers and business partners. In doing so, the firm is less likely to engage in comprehensive screening and monitoring, and instead use the same vendors and adopt standard, industry sanctioned monitoring practices (Vitharana & Dharwadkar, 2007). As a support to the above arguments, major telecom operators in India have recently handed over large IT and network outsourcing contracts to the same set of vendors. Idea Cellular, India’s fifth largest mobile operator, signed an IT outsourcing contract in 2007 with IBM for $500 million spread over seven years. Vodafone did the same with IBM for $1.5 billion. Aircel, which is owned by Maxis Telecom of Malaysia followed suit with outsourcing its IT services and Business Processes to Wipro, an Indian IT company (Sridhar, 2008). Similarly network management of Idea went to Ericsson while that of Vodafone was bagged by Nokia Siemens.
conclusIon In this chapter we analyzed the strategic outsourcing by telecom operators and the reasons for the same. India’s mobile telecommunications market is very dynamic and evolving. In a highly competitive market, Bharti had to continuously seek new opportunities from new products, services and market. It had to frequently add and change products and services in order that these would be the first in the market. This needed flexibility and innovation to be able to respond to the changing market environment. To function in this dynamic environment, Bharti looked for technological flexibility with an organic organizational structure. Hence it closely followed the “embedded outsourcing strategy” as explained in Lee (2006). In this chapter, we only considered strategic outsourcing of network management and IT services related to the mobile services business. An important research question is to find out whether
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such outsourcing models can be successfully applied in other telecom businesses such as fixed line services as well. This paper broadly validates reasons for outsourcing cited in the literature through a single case study. Though Martinez-Jerez & Narayanan (2006b) looked at Bharti’s outsourcing deal and its subsequent impact over a one-year time period, longitudinal studies of the kind are rare to find. It will be interesting to look at cross section of such similar outsourcing contracts of the other firms over a time period so that the intended effects and actual effects can be ascertained. This is of even more interest when the network outsourcing market is expected to grow to $100 billion by 2010.
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Murray, J. Y., & Kotabe, M. (1999). Sourcing strategies of US companies: a modified transaction—Cost analysis. Strategic Management Journal, 20, 791-809. Pinnington, A., & Woolcock, P. (1995). How far is IS/IT outsourcing enabling new organizational structure and competences? International Journal of Information Management, 15(5), 353-365. Prahalad, C. K., & Hamel, G. (1990). The Core Competence of the Corporation. Harvard Business Review, 68(3), 79-91. Quinn , J. B., & Hilmer, F. G. (1994). Strategic Outsourcing. Sloan Management Review, Summer 43-55. Saarinen, T., & Vepsalainen, A. P. J. (1994). Procurement Strategies for Information Systems. Journal of Management Information Systems, 11(2), 187-208 Sing, S., & Dubey, R. (2004). The World’s Top Off-shoring Locations. Business Standard, Retrieved 4 October 2004 from World Wide Web http://www.businessworldindia.com. Sridhar, V. (2007). Growth of mobile services across regions of India. Journal of Scientific & Industrial Research, 66, 281-289.
Sridhar, V. (2008). Changing Landscape of the IT Industry. Retrieved 16 February 2008 from World Wide Web http://www.economictimes.com Sridhar, V., & Bharadwaj, S. (2006). Growth of Outsourced IT Enabled Services in India: A System Dynamics Approach. In Kehal, H. S., and Singh, V. P. (Eds.) Outsourcing & Offshoring in the 21st Century: A socio economic perspective. Hershey, PA, U.S.A.: Idea Publishing, 282-301. Sridhar, V., Malik, A. (2007). Turning Copper in to Gold: Bharti Airtel’s Fixed Line Service in India. Asia Case Research Centre, University of Hong Kong, Case Reference No: 07/329C. Vitharana, P., & Dharwadkar, R. (2007). Information Systems Outsourcing: Linking Transaction Cost and Institutional Theories. Communications of the Association for Information Systems, 20, 346-370. Willcocks, L. P., Fitzgerald, G., & Fenny, D. (1995). Outsourcing IT: The strategic implications. Long Range Planning, 28(5), 59-70. Williamson, O. E. (1981). The Modern Corporation: Origin, Evolution, Attributes. Journal of Economics Literature, 19, 1537-1568.
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APPendIx I. bhArtI AIrtel: one oF IndIA’s lArgest telecoM oPerAtors Established in 1985, Bharti Airtel was a pioneering force in the telecom sector in India with many firsts and innovations to its credit. In 1995, Bharti was the first to launch mobile services in India’s capital region of Delhi. Its brand “Airtel” became a household name across the country with “touching the lives of millions” as its byline. As of March 2006, Bharti’s cellular subscribe base stood at about 21 million across all service areas accounting for 22 percent of the mobile subscriber base in India. Having constructed 32,900 route kms of optic fiber network in the country, by 1998, Bharti Airtel had become the first private fixed line telephone service provider in the country. Bharti also was the first Indian company to provide comprehensive telecom services outside India in Seychelles and first private sector service provider to launch National Long Distance Services in India. The company further received license to provide International Long Distance service in April 2002, and became the first private telecom company in the country to own an undersea cable network of 3,200 kms from Chennai, India to Singapore. Bharti also was a founding member of the consortium of 15 global telecom operators that commissioned the South East Asia—Middle East—Western Europe—4 (SEA-ME-WE-4) fourth generation international network. At the time, Bharti Airtel had two main business units - Mobility and Infotel. While the Mobility section operated Bharti’s cellular mobile services in the country, the Infotel section was divided into three types of services- fixed line services providing broadband and telephone service; National Long Distance and International Long Distance services; and enterprise services delivering end-to-end customized telecom solutions for corporate customers. In 2004, with revenues touching US$1 billion, Bharti brought all the different services under its strong mobile services brand “Airtel”. Under the new structure, while Airtel Mobile Services provided cellular mobile services, Airtel Broadband and Telephone services provided fixed line services and Airtel Enterprise and Carrier business unit provided enterprise services, national long distance and international long distance services. Acknowledging the company’s presence in the telecommunication sector, in 2005, world’s largest mobile operator Vodafone forked out about US$ 1.5 billion for acquiring 10 percent stake in Bharti Airtel. By financial year ending March 2006, the company reported revenues of US$2.09 billion and notched in a net profit of US$424 million. Mobile services contributed to about 63% of the revenue while the Broadband & Telephone and Enterprise & Carrier business segments brought in the rest. In June 2006, Bharti Airtel was recognized as the “Best Indian Carrier” at the Telecom Asia Awards, 2006 (For further information on various operations of Bharti Airtel, the reader is referred to Sridhar & Malik, 2007 and Khanna, et al., 2003).
This work was previously published in Breakthrough Perspectives in Network and Data Communications Security, Design and Applications, edited by I. Bose, pp. 1-13, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.8
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services Arjun K. Pai Queen’s University Belfast, Northern Ireland Subhajit Basu Queen’s University Belfast, Northern Ireland
AbstrAct
IntroductIon
This chapter provides insightful information on the key drivers of offshore outsourcing and highlights the emerging legal challenges for the IT-enabled service industry. This chapter has attempted to collate and exemplify the distinct qualifying processes in the offshore outsourcing landscape exploring and accentuating their legal and management implications where appropriate. Issues relating to risk assessment, selection of service providers, service level agreements, data protection and privacy, intellectual property rights, termination of contract and post-contract governance strategies have been discussed in detail. The primary intention of this chapter is to provide a broader exposure to the compliance management principles and regulatory frameworks which might provide outsourcing firms with vantage points to assess and adopt effective risk mitigation strategies when structuring multijurisdictional outsourcing deals.
Outsourcing is defined by Griffiths (2001) as “the strategic use of external resources to perform activities traditionally handled by internal staff and resources”. In its widest sense outsourcing is a strategy by which an organisation contracts out, usually on a long-term basis, non-core business functions to specialized and efficient service providers, which allows the organisation to refocus their scarce finance and technology resources on creative and value-added services. In the 21st century this phenomenon has created a wide range of scenarios that has particularly characterized the growth and evolution of the IT-enabled service industry. The META Group Inc. predicts that 80% of organisations will outsource at least one information technology function by 2005 (IT facts, 2004). But, the Outsourcing Pricing Guide report warns that 70% of that group will drive a harder bargain when they renew those outsourcing deals, cutting
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
both the scope and duration of the contract. The META Group (IT facts, 2004) also predicts that the offshore outsourcing market will continue to grow nearly 20% annually through 2008, despite the less-than-favourable light in which it is held in some political quarters, and by 2009, the average enterprise will outsource 60% of application work offshore. META Group also found that application development and maintenance constitutes approximately 30% of the average annual budget for any typical IT organisation and sending work offshore reduces that expense by 30%-60% (IT facts, 2004). It has been reported in Financial Times that the British insurance company, Prudential, had planned to save $26.2m through the creation of 1,000 customer-service jobs in India (Financial Times, 2004). The pharmaceutical giant GlaxoSmithKline had decided to outsource a significant portion of their global IT operations offshore with expected budget savings of around 35% a year (Vnuet, 2002). General Electric saved about $350m per year through the 18,000 offshore employees in India (Business Standard, 2003). Studies suggest that the U.S. banking industry alone saved as much as $8 billion in the last four years due to outsourcing and estimates on future gains (until 2009) for the overall U.S. industry to be $390 billion, with $138 billion in annual cost savings for the world’s top 100 financial institutions (Business Standard, 2003). British Telecom, Prudential, British Airways, Citibank, Accenture, HSBC, Standard Chartered and P&O Nedllyod’s outsourcing contracts has helped push UK’s foreign investments to £5 billion. The current outsourcing revenue estimated at $11.36 billion per year could push upwards to an estimated $27.06 billion by 2006 (Hindustan Times, 2003). So why do some firms spend a greater portion of their IT budget on IT outsourcing? Is this a long-term trend or a short-term obsession? From an organisational context, outsourcing is fuelled largely by cost cutting imperatives coupled with improved budgetary control, refreshing technol-
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ogy and a wish to concentrate on the core functions of the company. Moreover, offshore outsourcing has evolved into an increasingly strategic solution for solving long-term business problems and freeing resources to refocus on core activities.
globAl outsourcIng MArKet Offshore business process outsourcing (BPO) has become synonymous with globalisation and corporate strategy wherein companies are realising the strategic role it can play in maintaining global competitiveness and market dominance. The BPO segment of North America represented 57% of the total BPO market worldwide in 2003 — with market figures of $69 billion (Gartner Research, 2004). Further, Gartner analysts say that after several years of double-digit growth, delays in contract signings and lower negotiated rates for large BPO deals have led to moderate growth in 2003 and 2004 (Xicom, 2004b). The western European BPO market has grown by 10.9% in 2003, to $27 billion, according to Gartner Research Inc. (Xicom, 2004b). In Europe, outsourcing of financial services are widely used, however, other industries are growing in respect for different types of BPO. Customer interaction for demand-management BPO is proving popular in the utilities and telecommunications sectors. Supply-management BPO is gaining popularity in local governments, and enterprise services are growing in telecommunications for human resources, finance and accounting. The Asia Pacific BPO market has grown by 7.8% in 2003, to US$8.7 billion, and it is predicated to achieve double-digit growth in the next few years (Xicom, 2004b). META Group found that nearly all Asia Pacific IT organisations will outsource at least one mission-critical technology operation by 2005. McKinsey’s research found that Australia and New Zealand are the most mature economies in terms of acceptance of BPO services, followed by Singapore. In most other countries there is almost
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
gives the financial projections of the world-wide outsourcing market for IT-enabled services.
no history of outsourcing other than product support, education and training and some application development. The Indian market is largely export oriented with exports of IT services and BPO services far outstripping the domestic market size, which is still largely immature. BPO markets in China, Taiwan and Malaysia have a large contract-manufacturing base, but outsourcing of other business processes has yet to take off in a big way in these countries. The Tower Group estimates that the top 15 global financial institutions will increase IT spending on vendor-direct offshore outsourcing by 34% annually — representing an increase from $1.6 billion in 2004 to $3.89 billion in 2008 (CRM Today, April 2004). Offshore business process outsourcing services - which, unlike application development, typically require the transfer of personal data — grew 38% in FY’03 to just under $2 billion (Gartner Research, March 2004). Global spending on major outsourcing projects — in which a customer hires an outside company to design, implement and run a computer network or other IT endeavour — rose 44% from 2002 to $119 billion in 2003 (Datamonitor PLC, January 2004). Software transfers and technology outsourcing of high-importance business functions, has always been a problem from the point of functional outsourcing. The reasoning being that, virtually no company has distinctly defined the scale for degree of outsourcing of operations in software licensing, which apparently is one of largest source of revenue for companies. Table 1
AdoPtIng oFFshore outsourcIng: An InsIght Into the Key drIvers The global market for outsourcing has continued to grow, largely fuelled by the rise in offshore BPO deals. The persistent fears of an economic depression have, as it seems, little effect in general on the outsourcing agenda, partly because outsourcing serves a valid purpose during a recessionary period, when the central focus shifts from core strategic acquisitions of specialist services to more obvious emphasis on sharing strategies that ensure tangible and sustainable results.
strategic Imperatives: competitive Advantage The evolving dynamics in IT outsourcing has seen the paradigm shift in terms of the type of business functions that are being outsourced. Although, the quest for cost optimisation and quality of service inspired initial forays into offshore outsourcing; companies are now using offshore delivery to achieve significant improvements in their operating efficiency and business performance — transforming outsourcing from a tactical and technical point solution to a long-term business strategy for creating and defending competitive advantage
Table 1. World-wide IT-enables services (ITES) BPO market Worldwide ITES BPO Spending by region 2002-2006 Region
2002
2006
2002-2006 CAGR (%)
Americas
$484,732
$647,427
7.5
EMEA
$171,303
$237,390
8.5
Asia Pacific
$117,622
$194,228
13.0
Worldwide
$773,657
$1,079,054
8.6
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(Robinson & Kalakota, 2004). Organisations are reassessing their strategic outlook about what constitutes the core and non-core aspects of their business and capitalising on strong synergies in governance values and emerging compliance management solutions. A recent survey found that two thirds of large corporations are now engaged in outsourcing to some extent (Hindustan Times, 2003). The total value of major IT services outsourcing contracts throughout the world in 2003/2004 was $119 billion, up 44% on the previous year (Anderson & Strathern Solicitors, June 2004). Intel® and Apple® two of the world’s leading manufacturer’s of computer, networking and communications products have resorted to ‘turnkey contract manufacturing’ with their entire manufacturing process being outsourced to overseas manufacturers. This has given these chip manufacturing technology giants the leverage to allocate their assets on future marketing campaigns and branding strategies.
•
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economic Imperatives: consolidated growth So what are the drivers of outsourcing that are creating real value? The growth in the use of offshore services has illustrated that its benefits are no longer just about price — they can include service quality improvements, scalability, better risk management and the freeing up of internal resources to focus on core value-adding activities (Pai & Basu, 2005b).
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Financial restrain and budget planning: As business pressures continue to evolve, enterprises are confronting a common dilemma; control the expansion of IT budgets, while taking full advantage of the advancements in technology. Often, the search for more efficient ways to run the business ends up increasing the reliance on underlying complex systems and processes. At the
•
same time, every business faces continuous improvement pressures. Technology is increasing the number and quality of the choices available to your customers and competitors. Continuous technology investment is essential and its associated costs must be closely managed. Turn fixed costs into variable costs: Key commercial drivers for companies involved in outsourcing are employee related costs and their associated overhead. These costs are relatively fixed, regardless of product or service demand. This can be very costly during sluggish sales periods or in times of economic upheaval. Outsourcing turns these fixed costs into variable costs, as the BPO providers have greater economies of scale and thus can price for variable demand. Reduced investments in assets: Cash infusion into internal resources management and acceleration of product reengineering can benefit from outsourcing. Making strategic investment in the state-of-the-art technology and training, employee skills development, and transformational programs. Outsourcing effectively transfers ongoing investments in infrastructural development to the provider. Building stakeholder’s value: Increased competition within organisations for operational capital funds has driven the rise in outsourcing contracts. Deciding where to invest these funds is one of the most important decisions that the senior management makes. It is often hard to justify non-core capital investments when areas more directly related to producing a product or providing a service compete for the same money. Outsourcing can reduce the need to invest capital funds in non-core business functions. Instead of acquiring the resources through capital expenditures, they are contracted for on an “as used” operational expense basis. Outsourcing can significantly improve finan-
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
cial prudence of the firm by eliminating the need to show return on equity from capital investments in non-core areas.
sustainability and divergence: business continuity and resilience A major constraint in effective policy formulation for government and industry is the lack of understanding of how regulatory regimes and business strategy can reconcile competing private and public interests. There is limited knowledge of how to arbitrate competing private interests in sustainable development programs, especially when the market competition objectives involve individual businesses. The evolving policy debate suggests that interest groups may not have a clear understanding of what their interests actually are, let alone how best to serve them. In addition, management through decentralised access to information has resulted in differences and conflicts in domestic and international trade, requiring dispute settlement in various cases. As a result, by adopting sustainable business practices, companies can refocus their effort in business contingency planning and can gain a competitive edge, increase their market share and boost shareholders value. Offshore service providers have refined their approach to customer relationship management, commercial management and service delivery to become highly professional organisations delivering a full range of consulting services, software applications development, IT infrastructure management, help desks and business processing outsourcing.
oFFshorIng MArKetPlAce: IndIA And beyond India has emerged as “the world’s back-office” (Raysman & Brown, 2003), with its wage arbitrage, highly educated and English speaking labour force. It has been estimated that the out-
sourcing market in India for IT-enabled services (ITES) will reach $16.94 billion by 2008 (Reuters, 2002). The Indian domestic market has seen the revival with 17% growth in 2003 after sliding down to the lowest growth rate of 6% in 2002 for the last 15 years. This growth has been attributed to a strong global economic recovery and the spurt in the BPO industry for IT-enabled services from the U.S. and Europe. Maturity of the marketplace, precedent, rapid developments in telecommunications and infrastructure, new offshoring destinations and so forth have catalysed the growth of the ITES-BPO industry world over. India has offered a strong value proposition among all other developing countries in recent years. IT-enabled service hubs have spurted in India for the following reasons:
•
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Highly skilled labour: It’s true that only a few of the Asian developing economies have fluent English speaking call centre representative to cater for U.S. and European customers, but these countries have many other skills in abundance compared to the U.S. and the European countries. Wage differentials: India has invested heavily in technical education and can provide a ready supply of highly qualified people at relatively low cost. India produces close to 200,000 qualified IT graduate engineers every year compared to the 90,000 from U.S. engineering schools. Many of these engineering graduates in India are employed with call centres for troubleshooting and providing technical support at salaries that are dramatically lower compared to the pay scales in the U.S. The average monthly salary in India is $400-700 compared to $2,700-2,800 in the U.S. (Xicom, 2004a).
In the outsourcing field, China is the biggest challenge in the future and the largest threat to India as it is expected to become the fourth largest economy in the world overtaking UK. With the
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largest population and fastest economic growth, China has at least two strengths in the global outsourcing marketplace: manufacturing and IT. The main advantages of China is its lower manpower costs which is about 15% less than an equally qualified Indian together with relatively low real estate and power costs in comparison to India. This business preposition can be very attractive to companies from developed companies mainly U.S. and Europe. But the main disadvantages of China for IT-outsourcing services where India supersedes is:
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Lack of a good IT-service quality record in software: India has an excellent image in terms as a quality supplier mostly due to its track record of better quality software than China. Low English speaking population: This is the biggest drawback of China with only a very small proportion of the population capable of speaking fluent English. Less mature BPO market: The Indian business processes are much more mature with highly skilled operations base. China has only recently entered into BPO service industry.
The Philippines has also emerged as promising destination with the manpower costs 60%-80% lower as compared to UK and U.S. But the country has a significant shortage of skilled manpower mainly due to the small population as compared to India and China. Philippines currently is getting business from nearly 70 overseas companies employing more than 12,000 people, with revenue earning of US$250 million (Xicom, 2004a). The main advantage of Philippines is its large scale technical training programs that the government has initiated through policies by which the skills can be provided to a larger population and an improved telecom and office infrastructure. But the main disadvantages of Philippines where India takes over are:
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•
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Not having a record of high quality: India has consistently delivered very high quality services in the IT and software arena and has built a very high worldwide reputation. Political instability: Philippines has had frequent elections which make it difficult for companies to outsource as there is lack of uniformity of policies with changes in the government. Lack of disaster recovery facilities or multi-location facilities: After the WTC bombing terrorism has become a very important issue for the companies in particular and they want that the BPO providers should have multi-location facilities which can be used in case of any terrorist attack. Small scale BPO activities project stunted growth: The largest call centre in Philippines is that of AOL which employs around 800 people. The size of the Philippines BPO industry was only $150 million, whereas India’s BPO industry was at $1.8 billion (Xicom, 2004a).
Ireland and Israel have been the front runners in the BPO industry and started much earlier than India. Thus these countries have built good brand equity particularly in U.S. Both Ireland and Israel have a very conducive regulatory framework and are known for excellent quality standards. Both countries strategically pursued outsourcing services and have been investing heavily in telecom infrastructure, education, health-services and entrepreneurial skills development which are unparallel in the world. Ireland and Israel are actually one of the biggest exporters of software services in the world today. But both Ireland and Israel suffer from a very big disadvantage of lack of a large human resource pool and companies here are forced to outsource work to countries like India, Taiwan and China. Moreover, Ireland and Israel have been competitively very poorly placed compared with India and China in terms of manpower costs.
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
Another advantage that most Indian IT sourcing companies have an edge over the rest of the countries is that they operate at Carnegie Mellon Software Engineering Institute Capability Maturity Model (SEI-CMM) level five (Hagel, 2004) — the highest degree of quality expertise of the IT-service, whereas most internal IT departments in the U.S. operate at level two or level three. For instance, in 2004 at least 20 Indian companies were assessed at CMM level five, whereas, China does not yet have a single company above CMM level three (Hagel, 2004). Table 2 gives the SWOT
(Strengths, Weakness, Opportunities and Threats) analysis of India as an IT-outsourcing destination (Xicom, 2004a).
eMergIng legAl chAllenges: evolvIng PrIorItIes And concerns It is sometimes easy to get carried away to assume that outsourcing is the panacea to cure all business adversities. Conversely, an outsourcing
Table 2. SWOT analysis of India as an IT-outsourcing destination Strengths
Weakness (Challenges)
Solid history in software development
Positioning & brand management
English proficiency
Infrastructure
Government support
Cultural differences
Cost advantage
Sales & marketing
Strong tertiary education
Leverage expertise for higher-value
Process quality focus
education
Skilled workforce
Business process experience
Expertise in new technologies
Distance from U.S
Entrepreneurship
Fear/Uncertainty from neighbours
Reasonable technical innovations
Legal system
Reverse brain drain
Poor globalization skills
Opportunities
Threats
Creation of global brands
Internal competition for resources
BPO & call centre offerings
Over-promise / under-deliver
Expansion of existing relationships
Regional geopolitical uncertainty
Chinese domestic & export market
Rising labour costs
Leverage relationships in west to access
Competition from other countries
APAC/middle east markets
Government blocking reform/deals
Indian domestic market growth
Corruption/piracy/trust
Source: Xicom
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arrangement can be in dire straits if careful attention is not paid to due diligence strategies, legislative and regulatory procedures. Naturally, any organisation considering offshore outsourcing of IT-enabled services as an option will need to consider the legal implications of the distinct processes and will have to be aware of the judicial system of the outsourced country if the process fails to work satisfactorily. Key issues inherent to outsourcing arrangements are loss of control and multi-faceted differences between the customer and its service providers. Particularly, risks are infinitely higher when the outsourced work is being undertaken in a different time zone or in a different jurisdiction — especially if the outsourcing partner has in possession the software and data of the outsourcing company. As a result, the importance of legal issues is further elevated as, at every phase of an outsourcing agreement, compliance issues and contractual obligations can affect the success of the enterprise customer and its relationship with its service providers. Further, as enterprises continue to adopt varying operating models for outsourcing agreements, they must be in a position to evaluate and weigh the strategic and tactical objectives and priorities primarily involving four key factors, which includes: cost savings, service quality/delivery, level of control/ governance and risk tolerance. Some common legal issues which require special attention are outlined:
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Choosing a governing law for the crossborder contract, and establishing which regulatory laws apply in case of infringement or breach of contract. Resolving software licences and usage permission of proprietary support tools. Considering data protection and security delegations. Establishing the effect of any mandatory local laws which may prejudice the relationship or impact on later litigation.
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Making sure that all IP rights and trade secrets are protected so that they are not violated in the foreign country. Covering for the insolvency, winding-up and change of control of the supplier.
In addition to the legal issues mentioned above, there are some purely practical issues like language barriers, geopolitical instability, loss of management control; and accountability problems, which also need to be considered during the decision making process. Hence, as a matter of commercial practicality, clauses in a contract with an overseas company are completely worthless unless there is a mechanism for enforcing the contract in a way which actually works quickly and effectively. In jurisdictions where no reciprocal legal arrangements exist, or where it is unrealistic to expect genuine cooperation from the foreign legal system, the only sensible approach would be to build-in practical measures in the contract itself as discussed later in this section, which do not necessarily require the intervention of the legal process. In this section, as an example of offshored vendor services marketplace we have focussed our discussion on the Indian IT outsourcing industry in some of our case studies. Further, we have attempted to provide a comprehensive checklist of legal issues along with insightful guidance on coping with emerging challenges in doing business beyond the borders of Europe and U.S., although broader expertise in these areas is desirable in planning and executing international outsourcing transactions.
business risks in offshoring: Assessment and evaluation Offshoring brings with it the risk of losing access to business knowledge and intellectual capital. The senior management of an organisation has the responsibility for understanding the risks associated with outsourcing arrangements for information
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
technology services and ensuring that effective risk management and risk mitigation practices are in place. As part of this responsibility, the management should assess how the outsourcing arrangement will support the institution’s objectives and strategic plans and how the service provider’s relationship will be managed. Without an effective risk assessment phase, outsourcing technology services may be inconsistent with the organisation’s strategic plans, sometimes making it too costly for the company, due to unforeseen future risks. Outsourcing of information, transaction processing and settlement activities involves risks that are similar to the risks that arise when these functions are performed internally. Risks include threat to security, availability and integrity of system and resources, confidentiality of information, and regulatory compliance (Ramer, 2004). In addition, the nature of the service provided, such as bill payment, fund transfer, or emerging electronic services, may result in entities performing transactions on behalf of the institution, such as collection or disbursement of funds that can increase the levels of credit, liquidity, transaction, and reputation risks. Organisations should consider additional risk management controls when services involve the use of the Internet. The broad geographic reach, ease of access, and anonymity of the Internet require close attention to maintaining secure systems, through intrusion detection and customer authentication, verification, and authorisation. Institutions should also understand that the potential risks introduced are a function of a system’s structure, design and controls and not necessarily the volume of activity. An outsourcing risk assessment and mitigation exercise should be able to:
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Assess the strategic goals, objectives, and business needs of the organisation. Identify the importance and criticality of the services required by the organisation.
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• • •
•
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Adopt due diligence strategies in selection of service providers. Define scope of service agreements, with a detailed description of the services and the level to which these services are to be provided. Provide operations control, performance reviews and reporting quality of the processes. Define clearly the service provider’s contractual and compliance obligations. Incorporate contingency plans, including availability of alternative service providers, costs and resources required to switch service providers. Seek ongoing risk assessments in an outsourcing arrangement to evaluate consistency of performance with the strategic objectives of the organisation. Build regulatory requirements and guidance on quality standards for the business lines affected.
In addition to the above mentioned risks the other major concerns to firms involved in the outsourcing race is evaluation of the geopolitical scenario and the risks assessment exercises. Problems such as unstable governments, anti-west sentiments, currency devaluation and political unrest could dramatically affect the ability to outsource key business operations that rely on long-standing government support and policies for the development of their IT infrastructure and industry.
selection of service Provider: due diligence strategies Once the organisation has completed the risk assessment, the management should evaluate the potential service providers to determine their ability, both operationally and financially, to meet the institution’s needs. It would be very beneficial to review the service provider’s due diligence process
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for any of its significant supporting agents (i.e., subcontractors, support vendors, and other parties). A survey of outsourcing companies showed that, 74% felt that IP protection, security; business continuity & disaster recovery process was critical while considering an IT offshore vendor (Kulkarni, 2004). Hence, the management should convey the organisation’s needs, objectives, and necessary controls to the potential service provider (Tompkins, 2003). Depending on the services being outsourced and the level of in-house expertise, institutions should consider whether to hire or consult with qualified independent sources. These sources include consultants, user groups, and trade associations that are familiar with products and services offered by third parties. Ultimately, the depth of due diligence will vary depending on the scope and importance of the outsourced services as well as the risk to the institution from these services. Hence it becomes significantly more important for any organisation to seek legal advice before committing to obligations in the contract that could alter the risk profile of the deal. Due diligence strategies for short listing the potential IT-service provider will usually include:
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Conducting a through audit of the service provider’s financial position, experience and ability to provide the necessary services and supporting technology for the institution’s current and anticipated needs. Contacting references and user groups to learn about the service provider’s reputation and performance. Identifying areas where the organisation would have to supplement the service provider’s expertise to fully manage risk in case of failure to meet standards in the contract. Evaluating the service provider’s knowledge to adhere and comply with standards, policies and procedures relating to internal controls and facilities management.
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Assessing the service provider’s security precautions, including, when appropriate, firewalls, encryption, and customer identity authentication, to protect the institution’s resources. Determining the service provider’s ability to detect and respond to intrusions and service disruptions. Evaluating the service provider’s use of sub-contractors, third party proprietary tools and software licences that would be used to support the outsourced operations.
structuring offshore Agreements: contractual Provisions Contrary to popular belief that outsourcing is in the nature of partnership and strategic alliances (Huff, 1991), Lacity and Hirschheim (1993) have exposed this as an “outsourcing myth”. Outsourcing vendors do not share the same profit motives as their outsourcing customers. A tight contract is the only mechanism to ensure that expectations of the outsourcing customer are met. Outsourcing services researched by Lacity and Hirschheim (1993) argued that the contract is the key issue to a successful outsourcing relationship. Research on offshore outsourcing contractual issues tends to be mostly theoretical and very limited in scope. For example, Whang (1992) analysed software development contracts using a game theory model incorporating information and incentive issues but conceded that the model, though mathematically neat, would have very limited practical applicability. Richmond and Seidman (1991) also analysed software development contracts but used a transaction cost modelling framework instead. There is relatively little literature available on the systematic and practical treatment of issues relating to outsourcing contracts particularly in relation to IT. Lacity and Hirschheim (1993) seminal work represents a major step in that direction, offering important lessons learnt in contract negotiation.
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
Software development outsourcing organisations have also emphasised the need to have a robust escrow agreement in place in the contract. An escrow agreement provides for licensee access to the source code and other deposited material in certain limited circumstances such as insolvency of the supplier or where the supplier materially breaches its obligations in relation to maintenance and support. Clearly, a poorly drafted escrow agreement can create more problems than it avoids, particularly where release events and scope of rights of the user upon release are drafted in vague terms. Deposit materials generally include a number of copies of source code, manuals and maintenance tools, names and contact details of key technical personnel and compilation instructions. Certain escrow agents provide a sophisticated service which includes, authentication and verification of source code and its flexibility in relation to the type of escrow agreement to be used, for example facilitating multiple licensees. Outsourcing contracts fall into many different types, depending on the level of internalisation of human resources and technical resources chosen. Loh and Venkatraman (1991) have identified many alternative types of which three are particularly popular. These types of contracts relate to complete outsourcing, facility management outsourcing, and systems integration outsourcing respectively. Complete outsourcing involves the transfer of the entire IT function of a company, together with existing assets (such as equipment and software) and personnel, from the outsourcing company to the outsourcing vendor. This represents one extreme of the outsourcing spectrum where the whole function of a company is treated as a marketable commodity. Contracts for this type of outsourcing are usually voluminous and complicated, involving a whole range of assets and related legal issues, and are usually long term (i.e., 5 to 10 years) in nature. The outsourcing vendor in this case assumes all the risks and responsibilities of providing the outsourcing customer with its function on a long term basis. The degree of
internalisation of human and technical resources is very low for outsourcing of this type. Facility management involves the outsourcing vendor providing the human resources necessary to operate and manage the outsourcing customer’s equipment and software. Facility management outsourcing was particularly popular in the late 1980s when there was an acute shortage of competent IT staff necessary to manage and operate data centres. For facility management outsourcing, the internalisation of technical resources is high while there is a low internalisation of human resources. Systems integration outsourcing usually involves the contracting of a single outsourcing vendor whose role is to manage the installation and operation of the outsourcing company’s multivendor heterogeneous IT systems in such a way that these systems are integrated and can link with IT systems in other organisations. As the trend in adopting open systems standards (OSS) is gathering momentum and interconnectivity among different organisational IT systems is turning into a key issue, this type of outsourcing is becoming increasingly popular. The level of internalisation of human and technical resources is medium for this type of outsourcing. Other types of outsourcing include maintenance contracts, installation/procurement contracts, rental contracts, applications development contracts, and time-sharing contracts. However, more recently, contracts for education and training, telecommunication and networking management, and support for end-user computing are also becoming popular as companies move towards down-sizing and distributed computing. Common to most types of outsourcing contracts is the passing of one or more IT management and/or operational responsibilities from an in-house IT department to an outsourcing vendor bound by a contract. Outsourcing contracts involve complicated business and legal issues and are fraught with risks for both the outsourcing customer and the outsourcing vendor. As pointed out by Lacity and Hirschheim (1993), outsourcing vendors and
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outsourcing customers are not partners because their profit motives are not shared. An outsourcing customer cannot expect the outsourcing vendor to act in the best interests of the customer in situations where a conflict of interest arises. The written outsourcing contract is therefore the most important instrument for defining the rights, liabilities and expectations of both parties which guides the behaviours of both parties concerned. Thus, it is important for management to have some understanding of the complicated business and legal issues involved in IT outsourcing and have some awareness of how these issues should be addressed in the contracts concerned. An outsourcing contract often includes a collection of related agreements covering a variety of issues including service level agreements, intellectual property rights, privacy liability and dispute resolution mechanism (Pai & Basu, 2005a).
scope of services levels and Agreements Once the process of selecting the service provider and negotiating the terms of transfer of the function to that supplier have been completed, the long term relationships is then governed by the service delivery or service level agreements (SLA). The SLA defines the boundaries of the project in terms of the functions and services that the service provider will give to its client, the volume of work that will be accepted and delivered, and acceptance criteria for responsiveness and the quality of deliverables (Hayes, 2004). This agreement is likely to be in place for as long period and it has two main functions: • •
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To set out clearly the parties obligation to each other. To allow the parties to evolve service provision over time and to end the relationship rationally.
Hence a well-defined and well-crafted SLA correctly sets expectations for both sides of the relationship and provides targets for accurately measuring performance to those objectives. Allied to the SLA a few of the outsourcing customers have introduced in their contractual schedule key performance indicators (KPI) to cover them for financial loss when service level thresholds are not met. Under this system, a failure to achieve a service level would trigger a service level credit. Service credits are refunds of portions of the service provider’s charges paid by the service provider to the retailer upon the service provider’s failure to achieve a service level (Klein & Wolsk, 2004). They are designed to incent the service provider to perform, and not to fully compensate the retailer for its losses. Service levels are generally ineffective unless the service provider is required to pay a service credit upon its failure to meet a service levels. However, service credits are a first line remedy available to customers in circumstances of a supplier’s failure to achieve KPIs or the agreed service level. Generally, service credits are calculated by reference to a reduction in service fees, to reflect non-delivery of services, rather than a method of customer compensation for loss or damage suffered as a result of non-delivery of services. Clearly, without service credits, the retailer has no effective mechanism to manage the service provider. Use of service levels and service-level credit structures developed to improve vendor performance and client satisfaction in outsourcing transactions can help keep the parties interests aligned and incent the service provider to provide high quality and timely services. Also when setting up a SLA to control and manage the factors described above, there are many possible metrics from a service level credit system arrangement standpoint. The simplest way to approach these metrics is to group them into categories, decide which ones in a given category works best for the particular project, and then construct the desired metrics.
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
•
The key factors can be managed through four major categories of SLA metrics:
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Maturity, Capability and Volume: Maturity of the service provider coupled with capability metrics along the lines of volume of work delivered are typically the key sizing determinants of an outsourcing project, specifying the exact level of effort to be provided by the service provider within the scope of the project. Any effort expended outside of this scope will usually be separately calculated, or will require renegotiation of the terms of the SLA. Broadly defined as the number of units of a work product or the number of deliverables produced per unit of time and volume of work metrics should be specified for every major deliverable cited in the SLA. Projects that are billed on a time and materials basis may discuss volume in terms of number of resources, while a fixed price project will generally specify volume of deliverables. Standards and Quality Scorecard: Measuring the quality indicators are perhaps the most diverse of all of the SLA metrics. Enhancing information and process quality covers a wide range of work products, deliverables and requirements and seek to measure the conformance of those elements to certain specifications or standards. When deliverables fail to meet the acceptance criteria in the specifications or standards, quality problems arise (Hayes, 2004). Briefly, these metrics include:
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Standards compliance practice: Internal standards for application source code, documentation, reports and other tangible deliverables, including number of enhancement tasks passing standard reviews, number of documented programs, and so forth.
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Sustained enhancement of technical quality: Measurements of the operational excellence is dictated by the technical quality of application solution, which normally is developed by commercial tools that look at items such as program size, degree of structure, degree of complexity and coding defects. Service availability: The time frame for which the services have been delivered by the outsourced contractor, ranging from online application availability to delivery of reports by a specified timeof-day. Service satisfaction: Describes the client’s level of satisfaction with the perceived level of service provided by the outsourcer, and captured for each major function through internal and/or external surveys. Ideally, these surveys are conducted periodically by a neutral third party. Although subjective, they are a good double-check on the validity of the other SLA metrics.
Delivery & Responsiveness: Delivery metrics measure the response time that an outsourcer takes to handle a client request. They are usually the most important ones from the client’s perspective, and figure heavily in its perception of the quality of service provided by the outsourcer. Responsiveness to requests often motivates business areas to seek outsourcing in the first place. Some of metrics usually included in SLAs are:
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Time-to-implement & market: This SLA metric measure the elapsed time from the original receipt of a request until the time when it is completely resolved. Sample metrics include time to consummate an enhancement, time
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Efficiency: Efficiency metrics measure the engagement’s effectiveness at providing services at a feasible charge. The cost metrics, while important, miss the relationship between volume of work and effectiveness of its delivery. Examples of efficiency metrics include:
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to resolve production and maintenance obstacles, and so forth. Time-to-acknowledge: The metric measure how responsive the outsourcer is by focusing on when a request is acknowledged, and accessibility of status information. Sample metrics include time to acknowledge support calls in contact centres and programmer response time to production line crunches.
Cost/effort efficiency: This efficiency indicator is typically tied to an index that is based upon cost per unit effort, and is used to register cost reductions in regard to increase in productivity. Sample metrics include number of programs supported per person, cost per support call, and so forth. Resource utilization: The resource utilization metric empirically tracks the service load affecting each staff member in relation to the wise utilization of the in-house resources. Engagements that incorporate a charge primarily on a time and materials basis should also include metrics on staff utilization to measure the effectiveness of staff deployment in order to encourage the outsourcer to make staff reductions as efficiency is gained. Sample metrics include percentage of time spent on support, training and percentage utilization, and so forth.
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Overhaul & rework levels: Although rework metrics and overhaul are also quality measures, they can be applied on a percentage basis to measure the effectiveness of implementing quality improvements. These metrics track the percentage of work products that returned to a previous step for additional work, correction or completion. They track wasted effort and help to measure the quality of a process and its efficiency.
data Protection and security Outsourcing of critical information services can pose new challenges to business organisations in regard to data privacy risks and the complexity of managing these risks. European Union businesses that increasingly ship their business functions — credit card processing services, financial audits and sensitive medical data transcription have come under a legal obligation to have an agreement in place to deal with the third party’s compliance to the 1995 European Union (EU) directive relating to data protection (ECCD, 1995). Along the same lines of EU’s data protection directive the UK’s Data Protection Act of 1998 (DPA, 1998), contains a number of restrictions on the transfer of sensitive personal information by a data processor in the UK to a country or territory outside of the European Economic Area (EEA). It provides that such a transfer to third-party countries may not take place unless there are adequate norms governing the data privacy and practice in those particular territories. Moreover, there are a number of exceptions to this general prohibition on the transmission of data outside the EEA. As a result, European companies and manufacturers need to ensure that overseas vendors are contractually tied to specific conditions regarding how data is transmitted, accessed, used, stored and shared. Those challenges include compliance monitoring,
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
enforcement of data protection laws, audits and access regulations. The U.S. historically favoured self-regulation for privacy protection, and until recently, there were not many privacy laws to support and protect an outsourcing transaction. However, due to increasing pressure from consumer protection groups, legislations that address privacy issues and data protection have been effectively incorporated. In 1999, the U.S. Congress enacted the Gramm-Leach-Bliley Act, which governs personal financial information; the Health Insurance Portability and Accountability Act (HIPAA), which covers health and medical information; and the Children’s Online Privacy Protection Act (COPPA), which governs information collected online from children under the age of 13 (Raysman & Brown, 2003). As mentioned earlier, we have focussed our study here on the data protection and privacy legislation in India, to better understand the complexities of its legal reign. Currently, the Indian legal regime does not have specific legislation for privacy and data protection, although, the Indian government has been considering the idea of enacting a detailed law on data protection soon. It was in 1998 that the National Task Force (NTF) on IT and Software Development had submitted an “IT Action Plan” to the prime minister of India calling for the creation of a “National Policy on Information Security, Privacy and Data Protection Act for handling of computerized data”. The IT task force examined the UK’s Data Protection Act as a model and recommended several cyber laws including ones on privacy and encryption (NFT, 1998). The lack of Internet penetration in India means the pressure for implementation of such a law is definitely coming from the demands of outsourcing rather than from any concern for privacy. The Constitution of India does not expressly recognise the right to privacy (COI, 1949). However, the Supreme Court of India first recognised in 1964 that there is a right of privacy implicit in the Indian Constitution under Article
21 of the Constitution, which states, “No person shall be deprived of his life or personal liberty except according to procedure established by law” (Jain, 1997). However, Indian courts have interpreted the right to privacy as an unarticulated fundamental right against an action by the state. Though the Information Technology Act, 2000 addresses the issue of protecting privacy rights, it only protects privacy rights from government action. It is unclear whether such protection would be extended to private actions. The lack of adequate privacy protection in India may act as a disincentive for companies in the EU and U.S. to outsource business processes to Indian companies. However, India is expected shortly to enact legislation addressing the issues of privacy and data protection. It is necessary for an Indian company to be aware of the legislation in its customer’s country, as it could have an impact on the service provider. It may be difficult for Indian companies to keep abreast of the latest legislation in foreign jurisdictions that would have an impact on the services that the Indian company provides to a foreign company. Hence, an obligation may be imposed on the customer to update the service provider on the foreign laws and the amendments to which the service provider must adhere. If the service provider does not comply with these laws, an indemnity obligation may be imposed on them. As our business environment becomes increasingly global, and the value of personal data increases, issues of data transfer, and particularly cross-border transfer, will need to be considered seriously by organisations. Certainly, companies should take various steps to ensure that they minimize the risks of unauthorized access to sensitive personal information. Understanding the impact of privacy laws on one’s business is the first step. Businesses should appoint a privacy team that will lead them through the assessment, planning, communication, and eventual compliance steps. For example, an appropriate team might include representatives from the following areas: HR,
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legal, marketing, communications, technology, finance, and corporate strategy. Corporations such as IBM, Microsoft, and AT&T have appointed “Chief Privacy Officers” and privacy teams to lead the effort in helping those businesses meet privacy compliance requirements.
Intellectual Property: sharing and safeguarding Proprietary Information Protection of the customer’s intellectual property (IP) and trade secrets is another significant concern in negotiating outsourcing transactions. In any outsourcing agreement, there could be several IP issues involved, such as the licensing or assignment of copyrights, trademarks, and patents, and so forth. The issues concerning IP would largely depend on whether the IP is licensed by the service provider or the customer, or developed by the service provider. IP laws and enforcement vary considerably around the world, and one of the primary concerns of outsourcing clients is that they retain ownership of their IP and gain appropriate ownership of the deliverables of an outsourcing arrangement (Fernandez, Kemeny, & Bastani, 2003). For example, when an outside vendor is hired to perform information processing services, the vendor will often require access to the customer’s IP or IP that the customer has licensed from third parties in order to perform services under the agreement. With respect to customer-owned intellectual property, such as software, the customer will typically grant a limited license to the vendor to use the intellectual property for the term of the outsourcing agreement or until conversion to an agreed upon vendor system. The agreement should provide that the vendor may only use the customer’s intellectual property on the customer’s behalf. Additionally, the agreement should contain adequate confidentiality provisions. The major differences in the intellectual property rights of a vendor’s country can significantly
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affect the expectations of an outsourcing relationship. Certain IP protections, such as software and business method patents, may be harder to obtain in the UK than the U.S., while other protections such as copyright for factual databases, may be easier to obtain in the UK. Such disparate treatments of IP in other countries may well affect the value propositions of rights generated through outsourcing arrangements and the extent to which parties may strive to contractually obtain such rights. An issue worth exploring from an outsourcing standpoint is whether the IP laws of the vendor’s country can be overridden by the contractual agreement. The local outsourcing council on commerce and industry is in the best position to explore the intricacies of foreign IP laws that may impact an outsourcing transaction. Patent and trademark legalities have always been expensive and time consuming issues of an outsourcing transaction. Tight contracts and measures might prevent an undesirable situation in which disagreement arises over ownership of valuable patents and IPs. Legal systems in outsourced countries may be very different, thus creating additional time and costs to protect you and fight any legal disputes that may arise. Third-party intellectual property may raise more complicated issues (Evans & Smith, 2002). The customer should first examine the licensing agreements under which it has licensed the intellectual property, in order to ascertain whether there are any restrictions on use, limitations on transfers or assignments, or confidentiality provisions. The customer should also make the outsourcing vendor aware of the terms of such third-party license agreements, when contracting to vendors the use of their IP. If the customer opts to license the IP to the outsourcing vendor, and if this includes any fees associated with assigning the license of such IP to the vendor, the outsourcing agreement should specify which party must pay the fees. The customer should also be aware of the vendor’s IP. For example, if the vendor uses its own software to perform data processing services, the customer
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
should be aware of its rights over the software, in the event that the agreement is terminated. The customer should also ask the vendor to place the use of vendor source code and commercial tools in the escrow, in order to maintain its right to use the software, in the event of the vendor’s bankruptcy (Raysman & Brown, 1998). Under the doctrine of “nationality” or “territoriality” U.S. copyright, patent and trademark laws do not directly apply beyond U.S. borders (Rosenberg, 2001). Defining intellectual property rights and protecting them, is largely within the control of the jurisdiction in which the rights are asserted and infringement occurs. Thus, subject to international agreements, the IP rights of a U.S. or UK national in a foreign country are determined by the law of that country detailed in the (Paris Convention, Art. 3). This situation presents at least two important sets of IP concerns in the present context. First, the outsourcing customer must examine the legal environment of the country in which outsourced tasks will be performed to determine how the country’s law defines and protects intellectual property rights that are important to the customer. Second, and less obviously, the customer must consider how foreign law may affect the customer’s IP ownership even within the home country. This follows from the territoriality of IP law that, if a software outsourcing customer’s pre-existing materials or newly developed software are copied, decompiled or otherwise used abroad in a manner contrary to the customer’s interest, the customer’s only or principle remedy may be to try to enforce, in the country in which infringement occurs, such rights as the customer has under the law of that country (Philips, 2002). Enforcement issues relating to IP rights in India are well publicised. According to preliminary estimates from the business software alliance, trade losses to U.S. software companies from software piracy in India in 2003 were approximately $229.5 million (IIPA, 2004). The International Intellectual Property Alliance (IIPA) reports that
“corporate end user piracy (unauthorised use of business software in a business setting) is endemic in major Indian companies” (IIPA, 2002). Despite the reported high levels of wilful copyright infringement in business settings, since enactment of India’s copyright law, “there have been no criminal convictions for software piracy” (IIPA, 2002, p. 126). One possible explanation, according to IIPA, is that copyright cases in India “can take up to 12 years to complete” (IIPA, 2002, p. 127). Civil cases are also reportedly “long” and “drawn out” because of an “under-resourced and bureaucratic judicial system” (IIPA, 2002, p. 136). There are also substantive law concerns. India along side the UK and U.S. is a member of the Berne Convention. IIPA has stated that amendments to India’s Copyright Act implemented in 1995 “resulted in one in of the most modern copyright laws in any country” (IIPA, 2002, pp.138). Computer programs are expressly protected by copyright in India (IIPA, 2002, pp.138). Under amendments that took effect in 2000, however, India created new “fair dealing” or fair use rights for software. Specially, newly added section 52(1) (ab)-52(1) (ad) of India’s Copyright Act provide that copyright in computer program is not infringed by:
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The doing of any act necessary to obtain information essential for operating interoperability of an independently created computer programme with other programmes by a lawful possessor of a computer programme, provided that such information is not otherwise readily available. The observation, study or test of functioning of the computer programme in order to determine the ideas and principles which underlie any elements of the programme while performing such acts necessary for which the computer programme was supplied. The making of copies or adoption of computer programme from a personally legally
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obtained copy for non-commercial personal use. However section 52(1) (ab)-(ad) have not yet been subjected to definitive judicial scrutiny. The only case which directly deals with the issue is a 2004 judgment of the Delhi High Court in Microsoft Corporation v. Debasish Seal, which, although decided two decades after the amendment of the Copyright Act to include computer software, surprisingly dilates on whether or not software in magnetic or electronic form is a literary work. Microsoft had moved the court for an injunction restraining the defendant from reproducing and selling Microsoft Office 2000 Professional and Microsoft Office XP for approximately US$7. Microsoft had registered copyrights with respect to Microsoft Office 2000 Professional in India. The defendant failed to provide any evidence disputing Microsoft’s claim that he sold pirated copies of the software to an investigator hired by it. The Delhi High Court began its analysis by raising the question of whether copyright protection could be extended to cover computer programs which generally exist merely in magnetic or electronic form although, when a computer program is converted and transferred to a piece of paper, it would definitely enjoy the protection of copyright like any other literary work. Notably, the court failed to cite the relevant sections of the Copyright Act. It if had, it would have noticed that there is no statutory restriction which limits copyright protection to a computer program only if it is written on paper. Fortunately, the Court nevertheless concluded that computer software is protected by copyright as a literary work whether it is written on paper or appears in magnetic or electronic form. Observing that the defendant had also infringed the registered Microsoft trademark of the plaintiff which appears on the computer screen when the pirated software is used, the Court granted a permanent injunction against the defendant. The Microsoft case involved both registered copyrights and trademarks. However, it
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is important to note that registration of intellectual property rights in India can take up to six years due to bureaucratic delays. Therefore, in order to prevail in an infringement action, it is important to apply for copyright and trademark registrations well before transferring any sensitive code to any persons in India.
limitations and exclusion of liability As with all commercial contracts, service providers would seek to clarify the scope of their legal obligations and liability for incidental and consequential damage resulting from their service to their clients business within the terms of the contract. This may include the use of detailed contractual provisions, together with detailed exclusion warranty provisions. These warranties may contain clauses and invariably include exclusion of statutory and common law implied terms, as legally permissible, hence limiting the amount of liability that can be incurred by the service provider. The Supply of Goods and Services Act 1982 (SOGA, 1982) requires that the supplier of a service to carry it out with reasonable care and skill and, unless agreed to the contrary, within a reasonable time and make no more than a reasonable charge. Exclusion of certain forms of statutory implied terms and conditions in relation to the sale of goods and supply of services is permitted, some being permitted on an absolute basis and some on the basis of a “fair and reasonable test”. However, normally a breach of an implied term under SOGA/1982 Act would entitle the injured party to terminate the contract, whereas breach of an implied term, which is stated to be a warranty, will generally enable the injured party to claim for damages only. But, the distinctions between the implied terms and warranties are not entirely clear cut. In the Salvage Association versus CAP Financial Services case (Taylor, 2004) the English court considered consequential loss exclusion in the context of a contract for computer software
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
in 1988. The Salvage Association had engaged CAP to create and implement a software accounting system. But the finished system was riddled with over 600 errors and had to be scrapped in 1989 after repeated attempts to modify it failed to produce a usable version. The judge found that as a matter of fact the CAP was not able to perform the contract because it lacked access to relevant skills and experience and consequently, the system that CAP has produced was not fit for intended purpose. The central legal point in this case concerned the application of the Unfair Contracts Term Act 1977 (UCTA, 1977), but it also provided a guide to the classification of losses under an exclusion clause differentiating between direct and indirect losses, which reads as follows: CAP Financial Services will not be liable for any indirect or consequential losses, damage, injury, cost or expenses of any kind whatsoever including economic loss, such as loss of production, loss of profits or of contracts… (Taylor, 2004) The court held that this clause was enforceable, but the clause and the case tumbled due to the English law’s narrow definition of indirect and consequential loss. The court held that, because the other kinds of loss referred to were said to be examples of indirect and consequential loss and not separately listed, the clause was ineffective in excluding direct economic loss. The court therefore held that these losses were and direct and recoverable (in addition to the principal claim of wasted expenditure); (a) payments to a third party bureau facility (b) wasted computer stationary (c) payments to consultants (d) payments for testing. Almost invariably the exclusion and limitations of liability provisions will be one of the final provisions to be agreed during contract negotiations of an offshoring deal. The provisions and warranties are of great importance to both parties in events of serious difficulties arising under the contract.
Limitation and exclusion of liability provisions in IT-outsourcing contracts tend to be structured involving the following components:
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Distinction between liability for direct loss or damage, loss or damage to tangible property and other forms of direct loss or damage. This distinction reflects, first, the availability of large sums of insurance in relation to loss and, secondly, the high value of loss or damage to tangible property. Separate limitations of liability figures may be agreed, or uncapped liability agreed, in relation to certain specific forms of loss or damage, which could include fraud, breach of confidentiality obligations, breach of IPR obligations and breach of statutory obligations. The contractual limitations of liability provisions may also include indemnity protection by one party to another in relation to certain heads of loss or damage, which from the customer’s perspective, might include IPR infringement, breach of confidentiality obligations, data loss or damage, virus infection, and breach of statutory obligations. The contractual limitation of liability provision may be stated to apply on a per event or in aggregate basis. Alternatively, they may be calculated on a per year or other recurring basis. From the customer’s perspective per event liability levels may be preferable, while the service provider may seek to limit its liability in aggregate over the contract term, for the purpose of quantifying contractual risks. The relationship between the service credit regime in relation to supplier delay in implementation of contractual services and failures to achieve the contractual service levels/ KPIs, and the contractual limitations of liability provisions should be clarified. The contract should deal with exclusion of indirect consequential loss or damage,
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which is generally agreed to both parties and applicable to both parties. What can be contentious is the reference to specific leads of loss or damage, such as loss of profits, and whether these are excluded on an ab initio basis, or if rather they are indirect or consequential.
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• It is very important to tie together all contractual limitations and exclusion of liability provisions in order to avoid uncertainty or ambiguity within the contract.
exit strategy and termination of contract The ability to terminate and method of termination is a key element in any offshoring negotiation. The vendor will want to terminate for clause relatively quickly if payment is not being made on time. In any substantial outsourcing arrangement, cash flow is of key concern to the vendor so that the vendor can meet its payroll, equipment and administrative expenses. Usually, the client does not have any difficulty with this concept. The more seriously negotiated termination provision is termination for convenience. The client will want to have the ability to terminate the outsourcing arrangement without having to go through a lengthy process of declaring and proving a vendor to be in default. Additionally, a client will want to have a termination for convenience clause in the event of an acquisition after which another system is implemented. Sometimes, there is a reverse termination of sorts in the case where an acquiring company prefers the processing systems of the acquired company. Under those circumstances, the acquiring company may want to terminate for convenience so that it can move its processing to the acquired company’s more favourable systems. The three main scenarios that the parties engaged in an outsourcing relationship can find themselves in:
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The contract is approaching its end and the user wants to re-tender to decide whether to renew the contract or change suppliers. The contract is being terminated at its end with a possibility of change of suppliers, to the transfer of service operations back in-house. The contract is being terminated for breach, with a consequent change of suppliers, to the transfer of services back in-house.
Let us consider the first condition of change in service provider or supplier. Assume that neither party is in breach nor even if the customer is satisfied with the services, it is likely that the customer will want to go through a re-tendering process even if the aim is only to renegotiate the existing contract. If the customer allows an existing contract to roll on, it is likely to benefit from the competitive edge offered by other potential service providers, in terms of quality and range of services. Even though it is quite obvious that vendors will not want a termination in the initial phase of the contract for convenience right (Raysman & Brown, 1998); it is during those years that the vendor is being reimbursed for the initial substantial outlays in equipment, real estate and other costs in the start-up phase of the arrangement. Thus the termination for convenience right might not be effective until after the first or second year of an agreement. In the second condition of change of supplier can have two scenarios — the contract is being terminated for breach or one party has exercised a right to terminate at the end of the agreed term. The latter is relatively straightforward; it is termination for other reason which requires further consideration. The issue of termination of contract for breach could have a number of reasons, which includes that outsourcer must assess and comprehend the legislative, judicial, law enforcement and administrative capacity of the outsourced contractor’s country. It requires that the outsourcer have a legal right to call off
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
the contract for non-performance and identifiable breaches in the contractual agreement. Outsourcing transactions should also consider the other infrastructure strategies, such as mergers and acquisitions, divestitures, spin-offs, split-offs, strategic alliances and other special situations.
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coMPrehensIve due dIlIgence strAtegIes For reducIng outsourcIng rIsKs It is absolutely critical that appropriate policies and procedures on privacy, data processing and service level agreements be developed by any organisation handling identifiable and nonidentifiable individual-level data, which provides the most zealous protection for legitimate public interests. The debate does not rest with developing policies and procedures, and benchmarking them against risk metrics; the entire organisation needs to understand them and be trained to enforce and implement them (Tompkins, 2003). The keys to success in global sourcing would depend on the best practices and due diligence strategies employed (Pai & Basu, 2005b) by organisation’s to reap the benefits from their outsourcing effort:
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Strategic planning and assessment: A structured approach for identifying and evaluating the potential candidates for offshore outsourcing, and prioritising their relative benefits would reinforce the mainstream decision making process of enterprises. Outlining a long-term view for offshoring initiatives will avoid long learning curves and minimize redundant efforts in development and deployment of high-quality IT services. Focusing mainly on the labour wage differentials and cost arbitrage sourcing strategies might have an impact on the functional areas of the business in particular performance monitoring and efficiency in resource utilization.
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Due diligence to operating models and selection of service providers: The level of due diligence required, and the types of issues to address during supplier selection are substantially different. It’s important to review the service provider’s core business competencies, credibility, dependability and sustainability which are essential in maximizing returns from an offshoring initiative. Always ask your service provider hard questions and assess the risk associated with your operations. For example, does the service provider have a disaster recovery plan? What are the network security policies? Can the provider sustain a development operation? How will service levels and quality be assessed? And so forth. Risk mitigation: The outsourcing strategy for risk mitigation prescribes that it is important not to leave too much to change in offshore deals. The long-term success of the initiative is directly related to the level of planning for risk, and the commensurate governance structure set in place. Having a well-considered risk management document that measures the probability of each type of risk and the impact on the enterprise will be critical in determining the ultimately success of the offshore initiative. The risk management framework will also define which risks need to be managed, which can be transferred, and which can be simply ignored. Post-contract governance: Streamline a strong governance structure, seeded with location expertise for quality of service assessment and risk mitigation. Having a well-defined strategic post-contract monitoring model is imperative in developing a “proactive” monitoring and management process. Push hard on continuous improvement initiatives and give your organisation the leverage to renegotiate price reductions or
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•
•
•
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quality enhancements as the market changes over the term of the agreement. Knowledge acquisition: The bargain to realise cost savings and meet the value proposition often posses the danger of being information rich but knowledge poor putting your business continuity at risk. Vendor selection based on geographic cost arbitrage for example could be one of the several elements of a knowledge process outsourcing’s (KPO) value proposition. Another element would entail; despite the contract, the service provider could fail to manage your critical risks in a crisis. So what do we need here is a crisis and contingency management plan to face undesirable outcome. Changes to your business continuity plans and invocation procedures need to be communicated properly if operational integrity is to be upheld for a stable and secure partnership with your service provider. Compliance risks: Effective SLAs are extremely important to assure effective outsourcing engagements. The metrics used to measure and manage performance to SLA commitments are the heart of a successful agreement and are a critical long-term success factor. Lack of experience in the use and implementation of performance metrics causes problems for many organisations as they attempt to formulate their SLA strategies and set the metrics needed to support those strategies. Conflict & litigation resolution: Conflict resolution and contract negotiation is the process through which two or more parties arrive at mutually acceptable terms and conditions of exchange for items they own or control. Conflict arises between two parties when there is a deadlock between them over the aforesaid terms and conditions. Negotiation acts as an effective tool towards conflict resolution. A good management practice will be to have short-term focus on quality
•
assessment. This can lead to increasing the number of contract renegotiations aimed at achieving cost reductions. Additionally, increasing competition between service providers is expected to intensify and may lead to a lowering of contract prices. The three primary market pressures faced by service providers are the need to acquire new revenue, the need to retain or grow market share against competitors, and the need to avoid “buying into” deals that are only focused on cost reduction (Tramacere, 2004). Contract termination & exit strategy: The outsourcing firm must assess and comprehend the judicial, law enforcement and administrative capacity of the service provider’s country. Be prepared for renegotiations of IT infrastructure deals by planning for changes in the service delivery methodology as technology matures and new business needs emerge. Ensure that you have a legal right to call off the contract for non-performance and identifiable breaches in the contractual agreement. Speculate alternatives to outsourcing transaction and other infrastructural strategies, such as mergers and acquisitions, divestitures, spinoffs, split-offs, bankruptcy reorganisation, strategic alliances, joint ventures, with a possibility to take the operations back inhouse.
conclusIon In a global economy based on specialised skilled services, navigating and surviving the rough waters of offshore outsourcing has become synonymous to corporate strategy of many global business enterprises. Virtually everyone outsources some function in order to be able to devote scarce resources to their own unique core skills and products (Bierce & Kenerson, 2005).
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
If properly conceived and implemented, offshore outsourcing can fuel revenue growth, enhance service quality, operational effectiveness, and enable organisations to better manage their intangible assets and redefine their market. To adapt a truism, from a business outsourcing context; it becomes imperative that if one cannot evaluate and assess the vital role that enforcement policies and compliance management processes play, one should not be outsourcing. In other words, using outsourcing as a panacea to all organisational adversities will only compound the existing problem. In essence, it is extremely important that the enterprise business outsourcing houses falling under the EU and U.S. embargo statues restructure their regulative practices in order to enable a smooth transition towards a sustainable business establishment. Additionally, outsourcing would deliver greater control, efficiency and cost reductions which allow organisations to refocus their scarce finance and technology resources on creative and value-added services such as business strategy and execution, new opportunity identification, business interpretation and continuity planning. It is also required that adequate measures should be introduced in order to safeguard interest and proprietary information of the customer’s business through protection of their IP. Clearly, such a strategic and structured approach requires substantially more emphasis on due diligence to selection of service providers, contractual enforceability and compliance monitoring, but in return should pay great rewards in a long haul. Finally, the way forward would be to move from precarious and unwarranted region specific legislations and enforcement to a blend of multi-jurisdictional legal framework coupled with stringent informational security and procedural recommendations that are mutually acceptable to the outsourcing customer, service providers, local government and consumers.
reFerences Bierce, B., & Kenerson, P. C. (2005). Insights on effective outsourcing. Available at Outsourcing Law Global, LLC, at http://www.outsourcing-law. com/economics.htm Business Standard. (2003, April 16). U.S. firms saved $8 bn via local outsourcing. Business Standard. COI. (1949). Constitution of India, November 1949. Retrieved December 23, 2004, from http:// www.alfa.nic.in/const/a1.html Cravotta, N. (2004, September 2). Offshore outsourcing: Now boarding – A trip to China may just be the ticket to take your design to reality. Electrical Design News. DPA. (1998). Data Protection Act 1998, Chapter 29, London. Available at http://www.hmso.gov. uk/acts/acts1998/ ECCD. (1995, October 24). European Communities Commission Directive 95/46 EC of the European Parliament. Evans, P. C., & Smith, R. B. (2002, March). Intellectual property rights in collaborations. BioPartnering. Fernandez, D., Kemeny, D., & Bastani, B. (2003). Intellectual property strategies in security and privacy. Fernandez & Associates, LLP. Griths, D. (2001). The theory and practice of outsourcing. In the Proceedings of the Society for Technical Communications. Available at http://www.beethovan.org/Outsource/Outsourcing.pdf Hagel, J. (2004). Offshoring goes on the offensive. The McKinsey Quarterly, (2), 23. Hayes, I. S. (2004). Metrics for IT outsourcing service level agreements. Report by Clarity Consulting.
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Huff, S. L. (1991, Spring). Outsourcing of information services. Business Quarterly, 62-65. India fears impact of bid to curb jobs exports. (2004, June 4). Financial Times. International Intellectual Property Alliance (IIPA). (2002). India in 2002 Special 301 report on global copyright protection and enforcement 128 (app. C). Available at http://www.iipa.com International Intellectual Property Alliance (IIPA) USTR. (2004). Special 301 on intellectual property IIPA’s 2003 estimated trade losses due to copyright piracy (in millions of U.S. dollars) and piracy levels in-country. Available at http://www.iipa.com/ pressreleases/2004_May3_Sp_301_plus_chartrev.pdf at pp.8 IT facts Web page. (2004). Retrieved January 3, 2005, from http://www.itfacts.biz/index. php?id=P1371 Jain., R. C. (1997, July). Kharak Singh versus State of UP, 1 SCR 332 , 1964. National Human Rights Commission, India, Indian Supreme Court on Right to Privacy.
NTF. (1998, June 9). National Task Force on IT & SD. Basic background report available at http:// it-taskforce.nic.in/it-taskforce/bg.htm Pai, A., & Basu, S. (2005a, April). Offshore outsourcing – Weighing the risks of data protection and security. 20th Annual British and Irish, Legal Education and Technology Conference, BILETA Belfast, Northern Ireland. Pai, A., & Basu, S. (2005b). Offshore technology outsourcing: Overview of management and legal issues. International Journal of Business Process Management (accepted for publication). Paris Convention for the Protection of Industrial Property, International Bureau of WIPO. (n.d.). Retrieved from http://www.wipo.int/treaties/en/ ip/paris/trtdocs_wo020.html#P19_137 Phillips, D. E. (2002, September). Selected legal issues in international software outsourcing. The Licensing Journal, 13-19. Ramer, R. (2004). The security challenges of offshore development. The SANS (SysAdmin, Audit, Network, Security) Institute.
Klein, A., & Wolsk, J. (2004). Outsourcing service levels in POS maintenance transactions. Available at http://www.executivetechnology.com/ ViewSOFull.cfm? SOID=133
Raysman, R., & Brown, P. (1998, April). Key issues in technology outsourcing agreements. New York Law Journal. Available at http://www. brownraysman.com
Kulkarni, J. (2004). Best practices in IP protection when off-shoring. Available at ht t p:// www.noa.co.uk/features.http://www.noa.co.uk/ features/featuresKeyToneoppc.html
Raysman, R., & Brown, P. (2003, March). Offshore outsourcing means careful legal planning. New York Law Journal, 229(46).
Lacity, M., & Hirschheim, R. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86. Loh, L., & Venkatraman, N. (1991). Outsourcing as a mechanism of information technology governance: A test of alternative diffusion models. Working paper no. BPS3271-91, Massachusetts Institute of Technology, Alfred P. Sloan School of Management, Cambridge, MA.
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Reuters. (2002, January 1). India becoming world’s back office. Richmond, W. B., & Seidman, A. (1991). Outsourcing and contractual issues in the systems development life. Working paper. William E. Simon Graduate School of Business Administration, University of Rochester, NY. Robinson, M., & Kalakota, R. (2004). Offshore outsourcing: Next wave. E-Business Strategies, Inc., 5.
Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services
Rosenberg, P. D. (2001). Patent law fundaments (2nd edition). West Group. SOGA. (1982). The Supply of Goods and Services Act 1982. Consumer and Competition Policy, Department of Trade and Industry, UK. Taylor, A. (2004). Excluding consequential or indirect losses in software and outsourcing contracts governed by English law. Retrieved January 17, 2005, from http://www.mayerbrownrowe. com/Outsourcing/publications/article.asp?id= 1835&nid=1853&fl.pdf Tompkins, J. (2003). Outsourcing: Solution or setback? Available at http://www.tompkinsinc. com/publications/competitive_edge/articles/0404-Outsourcing.asp Tramacere, G. (2004, June). The future of infrastructure outsourcing in western Europe. Gartner Research Inc.
UK’s outsourcing revenue to touch $27 bn in 3 years. (2003). Hindustan Times. Retrieved December 29, 2003, from http://www.hindustantimes. com/news/6771_504972,004300190004.htm Unfair Contracts Term Act (UCTA). (1977). Fact sheets on the exclusion clauses in contracts. Available at http://www.dti.gov.uk/ccp/topics1/facts/ unfairact1977.htm Vnuet. (2002). GlaxoSmithKline considers outsourcing deal. Retrieved December 12, 2002, from http://www.vnuet.com Whang, S. (1992). Contracting for software development. Management Science, 38(2), 307-324. Xicom. (2004a). Business process outsourcing – Advantage India. Retrieved November 5, 2004, from http://www.xicom.biz/research.html Xicom. (2004b). Business process outsourcing (BPO) market growth. Retrieved November 6, 2004, from http://www.xicom.biz/bpo_market_growth.html
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 403-431, copyright 2004 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.9
Exploring ASP Sourcing Decisions in Small Firms Maria Woerndl University of Bath, UK Philip Powell University of Bath, UK Richard Vidgen University of Bath, UK
AbstrAct This chapter explores application service provision (ASP) in small- and medium-sized enterprises (SMEs). Five exploratory case studies among UK SMEs illustrate that SMEs are aware of the ASP concept and its potential. While the uptake of ASP is still low the idea of paying for information systems (IS) services on a monthly basis is gaining ground. A framework mapping the ASP sourcing decision process for SMEs is introduced, highlighting the issues and challenges that SMEs face when evaluating whether to source IS through the ASP renting model rather than building a solution in-house or buying it off the shelf.
IntroductIon Application service provision (ASP) is an information system (IS) sourcing option geared towards
the small- and medium-sized enterprise (SME) market. An ASP provider “manages and delivers application capabilities to multiple entities from a data centre across a wide area network” (Susarla, Barua, & Whinston, 2003). Though the ASP bandwagon has slowed down from late 2000 (Kern, Kreijger, & Willcocks, 2002a), shifting the industry life cycle from a growth to a shake-out stage (Kern, Lacity, & Willcocks, 2002c; Kern et al., 2002), the ASP paradigm is gradually evolving. ASP has been predicted to have substantial influence on small firms with the market developing primarily around SMEs (Kern et al., 2002c), but to date there is little evidence that SMEs are actually jumping on this bandwagon. This study presents an ASP decision process framework for SMEs highlighting the constructs and issues that impact on the decision to adopt ASP as an IS sourcing option. After introducing ASP in SMEs and IS sourcing, the research method is laid out and the framework and findings are presented.
the lIterAture: AsP, sMes, And Is sourcIng The simplest ASP relationship consists of a service provider, a client, and a network connecting the two. The service provider offers software-based services to the client who typically pays for these services through a monthly rental, per user, or per seat. The IS services are hosted and maintained by the provider with the client accessing the services via a network which is mainly the Internet. The software available covers a range of general and specific business applications, from accountancy to word processing, data back-up to healthcare. Software licenses are obtained and held by the provider and charges for these licenses are included in the monthly rental. ASP bears some resemblance to traditional outsourcing, however
there are a number of major differences (Cherry Tree & Co., 1999; Currie & Seltsikas, 2000), of which cost of application, ownership and service are highlighted as key. Table 1 consolidates these differences demonstrating that sufficient differences exist for ASP to be considered a new phenomenon. Presenting ASP as a new phenomenon is consistent with the IS sourcing perspective where ASP is a sub-set of netsourcing, which is the third wave of IT outsourcing, following the first waves of facilities management in the 1980s, and strategic outsourcing in the 1990s (Kern et al., 2002a). ASP is considered a particularly suitable IS sourcing option for SMEs. In the past, IS sourcing has concentrated on large firms, as SMEs lacked the financial resources to engage in traditional IS outsourcing partnerships. The ASP sourcing
Table 1. Contrasting ASP and traditional outsourcing (adapted from Currie, 2000, Currie and Seltsikas, 2000, Cherry Tree, 1999) SME Attribute Service Method
Contract form
ASP One-to-Many: One ASP offers the same service to different SMEs Service level agreement (SLA) between ASP
Outsourcing One-to-One: Adjusted to the firms specific needs Various contract forms available. Can be between the
and SME
firm and various outsourcers to deliver one service
Length of contract
Flexible, short term (12-24 months) possible
Usually long term
Ownership of application/
ASP owns the applications including software,
Outsourcing company or client, or both own applica-
assets
can also include hardware.
tion/assets
Databases, servers and software etc. are located
Outsourcer or firm or both can physically be the loca-
Location of application/asset
Access to application/asset
Maintenance and Support
with the ASP
tion of the applications or assets
Over the Internet, leased lines or other net-
Personally, written, or oral access through out-
works
sourcer.
ASP maintains and supports applications as part
Maintenance and support are additional features to the
of the service
outsourcing contract. Can be costly and long term.
Set up fee plus fee per use per month. Monthly Cost
rental fee can range widely depending on applica-
Fixed price according to contract with outsourcer
tion, number of users and service level. Focus Upgrades
ASP focuses on the specific application/asset
Outsourcer concentrates on various attributes like
for the SME
business processes and management of networks
Upgrades are part of the SLA
Upgrades additional to existing contracts
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Exploring ASP Sourcing Decisions in Small Firms
model has the ability to bridge this financial gap and enable access for SMEs to applications they cannot otherwise afford (Kern et al., 2002a). Access to IT skills and resources conventionally not available to SMEs is a further selling proposition of ASP. Also emphasised is that ASP enables SMEs to concentrate on core business without worrying about IT issues (Computing Staff, 2001) as there is no need to support complex technology. Despite the above motivators for adopting ASP, the uptake of ASP among SMEs lags behind the corporate sector, with only 8% of SMEs using ASP in 2000. The key barriers to entry seem to centre around issues of security, cost and reliability (Lynch, 2000) and particularly in the UK the lack of broadband Internet access for SMEs (Hopkins, 2000). Although ASP may indeed provide an opportunity for SMEs to gain access to information services and technology otherwise not available, this is largely unexplored territory. The decision to outsource IT can be reached using various aids. Options ( Lacity, Willcocks, & Feeny, 1997), taxonomies (Currie & Willcocks, 1998), and decision process models (Gartner Research, 2002) dominate the IT sourcing decision literature. Whereas IT sourcing options (Lacity
et al., 1997) are the front end of the sourcing decision—they evaluate whether to outsource IT or not—IT sourcing taxonomies (Currie & Willcocks, 1998) illustrate the various IT sourcing options that are available. One technique of evaluating IT sourcing options is to contrast contracts between providers and clients and buying vs. bringing in IT solutions (Lacity et al., 1997) (Figure 1). A transaction purchasing style contract is a one-off, whereas relationship contracts are incentive-based with mutual expectations that will exist over a number of years. The purchasing focus is the decision whether to in-source by buying in vendor resources or to outsource by managing the delivery by the vendor only. The differentiator here is whether to use the supplier as a resource and hence in-source, or to use the result only and to outsource. Four distinctive options of IT sourcing emerge: buyin, contract out, preferred supplier, and preferred contractor. This model is one method of clarifying IT sourcing options available for organisations. There is no distinction made here between large firms and SMEs and, although ASP can be an option within this model, it needs further clarification
Figure 1. Clarifying IT sourcing options (Source: Lacity, et al., 1997) Transaction
Contract out
Buy in
In-house
Purchasing style
Preferred contractor
Preferred supplier
Relationship
Resource
4
Insourcing
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Result Outsourcing
Exploring ASP Sourcing Decisions in Small Firms
as IS rental through the Internet is a relatively new phenomena. Classifying the IT sourcing decision complements the above IT sourcing options. Currie and Willcocks (1998) identify five types of outsourcing decisions (Figure 2): total outsourcing, multiple supplier outsourcing, selective sourcing, joint venture/strategic alliance sourcing, and in-sourcing. These decisions are set in the context of scale of IT market use and client/supplier interdependency. The scale of market use refers to the percentage of IT work done by external supplier(s) and the client/supplier interdependency refers to the mutual dependency of the client and the supplier. Whereas IT sourcing options and taxonomies are typically contingent models, the sourcing life cycle (Gartner Research, 2002) is a process model consisting of various stages (Figure 3). Although contingent models do not enforce a decision order, stage models do propose that one step has to follow the other. The specific sourcing lifecycle, used here as an example, consists of four distinctive phases of the organisational sourcing decision process: sourcing strategy, evaluation and selection, contract and development, and sourcing management. Sourcing strategy focuses on the need for, and viability of, external sourcing versus internal sourcing and includes evaluation
of strategic objectives, financial expectations, skill requirements, risks, and so on. The second phase, evaluation and selection, entails a request for proposal (RFP) that should contain hardware and software inventory and identify the scope of the sourcing. The sourcing requirements will then lead to the selection. The third phase, contract development, is concerned with negotiating the sourcing contract. Finally, sourcing management looks at the ongoing management of the sourcing and the methods of monitoring and control. These existing IT sourcing models do not take emerging IS rental options into account and do not address the differences between SMEs and large firms in terms of IT sourcing decisions. As the IS sourcing field has concentrated heavily on larger firms, there is little knowledge about IS sourcing in SMEs. The ASP model is opening the SME market to IT outsourcing through an affordable, flexible renting model. The buying and building of IS is therefore complemented by a third option, the renting of IS through, for example, the ASP model. The current IT sourcing models do not take into account the possibility of rental or lease options. This implies that there is a role for a framework looking at rental or lease options to bridge the gap in the current literature and illustrate the suitability of the rental model
Figure 2. A taxonomy of IT sourcing decisions (Source: Currie & Willcocks, 1998)
Total
Multiple Supplier Sourcing
High
Scale of IT Market Use
Joint Venture/ Strategic Alliance Sourcing
Selective Sourcing Insourcing/Inhouse
Low
High
Client/Supplier Interdependency
Low
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Exploring ASP Sourcing Decisions in Small Firms
Figure 3. Sourcing Life Cycle (Gartner Research, 2002) 1.
Sourcing Strategy
In-house
2.
Evaluation & Selection
3.
Contract Development
4.
for the SME market. The framework derived here illustrates the IS rental model using the ASP concept in the SME context; the framework concentrates on the actual decision to source IS using ASP and is presented after the illustration of the research method.
reseArch Method In order to develop an in-depth understanding of the ASP decision process in SMEs, a multiple case study approach (Yin, 1994) is adopted here. An exploratory approach (Marshall & Rossman, 1989) is chosen as the ASP phenomenon is still in its infancy and prior research on ASP in SMEs is limited. Data was collected in face-to-face, semi-structured interviews with SME personnel and management responsible for the adoption of IS, and ASP in particular. The interviews were conducted in late 2002 and the respondents were asked “how” and “why” questions (Yin, 1994). The interviews were tape recorded if the respondents consented and transcribed. The focus of this study is to explore the decision process that leads to the adoption of ASP in SMEs and data from five
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SMEs, located in the south of the UK, Wales, and London, illustrates that there are various stages of evaluation of the ASP concept. Information about the participating SMEs and the ASP solutions is summarised in Table 2. Turnover and names of the SMEs are withheld due to confidentiality arrangements. The SMEs are defined as having fewer than 250 employees, are exploring and evaluating the ASP concept, and are located in the South of the UK with activities in different sectors. The sampling therefore is purposeful. Firm A is a family business established more than 30 years ago. This limited company, based in Nottingham, is in the packaging industry, manufacturing cardboard boxes and cases, and employs about 90 people. Firm B acts as a business accelerator for creative service firms by offering professional business services, finance and advice. These creative service firms include design agencies, PR firms, advertising agencies, and television producers. The firm is based in London and is run by nine directors. These nine partners set up the firm in October 2001 and at the time of the study employ two personal assistants and one corporate and market analyst. Firm C is a third sector firm bridging the gap between the
Exploring ASP Sourcing Decisions in Small Firms
Table 2. SME participating in the study including respective ASP solutions Firm
Location
Sector
Employees
A
Midlands
Manufacturing
~ 90
B
London
Service
12
C
Wales
Service
~ 100
D
Wales
E
Bristol
Marketing & Consultancy Consultancy
~ 20 2 full-time 3 part-time
public and private sector. The firm was found in 1979 as a grassroots community initiative to promote economic and social development in West Wales. Approximately 130 people work it in its 12 locations. Firm D is a multimedia marketing and business consultancy and employs five people. The firm is based in South Wales servicing mainly local businesses. Firm E is a nonprofit organisation which operates as a consultancy. Its members create consortia for joint project bids in the digital media arena. The firm is based in Bristol and employs five people. The data collected from the five firms in the interviews was analysed using qualitative data analysis techniques (Miles & Huberman, 1994). In total, 16 interviews were conducted in the five firms. The data collected in these interviews was first ordered, then summarised in case summaries and then matched using matrixes which build the basis for the findings presented hereafter.
dIscussIon The exploratory, multiple case studies illustrate that SMEs go through a process of evaluating the adoption of ASP. This process usually starts when SMEs are aware of the ASP IS rental model, where word-of-mouth plays an important role. Firm A has
ASP solution E-banking Website hosting Email service
Payment Flat fee Per month per user
Email service
Per month per user
Exploring ASP options Email service
-
Flat fee
Provider UK Bank Specialist ASP provider Specialist ASP provider
Specialist ASP provider Exploring Service & ASP providers Service provider
a long established relationship with the provider that offered the firm an e-banking option. This e-banking option suited Firm A well, was readily available from the provider, and was practicable. The other ASP solution adopted by Firm A, Web site hosting, originated in an informal conversation between the firm’s owner and an executive of the solution provider at a Small Business Federation (SBF) meeting. A need for such a solution was identified, broadband was available, a provider was at hand, and so the owner of the business decided to adopt the solution. Firm B found the ASP solution through an Internet search and only one provider offered a solution that could satisfy the firm’s IS need: “one of my [business] partners looked on the Web and imagined that such a service must be available, we didn’t know where to start and we just did a Google search I think and found two or three providers and phoned them up, asked for a quote and in the end actually it was only one provider that we could locate that could do what we wanted” (Director, Firm B). The firm realised that without broadband, using ASP is not feasible: “we do broadband without that it [ASP] is crap… most of us [directors] have broadband at home, those of us that don’t have broadband at home it doesn’t work terribly well, the bandwidth requirements for Outlook are quite large and there was also a
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Exploring ASP Sourcing Decisions in Small Firms
surprising thing we found, one of my partners was trying to use satellite broadband and there was a delay which is a problem.” Therefore ASP was deemed suitable, feasible, available, and doable and was adopted by Firm B. Firm C’s head of unit got to know about the ASP concept through friendly connections at the Welsh Development Agency: “I got to know about [the provider] and broadband because I did broadband awareness raising…I’ve kind of heard of these ASP providers…I thought, hold on we’ve got broadband here” (Unit manager, Firm C). Upon further investigation, the ASP concept had the ability to satisfy an arising IS need and was deemed beneficial: “I had a new project that I was managing coming on-stream so instead of actually buying an exchange server and going to the Service Level Agreement which was again a high ongoing cost, I decided to use a service, an ASP provider” (Unit manager, Firm C). Firm D is in the process of evaluating possible ASP solutions. One manager of Firm D is actively involved in a UK broadband pressure group where he got to know about the ASP concept and the opportunities that ASP may offer in terms of IS provision for SMEs. The potential that ASP has is the reason for Firm D, which has broadband readily available, to continuously monitor the ASP market for suitable ASP solutions which for example could replace existing in-house IS at lower cost. Firm E is not aware that the solution they use is in essence an ASP solution. The person looking after IT in Firm E did talk to friends when searching for an e-mail solution. These friends suggested the solution that Firm E adopted. This word-of mouth discovery of a suitable solution was coupled to broadband access being available to the firm and recognition of the benefits expected from adopting e-mail communication. Risks of adopting this e-mail solution are considered manageable by Firm E.
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FIndIngs Undertaking this study highlights that awareness of the ASP concept tends to be created through word-of-mouth, when SMEs attend industry gatherings, as SMEs keep in touch with SME agencies, and, for IT-minded firms, through Internet searches. Once SMEs are aware of the ASP concept, the issue is whether it actually has the ability to fulfil an existing or arising IS need and if it is beneficial to the SME; the suitability of ASP vs. building a solution in-house or buying it off the shelves needs to be established. When the suitability of ASP is evaluated and given the go ahead, SMEs need to find suitable solutions and providers (assuming they have not done that in the original suitability study) and then make a choice. In all but Firms B and D, possible ASP providers and solutions were identified during the suitability and awareness process. Firm A’s owner met the manager of the ASP provider at a meeting, Firm C’s head of unit was aware of firms and solutions through contacts to the Welsh Development Agency, and Firm E just followed what others in the industry were doing. Firm B did find solutions and providers on the Internet and went through a process of evaluating these solutions and providers and whether they fulfilled their IS needs. Firm D is aware of solutions and providers mainly through customers and through one manager’s involvement in a broadband pressure group. Before an ASP solution is implemented SMEs need to evaluate the benefits, drawbacks, and risks that are specific to the ASP concept. This evaluation provides further guidance concerning whether or not to go down the ASP route. These three process stages are fairly obvious and continuous however there is a fourth stage that only became apparent to some SMEs once ASP was implemented: ASP only works properly on a physical broadband connection because the network component of the ASP concept makes it necessary to have a fast, reliable, always-on, and
Exploring ASP Sourcing Decisions in Small Firms
cost-effective Internet connection. The feasibility stage needs to follow suitability considerations as without broadband using ASP will not be doable by SMEs. These four stages are illustrated in Figure 4. Whereas the above model is, in essence, a process model consisting of four stages, these stages are contingent and do not necessarily need to follow each other one by one; for example broadband may need to be available before ASP is considered at all. One of the major strengths of the SFAD framework is that it does not exclude the use of existing models, such as IS sourcing taxonomies. These contingent models can be used at all four loops of the framework. For example, the business factors matrix (Lacity et al., 1997) in the first loop to explore whether ASP is suitable for the SME. The suitability implies differentiating the renting through ASP from building a solution in-house or buying it off the shelf. The adoption of the Web site hosting ASP solution in Firm A is
solely down to the owner’s desire to have such a solution. Firm B does not have an IT department nor anybody IT-proficient in-house to develop a solution equal to the ASP solution and neither did they find something equivalent off the shelf. Firm C has in-house IT support but the ASP solution does offer features not achievable in-house and is cheaper than doing it in-house. Firm D is still exploring options and Firm E did engage in ASP as it was seen to be the right thing to do at the time. The economic factors matrix and the technology matrix (Lacity et al., 1997) can be used in the third loop to compare vendor offerings as well as selecting appropriate contracts respectively. In the fourth loop, “doability”, Scott Morton’s (1991) MIT90s framework can be used to investigate internal influences on the organisation and its environment highlighting benefits and drawbacks of using an ASP solution. Benefits include access to scarce IT skills and efficiency gains; drawbacks include losing control over data and dependency
Figure 4. SFAD – SME ASP decision process framework
Adopt ASP
Is ASP doable?
Benefits & Risks
Is ASP available?
Solution provider
Is ASP feasible?
Broadband availability
Is ASP suitable?
Identify need
Exit 2
Exit 1 Decision Process
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on a third party. Risk frameworks (Currie, 2003; Kern, Willcocks, & Lacity, 2002d) can help SMEs evaluating risks arising from engaging in ASP relationships. Examples of risk areas include data security and integrity and the necessary network connection (Currie, 2003). Besides the four loops and the applicability of other models within the “SFAD” framework, four exit points within the spiral are distinguished. The first exit, which occurs at the end of the first loop, highlights that SMEs need to consider whether ASP is the best solution to their problem or if other forms of IS/IT sourcing are appropriate. The second exit shows the dependency on broadband for the ASP decision process. Without broadband Internet access, SMEs may find it difficult to realise a suitable ASP solution. The third exit reflects on the unavailability of a suitable ASP solution. Caution needs to be paid to the degree of adaptability of existing solutions to the need of the SMEs. The fourth exit is concerned with the bigger picture and an assessment of the risks and potential disbenefits of the available solution outweighing the anticipated benefits. For example, SMEs need to consider the influences that ASP will have on their internal environment (e.g., changes to business processes, integration with existing IT systems).
theoretIcAl IMPlIcAtIons SMEs tend not to be familiar with the term ASP, yet they are becoming acquainted with the concept of paying a provider on a monthly basis for IS services. Once SMEs get used to the idea of renting IS services there is no limit to engaging in various ASP relationships to satisfy IS needs. Though the ASP concept is geared towards SMEs, the uptake of ASP among SMEs is still low. This low uptake is explained in part by the lack of broadband access in some parts of the UK (Hopkins, 2000), since when broadband is not available only limited use of ASP applications is possible.
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The main methods of payment emerging for the ASP services are payments per month per user(s) or per use and flat fees. ASP solutions are often provided by specialist ASP providers as well as solution specialists expanding their services to include electronic versions. Trends in the ASP concept, such as e-mail solutions being popular and provider categories including ASP specialists and solution specialists (e.g., customer relationship management), are emerging. For the SMEs participating in this study, the decision to adopt an ASP solution is best summarised by four decision factors: (1) evaluating suitability of the ASP concept, (2) exploring broadband availability, (3) searching for solutions and providers available and (4) evaluating benefits and risks. Undertaking this study highlights that awareness of the ASP concept tends to be created through word-of-mouth, when SMEs attend industry gatherings, as SMEs keep in touch with SME agencies and, for IT-minded firms, through Internet searches. Once SMEs are aware of the ASP concept, the issue is whether it actually has the ability to fulfill an existing or arising IS need and if it is beneficial to the SME; the suitability of ASP versus building a solution in-house or buying it off the shelves needs to be established. SMEs further need to find suitable solutions and providers and then make a choice. Before an ASP solution is implemented SMEs need to evaluate the benefits and risks that are specific to the ASP solution, provider and SME. This evaluation further manifests a possible decision to go down the ASP route. The adoption drivers identified in this study for SMEs to adopt an ASP solution do correspond with proposal for the SME markets: low up-front and investment cost, easy set up, access to skills and little burden on resources (Currie, 2004; Kern, et al., 2002a; 2002c). In Firm C, the discovery of drawbacks and the reevaluation of benefits after nine months lead the new head of unit to stop using the ASP solution and transferring services back in-house. Hence on-going evaluation of the ASP model is commendable.
Exploring ASP Sourcing Decisions in Small Firms
recoMMendAtIons For sMes: PrActIcAl IMPlIcAtIons 1.
2.
3.
4.
SMEs need to establish whether ASP is a suitable solution for an arising IS need. Whether ASP is a suitable solution not only depends on the availability of broadband but further on the resources and skills that the SME has. Only one of the SMEs in the sample has an IT department (Firm B) and still it was cheaper and easier for Firm B to satisfy an arising IS need using an ASP solution. Hence SMEs need to find out whether they have the skills and resources to satisfy an arising IS need in-house or through other means like buying software packages off the shelves. SMEs considering the adoption of an ASP solution need to be aware that they need a physical broadband connection for ASP to work properly. Without broadband, ASP is not feasible and satellite broadband is unfavourable due to latency issues. SMEs need to find out whether a suitable ASP solution and provider are available. To find out whether a suitable solution and provider are available for an arising IS need, SMEs first and foremost need to be aware of the IS rental concept through ASP. Word-of mouth and SME get-togethers seem to be very fruitful in gathering knowledge about ASP solutions and providers. SMEs of the sample found out through word-of mouth, meetings and initiatives, and Internet searches about ASP solutions and providers. The available solutions and providers need to be matched to establish whether they have the ability to satisfy the arising IS need. SMEs need to value the possible adoption of an ASP solution by assessing benefits and risks. Benefits can include cost savings, access to skills not available in-house and 24/7 independent access to solutions. While risks are often context specific depending
on the solution and the firm, SMEs should evaluate potential risks that come with the adoption of ASP solutions.
conclusIon This study explores SME decisions to source IS through the ASP concept. It emerges that four decisions loops are apparent when SMEs evaluate the adoption of ASP: suitability, feasibility, availability, and doability. These four loops guide SMEs considering ASP adoption through illustrating issue that SME participating in this study did face. Further, trends among SME ASP adopters are identified; these trends include solutions frequently found, such as e-mail, and providers operating in the UK market. Finally, this study illustrates that the rental option is becoming more and more important besides in-house IS developments and off the shelf IS packages for SMEs. This shift in the IS sourcing discipline to include the rental concept underlines the notion of ASP as a new phenomenon. The main limitation of this study is that five SMEs cannot represent the SME population in the UK. However, the process of evaluating the adoption of an ASP solution is strikingly similar in all five SMEs. The resulting SFAD framework alerts SMEs to issues that need to be considered when evaluating the ASP option.
reFerences Cherry Tree & Co. (1999). Research spotlight reports. Retrieved July 11, 2001, from http://www. cherrytreeco.com/current/res_rep.htm Computing Staff. (2001). Small companies favour ASP model. Retrieved October 28, 2002, from http://nl2.vnunet.com/News/1123624 Currie, W. (2003). A knowledge-based risk assessment framework for evaluating Web-enabled
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application outsourcing projects. International Journal of Project Management, 21, 207-217. Currie, W. (2004). Value creation from the application service provider e-business model: The experience of four firms. Journal of Enterprise Information Management, 17(2), 117-130. Currie, W., & Seltsikas, P. (2000). Evaluating the ASP Business Model. Executive Publication Series CSIS2000/004. Brunel University. Currie, W. L., & Willcocks, L. P. (1998). Analysing four types of IT sourcing decisions in the context of scale, client/supplier interdependency and risk mitigation. Information Systems Journal, 8, 119-143. Gartner Research. (2002). Pitfalls to avoid in the sourcing life cycle. Retrieved May 11, 2002, from http://www3.gartner.com/Display Document?doc_cd=96660 Hopkins, M. (2000). ASP market set to take off with “always on” broadband access. Retrieved June 25, 2002, from http://www.analysys.com/ default.asp?Mode=article&iLeftArticle=458 Kern, T., Kreijger, J., & Willcocks, L. (2002a). Exploring ASP as sourcing strategy: Theoretical perspectives, propositions for practice. Journal of Strategic Information Systems, 11(2), 153-177. Kern, T., Lacity, M. C., & Willcocks, L. P. (2002c). Netsourcing. Renting business applications and services over a network. Upper Saddle River, NJ: Financial Times Prentice Hall. Kern, T., Willcocks, L. P., & Lacity, M. C. (2002d). Application service provision: Risk assessment and mitigation. MIS Quarterly Executive, 1(2), 113-126.
Lacity, M. C., Willcocks, L., & Feeny, D. F. (1997). The value of selective IT sourcing. In G. Islei (Ed.), Managing IT as a strategic resource (pp. 277-305). London: McGrawHill. Levy, M., & Powell, P. (2002). SME transformation: Modelling progressions. Paper presented at the ECIS 2002, Gdansk, June 6-8. Lynch, I. (2000). Smaller firms unimpressed by ASPs. Retrieved June 25, 2002, from http://www. thechannel.vnunet.com/News/1109773 Marshall, C., & Rossman, B. G. (1989). Designing qualitative research. London: Sage Publications. Miles, M. B., & Huberman, A. M. (1994). Qualitative data analysis. Thousand Oaks, CA: Sage Publications. Scott Morton, M. (1991). The corporation of the 1990s. Information technology and organisational transformation. Oxford: Oxford University Press. Sillience, J. A. A., MacDonald, S., Lefang, B., & Frost, B. (1998). E-mail adoption, diffusion, use and impact within small firms: A survey of UK companies. International Journal of Information Management, 18(4), 231-242. Susarla, A., Barua, A., & Whinston, A. B. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP Services. MIS Quarterly, 27(1), 91-123. Yin, R. K. (1994). Case study research: Design and methods (2nd ed.). Newbury Park, CA: Sage.
This work was previously published in Global Electronic Business Research; Opportunities and Directions, edited by N. Al Qirim, pp. 348-362, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.10
Make, Source, or Buy: The Decision to Acquire a New Reporting System Steven C. Ross Western Washington University, USA Brian K. Burton Western Washington University, USA Craig K. Tyran Western Washington University, USA
executIve suMMAry The College of Business (COB) at Northern Washington University (NWU) needs new data systems to provide reports and information both internally and for its external accrediting body. Dewitt Brown, COB’s associate dean, has been tasked with determining COB’s needs and developing recommendations for sources of systems. COB could develop the systems internally since it has database expertise among its faculty and staff. Or, it could outsource to NWU’s information technology staff. A third option, at least for some systems, is to purchase from an outside vendor. The decision is crucial: efficient, accurate reporting of data is key to COB’s strategic plan to continue its accreditation as well as ensure that operations are smooth as possible. If COB were
to lose its accreditation, it would lose status and likely lose funding and students as well.
orgAnIzAtIonAl bAcKground The setting for this case is the College of Business (COB) at Northern Washington University (NWU).1 COB has about 1,100 full majors at the undergraduate level, plus another 300 premajor students and a small MBA program of about 65 students. COB’s primary mission is to graduate students who have a broad general background in business administration as well as in-depth knowledge in a specialty area. Undergraduate majors include a BA in Business Administration, a BA in Accounting, and a BS in Manufacturing and Supply Chain Management. Concentra-
tions within the business administration major include finance, human resource management, international business, management, management information systems, marketing, and operations management. COB is one of seven colleges that form NWU. The university is a public institution, at the Masters I level of the Carnegie classification, and it holds a high reputation within the state and nationally for the quality of its undergraduate programs. NWU has about 12,000 students, including about 700 graduate students. Many NWU students have attended a community college in the state, and a large number come to the university with an associate’s degree that may include some or all of COB’s lower-division foundation courses. NWU is primarily a residential campus: most students live in the local community and attend class full-time in quarters in which they are enrolled. The university has few extension programs and a limited number of distance-learning course offerings. COB has been accredited by AACSB International, the Association to Advance Collegiate Schools of Business, since 1990. It is due for review in 3 years (in 2007—the year of the case is 2004), and will be one of the first schools reviewed under new accreditation standards. Maintenance of accreditation is critical for a school like COB. Accredited status affects the school’s ability to attract high-quality students and faculty, as well as funding from both state and private sources. The review process has changed from previous years, and the standards have been extensively revised under the new rules. Schools are expected to prepare relatively short annual reports and a more extensive fifth-year report, with data available to teams at the time of the maintenance visit. Three broad categories exist in the new standards: strategic management, participants (primarily faculty and students), and assurance of learning. The second category contains several items that require either reporting of data or easy availability
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of data, including faculty workload (courses and students taught), faculty qualifications (degree earned and recent activity in the field), and student admission and retention (incoming GPA and progress toward degree). The third category is completely new and focuses on assessment of student learning outcomes to determine if the school is fulfilling its mission. This category also requires data collection and dissemination either in a report or upon request. Data to compile these reports come from a number of sources, including university records, college records, and annual reports completed by the faculty. COB’s management structure is fairly simple. Peter O’Toole, the dean of COB, has two associate deans, one whose job responsibilities are more externally oriented and one whose job responsibilities are more internally oriented. The internally oriented associate dean, Dewitt Brown, has substantial responsibilities in the accreditation effort, including curriculum review, assurance of learning, and data reporting. Jennifer Wilkins, the dean’s executive assistant, also plays an important part in the accreditation effort; she is assisted by Mildred Stinson, the COB program manager. Four department chairs make up another important part of the COB management structure. These chairs oversee the departments of accounting, decision sciences, finance and marketing, and management, and a total of 45 full-time, tenure-track faculty. Of particular importance in this case are the five full-time, tenure-track faculty who specialize in management information systems. They are housed in the decision sciences department. Each department has its own administrative assistant (secretary). The strategic planning process at COB is informed by, but not driven by, AACSB mandates. The college’s mission is to give students highquality instruction within the limits imposed by its status as a college within a public university in times of tight state budgets. Strategic proposals are examined closely to see if they conform to the
Make, Source, or Buy
COB mission and can be accomplished within the resource constraints under which COB and NWU operate. Those constraints include partial legislative control over tuition rates, an initiativemandated limit on the growth of state spending, and limits on the amount of tax increases (also imposed through the state’s initiative process). COB operates with a $7 million annual budget. Maintenance of quality will be an important issue for COB. Business administration is consistently the single most popular area of interest among entering students, and the state is experiencing explosive growth in the college-age population as a result of the baby-boom echo. In general, the faculty do not wish to grow explosively; they see COB’s competitive advantage as its small class sizes, and the fact that the vast majority of courses are taught by doctoral-qualified instructors. COB’s growth historically has been slow but steady. It has not experienced the sharp rises and dips in enrollment experienced by some other business schools. COB’s culture is collegial and collaborative. Although politics are not totally absent from the College, political considerations are a relatively small factor in the decision-making process. Dean O’Toole operates by consensus. Ideas typically are given first hearing in meetings of the dean, associate deans, and department chairs. On favorable review, or after revision, worthy ideas come before the Policy Council, a body composed of the dean, associate deans, chairs, and elected representatives from each department. The Policy Council either makes decisions or takes proposals to college-wide faculty meetings for approval. Because of the dean’s style, few proposals get wide circulation in COB without substantial support. For example, a college-wide reorganization was agreed upon 3 years ago with little opposition among the faculty, and changes to the policies and procedures concerning evaluation of faculty were approved last year with near-unanimous support.
settIng the stAge NWU has been recognized by Yahoo! Internet Life as one of America’s “100 Most Wired Universities.” It prides itself on providing technology to its students and faculty. Students study technology in majors such as management information systems (in COB) and computer science. Almost all classrooms contain computer projection equipment. Annually, the President provides funds for faculty workstation purchase and upgrades, and numerous innovations have been funded by a student technology fee. All NWU students are entitled to a computer account that provides e-mail, data and document storage, and a place for a Web site.
nwu technology systems and support NWU has a technology support structure that supports uses of technology for teaching (e.g., computers and projection systems in the classrooms, data storage for students and faculty) as well as technology support for the operation of the university (e.g., payroll, registration, academic records). The group that supports teaching is called academic technology (AT), while the group that supports administrative systems is called administrative computing services (ACS). Both AT and ACS report to a Vice Provost, who is the Chief Information Officer (CIO) of the university. The ACS staff consists of a manager, 14 persons in technical roles (titles such as analyst, programmer, database administrator), and 6 persons in support and administrative roles. Functions assigned to the ACS staff include maintenance of the data and interfaces to the administrative computing systems as well as management of the “machine room,” a centralized, secure, and protected facility that houses servers for both NWU and some of its academic units. NWU maintains its administrative computing systems using Oracle database technology with an
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interface and control system developed by SCT, Inc. The trade name of that system is “Banner” (SunGard SCT, 2005). NWU has adopted several modules of the Banner system, including student, finance, and human resources. Like most “production” systems, the Banner system uses highly normalized tables, requiring multiple joins to yield a result such as a student transcript. This system works very well for applications where a single student is involved, for example, registering for classes or obtaining a transcript. The system is unacceptably slow and complex for reports that involve several students, for instance the determination of which students qualify for magna cum laude status at graduation. The ACS staff has developed a data warehouse that contains a series of data sets, including student academic records and human resources data about faculty and staff. While tables in the Banner system are highly normalized, tables in the data warehouse are designed for easy query. Most of the data warehouse tables are combinations of multiple Banner tables and thus, not even in first normal form. NWU has adopted Hummingbird BI [business intelligence] products (Hummingbird BI, 2005) to provide users an easy interface for query of the data warehouse. NWU has also developed specialized systems for one of its colleges—the Miller College of Education (MCE). The State of Washington, like most states, has imposed a number of record-keeping requirements on institutions that certify teachers. The NWU administrative computing staff developed tables to hold information specific to MCE needs, and then developed a user interface (using Java technology) for the MCE faculty and staff.
cob technology systems and support COB has been a leader in technological innovation on the NWU campus. It was the first college in NWU to provide personal computers to its entire
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faculty, and operated the first networked PC lab on campus. COB originally provided a server for student data and documents and hosted its own e-mail system, but those services are now provided by NWU. However, COB still maintains its own servers for faculty data and documents, course materials, Web sites, and database systems. COB’s systems are fully integrated into the NWU network system; in fact, many of its physical systems assets are collocated with NWU systems in a modern server room. Bartlett Smith is COB’s Director of Information Technology. He reports to Peter O’Toole, the Dean of COB. Smith’s duties include management of a small staff—one systems manager and several student assistants—and liaison with university technology services. The systems manager position was added three years ago; Smith would like to add a half-time position directed toward systems development. Smith and his staff provide support for faculty and staff hardware and software, operate an instructional lab that contains 55 workstations, and manage a dozen servers. The servers are used for tasks ranging from administrative support and record keeping for the college to instructional uses such as supporting classes in network management and database administration. Devin Elkins, Professor of MIS, and Sterling Kelley, Assistant Professor of MIS, were instrumental in developing the Web site for the college. The site uses active server page (ASP) technology to draw information, such as lists of professors and class information, from a SQL server database. Both the Web server and the database are hosted by COB on its own machines, which are maintained by Smith and his staff. Elkins, whose specialty is database systems, designed the database and wrote the stored procedures used in the system. Kelley, a specialist in ASP, developed both public pages that display the data as well as an administrative interface that allows department secretaries to maintain the data.
Make, Source, or Buy
COB must develop a series of reports as part of its application for maintenance of accreditation. In 1989, COB developed a data system to support its initial accreditation effort. That system contained both student and faculty data (see Table 1). The developers of that system, who are no longer with COB, employed a number of clever techniques to enable the system to be used by multiple persons. Over time, however, the faculty portion of the system became unusable, and the student portion was restricted to a single user. The last entries in the faculty portion of the system were made in June 2000. The student data are still being maintained, but Dean O’Toole has grave doubts about the system’s ability to support the college’s upcoming accreditation review. He has shared his concerns with Smith and also with the members of the MIS faculty (five professors in all, including Elkins and Kelley). To address the requirements of the accreditation agency, it has become evident that COB will need to develop a new information system to aid with data collection and reporting. The necessity to acquire new systems to address the mandate of external agencies
is not unusual. In addition to organizational units at NWU such as COB and the Miller College of Education, it is common for university, government, and commercial organizations to be faced with a requirement to update or replace systems to meet new reporting requirements (e.g., Chae & Poole, 2005).
cAse descrIPtIon Dewitt Brown, Associate Dean of COB, is responsible for assembling the data to present to the accreditation review team. The standards are explained on the AACSB Web site (AACSB, 2005), which also contains templates for reports. The data pertain to three general entities: students, faculty, and classes. Brown has made a list of the items important to each (see Table 2). He notes that some of these items are in the old system and some are in NWU systems, but many are new. In consultation with O’Toole and Elkins, Brown has divided the college’s data reporting and management requirements into five systems
Table 1. Data in original COB system System
Data Elements
Student Name Address Transfer Business Classes (1 record per class – entered by COB staff) College from which transferred NWU COB Classes (1 record per class – downloaded from NWU system) Status (e.g., applied, admitted, probationary) Faculty
Name Address Highest Degree (e.g., Ph.D. or M.B.A.) Teaching Specialty Courses Taught (1 record per course) Rank (1 record for each change of rank) Salary (1 record for each change of salary)
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Table 2. Data required for accreditation Entity Data Elements Student Name (available on NWU system) Address (available on NWU system) Transfer Business Classes (1 record per class – entered by COB staff in old system) College from which transferred NWU COB Classes (1 record per class – available on NWU system) Status (e.g., applied, admitted, probationary – entered by COB staff in old system) Faculty Name Address Department Degrees Earned (e.g., B.A., M.B.A., Ph.D.) Teaching Specialty Role: Full-time or Part-time Level of Qualification (e.g., Academic, Professional, not qualified) Courses Taught (1 record per course – available on NWU system) Rank (1 record for each academic year) Salary (1 record for each academic year) Publications (1 record for each journal article, book, presentation, etc.) Activities (1 record for each committee membership, public speech, consulting job) Course Name Instructor (1 record for each term) College Learning Objectives (varies by instructor and term) Methods of Evaluation (varies by instructor and term) Method of Evaluation for Each Objective (varies by instructor and term)
(not listed in any order of priority): faculty management, faculty activities, student management, course objectives, and student planning (see Table 3). He has made notes about each of the systems to help in his search for solutions. COB needs a faculty management system to record and report on a faculty member’s workload—the number of classes and students a faculty member teaches—and other characteristics such as the role (full- or part-time), degrees, rank and salary history, level of qualification, and personal data such as name, address, and birth date. Some of these items can be calculated by summarizing university data, while other items are in college files. The determination of whether a person is academically qualified is made by the Dean and the person’s department chair after a review of the person’s activities during the past 5 years. The COB office staff will make any necessary
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data entries into this system. Reports from this system are required for the accreditation review (see the definition of Table I in the AACSB 2005 documentation). A faculty activities system is needed to allow faculty members to record their publication and other nonteaching activities (e.g., speeches, consulting). Most of the data input for this system will be done by the individual faculty member. Reports from this system are required for the accreditation review (see the definition of Table II in the AACSB 2005 documentation) and are used in the determination of academic qualification. A college’s means of tracking student progress is another of the items reviewed for accreditation. The student management system developed by COB in 1989 enabled the college to track academic progress of COB students from initial acceptance into the program until graduation. The old sys-
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Table 3. The five systems and expected benefits (continued on the following page) System
Benefits
Faculty Management
Current Situation: Jennifer Wilkins spends many hours compiling statistics about faculty from various sources and arranging it in the required report format. She estimates that she spends about 70 hours per year to compile this information. When the System is in place: Most of the information required to create AACSB Table I and similar reports will be provided by the system, in proper format. Jennifer will still have to review the system output and make adjustments. Direct Benefits of the System: The current process yields highly-accurate reports, which the new system will duplicate. Jennifer would be able to use the time saved by this and the following system for outreach efforts such as contact with alumni and potential donors.
Faculty Activities
Current Situation: Faculty provide a report each year to Jennifer Wilkins, who must then compile these individual reports into an overall summary for Dean O’Toole. Compiling this information is part of her 70 hours per year estimate. Faculty spend many hours each year creating the information in the first place. When the System is in place: Faculty will enter their publication and activity information into a WWW-based form. In the case of an article with multiple authors, only one need make the entry. Information in the system will enable the automated creation of AACSB Table II. Direct Benefits of the System: Both Jennifer and individual faculty members will save time. Data in the system can be used to generate other outputs as well, such as faculty résumés and COB’s biannual “List of Faculty Publications.”
Student Management
Current Situation: Mildred Stinson must enter data about every COB student into the “old” system. Bartlett Smith downloads grades once a quarter. After initial entry and download, most of this information is not checked for later changes. When the System is in place: The amount of data that Mildred must enter will be cut by more than 50% because that data will be drawn from NWU systems. Bartlett will no longer need to download grade data. All data on the NWU system is refreshed on a regular basis. Department secretaries will be able to access (read only) the data in the system. Direct Benefits of the System: Mildred will save several hours each week because she will no longer have to enter data such as student addresses. This will allow her to spend more time advising students. Data in the COB system will be more accurate and available to more users.
Course Objectives
Current Situation: COB does not have an on-going method for collecting, analyzing, or storing course objective information. Dewitt Brown, with the help of several faculty committees, collects course syllabi and asks faculty to complete surveys in an attempt to gain some measure of learning objective coverage throughout the curriculum. Dewitt estimates that more than 100 hours per year, in his and other faculty time, is spent analyzing the data. When the System is in place: Each professor will record the coverage of course objectives in his classes. Data can be summarized in several ways, e.g., by course or by objective. Direct Benefits of the System: Almost all the time that Dewitt and other faculty spend analyzing the data will be freed by the system.
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Table 3. The five systems and expected benefits (cont.) System
Benefits
Student Planning
Current Situation: Students complete a plan of study worksheet (paper document) that is reviewed and approved by their advisor. This document is filed in the department office, but rarely used beyond the initial meeting. The advisors often miss course prerequisites and occasionally miss other flaws, such as missing courses. When the System is in place: Students will complete an on-line plan of study before meeting with their advisor. The online version will check for most planning errors, including course prerequisites and missed courses. Direct Benefits of the System: Student plans will be more accurate and complete – which will reduce amount of time needed to advise students who have prepared poor plans and enable faculty advisors to concentrate on career-oriented aspects of advising.
tem, still in use, requires a lot of maintenance, and duplicates much information that is also maintained in the NWU systems. For instance, Bartlett Smith downloads student grades and course registrations each quarter from the NWU system into the COB system. Although this data is relatively stable, grade and registration changes do occur that make the data in the COB system out-of-date later in the quarter. Most of the data maintained by COB in its old system is available in the university system. There are some data elements however, such as business transfer classes (e.g., financial accounting and microeconomics), that are not maintained in the NWU systems and must, therefore, be input and maintained by COB. Dean O’Toole would like a new system that eliminates the need for downloading and input of data that is already stored by NWU. “Assurance of learning” is another aspect of accreditation. To demonstrate assurance of learning, schools develop a set of student learning objectives, record the courses to which the objectives apply, and then test whether students have achieved those objectives. Currently, COB has no formal means for recording and summarizing student learning objectives. A course objectives system would enable COB to track which objectives are covered in which courses. Combined with results of objective assessment such as test
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scores, this system would enable COB to document its efforts at assurance of learning. Input to this system would be accomplished by faculty members indicating which objectives are covered in each of their courses. The final system identified by Brown is a student planning system. With this system, students may plan their program of studies in COB: ensuring that they take all required and necessary elective courses and that they do not violate prerequisites. Currently, students in COB majors complete a “plan of study” (paper) worksheet that is reviewed by their advisor. Although advisors usually notice when required classes are omitted, they often fail to catch violations of course prerequisite rules. These documents are filed in department offices, but no attempt is made to plan course offerings based on student plans. A welldesigned student planning system would combine information from university, college, and student sources; it would store data that could be queried to determine course demand; and would check plans to ensure they were valid. Dewitt Brown worked with the MIS faculty to develop system specifications and sample interfaces for each of these five systems. Brown’s specialty is management, not MIS, so he turned to Joseph Cameron, the MIS professor specializing
Make, Source, or Buy
system. If a system has specifications that are not unique to any one organization (e.g., a basic registration system), then it is quite possible that a useful system can be purchased “off the shelf” from a vendor. However, if the system specifications are unusual or unique, then it can be more difficult to locate a packaged system that will be suitable.
in analysis and design, for help in determining the best approach to take to acquire these systems.
Approaches to software Acquisition In his discussions with Joseph Cameron, Associate Dean Brown learned that there were three primary approaches for acquiring information systems: in-house software development, outsourcing, and purchase of a packaged software solution. Each of these options is summarized as follows: •
•
•
In-house software development: This approach would entail software development by members of COB (primarily the MIS faculty members). A number of software development activities would need to be completed. These steps would include design, programming, testing, installation, training, and maintenance. Developing the systems in-house would require oversight and management of the system development, as well as the maintenance of the system over time. Outsourcing: This option would entail having a third-party handle system development. Outsourcing has become a very large segment of the information system industry, with many vendor organizations providing outsourcing services ranging from small consulting firms to very large corporations (e.g., IBM). Outsourcing services can include the initial systems development, as well as ongoing system operation and maintenance. Packaged software: The third option would be to purchase a packaged software product. Software vendors have developed software applications to fit almost all types of organizational niches, including administrative systems in higher education. The viability of this option typically hinges on whether or not there is a software product that will fit the specific requirements of the desired
software Acquisition and the decision-Making Process After learning about the different ways that an organization may acquire software, Associate Dean Brown asked Joseph Cameron for a recommendation on how to approach the decision process. Cameron (who does research and teaching on decision making) suggested that a useful technique adopted by many decision makers is to follow a structured process. For the software acquisition decision, Cameron recommended that Brown follow a decision-making “stage model” based on the well-known model developed by the late Nobel Laureate Herbert Simon (1960). In particular, Cameron suggested a modified version of Simon’s model that had recently been published (see Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). While the Dibbern model had been developed for outsourcing decisions, it could be adapted to help managers to understand the decision-making process for the more general scenario of software acquisition. Cameron drew a sketch of the decision-making model for Associate Dean Brown that is shown in Figure 1. As indicated in the figure, there are five stages to the model: the first three stages involve the decision process itself, while the final two stages address the implementation of the decision. A summary of each of the stages is discussed next. •
Why stage: In this stage, the decision maker considers the reasons “why,” or “why not,” it may be useful to go outside the organiza-
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Figure 1. Stage model for software acquisition decision making Software Acquisition Stages
• Examine reasons to acquire via internal or external means
Why Decision Process
What
Implementation
Outcome
• Identify options (e.g., specific packages, vendors)
• Evaluate options • Make choice
Which
How
Example Activities
• Prepare contract • Manage relationships
• Monitor and evaluate outcome • Modify implementation
(Adapted from Dibbern et al., 2004)
•
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tion to acquire an information system (IS) (i.e., outsource or buy packaged software). In this stage, the decision maker gathers background information and perspectives that will be relevant to the subsequent decision. In the context of software acquisition decision making, it is during the Why stage that the decision maker examines the advantages and disadvantages of different approaches to software acquisition. The decision maker has a number of issues to consider such as costs, service quality, and ability to take advantage of the expertise of specialized suppliers. What stage: This stage concerns the question of identifying “what” may be the acquisition options to consider for the new system. As discussed earlier, options may come from different sources such as in-house development, outsourcing, or packaged software. A key task for this stage is to identify what specific options will be considered for the
•
decision (i.e., what specific outsourcer(s), what specific packaged software package(s)). The decision maker’s findings from the Why stage can serve as the criteria for generating the options considered in the What stage. For example, if technical innovation issues are central to the decision process, then it will be important to explore third-party options for an IS project that will require technical skills not found in the organization. Which stage: The decision regarding “which” option to implement is made in the Which stage. In some cases, the decision may be based on objective criteria such as costs and benefits (Marakas, 1999). For example, the decision on whether or not to build a system in-house may be handled by conducting a quantitative analysis for the various options under consideration. This process involves estimation of project costs and benefits over a specified time horizon
Make, Source, or Buy
•
(Hoffer, George, & Valacich, 2005). Estimation of benefits may include both tangible and intangible elements. Examples of tangible benefits are savings related to manpower and operating costs. Examples of intangible benefits (some of which may be quantified over time) are enhanced customer service, competitive or operational necessity, and improved management decision making and planning (Lederer & Prasad, 1992). In addition to financial factors, there are other issues that a decision maker may take into account when deciding which option to choose. These factors may include software functionality, quality of vendor support, and the “fit” that may exist between the vendor and client (Michell & Fitzgerald, 1997). To promote a good working relationship, it is useful for the vendor and client to share similar values and work practices. How stage: This stage is concerned with “how” to implement the acquisition decision that was made in the previous stage. The issues confronting the decision maker at this stage will vary depending on whether or not the software will be acquired internally or externally. If the decision is to build in-house, then it will be necessary to manage the various activities associated with software development (e.g., programming, testing, and maintenance). Even for smaller-scale projects, it can be a complex task to manage these activities (Ensworth, 2001). If the decision is made to go outside the organization to acquire the system, then a third party will be responsible for systems development. While this may relieve the client organization of some headaches, the use of a third party introduces a new set of challenges. For example, the organization will need to pay attention to issues such as how to structure the relationship with the third party, how to manage the arrangement,
•
and lack of flexibility and responsiveness on the part of the vendor (Marciniak & Reifer, 1990; Michell & Fitzgerald, 1997). Outcomes stage: The outcomes stage is concerned with the consequences of the decision and the evaluation of the decision outcomes. In this stage, management monitors the decision outcomes to determine whether or not changes should be made with respect to the implementation of the decision, or whether the decision itself needs to be modified. Performance aspects of the project to evaluate may include factors such as economic, technical, strategic, and usersatisfaction performance (Saunders, Gebelt, & Hu, 1997).
Alternatives Available to cob Dean O’Toole has given Associate Dean Brown the task of recommending how COB can acquire the data systems it needs. The decision as to how to develop the old system had been simple: either do the reports by hand or develop a system using COB assets. According to O’Toole: This is a whole new ball game. Commercial options are available that weren’t available when we developed our first system. NWU’s computing staff is now able to offer services that weren’t possible in the past. Your task is to sift through these options and decide how best to deliver the solutions. Brown has collected information about the various means by which COB could acquire the systems. Based on his discussions with Cameron and Elkins, he realizes that the three general strategies translate to develop internally (to COB) by faculty and IT staff; outsource development to NWU IT staff; or purchase a commercially available system. It is possible for COB to mix and match options depending on the particular issues associated with each of the five system projects.
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Brown has asked Elkins to help him assemble the facts necessary to make a decision.
Develop Internally The COB IT support staff and MIS faculty have been investigating the feasibility of developing the five systems. They would be able to develop a set of integrated systems on COB’s SQL and WWW servers that would store data about students and faculty that are not kept on the NWU systems, and then join that with data drawn on an ad hoc basis from the NWU Banner or Data Warehouse systems. They would develop user interfaces in Microsoft Access or Active Server Pages, two technologies with which they are familiar. In fact, Kelley and Elkins used these technologies in 2002 to develop a Web site for COB. Smith, COB’s Director of Information Technology, is an advocate of internal development. He points out that internal development leads to greater control of both system features and data stored in the system. He is concerned that outsourcing the project will lead to a loss of control over data and systems assets. According to Smith, “When ACS took over the Miller College of Education (MCE) project, several [MCE] systems personnel were reassigned or let go. MCE faculty do not enjoy the same level of support they once did.” To support development of this and other systems, Smith would like to hire a half-time staff person (the other half of the person’s time to be paid by another unit on campus). COB’s portion of the person’s salary would be approximately $20,000 per year. Elkins is less sure that COB should undertake the full project and hire a staff programmer. MIS faculty in universities rarely undertake substantial systems-development projects because such projects would interfere with their other duties in teaching and research. Dean O’Toole has committed a total of $5,000 in summer grants to Elkins and Kelley to fund their initial design and development work. Elkins proposes that he and
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Kelley develop prototype systems, using part of their summer grant funding to employ a student. Once the prototypes are developed, COB can make decisions concerning further internal development or other alternatives. Elkins has mixed opinions regarding the advisability of internal-to-COB development: On the one hand, we have plenty of control and learn a lot of interesting things while developing projects, the downside is that such projects always take more time and effort than expected and can interfere with both academic and recreational pursuits. Work on the Web site interfered with my summer salmon fishing trip! Outsource to NWU/ACS staff: For the software acquisition decision confronting Brown, the most realistic outsourcing option would be the NWU’s Administrative Computing Services group. The ACS staff is eager to provide support to any and all units of NWU, including COB. David Albion, Director of Administrative Computing, and Dominique Good, one of ACS’s project managers, have been briefed on COB’s needs. Good has been tasked to work with Elkins as he develops systems specifications. John Buskin, ACS database specialist, has also been assigned to work with Elkins. Good is an advocate of outsourcing to ACS as soon as possible. ACS developed a similar system for NWU’s Miller College of Education (MCE). The MCE staff had started to develop a system and ran into technical issues beyond their expertise. According to Good, “ACS staff did quite a bit of rewriting of both code and database structure when they took over the MCE system. This made the project more complicated than if ACS had worked on it from the start.” Good acknowledges that COB has more experience and expertise in its staff and faculty, but she also notes that there are operational differences between COB’s platform of SQL Server and Windows ASP on the one hand, and ACS’s platform of Oracle and Java.
Make, Source, or Buy
She expects that the COB systems will eventually come under the control of ACS, certainly within the next 10 years when both Elkins and Smith are due to retire. Good’s is very direct in expressing her opinion, “The sooner our staff takes over the development and operation of a system, the better.” Because some of the data used in the COB system will come from the Oracle databases managed by ACS, Good expects that there will be some challenging interface issues. Elkins is impressed by the quality of the system developed by ACS for MCE. He is a bit concerned, however, about the “distance” between ACS and the ultimate users of the system: COB staff, faculty, and students. In discussions with Albion and Good, he has noted that they do not always understand what is being requested, and the urgency of COB’s requests. He noted that “[ACS managers] are constantly challenging the need for the systems we discuss—trying to make existing systems meet our needs and simplifying our requests.” Although ACS would be committed to delivering what COB needs and Elkins is certain these discrepancies can be overcome, he feels that internal development would expedite the process. Many organizations have some sort of transfer pricing in effect to account for IT support of operational units. Although NWU has no formal system in place, David Albion suggested to Dean O’Toole that some reallocation of funds would be appropriate. Albion pointed out that COB was prepared to spend a certain amount for design and development of the system: if ACS were to accomplish that feat then at least some of the funds COB had planned to dedicate to the system should be shifted to ACS’s budget. Purchase a commercially-available system: Brown and Elkins attended a seminar sponsored by AACSB, the accrediting agency, dealing with data management and other accreditation-related topics. While at that seminar, they learned of two commercial products. Both SEDONA (Sedona
Systems, 2005) and Digital Measures (Digital Measures, 2005) offer products that would accomplish some, but not all, of COB’s data management needs. While waiting at Seattle-Tacoma airport for a connecting flight, Brown and Elkins had a long discussion about the commercial products. Brown had discussed one of the systems with his counterpart at another university who was using the software. According to that person, “[the software] is a really neat system and does a lot of stuff.” Elkins had viewed the demonstrations. He observed that: The commercially-available systems present both plusses and minuses. They are available immediately, and appear to be sufficiently customizable to meet COB’s specific needs. All data in the systems is stored at the vendor’s central location—not on the NWU campus—although both offer the ability to download data for analysis. The subscription cost for the first three or four years of operation (for the ‘faculty’parts) would be approximately the same as the cost to develop all systems within COB, or the amount transferred to ACS. These systems do not meet all COB needs, however, and COB would have to spend additional funds to acquire systems meeting the remainder of its needs. Shortly after Brown and Elkins returned from the conference, Dean O’Toole received information from both companies. One of their e-mail messages is displayed in Figure 2. Based on what they learned at the conference, Brown and Elkins feel that SEDONA and Digital Measures are quite similar in features and pricing. Either system would track and report on the items in both the proposed faculty management system and the faculty activities system. Neither system would accomplish the student management or student planning requirements. The Digital Measures system does include an objective mapping component that might meet COB’s needs for a course objectives system.
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Figure 2. Email received by Dean O’Toole concerning a commercial system (altered and disguised for this case) To: Peter O’Toole Subject: Web application to manage faculty data Hi Dr. O’Toole, I would like to invite you to consider subscribing to a tool that can significantly streamline your faculty activity data collection and reporting processes. The tool is a web database application that business colleges around the world are adopting to help them manage faculty teaching, research, and service records in a single, web-enabled database. Once the database is populated, administrators may use it to document accreditation information, support pay-forperformance, and manage post-tenure reviews. If you would be interested in "test driving" the package, you can access a demonstration at our web site. When you get to the site, simply click on "Demo" and choose the level from which you wish to view. There are three levels: the faculty level, the department level, and the college level. Each of these levels allows you to browse through the application's input screens and reports appropriate for that level. There is also a link to a list of over 75 schools who have adopted the software. The annual license fee is based on the number of FTE in your college. The formula for calculating the license fee is $2,500 + ($25 * the number of FTE over 30). So if you have 50 FTE, the annual license fee would be $3,000. For 100 FTE, it would be $4,250. The annual license fee is capped at $5,000 for schools with over 130 FTE. Some of the program’s features include: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
The ability to upload teaching schedules directly from your university system; The ability to download the entire data base and data structure to a local server; Faculty vitae templates, customizable by the college and faculty; Customizable annual faculty activity report templates; Faculty lists/counts of refereed articles; Faculty research aggregated by discipline-based scholarship, contributions to practice, and Learning & pedagogical scholarship; Publications aggregated by journal title/type; Faculty development records, include CPE hours; Faculty service accomplishments; Faculty travel; Teaching assignments by term; Student credit hours by faculty type, department, campus, session; Faculty sufficiency by faculty type (participating/supporting and qualification), department, campus, session; Faculty Intellectual Contributions by faculty type, department, campus, session; Faculty diversity and rank; Committee memberships with searchable committee minutes; The ability to upload PowerPoint, Word, Excel, and .pdf files, including minutes and articles; High-speed, local database backup; and Access to all data items through QBE (query by example). Customizable score cards, giving administrators the ability to select and weight activities on which they are interested in benchmarking faculty members.
current chAllenges / ProbleMs FAcIng the orgAnIzAtIon Associate Dean Brown has decided to follow the five-stage model. Later this week, he must brief the College Policy Council on his progress toward
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a decision, presenting what he knows and what he still needs to learn to make his recommendation whether, for each system, to develop within COB, outsource to NWU, or purchase from an outside vendor. In preparing for the Policy Council meeting, Brown has considered certain framing questions to guide his presentation to the council.
Make, Source, or Buy
•
•
•
•
•
What information do we need to know to proceed with the decision-making process? Do we have this information readily available? What options are available for each of the five subsystems? Brown will create a matrix illustrating the choices. What are the pros and cons of each available option for each subsystem? What should be the most important factor in making each decision? What important issues can be foreseen as arising during the implementation process? How should progress toward the system’s complete implementation and operation be monitored?
Brown must make his final recommendations to Dean O’Toole one week after the Policy Council meeting. For each system, he will recommend a source, priority, and (if possible) a contingency plan in case the preferred source cannot be employed. Several of these systems are critical to the accreditation effort, and all are important to COB’s mission. Once Dean O’Toole makes his decision, time will be needed for implementation and practice to ensure the systems are working before reports to AACSB must be made and the review team arrives on campus. The systems must be completed within the next two years.
reFerences AACSB. (2005). Maintenance of accreditation handbook. Retrieved February 19, 2005, from http://www.aacsb.edu/accreditation/maintenance/handbook.pdf Chae, B., & Poole, M. S. (2005). Enterprise system development in higher education. Journal of Cases on Information Technology, 7(2), 82-101.
Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. DATA BASE for Advances in Information Systems, 53(4), 6-102. Digital Measures. (2005). Retrieved February 20, 2005, from http://www.digitalmeasures.com/ Ensworth, P. (2001). The accidental project manager: Surviving the transition from techie to manager. New York: Wiley and Sons. Hoffer, J. A., George, J. F., & Valacich, J. S. (2005). Modern systems analysis and design (4th ed.). Upper Saddler River, NJ: Pearson-Prentice Hall. Hummingbird BI. (2005). Retrieved February 19, 2005, from http://www.hummingbird.com/ products/bi/index.html Lederer, A. L., & Prasad, J. (1992). Nine management guidelines for better cost estimating. Communications of the ACM, 35(2), 51-59. Marakas, G. M. (1999). Decision support systems in the 21st century. Upper Saddle River, NJ: Prentice Hall. Marciniak, J. J., & Reifer, D. J. (1990). Software acquisition management. New York: John Wiley & Sons. Michell, V., & Fitzgerald, G. (1997). The IT outsourcing market-place: Vendors and their selection. Journal of Information Technology, 12(3), 223-237. Saunders, C., Gebelt, M., & Hu, Q. (1997). Achieving success in information systems outsourcing. California Management Review, 39(2), 63-79. Sedona Systems. (2005). Retrieved February 20, 2005, from https://www.sedona.bz/ Simon, H. A. (1960). The new science of management decision. New York, NY: Harper.
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SunGard SCT. (2005). Main page. Retrieved February 19, 2005, from http://www.sct.com/ Education/
endnote 1
The facts described in this case accurately reflect an actual decision process that occurred at a university located in the United States. For purposes of anonymity, the name of the organization and the names of individuals involved have been disguised.
This work was previously published in the Journal of Cases on Information Technology, Vol. 8, Issue 3, edited by M. KhosrowPour, pp. 55-70, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.11
European International Freight Forwarders:
Information as a Strategic Product Hans Lehmann Victoria University of Wellington, New Zealand
executIve suMMAry This case study is about information systems in one of the largest freight forwarding companies in Europe, here named Spedition Chur AG (SCA)1. With a long tradition of computers, data processing, and information systems on a global level, SCA has used information technology extensively since the 1960s. Over the years, their systems have become a truly strategic resource; many of the services SCA offers today are based solely on information management — the physical side of the transport business has taken a back seat and is often outsourced. The problems and issues SCA is dealing with now are the dichotomy of its IT strategy: how to coordinate a stringently standardized core of systems with its critically important but highly individualized system-to-system interfaces with its key customers. Furthermore, the rapid change in technology and the very wide range and reach of its operations now means that the global implementation of new information systems often cannot be completed before the technologies
underlying them have become obsolescent. The case describes the development of the systems that underlie the business success and sets out the governance and management structures that make this possible.
orgAnIzAtIonAl bAcKground spedition chur Ag The traditional freight forwarder’s market is defined as “managing the door to door transportation of goods (larger than parcels but smaller than bulk) by reselling transport capacity purchased wholesale”2. European companies, mostly of German-speaking origin, seem to dominate the global market. The traditional reliance of European business on trade across country borders and the centuries of experience in it seem to have given European firms a distinctive advantage in the global market. SCA is one of the largest, as Figure 1 shows.
Figure 1. Comparing SCA with two other large European freight forwarders and one integrated logistics firm (Schenker-Rhenus) 2001 Revenue in US$m 6,000 5,000 4,000 3,000 2,000
SCA
1,000 0
BLT
Schenker
Schenker Rhenus
Kuehne
Figure 2. Comparison of SCA with the largest U.S. freight forwarders
SCA 3,500 3,000 2,500 2,000
Largest US Freight Forwarders
1,500 1,000 500 0 2001 Revenue in US$m
Air Express
European companies on the whole are significantly larger than their American competitors; Air Express, the largest American freight forwarder, is only about a third of the size of SCA. Figure 2 compares SCA with the largest U.S. companies. The freight forwarding industry was influenced by two events over the last two decades. First, the swing to just-in-time manufacturing
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Fritz
Expeditors
Harper
since the late 1980s has increased the importance of transport. Second, world trade has continued to expand and has accelerated since the 1993 GATT round. Both those developments meant that the markets for forwarding have grown considerably, bringing with it a large number of profitable opportunities, all of which involve information technology on a global scale.
European International Freight Forwarders
The case illustrates with the example of a highly successful multinational company (MNC) what the key issues are for the development, implementation, and maintenance of a set of systems for an enterprise that is entirely knowledge-based and where information technology is the main core competence of the firm. The case touches on two major research areas in the field of information systems; namely: •
•
The role of architecture and infrastructure with a specific emphasis on the issues in an MNC. The strategic management of change and the role that information technology plays in this regard, again with particular reference to the implications for MNCs.
The increasing importance that the nature and structure of the technology infrastructure was first recognized and developed by Weill (1992, 1993), Weill, et al. (1994a, 1994b, 1995, 1998), and Broadbent, et al. (1997). With the ever-increasing ubiquity of information technology and its everincreasing pervasiveness, infrastructure has now acquired the role of the main technology architecture. This notion has been developed further by Weill, et al. (2002) and Weill and Vitale (2002), as discussed in more detail by Ross (2003) and elaborately summarized by Tucker and Woolfe (2003). Facilitated by this ever more important role of architecture is the role of information technology in enabling and often catalyzing organizational change. Building on the seminal work by Benjamin and Levinson (1993), Gibson (2003) sets out a framework for the risks inherent in IT-enabled change, and Burton, et al. (2001) provides an up-to-date catalogue of users’ issues in this field. Kuruppuarachchi, et al. (2001) discuss the implications of IT-driven change on project management (setting a backdrop for SCA’s development structure), and Venkatesh (2003) summarizes and
amalgamates a unified view on change management in the information age.
settIng the stAge: A brIeF hIstory oF scA Friedrich Schuster, an astute entrepreneur, began to work in the transport industry in Vienna after the Second World War. In 1948, he founded his own trucking company to engage in the trade fired by Marshall Plan aid between Austria and its neighbors across the Alps. In the 1950s, he expanded the company through acquisitions, and in the 1960s, as he began to acquire international freight forwarders in Switzerland, it became more economical to move to Switzerland, too. Since then, SCA expanded in rapid succession across the globe by first cooperating with local firms and then entering into joint ventures before acquiring them outright. This growth by stepwise acquisition has formed the global management style and philosophy of SCA. Giving considerable freedom to the independent agencies in order to let them build up the business to the best that their local knowledge would allow, global control was only impressed onto the subsidiary offices as far as the integration into worldwide operations dictated. Furthermore, the emphasis on the international nature of the business was building up a solid understanding of working with different business cultures in a positive, effective way. This resulted in a transnational mix of global control over the operations and systems aspects of the business and local autonomy to maximize customer opportunities. As is customary in Switzerland, SCA is governed by a supervisory board, of which Friedrich Schuster is still the honorary chairman. The firm is run by the Executive Board of the holding company (shown in Figure 3). The head of MIS is on an equal level with the executives responsible for the operation in each of the regions. In
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Figure 3. SCA organizational structure at executive board level Chairman of the Supervisory Board
Chairman of the Executive Board
Other Members of the Supervisory Board
Chief Executive Officer Executive Board
Operations Chief Financial Officer
Management Information Systems
Human Resources
Far East & Seafreight
Controlling
North America & Airfreight
Corporate Auditor
Latin America
Corporate Secretary
Africa, Middle East, India
Corporate Services
a recent management move, the (previous) head of MIS moved on to take the head position in France, as the previous head of France took over the Group Chief Executive role. All executives and the large majority of regional management staff were Swiss.
•
business strategy
Consequently, information systems are a key competency in the forwarding industry. SCA have recognized this very early on: Friedrich Schuster was one of the first users of IBM’s card-based computer equipment in Austria. His view of information systems as a major driver of competitive advantage is still a high priority for the firm today.
SCA has followed the same two-pronged strategy for most of its 50-year existence, growing geographically and beating the market by working together more effectively than the competition. Information technology has always played a major role in all the main components of this strategy in the following ways:
As a major enabler in the development of the niche markets, complementing the core business competencies required there. Friedrich Schuster coined the phrase “to maintain the pole position in niche markets” for this distinct strategic thrust.
nature of the business •
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As an accelerator for geographical expansion, it establishes all standard business processes in the key operational areas, shortening the learning curve for new local staff.
Engaged in the door-to-door delivery of goods, the activities of SCA can be grouped into two interdependent areas:
European International Freight Forwarders
Figure 4. Revenue derivation — Physical business Miscellaneous
4%(*)
Airfreight 47% (*)
Overland freight 9% (*)
Seafreight 40% (*)
Figure 5. SCA’s client linkage for warehouse inventory management and distribution services. Customer orders are routed transparently through SCA’s warehouse, which is restocked independently, bringing significant cost and process efficiencies for the client.
Client Client
Customer Customer Replenishment Orders
Order Delivery
*)= % of Gross Income 1996
1.
2.
The traditional management of air, sea, and overland (road and rail) transport — the physical side of the business; and Value-added services, which in the main are used to feed the traditional business.
The proportions to which SCA’s income is derived from the respective areas of its physical business are depicted in Figure 4. In terms of gross revenue, about a quarter each comes from Europe, North America, and Asia, with the rest of the world sharing the last 25%. Maintenance of the pole position in niche markets means, in essence, the development and honing-to-perfection of value-added services that generate feeder business for the traditional business activities. The most important one of those is the provision of logistics services for multinational clients. The reason is its future potential. There is a high degree of leverage that can be gained from each client for introducing their own customers as new SCA clients. It consists in its simplest form of the exclusive delivery of a client’s products to its customers worldwide. A further stage of this service is where SCA is linked to the client’s sales and inventory systems and fulfills orders automatically as they
Replenishments
SCA Client Warehousing
arise from the client’s customers. A logical extension is the application of this link-up to both ends of the client’s value chain (i.e., also automatically picking up consignments from the client’s suppliers). As it then becomes more economical for SCA to keep a buffer stock, it is only a short step for them to take over inventory management as a further service. Figure 5 depicts this service.
cAse descrIPtIon The case description begins with an overview of the information systems in SCA and then describes the management of ICT on two levels: first, the philosophy of global vs. local systems and management is set out, and finally, the way in which SCA manages its international systems projects is outlined.
Information systems in scA Freight forwarding is a business where the effectiveness of operations depends almost entirely on information and knowledge about consignment details, routing, and tracking as well as client and carrier schedules. Because of this, information systems have been closely mirroring the physi-
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cal operations very much from the inception of computerization in the mid-1960s. Today, information technology is an essential ingredient of the business and considered a key core competency for SCA. Figure 6 illustrates the way in which information systems are integrated into the forwarding operations across the three strategic domains of physical operations, local client interaction, and central coordination. There are four logical stages (following the black numbers in the figure) in the transactions of SCA with its customers:
1.
The client advises SCA that there is a consignment to ship — mostly computer-tocomputer electronic linkages or PC front ends — which initiates the physical transport chain. In parallel, the data enter ORTRAC, the main consignment routing and ORder TRACking system; The system establishes a route for the consignment and generates records for all of SCA’s branches involved with the consignment. It subsequently updates the databases in all the servers to which the respective
2.
Figure 6. Interplay of business operations and information systems Consignment Order
Client Interface
SCA Network
Pick-up & Routing
1
FOR WARD
OR TRAC
All Stations are updated immediately
Consignment
Electronic Link
Carrier Interface
2
Doc’s
FOR WARD
OR TRAC
FOR WARD
OR TRAC
Paper Alternative
3 Carrier Interface
Doc’s
Carrier Interface
Doc’s
FOR WARD
OR TRAC
Carrier Interface
Doc’s
FOR WARD
OR TRAC
Client Interface
4 Delivery Announcement and Documentation
Physical Operations
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SCA Network
Local Systems
Global Systems
European International Freight Forwarders
3.
4.
5.
6.
branches are connected and establishes linkage for the life of the consignment. From now on, every movement and/or transaction connected with the consignment will be updated in all databases concerned; Now FORWARD, the second major information system, comes into play and generates the necessary documentation for the consignment as it passes through the stations of its route. The documents then are handed forward to the next branch office en route. Based on this, and where applicable: The documentation necessary for whichever physical transport agent is involved is generated and either produced in paper form or converted into the input format for the respective carrier interface; these carrier interfaces are often local (e.g., third-party information agencies such as TDNI or STAR for specialized air freight and ocean carriers in the U.S.) but some (such as airline connections) are international; The third form of documentation that is produced (or the major items of data collated for manual processing) is for local statutory or regulatory authorities, who increasingly deal through online channels; Once a reliable estimate is available of the consignment’s arrival at its final destination, the respective SCA branch office can advise the receiving client, either system-to-system or by e-mail, fax, or phone. Following this, the physical delivery can be scheduled, and the documentation (delivery notes, etc.) is prepared.
This deep integration of the system into the business is critical for SCA for two reasons: •
First, it allows the prediction of delivery times with maximum accuracy, as the physical transport performance is visible instantly all the way to the final destination. This allows SCA in the first instance
•
to take corrective action on its own to bring the consignment back on time. Should the problem still remain, then the client can be forewarned at the earliest possible time. Second, the in-built early advice of physical transport requirements for the total life of a consignment allows SCA an early and accurate accumulation of capacity needed. In this way, the best possible advantage can be taken of volume and pre-booking discounts with carriers. As SCA’s profits are made in the difference between rates paid and rates charged, this directly affects the Group’s profitability.
While these core systems are in a state of continuous stepwise improvement and upgrading to keep pace with the ever-changing technology, new systems are being built on top of their databases, their real-time capabilities, the interfaces to thirdparty carriers/haulers, regulatory authorities/ agencies, and the client linkage connections with customers. These may be called second-generation systems, because they derive their foundations from the basic operational systems, which, in turn, now have become utility systems — they feed data and information into the new information systems. One main area where these second-generation systems are being developed and used with great success is in the Project Management of logistics activities. These systems utilize the consignment database and the real-time capabilities of ORTRAC together with carriers’ timetables and schedule databases as well as the linkage with a multitude of shipping firms. In this way, SCA can take over the management and coordination of time-critical, often interdependent consignments. Figure 7 illustrates this. These developments in information technology reflect the movements in the industry as a whole; the main strategic thrust for forwarding companies seems to be the ability to add value to their basic freight hauling capacity. While other companies
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Figure 7. Secondary services built around information systems: The example of the project management service Consignment Order
progress toward this goal by merger and strategic alliances, SCA utilizes its information technology competencies to build competitive advantage. The backbone for all of SCA’s information systems and applications is a series of IBM servers connected to third-party networks that run ORTRAC and FORWARD. These base systems interface with two further layers of systems: 1.
2.
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LANs in the local offices, with PCs that also act as terminals for ORTRAC and the FORWARDING system; they, in turn, link to third-party carriers, haulers, and regulatory agencies; and Material Handling Systems, which use information technology extensively to automate the flow of goods between customers and SCA.
Figure 8 gives a conceptual view of SCA’s main information technology infrastructure. Although seemingly just one branch of local interfaces, the linkage to, and as deep as possible, into “Clients’ IS” is of key strategic importance for SCA. These interfaces are designed to make the collaboration between the client and the transport function as efficiently, conveniently, and transparently as possible in order to erect as high a barrier to change for the client as possible. The warehousing service depicted in Figure 5 was the first such area of client interfaces, and together with second-order information systems such as Project Management (as illustrated in Figure 7), they soon amounted to a capacity to take over all of the logistics functions that a client needed. This gave SCA’s clients the ability to focus and concentrate their efforts on the essential elements
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Figure 8. SCA’s international information technology and systems architecture Materials Handling Systems RS/6000 ORTRAC FORWARD
ADVENTIS INFONET
Materials Handling Systems RS/6000
ADVENTIS
ORTRAC FORWARD
INFONET
RS/6000 ORTRAC FORWARD
GLOBAL Interfaces Gateway INTERNET X.400
Local Office LOC InterfaAcL Standard es I nt WINTEL LAN e e G rf ac
f ter ay In &tew Ga
ate & ac wa e y
Regulatory Regulatory Agencies’IS IS Agencies’
ClientIS IS Client
and functions of their business in line with the current management philosophy3 of concentrating on the firm’s core competencies. The key backbone systems have been written in-house and are now maintained exclusively by in-house teams. Application systems such as warehousing systems and accounting systems nearly always are sourced from ready-made application systems, often on a large scale, such as the intended global standardization of Group Finance systems using the SAP enterprise resource system.
Management of Information systems Two aspects of the management of information technology within SCA may be regarded as key factors for the successful management and operation of the information technology portfolio: •
The philosophy and its resulting strategy and policies of what should be a common standard for all SCA business units and what should be initiated, designed, and managed locally.
CarriersIS IS Carriers
•
The role of ChurInfo-Centre (i.e., the international MIS head office in Lausanne) in the development and implementation of international information technology projects.
The Global vs. Local Philosophy SCA firmly subscribes to the philosophy of “Think global, act local.” This means that there is a balance between the autonomy of local operations and global management by fiat from the center; where business operations dictate a unitary process, the information system used will be a globally standardized one maintained by ChurInfo-Centre. Other than that, every local or regional office has full freedom to: [R]eact to local or even regional needs within [their] sphere of influence…we’re doing a lot of local country business and for that we need [that autonomy]4.
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The approach is based on a deep-seated understanding that it would not be possible to create a system that reflects the totality of all user requirements worldwide: We don’t want to cover all of SCA world-wide to a 100%. That is just not possible, not even in an international team, which is spread all around the world. We’re also forever extending the business into more and more new things, everywhere. It simply can’t be done4. This declared absence of any intent to impose systems or business practices from the center unless there is a rational benefit for the local office is important, because it delimits clearly the extent and nature of the core information systems applications. Furthermore, there is a clear management process to decide what should be a global standard functionality and what should be left to vary with individual local business requirements5. The reaction of the users to the global systems, the way in which they interface with local systems, and how they adapt to local requirements on the whole indicates that the approach works. The business people interviewed were very complimentary about the functionality of the information systems and their degree of fit with local requirements. A case in point are the Austrians, who, because of the significantly different nature of their business6, are only marginal users of the global systems but have extensive and sophisticated local information systems and technology. There are, however, requirements that are more than local but not yet global — not business processes compulsory for everyone, but where a number of local users might benefit. Examples follow: •
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The UK suffers from not being able to customize client linkages (partly because there are very few MIS people supporting a major region), but Austria has an automated interface generator for this purpose
•
ready and working; for similar reasons of resource shortage for developing system-tosystem interfaces, Los Angeles limits client linkages and warehousing services to large multinational accounts; The UK has a working EDI interface in place with key clients at the same time that ChurInfo-Centre had written an add-on for ORTRAC with essentially the same functionality.
ChurInfo-Centre approached the commonalization of local solutions with the acquisition of software for requirements that are common for a number of offices, such as a third-party warehousing system. This was bought and used in Asia originally and will be offered to any other office that wants to use it, once it can be shown that the operation warrants ChurInfo-Centre support for the installation. This support philosophy underlines the importance of information technology for the business and the self-image of MIS as an integral part of the Group’s operations; nothing less than in-depth support is acceptable. However, like in any other area of SCA, cost-effectiveness is a significant consideration.
The Management of Projects SCA’s information systems development approach reflects the deep integration and strategic significance of information technology. It is characterized by the following: •
• •
Continuous stepwise improvement of information systems rather than big wholesale replacement projects; Careful piloting with experienced sections of the business; and Making adjustments and refinements at each phase of a project.
The definition of an information systems project and backing within the organization is
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the first concrete step toward its realization. Clarity of mandate and responsibility of the project sponsor are the main considerations at this stage of the project7: This is not something that someone just thought of along the way somehow, no, we will have spent perhaps two, three months just to clarify the problem in our minds and [we would have been] working with the “Auftraggeber” (sponsor) to come to a final job/problem definition. Once the project has found a sponsor, the other parts of the organizational structure are put into place: There are two additional committees we have installed: One is the Project Committee, which is at the functional business level and which clarifies functional questions and sanctions functional solutions; that is not always easy in an international environment, there [always] are conflicts. In addition to the functional committee we then have the Clearing Committee, which is essentially the executive level management [affected by the project] who have the ultimate supervision and who have to give the final blessing to whatever they decide. Assembling the project team for carrying out the work of defining and specifying the proposed information systems solution is the next step: What we have done to cover the international [character of the projects] is to have a project team of about 15 people on average, user representatives from around the world which we have invited to us here in Lausanne. They then spend about 70% to 80% of their time on the project, although that changes from phase to phase. We also went out and travelled around the world, went to the local branches, presented our pointof-view and got information from them.” This process takes time: “ [for the SAP project] we’ve
spent more than two years at a conceptual level, so as to get the whole system absolutely clean from a conceptual perspective, before we even started the realization - and today, I think, we’re cashing in on that. This project organization structure model is depicted in Figure 9. Project teams are staffed with specialists from both the technical side (i.e., IT people familiar with the respective systems environments) and representatives from the business areas affected. Different people take on phase leadership of the team, which is under the overall command of a Project Manager. This role reports to a project committee, which unites representations from all the stakeholders in the business function that the systems purport to support — one has to be the declared Sponsor of the project. The chair of the project committee then is also a member of a Clearing Committee (at Executive Board level), which has the sole purpose to arbitrate and establish consensus between stakeholder interests where this cannot be achieved in the Project Committee. It is in this phase that conflicts and contradictions are resolved in the committee process: It was first of all a team forming process [which] the project team underwent themselves, until all the people … speak a common, uniform language and develop a common understanding for the [analysis and requirements specification] techniques we use. And, of course, there are discussions, and they stem from the work of the team itself — it’s quite clear that the representative from New York has different needs from the representative in Frankfurt, and in parts their requirements will be contrary. So you try and find a solution acceptable to both sides. And sometimes we went a step further and asked for the heart of the problem: what are the business and operating policies underlying the problem? Does it have to be like that? Can it not be done in
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Figure 9. The four layers of the typical information systems project in SCA
Project Manager Phase Leadership Concept Realisation Pilot
Roll-out
Panal-Centre H/O Experts Local Expert Local Office
any other way? And you try and find an optimal solution. And where that was not possible, we just had to say: OK, we’ll do it this way or that way in the core system, the rest is local enhancement, and can you please do that yourselves. The careful approach to the specification of the business solution is then complemented by an equally participatory development process led by the best domain experts at each stage. Any changes to business processes (e.g., to resolve conflicts), however, have to be ratified by the executive level steering committee. Similarly, any changes to the core information system has to be sanctioned by the executive director MIS to assure that their technical impact is analyzed, understood, and accommodated. Implementation of the new system goes through a series of pilot stages before it is rolled out to more locations simultaneously in a series of cascades; ChurInfo-Centre in Lausanne quite often leads the first pilot projects with key people from the regions as integral parts of the team. These understudies, in turn, then lead teams from
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the local offices, teaching local key staff how to provide front-line support for the new system. Figure 10 illustrates this concept. ChurInfo-Centre maintain that its way of project management is a key ingredient to its relative success in making large international information systems an integral part of SCA’s business core competence.
current chAllenges FAcIng scA When information systems have become a strategic core competence, the main issue is one of keeping pace with both business developments and the growth in technology opportunities. For SCA, this is by far our most difficult challenge. Despite the high efficiency that we have developed in rolling out technology, it still takes years, not months, to install new infrastructure in our offices. Theo Mürli, the Executive Director for MIS, in his penthouse office overlooking Lac Léman,
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Figure 10. Cascade method of international systems roll out in SCA
Number of ‘Live’ Sites
Number of Systems Fixes and Modifications Project Progress
Pilot Sites
Cascaded Roll-Out
Regular Growth*
*= New Offices opened during Project
points to a wall chart where schedules of major developments are sketched out — well into 2006. For this reason, we will need to leave major parts of the infrastructure untouched and have to concentrate on developing new products, each with their own technology. SCA is in the middle of a strategic turnaround: having moved away from the physical business of transport into the management of information, their ability to plan, schedule, and predict has reached a point where it can be translated into a superior core competence for running an airline and a shipping company. The concept, developed jointly between MIS and the Operations executive, is dubbed Integrated Forwarding and builds on the existing primary systems (i.e., ORTRAC and FORWARD) as well as on secondary information technology services such as Logistics and Project Management. The wall chart behind Mürli’s desk, shown in Figure 11, illustrates the point. Integrated Forwarding is demanding in terms of the mastery of advanced information technol-
ogy in two dimensions: the value chain within SCA as well as between SCA and its alliance partners consists almost purely of information per se, as does the actual service the way SCA’s clients see it — the integration of multiple planning paths (e.g., for the different components of an oil platform), forecasting functionalities (when will they all come together at their respective places of subassembly?) and specification of logistic elements (what modes of transport are optimal for the nature of the part, the cost of different transport modalities, and their speed?). Another area where SCA has mastered the art is the seamless integration of these technologies (from outsourced warehousing over logistics and project management all the way to fully Integrated Forwarding) into companies of nearly any size in virtually every kind of environment, and in the process, having had to master a wide variety of technology platforms and working with a massively divergent population of users with an enormous spectrum of technology literacy. However, the technology that underlies all of SCA’s information systems is essentially outdated; distributed processing on multiple platforms with replicated installations of standard software has been overtaken rapidly by Web-centric client/ server technology. Migrating from yesterday to tomorrow is a big challenge but needs to be faced: The problem with this sort of a strategy is that it will take some major efforts to do both things at the same time: look after the “legacy” technology and pioneer new technology. Our customers, too, are forcing us into their own technologies — that might well run counter to our own platforms. How do you plan in an environment like this? Theo Mürli helps himself to another cup of coffee.
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Figure 11. The “Strategic Unity” of business and information technology demonstrated on the example of secondary products and services
Basic Products and Services (based on Primary Systems)
Strategic Products and Services (Secondary Systems) Integrated Integrated Forwarding Forwarding Air Logistics Logistics
reFerences Benjamin, R., & Levinson, E. (1993, Summer). A framework for managing IT-related change. Sloan Management Review, 23-33. Broadbent, M., Weill, P. (1997). Management by maxim: How business and IT managers can create IT infrastructures. Sloan Management Review, 38(3), 77-92. Burton, F., Leitch, R., & Tuttle, B. (2001). A user’s willingness to adopt a new information system: The influence of the decision-making improvements and performance-monitoring dimensions of the system. Journal of Information Systems, 15(2), 61-80. Gibson, C. (2003). IT-enabled business change: An approach to understanding and managing risk. MIS Quarterly Executive, 2(2), 104-115. Kuruppuarachchi, P. R., Mandal, P., & Smith, R. (2001). IT project implementation strategies for effective changes: A critical review. Logistics Information Management, 15(1/2), 126.
Low
High
Information Intensity of the Product
Ross, J. (2003). IT architecture as strategic capability: Learning in stages. MIS Quarterly Executive, 2(1), 31-43. Smith, G. (1999). Project leadership: Why project management alone doesn’t work. Hospital Material Management Quarterly, 21(1), 88-92. Tucker, C., Woolfe, R. (2003, October). The reality of IS lite. Gartner Report. Venkatesh, V., & Morris, M. 2000. Why don’t men ever stop to ask for directions? Gender, social influence, in their role in technology acceptance and usage behaviour. MIS Quarterly, 24(1), 115-139. Venkatesh, V., Morris M., Davis,G., & Davis, F. (2003). User acceptance of information technology: Toward a unified view. MIS Quarterly, 27(3), 425. Weill, P. (1992). The role and value of information technology infrastructure: Some empirical observations (Working Paper No. 8). Melbourne: University of Melbourne. Weill, P. (1993). The role and value of information technology infrastructure: Some empirical
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observations. In R. Banker, R. Kauffman, & M. A. Mahmood (Eds.), Strategic information technology management: Perspectives on organizational growth and competitive advantage (pp. 188-210). Harrisburg, PA: Idea Group Publishing. Weill , P., Broadbent, M., Butler, C., & Soh, C. (1995). Firm-wide information technology infrastructure investment and services. In Proceedings of the 16th International Conference on Information Systems (pp. 181-202), Amsterdam, The Netherlands. Weill, P., Broadbent, M., & St.Clair, D. (1994). Information technology value and the role of information technology infrastructure investments. In J. Luftman (Ed.), Strategic alignment (pp. 5583). Oxford: Oxford University Press. Weill, P., Subramani, N., & Broadbent, M. (2002). Building the IT infrastructure for strategic agility. MIT Sloan Management Review, 44(1), 25-31. Weill, P., & Vitale, M. (2002). What IT infrastructure capabilities are needed to implement e-business models? MIS Quarterly, 1(1), 17-35.
endnotes 1
2
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6
7
All names of firms and persons are disguised Quoting the Chairman of the Supervisory Board of SCA Austria As set out in the seminal paper by C. K. Prahalad and G. Hamel, “The Core Competence of the Organisation,” Harvard Business Review, January/February 1990, pp. 55-78. Quoting SCA’s International Development Manager As described further in the section on The Management of Projects In other words, predominantly overland, virtually no sea and airfreight, a diametrically different business structure of the rest of SCA All following quotes are from SCA’s MIS Director and International Development Manager
This work was previously published in the Journal of Cases on Information Technology, Vol. 8, Issue 1, edited by M. KhosrowPour, pp. 63-78, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.12
IT Portfolio Management:
A Holistic Approach to Outsourcing Decisions Luke Ho Staffordshire University, UK Anthony S. Atkins Staffordshire University, UK
AbstrAct This chapter provides an introduction to the advent of Information Technology Outsourcing (ITO) and its impact on portfolio management in modern day decision-making. Specifically, it outlines the use of the Application Portfolio Matrix (APM) by companies in formulating their strategic IT direction and why such techniques may be unsuitable for outsourcing decisions, which are inherently complex and multi-faceted in nature. Consequently, there is a need for alternative decision support tools to enable companies to determine how to “best-source” various aspects of their business. This chapter subsequently presents an analysis of ten outsourcing decision-making frameworks, identified from the literature, highlighting their commonalities, strengths, deficiencies and the potential misalignment between the theory and practice of outsourcing as determined by focus
group discussions. This chapter gives a background introduction to the practitioner-driven Holistic Approach {Business, Information, Organizational} (HABIO) Framework, which adopts a holistic approach to outsourcing that examines underlying issues from the business, information (i.e. technical) and organizational perspectives. The framework adopts a “card/deck” analogy in its design, allowing for the flexibility and scalability required to accommodate the intricacies of heterogeneous outsourcing decisions in varying industry and context. The chapter outlines its application to two case studies, involving multi-million contracts from the finance and retail sectors, which is of particular interest to academics seeking accounts of current practices and practitioners seeking a systematic guide to ITO portfolio management.
IntroductIon The outsourcing of Information Technology (IT) and business services has been receiving increased attention since the late 1990s, particularly in 1999 where there was a particular surge in offshore outsourcing as companies sought to resolve the Y2K problem (i.e. millennium bug). Since Eastman-Kodak’s mega-deal (i.e. outsourcing contracts with total worth of over $1bn) in 1989, where outsourcing was perceived to be first formalized as a strategy, over 78 other mega-deals have been publicly announced. This meteoric rise is also reflected in the statistics and analyst predictions, which indicate that 88% of IT companies in UK currently utilize some form of outsourcing and that Business Process Outsourcing (BPO) will reach a market worth of $650bn by 2009 (Ravi, Bingham, Rowan, Danilenko, & McStravick, 2005). The traditional concept of geographical boundaries has diminished in recent years, as advances in communication technology and the subsequently deregulation of telecommunications facilities have resulted in the ability for economically-viable international communication via data and voice networks (Namasivayam, 2004; Weinstein, 2004). With proliferated access to computing capabilities and emergence of collaborative groupware tools as a catalyst, the concept of virtual teamwork is now a reality, particularly for service-related functions (e.g. call centre operations and medical transcription). Hence, such functions are now being outsourced to knowledge workers around the world more on virtue of skills and capabilities and less on physical proximity. At present, there are indications of Computerized Axial Tomography (CAT) scans from US hospitals being remotely analyzed in Israel and Magnetic Resonance Imaging (MRI) scans from UK hospitals being transmitted for analysis in Spain, which offers not only commercial revenue, but also altruistic opportunities for knowledge
sharing. In such healthcare setups, the CAT scans are first taken within the US hospital, following which the digitized information is then transmitted via data networks to remote doctors based overseas in Israel, where the analysis and subsequent recommendation(s) on whether to operate can be made. Such information can be reviewed quickly because of the difference in time zones, thus allowing the CAT scans to be analyzed overnight (working day in Israel). This setup also provides coverage for the US hospital to deal with emergency cases arriving at night which require urgent attention. Due to the seamless integration of information interchange, boundaries between the US-based components and Israeli-based components are indistinct, and hence patients are often unaware that the hospital is essentially a virtual organization. There is an increasing propensity for companies to consider offshore outsourcing, largely due to the promise of significant cost reductions (primarily from labor cost arbitrage), but also the potential to maintain round-the-clock availability (by exploiting time zone differences) and leverage foreign expertise. This has made countries such as India and China attractive offshoring locations for a myriad of industries, ranging from laptop production to remote tutoring. Niche markets have also developed, such as Taiwan for research and development of Personal Digital Assistant (PDA) components and South Africa for insurance claims processing. Despite the various realizable benefits associated with outsourcing, it is not without its risks, just like any other business moves (Aubert, Patry, & Rivard, 1998; Earl, 1996). Hence, companies which fail to consider outsourcing as a strategic decision (often eliciting to rely solely on computational cost analysis instead) tend to encounter financial consequences, as illustrated by a supermarket group’s cancellation of its $3.3bn outsourcing contract in 2006, which resulted in termination costs of $128m (Hadfield, 2006).
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The recent growth in outsourcing uptake has accentuated the increasing challenge to achieve successful outsourcing, with as many of 50% of outsourcing deals running into complications and indications of $7.3bn being wasted by European companies on poorly managed contracts (Cohen & Young, 2005; Deloitte, 2006; Overby, 2006). This is further highlighted by the Computerweekly’s 2006 survey of Chief Information Officers (CIOs), in which 75% of the 140 respondents disagreed that outsourcing has provided expected benefits (Computerweekly, 2006). These figures highlight a number of critical concerns for corporate IT portfolio management, one of which is the need for rigorous and methodical process by which outsourcing is incorporated into the planning process as a strategic investment, rather than a simple procurement decision.
It PortFolIo PlAnnIng Process Companies should adopt a systematic approach to IT portfolio management (as shown in Figure 1) in order to ensure that decisions involving such projects (including that of outsourcing operations) are considered in an objective manner, which takes into account the longer term impact on the organization as a whole.
Figure 1. IT portfolio planning process
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stage 1: Prepare It strategy Initially, companies need to clearly articulate defined long-term business objectives, and then develop an Information Technology (IT) strategy which will enable them to progress and align with such business goals. At this stage, decision support tools, such as the Application Portfolio Matrix (APM), are often utilised to analyse each function’s (or application’s) strategic importance, contribution to business value or/and other specific criteria. A rigorous review of legislative implications is also needed to determine the legal implications of the associated project (e.g. “do the national labour laws inhabit implementation of a 24/7 operation?”). In instances where outsourcing is being considered, a through evaluation is needed to identify the mission-critical elements for strategic retention and the level of internal expertise required in order to prevent loss of organizational competencies, and hence safeguard against the risk of vendor lock-in.
stage 2: resource Planning The next stage in the process is resource planning, in which the resources (both personnel and equipment) currently required for maintaining the functions (or applications) are identified. The identification facilitates the creation of a resource utilization table (e.g. breakdown into volume of
IT Portfolio Management
data transmission, processor capacity required, etc.) in which the resource commitment for the various functions can be detailed, thus allowing resource-intensive functions/applications to be flagged. Subsequently, these resource-intensive functions/applications can then be evaluated for suitability for streamlining (e.g. Business Process Re-engineering) or elimination (e.g. outsourcing to external service providers). At this stage, an understanding of the internal cost metrics is required in order to establish a “base case” against which submitted tenders can be evaluated. This is increasingly formulated using the Activity-Based Costing (ABC) method, which seeks to objectively assign costs by identifying cause and effect relationships via the concept of “cost drivers” (Massy, 1999). In the event of outsourcing, it is important that human resource issues are not overlooked, due to the definite impact that outsourcing has on staff morale. Companies may hence have to commit more resources (typically financial) to make corresponding adjustments in order to maintain internal work efficiency. In some instances, it may be appropriate to utilize consultants to help identify or redefine the company’s strategic intention, particularly if this has yet to be clarified in the previous stage. It is also important that issues concerning ownership of equipment and other resources are clarified beforehand in a defined exit strategy, in order to pre-empt complications resulting from a later change in service provider or reversal of decision (i.e. bringing the outsourced function/application back in-house). In the event of outsourced software development, further consideration concerning copyright of the final product will have to be taken into account in addition to the legal implications (e.g. UK Data Protection Act of 1998) relating to data transfer outside of the organization or overseas.
nition can result in resource waste, misalignment to business objectives, implementation delays and client dissatisfaction. Requirement analysis should begin with business requirements which are then translated into performance requirements for the respective function/application. The exact method to be utilized will be specific to the context of individual companies; some may prefer the use of formal project methods while others may prefer the use of informal brainstorming sessions as the basis. Typically, companies have found it helpful to utilize Service Level Specifications to set measurable requirements and performance criteria (Sorteberg and Kure, 2005). Completed requirements analyses should be reviewed by a select management committee at this stage before further progression, as individuals may inevitably omit the required clarity and details, which results in ambiguous definitions that consequently lead to complications during implementation.
stage 4: Issue Invitation to tender (Itt) The Invitation To Tender (ITT) stage, also known as Request For Proposal (RFP) stage, is a procurement procedure where clients invite potential service providers to tender for a particular function/ application. The key component of this stage is the ITT/RFP document, which should comprise of the following sections: • •
•
stage 3: requirements Analysis Requirements definition is a vital part of the IT portfolio management process, as inaccurate defi-
Introduction, e.g. industrial context, goals and objectives, and the procurement timetable Background, e.g. background information about the company, details of the technical environment and the current business systems in place Scope and scale of functions, e.g. detail and scope of the function/application under tender, such as number of users, number of transactions and data transmission volume
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• •
• • •
•
• • •
Key requirements, e.g. the most important requirements, such as legal adherence to data protection legislations General requirements, e.g. description of service provision and type of client-provider relationship to be established, such as strategic partnership Detailed functional requirements, e.g. full description of what is specifically required from the service provider Technical requirements, e.g. details on technological direction, software and hardware Cost information required, e.g. details of costs for various activities, such as licensing, training, consultancy, development, customization and implementation Service provider information required, e.g. contact details, parent company name, financial backing details, company audits and evidence of ability to deliver Implementation requirements, e.g. timescales, preferred project methodology and resource utilization Instructions to service provider, e.g. format and content of tender responses, selection criteria and submission deadlines Appendices, e.g. organizational charts, glossary of terms and business process diagrams
It is particularly important for companies to ensure that service providers maintain the strict numbering in the ITT/RFP document, which makes it easier to verify if respective service providers have replied to each defined requirement. At this stage, companies often also opt to include a compliance grid for tendering service providers to complete, which facilitates an intuitive and hence quicker review of requirements fulfilled. In order to meet scheduled timeframes, it is important for companies to state a clear cut-off date for tender submission and emphasize that tenders received after such date will be rejected outright.
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stage 5: contract negotiation This stage involves negotiating with the selected service provider to reach a suitable contractual agreement, which often requires a mix of tact, diplomacy and knowledge of relevant market dynamics (e.g. typical implementation cost of technology X, availability of alternative options, etc.). After a potentially time-consuming selection process, there is often a natural tendency for companies to desire a speedy negotiation to reach a suitable contractual agreement. This is, however, a potential pitfall that companies should safeguard against, as it typically results in the haphazard drafting of contracts which may lead to complications, and subsequently a costly and time-intensive remediation process. In this stage, the service provision issues that should be discussed are performance standards, compliance monitoring, change management procedures, technological review periods and penalties for non-compliance, which are typically addressed by the establishment of Service Level Agreements. Acceptance testing should also be included in the contract, as a means of ascertaining whether pre-defined client requirements have been adequately met. Ideally, various safeguards should also be worked into the contract, such as the following: • • • • • •
Non-disclosure clause for information identified as confidential or company secret Unambiguous definition of Intellectual Property (IP) rights Requirement for implementing a recognized code of practice on information security Ability to veto the use of sub-contractors (i.e. further outsourcing of functions) Exit clause in the event the contract termination is deemed necessary Procedures to account for business changes where both parties share any potential savings from new technology or process streamlining (i.e. mutual goal sharing)
IT Portfolio Management
There should be a clear escalation hierarchy and dispute resolution procedures in terms of problem resolution. In instances where traditional pricing arrangements are deemed inadequate, companies can opt to utilize escrow arrangements, where a third party intermediary acts as a security buffer between the client and the service provider. During this stage, the contract negotiation should be built on trust and not developed in an adversarial way. Overall, companies should have a good understanding of the market, and thus have a grasp of their bargaining power in the contract negotiation with service providers.
can seek to identify any best practices and isolate problem areas. This is important as it provides review information which can be utilized in future implementations to pre-empt potential problems and can facilitate knowledge transfer, through documented practices, from experienced staff to those in training. Such practices can be further extended by the use of web-based monitoring systems, which integrate with varying service management software (e.g. BMC Remedy) to provide a consolidated view of service compliance, thereby facilitating a pro-active approach to performance monitoring. An example of this application is outlined later in the chapter.
stage 6: Implementation The implementation stage involves the establishment of monitoring procedures and ascertaining the compliance of performance standards in the service provision. In order for the client-provider relationship to be truly effective, constant communication is a must, and hence it is particularly important that communication channels and feedback procedures are established to facilitate constant and open communication. It is also important that formal procedures are developed to resolve issues in a convivial rather than adversarial way. In the interest of long-term business benefits, companies should build up a strategic client-provider relationship, which is based on trust, and work towards designing contracts that account for the velocity business changes.
stage 7: Performance Monitoring Performance monitoring is an essential postimplementation stage in ensuring that pre-defined requirements and performance criteria for the function/application are being met, and that its implementation is contributing towards the business objectives of the organization. This stage is often extended by the establishment of a feedback loop via means of review sessions (typically 4-6 weeks after implementation), in which companies
APPlIcAtIon PortFolIo MAtrIx (APM) The concept of IT portfolio management was first proposed by McFarlan (1981), beginning initially on a project-centric basis, and then evolving towards the inclusion of “steady-state” portfolio entries such as application maintenance and support. Although analogous to financial portfolio management, there are significant differences between the two, particularly as IT investments typically involve a “harvest period” (i.e. returns are not immediate) and can be measured using by both quantitative and qualitative measurements. Consequently, a range of decision support tools specific to IT portfolio management have been developed by academics and practitioners, one of which is the well-known Application Portfolio Matrix (APM) by McFarlan and McKenneys (1983) that provides for systematic management of an organization’s IT portfolio by assessing the scope of its current, planned and potential applications. The APM is a 2x2 framework which allows for analysis of each respective application’s strategic impact on existing operating systems against its strategic impact on the application development portfolio.
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Figure 2. Application portfolio matrix
High
Factory
Strategic
Support
Turnaround
Low
High
Strategic impact of existing operating systems Low
Strategic impact of application development portfolio (Modified by Authors; Source: McFarlan and McKenneys, 1983)
In addition to the APM, there were also other traditional techniques that are utilized for IT portfolio management, such as: •
•
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Strength, Weakness, Opportunity, Threat (SWOT) Analysis, resultant from Stanford University’s research led by Albert Humphrey (Learned, Christensen, Andrews, & Guth, 1965), is a strategic planning tool which is utilized to generate strategic alternatives from a situation analysis, by identifying the strengths and weaknesses of an organization along with the opportunities and threats in the environment. Value Chain Analysis by Porter (1985), which is a systematic approach to examining the development of competitive advantage by decomposing a company’s sequence (i.e. chain) of business functions into specific activities (e.g. inbound logistics and procurement) and analyzing their links to the organization’s competitive position, thereby identifying opportunities for value adding. This has been updated for the Internet Era as the “value web chain” (Laudon and Laudon, 2004).
•
Porter’s 5 Forces by Porter (1979), which is a business management framework for diagnosing an industry’s structure through the analysis of five competitive forces that erode its long-term average profitability (i.e. Suppliers, Potential Entrants, Buyers, Substitutes and Industry Competitors). The 5 Forces framework has been refined over the years by academics and strategists (Laudon and Laudon, 2004), including the addition of a 6th force known as ‘complementors’ which helps to explain the reasoning behind strategic alliances.
Although anecdotal evidence suggests that the above-mentioned techniques are still very much in use for IT portfolio management in general, the increasingly diverse nature of outsourcing and the myriad of domains of application (ranging from micro-scale logistics outsourcing to large-scale private military operations) indicates a need for refined frameworks, tools and techniques specific to outsourcing decision-making. Since the Eastman Kodak mega-deal in 1989 which brought outsourcing into the public eye, there has been an increasing (in line with the growth of outsourc-
IT Portfolio Management
ing) number of such frameworks developed by both academics and practitioners for outsourcing decision support.
outsourcIng decIsIon-MAKIng FrAMeworKs In place of the Application Portfolio Matrix (APM), there are a number of other frameworks which can be utilized for outsourcing decisionmaking. Table 1 outlines the key features of ten
such frameworks identified from the literature (excluding commercial sources such as paid access consultancy reports). Analysis of the identified frameworks highlighted a lack of quantitative measurement in the frameworks, similar to the case of the APM. In terms of making definite comparisons, the use of quantitative measures can provide a more distinct yardstick over relative descriptive properties (‘10 compared to 8’ against ‘very high compared to high’). As such, quantitative measurement within a framework approach is considered to be important,
Table 1. List of alternative outsourcing decision-making frameworks Willcocks Frameworks (Willcocks, Feeny & Islei, 1997)
Matrix Analysis (Strategic Grid/Boston Matrix) Empirically derived frameworks which focus on critical factors Set of three frameworks Business Matrix / Economic Matrix / Technical Matrix
Yang-Huang Decision Model (Yang and Huang, 2000)
Utilizes Analytic Hierarchy Process method Hierarchical format which works on the principle of decomposing complex problem into sub-problems
De Looff Framework (De Looff, 1995)
Descriptive framework in the form of a checklist Provides for systematic description of outsourcing options
Perry Matrix Framework (Perry, Stott, & Smallwood, 1993)
Matrix Analysis (Strategic Grid/Boston Matrix) Based on concept of Unit Competitive Advantage Analyses a function’s abilities to value-add
Systems Audit Grid (Earl, 1989)
Matrix Analysis (Strategic Grid/Boston Matrix) Involves an Information Systems audit which incorporates both the business user perspective and technical specialist perspective
Cox Methodology (Cox, 1996)
Based on Relational Competence Analysis Involves assessment of asset specificity
McIvor Framework (McIvor, 2000)
Integrates key theories such as core competency thinking, value chain perspectives and supply base influences Involves core activity definition, value chain analysis, total cost analysis and relationship analysis
Four Outsourcing Relationship Type (FORT) Framework (Kishore, Rao, Nam, Rajagopalan & Chaudhury, 2003)
Matrix Analysis (Strategic Grid/Boston Matrix) Classifies client-provider relationships into Reliance, Alliance, Support and Alignment types
Market, Competence and Advantage Model (MCA) (Cullen and Willcocks, 2004)
Matrix Analysis (Strategic Grid/Boston Matrix) Considers supplier and market maturity, organization’s relative competence and sustainable competitive advantage
Outsourcing Decision Tree (Cullen and Willcocks, 2004)
Based on traditional decision flowchart technique Involves high-level analysis of six issues such as the potential for a monopolist supplier market
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as it increases the precision of decision-making by increasing objectivity in the decision-making process (Yang and Huang, 2000) The analysis also highlighted a lack of financial costing tools within the frameworks, which is considered to be contradictory as reducing operational costs is commonly identified as one of the top reasons for outsourcing (Mills, 2004). Hence, the lack of a defined costing method will result in challenges for companies seeking to ascertain whether such projected cost savings have been achieved post-implementation. Research by McIvor (2000) attempts to include financial costing within a framework but does not provide examples or procedural guidelines in its application. This is considered to be a crucial component for framework approaches, as it facilitates the ability of the business to benchmark its internal cost position against external service providers, and hence provides a comprehensive financial justification for outsourcing decisions (Farbey, Land and Targett, 1993). The reviewed frameworks appeared to only provide partial coverage of the domains associated with outsourcing decision-making, i.e. business, technical (information) and organizational. Majority of the frameworks were focused on issues within the business domain (e.g. in-house economics of scale and contribution to business value), and do not adequately address issues within the technical and organizational domains (e.g. retention of internal expertise and political influences from labor legislations). These shortcomings were the motivation behind the development of a new outsourcing framework, which incorporates a holistic approach that considers the organization as a whole rather than carrying out an analysis of separate parts (i.e. emphasizes the importance of the whole and the interdependence of its parts). This framework, known as the Holistic Approach {Business, Information, Organizational} (HABIO for short), is named after its tri-perspective grouping of issues, which is detailed in the following section.
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hAbIo FrAMeworK Figure 3 illustrates the proposed HABIO framework, which is based on the Information Systems Strategy Triangle (ISST) by Pearlson (2001) - a framework for understanding the impact of Information Systems (IS) on organizations that relates Business Strategy with Information Strategy and Organizational Strategy. It advocates that the corner of the triangle are interlocking, hence a change in one strategy will require re-evaluation of the other two strategies so that corresponding adjustments can be made to ensure that balance is preserved. Changes in Business Strategy without consideration of the corresponding effects on Information Strategy and Organizational Strategy will result in the business struggling until balance can be restored (Pearlson and Saunders, 2004). Similarly, changes in Information Strategy or Organizational Strategy alone with prior consideration of corresponding impacts will cause an imbalance. This is analogous to the concept of strategic alignment (Luftman, Lewis and Oldach, 1993). The choice of the Strategic Triangle concept (i.e. the ISST) for mapping the outsourcing decision-making process is based on merit that the Strategic Triangle concept (such as the ISST) is both a well-documented concept and a wellknown convention (Frenzel and Frenzel, 2004; Robson, 1997). The resultant HABIO framework design, illustrated in Figure 3, provides a tri-perspective approach (akin to the ISST’s tri-strategy) approach to outsourcing decisionmaking which addresses issues within a range of domains. Developed with inputs from a leading financial institution and a large UK retail group (profiled in a later section), the framework’s tri-perspective approach advocates the logical grouping of issues to be considered under the Business, Information (i.e. technical) and Organizational context. This logical grouping adopts the analogy of a deck of cards, in which each issue is depicted as a “card”,
IT Portfolio Management
Figure 3. ISST and the HABIO framework Organizational Strategy
Information Strategy
Business Strategy
Business Strategy:
A well-articulated vision of where a business seeks to go and how it expects to get there
Information Strategy:
Refers to the plan the organisation uses in providing Information Systems and services
Organisational Strategy:
Refers to the organisation’s design as well as the choices it makes to define, setup, coordinate and control its work (Source: Pearlson, 2001)
Information Systems Strategy Triangle
which can be added or removed to the corresponding “deck” (i.e. perspective) as appropriate to the organization under consideration. The resultant flexibility is an intentional design as outsourcing decisions are not necessarily homogenous between companies (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004), thus customization is essential to facilitate adaptability for specific context and industry. The HABIO Framework (Ho, Atkins, & Eardley, 2005) is normally comprised of 11-12 “cards” (depending on the inclusion of core/noncore classification), as listed in Table 2. However, due to its holistic approach, the framework can be extended to include additional or modified “cards” that relate specifically to the organization under consideration. An example of this is a government agency that may choose to expand
Holistic Approach Business Information Organisational
} } } } }
HABIO
HABIO Framework
the Organizational Perspective to factor in the issue of ‘political sensitivity’ and the Information Perspective to factor in the issue of ‘defense systems integration’. The concept of core/non-core classification relates to the theory of “core competence”, which has been frequently mentioned in connection with outsourcing decision-making since the work of Prahalad and Hamel (1990). Popularized by the notion of strategic outsourcing (Quinn and Hilmer, 1994), the concept argues that companies should focus on core competencies, while contracting with other companies for support services and ancillary functions (i.e. outsource). Core competencies are deemed to underpin the ability of the organization to outperform the competition (McIvor, 2000), thus convention suggests that they should be defended and nurtured (i.e. kept
Historical Precedent Internal Policies Union Pressures
Additional / Modified “Card”
in-house). However, such convention appears to be designed for a stable and well-defined environment, which is far from a live environment where technologies, priorities, finances and demands are more volatile (Healy and Linder, 2004). Non-core functions have traditionally been labeled as prime candidates for outsourcing (Willcocks et al, 1997), but the clear identification of functions by such core/non-core classification remains a challenge as it is subject to an organization’s strategy, which can change quickly. In such classification, some organizations may perceive that nothing is sacristan and hence everything can be outsourced, while other organizations may perceive it as crucial to be retained in-house. Furthermore, distinguishing between core and non-core functions is a complex task (McIvor, 2000) and to some degree a subjective process. For example, the processing of tax records may be considered by some as a core function of the UK Inland Revenue, thus its outsourcing mega-deal with the Cap Gemini Ernst & Young consortium (Cullen, 2003) could be deemed as contradicting the convention that core functions should be retained in-house. In addition, studies have found no support for the argument that organizations retain strategic (i.e. core) functions and that such functions are indeed outsourced (Dibbern et al., 2004; McLellan, 1995; Nam, Rajagopalan, Rao, & Chaudhury, 1996). This challenges the concept of core competency and introduces the need to
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reconsider its relevancy in modern outsourcing decision-making practices. Hence, the HABIO framework considers core/non-core classification to be an optional process, which can be included or excluded as deemed appropriate by the organization. In instances where core/non-core classification is considered within the outsourcing decision, it is important to take into account both the (technical) specialist and (business) user perspectives in the analysis, due to the possibility of differences between individual perceptions (Earl, 1989). In order to reflect this, the core/non-core classification process is illustrated in the HABIO framework as spanning both the information (i.e. technical) and business (i.e. user) perspectives. The framework adopts a Weight and Score (W&S) technique that provides a systematic approach by which the outsourcing decision can be evaluated. This involves a three stage process outlined as follows: • • •
Assign weights to each of the three perspectives (to indicate priorities) Assign scores to each of the issues (according to specific assessment method) Determine weighted score which indicates propensity for successful outsourcing
Each perspective is first assigned a weight to indicate its overall priority in the outsourcing
IT Portfolio Management
decision, e.g. a higher weight assigned to the Business Perspective indicates that the hard and soft financial costing aspects are of greater emphasis. Each issue within the framework is then measured by its respective assessment method, involving either a grid or scale evaluation technique (as illustrated in Figure 4). This involves only the measurement of issues which are prevalent to the company under consideration, e.g. the issue of union pressure is not measured if considered to be inconsequential for a company’s outsourcing operations. The three perspectives of the HABIO Framework and their underlying issues are described in the following sections.
organizational Perspective The Organizational Perspective involves the consideration of organizational issues and political influences, which includes:
Internal Expertise One commonly cited risk associated with the use of outsourcing is the loss of internal expertise, which increases the level of dependence that an organization has on the external service provider(s). The organization thus risks being more locked into the service provider(s), and is therefore more vulnerable to business disruptions from service provision failures. As such, in outsourcing decisions, it is important for a company to take into account the degree of internal expertise which it intends to retain to ensure business continuity in the event of complications in the outsourcing arrangement. The need to retain internal expertise is particularly crucial in instances where outsourcing has been utilized in domains that relate to national security. At present, US Private Militaries Companies (PMCs), which take up 1/3 of the $87bn
Figure 4. HABIO framework - Grids and scales
Grid-based Scoring
HABIO Framework
Scale-based Scoring
Series of Grids and Scales
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budget earmarked for US military operations in the Middle East, are responsible for maintaining over 28% of all US weapon systems (Eyal, 2004; Traynor, 2003). This is a particularly worrying statistic as PMCs can legally withdraw their employees when faced with danger in a combat zone. Thus, without retaining some degree of internal expertise, the US military may be stranded in a combat zone with complex weapon systems that they no longer have the skill or knowledge to operate (Yeoman, 2003).
trade unions and employee representatives) and potential requirement for staff transfers across the organizations (e.g. from the company to the external service provider). Although seemingly an obvious consideration, confusion over TUPE regulations has resulted in a number of highprofile disputes, such as the cancelled contract between Atos and Lucent (Benett, 2002), and employer compensations of up to 13 weeks of pay as illustrated by the case of Sweetin v Coral Racing (2005).
Legislations
Historical Precedent
In each country, there are different legislations (e.g. US Sarbanes-Oxley Act 2002 and UK Data Protection Act 1998) that shape the operating environment for businesses, which in turn enforces a unique set of constraints on the outsourcing decision-making process. An example of national legislation that affects the outsourcing decision is the UK Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), which applies where there is a transfer of undertaking from one person to another. The purpose behind the legislation is to provide special protection for employees when the business in which they work is transferred to a new employer. This was revised in mid-2006 to include first generation outsourcing (i.e. 1st customer to 1st service provider), second generation outsourcing (i.e. 1st service provider to 2nd service provider) and contracting in (i.e. bringing the service back in-house). Under the legislation, employees involved in the undertaking automatically continue in their jobs with their existing terms and conditions, thus preserving continuity of employment. In addition, TUPE requires that recognized trade unions and elected employee representatives are informed and consulted about the potential transfer and its corresponding implications. As such, due to TUPE, the outsourcing decision-making process within the UK has to take into account additional time required for the consultation period (with
This relates to evolutionary game theory (Fisher, 1930) where players are able to observe the actions and subsequent outcomes of previous games, and base their future actions upon these observations. Actions which cumulate to positive outcomes are perceived to be better and hence more likely to be adopted, thus “past perception dictates future performance”. Similarly, the outsourcing decision can be influenced by an organization’s history (Dibbern et al., 2004), as decision-makers evaluate the consequences of past decisions and base their future decisions upon such knowledge. For example, if the previous outsourcing of the payroll function has resulted in cost savings and increased service quality, it is perceived to be successful (i.e. positive outcome), thus outsourcing of the payroll function is likely to continue and similar functions (e.g. human resources administration) may be considered for outsourcing.
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Internal Policies A company is a political coalition (March, 1962) and like any other human organization, there are some individuals who have more influence in key decisions than others (Dahl, 1958). The nature of a business organization endows the management level with higher authority (i.e. political influence) than others in the organizational strata and hence internal policies by the management level tend to
IT Portfolio Management
take precedent in decision processes. Initial case studies by Palvia (1995) and Goodstein Goodstein, Boeker, and Stephan (1996) have illustrated that different stakeholders have different motivations for and against outsourcing within an organization, and that power and politics play a role in the outsourcing decision. Interpretative results from multiple case studies of Lacity and Willcocks (1995) also concur that such political factors may influence the outsourcing decision. In some instances, managers were found to have manipulated or instrumentalised the benchmarking process in order to prove the efficiency of internal capabilities, expose exaggerated outsourcing claims or justify the need for new resources (Hirschheim and Lacity, 2000).
loss or organizational impact in the outsourcing process. Risk management strategies include risk avoidance, risk abatement (e.g. contingency planning), risk retention, risk transfer (e.g. corporate insurance or indemnification provisions) and risk allocation (e.g. joint venture). Risk is commonly defined as probability against impact. More specifically in the context of outsourcing, risk is defined as the probability of an undesirable outcome against the importance of potential loss (Aubert, Dussault, Patry, & Rivard, 1999).
Information Perspective The Information Perspective involves the consideration of technical issues, which includes:
Union Pressures
Quality of Service (QoS)
Union pressure is a factor commonly overlooked in outsourcing decision-making frameworks, which varies from country to country, depending on factors such as the percentage of unionization, industrial context and political clout. In certain countries such as the UK, the strength of trade unions is highly visible as demonstrated by their willingness to utilize strike action (Oates, 2004, Richardson, 2004) and legal action to achieve their objectives. The literature indicates that such trade unions have disrupted outsourcing attempts by a number of companies (McIvor, 2000), and that union pressure is considered one of the most significant hurdles to overcome among obstacles to effective outsourcing (Healy and Linder, 2004; Verhoef, 2005). Hence, this is a critical factor that could potentially undermine the entire outsourcing operation or/and result in severe financial impact (primarily from compensation claims) if left unaddressed.
This refers to the degree to which the service provided is fit for purpose, i.e. fitness for intended use. The International Organization for Standardization defines three components of quality of service, which are outlined as follows:
Risk Management This refers to the process of identifying, assessing and controlling risks that may result in financial
• •
•
Effectiveness relates to whether the service provided fulfils the requirements of its intended users Efficiency relates to whether the service provided allows its intended users to perform their required tasks effectively with a minimum of effort (i.e. without unnecessary effort) Satisfaction relates to whether the service provided meets the expectations of its intended users (i.e. the intended users are content with the service provision)
It is important to note that although managers claim rational economic benefits when making outsourcing decisions, they may in fact be bounded in their rationality by their perception of the quality experienced as the users (Fowler and Jeffs, 1998). As such, if an accurate measure of
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quality of service for an internal function were to be derived, its actual users should be involved in the evaluation process, rather than management representation alone. In some instances, organizations have preassessed potential service providers based on QoS practices and standards such as the IT Infrastructure Library (ITIL), Capability Maturity Model Integration (CMMI) model and Six Sigma. This is taken a step further in some organizations, which also evaluate QoS based on the number of service provider staff who are certified to relevant accreditations, such as those of the Information Systems Examinations Board (ISEB) which is administered by the British Computer Society (BCS). Some of these practices, standards and accreditations are outlined as follows: •
•
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Information Technology Infrastructure Library (ITIL) is widely adopted around the world as the de facto standard for best practices in IT service management. It is essentially a series of consistent documentation, which are used to aid in the implementation of a framework for IT service management. ITIL was revised in 2000 by the Office of Government Commerce (OGC) to operate in synergy with related standards such as BSI Management Overview (PD0005), BS15000-1 (Specification for Service Management) and BS15000-2 (Code of Practice for Service Management). It is divided into a series of sets, which can be classified under two main categories of Service Support and Service Delivery. Capability Maturity Model® Integration (CMMI) is a model which provides a structured view of process improvement across an organization. It seeks to integrate traditionally separate organizations, set process improvement goals and priorities, provide guidance for quality processes, and provide a yardstick for appraising current practices. CMMI defines six capability levels by which
•
an organization’s capability, relative to a particular process area, can be measured. It is similar to ISO 9001, which specifies an effective quality system for software development and maintenance, but differs in the sense that ISO 9001 specifies minimal acceptable quality levels while CMMI establishes a framework for measuring continuous process improvement. Six Sigma (6σ), developed by Motorola, is a rigorous and systematic data-driven methodology that utilizes management information and statistical analysis to measure and improve a company’s operational performance, practices and systems. The fundamental objective of the methodology is the implementation of measurementbased strategies, which focus on variation reduction and process improvement through Six Sigma improvement projects. This can be achieved through the use of two systems, known as the DMAIC (Define, Measure, Analyze, Improve, Control) and DMADV (Define, Measure, Analyze, Design, Verify) respectively.
Performance This refers to the standard of measurements which is applied in the evaluation of the activities being considered for outsourcing. There exists a myriad of metrics which can be used to track areas such as system response and to measure compliance with set performance standards. Each activity being considered for outsourcing should be benchmarked against the capabilities of all potential service providers of the activity. This will enable the organization to identify its relative performance for each activity along a number of selected measures (McIvor, 2000; Willcocks, Fitzgerald, & Lacity, 1996). Although the benchmarking process may be time consuming and expensive, it can provide useful detailed information to validate the relative capabilities of
IT Portfolio Management
the organization, and hence determine the need for outsourcing. With increasing emphasis by companies on establishing reliable, measurable and defined levels of performance from service providers, Service Level Agreements (SLAs) have gained wider acceptance as a primary governance tool for performance monitoring and service compliance management.
External Expertise This refers to the market availability of the required skill sets, i.e. the ability of external service provider(s) to supply the required skill sets at a price considered affordable by the company. For example, the company may require outsourced services provided by highly specialized medical experts, such as in the field of epilepsy surgery (Malmgren, 2003), which is limited in availability and hence potentially expensive. This lack of market availability and affordability of the required skill sets can thus constrain the decision-making process for outsourcing (Mueller, 2001).
business Perspective The Business Perspective involves the consideration of financial issues related to the outsourcing decision. This can be a major determinant of profitability, making a significant contribution to the financial health of the company (Yoon and Naadimuthu, 1994). Thus, financial feasibility is a key consideration in the decision-making process, and there is consequently a need for financial costing to allow the company to benchmark its cost position relative to potential service providers (i.e. comparison of costs associated with keeping activities in-house against outsourcing). This facilitates the identification of economic disparity between the internal and external service providers of the activities (McIvor, 2000), which in turn provides the financial justification required for the outsourcing decision. Distinction is made between two types of financial costing
(i.e. “soft” and “hard” financial analysis) which are outlined as follows: Soft Financial Analysis refers to financial analysis via the use of costing methods that utilize qualitative (i.e. relative) metrics, which provide measurement for intangible aspects such as research and development work. A candidate costing method for this is the Information Economics Scorecard (IES). The IES (Parker, Benson, & Trainor, 1998) is an investment justification tool which is based upon the concepts of value and two-domain analysis of business and technology factors (General Services Administration, 2003). It provides an evaluation of investment alternatives by identifying, evaluating, scoring and ranking potential positive and negative aspects for each investment. Hard Financial Analysis refers to financial analysis via the use of costing methods that utilize quantitative (i.e. absolute) metrics, which provide measurement for tangible aspects such as the product delivery work. A candidate costing method for this is Activity-Based Costing (ABC). The ABC method, developed by Cooper and Kaplan (1988), is based on the principle that overheads do not just occur, but that they are caused by activities, such as data processing, that “drive” the costs (Atrill and McLaney, 2004). It utilizes an approach for assigning overheads to products and computing product costs, which claims to provide activityoriented product cost information that is useful for decision-making purposes. ABC-based systems acknowledge that companies need to understand the factors that drive each major activity, their costs and how these activities relate to products. Such understanding is also crucial to the outsourcing decision-making process.
Analysis of “cards” (hAbIo grids and scales) Figure 5 provides an example relating to the Risk Management issue (one of six issues within the Organizational Perspective listed in Table 2),
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Figure 5. HABIO risk management Grid example Calculated Overall Risk
Modified by Authors
Strategy I: Tolerance
Strategy III: Mixed
Strategy IV: Monitoring
Strategy II: Prudence
Risk Management Grid (Source: Aubert et al., 1999)
within a financial services context, in which various potential risks have been plotted on the positioning grid. In this example, the company first begins by identifying a list of risks that it considers relevant to its organization, namely: • • • • • • •
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Transition costs - cost of switching service providers (e.g. internal to external) Contractual amendments - flexibility in updating contract for business changes Cost escalation - risk of opportunistic price hikes by service provider Management costs - cost of monitoring and supervising the outsourcing operation Disputes and litigations - risk of legal complications Loss of organizational competencies - risk of tacit knowledge loss Lock-in - risk of captive contract by monopolist service provider
•
Service debasement - risk of performance degradation in service provision
The company then categorizes identified risks into high and low impact on a scale of 1 to 5 (as illustrated in Table 3), based on assessment of how disruptive the respective risks are to its day-to-day operations (i.e. importance of potential loss). This is typically conducted via use of a risk assessment questionnaire which guides practitioners through a systematic review of risk factors (e.g. “how integrated is the outsourced IT function with business operations?”), although it can alternatively be assessed by comparison with risks of previous projects of a similar nature. In this example, the company is particularly concerned about the impact from lock-in, which would severely increase its reliance on a specific service provider (and its propriety technologies, definition of standards, etc), and any potential complications from likely contractual amendments (i.e.
IT Portfolio Management
Table 3. High and low impact risks
Table 4. High and low probability risks
flexibility of contract in accommodating business changes) given its dynamic and highly competitive operating environment. Subsequently, the company categorizes identified risks into high and low probability on a scale of 1 to 5 (as illustrated in Table 4) based on assessment of the likelihood of occurrence of the respective undesirable outcomes. Similarly, this is typically conducted via use of a risk assessment questionnaire which guides practitioners through a systematic review of risk factors, although it may also be useful for decision-makers to review historical statistics to identify recurring trends. In this example, the company has identified contractual amendments (given its dynamic and highly competitive operating environment) and transition costs (given that this is a recurring issue of concern in previous outsourcing initiatives) to be high probability risks. In such instances involving multiple plottings, the overall scoring for the Risk Management issue can be derived by two techniques: algorithmic
determination of the average of all individual risks or plotting of a combined risk factor representative of the overall perceived risk. The latter of which was utilized by the company, leading to the derivation of a medium-impact, medium-probability overall risk (after factoring in considerations such as the use of incentive-based contracts) as illustrated in Figure 5.
cAse study 1: uK retAIl grouP (uKrg) UKRG is a leading retail company with total sales of over £3.5bn. It is a subsidiary of an FTSE company that focuses on three key activities, namely general merchandise retailing, information and customer relationship management, and luxury goods retailing. As part of the company strategy, customers are provided with a multichannel approach to shopping: through its direct retail website, in store or via telephone to one of its call centers located around the UK.
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Figure 6. UKRG outsourcing evaluation using HABIO framework
Its Customer Services Division (CSD) is the business unit which manages all aspects of nonstore contact relating to this, such as handling orders over the telephone and contacting customers to arrange a delivery time for their items. The CSD is responsible for all of UKRG’s call centers, which are typically staffed entirely by internal human resources. However, due to the increasing volume of business during the months of July to December (typical “peak period”), additional call center agents were required to cope with the sharp rise in the number of customer calls. As the demand for such human resources was only seasonal, UKRG decided to outsource this overflow to an external service provider, rather than hiring new personnel, who would be otherwise underutilized during the later “lull period”. It was determined that the outsourcing arrangement would initially begin with a capacity of 25 “seats” (i.e. call center agent positions),
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which will then be incrementally ramped up to 100 “seats” by December. This would involve a full outsourced service, in which the service provider handles all aspects of the call centre operation, including facilities, equipment, staff, overheads and the necessary infrastructure. This type of outsourcing was deemed to be in line with the company’s overall strategic aim of achieving higher cost efficiency throughout the organization. The cost basis of UKRG’s call center operations was approximately $59m, of which $37m was attributed to direct people cost. It is anticipated that outsourcing will deliver costs savings of $4-6m in the long run, primarily from ensuring efficient staffing and cost reductions from provision of amenities and staff benefits (Sharp, Atkins, Ho, Kothari, & Paul, 2005). Figure 6 illustrates the executive summary view of UKRG’s outsourcing decision evaluated using the HABIO Framework, in which the overall weighted scores for only 3 vendors (anonymously
IT Portfolio Management
labeled “A”, “B”, and “C”) that qualified for the final selection phase are shown for brevity. In this instance, the weights have been assigned as 3/10 (30%), 3/10 (30%), and 4/10 (40%) respectively, indicating a higher emphasis on the Business Perspective which relates to financial costing. This is reflected in the tiered baseline of the diagram, which indicates a step-up in the Business Perspective sector in accordance with its higher weighting. In this particular case, although service provider (i.e., vendor) C was marginally prevailing in terms of weighted scores (69% compared to B’s 68%), UKRG opted instead to contract with service provider B due to concerns regarding the former’s corporate stability, having recently undergone ownership changes. This indicates that a single factor may have an overriding effect in the overall outsourcing decision, particularly in instances where the final scores are similar, which underscores the importance of flexibility (to accommodate such intricacies) in outsourcing decision-making frameworks. The UKRG case study presents an interesting paradox: although there was a higher emphasis on financial costs in the outsourcing decision, its evaluation suggests a contradiction, as the financial basis of the decision appears to be below baseline (i.e., internal operating costs) as illustrated in Figure 6. This is because the arrangement involves a fully outsourced service (including personnel, software and amenities), which results in a high start-up cost that UKRG anticipates to make cost savings on in the longer term. In general, the evaluation of UKRG’s outsourcing decision via the HABIO Framework yielded similar results and the same ordering as UKRG’s in-house system of rating various criteria on a scale of 1-3 (Vendor A, B, C : HABIO’s weighted scores of 59% / 68% / 69% as compared to UKRG’s ratings of 17 / 21 / 23), which illustrates its mappability to UKRG’s decision system. In this instance, the application of the HABIO Framework is particularly advantageous to UKRG as it allows for adaptability at any stage of the selection process, e.g.,
the Risk Management issue can be decomposed into sub-issues to accommodate consideration for corporate stability.
cAse study 2: InternAtIonAl FInAncIAl InstItutIon (IFc) IFC is a leading financial institution which operates in the areas of asset management, banking and securities, transaction banking and private wealth management, with assets exceeding $1000bn in total. The company has a significant private and business banking franchise globally, and a prominent position in international foreign exchange along with fixed income and equities trading. In order to address the needs of its wide customer base, IFC offers a broad range of banking and financial services. Private clients are provided with an all-round service (including asset management, account-keeping and securities investment advisory) while corporate clients are provided with the full assortment of services of an international corporate and investment bank. This includes payments processing, advisory relating to Mergers and Acquisitions (M&As) and support with Initial Public Offerings (IPOs). In order to provide opportunities for its staff to move up the value chain (i.e. to positions of more strategic value) and achieve higher cost-efficiency, IFC decided to evaluate the use of outsourcing. In particular, the company was keen to explore the potential of Remote Infrastructure Management (RIM), which is essentially an extension of Infrastructure Management Services (IMS). IMS refers to the day-to-day management of the IT needs of an organization, such as managing network operations, desk and server management (e.g. configuration, updates and maintenance), security requirements and a 24x7 technical helpdesk. RIM differs from IMS in the sense that the management of infrastructure is conducted remotely, typically in a lower cost country such
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as India, thereby allowing for labor cost arbitrage (Ho, Atkins, Prince, & Sharp, 2006). Figure 7 illustrates the executive summary view of IFC’s outsourcing decision evaluated using the HABIO Framework, in which the overall weighted scores for only 2 vendors (anonymously labeled “X” and “Y”) that qualified for the final selection phase are shown for brevity. In this instance, the weights have been assigned as 3/10 (30%), 3/10 (30%), and 4/10 (40%) respectively indicating a higher emphasis on the Business Perspective which relates to financial costing. This is reflected in the tiered baseline of the diagram, which indicates a step-up in the Business Perspective sector in accordance with its higher weighting. In this case, the weighted scores are more clearly differentiated, indicating that Vendor Y is the preferred choice at 87% compared to Vendor X at 74%. This is because of the higher weighting of the Business Perspective (incorporating financial costing) which unequivocally
distinguishes Vendor Y due to its cost basis. This typifies that financial cost is still a major factor in outsourcing decision-making, although recent literature indicates that companies are progressively more aware and hence more inclined to consider strategic implications such as knowledge retention (Ho et al., 2006). In general, the evaluation of IFC’s outsourcing decision via the HABIO Framework yielded similar results and the same ordering as IFC’s in-house system of rating various criteria on a scale of 0-4 (Vendor X, Y : HABIO’s weighted scores of 74% / 87% as compared to IFC’s ratings of 27 / 32), which illustrates its mappability to IFC’s decision system. In this instance, the key benefit of the HABIO Framework is its concise executive summary format that facilitates quick visual review and intuitive analysis, which is advantageous to IFC’s directorial level decisionmakers who are often time-constrained by hectic schedules. In addition, electronic interpretation
Figure 7. IFC outsourcing evaluation using HABIO framework
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of the “cards” in the HABIO Framework makes it amenable for comparing initial framework assessments against post-implementation performance evaluations.
web-bAsed dAtA collAtIon And AnAlysIs InterFAce Figure 8 illustrates conceptual views of a webbased interface that is currently being developed for integration with the HABIO Framework, which will automate data import (e.g. performance metrics and QoS measurements) from varying service management software (e.g. BMC Remedy), in turn minimizing manual collation efforts. The webbased nature of the system will facilitate accessibility across locations (i.e. geographically diverse decision-makers) and promote data consistency by serving as a central point of interaction. The system will involve a “wizard” type of interface, which allows users to easily add and remove issues to be considered under each perspec-
tive as appropriate to their specific organizational context. This accentuates the flexibility provided by the framework, thereby facilitating adaptiveness in live environments where technologies, priorities, finances and demands are ever-changing. Besides providing for dynamic customizations of the framework “on the fly”, the web-based system is intended to include visualization algorithms, which will assist in the weighting process. This will be potentially extended by the incorporation of software agents to provide intelligent analysis and expert recommendations in outsourcing decision-making processes.
conclusIon Outsourcing has grown considerably since Eastman-Kodak’s mega-deal in 1989, where it was perceived to be first formalized as a business strategy. This meteoric rise is reflected in various media reports and analyst statistics, which also highlight its increasing use as a mainstream
Figure 8. Web-based data collation and analysis system (Conceptual Views)
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management practice. Facilitated by advances in technology and enablers of virtual teamwork, global sourcing of functions and applications is now a commonplace phenomenon, as selection priorities shift towards best-skilled rather than physical proximity. In addition to the often quoted benefit of significant cost savings, such outsourcing practices also offer altruistic opportunities for knowledge sharing (e.g. CAT/MRI scan analysis) and provision of round-the-clock support (e.g. Enterprise Software Systems such as SAP/R3), which has further increased the appeal of outsourcing, and consequently its uptake. However, despite such realizable benefits, outsourcing is not without its risks, particularly in instances where it has not been considered as a strategic decision. This increasing challenge to achieve successful outsourcing is also reflected in media reports and analyst statistics, which indicate that up to 50% of outsourcing deals run into complications and as much as $7.3bn was wasted by European companies on poorly managed outsourcing contracts. Consequently, there is an increased focus on the IT portfolio management process by which outsourcing and other IT projects are assessed, which should involve a systematic and objective approach, such as the 7-stage planning model. There are a number of decision support tools traditionally utilized for IT Portfolio Management, ranging from grid-based approaches such as the Application Portfolio Matrix and SWOT analysis to management models such as the Value Chain Analysis and Porter’s 5 Forces. However, with its increasingly diverse nature and expanding domains of application, the assessment of outsourcing as an option for the IT Portfolio requires refined tools and techniques, which has been addressed in part by various frameworks developed by sourcing theorists and practitioners such as Willcocks (1997). Analysis of such frameworks identified from the literature indicates a potential misalignment between theory and practice, as majority of the frameworks do not include quantitative measures,
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performance benchmarking and clear methods of financial costing, which is contradictory given that service improvements and cost savings are often quoted as the top drivers of outsourcing. Consequently, the HABIO Framework was developed following professional insights from industrial collaborators and theoretical accounts from the literature. The framework proposes a tri-perspective approach, which advocates the logical grouping of decision factors (i.e. issues) under the Business Perspective, Information Perspective and Organizational Perspective by adopting a “card/deck” analogy. This encapsulates the holistic concept which provides for the customizability and adaptability required to address heterogeneous outsourcing decisions in various context and industries. Each issue within the framework is assessed using a grid or scale-based method, which is weight-adjusted according to the company’s defined priorities, and subsequently summated to provide an overall indicator value that represents its propensity for successful outsourcing. This chapter provided an overview of the framework’s application to two industrial case studies, involving the application of Business Process Outsourcing (BPO) to call centre operations of a retail group and Information Technology Outsourcing (ITO) to infrastructure management of a financial institution. Evaluation of these outsourcing decisions via the HABIO Framework produced similar results to assessment using the companies’ distinct sets of in-house decision criteria, indicating the framework’s versatility and mappability to varying context and industry. In particular, decision-makers have noted the framework’s intuitiveness in application, and its executive summary format which allows them to quickly identify areas of concern. The current development of a web-based interface for automated data collation and issue analysis makes the HABIO Framework amendable for comparing initial assessments against post-implementation results, thereby widening
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its coverage of the IT Portfolio Planning Process (as illustrated in Figure 9) to include Performance Monitoring. This can be extended in future by the use of software agents to provide intelligent analysis and expert recommendations in the outsourcing decision process. There appears to be a lack of decision support tools which span the entire advocated IT Portfolio Planning Process, indicating a potential disparity between theory and practice. Traditional tools such as the Application Portfolio Matrix and SWOT analysis (as indicated from the literature) provide excellent high level analysis of the Prepare IT Strategy and Resource Planning stages, but are limited in terms of coverage of the Requirements Analysis stage, where operational level requirements and metrics are identified. In the outsourcing context, framework approaches (e.g. HABIO, Willcocks and McIvor) address this shortcoming by supporting the definition of service performance and quality of service
criteria, but do not extend themselves into the later stages of Issue ITT, Contract Negotiation and Implementation. Organizations, on the other hand, appear to be adopting a procurement approach to outsourcing, involving a more short-term “buying” focus which prioritizes the tactical selection of vendors over the strategic selection of candidate outsourcing functions/applications (as advocated in the Prepare IT Strategy stage). In such approaches, the function/ application to be outsourced is tenuously selected prior to the decision process, which instead focuses on the evaluation and subsequent identification of an ideal service provider by means of a weight and score or scorecard method. This is reflected in both case studies (i.e. UKRG and IFC), where the companies have initiated the outsourcing decision from the Issue Invitation To Tender (ITT) stage, thereby bypassing the earlier stages of the advocated IT Portfolio Planning model, which seek to analyze the high level needs of the
Figure 9. Decision support tool use in the IT portfolio planning process
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organization and align its IT portfolio (including the use of outsourcing) with its overall business objectives. As such, there is a need for an extended framework to provide guidance throughout the IT Portfolio Planning Process to help align advocated portfolio management principles with actual business practices. This could be potentially established by expanding an existing framework or by an amalgamation of existing decision support tools and techniques, and will benefit greatly from the incorporation of ITIL best practices.
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This work was previously published in Strategic Information Technology and Portfolio Management, edited by A. Tan and P. Theodorou, pp. 79-106, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.13
A Collaborative Learning Environment to Support Distance Students in Developing Nations Michelle Dottore San Diego State University, USA Steve Spencer San Diego State University, USA
AbstrAct In developing nations, information and communications technologies (ICT) offer dramatic opportunities for economic and social transformation. Such nations hope to jump-start economies and actualize human potential by providing ICTbased education and training to individuals in remote areas. Educational institutions seeking to outsource programs internationally face complex cultural, political and technological considerations not found within traditional student populations. Virtual learning environments (VLEs) are tools that provide electronic access to campus services. However, distance educators are challenged to develop VLEs that also support critical social elements of student life. The San Diego State University Interwork Institute is partnering with
community colleges in the Western Pacific to offer degrees using a unique educational model. Through partnership and technology, this model blends virtual technologies with site-based facilitators and services, enabling Pacific Islanders to access advanced degrees without having to travel abroad.
IntroductIon At the threshold of the 21st century, the transition from the Industrial to the Information Age is well underway. The explosion of new and sophisticated information and communications technologies (ICT) is causing a gradual, yet fundamental shift in social and economic systems worldwide (ILO, 2001; Knight, 2002). The possibility of margin-
A Collaborative Learning Environment to Support Distance Students in Developing Nations
alization and scarcity is real for those who lack the equipment or skills to participate in this new electronic frontier. Not wishing to be excluded, technologically underdeveloped nations are identifying resources to build infrastructure and equip residents with the skills needed to access ICT’s vast potential. Many have drafted national plans to implement widespread education and training at the secondary and tertiary levels (Palau MOE, 1999; UNESCO, 2001). Conversely, governments and universities are responding by ramping up the delivery of educational programs internationally. Yet, many educational organizations lack systems and strategies to support international students, who present complex cultural, political and technological issues not typically found within traditional student populations. Reputable distance education organizations must think beyond mere delivery of quality content. An exemplary online degree program not only offers comprehensive and targeted student support services, but also provides students with opportunities for social connectedness through access to a rich academic community. VLEs are tools that provide electronic access to some or all aspects of campus life, including libraries, program advisement and financial aid. However, distance educators are challenged to develop VLEs that also foster critical social elements of student life. Educational organizations are applying emerging technologies to deliver high-quality instructional programs to developing nations. In this chapter, we will describe trends and critical factors affecting these efforts and present a model being implemented by the Interwork Institute at San Diego State University, in partnership with community colleges in the Western Pacific. Through partnership and technology, this model blends virtual technologies with site-based support and services, enabling Pacific Islanders to access advanced degrees without having to travel abroad. At the same time, it allows regional 2-year colleges to build capacity to meet critical
educational challenges that will position their citizens with the skills and aptitudes needed in the 21st century.
new educAtIonAl oPPortunItIes For develoPIng nAtIons ICT has impacted societies worldwide, touching all but the furthest reaches of civilization. With the worlds of work and education converging, life-long learning will become a fundamental aspect of job security and employability in the digital age. Meanwhile, access to current and sophisticated education and training resources will provide a competitive advantage to employees, businesses and governments (ILO, 2001; Quibria, Ahmed, Tschang, & Reyes-Macasaquit, 2002). With the half-life of the latest technical innovations currently at 1 to 2 years, and quickly shrinking to just a few months (Kurzweil, 2005), technological fluency is a constantly moving target. Critical skill sets will be characterized by the ability to transform existing knowledge into new knowledge. In remote and developing nations, ICT offers dramatic opportunities for economic and social transformation. These nations hope to jump-start economies and actualize human potential by leveraging ICT to increase workforce skills and knowledge (Bloom, 2001; Quibria et al., 2002; Singh 2001; Tellei, 2004). Global policymakers concur that investment in education for third-world and developing nations is key to achieving economic growth and access to the global market. “Investment in basic and higher education is the most critical policy tool available to governments [who wish] to reap the benefits of ICT” (ILO, 2001, p. 323). Consequently, these nations are taking action to establish a solid education platform by seeking to import ICT-based degrees and programs. To access secondary and tertiary educational programs, they are exploring partnerships with foreign universities who offer
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distance education internationally (Knight, 2002; Rumble, 2000a; UNESCO, 2001). Governments, private industry and universities are taking keen notice of the vast market potential in distance education, and are quickly ramping up delivery of programs to learners in remote geographic locations (Dolence & Norris, 1998; Rumble 2000a; Tait, 2003). The organization for General Agreement on Trade in Services (GATS) and the World Trade Organization (WTO) have developed initiatives for outsourcing education to developing nations, much to the concern of many who feel that these policies have been prematurely developed without proper research or enough stakeholder input. At risk are inappropriate or fiscally unsound agreements for implementing educational solutions to target populations within developing nations (Currie, 2001; Knight, 2002; UNESCO, 2005). In response to the GATS initiative and international trends in general, the United Nations Educational, Scientific and Cultural Organization (UNESCO), in collaboration with the Organization for Economic Cooperation and Development (OECD), recently held a Global Forum on International Quality Assurance, Accreditation and Recognition of Qualifications. Observing that trade in higher education is a billion-dollar business, and the demand for higher education internationally is growing into a very lucrative market, the forum’s objective was to respond to emerging ethical challenges and dilemmas as a result of the globalization of higher education (UNESCO, 2001). Based on outcomes of the forum, UNESCO and OECD are now drafting a set of guidelines on “Quality provision in cross-border education” (UNESCO, 2005). The draft addresses issues surrounding transnational partnerships, local capacity building, relevance of curriculum, technical infrastructure and accessibility of education for all sectors of underdeveloped populations. From these efforts will evolve a set of recommendations to educational institutions and to nations for delivering or receiving programs via distance.
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reinventing education to Maintain viability Some futurists are predicting a dramatic shift of educational responsibility to the private sector (Sokolowski, 1999). Students will be turning to the university as only one of many resources available to meet their needs, forcing universities to reinvent their role in society (Dolence & Norris, 1998). It is only through rapid and dramatic transformation that universities and educational institutions will be able to keep abreast of sophisticated learning technologies and maintain market share. Grasping the implications of this suddenly very competitive environment, many universities are searching for ways to retain life-long learners and to effectively position themselves with uniquely desirable degrees, courses and training (Gibbons, 2001; Howell, Williams,& Lindsay, 2003; Rumble, 2000b). Governments, too, are looking at educational outsourcing as an important means for continued economic development. Education is now Australia’s third-largest service export (DEST, 2004). With a fiercely guarded reputation for providing quality higher education internationally, Australia is undergoing a national inquiry to refine its vision and framework for international educational programs, as evidenced in its Education for Students Overseas (ESOS) Act passed in 2000. A recent evaluation of the ESOS legislation recommends further clarification of legislative objectives, including implementing systems and policies to assure Australia’s continued outstanding reputation as an international provider of educational programs (DEST, 2005). In response to education’s sudden popularity as an internationally traded commodity (Altbach, 2002), accrediting bodies, such as the Western Association of Schools and Colleges, (WASC), the Council for Higher Education Accreditation (CHEA) in Washington, DC and the Council of Europe (COE) have developed policies and best practices for distance and international education programs. These policies assert that in addition to
A Collaborative Learning Environment to Support Distance Students in Developing Nations
rigorous curriculum and engaging learning experiences, quality distance education programs must be in alignment with an institution’s mission and policies, and must demonstrate a commitment for support. To achieve accreditation from these agencies, a new distance education program undergoes intense scrutiny. Accreditation requirements cover the gamut of academic standards, educational best practices and student support services, ensuring that distance students receive the same quality education as that of campus-based programs. These agencies also explicitly stress the need for systems that encourage student interaction and the establishment of learning communities. In this new market, students are becoming savvy shoppers for customized educational programs that best suit their needs and lifestyle (Howell et al., 2003). Choice points include institutional reputation; quality and relevance of instruction; flexibility in schedules; and robust, easy-to-access student support systems (Tait, 2003). Another important trend is the shift in consumer interest from availability of individualized courses toward full online degree programs. A recent study indicates that programs offering full degrees have a 4:1 success rate over programs that only provide courses without a degree outcome (Abel, 2005).
Distance Students Need Comprehensive Support As previously mentioned, with the mobilization of distance education worldwide, concerns are being raised about academic quality and value. Problematic areas include danger of student isolation; curriculum becoming a packaged good; and “globalization of content, with reduction of cultural diversity and richness” (Rumble, 2000b, p. 2). It has been observed that retention rates for distance programs are typically 10% to 20% lower than campus-based programs (Howell et al., 2003; Miller & Elbert, 2003). Research indicates that many students are dropping through the cracks
for a variety of reasons, including personal crises, non-resolution of technical issues and difficulty with admissions and bureaucratic processes (Abel, 2005). The shift from student support on a course-bycourse basis to comprehensive support throughout an entire online degree creates a new dilemma for distance education institutions—that of tracking and guiding a student throughout a program of study, from start to finish. Best practices outline many critical services that should be made available to students in an online educational program. The list is long, but includes information for prospective students, online registration, admissions assistance, financial aid, library resources, academic advisement, career services, support for students with disabilities, personal counseling, tutoring, and technical training and support (Krauth & Cargajal, 1999; Shea & Armitage, 2003). Finally, almost all best-practice guidelines stress the need for services that promote a sense of community, inside and outside the virtual classroom (Chambers, 2004; LaPadula, 2003; Levy, 2003; Ludwig-Hardman & Dunlap 2003; Tait; 2003; Wright, 2001). Student services are an integral part of any college or university experience. They serve to decrease attrition, ease transition into college and contribute to academic success (LaPadula, 2003). Traditional campus-based student support models offer a wide array of services. However, most campuses do not offer support mechanisms that allow provision of services to distance students. Traditional campus-based student service centers are specialized and autonomous, with little interaction or sharing of information between other service centers. Organizational stove-piping obstructs a holistic approach to monitoring and supporting distance students across an academic life cycle, particularly for students with unique needs in remote regions. Interestingly, universities are finding that alongside distance education students, the new, technically savvy “Net Generation” college student is demanding a “One Stop”
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approach that allows students to access multiple services via single online portal (LaPadula, 2003; Oblinger & Oblinger 2005). With students in the more powerful consumer role, universities will need to find better ways to respond to the needs and desires of the non-traditional student. Lack of adequate student services can be discouraging and isolating for the distance student (LaPadula, 2003; Tait, 2003). Even if universities were to allocate resources and staff specifically to distance programs, it is not easy to convert existing site-based services into an electronic format. Libraries, for example, have devoted extensive time and resources to making reference and academic material available online. So too, with special education services—the creation of virtual support systems for students with disabilities has involved several years of concentrated effort.
Unbundling Traditional Roles Starting from the ground up, distance education organizations are “unbundling” traditional university functions and roles, including that of the instructor, and redefining what it means to teach and support learners at a distance (Levy, 2003; Tait, 2003). With the tremendous logistical and technical effort required to deploy an online course, instructors are no longer expected to run the show alone. Instead, technical and administrative support teams assist with coordination and delivery, while instructors are tasked to focus on providing meaningful content and instructional activities, and to take responsibility for the achievement of learning outcomes. Instructors may be assisted by facilitators, who are typically assigned small groups of students to support throughout a course. Facilitators’ roles may also be expanded to that of academic advisor, tutor or learning coach, providing a consistent and familiar point of connection to students throughout an academic lifecycle (Riffee, 2003; Rumble, 2000; Tait, 2003). With flexible start dates, unique costing models and an atypical student base, distance
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education programs rarely fit into the existing university structure. Distance administrative support personnel take on much broader roles than their campus-based equivalents. Distance staff must often provide individualized guidance through the academic bureaucracy, closely monitoring the receipt of records, entrance exams and payment of fees. Often, administrative personnel in distance education centers have special arrangements with admissions, financial aid and records offices on campus that enable them to provide services to students that fall outside of the norm. These administrative personnel also work with libraries and campus bookstores to allow distance students access to services outside of the regular session timetable.
Connectedness through a Virtual Learning Environment Distance education’s Achilles’ heel can be found within the isolation that students feel when interactivity and collaborative activities are absent from the curriculum, where courses become little more than independent study with low success rates and high learner dissatisfaction (Ludwig-Hardman & Dunlap, 2003; Tait, 2002). In fact, 90% of the student population attending Open University, United Kingdom (UK), report that they want interaction with other students (Tait, 2003). Over the years, distance education programs have become adept at incorporating interactivity within a course through group activities, class-wide dialog and managed interaction between participants. However, the model fails at the programmatic level, outside of the virtual classroom. The resulting sense of isolation is linked to attrition, lower achievement levels, reduced satisfaction with the learning experience and a disconnectedness with the university (Krauth & Carbajal, 1999; LudwigHardman & Dunlap, 2003). It is widely agreed that the cumulative effect of a college degree goes beyond that of becoming knowledgeable in a particular field of study.
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Rather, the “College Experience” treasured by most graduates conjures up a myriad of social, emotional and cognitive events that, over time, culminate into a transformational rite of passage. The next question, then, is how to deliver a rich and meaningful academic experience in an online environment? The answer provided by distance education research almost always points to the interaction with classmates, instructors, advisors and educational coordinators to create a sense of mutual support and growth, as an academic community: Our communities today are formed around issues of identity and shared values; they are not placebased. There is a dynamic whole that emerges when a group of people share common practices, are interdependent, make decisions jointly, identify themselves with something larger than the sum of their individual relationships and make long-term commitment to well-being (their own, one another’s and the group’s). (Palloff & Pratt, 1999, p. 26) The challenge to distance educators is that of providing a comprehensive student services network while simultaneously forging an academic learning community using ICT-based tools and strategies. Dillenbourg (2000) describes a VLE as an information space that is “populated” and where educational interactions occur. VLEs are inherently social, and use the word “place” to emphasize that notion. As in the real world, participants are able to modify virtual “rooms” to serve their unique needs and interests. Dillenbourg suggests that the VLE allows members to co-construct the virtual space, extending the level of participation from that of merely being active to the role of actor. In these early stages, it is important to note that most virtual environments overlap with physical environments. Electronic environments are still in the experimental stages, with several university VLEs currently providing a narrow range of support services and
interactive experiences geared to specific student populations. Ideally, VLEs provide a single point of entry for students, faculty and staff to access courses, student services and a thriving academic community. Online learning communities are products of the skillful blending of technology and pedagogy (Dillenbourg, 2000). To proliferate, they require nurturing and motivated effort on the part of learners and instructors. They evolve as a course progresses but, too often dissipate with the close of the course and assignment of the grade. Sometimes the learning community reconvenes, through collaborative activities in courses further down the road. However, in many online programs, there is no vehicle for sustained community interaction. A conscious effort must be made to put structures in place that further the dialog and social exchange. Despite the sparseness of information conveyed through electronic communication tools, relationship and community can thrive in an online environment. If tools and spaces are made available within a VLE, camaraderie and dialog can continue to occur outside of the classroom, allowing students to form lasting bonds, similar to those found among college students on any campus. If we are seeking an engaged and thriving academic community that centers around a program and an institution, the electronic learning environment must not only simulate campus-based support services, but also integrate engaging activities that build and sustain social and collaborative interests. Lesser, Fontaine and Slusher (2000) add four key challenges in building virtual communities; the technical, social, management and personal challenge: 1.
2.
The technical challenge: Design human interfaces that not only make information available, but help community members think together; Social challenge: Develop communities that share knowledge and still maintain
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3.
4.
enough diversity of thought to encourage differences; Management challenge: Create a support network that allows members to accomplish intended activities easily without technical or participant obstruction; and Personal challenge: Maintain openness to the ideas of others and a thirst for new knowledge. (p. 34)
Cognizant educational institutions recognize that even student support systems developed for “traditional students” must become fluid and dynamic service portals to meet the needs and expectations of online and “Net Generation” students. The VLE is designed to extend beyond the walls of the virtual classroom and into the university community. It is tasked with the goal of providing both managed and spontaneous opportunities for student support, learning and academic community building. Although VLEs can help colleges improve student support systems, implementation of a VLE within most universities will require organizational culture change and re-engineering of business processes within colleges (JISC, 2003).
regional Implications to education by distance Gibbons defines the term “globalization” as the adaptation and marketing of existing solutions to local environments (2001, p. 5). When exporting education to foreign countries, institutions must seek to harmonize programs against regional standards and policies so they may best meet the needs of foreign populations. Alignment efforts often involve activities such as cross articulation of courses, identification of cross-border financial aid, reevaluation of degrees by accrediting bodies such as WASC or CHEA, and clearance by Ministries of Education or local educational agencies (McBurnie & Ziguras, 2001; UNESCO, 2005). Finesse and expertise is required to “hybridize”
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academic standards and learning outcomes that integrate and support the cultural diversity and richness of the populations served. Without losing focus on learning outcomes and pedagogical rigor, curriculum and instruction should address a variety of cultural, environmental and technical aspects at the local level. Increasing diversity requires increased learner support (McCracken, 2004). Prior to program design and implementation, cultural, physical and technical aspects of the local environment should be assessed to ensure the use of appropriate learning solutions. For example, in some non-Western cultures, ancient learning traditions were based in oral and real-world activities such as storytelling and apprenticeship (Rechebei & McPhetres, 1997; Tellei, 2004). For these cultures, curriculum that is text laden may be less effective than the use of graphics, visual and audio material alongside field-based activities. Similarly, activities involving egalitarian class-wide discussions may be a new experience for these populations and, therefore, extremely challenging. The situation may be exacerbated when English is a second language (ESL). Interestingly, distance tools seem well suited to shy, inhibited or ESL individuals, allowing them to “post” or “submit” ideas only after they have had time to formulate and edit them. In a final example, group work is another area that may push against traditional boundaries, with members of varying clans and ranks expected to forgo cultural norms to complete project activities as a team. Sensitivity to these and other cultural issues during the design and implementation phases helps to ensure successful learning outcomes. When considering local educational facilities, assessment should include classroom size and availability as well as local access to textbooks, research materials, and libraries. It is also important to identify learning spaces and community resources that support authentic activities, including fieldwork and practicum. Evaluators should make determinations regarding computer
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labs, Internet availability and speed (throughout various times of day and seasons), configuration of local servers, and student access to computers at home or on the job. In developing nations, shortwave radio is also a viable means for delivering education. In ICT-based programs, even evaluation and identification of e-mail providers can become an important activity. Students with no personal computer do better with Web-based e-mail accounts that allow them to access their e-mail from any Internet-ready machine. In low Internet-bandwidth areas, e-mail accounts that offer minimal graphic interfaces, such as Gmail, are preferable to high-graphic interfaces, such as Yahoo or Hotmail. Perhaps most critical to the success of online programs offered to international students is the implementation of site-based facilitators. Best practices indicate that providing students with facilitators or mentors helps ensure successful completion rates (Riffee, 2003; Tait, 2003). In a study of high-quality, international educational institutions, Roberts (2004) identifies local and individualized student support systems as resulting in improved completion rates. The study recommends the presence of local facilities and resources, academic advisement and mentoring, and allowance for learner input in decisions regarding program design and implementation. The study also concluded that international educational programs should find ways to encourage participation by students, facilitators and instructors in a community of learning.
Case Study: VLEs to Support Pacific Partnerships In the emerging knowledge-based economy, there is a causal link between education and economic growth (ILO, 2001). Developing nations have the opportunity to “leapfrog” traditional phases of economic development by leveraging ICT. However, without access to adequate educational resources, workforces will not be able to
take advantage of ICT potential. As part of their economic growth plan for the new millennium, entities in the Western Pacific region are seeking ways to implement widespread access to 4-year and graduate degree programs (Palau MOE, 1999; UNESCO, 2000). In the Federated States of Micronesia (FSM) alone, there are approximately 1,600 teachers, about 30% of whom are educated at the high school level, 40% holding AA or AS degrees, 20% holding a third-year teacher certificate and only 10% with a bachelor of arts (BA) (ADB, 1998). Most teachers serving in FSM have had no formal teacher training courses, with an overall low literacy rate in FSM directly related to teachers lacking the skills needed to provide adequate instruction. The population rate of children in FSM is increasing, while at the same time, formally educated teachers are leaving FSM for more profitable jobs on the U.S. mainland and other countries. These two factors put the projected need of new teachers at 160 annually. Yet the college system within FSM is able to graduate a significantly lower rate of new teachers per year with an AA degree. Currently, there is no comprehensive training program for incumbent teachers. As a case in point, FSM demonstrates the need throughout the Western Pacific to ramp up new teacher education programs in the region that can realistically respond to the urgent need for qualified teachers. FSM and other Pacific entities have elevated teacher education to a top priority, and have developed national policies to support this effort (Palau MOE, 1999; UNESCO, 2005). Unfortunately, on island, existing 2-year colleges are not able to respond to the magnitude of need for BA-level training. The potential for exciting new opportunities to meet current and future educational needs of remote and developing nations can be found within close partnerships between local community colleges and external 4-year colleges. Over the past 25 years, the Interwork Institute at San Diego State University (SDSU) has provided
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education and training to the emerging nations of the Western Pacific. Programs and services have been delivered in American Samoa, FSM, Republic of the Marshall Islands, Guam, Commonwealth of the Northern Marianas Islands and the Republic of Palau. Inherent to its mission and vision, SDSU Interwork Institute has forged several partnerships with community colleges and other government agencies in the Pacific region that allow bachelor’s- and master’s-level programs to be delivered locally, on island. This regional collaborative model for education is strategically different than the student-driven model, in which individuals seeking an education must work with foreign universities to gain admittance and matriculate through a program—essentially conducting all college activities without the benefit of local support services. For international students, the admissions process alone can be formidable. The result is that many potentially good students drop out even before coming under the radar of university administrative staff. In direct contrast, this regional collaborative model offers a comprehensive program negotiated in partnership with a local community college or Ministry of Education. The model allows highquality curriculum of a well-developed distance education program to be effectively implemented in rural Pacific island settings, and enables degree programs to be offered in partnership with local 2-year colleges. The partnerships are designed to leverage the strengths of each institution, to offer comprehensive student support jointly. Marketing, recruitment, advisement, financial aid and other logistics are predominately handled through the local educational institution. SDSU focuses on delivering high-quality, upper-division and graduate-level courses via distance as well as providing sophisticated educational resource tools to support the academic community. Students participating in the program have local access to Internet-ready computer labs and technical support, a community college library and classrooms.
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Research-quality materials, professional journals and reading resources are provided through the SDSU university library portal, alongside other electronic and non-electronic university support systems. This joint partnership approach minimizes fragmentation and confusion for students by providing knowledgeable support staff on island, who are usually faculty members and employees of the local college. Students identify with being affiliated with the local college while attending a well-known university. External resources provided by SDSU are seen as complementing local resources and building local capacity, rather than as goods offered by an outsider who is trying to sell something that might not fit local needs. This collaborative model has become a successful means for a 2-year community college within a developing nation to be able to “broker” bachelor’s- and master’s-degree programs without having to become a 4-year educational institution. The potential for this model is significant, as most of these developing entities do not have the resources to support an advanced degree offering. The win-win situation allows local community colleges in rural/remote Pacific island settings to present opportunities for students to fully participate in advanced degree programs without having to leave the island. Local colleges then gain further credibility and recognition by providing the means to meet their own critical national educational goals. For this type of model to work effectively, all members of the collaborative must have a sense of trust and mutual respect. There are many hurdles and “square pegs” to be fit into “round holes,” requiring a strong commitment by all parties in order to reach a successful conclusion.
Interwork Student Information System-VLE: Tools and Techniques To address student needs in the Pacific at both the course and programmatic level, SDSU Interwork Institute is implementing a VLE that combines
A Collaborative Learning Environment to Support Distance Students in Developing Nations
ICT and face-to-face activities in a blended format. The blending of technology with live human interaction at a local level firmly positions the Pacific community colleges or Ministries of Education as a central figure in the degree offering and as advisor for regional and cultural aspects of the program. The Interwork Student Information System (ISIS) VLE integrates social spaces, online grade books, electronic portfolios and other campus support mechanisms to provide an academic network for students in multiple time zones and throughout a degree lifecycle. The ISISVLE is composed of a suite of ICT applications that enables students and instructional staff to access information and services using an Internet Web browser. Interwork Institute has been developing and testing the ISIS-VLE system over the past year. The applications and tools at this point are still somewhat disconnected. In the coming year, SDSU Interwork Institute will be integrating the individual tools into a single platform. It is important to note that ISIS-VLE is designed to be “bandwidth friendly” and fully accessible for students with disabilities. We have several students within and outside of the U.S. who are using dial-up access, or are limited in bandwidth at their campus or on island. We also have several students who use screen readers or require captioning or alternative forms of multimedia and materials. It is imperative to us that students are able to fully participate in a robust and engaging learning experience through unobstructed access to content, faculty, staff and each other.
the IsIs-vle Administrative support tool A technology tool that sustains an academic program requires seamless and integrated information management. The ability to track a student from initial contact through application, coursework, graduation, and alumni phases contributes to effective and individualized support. Prior to implementation of ISIS-VLE, the incredible de-
tail required to enroll and manage our distance students caused duplication of effort, loss of historical details, and confusion for students and staff. The new ISIS-VLE consolidates information within a single system, enabling administrative personnel to determine the status of an individual immediately (see Figure 1). Using an activity tracking tool (see Figure 2), support personnel are able to capture and retrieve narrative information and commentary. This type of information can be important, for example, when making personal contact, and allows for further personalization of student support and tracking. In ISIS-VLE, support personnel can also hand off tasks to other personnel through a task assignment form. Once assigned, the task is e-mailed to the designee for follow-up. Using a Web browser, personnel can view all open tasks assigned to them or others through various options in the system.
IsIs-vle student Portal Throughout our years of delivering Web-based distance education, students have continually requested spaces outside of the virtual classroom for sharing of information with colleagues and faculty. Similar to the powerful community spaces designed within the popular Yahoo! Groups or other public Internet portals, the final ISIS-VLE will include personal Web pages (see Figure 3), directories, blogs and discussion places. The student portal provides students with a snapshot their of current academic status, direct access to classes, news and headlines specific to each program, ability to purchase books online and access to the library, grades and more. It also provides an electronic portfolio where they can share their progress and showcase their work to the academic community. Students can update their profile and email address, or share favorite sites and resources using the tools provided by ISIS-VLE (see Figure 4).
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Figure 1. Program activity matrix allows for customization of program requirements and procedures
Figure 2. Activity tracking enables support personnel to view contact details and status of support activities; personnel may also assign tasks to themselves or others
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Figure 3. Student portal allows students to access current records, classes and their electronic portfolio
The virtual campus gateway (see Figure 5) allows access to the student portal and other university-based academic support tools. Here, students will find additional services, such as resources for financial aid, technology and orientation tutorials, as well as places to interact with fellow students, faculty and distance learning staff. Although graphics and visual appeal tend to lose their importance after an initial period of use (Dillenbourg, 2000), we chose to correspond functional areas within the virtual campus to
physical images on our campus. We hope this will serve to increase the affinity and connection to the university. This may change if usability tests indicate they should be replaced with a more linear, text-based gateway to the virtual campus.
course-based tools and technologies As mentioned earlier, most distance courses regularly provide multiple opportunities for intellectual
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Figure 4. Student profile area gives students a place to share personal and academic information about themselves
Figure 5. Virtual campus provides a gateway to student support in the larger context, simulating services provided at the university
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and social interaction. In our case, we would like to share two techniques in particular that have resulted in strengthening the academic community. To meet diverse learning needs, SDSU faculty and instructional designers are continually searching for ways to collect information that will inform the design of culturally appropriate curriculum. We have successfully engaged students and instructors in a “getting to know you” introductory discussion board during the design phase of each course several weeks before it goes live. In these boards, faculty members inquire about students’ knowledge and background in specific subject areas. Questions range from sharing of personal knowledge and experiences to requests by the instructor for regional curriculum standards and textbooks used on island. This information then serves to guide the course development process. The discussion board also gives students and faculty a chance to “meet” and get to know each other before the course starts. Students are enthusiastic about meeting their instructors and having a chance to disclose fears or lack of knowledge in a safe and casual environment, outside of the classroom. At the same time, faculty members enjoy discovering more about their students culturally, professionally and academically. The site based “Circle Group” activity is another technique we have used successfully with learners in the Pacific. The power of the Circle Group is in the negotiation of meaning and the sharing of local experiences and perspectives with classmates on other islands. During the week, individuals explore a central theme or topic through readings and online activities. Students then meet face to face with local facilitators to continue exploration of the topic through guided questions. At the close of the Circle Group session, a student volunteers to summarize the group dialog using an online webform. Once submitted, the group’s summary is automatically sent out to other student groups via email. When individuals in the same class are spread across geographically diverse locations, they delight in comparing the
similarities and differences between groups. Circle Groups are particularly invaluable for pods of learners situated across multiple locations or islands.
electronic grade book Although many course management systems provide grading tools, few offer space for rich commentary and feedback. We implemented an electronic grade book several years ago and it remains one of the most important tools in our VLE suite. Moving the grading process from spreadsheets and e-mail to a central Web-based environment has helped to metamorphose what was once a logistical nightmare into a valuable feedback and tracking tool (see Figure 6). Students and instructional staff can review the grade book from any Web-ready computer, reducing interruption in feedback activities due to travel or computer difficulties.
A Regional Facilitation Model An important factor in the success of this distance education model is the involvement of facilitators at the local level. We implemented facilitators into the online program to serve two important functions: introduce a formal structure for capacity building at the local level, and promote and support the specific learning needs of students in the online degree program. As the program is implemented, community college faculty or professionals within the field of study are selected to serve as facilitators. In this role, they gain new teaching skills and are able to broaden their use of technology to teach and learn. Using a strategy that blends an online format with facilitated local support allows individuals to participate in advanced degree programs while remaining in current jobs, without impact to families and the local community. Until now, educational programs that require participants to leave island have often resulted in these individuals
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Figure 6. A Web-based grade book provides a central location for feedback accessible from any Internetready computer
never returning, a phenomenon frequently referred to as “brain drain.” This becomes a cost-effective and practical solution to teacher and workforce development. As evidence of the success of this model, three of the four current presidents of the 2-year colleges in the Western Pacific have participated in programs offered through SDSU. The SDSU facilitated online regional model has evolved over the past several years from a program implemented in the FSM to deliver teachertraining courses in special education. This widely successful program enabled students, who were distributed across four states, multiple islands and 3,000 miles, to have access to courses not available
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locally. During its 3 years of implementation, all four courses in the program were completed by more than 150 teachers, many of whom were using computers and the Internet for the first time. The program demonstrated high retention rates (85%-90%) and enthusiastic learners who were able to apply newly gained skills and knowledge directly to the classroom. Even more exciting were reports of networking and professional affiliation among teachers across vast distances. These teachers delighted in meeting their virtual classmates at national and international conferences and in sharing regional differences and similarities in policy and educational activities. Based on course
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evaluations, the comments below are typical of the impact that this model served (personal communication, December 2, 2001): •
•
•
“I think I would not learn from traditional course as much as I have learned from this distance education. So thank you very much for such a wonderful opportunity, I just wish more teachers would take it.” “Communication was out of this world! Support was very helpful. I almost dropped out, but thanks to my facilitators, it didn’t happen.” “We had an excellent group. I enjoyed working with and sharing with my fellow students in this course. [The facilitator] was with us all the way, making sure we stayed on task and resolved any problems we had and helped us when we got ‘stuck.’ He valued our input and worked with us.”
Interwork Institute SDSU is continuing to refine and expand the facilitated model. Recently, it partnered with Palau Community College (PCC) to develop a distance learning program that will allow individuals who have achieved an AS degree through PCC to complete an inter-disciplinary bachelors degree program specifically designed for educators. Using the ISIS-VLE alongside the facilitated online regional model, the bachelor’s degree is conferred through SDSU. The program is designed to prepare teachers with skills and expertise necessary to provide high-quality instruction for the students of Palau. Integral to the success of the program is a teacher training curriculum that incorporates practical applications within the context of Palau. There is an immediate theory-topractice approach for students. The island-based course facilitators work with SDSU professors to integrate local needs into the curriculum and determine ways to practically apply skills within the public schools of Palau. Courses have been adapted to incorporate local context and cultural
issues, particularly in the critical content areas of mathematics, literacy and technology. Within this model, the facilitator helps to assure student success by offering logistical support and guidance throughout the learning process. As an essential member of the educational delivery team, the facilitator establishes meeting dates, motivates and monitors students, and serves as a liaison between the students, instructors, and university. He or she will also assist with access to technology and meeting spaces, notify students or instructors of situations or events impacting the class, etc. Thus facilitators are tasked with a variety of jobs that are vital to maintaining a consistency and flow within a program, from beginning to end. A vital contribution made by the facilitator is that of “learning guide,” helping students find value in course and program goals. Figure 7 compares roles played by the instructor and facilitator in the facilitated online regional model. Pedagogical strategies used by the facilitator include techniques to help students conceptualize, clarify, synthesize and localize the content (Figure 8). Facilitators must provide sustained learning support throughout the entire degree, maintaining the momentum between courses. The support role thus extends over long periods of time, and is instrumental in establishing and maintaining the learning community as well as the community college/university affiliation. The partnership between the university and local educational institutions has proven invaluable in getting these programs underway, with each institution making critical contributions to program success. Island community colleges and Ministries of Education dedicate resources, such as classrooms, computer labs, technical and administrative staff, and local faculty, who serve as facilitators. Local institutions have also been instrumental in identifying students for the programs and assisting with the admissions process. Due to its success in the first year at Palau Community College, the facilitated online
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Figure 7. A comparison of roles played by the instructor and facilitator Facilitated Online Regional Model: Instructor and Learning Facilitator Roles Instructor
Learning Facilitator
Presents the Theories
Facilitates Practice and Application
Provides the “What”
Facilitates the “So What”
Provides the “Big Picture”
Facilitates “My Picture”
-Global-
-Local-
Provides Cutting-Edge Content
Facilitates Synthesis of Content
Figure 8. Pedagogical strategies available to the learning facilitator Pedagogical strategies Provided by the site-based learning Facilitator
conceptualize
Using the material and activities provided online, the facilitator assists students in formulating new concepts relevant to personal experiences, current work experiences and future job goals. The facilitator may accomplish this through large-class face-to-face discussions and e-mail follow-up to questions. The facilitator may also provide input to online discussions.
clarify
The facilitator plays an important role in helping clarify key concepts and theories. Given the diverse background and experiences of the learners, it is important to work with each student to ensure that major concepts are being internalized with practical considerations for implementation. The facilitator may provide this guidance during periodic large- or small-group meetings and by serving as mentor to individuals.
synthesize
The facilitator assists students to use the information and concepts being presented online in conjunction with their unique circumstances to formulate new understanding. Facilitators work with learners to negotiate meaning and generalize ideas.
localize
The facilitator works with students to transfer “theory” into “practice.” The facilitator provides a local context to assist students in formulating practical individual and group projects that directly relate to the working environment. Through application of theory, students interact within the local setting for case study and experiences relevant to their needs.
regional model has allowed SDSU to partner with institutions throughout the Western Pacific to offer a bachelor’s degree for teachers as well as a second bachelor’s degree with an emphasis in special education.
distance support staff It is imperative that we mention the critical role played by distance support staff. When offering
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a program internationally, support staff are geographically disparate, yet must be in continuous communication. For example, the admissions process requires extensive time and attention to detail on both sides. Staff must work closely with Academic Affairs and Admissions offices on each campus to track submission of applications and fees, transcripts, completion of entrance exams, and other activities necessary for admission to the university. Support staff also manage
A Collaborative Learning Environment to Support Distance Students in Developing Nations
logistical tasks such as travel arrangements for visiting professors, shipment and duplication of course materials, provision of technical support in computer labs, tracking down missing students, maintaining current email addresses and listservs, turning in grades, and a myriad of other duties that keep the program running smoothly. As a side note, we have found instant messaging (IM) to be a fundamental tool for communication with our remote teams in the Pacific. Through IM we can work out specifics that were not clearly communicated over email, or quickly resolve small issues that arise. IM is helpful in supporting and sustaining partnership. This “ounce” of an application has provided a “pound’s” worth of value, particularly when work schedules across time zones overlap by only a few hours.
conclusIon Going to college is much more than attending class. It is an opportunity to develop a sophisticated set of skills and knowledge that will support an individual throughout a lifetime of learning. A quality distance education program must find ways to incorporate into the curriculum the rich and memorable academic, social and transformational experiences held so dear to college graduates around the world. Beyond the narrow walls of the virtual classroom lies a lively and robust academic community. Best practices suggest that in addition to the availability of meaningful and sustained social interaction, students should have access to comprehensive academic support services made available through an online, easily accessible format. Several additional layers of complexity are introduced when distance education programs are delivered internationally. The presence of site-based facilitators and local support systems have proven to be critical to the success of international distance education programs. Facilitators can function in a multitude of roles, including learning guide, liaison between
university and student, technology champion, and advisor on cultural and local learning needs. In the technical arena, VLEs strive to embody all elements of a college experience, including access to library resources, financial aid, disabled student services as well as providing means to support the social aspects of student life—sharing of interests, learning experiences, and mutual support—outside of the classroom. VLEs are, by nature, technologically based. They integrate Web tools, databases, software applications, graphics and more. However, at the heart of a VLE are engaging learning spaces and human interaction, found both electronically and in the natural environment. The “college experience” should be an opportunity available to all students, including distance learners. Integrating the notion of a VLE into the big picture serves to guide the vision of student support networks for universities wishing to export programs internationally. It is our prediction that VLEs developed out of necessity by distance education centers today will come full circle, to inform future solutions for universities facing the onslaught of the consumer-oriented “Net Generation.” Michael Fullan, renowned educational reformist suggested, “The society that will most successfully face the challenges ahead is one that is truly a learning society” (1993, p.131). San Diego State University, Interwork Institute has integrated technology and human touch to develop a facilitated online regional model for distance education that is VLE supported. While providing tools for monitoring and tracking individual students across an entire academic lifecycle, this model blends virtual environments with face to face contact to achieve social interaction and nurturing of the academic community. Collaboratively, local community colleges and Ministries of Education form partnerships with a prominent university to offer bachelor’s and master’s degrees, expanding access to educational programs that would not be available otherwise.
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The blending of technology and pedagogy fosters a free flow of knowledge across borders, allowing for a global, yet customized learning opportunity. The collaborative partnership shared by SDSU and its Pacific neighbors have so far provided all participants—students, instructors, facilitators, and support staff—with a unique capacity building opportunity to teach, learn, and grow academic communities. It is through this endeavor and others like it that Pacific island residents, and eventually populations within other developing nations will create and demonstrate new paradigms for education that help lead the way to an equitable and dynamic learning society.
reFerences Abel, R. (2005). Achieving success in Internetsupported learning in higher education. Alliance for Higher Education Competitiveness. Retrieved February 2, 2005, from www.a-hec.org/research/ study_reports/IsL0205/TOC.html Altbach, P. (2002). Knowledge and education as international commodities: The collapse of the common good. Current Issues in Catholic Higher Education, 2(22), 55-60. Asian Development Bank (ADB). (1998). Annual report. Retrieved February 2, 2005, from www.adb.org/Documents/Reports/Annual_Report/1998/default.asp Bloom, D. (2001). Higher education in developing countries: Peril and promise. Society for Research in Higher Education (SRHE) International News, 46. Retrieved November 2, 2005, from www.srhe. ac.uk/documents/inewsglobalisation.pdf#print Chambers, D. P. (2004). From recruitment to graduation: A whole-of-institution approach to supporting online students. Journal of Distance Learning Administration, 7(4). Retrieved July 18, 2005, from www.westga.edu/%/7Edistance/ winter74/winter74.htm
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Council for Higher Education Accreditation (CHEA). (2002). Accreditation and assuring quality in distance learning. CHEA Institute for Research and Study of Accreditation and Quality Assurance. Retrieved March 1, 2005, from www.chea.org Currie, J. (2001). Gumnut University as an enterprise university: An Australian case. SRHE International News, 46. Retrieved November 2, 2005, from www.srhe.ac.uk/documents/inewsglobalisation.pdf#print Department of Education, Science, and Technology (DEST). (2004). Auditing the offshore activity of Australian higher education providers. Retrieved June 2, 2005, from www.dest.gov.au/ sectors/international_education/policy_issues_ reviews_issues_reviews/reviews/quality_auditing_of_offshore_delivery Department of Education, Science, and Technology (DEST). (2005). Evaluation of the education services for overseas students act 2000. Retrieved June 2, 2005, from www.dest.gov.au/sectors/ international_education/publications_resources/ profiles/evaluation_report.htm#abstract Dillenbourg, P. (2000). Workshop on virtual learning environments: Learning in the new millennium. EUN Conference. Retrieved June 2, 2005, from http://tecfa.unige.ch/tecfa.unige.ch/tecfa/publicat/ dil-papers-2/Dil.7.5.18.pdf Dolence, M. G., & Norris, D. M. (1998). Transforming higher education: A vision for learning in the 21st century. Ann Arbor: Society for College and University Planning. Gibbons, M. (2001). Globalisation in higher education: A view for the south. SRHE International News, 46. Retrieved June 2, 2005, from www.srhe. ac.uk/documents/inewsglobalisation.pdf#print Howell, S. L., Williams, P. B., & Lindsay, N. K. (2003). Thirty-two trends affecting distance education: An informed foundation for strategic
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planning. Online Journal of Distance Learning Administration, 7(3). Retrieved November 10, 2005, from www.westa.edu/~distance/ojdla/ fall63/howell63.html International Labor Organization (ILO). (2001). World employment report 2001: Life at work in the information economy. Geneva: Author. Joint Information Systems Committee (JISC). (2003). MLEs and VLEs explained: MLE briefing paper 1. JISC MLE Information Pack. Retrieved August 10, 2005, from www.jisc.ac.uk/mle/reps/ briefings/bp1.html Knight, J. (2002). Trade in higher education services: The implications of GATS. The Observatory on Borderless Higher Education. Retrieved March 10, 2005, from www.obhe.ac.uk/products/ reports/publicaccesspdf/March2002.pdf Krauth, B., & Carbajal, J. (1999). Guide to developing online student services. Western Cooperative for Educational Telecommunications. Retrieved May 10, 2005, from www.wcet.info/resources/ publications/guide/guide.htm
Asia: Case studies of Hong Kong, Malaysia, and Australia. Higher Education, 42, 85-105. McCracken, H. (2004). Extending virtual access: Promoting engagement and retention through integrated support systems. Online Journal of Distance Learning Administration, 3(1). Retrieved July 1, 2005, from www.westga.edu/%7Edistance/ jmain11.html Miller, P. E. (2003). Lessons from afar: Concerns of distance students. Paper presented at the 10th Annual International Distance Education Conference. Retrieved July 1, 2005, from www.cdlr. tamu.edu/dec_2003/decProceedings/20-MillerLessons%20from%20afar.pdf Oblinger, D., & Oblinger, J. (2005). EDUCAUSE e-book: Educating the net generation. Retrieved July 1, 2005, from www.educause.edu/educatingthenetgen Palau Ministry of Education (Palau MOE). (1999). Palau 2000 master plan for educational improvement. Palau: Palau Ministry of Education, Bureau of Curriculum and Instruction.
LaPadula, M. (2003). A comprehensive look at online student support services for distance learners. The American Journal of Distance Education, 17(2), 119-128.
Palloff, R. M., & Pratt, K. (1999). Building learning communities in cyberspace: Effective strategies for the online classroom. San Francisco: Jossey-Bass.
Levy, S. (2003). Six factors to consider when planning online distance learning programs in higher education. Online Journal of Distance Learning Administration, 6(1). Retrieved July 1, 2005, from www.westga.edu%7Edistance/ojdla/ spring61/spring61.htm
Quibria, M. G., Ahmed, S. N., Tschang, T., & Reyes-Macasquit, M. L. (2002). Digital divide: Determinants and policies with special reference to Asia. Asian Development Bank. (Economics and Research Department Working Paper Series No. 27). Manila Philippines.
Ludwig-Harwman, S., & Dunlap, J. C. (2003). Learner support services for online students: Scaffolding for success. International Review of Research in Open and Distance Learning, 4(1). Retrieved May 5, 2005, from www.irrodl.org/ content/v4.1/dunlap.html
Rechebei, E. D., & McPhetres, S. F. (1997). History of Palau: Heritage of an emerging nation. Koror: Palau Ministry of Education.
McBurnie, G., & Ziguras, C. (2001). The regulation of transnational higher education in Southeast
Riffee, W. H. (2003). Putting a faculty face on distance education programs. Syllabus Magazine. Retrieved July 1, 2005, from www.campustechnology.com/article.asp?id=7233
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Roberts, D. (2004). Learner support in South African distance education: A case study. Third Pan-Commonwealth Forum on Open Learning, July 4-8. Dunedin, New Zealand. Rumble, G. (2000a). Student support in distance education in the 21st century: Learning from service management. Distance Education Melbourne: 2000, 21(2), 216-235.
www.irrodle.org/content/v4.1/tait_editorial. html Tellei, P. U. (2005). Omesubel a ureor: Workforce development in Palau from pre-contact to 1999 (unpublished doctoral dissertation). San Diego: University of San Diego.
Rumble, G. (2000b). The globalization of open and flexible learning: considerations for planners and managers. Retrieved July 1, 2005, from www. westga.edu%7Edistance/ojdla/fall33/fall33.html
UNESCO. (2001). Global forum on quality assurance, accreditation and the recognition of qualifications in higher education: Information note. Retrieved June 10, 2005, from www. unesco.org/education/studyingabroad/highlights/ global_forum/gf_info_note.shtml
Shea, P., & Armitage, S. (2003). Beyond the administrative core: Creating Web-based student services for online learners. Retrieved March 1, 2005, from www.wiche.edu/telcom/resources/ publications/guide/guide.htm
UNESCO/OECD. (2005). Global forum in international quality assurance, accreditation and recognition of qualifications. Retrieved June 1, 2005, from http://registration.wascsenior.org/ wasc//Doc_Lib/GoodPracticesDeD.pdf
Tait, A. (2003). Editorial: Reflections on student support in open and distance learning. International Review of Research in Open and Distance Learning, 4(1). Retrieved May 10, 2005, from
Wright, T. (2001). Toward a holistic view of staff development of regional tutorial staff at the Open University. Systematic Practice and Action Research, 6(14), 735-762.
This work was previously published in Technology and Diversity in Higher Education: New Challenges, edited by Y. Inoue, pp. 189-212, copyright 2007 by Information Science Publishing (an imprint of IGI Global).
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Chapter 4.14
The Role of Prisons in Offshoring Whitney Hollis University of Arizona, USA
AbstrAct Outsourcing and offshoring are popular (and often controversial) trends in American business, yet not all outsourcing is done in foreign countries; many jobs are being sent to prisons, where inmates can provide low-cost, locally based labor. This trend has extended from a role in manufacturing to white-collar jobs, like telemarketing. This chapter analyzes this type of outsourcing in terms of the costs and benefits for business and consumers, as well as the social implications.
overvIew From a U.S. perspective, there are businesses that can afford outsourcing contracts managed from a distance, but there are also businesses that would like to remain competitive and keep the jobs “on the home front.” One solution is to
outsource to prisons in the U.S. Since 1995, several states in the U.S. have embraced this concept. The perceived benefit is that prison outsourcing is beneficial for the taxpayers, it is an answer to reducing recidivism to promote our social duty to help return criminals to society, and it provides a ready talent pool of inexpensive labor. Popular media have always depicted inmates making license plates or doing some kind of manufacturing. Those things were really happening in many prisons nationwide until 1929, when the Hawes-Cooper Act was put into place banning prison goods from interstate commerce; many of these initiatives are underwritten by state governments and were viewed as a way to keep primary state industries protected and profitable. Recently, Oregon, California, Iowa, Oklahoma, Texas, Michigan, Utah, and other states have jumped on the bandwagon, employing prison labor to carry out their low-level jobs. Many of these states provide tax incentives to businesses
for utilizing prison labor. According to Jon Swartz of USA Today, “[…] companies seek cheap labor without incurring the wrath of politicians and unions” (2004). However, the unions have a different perspective. Unions see prison outsourcing as a violation of minimum-wage laws and as being unfair to workers in America. To curb the arguments laid out by the unions, correctional authorities claim they pay the workers minimum wage, but the net income to prisoners is reduced as they must pay rent and other miscellaneous bills and taxes. And they argue that if prison outsourcing did not exist, the same amount of jobs would be exported, anyway.
orgAnIzAtIon bAcKground As foreign outsourcing has been on the increase, so has correction outsourcing programs. An agency that has furthered the option of correctional outsourcing is The National Correctional Industries Association (NCIA). The NCIA consists of “all 50 state correctional industry agencies, Federal Prison Industries, foreign correctional industry agencies, and numerous city and county jail industry programs” (2007). NCIA has been around since 1941, primarily focusing on the manufacturing industry, but now, this focus is changing. While there are several programs focusing on allowing prisons to participate in providing outsourcing services, one program found in most all federal prisons is the UNICOR Federal Prison Industries. They provide all sorts of services, and have now begun to cater to the call-center industry. Their Web site has a video that explicitly shows how operations are conducted, and how the security qualms of the business partners and citizens can be potentially mitigated (http://www. unicor.gov/services/contact_helpdesk/).
legislative history The Hawes-Cooper Act and the Ashurst-Sumner Act of 1935 banned prison goods from interstate 1190
commerce due to earlier instances of abuse of prison labor. In 1979, Chief Justice Warren Burger advocated using the prison system to set up programs that would be beneficial to the economy. The Justice System Improvement Act of 1979 created seven Prison Industry Enhancement (PIE) pilot projects. In 1984, the program was expanded to 50 PIE projects. The Crime Control Act of 1990 (Public Law 101-647) continued the program indefinitely. Correctional departments have to become certified by the Director of the Bureau of Justice Assistance (BJA), U.S. Department of Justice. Arizona Correctional Industries (ACI) is one of the programs certified by the U.S. Department of Justice, and must therefore comply with the Mandatory Criteria for Program Participation: Corrections departments that apply to participate in PIECP must meet all nine of the following criteria: 1.
2.
3.
4.
5.
Eligibility: Authority to involve the private sector in the production and sale of inmatemade goods on the open market. Wages: Authority to pay wages at a rate not less than that paid for work of a similar nature in the locality in which the work is performed. Non-inmate worker displacement: Written assurances that PIECP will not result in the displacement of employed workers; be applied in skills, crafts, or trades in which there is a surplus of available gainful labor in the locality; or significantly impair existing contracts. Benefits: Authority to provide inmate workers with benefits comparable to those made available by the federal or state government to similarly situated private-sector employees, including workers’ compensation and, in some circumstances, Social Security. Deductions: Corrections departments may opt to take deductions from inmate worker wages. Permissible deductions are limited
The Role of Prisons in Offshoring
6. 7.
8.
9.
to taxes, room and board, family support, and victims’ compensation. If victims’ compensation deductions are taken, written assurances that the deductions will be not less than 5% and not more than 20% of gross wages and that all deductions will not total more than 80% of gross wages. Voluntary participation: Written assurances that inmate participation is voluntary. Consultation with organized labor: Written proof of consultation with organized labor prior toprogram startup. Consultation with local private industry: Written proof of consultation with local private industry prior to program startup. National Environmental Policy Act (NEPA): Written proof of compliance with NEPA requirements prior to program startup (http:// www.ncjrs.gov/html/bja/piecp/bja-prisonindustr.html#mandatory)
The National Correctional Industries Association also oversees the state correctional partners. The setting for this case is Arizona. The Arizona Department of Corrections is connected
with the Arizona Correctional Industries, which contracts prison labor for businesses. The case specifically highlights outsourced prison labor in the telemarketing industry.
setting the stage in Arizona Arizona Correctional Industries (ACI) is a program that is undertaken by the Department of Corrections, and the overall operations are supervised by the Director of the State Department of Corrections (Statute 41-1621). The committee and the Director have the power to commission where, and which products will be sold or manufactured and for how much it will cost (According to Statue 41-1629, 41-2636 section F, 41-1624 section D and 41-1628). ACI is politically and fiscally tied to the Arizona State Department of Corrections and works with only the state prisons and not the federal prisons. There is a revolving fund that is annually appropriated to underwrite more programs for inmates. Arizona Statute 41-1624 defines the purpose and the allocation of the revolving fund. Any profit contributes to the revolving fund. Companies become contract partners with ACI in order to receive benefits
Figure 12.1. Dollar benefits to Arizona economy by year (Source: 2005 ACI Annual Report, pg. 3)
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from the state, and it works much like a labor union; it brings all companies together under one umbrella and provides protection for the inmates. The Hawes-Cooper Act was rendered inactive by Statute 41-1622, which now implies that the sale of the goods and services are allowed. In 2004, prison outsourcing created $25.6 million in sales for ACI; in turn, ACI directly and indirectly contributed $48 million to the Arizona economy (ACI, 2005).
cAse descrIPtIon The Arizona State Prison Complex (ASPC)Perryville is located in Goodyear, Arizona. This facility houses Televerde, which is the ACI Telemarketing business staffed by female inmates. It is a completely privatized call center that conducts business-to-business contracting market intelligence. The facility began as a social service and then grew into a for-profit business. The workforce consists entirely of women who conduct calls to businesses and do not have to disclose that they are prison inmates. The work setting is the same as any other. There are cubicles and computers. Workers must apply and interview for their positions and are allowed to quit. In order for inmates to be considered, they must not have a crime of notoriety on their record and must have six months of good behavior. One of the concerns for using prison labor is the question of trustworthiness of the inmates. With the Arizona Televerde facility being a call center, security of one’s personal information and identity is essential. However, this particular call center is one that is geared towards telemarketing to other businesses, not to the local public; as such, no personal information is intended to be swapped. Inmates go through an orientation process and are carefully supervised. In Arizona, a Fortune 500 distribution company contracted with Televerde, aware of the work being performed by the prisoners. Companies that
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contract with Televerde are requested to visit the facilities and listen in on some calls to see how daily operations run.
the Prison operations at televerde: A First Person case study Televerde is a business-to-business (B2B) telemarketing company. The company got the idea to utilize prison labor through a friend who was part of a Christian organization that helped the prisoners to obtain workable skills. The company felt that its target is the American market, and it needed employees who had a better understanding of the American market and would be able to involve high-tech businesses and concepts. This author had the opportunity to visit Televerde operations at one of the state prisons in Arizona. It was at a women’s facility out in the middle of nowhere. Two employees of Televerde escorted the author on her visit. There were three different areas where Televerde conducts business, based on the level of the crimes of the women. In order to understand how this impacts the business model, it is pertinent to explain how the prison ranking system works. Yards are how the prisoners are separated, usually by their rating; the most severe crimes and threats in one yard and the less severe in other yards. Two ratings are utilized, each on a scale of 1-5: The first rating is the crime severity, and the second rating is the prisoner’s threat to society; a 1 is usually safe, whereas a 5 is severe. For example, a woman can be ranked 1:5, reflecting that she was convicted of a petty crime, but she is deemed psychologically to be a threat to the society. Of course, these rankings are not set in stone. Over time, a woman can demonstrate good behavior and move to other yards. Televerde only hires women who rank 3-2 or 2-3 and cannot be convicted of identity theft. The process to get hired is difficult. Some of the women said that they applied three or more times before they were hired, after going through
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rigorous interviews with the company and with psychologists. Once they are accepted, they must complete a training course that takes months, and they must pass with flying colors. Walking in the yard to the room where daily operations take place was intimidating. The women outside stared and did not seem happy. Upon entering the building, the women greeted this author with open arms. It was a completely different situation. The work day starts around 5 in the morning and ends at around 7 pm. Then the women go “home” and study for the next day’s work. They are calling businesses to market products and services to other businesses; they are generating leads and cold calling. These women must have an understanding of the products and the business. They use VoIP to conduct their calls and software created by Televerde to track the calls. They create profiles for leads. They channel programs and lead to get forecasts. The prisoner’s create marketing intelligence that is actionable. The women in return are paid minimum wage and receive education in management information systems, marketing, and other business areas. Although they only make minimum wage, 30% of this wage is deducted to pay for victim’s compensation, room and board, and other purposes. When one thinks of a prisoner, one thinks of some hard, cold person; in contrast, the prison escorts were a lively pair. And at the end of the trip, they were just regular people in this author’s eyes. They mentioned that Televerde had put together the TOPS programs that help a woman who is a year from the “gate.” At that time, she will get the chance to be groomed for reality with mock interviews, talk with alumni, learn budgeting, and attain more life skills. Televerde also has a scholarship programs called TENS: if a woman has achieved her associates degree from Rio Salado Community College while in prison, when she leaves, Televerde will help her to receive her bachelor’s degree. Many of these women dream to work at Televerde when they are out. By the end of the day, it was made known
to this author that most of the women working at Televerde used to be inmates, but one would never have guessed. This author had the opportunity to sit in on a call. After the call, this author got the chance to briefly talk with the operator-cum-prisoner about what she thought about her job. She was happy to have a job that will help her later on in life. She said her daughter was proud of her. She was saving up her money to help out her daughter, who will be attending the University of Arizona. Leaving the buildings and walking through the yard, most of the women sat around all day smoking cigarettes. There were other women who came up to some of the workers on a break and would try to get their advice because they wanted to apply and work for Televerde. In this case, all parties realize benefits, from the customer to the rehabilitated and trained prisoner. However, this author cannot guarantee that all businesses are just as moral as Televerde, or that the situations in other prisons are similar.
chAllenges And ProbleMs FAcIng the orgAnIzAtIon the wage debate The issue of wages has been hotly debated by unions, states, and business. While some companies do pay minimum wage, like the call center at Televerde in Arizona, there are deductions taken out. USA Today reported that at an Oregon facility, inmates made $120-$185 a month for a 40-hour work week, which comes out to 75 cents an hour. According to the Federal Bureau of Prisons, reported by USA Today, on average, inmates across the nation receive only 11-36 cents an hour (Swartz, 2004). The inmate employees in the Televerde program do earn a wage. Most of their wage is reduced, but is known to be greater than 50 cents an hour. Their wages help to pay for victim compensation,
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dependent payments, and other correctional programs like drug and alcohol rehabilitation (Figure 12.2). Televerde does not disclose the real wage cost, but they do disclose their fiscal profits and allocations to ACI because of their partnership. For the full ACI partnership during the fiscal year 2005, more than $48M was contributed by ACI to the Arizona General Fund, and over 403 jobs were active (ACI, 2005). Why would a business want to pay 11-36 cents an hour when the cost is lower in some countries around the globe? This is where the benefits of an English-speaking person may come in handy. Also, the societal aspect needs to be considered. If the prison is privatized (meaning connected with ACI and their business partners), then, in theory, taxpayers would have lower taxes. The prison system was created to not only keep criminals out of society, but also to rehabilitate them for life after prison.
opposition: human rights Perspective Critics of prison outsourcing and privatization are concerned about humanitarian issues. The focus on these issues is the concern about ethical human
rights and inmate rights regarding protection from becoming a labor camp. On the flip side, there are many “Dilbert” followers who would venture to state that the cubicle is just another form of a prison or a cell. The ACLU is one of the main groups that is against prison outsourcing and privatization primarily for prisoners’ rights from labor work programs that are suggestive and could turn into oppressive labor work camps. Jenni Gainsborough, who is the public policy coordinator of the ACLU expressed, “I’m completely opposed to the concept of private prisons. The most extreme sanction the state has against the individual, short obviously of the death penalty, is imprisonment, and that should not be turned over to an organization whose primary concern is the profit of its shareholders”(2003). She feels that privatization will imply caring more for the money and the profit then effective rehabilitation; further, the human rights of the inmates will be compromised. Businesses may not be able to draw the line between a healthy worker program and a bottomless pool of slave labor because they may get blinded by the profits and shareholder satisfaction. This is a valid ethical issue that cannot be ignored.
Figure 12.2. Wages earned and deductions taken (Source: 2005 ACI Annual Report, pg. 3)
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opposition: security Issues Other than inhumane practices, the fear of security is another main concern. Utah Correction Industries is the best example. The issue of keeping the integrity of call center programs while operating in a prison environment came into focus in 2000. This one concerns the call center in Utah. In 2000, the call center program in Utah discovered insider inmate swapping of personal information. The program was scrapped. The fear of customer identity theft and the leak of personal information came to fruition, and it became apparent to correctional industries that these white-collar services would need to be monitored and secured. While this case provided foes of correctional outsourcing with a strong case to discourage it, economic pressures and business incentives have assisted in the industry’s continued growth. Now, UNICOR and the other correctional industries claim that no personal information is swapped and that calls are monitored. Many places do not even allow the inmates to bring utensils and/or their keystrokes are limited by the computer. Operations at Televerde in Arizona require the inmates to learn about products and companies. The computers they work on are very limited and controlled. The calling is through a program on the computer where the ladies click on the company, then the specific person. Any information from the call is then quickly typed in a limited word box, where they can record time, date, person called, inmate name, and the information discussed or not. It is a specific software program that the company and inmates use to make their calls. Yes, these women end up with an extensive background in a business and this may be alarming to many. It is uncertain as to which direction the inmates could use the information. Companies say that they have put in place precautions, creating intranets, monitoring systems for computers, recording and archiving conversations, limiting user keystrokes, but the technology frontier contains loop holes that
someone might be able to discover. For some, the risk may be too high to leave in the hands of convicts; or is the information better off in the hands of foreign nationals?
Benefits of U.S. Prison Labor Prison privatization entails that ACI is the contracting/interlocutor “company” that lends the prison facility to the business to conduct their work to hire who they please. Then the company pays the employees’ wages to ACI, who deducts and allocates the money to the state prison. Since inmates receive deductions from their pay to cover expenses discussed in the last section, the money left over is put in savings for when the inmate is released into society. The privatization of prisons means that quality can be improved too. There are many prisons that are not up to par with conditions like beds or space and, therefore, contracting with a company means that they can provide extra space and be able to pay for beds. Also, the contracts enforce that conditions must be up to standards and in many cases, the privatized prisons scored better than prisons that were not. If a detention facility is up to par, it would be accredited by the American Correctional Association (ACA). According to Moore and Segal (2002), a larger percentage of privately owned prisons are accredited by the ACA (44% of privatized prisons vs. only 10% of government-operated facilities). The other benefit is a lower recidivism rate. Recidivism is the rate that the inmates end up returning to the prison. In theory, inmates who are released have a hard time assimilating back into society because they lack skills to work, and are only given $50 at the time of leaving the prison. But ACI and its partners offer training and jobs for inmates. The Arizona Inmate Program Evaluation of February 2005 found that the 2-year recidivism rate for participants was reduced from 21.1% to 15.8% due to participation in the programs.
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Figure 12.3 reflects the breakdown of the number of inmates employed. Apart from the three operations of Televerde, there are two other ACI operations supporting the Arizona Motor Vehicle Department (MVD). In fiscal year 2005, 75 inmates assigned to the MVD call centers worked more than 134,213 hours, leading to a savings to the state of $691,197. (ACI, 2005)
conclusIon The outsourcing to prisons in the U.S. is partly a response to global outsourcing trends and partly a mechanism to address the problem of overcrowded prisons. The fear of white collar, low-end service jobs increasing in prisons is alarming. These jobs require computers, and computer technology is not as secure as many would hope it to be. The industries allay consumers’ fears in stating that no personal information is ever swapped, and that their work is being tightly monitored through security technologies. There is also concern that prison labor is still taking jobs; even though the jobs are not going abroad, these jobs are taken from those who are actually responsible lawabiding citizens of society. On the business and government side, prison outsourcing is lucrative, even though it may come with a bad stigma; on
the other hand, consumers and citizens feel that their security is being compromised. Each point of view on prison outsourcing highlights valid concerns.
Further reseArch For further research, it would be useful to view other industries that benefit or could benefit from using prison labor, ranging from more laborintensive jobs to white-collar positions. Further, one could do comparisons from different states. Another avenue is to break down the tax benefits and costs by the facility. One could create a detailed picture of how the costs are incurred, how the benefits are received, and if those benefits and reduced recidivism rates are truly being realized. There is also the concept of gender bias in correctional outsourcing. There are those analysts who feel that women will tend to think of their family first rather than themselves so the money that they earn is well spent, and that women will be more responsible at budgeting. In addition, the type of labor, that is, white collar jobs vs. more labor intensive, may be found to be gender biased, where the men will perform the more labor intensive jobs and the women will receive the white collar positions. Prison outsourcing is not limited to the United States. Countries have
The Role of Prisons in Offshoring
been using prisoners for years. It would be useful to discuss the differences around the globe and view the international trend that is occurring, and where prison outsourcing will lead. How far will privatization go in prisons and management, and how will prison outsourcing impact international trade treaties and international legislation on issues like human rights.
Further reAdIng
reFerences
Bureau of Justice Statistics. (2000). Sourcebook of criminal justice statistics. Washington, DC: U.S. Department of Justice.
Arizona Correctional Industries. (2005). Annual Report (pp. 1-11). Retrieved June 1, 2006, from http://www.aci.az.gov/annual/2005annual.pdf Department of Justice. (2004). National Criminal Justice Reference Service. Bureau of Justice Assistance Program Brief. Retrieved May 1, 2007, from http://www.ncjrs.gov/html/bja/piecp/bjaprison-industr.html#mandatory Gainsborough, J. (2003). The truth about private prisons. Alertnet. Retrieved June 2, 2007, from http://www.alternet.org/story/17392 Krasny, R. (2006). Study sees increase in U.S. outsourcing. The Houston Chronicle, November 6, 2006, pg. 6. Moore, A., & Segal, G. (2002). Weighing the watchmen: Evaluating the cost and benfits of outsourcing correctional services. Retrieved June 1, 2007, from http://www.rppi.org/ps290.pdf National Correctional Industries Association. (2007). Retrieved June 1, 2007, from http://www. nationalcia.org/ Pens, D. (1996). U.S.: Out-celling the competition. North Coast Xpress. Retrieved May 12, 2007, from http://www.corpwatch.org/article.php?id=864 Swartz, J. (2004). Inmates vs. outsourcing. USA Today, July 7, 2004. Retrieved June 1, 2006, from http://www.usatoday.com/money/ economy/employment/2004-07-06-call-center_x. htm?POE=click-refer
Alabama Department of Corrections. (2005). Monthly statistical report. Retrieved from http:// www.doc.state.al.us/docs/Monthlyrpts/2003-05. pdf Berg, J. (2000). Private prisons: International experiences and South African prospects. University of Cape Town.
Chang, T., & Thompkins, D. (2002). Corporations go to prisons: The expansion of corporate power in the correctional industry. Labor Studies Journal, 27(1), 45-69 Connecticut Department of Corrections. (2003). York CI programs and services. Retrieved from http://www.doc.state.ct.us/report/compendiumYork.pdf Davis, A., & Shaylor, C. (2001). Race, gender, and the prison industrial complex: California and beyond. Meridians: Feminism, Race, Transnationalism, 2(1), 1-25. Freeman, C. (1993). Designing women: Corporate: discipline and Barbados’ offshore pink-collar sector. Cultural Anthropology, 8(2), 169-186. Gilmore, R. W. (1999). Globalization and the U.S. prison growth: From military Keynesianism to post-Keynesian militarism. Race & Class, 40(2-3), 171-188 Gondles, J. A. (1999). Prison industries: A new look at an old idea. Corrections Today, 61(6), 6. Ingley, G. S., & Cochran, M. (1999). Ruinous or fair competition? Corrections Today, 61(6), 82. Kansas Correctional Inudstries. (2005). Data entry. Retrieved from http://www.kci.dc.state. ks.us/standard/services/dataentry.html
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New Jersey DEPTCOR. (2003). Accomplishments. Retrieved from http://www.state.nj.us/deptcor/ enterprise_highlights.html New Mexico Correctional Industries. (2003). Telemarketing, data entry, and mail fulfillment. Retrieved from http:corrections.state.nm.us/ industries/products/telemarket.htm Oklahoma Correctional Industries. (2003). Mabel Bassett Correctional Center. Retrieved from http://www.state.ok.us/~osi/pmabelb.htm Oregon Corrections Entreprises. (2002). Inmates working for Oregon: Oregon corrections enterprises 2001-2002 annual report. Retrieved from http://www.insideoregon.com/who_we_ are/2002annualreport_web.pdf Parenti, C. (2003). Privatized problems: For-profit incarceration in trouble. In A. Coyle, A. Campbell, & R. Neufeld (Eds.), Capitalist punishment: Prison privatization and human rights. Atlanta/ London: Clarity/Zed. Reynolds, M., & Rostad, K. (2001). Creating factories behind bars: Brief analysis No.354. Texas/Washington, DC: National Center for Policy Analysis. Retrieved from http://www.ncpa.org/ pub/ba/ba354 Sexton, G. (1995). Work in American prisons: Joint ventures with the private sector. Washington, DC:
U.S. Department of Justice. Retrieved from http:// www.ncjrs.org/pdffiles/workampr.pdf Tennessee Department of Corrections. (2003). Riverbend Maximum Security Institution. Retrieved from www.state.tn.us/coorections/institutions/ rmsi.html UNICOR. (2003a). Call center & help desk support. Federal Prison Industries, Inc. Retrieved from http://www.unicor.gov/services/callcenter. htm Van Zyl Smit, D., & Frieder, D. (Eds.). (1999). Prison labour: Salvation or slavery? International Perspectives. Aldershot: Ashgate. Washington State Department of Corrections. (2003). Washington Corrections Center for Women. Retrieved from http://doc.wa.gov/facilities/wccwdescription.htm Weiss, R. (2001). Political economy of prison labor reprivatization in the postindustrial United States. Criminology, 39, 253-91 Western, B., King, J., & Weiman, D. (2001). Labor market consequences of incarceration. Crime and Delinquency, 47, 410-427. Wilson, M. (1998). Information networks: The global offshore labor force. In G. Sussman & J. A. Lent (Eds.), Global productions: Labor in the making of the information society. NJ: Hampton Press.
This work was previously published in Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy, edited by A. Gupta, pp. 215-224, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.15
Human Resources Outsourcing Strategies Veronique Guilloux Université Paris, France Michel Kalika Université Paris, France
IntroductIon Often, organizations externalize work activities and use employment intermediaries (consulting firms, temporary help agencies, contract companies (Nesheim, Olsen, & Kalleberg 2007). At a functional level, firms tend to externalize business as well so that boundaries of firms are extended. Historically production function, catering, cleaning, security, IT functions have been outsourced for several years. HR outsourcing is far more recent. Several elements will be discussed: HR outsourcing definition, typology, process management, and research perspectives on performance.
bAcKground Outsourcing can be defined as a phenomenon in which a company delegates a part of its in-house
operations to a third party. It includes a contractual relationship for HR services with an external provider. Wahrenburg, Hackethal, Friedrich, and Gellrich (2006) find that outsourcing is a major international trend for companies from all types of industries and for most organizational business units and level. Different activities can be externalized: payroll and benefits, training, HRIS, compensation, recruiting, and/or relocation.
hr outsourcing typology Practitioners subsidize RH externalization in different categories: application service provides (ASP), application outsourcing, business process outsourcing (BPO), and professional employer organization (PEO) (Guilloux & Kalika, 2008). Different terms exist for application service provider: On-demand software or software as a service can be also found. It offers online human resources management tool and it is often used by SME.
External hosting of HR application: the firm’s application is “taken” and is hosted by the service provider Third-party maintenance applicative concerns operational and functional maintenance of a software application. A service level agreement is determined: overall service description, service delivery financing aspect, including penalties, contract terms and conditions, and specific performance metrics governing compliant service delivery (system availability, incident resolution time…). Application outsourcing is a computing resources management (materials and networks) which can be localized in the provider. For a firm HR processing services consists in entrusting a whole HR process to the provider (legal monitoring, social reporting, functional aid, computation…). The vendor’s resources are mutualized on several clients. The vendor commits himself to reaching results. Business process outsourcing (BPO) consists in entrusting whole business process to provider (Gyeung-Min & Hyun, 2007). The firm keeps its managerial and strategic decisions. BPO can be offshore outsourcing (contracted outside a company’s own country), nearshore outsourcing (contracted to a company’s neighboring country), or onshore outsourcing. Move on rationalization of key business leads some US firms to go further in externalizing working contract, recruitment, remuneration with “professional employer organization.” A professional employer organization assumes full responsibility for the company’s HR administration. It becomes a co-employer of the company’s workers by taking full legal responsibility of the employees (hiring, firing, pay…). This is only set for small firms and is only running in the USA (Klaas, Gainey, McClendon, & Yang 2005)
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hr outsourcing underlying Processes Two perspectives can be analyzed: the intensity of the relationship and the stage based model.
Intensity of the Relationship If we retain the concept on developmental processes of cooperative interoganizational relationships, each category of externalization can be visualized as a repetitive sequence of negotiation, commitment, and execution stages. In negotiations stage, parties develop joint expectations about their motivations, possible investments and perceived uncertainties of a business deal which is explored to undertake jointly. In commitments stage, wills of the parties meet together, when they reach an agreement on the obligations and rules for future action in the relationship. In executions stage, commitments and rules of action are carried into effect. According to Byham and Riddle (1999), the intensity of the outsourcing relationship is tied with a continuum from the Table 1 first level (vendor-customer relationship or supplier relationship management) where in house staff continue to retain responsibility to the fifth level strategic (partners) where the line between the firm and the third party have become practically indistinguishable . At the second stage (supplier customer relationship) the outsourcing firm provides services in specific topics as determined by the organization. In the third level (strategic supplier-customer relationships), the outside firm is responsible for more activities. Then for the fourth level, a few in-house staff is used as liaisons between the provider and the firm. Of course the total continuum could be uncovered. For example, Lievens and De Corte (2008) examine the HR manager’s commitment reasons to continue existing HR outsourcing relationships or not. They eliminate the case of total HR function outsourcing, they focus only on recruitment
Human Resources Outsourcing Strategies
Table 1. Outsourcing relationship stages
Stage 1 Vendor customer relationship
Stage 2 Supplier-customer relationship
Stage 3 Strategic supplier-customer relationships
Stage 4 partners
Stage 5 Strategic partners
Negotiations
Contract negotiation
Auditing
Spot control
Discussion
Joint developing
Commitments
Contract realization
Performance
Quality
Progress Plan
Long term
Trust
Total transparency Osmosis
Execution based on
Strict execution
Expertise
activities therefore HR managers could frequently change among HR vendors.
Stage-Based Model At first, a firm can centralize HR services in shared service center (Horan & Vernon, 2003; Redman, Snape, Wass, & Hamilton 2007). Then when the reorganization is effective, a joint venture between the contractors and the providers can be created in order to smooth the transition to outsourcing. Some employees of the firm are transferred in the ad hoc entity. The purpose of this structure is not to endure. In the long run, this special purpose company will be outsourced (Guilloux et al., 2008). A firm, which outsources HR applications could search to mutualize them with other function applications. Multi-tower, or multi-process outsourcing contracts concern several functions of the firm. For example, a multinational can outsource pay (human resource function) and CRM (marketing function). Finally as contract includes a reversibility clause, “backsourcing” or “reverse sourcing” can be set in motion. But it is easy to imagine that this king of strategy is expensive and is not often used.
Responsibility
outsourcIng And hr PerForMAnce The most common reasons in favor of outsourcing are oriented on reducing costs, building flexibility, focusing on the core competency, obtaining access to best practices. Several empirical studies tend to legitimate the HR externalization. Using a contingent perspective, Lilly, Gray, and Virick (2005), analyze when and under what circumstances does HR outsourcing contribute to value the firm. They attempt to identify environmental and organizational characteristics that affect HR department performance. The show how HR outsourcing mediates that relationship. For Shih, Chiang, and Hsu (2005) four variables, namely environmental dynamism, company strategy, HR involvement in the company’s strategy process, and contractor relationship were employed to test the moderating effect between HR outsourcing and its effectiveness In a more institutional perspective, Galanaki and Papalexandris (2007) stress that multinationals are important disseminators of human resource practices, innovations in work organization and more specifically of HR outsourcing methods. Foreign MNCs subsidiaries duplicate headquarters management style and then participate in spreading in this king of methods in the entire world (mimetic phenomenon). Working on the basis of a Flemish Panel Survey of Organizations, Delmotte and Sels (2005) stress
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that HR outsourcing is not always an instrument of costs reduction, but can be also dictated by a strategic vision of the HR function role. They observe that the internalization (delegation of HR responsibilities with the hierarchical line) and the externalization are strongly correlated, without emptying out HR department attributions. Combining Internalization and externalization makes it possible for the HR function to move towards a role of “strategic business partner.” For Linder (2004) and Mani, Barua, and Whinston (2006) it seems useful to analyze this set of themes to distinguish two types of externalization: transactional and transformational externalization. Falguni and Michael (2006) speak about knowledge process outsourcing (KPO) and underline links between outsourcing and organizational learning. Shen (2005) reminds us that a good management to the externalization relationship is a vital condition for collaboration. In that way, Schlosser, Templer, and Chanam (2006) suggest that managers can possibly influence the relationship between outsourcing and social capital through marketing tactics and enriched psychological contracts. Even though we possess limited knowledge concerning the effectiveness of outsourcing and HR duties, we can realize how IT could affect BPO. Advance Internet technology furthers a seamless relationship between external vendors and client companies. That’s why, investment and innovations in integrated HR information technology are often a selling point of the HR specialized service providers. This could enhance “cross fertilization” between the two firms and perhaps by-pass the resistance to change syndrome existing in-house. Companies may learn latest techniques and benefit from benchmarking. They may capitalize on other’s expertise and raise organizational memory with IT. However firms must not forget that IT is not a miracle. A real HR thought is needed. Meanwhile, Hesketh and Fleetwood (2006) are skeptical in front of “scientific approach” demonstrating empirical association between
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HR outsourcing and increased organizational performance. They underline the shortcomings of quantifying this link. They rather recommend to understand reflexive performance through the discursive penetration of HR professionals’ internal conversations. Relying on critical realism, the authors explain that it is not valuable to analyze the theme of HR outsourcing as the “end game.” Academics should rather understand the HR in its complexity rather than thinking in an abrupt way that HR costs will decline of x% with outsourcing. As Belcourt (2006) shows it, outsourcing can lead to advantages and rewards but also to big risks.
Future trends Human resource tends to be considered as a component of value chain (Kosnik, Wong-MingJi, & Hoover, 2006). As a result, HR supply chain based on outsourcing generates new business models. As BPO redefines shapes of the firm, the effective management of human resource outsourcing hardly relies on managing good relationships with the providers (Enlow & Ertel 2006). HR department is invited to create new sorts of governance between different stakeholders (company, global service providers…) in order to achieve a real seamless interfirms coordination.
conclusIon This article doesn't show outsourcing only as a cost reduction instrument but also as a transformational outsourcing and as a process of organizational and strategic change. With greater emphasis being placed on the links between outsourcing and performance, new business models will be developed (Osterwalder, Pigneur, & Tucci, 2005). New skills will be imagined to set up effective relationships management (Cooke, Shen, & McBride, 2005).
Human Resources Outsourcing Strategies
reFerences Belcourt, M. (2006). Outsourcing: The benefits and the risks. Human Resource Management Review, 16(2) 269-279. Byham, W., & Riddle, S. (1999). Outsourcing: A strategic tool for a more strategic HR. Employment Relations Today, 26(1) 37-55. Cooke, F. Shen, J., & McBride, A. (2005). Outsourcing HR as a competitive strategy? A literature review and an assessment of implications. Human Resource Management, 44(4), 413-432. Delmotte, J., & Sels, L. (2005). L’outsourcing des RH: opportunité ou menace? Editions Université Leuven, Federgon. Enlow, S., & Ertel, D. (2006). Achieving outsourcing success: Effective relationship management. Compensation Benefits Review, 38, 50-55. Falguni, S., & Shiel, M. (2006). From business process outsourcing (BPO) to knowledge process (KPO), Human Systems Management, 25, 145-155. Galanaki, E., & Papalexandris, N. (2007). Internationalization as a determining factor of HRM outsourcing. International Journal of Human Resource Management, 18(8), 1557-1567. Guilloux, V., & Kalika, M. (2008), Outsourcing HR in France: Theory and practice. In technology, outsourcing & transforming HR. Graeme Martin, Butterworth Heinemann. Gyeung-Min, K., & Hyun, J. (2007). HR BPO service models for small and medium enterprises. Business Process Management Journal, 13(5), 694-706. Hesketh, A., & Fleetwood, S. (2006). Beyond measuring the human resources management-organizational performance link: Applying critical realist meta-theory organization. Organization, 13(5), 677-699.
Horan, P., & Vernon, P. (2003). Expanding HR’s global potential: Shared service centers in multicountry Regions. Compensation & Benefits Review, 45-53. Klaas, B. Gainey, T., McClendon, J., & Yang (2005). Professional employer organizations and their impact on client satisfaction with human resource outcomes: A field study of human resource outsourcing in small and medium enterprises. Journal of Management, 31(2), 234-254. Kosnik, T., Wong-MingJi, D., & Hoover, K. (2006). Outsourcing versus insourcing in the human resource supply chain: A comparison of five generic models. Personnel Review, 35(6), 671-684. Lievens, F., & De Corte, W. (2008). Development and test of a model of external organizational commitment in human resources outsourcing. Human Resource Management, Forthcoming. Lilly, J., Gray, D., & Virick, M. (2005). Outsourcing the human resource function: Environmental and organizational characteristics that affect HR performance. Journal of Business Strategies, 22(1), 55-73. Linder, J. (2004). Transformational outsourcing, Sloan Management Review, 45(2), 52-58. Mahoney, C., & Brewster, C. (2002). Outsourcing the HR function in Europe. Journal of Professional HRM, 27, 23-28. Mani, D., Barua, A., & Whinston, B. (2006). Successfully governing business process outsourcing relationships. MIS Quarterly Executive, 5(1), 15-29. Nesheim, T., Olsen, K., & Kalleberg, A. (2007). Externalizing the core: Firms’ use of employment intermediaries in the information and communication technology industries. Human Resource Management, 46(2), 247-264. Osterwalder, A., Pigneur Y., & Tucci C. (2005). Clarifying business models: Origins, present, and
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future of the concept. Communications of the Association for Information System, 15, 1-40. Shen, J. (2005). Human resource outsourcing: 1990-2004. Journal of Organizational Transformation and Social Change, 2(3), 275-295 Shih, S., Chiang, Y. H., & Hsu, C. C. (2005). Exploring HR outsourcing and its perceived effectiveness. International Journal of Business Performance Management, 7(4), 464-482. Schlosser, F., Templer, A., & Ghanam, D. (2006). How human resource outsourcing affects organizational learning in the knowledge economy. Journal of Labor Research, 27(3), 291-304. Shih, H. A., Chiang, Y. H., & Hsu, C. C. (2005). Exploring HR outsourcing and its perceived effectiveness. International Journal of Business Performance Management, 7(4), 464-482. Stroh, L., & Treehuboff, D. (2003). Outsourcing HR functions: When-and when not-to go outside. Journal of Leadership & Organizational Studies, 10(1), 19-28. Wahrenburg, M., Hackethal, A., Friedrich, L., & Gellrich, T. (2006). Strategic decisions regarding the vertical integration of human resource organizations: Evidence for an integrated HR model for the financial services and non-financial services industry in Germany, Austria, and Switzerland. International Journal of Human Resource Management, 17, 1726-1771.
Key terMs Business Model: First concept is generally understood as a view of the firm’s logic for creating and commercializing value. Second, business model implementation contains its translation into concrete things, such as a business structure, business processes, and infrastructure. Business models are subject to external pressure and thus constantly subject to change (Osterwalder et al., 2005). Core Competency: An area of specialized expertise that is the result of harmonizing complex streams of technology and work activity. Atkinson distinguishes core and peripheral activities. The organisation’s core is tied with employees who are most vital for the enterprise. Extended Enterprise: A concept that includes the firms as well as the stakeholders (suppliers, distributors, partners and so on) Internalization-Externalization: To make (captive sourcing) or buy strategy (outsourcing). These two strategic choices are not considered as a dichotomy but rather as a continuum from “hierarchy” mode to market governance (spot contract). Multi-Tower BPO or Multi-Process Outsourcing: Service providers build multi-tower capability into their business process outsourcing (BPO) portfolios across human resources, finance and accounting and procurement functions. Shared Service Center: A back office optimization of process and support activities. It can be internalized or externalized.
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Supplier Relationships Management: A comprehensive approach to managing an enterprise’s interactions with the organizations that supply the goods and services it uses. The goal of supplier relationship management (SRM) is to streamline and make more effective the processes between an enterprise and its suppliers. It is like customer relationship management (CRM) which is intended to streamline and make more effective the processes between an enterprise and its customers.
Supply Chain Management: Encompasses the planning and management of all activities involved in sourcing and procurement. It also includes coordination and collaboration with channel partners, which can be third-party service providers. Supply chain management integrates supply and demand management within and across firms. Transformational Outsourcing: The intelligent mixing of different skills and competence that, through an outsourcing relationship, leads to innovation and significant business change to the firm.
This work was previously published in Encyclopedia of Human Resources Information Systems: Challenges in e-HRM, edited by T. Torres-Coronas, & M. Arias-Oliva, pp. 477-481, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.16
Offshoring in the Pharmaceutical Industry Jason McCoy Global Seawater, Inc., USA Johannes Sarx ALCIMED, France
AbstrAct Offshoring has been adopted as a tool for reducing costs and for gaining strategic advantages by financial services, software development, and other competitive industries. For a variety of reasons, the pharmaceutical industry has been slow to take advantage of the benefits that offshoring can provide. The purpose of this article is to explore the internal and exogenous factors motivating global pharmaceutical firms to increase and expand their sourcing activities. And, instead of discussing global sourcing in general, India has been analyzed as a unique and explanatory case study for this new, emerging trend. The reasons behind this decision include India’s position as a renowned global IT hub, the country’s “home grown” biotechnology and biopharmaceutical industries, the numerous strategic partnerships and offshoring relationships between global and
Indian firms, as well as its significant advances in IT and information management.
globAl PhArMAceutIcAl overvIew The global pharmaceutical industry broke historical records with revenues of approximately U.S. $600 billion in 2006 (Pharmaceutical Research and Manufacturers of America [PhRMA], 2006). This is particularly striking as the growth slowed somewhat in North America and Europe; however, China, India, Mexico, Russia, South Korea, and other emerging markets outstripped established markets, growing collectively at an astounding rate of 81% (Herper & Kang, 2006). The lifeblood of the industry flows from its research and development (R&D) efforts with an annual investment of U.S. $49.3 billion, or between 10
to 15% of total revenues (Herper & Kang, 2006). As the world becomes increasingly globalized, the pharmaceutical industry must respond to emerging challenges and opportunities, especially in developing countries. Currently, the industry faces issues related to expiring patents, drying pipelines, decreasing returns on investment, growing urgency to introduce new drugs in a timely manner, and an increasing need to access broad patient populations. This reality has prompted a wave of offshoring by top multinational firms. Offshoring was originally adopted as a tool for reducing costs and for gaining strategic advantages (Gupta, Seshasai, Mukherji, & Ganguly, 2007), yet the pharmaceutical industry has been slow to take advantage of the benefits that offshoring can offer. This section examines the current levels of global pharmaceutical employment and offshoring.
global Pharmaceutical employment The pharmaceutical industry employed approximately 1.76 million individuals worldwide in 2006 (U.S. Department of Commerce, 2003). This number is expected to grow by 2.8% annually, resulting in an estimated 2 million jobs by 2010 (U.S. Department of Commerce, 2003). Structurally, the pharmaceutical industry is becoming increasingly consolidated with relatively few, but large, employers. The top 20 pharmaceutical companies constituted 59% of global employment in 2005 (U.S. Department of Commerce, 2006). The United States leads in employment (41%), followed by Europe (25%) and Japan (13%) (Farrell, 2005). Consequently, only 21% of industry employment is located in less developed nations. Employment is concentrated in three main areas: commercial (40%), manufacturing (31%), and research and development (15%). Sales agents represent the largest percentage of the workforce (35% total; 88% of commercial). The remaining 14% of employment is involved with back office services such as general and administrative func-
tions (G&A) (6%), IT (3%), procurement (3%), and supply chain management (2%) (Ernest & Young, 2004). Employment by occupation is skewed towards the commercial and manufacturing sectors with generalists (37%) and support staff (30%) dominating the industry. Increased offshoring is predicated on the ability to fundamentally alter the make-up of occupational employment to take better advantage of highly skilled-labor in lowwage countries (Ernest & Young, 2004).
current levels of global sourcing At the forefront of the offshoring wave are the large multinational corporations based in the United States, Western Europe, and Japan. In 2005, an estimated 13,000 jobs were offshored (Pascal, Robert & Rosenfeld, 2006). This number will increase to 21,200 jobs by 2008 (Pascal & Rosenfeld, 2006). Unlike many other competitive industries, the pharmaceutical sector is uniquely positioned to remotely execute one if its core competencies— R&D, which represents 74% of offshored employment (Pacal & Rosenfeld, 2006). The R&D activities currently performed in less developed nations include clinical trials, clinical statistics, data management, medical writing, and discovery. The pharmaceutical industry has recognized clinical trials as an area with the greatest potential for cost-savings and expansion. For example, Quintiles, a provider of clinical trials, has hired 850 employees in India, or 5% of its total employees, and plans to expand its data management center in Bangalore (“Quintiles Moves Data,” 2005). Although globally sourcing a core function such as R&D is inherently risky, pharmaceutical companies are now willing to follow in the footsteps of industries that have successfully utilized offshoring. IT is the next largest offshored function, with 22% of employment performed abroad by pharmaceutical companies, although it constitutes only 3% of total employees (Farrell, 2005). In
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Offshoring in the Pharmaceutical Industry
May 2005, Wyeth outsourced its clinical data management to Accenture, with a large portion of its operations to be located in India (Global Newswire, 2005). The smallest job function to be offshored by pharmaceutical companies (2%) is G&A, which includes basic financial operations such as payroll, finance, and accounting (Farrell, 2005). While there is no distinct pharmaceutical model, companies are conducting their offshoring activities through a mix of captive and vendor arrangements. One of the more commonly used arrangements involves a hybrid model, where a pharmaceutical company initially controls procedures and management but gradually transfers power to its on-site vendor or partner. This trend is especially evident between established global pharmaceutical companies and India-based biotechnology firms.
supplies 85% of its domestic market and generates approximately U.S. $900 million a year from sales in India alone (Park, 2002). Indian-based pharmaceutical firms have achieved a degree of sophistication that is accelerating the strategic need for working relationships with leading global firms. For example, Ranbaxy recently signed an agreement with GlaxoSmithKline to commercialize compounds that are developed together, despite the fact that the two firms were locked in a patent lawsuit a few years ago. Some analysts state that the Indian pharmaceutical industry will grow quickly if it can not only create commodities but also share in the financial and strategic benefits of codevelopment and ownership of new patented compounds and products (Go, 2005). Increasingly, the source for innovation in the global pharmaceuticals industry comes from the biotechnology sector, particularly biopharmaceuticals, bioservices, and bioinformatics. Globally, the market for biotechnology products is valued at US $54 billion (Biospectrum India, 2006), to which India contributed about 3 to 4% with total revenues of US $1.8 billion in 2006 (Business Standard, 2007). Figure 1 shows the potential, rapid growth of the Indian biotechnology industry. The Indian biotechnology industry
India’s Pharmaceutical and biotechnology Industry India is the world’s largest producer of generic anti-AIDS drugs, and its overall generics industry totals more than U.S. $4 billion (Expanding Global, 2005). India’s pharmaceutical industry
Figure 1. Projected growth of indian biotechnology industry (U.S. $) (Source: “Biotechnology”, India Equity Brand Foundation, 2005) Indian Biotechnology Industry Size (US $) 6000 5000
Millions of US $
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Offshoring in the Pharmaceutical Industry
is growing at an annual rate of 35% compared to 17% worldwide. The Indian biotechnology industry is expected to grow to U.S. $5 billion in 2009 (Business Standard, 2007), thereby increasing its global market share from 1 to 10% in only 5 years and generating more than a million jobs (New York Times, 2005). Despite its current small size, the Indian biotechnology industry plays a significant role in certain segments such as vaccines for children and competes globally, with exports accounting for 52% or U.S. $763 million of total sales. In terms of exports, the biopharmaceuticals segment accounts for the largest share of the biotechnology sector, with total revenues of U.S. $572 or 75% of total exports (“Offshoring R&D,”, 2007). Unfortunately, the impact of the industry on the job market is limited, with only 10,000 people employed (Ernest & Young, 2002) in 280 biotech and 190 bio-supplying companies (“Offshoring R&D,” 2007). The Indian biotechnology industry is dominated by the biopharmaceuticals market, which accounts for 76% of total industry revenues. Other important segments include bioservices (9%), bioagricultural sector (7%), industrial biotechnol-
ogy (5.5%), and bioinformatics generating 2.5% of the total industry revenues respectively (New York Times, 2005). Of these segments, the bioagriculture and bioservices markets are growing at an annual rate of 70% and 100%, respectively (Ernst & Young, 2002).
biopharmaceuticals While relatively small compared to the overall pharmaceuticals industry, the biopharmaceuticals sector is the single largest contributor to the Indian biotechnology industry with total revenues of U.S. $811.4 million, accounting for more than 75% of the total biotech industry (India Can Become, 2006). In recent years, this segment achieved close to 30% annual growth, primarily driven by vaccine production. Apart from vaccines (e.g. recombinant hepatitis), the range of medical biotechnology products include diagnostics (e.g., immunology products) and drug development (“Offshoring R&D,” 2007). In 2005, the Indian vaccines market generated sales of about U.S. $380M growing at an annual rate of 20%. One of the most important vaccines is recombinant Hepatitis B, with a market of U.S. $22 million in India,
Figure 2. Percentage Break-Down of Biotechnology Sector (Source: Data used from “Biotechnology”, India Equity Brand Foundation, 2005) Break-Down of Biotechnolog Sector
BioPharmaceutical
0.75
BioServices
0.09
BioAgriculture
0.07
BioIndustrial
0.07
0.02
BioInformatics
0
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Percentage
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Offshoring in the Pharmaceutical Industry
produced by Shantha Biotechnics, Bharat Biotech, and Wockhardt as well as foreign producers such as Aventis, LG Chemicals, and GlaxoSmithKline (Ernst & Young, 2002). With over 25 companies, the diagnostics sector generated sales of U.S. $137 million with its proposition of real-time and low-cost processes through new reagents and instruments. The therapeutics segment achieved U.S. $113.64 million in sales with the development and marketing of products such as Streptokinase, Granulocyte Colony Stimulating Factor (G-CSF), Erythropoetin (EPO), Interferon Alpha 2 (otherwise known as human insulin), which was released in 2003. Within the biopharmaceutical sector, the production of biogenerics plays an important role: Indian companies such as Wockhardt, Biocon, and Shantha Biotech are manufacturing generic versions of biotech drugs—focusing on EPO products, human insulin, Interferons, and G-CSF. Other fast-growing areas are the bioengineering and nanobiotechnology segments that develop new tissue engineering processes and biomaterials for therapeutics.
bioinformatics The bioinformatics sector is successfully creating synergies between the IT and pharmaceutical industry. In 2005, the bioinformatics segment grew by 25% generating U.S. $22.7 million and is expected to generate U.S. $120 in million sales by 2007 (India Equity Brand Foundation, 2005). Certainly, the bioinformatics industry benefits from the strength of the IT industry in India. Companies such as Questa Bioinformatics, Ltd., or Tata Consultancy are offering services related to data mining, scientific visualization, information storage, and simulation of DNA sequences. Some companies, such as Advantage and Agarare, specialize in the development of Laboratory Information Management Systems (LIMS).
drIvers And trends global Pharmaceutical sourcing Advances in IT and bioinformatics, escalating cost pressures, cost differential between highwage and low-wage countries, and time to market considerations are motivating companies to move part of their operations to countries like China and India.
Information Technology As scientists delve into the complex biological code of the human genome, there is intense competition to develop potential drug targets that affect key population groups and profiles. The challenge is that much of the clinical information remains on paper, and many firms are embracing the opportunity to streamline and centralize their information resources. Consequently, advances in IT is one of the most critical drivers in the decision to offshore, especially in India, which has become a renowned global hub and generally ensures standardized procedures for complex data services and discovery software. Global pharmaceutical companies are looking for local data management units that invest heavily in hardware, software, line connectivity, and skilled employees. Typically, a major firm would look for the following: • • • • • • • •
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A detailed data management plan Preparation of database in a desired software Comprehensive electronic validation and consistency checks Data entry including double data entry Query generation, handling, editing and tracking Database lock 100% Quality Control of the efficacy parameters and safety data 21 CFR Part 11 compliant
Offshoring in the Pharmaceutical Industry
Perhaps the most critical is whether or not the local Indian partner is “21 CFR Part 11 Compliant,” which addresses the FDA’s guidelines on electronic records and electronic signatures in the United States. Part 11 as it is commonly called, defines the criteria under which electronic records and electronic signatures are considered to be trustworthy, reliable and equivalent to article records. Part 11 requires drug makers, medical device manufacturers, biotech companies, biologics developers, and other FDA-regulated industries (not including food manufacturers) to implement controls, including audits, validation systems, and documentation for software and systems involved in processing many forms of data as part of business operations and product development. The pharmaceutical industry spends roughly 5% of its revenues on IT, much less than other information-intensive industries such as financial institutions. A report by PricewaterhouseCoopers (2005) estimates that as much as 80% of the information held by many large pharmaceutical companies is unstructured and not easily searchable. The prevailing realities provide an excellent opportunity for firms to offshore their restructuring process and devote more of their resources to IT, which has the potential to convert a tidal wave of data into new products. Further, increasing automation allows firms to more easily monitor trials from abroad and understand the relationships between complex variables and derive conclusions within a shorter time frame. Easier monitoring ability, access to data, and application development help to reduce many of the operational and logistical challenges associated with offshoring. Strategic collaborations between global pharmaceutical companies and local Indian firms, particularly those in the bioinformatics sector, have reported cost savings of 30 to 40% in the drug development process, notably activities related to biological and chemical databases, data mining, biomedical text mining, scientific visualization,
customized tool development, and information storage (Pascal & Rosenfeld, 2005). Other services include integrated data management systems, customized algorithms for key biological data, and streamlining the linkages between the research pipeline and expert analysis of data. Alpha Gene, Inc., utilizes tailored informatics technology from Questar Bioinformatics to mine its protein library. Questar provides support for structure determination, pathway identification, and small molecule library development. Another interesting example of this synergistic dynamic is Tata Consultancy Services’ recent agreement to research “P66,” which is a target protein identified by Congenia in several age-related diseases. The optimized lead molecules discovered by Tata Consultancy Services will be further tested and developed by Congenia through extensive animal, and eventually human, clinical trials. Not surprisingly, key partnerships between global and local firms have developed around the IT service centers, such as in Bangalore, Hyderabad, and Chennai.
Rising Costs of Research and Development According to the Tufts Center for the Study of Drug Development, the cost of developing a new drug increased from U.S. $131 million in 1987 to U.S. $ 1 billion in 2006. The Bain Drug Economic Model estimates that investment required for one successful drug launch at $1.78 billion dollars, including typically $250 million for launch. On average, one out of every 1,000 compounds that enter preclinical testing will survive to the clinical phase (Eaton & Wierenga, 1999). Of this, just one out of every five will eventually receive regulatory approval (Eaton & Wierenga, 1999). Once it reaches the marketplace, only 3 of 10 new drugs generate a return on investment (Goodwin & Goldberg, 2001). Failure for certain drugs to receive regulatory approval for sale in the market stem from a vari-
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ety of sources, such as harsh negative side effects or weak therapeutic effects. For those drugs that do reach the clinical testing phase, the future remains uncertain, partly because of the increasing difficulty of obtaining approval from regulatory agencies. It is the norm in the industry that, for every one hundred drugs that enter clinical studies, 30% will be rejected during Phase 1, a further 37% during Phase 2, 6% in Phase 3, and an additional 7% during the regulatory review period (Go, 2005). In total, only 10 to 12% of drugs that reach the stage of being tested on humans are approved for marketing (Go, 2005). Although these low yields are consistent with the identity of the pharmaceutical industry of being notoriously R&D intensive, a historical perspective casts an equally grim light on current productivity levels. Figure 3 illustrates the industry’s anemic level of recent drug discovery. Although the funding for R&D has been increasing, pharmaceutical companies have not been able to maintain past levels of drug discovery. The FDA approved only 21 new molecular entities (NMEs) in 2003, compared with a peak of 53 in 1996, according to the FDA’s Center for Drug Evaluation and Research. Figure 4 displays the increasing cost of passing regulatory hurdles.
Inherent in a system of patents with limited durations is the gradual loss of revenue after expiration of the patent. This loss has been historically offset by the continual development of new drugs; but that is no longer the case. Tremendous pressure is being placed on drug discoverers to accelerate the pace of innovation. To put this challenge in perspective, consider that 35 blockbuster drugs will lose their U.S. patent protection within the next 4 years alone (Kelly Scientific Resources, 2004). These losses are estimated by the market research firm Datamonitor to total $70 billion globally. In addition to a rise in the cost of developing new drugs and a decrease in the frequency of their discovery, the increasing use of generic pharmaceuticals is putting pressure on firms to cut costs. According to a February 2005 IMS Health Report, generic drug revenue has grown in the U.S. market from 15% in 1999 to 17% in 2004, while the portion of generic prescriptions dispensed has grown from 50% in 1999 to 54% in 2004 (IMS Health, 2005). Lower priced generics cater to the demands of price conscious third-party payers and individual consumers alike, as is shown in Figure 5. The shift from branded drugs to generics is a sign of the growing strength of managed care or-
Figure 4. Trends in preclinical, clinical, and total cost per approved new drug (Souce: J. A. DiMasi, 2005; Journal of Health Economics, 22, 151-185) 900 802
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Hansen (1979) DiMasi et al. (1991)
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Figure 5. Generics’ share of U.S. prescription drug market: 1984-2005 (Source: 1984-2000 IMS Health, National Prescription Audit Plus 2001; 2004 projection: S&P) Generic % Share of Market (Countable Units, Such as Tablets)
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ganizations, a growing variety of generic versions available when a patent expires, and more aggressive sales and marketing techniques by manufacturers of generics (U.S. Department of Commerce, 2003). Multistate purchasing pools in particular are significantly strengthening the leverage buyers have over pharmaceutical companies (NSCL, 2005). As the U.S. population ages, the larger segment of Medicaideligible consumers will heighten this pressure, as highlighted in a recent A. T. Kearney (2004) report that states from 2003 through 2007, pricing strains
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0
will pare $9 billion from the same [top] 10-pharma firms’ revenues, as key customers (e.g., state governments, the elderly, and retail consumers) balk at paying top dollar. The increasing cost of R&D makes low-cost alternatives such as offshoring to developing nations all the more attractive.
Cost Differential Many companies cite the large gap between what it costs to employ equivalent employees at home
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Offshoring in the Pharmaceutical Industry
Time to Market
and in low-wage countries as one of the primary drivers of offshoring. The unusually high labor costs of the pharmaceutical industry make it especially attractive in this case. While there exists many different ways to cut costs, offshoring clinical trials promises to dwarf savings in other areas. The pharmaceutical industry spends the majority of its R&D dollars on phases that require clinical trials (Kermani & Bonacossa, 2003). Furthermore, these phases’ relative importance has been increasing, since the proportion of industry R&D expenditure allocated to clinical studies increased between 1996 and 1998 from 32.5 to 39.5%, respectively (Kermani & Bonacossa, 2003). SRI International, an independent nonprofit research institute, estimates that by sourcing in a low-wage country, 10 to 40% can be shaved off early drug work such as toxicology studies. GlaxoSmithKline is leveraging Indian talent in its alliance with Ranbaxy, under which Ranbaxy identifies promising potential drugs and performs preclinical trials, while GSK performs later stage developments and retains the rights to market the drugs in all countries other than India (Ernst & Young, 2004).
Patents provide the monopoly power to producers that enable them to recoup their enormous R&D costs. Without exclusive rights to produce and sell patented goods, generics would dominate the market. Consequently, each year of a drug’s patent-protected life is extremely valuable. This sheltered time period is defined by two factors: first, patent lengths, which have been fixed globally by the WTO at no less than 20 years; and second, the time from the date a patent is filed and its debut on the market. Of these, only the latter is variable. Offshoring has the potential to significantly reduce this development time. Mounting development requirements make any option for speeding this process even more attractive. It has been estimated that each extra day a drug is on the market generates around U.S. $1 million (U.S. Department of Commerce, 2006). Figure 6 illustrates the declining time period of exclusivity. The Pharmaceutical Research and Manufacturers of America (PhRMA) comments on this phenomenon that the average period of effective patent life for new medicines is substantially shorter than the 20-year period that constitutes a full patent term in the United States.
Innovative Drug - Year of Introduction
Figure 6. Period of market exclusivity between introduction of breakthrough medicine and competing innovators (Source: PhRMA, 2000; The Wilkerson Group, 1995) Celebrex ® 1999
0.25
Invirase ® 1995
0.25 1
Recombinate ® 1992
2
Diflucan ® 1990 Prozac ® 1988
4
Mevacor ® 1987
4
AZT ® 1987
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Seldane ® 1985
4 5
Capoten ® 1980
6
Tagamet ® 1977
13
Inderal ® 1965 0
2
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10
12
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Offshoring in the Pharmaceutical Industry
Furthermor,e a generic drug manufacturer may file a patent challenge as early as 4 years after the new medicine is approved, and in some cases, as early as 3 years after approval (PhRMA, 2003). Offshoring can alleviate this time crunch by speeding clinical trials. Drug companies in Western Europe, the United States, and Japan face daunting regulatory requirements for approval. In order to meet these standards, extensive clinical trials must be conducted. The populations of developed countries are far less conducive to these trials than those in developing countries. Finding untreated or drug “naïve” patients that have the health characteristics sought by pharmaceutical companies is exceedingly challenging in developed nations. For example, an expert interviewed by McKinsey & Company, commented that it was challenging to recruit diabetes patients who had not received treatment in the U.S., while there is a large patient pool available in India (Farrell, 2005). Drug companies are taking advantage of this fact by contracting with Indian firms. However, the relationship between India and the drug industry extends further. For example, Pfizer, in recognizing the long-term potential of India as a location for clinical testing, has partnered with the Bombay College of Pharmacy to create an Academy for Clinical Excellence. The scientific academy is to be set up near the Bombay College of Pharmacy, with modules offering training programs in clinical research methodology, data management and biostatistics (“Pfizer to set up,” 2005). In late 2004, GlaxoSmithKline’s chief executive Jean-Pierre Garnier stated there were few alternatives to streamlining research and development department, and therefore the company is attempting to move 30% of its clinical trials to low-cost countries (Tomlinson, 2004). Complementing this superior access to patients for clinical trials, offshoring enables companies to work around the clock on promising compounds. According to experts at the U.S. Department of Commerce (2006), a development time of a
blockbuster drug shortened by 1 month equals roughly $100 million in additional sales at a 40% profit margin. Further, Indian CRO firms and those that provide other types of services must meet the U.S. good manufacturing procedures (cGMP), good laboratory practices (GLP), and good clinical practices (GCP) requirements. Any global pharmaceutical firm that works with Indian firms is subject to inspection by USFDA scientists, and if a critical clinical trial is conducted in India, it must meet both the GCP requirements as well as investigation from Indian experts. This allows for quality control and provides strong regulatory guidelines for Indian-based firms.
offshoring risks and concerns Large pharmaceutical companies are still somewhat wary of outsourcing sensitive and vital operations. There is a low tolerance for error industry-wide; simple mistakes can compromise results or, in the worst-case scenario, harm patients, resulting in a massive and expensive liability. Joe McCracken, SVP of business and commercial development at Genentech, highlighted that his firm has a very low threshold for error. Every decision must be correct and done quickly to prevent customers from suffering and competitors from capturing a larger portion of their consumer base. And, because of the higher potential threshold for error, Genentech is much less interested in outsourcing because the savings do not justify the risk (IMS Health, 2005). Data integrity has a magnified effect in the pharmaceutical industry, and companies must carefully outsource their IT functions to the best, most error-proof partners. Russ Bantham of the Pharmaceutical Research and Manufacturers of America (PhRMA) cites industry fears about maintaining data integrity, saying, “Misreading, losing, or mis-entering one piece of data could result in a multi-billion dollar lawsuit” (PhRMA, 2006). Along those lines, delays in any process whether it is regulatory, a flawed process, or inef-
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Offshoring in the Pharmaceutical Industry
fective drugs is highly costly. If the FDA discovers flaws in any aspect of pharmaceutical research, companies face setbacks. If these errors are discovered while the drug is out on the market, it can result in the loss of billions. Highly rigorous and expensive regulations worldwide, as previously discussed, can become complicated with the use of third parties. Relying on foreign vendors and partners can make compliance more burdensome, costly and risky. Privacy laws recently passed in several countries might hinder data sharing during the highly regulated development and manufacturing processes. The cost of an unsuccessful partnership is more than just a financial lost, since the company loses crucial time and opportunities that it could have done elsewhere (Arnold & Grindley, 1996). In outsourcing arrangements, there is also a loss of partial control as it passes from client to provider. As a result, the information available to the project manager is typically less detailed and complete if it had been retained in house. Poor communication can also lead to problems with quality and delays. Thus, there is an element of trust in any relationship, and certain problems can become magnified if the partners do not know each other well (Cavalla, 1997). Firms also worry about weak intellectual property protections and do not want to risk losing a strategic formula or manufacturing advantage because of outsourcing. If the legal system is weak, there will be little if any recourse a firm can take if its information is leaked to a competitor or generic manufacturer (Feeny, Lacity & Willcocks, 1995). There is also the challenge faced by upper management to juggle 20 to 30 individuals during the life of a project, working with multiple languages, and time zones (Kelly Scientific Resources, 2004). In conclusion, fewer drugs are being discovered, it is costing more money to push them through the development pipeline, and the length of the process is increasing, thereby eroding drugs’ patent protected life spans. Consumers,
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especially bulk buyers, are exerting greater pressure on pharmaceutical companies to reduce or cap prices. Each of these factors negatively affects profits, and collectively their impact cannot be ignored. Increasingly, offshoring is being looked to as the solution.
why India? A report by Preston and Singh (2003) states that global manufacturing offshoring will increase from $14 billion to $27 billion by 2008. India’s inherent advantages in both contract manufacturing and research make it an attractive destination for the mass production of drugs and clinical research. Indian companies have also built manufacturing facilities, which could quickly be updated to international standards. In fact, there are 70 USFDA approved plants and over 200 units certified as following Good Manufacturing Practices (GMP), which is the highest number outside of the U.S. (Higgins & Rodriguez, 2004). Indian companies would also make excellent partners for multinational pharmaceutical companies since they filed a total of 126 Drug Master Files (DMFs) with the FDA in 2003, ranking only second to the U.S. and constituting 20% of all drugs entering the U.S. market (Higgins & Rodriguez, 2004). While this does not take into account the usefulness or value of the produced drugs – it does signal India’s ability to discover, develop, and manufacture drugs in a timely manner. Put simply, India possesses a talented workforce and efficient manufacturing infrastructure that is suited for offshoring. The Indian government now allows 100% of foreign direct investment (FDI) to directly flow to the pharmaceutical industry. Reduced import tariffs and price controls have also made India a more attractive destination for FDI (Evans & Varaiya, 2003). The movement towards a friendlier investment climate was motivated by the lowlevels of R&D investment by domestic pharmaceutical companies (1.9% of total revenues). The needs of the Indian and global pharmaceutical
Offshoring in the Pharmaceutical Industry
companies complement each other—Indian firms require large inflows of FDI and international companies need to significantly reduce R&D and manufacturing costs.
contract research opportunities As outlined in a previous section, the drug discovery and development process is expensive and extremely research intensive. Since R&D is such a critical function, firms are now partnering with Indian biotech and pharmaceutical companies to leverage their low cost of innovation. According to a McKinsey Quarterly study, R&D costs for Indian pharmaceutical firms are 75% less than those of a multinational firm (Quinn & Hilmer, 2004). Furthermore, India is an ideal destination for clinical trials accounting for more than 66% of total R&D costs (Bakhle, 2003). India also possesses a world-class infrastructure of healthcare professionals: 500,000 well-trained English-speaking doctors, 16,000 hospitals, 171 medical colleges, and a heterogeneous pool of genes, making it a well-suited location for conducting clinical trials (Charai, 2002). India’s uncontaminated drug naive patent population is another factor contributing to the growth of clinical research outsourcing. Unfortunately, this stems from India’s high levels of poverty and low per capita expenditure on drugs (less than U.S. $5 per year). It is also less expensive to recruit patients, nurses, and investigators. It is projected that India offers a 50% cost savings for Phase 1 research and 60% for Phase 2 and 3 (Indian Pharmaceutical Overview, 2004). However, there are regulatory barriers limiting the growth of clinical research outsourcing to India. The Drugs and Cosmetic Rules (Schedule Y) describe India’s clinical trials as, “one step behind other countries,” (Indian Pharmaceutical Overview, 2004). Currently, multinational firms are primarily outsourcing Phase III trials, which are extremely costly and involve a large number of patients (1,000 to 3,000, on average). Lead-
ing pharmaceutical companies such as GlaxoSmithKline, Pfizer, and Novartis have already outsourced their clinical data management to India; GSK is building a new global center for clinical research and development. Domestic companies, such as Syngene, the subsidiary of the Indian biotech giant Biocon, carry out early state oncology drug discovery and delivery for companies like Novartis (India Equity Brand Foundation, 2004). High Quality and Educated Workforce The quality of education of the pharmaceutical and biotechnology workforce in India is one of its more attractive characteristics. At the surface, India does not seem to have a strong educational system, but unlike other developing countries, it has invested heavily into higher education for decades, establishing world-class universities and research institutes. The Indian Institutes of Technology (IIT) provide research facilities and education that are on par with those offered at Ivy League schools in the U.S.. Only the brightest students are admitted to these schools, thus, considering the large population, there is an enormous talent pool available. In addition, there are over 45 Indian universities teaching postgraduate biology and chemistry courses and 300 college levels educational and training institutes offering degrees and diplomas in biotechnology, bioinformatics, and other sciences. As a result, each year 500,000 undergraduate students, 300,000 postgraduates and 1,500 PhDs qualify in the biosciences (Indian Department of Biotechnology). Although there are over 100 National Research Laboratories, world-class research is limited to a few prestigious institutes such as the Indian Institute of Science in Bangalore (IISc) or the National Center for Biological Sciences in Bangalore (NCBS) a branch of the Tata Institute of Fundamental Research. From a cost perspective, Indian companies will remain competitive in the near term as qualified researchers and employees in India cost only 30 to 40% of their peers in developed countries (ITP News Network, 2003).
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Indian government support The Indian government supports the pharmaceutical industry in various ways. First, the government provides fiscal incentives to the pharmaceutical and biotechnology sector by granting a 150% weighted average tax deduction on R&D expenditures as well as on international patenting costs until 2010. In addition, it offers exemptions on import duties on key R&D and clinical trial equipment. Also, the Indian government plans to remove duties on raw imported materials, where the finished product is imported duty free, thereby facilitating drug development in India. Additionally, the Ministry of Science and Technology is promoting a number of high-quality research centers. These institutes are outfitted with state-of the art technology, hire highly skilled researchers, and collaborate with the private industry and organize the purchasing of laboratory supplies and equipment. Examples of such centers include the Plant Genomics Center in New Delhi, the Center for Human Genetics in Bangalore, and the Center for Cellular and Molecular Biology (CCMB) in Hyderabad (“Offshoring R&D,” 2007). State governments are also supportive, with many investing in R&D parks where firms benefit from cutting-edge technology and infrastructure. The Southeastern state of Andhra Pradesh is a leading example, with a research park named Genome Valley near Hyderabad, but also the states of Karnataka, Maharashtra, Tamil Nadu, Gujarat, Punjab and West Bengal are investing public funds to develop such facilities. The government supports these parks by providing up to 30% of total costs as a grant or 49% through private equity (New York Times, 2005). The government actively encourages privatepublic partnerships. The ICICI bank established the “knowledge park” at Genome Valley. Other examples include The Centre of Genomic Applications (TCGA), which is a joint project between the Chatterjee group, the Council of Scientific and Industrial Research (CSIR), and the Ministry of Science and Technology. 1218
Intellectual Property considerations in India The pharmaceutical industry, like the software industry, is based on information, protected by trademarks, patents, trade secrets, and copyrights. Without adequate intellectual property rights (IPR) protection, no level of cost savings could motivate pharmaceutical or biotech companies to operate in low-wage countries. The demand for stronger and better-enforced IPR is coming not just from global pharmaceutical companies, but from Indian-based ones as well, in particular those that make-up the biotechnology sector. For example, Biocon, India’s largest biopharmaceutical firm is altering its strategy to take advantage of emerging dynamics – its revenues, to date, rely heavily on producing generic drugs with non-infringing process technologies, but now there has been a shift towards engaging in collaborative developing and licensing with global partner firms to save costs and benefit from larger, more robust IP portfolios. This type of strategy, which is expected to become increasingly popular, given the trends and political environment previously outlined, is best exemplified by Biocon’s acquisition of U.S.-based Nobex Corporation’s assets in March 2006, which allowed Biocon to obtain ownership of all oral insulin BNP programs as well as peptide delivering technology (“Offshoring R&D,” 2007). Further, Biocon began targeting global markets in 2006 by selling its insulin products in Europe (“Offshoring R&D,” 2007). This new type of strategic model allows global pharmaceutical firms to maximize the value from offshoring key manufacturing, research, and IT activities, while at the same time allowing local Indian participants to shift their intellectual and capital resources away from purely reverseengineering blockbuster drugs and becoming a value-added partner in the critical R&D process that helps create new, profit generating products. This type of joint relationship and better-enforced
Offshoring in the Pharmaceutical Industry
IP legislation creates new, attractive incentives for global and local pharmaceutical firms to leverage each other’s strengths and reduce many risks associated with offshoring. There are, of course, concerns about foreign pharmaceutical companies patenting the DNA of organisms native to India that and have been used for thousands of years for health and cosmetic applicants. For example, in 2004, Monsanto, an American-based agricultural biotechnology firm was granted a patent on “Chapati” from the European Patent Office (Vanguri & Rajput, 2002). Chapati bread has been used in Indian society for hundreds of years and to the Indian public; it was shocking that American and European patent authorities have, and will likely continue to, grant patents on indigenous products. Another emerging concern is the treatment of the poor (and often sick) Indian volunteers in clinical research studies—some regulatory bodies want to ensure that participants are not being exploited, misinformed, or used as guinea pigs for riskier drug treatments and trials. Foreign companies need to understand and be sympathetic to the local Indian reality and to conduct their business practices in the most ethical manner; this is a growing critical success factor.
conclusIon The global pharmaceutical industry is embracing the advantages of offshoring many of its nontraditional activities to emerging countries such as India. The reality of shrinking profit margins, drying pipelines, patent expirations, and increased R&D costs has made offshoring an attractive cost-reducing strategy. Multinational firms are offshoring R&D activities, most notably clinical trials and IT services. Despite concerns, firms are overcoming current risks in order to realize the gains offshoring can provide. One of the greatest drivers to offshore to India is the development of more sophisticated
IT applications and services by local firms. According to Ed Thompson, principle scientist of Procter & Gamble, many large firms have vast databases that are inexact or error-filled because scientists frequently use different names for the same chemical (Farrell, 2005). Consequently, P&G worked with Accelrys, who has offices located in Bangalore, India, to solve this challenge by reengineering their chemical registration process to include validation stages for data quality assessment and duplicate checking. A new “substance” data model was a central aspect of supporting the duplicate checking stage. The software makes it possible for P&G scientists to register, search, and retrieve entities consisting of generic chemical structures, polymers, exact structures, mixtures, and formulations—even when not all specific components or their contents can be identified. Further, this centralized database makes it significantly easier for CROs to register their results and for managers to receive the most updated information within 24-hours. One of the most intriguing activities to be outsourced to India, due entirely to advances in IT, is the ability to target thousands of new genes per year, versus 500 less than 2 decades ago. The Human Genome Project aims at sequencing the entire human genome, containing roughly 80,000 to 100,000 genes, which has enormous implications for R&D. For example, if 5% of the proteins encoded have therapeutic value and a further 20,000 represent possible biological targets, this would mean a 14-fold improvement in current discovery rates and, consequently, more targeted product development (PhARMA, 2005). Many firms in India can easily help identify and encode potential genes that possess therapeutic value and provide real-time discovery to other scientists throughout the world. The reduction in cost and time due to advances in IT, database management, and tailored applications for chemical identification are significant drivers in the decision to offshore nontraditional core competencies of the pharamceutical industry.
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Offshoring in the Pharmaceutical Industry
Presently, India has many different types of firms entering into the clinical trial data management business. Some entrants are CROs who are creating separate data management units, some are IT/ITES companies diversifying their business portfolios, and others are global and local pharmaceutical companies that are setting up their own biometrics and data management operations—either alone or through partnerships. For example, Pfizer has signed a preferred provider contract for its Biometrics Division with Cognizant Technologies in India. Similarly, Accenture is working exclusively for Wyeth in clinical trial data management with approximately 400 staff, working across two offices, with plans to build a third. As India emerges as an IT and clinical trial super “hub,” outsourcing to India for clinical data management will become more pronounced than originally predicted. However, with several different business models, it will take time to see how many are profitable after meeting stringent global regulatory standards. Firms and partnerships who quickly meet global standards and regulations are more likely to survive. Outsourcing of research and development, especially clinical trials, is expected to increase in upcoming years. Although there is no set limit on the percentage of trials that can be done abroad, experts agree that it is unlikely that drugs will be approved if more than 40% of a trial are performed internationally (PhRMA, 2006). Regulatory approval aside, a large percentage of clinical trials must be done locally because it is necessary to communicate with individuals who assist in the shaping of the trials, as well as those who promote the drug once it is approved. Offshoring is quickly becoming an essential component of the pharmaceutical industry. Pilot programs and strategic global/local relationships are becoming commonplace and plans to expand overseas operations are a standard response to increasing cost pressures. The drive to outsource more, both in magnitude and in scope,
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is inevitable, and India is an ideal place to do it. Firms will still be saying “yes” to the “should we offshore” question in 10 years; however, “India” might not necessarily remain the answer to the “where” question. As multinational firms offshore higher level, sensitive R&D activities to foreign CROs and other biotech firms, more research is needed on how this trend will affect the regulatory structure, especially as companies file new patents in multiple countries. Additionally, the trend of global firms partnering with local ones allows both participants to leverage each other’s strengths; these dynamic arrangements will offer a critical area of new research to delineate new strategic approaches to R&D and future blockbuster drugs. Lastly, and most importantly, time will tell how India’s highly regarded, preexisting IT “hub” caters to the technical needs of global and local pharmaceutical companies, while at the same time ensuring a high degree of control and data integrity.
reFerences A. T. Kearney. (2004, September). Outsourcing among pharamaceutical and biotech firms: The growing imperative for a more aggressive approach. Boston: Author. Bakhle, D. (2003). Global clinical trials: Challenges and opportunities. Business Briefing: Pharmatech. Cavalla, D. (1997). Modern strategy for preclinical pharmaceutical R&D: Towards the virtual research company. Chichester, England: Wiley. Charai, S. (June, 2002). Pharmaceutical outsourcing. American Pharmaceutical Outsourcing. Clinically speaking, India is becoming a hub for clinical trials and insight. (2005, March 31). India Business Insight.
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DiMasi, J. (1995). Trends in drug development costs, times, and risks. Drug Information Journal. Eaton, C. E., & Wierenga, D. E. (1999). The drug development and approval process. Pharmaceutical Research Association, Office of Research and Development. Ernst & Young. (2004). Progressions 2004: Global pharmaceutical report, industry defining events. New York: Author. Evans A. G., & Varaiya, N. (2003, Fall ). Assessment of a biotechnology market opportunity. Entrepreneurship Theory and Practice. Expanding global access to HIV/AIDS treatments: An overview of the issues. (2005). American Newsletter. Farrell, D., (Ed.). (2005, June). The emerging global labor market. Washington, DC: McKinsey Global Institute Press. Feeny, D. F., Lacity, M. C., & Willcocks, L. P. (1995). IT outsourcing: Maximize flexibility and control. Harvard Business Review, 73(3). Go, R. (2005). Deloitte white article: India meets Doha: Changing patent protection.New York: Deloitte Touche Tohmatsu. Goodwin, F., & Goldberg, R. (2001, July 7). New drugs: The right remedy. The Washington Post, p. A21. Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007). Offshoring: The transition from economic drivers toward strategic global partnership and 24-hour knowledge factory. Journal of Electronic Commerce in Organizations, 5(2). Herper, M., & Kang, P. (2006, March). The world’s ten best-selling drugs. Forbes. Higgins, M. J., & Rodriguez, D. (2004, December). The outsourcing of R&D through acquisitions in the pharmaceutical industry (SSRN Working Article).
India can become significant global player by 2010. (2006, November, 14). Biospectrum India. Kelly Scientific Resources. (2004). Management of clinical trials in an era of outsourcing. Issues and Trends. Kermani, F., and Bonacossa, P. (2003). Outsourcing Clinical trials in the pharmaceutical industry. Chiltern International Business Briefing: Pharmatech. Leavy, B. (1996). Outsourcing strategy and learning a dilemma. Production and Inventory Management Journal, 37(4). “Offshoring R&D activity.” (2007 , January 1). Genetic Engineering and Biotechnology News. Pharmaceutical Research and Manufacturers of America (PhRMA). (2003a). Incentives to discover new medicines: Pharmaceutical patents. Washington, DC: Author. Pharmaceutical Research and Manufacturers of America (PhRMA). (2003b). The 2003 pharmaceutical industry profile. Washington, DC: Author. Park, R. (2002). The international drug industry: What the future holds for South Africa’s HIV/ AIDS patients. Minnesota Journal of Global Trade. Pascal, R., & Rosenfeld, J. (2005). The demand for offshore talent in services. Washington, DC: McKinsey Global Institute Press. “Pfizer to set up academy for clinical excellence.” (2002, February, 16). Business Line. Preston, G., & Singh, A. (2003, November). Rebuilding big pharma’s business model. Vivo, the Business and Medicine Report, 21(10). Quinn, J. B., & Hilmer, F. G. (2004). Make versus buy: Strategic outsourcing. McKinsey Quarterly.
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“Quintiles moves data management work to india.” (2005, April 11). Associated Press. Sherman, P., & Oakley, E. (2004). Pandemics and panaceas: The WTO’s efforts to balance pharmaceutical patents and access to AIDS drugs. American Business Law Journal, 41(2/3). Tomlinson, H. (2004, November 1). Drug giant moves trials abroad: Glaxo lured by security and low cost of trials overseas. The Guardian.
U.S. Department of Commerce. (2006). U.S. industrial outlook: 2006. Washington, DC: U.S. Government Printing Office. Vanguri, S., & Rajput, V. (2002). Patents and biotechnology. Indian Journal of Medicine, (3).
endnote 1
This article presents the personal views of the authors, and does not represent the views of their respective employers in any way
This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 2, edited by M. Khosrow-Pour, pp. 38-53, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.17
Outsourcing in the Healthcare Industry: Information Technology, Intellectual Property, and Allied Aspects Amar Gupta University of Arizona, USA Raj K. Goyal Harvard Medical School and VA Boston Health Care System, USA Keith A. Joiner University of Arizona, USA Sanjay Saini Harvard Medical School and Massachusetts General Hospital, USA
AbstrAct The healthcare industry is being impacted by advances in information technology in four major ways: first, a broad spectrum of tasks that were previously done manually can now be performed by computers; second, some tasks can be outsourced to other countries using inexpensive communications technology; third, longitudinal and societal healthcare data can now be analyzed in acceptable periods of time; and fourth, the best medical expertise can sometimes be made available without the need to transport the patient to the
doctor or vice versa. The healthcare industry will increasingly use a portfolio approach comprised of three closely-coordinated components seamlessly interwoven together: healthcare tasks performed by humans on-site; healthcare tasks performed by humans off-site, including tasks performed in other countries; and healthcare tasks performed by computers without direct human involvement. Finally, this paper deals with intellectual property and legal aspects related to the three-pronged healthcare services paradigm.
IntroductIon Advances in computing and communications technologies are dramatically altering the healthcare landscape around the world in a number of ways such as: •
• •
• •
enabling detailed analysis of healthcare data to elicit underlying trends and interrelationships; facilitating storage, transmission, integration, and retrieval of healthcare records; enabling healthcare professionals to render assistance to patients separated by significant geographic distance from each other; monitoring the safety of medical procedures and pharmaceutical drugs; and bringing the latest healthcare information to the attention of healthcare professionals and others.
In this article, we take five operational scenarios, one from each of the five illustrative categories delineated above. In each operational scenario, at least one of the co-authors of this article played a significant role and therefore possesses firsthand knowledge of that healthcare application. The operational scenario is analyzed, post-facto, from the viewpoint of diagnosing what subset of tasks can be handled by evolving information technologies without significant human intervention, what subset needs to be performed on-site by humans, both now and in the foreseeable future, and what subset can be potentially performed by humans located at a significant distance from the patient. Based on the above analysis, we postulate that the future healthcare industry is unlikely to adopt a mono-operational scenario in which all the tasks occur on-site (as happened in the past), off-site, or by machines alone. Instead, the healthcare industry will gradually adopt an operational model in which there is a seamless and symbiotic combination of all three modes of operation.
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After examining the future healthcare industry model from multiple perspectives, we conclude that we need a new approach to intellectual property in order to adequately safeguard the interests of the relevant constituencies. Based on the forces that will motivate the change, we further assert that healthcare organizations that are unwilling to adapt and embrace the evolving three-faceted work paradigm will be at a competitive disadvantage to their peers. National, state, and local medical regulatory agencies will need to respond to market pressures in order to support the longterm interests of both medical professionals and patients in their respective jurisdictions.
coMPrehensIve AnAlysIs oF heAlthcAre dAtA One out of eight women in the United States will develop breast cancer during her lifetime. Early detection is a woman’s best defense against breast cancer, which is 97% curable when detected and treated at an early stage. Mammography is the gold standard for screening for breast cancer. With the trend towards people living longer lives and taking proactive measures on their health, the demand for mammography is increasing at a significant pace. Unfortunately, 10-20% of the cancers currently detectable by a screening mammogram are missed by the human radiologist, allowing the disease another year to progress. In addition, there is a high degree of liability on radiologists due to missed diagnoses. To mitigate this problem, some radiology screening centers employ two radiologists to read each case. This approach involves significant cost to support an additional radiologist, reduces the number of total mammograms that can be performed within a center, and is problematic due to the shrinking numbers of radiologists in the field of mammography, especially in the United States. Based on the latest information available on the FDA Web site (October 2006), there were
Outsourcing in the Healthcare Industry
8,832 FDA-certified mammography centers and 13,511 accredited units in the United States. In the year 2006, there were 34.6 million mammograms performed in the United States alone, which translates into a total market of $5 billion (at $150 per mammogram). Globally, there are over 200 million mammograms per year, which translates to a market running into several billions of dollars per annum. As the population of women over 40 increases and the awareness of proactive health measures, such as mammograms, gets enhanced, the number of mammograms increases every year. However, a decrease in mammogram centers and the number of radiologists in this field are negatively correlated with the demand. The area of mammography and the aspect of errors in diagnosis (both false positives and false negatives) have been studied in detail by many researchers (Berlin, 2005; Ghate et al., 2005; Gilbert et al.; 2006; Khoo, Taylor, & Given-Wilson, 2005; Sickles, Wolverton, & Dee, 2002; Skaane, Kshirsagar, Stapleton, Young, & Castellin, 2006). The use of computer-aided detection (CAD) techniques in mammography can mitigate the growing shortage of radiologists, as well as reduce or eliminate many of the instances of missed diagnosis. One of the authors of this article and several of his colleagues have developed new computer-based algorithms that allow a rapid analysis leading to the marking of cancerous and pre-cancerous regions, thereby providing a decision-support diagnostic facility to the radiologist. Using a CAD-based approach in conjunction with a human radiologist allows for the second reading of a mammogram, with the human radiologist actively involved in the process and making the final determination in each case. The advantages of the proposed approach are: •
•
The capital investment of using a CAD service is significantly less, when compared to that of employing a second radiologist. No additional hardware or space requirements are required.
•
•
• • •
•
Current and previous cases can be made available to the radiologist online for necessary comparison. There is a minimal footprint in the workspace, allowing multiple radiologists to objectively view and analyze mammograms. Results and information can be made available anywhere via the Internet. Improvements to the algorithm and core technology can be readily disseminated. The approach is consistent with the trend towards teleradiology, allowing radiologists to perform analysis from anywhere, anytime. The proposed approach reduces the incidence of second visits and the level of patient anxiety by providing expert (specialty) second opinions when needed in a timely manner through a teleradiology model.
The proposed approach was developed in 2001 and 2002 (Gupta, Norman, Mehta, & Benghiat, 2002), and its technology component is described in Norman and Gupta (2002), which advocated that instead of taking the mammogram image and its interpretation by the radiologist at the same location, it would be more advantageous to use a geographically decentralized strategy that utilized the following principles: •
•
•
•
taking of the mammogram image by a technician at the location where the patient was available; transmitting the image to a central location where the image was analyzed by advanced data mining techniques and compared with other images; interpretation by a qualified radiologist at the same location where the centralized computing facility is located or at a different place altogether; and making the image available, with appropriate privacy and security safeguards, to the patient when she visits other clinics and
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to appropriate medical personnel with the patient’s consent. Based on unique and patentable distributed computing technology, a peer-to-peer model was implemented; it could act as a pure application service provider (ASP), a pure client application, or any combination in between. The proposed solution could: • • • • •
minimize or eliminate the costs of a “second reader”; provide scalability for large, medium, and small centers (national and international); support the development of distributed teleradiology systems; decrease the liability factor for false readings; and improve equity of access to radiology services by employing only technicians on-site and performing both human and CAD readings off-site.
The proposed technology envisaged a longterm vision of “Image Anywhere.” where there is a network of mammography screening centers in shopping malls across the country. A woman could step into a mammography center as easily as walking into a drug store. While the screening was performed at that site, the radiologist could be located hundreds of miles away looking at images from several mammography centers (via teleradiology) and could provide an opinion back to the concerned location within a few minutes of the screening time. Finally, the proposed architecture and the technology could be readily adopted for use with all other types of medical images, as depicted in Figure 1. After establishing a track record with mammography CAD, the plan envisaged expansion into auxiliary applications (first medical, then non-medical). These include dentistry, CT colonography, and bone cancer detection.
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The above concept was unanimously voted to be the first-place winner at the Big Red Venture Fund Innovation Contest, organized on an annual basis by Cornell University (2002). To the best of the authors’ knowledge, this is the pioneer instance where the three-pronged strategy of using resident medical resources, off-site medical resources, and advanced computational techniques was explicitly delineated; this was done in the context of optimizing the productivity of radiologists, enhancing access to mammography centers by women, improving the quality of interpretation of mammograms, reducing the incidence of errors (both false positives and false negatives), and reducing the costs incurred in performing mammograms.
MAnAgeMent oF heAlthcAre records As healthcare costs continue to rise, researchers are exploring new options for enhancing the process of sharing medical data across disparate information systems, both within and across hospitals and other healthcare facilities. This has the potential to reduce costs by billions of dollars each year, estimated at $77.8 billion for the United States alone (Walker et al., 2005), and concurrently improve the quality of healthcare rendered to patients. Each of the entities in the current generation of hospital systems was built to function on an individual basis, with each island of information governed by its own idiosyncratic data model (Shortliffe, 1998). In the U.S., only regional interoperability has been implemented, so far, on an experimental basis (Halamka et al., 2005). The absence of a larger-scale interoperable system presents other problems too. For example, in the case of a plane crash or other catastrophic situation, the manual approach to accessing large numbers of patient records is very weak (Teich, Wagner, Mackenzie, & Schafer, 2002). There are several other facts that further strengthen the
Outsourcing in the Healthcare Industry
requirement for interoperable healthcare systems, such as: 1.
2.
3.
There is a large number of cases where institutions have split or merged, and existing data are physically distributed. There are several ‘mobile’ individuals who frequently use medical facilities in different states or even countries. The aged population contribute significantly to overall healthcare costs and very often have limited mobility.
This increases the requirement of access to healthcare records from a previous residence or transmittal of medical data to remote facilities for diagnosis rather than to move the patients themselves. The challenges inherent in transforming disparate islands of data into an archipelago of integrated information have been highlighted by Gupta (1988) and others (Reddy, Prasad, Reddy, & Gupta, 1994; Arellano & Weber, 1998; Arts, Keizer, & Scheffer, 2002). The constituent systems differ in terms of data types, data definitions, data structures, data hierarchies, data categorizations, and underlying assumptions that are not expressly denoted in the concerned information systems. Imagine that you receive an electronic medical record of a new patient. The weight of the person as shown in the corresponding database field is 75. If you are a medical professional in the United States, your immediate reaction is that the person is extremely underweight, based on the assumption that weight is specified in pounds, whereas it is actually in kilograms. The U.S. is among the handful of countries that still use the traditional British system for most measurements; another county in this category are in Africa. Britain moved to the metric system a few decades ago. Ironically, the healthcare arena is the only one where the metric system has been adopted in the U.S. for measurement of mass and volume. However, many other types of differences continue to remain in
terms of underlying assumptions of data types and other parameters; such assumptions are not revealed by looking at the data alone. The above example highlights that healthcare data must often be converted from one form into another to facilitate communication, either at the source or at the destination. The process of conversion of data, manually or by computer, involves significant costs and is prone to the loss of information (Barthell, Coonan, Pollock, & Cochrane, 2004; Shapiro et al., 2006). Since many healthcare applications require access to each other’s data, and neither the source nor the destination is willing to do the required conversions, the only possible solution is to transform the data en route from the source to the destination. The format and other details related to the data at the source are maintained in the source schema. The target schema contains the same types of underlying information for the destination. As the number of potential sources and potential targets increase, the number of likely transformations increases in a non-linear fashion. Haas, Miller, Niswonger, Roth, and Wimmers (1997), Milo and Zohar (1998), Abiteboul, Cluet, and Milo (2002), and Shaker, Mork, Barclay, and Tarczy-Hornoch (2002) advocated the use of middleware and the use of one common schema that incorporates data elements from multiple client schemas. The complexity of this common schema increases with the number of sources and targets, thereby restricting the use of this approach in large, diverse healthcare applications. Wiederhold and Genesereth (1997) highlighted the fact that a single mediating schema in a large domain such as healthcare is not feasible; they advocated that the implementation of domainspecific data standards and mediators across heterogeneous medical information systems results in a cost decrease for mediating the transfer of data. Despite these findings, there is minimal standardization in the creation of healthcare information systems in the United States and in many other countries. This means, for example,
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that if there are “m” ambulance systems and “n” emergency department systems that could potentially need the medical data from any of the “m” ambulance systems, one could be dealing with as many as “m multiplied by n” transformations of data. Given the complexity of dealing with such a large number of possibilities, the process of data transformation is clumsy, time consuming, and costly (Gupta, 1998). One approach to address the above problem of non-linearity is to create a mediating schema as the framework for reconciling heterogeneous information systems within and across hospitals and other healthcare facilities. Using the approach described in several papers, including Reddy and Gupta (1995), the number of necessary transformations can be reduced from “m x n” to “m + n”. This requires that the mediating schema contain a core set of context-specific patient care-related information and a comprehensive methodology for specifying the ontology (vocabulary) of the relevant healthcare domain. The lattice-based context interchange approach, described by Reddy and Gupta (1995), allows evolutions of the semantics of data in the source or target schemas to be managed in a more effective manner as compared to traditional approaches. Differences in ontology always exist in large information systems (Wiederhold & Genesereth, 1997). Within a single hospital, each healthcare unit may collect, store, and process its own set of data, based on its own specialty and needs. The application of the mediating schema approach requires the careful study of the different ontologies, and the formulation of rules to transform data from one particular ontology to another. Sarnikar and Gupta (2007) describe the problems and challenges involved in creating a mediating schema that would transfer data between the heterogeneous databases of a particular pre-hospital and ED system in the Boston area, and in extending the prototype system to cater to the idiosyncrasies of additional medical systems (see Figure 2). Based on the assessment of the
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size and complexity of the source and destination databases, as well as the associated data dictionaries, it was concluded that the mappings between single data elements needed to be done manually. This was based on the realization that the available software approaches to automate the mapping process between databases were frequently unreliable and required human intervention to analyze and to make corrections to the mappings generated. The manual creation of mappings could, however, lead to a set of development rules that could facilitate the creation of additional schemas in the future. These tasks involved extensive consultation between members of the development team and experts from several concerned medical specialties, especially for “analysis of what information most succinctly and completely composed the patient care record across the source and target hospital information systems.” The analysis of the data elements involved acquiring deep understanding of the meaning of each element in the source schema and its corresponding element in the target schema, as well as the associated differences in cardinality. Sarnikar and Gupta (2007) presented a performance analysis of the above system in terms of information loss during the automated data translation process, relative to the coverage (amount of fields populated in the target schema using information from the source schema). Due to the presence of certain type conflicts and missingdata conflicts, a small amount of information was lost (<15%) in the presence of significant coverage values (>80%). Further, this was eliminated through the use of appropriate converters and filters (Gaynor, Gupta, Rawn, & Moulton, 2008; Gupta Martin, Avanavadi, & Sarnikar, 2007). Industries and applications that are still at an evolutionary stage are frequently characterized by the existence of no standards or by the existence of too many standards, none of which carry broad acceptance. In the case of the healthcare arena, multiple standards currently exist, including HL7,
Outsourcing in the Healthcare Industry
EDIFACT, X12, ASTM, NCPDP, DICOM, and XDT (Dudeck, 1998). Further, as a reviewer of this article pointed out, the need for the transmission of medical data may be acute, sub-acute, or delayed. The electronic transmission of acute data (pre-hospital to emergency department) usually occurs in the case of healthcare providers who can use a common data set for their medical records. Sub-acute transmission could apply in situations involving hospitals and providers who use similar data elements, but not necessarily a similar platform. Delayed transmission, such as transmission of data across a national boundary, will need a standardized healthcare language, but not common data elements or platforms. Based on the above discussion, we find that the use of cutting-edge computer and communications technology alone cannot accomplish the goal. Instead, large amounts of computational power and human expertise are needed to create the bridges across legacy healthcare information systems at this stage. Hospitals and other healthcare facilities in the U.S. have traditionally used medical and information technology personnel in the U.S. to undertake initial efforts in this area. Unfortunately, a vast majority of work remains to be done, and this cannot be accomplished, in terms of both time and costs, by the personnel available in the U.S. As such, one needs to explore non-conventional solutions that involve the use of resources from abroad. Until the eighties and the nineties, large U.S. companies belonging to other sectors of the economy focused on doing all of their information technology work in the U.S. (Gupta, Seshasai, Mukherji, & Ganguly, 2007b). This was the traditional model, and the concerned management and technical personnel were satisfied with the pace of progress. Options for doing such work abroad, or by persons recruited from abroad for temporary work in the U.S., were frequently discarded on the basis that:
1.
2.
3.
4.
Only the persons currently associated with the work were familiar with the intricacies involved, thereby implying that such peculiarities were too complex or too confidential to be shared with others. Organizational procedures or governmental regulations did not permit data and process information to be transmitted abroad or shown to foreign nationals. The concerned work was too important for the success of the company, and the option of saving costs on this particular application was miniscule in comparison. The work could not be performed by persons working in Asia because the difference in time zones made it impossible for them to interact with domain experts in the U.S.
The above situation was dramatically altered by the Y2K dilemma. Management and technical personnel could no longer plead for six more months to complete a project. The date, December 31, 1999, was a very hard deadline, and the conversion of information systems had to be completed by then: no exceptions, indeed. This inflexible scenario forced the companies to become flexible. They permitted parts of the conversion work to be done abroad, as well as to employ persons with foreign qualifications and experience. The conversion from national currencies to the common currency, euro, had a similar impact in Europe. The unqualified success in both cases forced companies to depart from their arrogance in maintaining status quo. A similar compelling need currently exists in the case of management of healthcare records. Conventional database systems are clumsy, costly, and time consuming. The integration of information in such systems, as well as the gradual incorporation of newer concepts, requires the healthcare industry to seriously consider the use of the hybrid model, involving the use of human resources in the U.S., human resources abroad,
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and state-of-the-art information technology. The success of the banking industry, the insurance industry, and several other industries too relies heavily on ensuring the privacy and the security of data belonging to their customers. Yes, glitches do happen from time to time. In 2004, information on 20 million credit card holders was compromised at a credit card processing facility in Tucson, Arizona. This particular facility was subsequently acquired by another company. But this unauthorized disclosure was not used as the basis to cease this type of application altogether. Instead, it should serve as the motivator for human experts, both in the U.S. and abroad, to develop more robust applications that can be used by more industries.
reMote dIAgnosIs Remote diagnosis is both an outsourcing and an insourcing phenomenon. For many years, medical records and medical images from patients and healthcare practitioners in Latin American countries, as well as from other countries in the world, have been reviewed by doctors at Massachusetts General Hospital in Boston and by a number of other leading hospitals in the U.S. The Arizona Telemedicine Program (ATP) is a pioneer in terms of medical professionals located in Tucson, Arizona, providing expert advice to patients located elsewhere in the state, in neighboring states, and in other countries. ATP provides teleradiology, telepathology, and teleoncology services to patients in hospitals, in prisons, and in other settings (Weinstein et al., 2007). A significant number of the patients, who seek remote diagnostic advice, are from Navajo Nation and from other Native American nations in Arizona and neighboring states of the U.S. On the outsourcing side, medical personnel in other countries are looking at medical records of patients in the U.S. The specialty that has witnessed the most attention is teleradiology
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(Pollack, 2003). Teleradiology involves the electronic transmission of radiological images, such as X-rays, computed tomograms, and magnetic resonance images, across geographical locations via telephone lines, satellite connections, and wide area networks. It enables a single radiologist to serve multiple hospitals concurrently, even ones in other continents. Further, it enables the image to be interpreted by an alert physician working a day shift rather than a radiologist who has been up all night (Weinger & Ancoli-Israel, 2002; Firth-Cozens & Cording, 2004). Telemedicine is the delivery of healthcare services in situations where the physician and the patient are not at the same geographic location; it is a broad term and includes teleradiology, telepathology, and teleoncology. Telepathology involves the use of video microscopy at the patient’s location and a pathologist’s workstation at the physician’s location. Teleoncology refers to the use of remote technology to address different aspects of cancer care. For the purposes of studying “remote diagnosis,” we will focus primarily on teleradiology for four reasons. First, the area of teleradiology has attracted wide attention in the media (e.g., Pollack, 2003). Second, this article focuses on outsourcing rather than insourcing, and the other specialties are characterized more by insourcing than by outsourcing. Third, within outsourcing, we are focusing on offshoring issues and are looking at applications that transcend national boundaries, not just local or state boundaries. Fourth, the teleradiology scenario allows an objective assessment of the potential risks and opportunities for individual radiologists in the U.S., as well as for the broader medical community in the U.S. The growth in teleradiology is being driven by four major forces. First, there is a significant shortage of radiologists, because of a significant number of radiologists retiring from practice and training programs not keeping pace with growing demand (Sunshine, Maynard, Paros, & Forman, 2004; Bhargavan & Sunshine, 2002).
Outsourcing in the Healthcare Industry
Second, the aging population and the advent of newer imaging technologies are leading to annual increases in imaging volumes; for example, a 13% increase in the utilization of radiological imaging was observed among Medicare beneficiaries (Maitino, Levin, Parker, Rao, & Sunshine, 2003). Third, the increased use of imaging technologies in trauma situations has led to a corresponding need for round-the-clock radiological services in hospital emergency rooms (Spigos, Freedy, & Mueller, 1996). Fourth, changing regulations and guidelines have contributed to the need; as an example, the Health Care Financing Administration (HCFA) requires that overnight coverage be provided by certified radiologists, rather than by residents or trainees, in order to be billable (HCFA Medicare Program, 1995). Typically, the radiology group outsources its night calls to a teleradiology provider and pays the latter for preparing the preliminary report. The insurer is billed for the final report that is prepared by the radiology group the following morning. The service delivery model depicted in Figure 3 includes mechanisms for communications, workflow, and payments. Teleradiology offers several advantages: 1.
2.
3.
4. 5.
A single professional can support multiple hospitals concurrently via teleradiology links to a central reading facility (often the radiologist’s home). Remote locations with radiological scanning, but no on-site radiologist, can be supported leading to improved patient care (Franken et al., 1995; Lee et al., 1998). The productivity of the radiologist can be enhanced by bringing the images to the radiologist, rather than vice versa, thereby eliminating commuting time and delays. The work can be optimally assigned among multiple radiologists in large hospitals. Greater availability of subspecialty consultations results in better patient care (Kangarloo et al., 2000; Franken et al., 1997; Sickles et al., 2002).
6.
7.
Residents (junior doctors) covering night shifts in academic hospitals can use teleradiological services to ensure correct diagnosis and to seek confirmation. The increasing disparity in the patient-toradiologist ratio, especially during off-peak hours, can be effectively addressed by offshoring teleradiology services.
The increasing availability of technologies that replace invasive screening procedures (virtual colonoscopy replacing actual colonoscopy) means enormous increases in patient volume. Further, defensive medicine increasingly employs tests to guard against missing even the most unlikely diagnosis. The use of head CT in the ED under circumstances when the chance of an abnormal reading is extremely small is one example. It remains commonplace to get a head CT done if the patient has expected meningitis before doing a lumbar puncture, even though the literature indicates this is typically unnecessary. While this example of defensive medicine is not gratifying to mention, it represents the current reality. It also provides another reason why the workload in the radiology department has increased and will continue to increase further. Teleradiology providers must conform to the guidelines of the Health Insurance Portability & Accountability Act (HIPAA), and are required to implement adequate privacy and security practices, as Protected Health Information (PHI) and Electronic Protected Health Information (EPHI) are transmitted over public networks on a regular basis. HIPAA requires that “covered entities execute contracts that consist of specific provisions for protection, use and disclosure of health information” (Hilger, 2004). The Privacy Rule deals with all forms of patients’ protected health information, whether electronic, written, or oral, while the security rule covers only protected health information that is in electronic form, including EPHI that is created, received, maintained, or transmitted. The security rule does
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not prescribe any specific technologies; being technology neutral, it allows the HIPAA-covered entities to choose solutions based on their specific requirements. Technical safeguard standards include stringent guidelines for Access Control, Audit Controls, Data Integrity, Person or Entity Authentication, and Transmission Security. The biggest hurdle to the rapid deployment of teleradiology services is the credentialing process. The U.S. requires statewide licensing requirements and board certifications; as such, a teleradiologist based in Australia must be registered to practice in all the relevant states in the U.S., so to look at radiological images from hospitals in these states, as well as pay appropriate fees to these states on an annual basis. Canada does certification at the national level for radiologists. And in Europe, some of the members of the European Union allow still greater flexibility. The current U.S. regulatory and credentialing structure was designed for a physical presence of medical professionals and needs to be adapted for the evolving technologies and procedures. Recently, some states have modified credentialing laws to allow out-of-state radiologists to perform remote diagnosis. Further, several federal and military healthcare organizations in the U.S. have licensure laws that enable them to render services independent of state and national boundaries. However, such privileges have not been extended to the private sector. Other obstacles to the growth of teleradiology are: 1. 2. 3.
4.
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limited availability of reliable Internet connections, especially in remote locations; limited availability of trained technicians; traditional billing and reimbursement procedures that vary by country and state, such as Medicare not paying for services rendered from abroad; variations by nations and states, as well as underlying ambiguity, in medical malpractice liability laws (Gantt, 1999); and
5.
the need for incorporating new encryption methods while transmitting image data (Cao, Huang, & Zhou, 2003).
Other related aspects of radiology have been discussed by several researchers (Bradley, 2004; Graschew, Roelofs, Rakowsky, & Schlag, 2006; Hayward & Mitchell, 2000; Jacobson & Selvin, 2000; Kalyanpur, Weinberg, Neklesa, Brink, & Forman, 2003; Kalyanpur, Neklesa, Pham, Forman, & Brink, 2004; Levy & Yu, 2006; Maitino et al., 2003; Mun, Tohme, Platenbery, & Choi, 2005; Takahashi, 2006; Weinger & Ancoli-Israel, 2002). Over time, the concept of using both onshore and offshore radiologists will grow in terms of overall numbers of radiological images analyzed, as well as in terms of the breadth of the cases studied. Further, we expect the trends in both insourcing and outsourcing to continue. Parts of some medical diagnostic and allied applications will be performed abroad because of lower costs, quicker response, and load balancing. Conversely, more patients from abroad will seek professional advice from medical experts in the U.S. Overall, it appears appropriate to gradually lift barriers that currently impede outsourcing and insourcing activities; most of these barriers are in the former category.
MonItorIng And enhAnceMent oF sAFety Timely information on adverse drug effects can save lives and reduce healthcare costs. Previous studies show that more than two million adverse drug reactions occur yearly and are responsible for an estimated 100,000 deaths (Lazarou, Pomeranz, & Corey, 1998; Gurwitz, Field, Avorn et al., 2000; Fontanarosa, Rennie, & DeAngelis, 2004). Some systems exist for identifying drugs with serious adverse effects, but they have had limited success (Kopec, Kabir, Reinharth, Rothschild, &
Outsourcing in the Healthcare Industry
Castiglione, 2003; Ray & Stein, 2006). Between 1997 and 2005, the MedWatch system in the U.S. identified 15 drugs with toxic side effects, taking an average of 5.9 years for the identification phase and the subsequent drug withdrawal phase. In general, after the introduction of a drug into the market, the process of eliciting and analyzing information from patients is weak, especially when problems arise during extended use of the drug (U.S. Department of Health and Human Services, 1999; Brewer & Colditz, 1999; Okie, 2005). The problem with Vioxx, for example, was only uncovered during controlled clinical trials (Bombardier, Laine, Reicin et al., 2000). And there is still no system, either in existence or under discussion, for addressing this need at a global level. In order to address these issues, the Institute of Medicine (2006) presented a report on “The Future of Drug Safety” and made the following recommendations: 1.
2.
3.
4.
increase the FDA’s authority to ensure sponsor compliance with standards and regulatory requirements, especially those related to packaging and distribution; establish separate performance goals for safety, in addition to existing goals for speed of approval; ensure proper communication of the drug approval/testing status to consumers and medical practitioners through effective package indicators and advertisements; and improve the facilities, available resources, and organization structure of the FDA.
Towards these goals, a prototype Community Pharmacy Safety Network (CPSN) was developed. Pertinent raw data are spread over the computer systems of multiple organizations including: (1) the one who performed the original drug development work, (2) the one that produced the drug, (3) the one that conducted the clinical trials, (4) the FDA in the U.S. and equivalent government agencies
in other countries, and (5) the one that prescribed the medication. In addition, pharmacies contain information on the buyer of the drug, on what date, and in how much quantity. The problems involved in integrating these types of information from diverse sources were discussed in a different context earlier in this article; additional details are available in recent papers by Kalyanpur, Parsia, and Hendler (2005), Corcho and Gomez-Perez (2005), and Cristani and Cuel (2005). The problems become even more complex in the present case because of the need to access information from multiple countries and cultures. The prototype system, including the key modules, is depicted in Figure 4. Detailed information on the system architecture and allied issues are available in Gupta, Crk, Sarnikar, and Karunakaran (2007a) and Gupta, Woosley, Crk, and Sarnikar (2007c). With proper infrastructure and incentives, pharmacists and pharmacy technicians would be designated agents for collecting raw information on the patient’s medication history, including the adverse reactions experienced by the patient. Development of the prototype system revealed several issues and opportunities. First, some drugs are given as samples by physicians to patients, and significant effort would be involved in incorporating such information into the overall system. Second, individual patients buy drugs from multiple pharmacies; in view of the current guidelines for privacy of patient records, it is very difficult to link records concerning the same patient from different pharmacies. Third, the procedures differ very significantly across countries. Fourth, analysis of the information requires the use of sophisticated data mining technology, with the help of (human) domain experts and (human) data mining experts. Such experts are already pressed for time in the U.S.; they are expensive too. It therefore seems appropriate to explore if this type of work could be done abroad. For example, one could envisage the creation of a global center of excellence for this particular field in Mexico, close to the U.S.
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border, so that one could benefit from the less expensive rates in Mexico in conjunction with the feasibility of experts from the U.S. visiting such a center on a frequent basis. Gopal (2007) and her associates have employed an entirely different approach to assimilate information from patients, especially related to the side effects of alternative medicines. Their approach focuses on the mining of information from chat groups and other online repositories of information voluntarily provided by the patients, such as message boards, blogs, and listservs. They utilize proprietary search and aggregation techniques to distill raw data into structured information that answers critical questions. Their approach, again, utilizes a combination of computer power and human expertise.
dIsseMInAtIon oF the lAtest heAlthcAre InForMAtIon The ideas presented in this section are currently geared more towards medical education and medical research, rather than the provision of improved patient care. The current version of the prototype system enables users to search for current and previous literature, how-to articles, and other educational items. In the future, the enhanced Web site will assist healthcare providers by providing immediate lookups for symptoms and diagnosis. This would not only aid practitioners by giving them access to the latest medication data available, but also reduce treatment times. Further, based in part on a suggestion from a reviewer of this article, access to a human expert will be provided for the purpose of providing additional advice and support on specific cases. Medical information has been maintained in books, journals, and specialty magazines. Now, a growing number of people turn to the Internet to retrieve healthcare-related information, and they do so from a variety of sources, most of which are run by commercial entities. The
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next area of growth will be sites that focus on specific fields of medicine, contain data culled from scholarly publications, and are operated by eminent specialists in the field. One such site is being developed for the field of gastrointestinal motility; it builds upon the concept of existing healthcare information sites with the intention of serving the diverse needs of laypeople, medical students, and experts in the area. The site, called Gastrointestinal Motility Online, leverages the strengths of online textbooks, which have a high degree of organization, in conjunction with the strengths of journal collections, which are more comprehensive, to produce a knowledge base that can be easily updated, is comprehensive, and can provide accurate and high-quality information to users. In addition to implementing existing Web technologies such as Wiki- and Amazon-style commenting options, Gastrointestinal Motility Online uses automatic methods to collect information from various heterogeneous data sources to create coherent, cogent, and current information for the diverse base of users. Gastrointestinal motility is a very small part of the vast field of medicine. Books such as Harrison’s Principles of Internal Medicine serve as the main source of information in the field of medicine including gastrointestinal motility (Kasper et al., 2005). Most of these books now also have electronic versions. More recently, electronic texts sites such as Wiki, eMed, WebMD (http://www. webmd.com/), and UpToDate (http://www.uptodate.com/) have evolved and are rapidly gaining popularity. Because these works are designed to provide a broad overview of the field of medicine, they only provide a very superficial treatment to a topic such as gastrointestinal motility. More detailed information about gastrointestinal motility disorders may be found in medical journals. Many journals that were previously in paper format now come out both in paper and electronic formats. Searchable electronic archives, such as PubMed (http://www.pubmedcentral.nih.gov/), now place a plethora of information into the hands of research-
Outsourcing in the Healthcare Industry
ers and physicians. However, such searches are very time consuming and inconvenient. Sites like AccessMedicine (http://www.accessmedicine. com/) serve as search engines that attempt to place the most suitable information on a medical topic in a user’s hand. As shown in Figure 5, Gastrointestinal Motility Online is a hybrid between standard textbooks and review articles (Au & Gupta, forthcoming). It seeks to centralize and present the information in a scalable manner that is customized to the user’s information requirements. The user base includes: laypersons, patients, medical students, biomedical scientists, physiologists, pathologists, pharmacologists, biomedical students, researchers, pharmaceutical personnel, house staff, specialty fellows, internists, surgeons, and gastroenterologists. Creation of the gastrointestinal motility knowledge repository started with calls to key gastrointestinal experts inviting them to submit a chapter, in electronic form, for inclusion in this knowledge repository. The titles and themes of these chapters were determined through discussions involving the concerned authors and the editors for this project (Dr. Goyal and Dr. Shaker). The inputs from the contributing authors were reviewed by the editors and by others. Under the aegis of an unrestricted grant from Novartis Corporation, the two editors worked closely with the staff of Nature Publishing Group on a number of tasks that ultimately led to the creation of the Web site, http://gimotilityonline.com. This site may serve as a model for user-driven, scalable, and interactive medical information at a single site for other specific medical topics. These sites can then be interlinked to cover the broad field of medicine. Since GI Motility Online is a hybrid that includes textbook-type material as well as authoritative upto-date reviews and interactive features, it poses many new problems and opportunities. Currently, all updates must be initiated manually. Automated content generation or extraction from other publications is not feasible, due to the stringent need
to maintain relevance and quality. This applies to addition of new material, editing of existing material, and deletion of parts of existing material as new test results become available. In the next part of the endeavor, the goal is to enable machine-assisted updating of the material in the gastrointestinal knowledge repository. Given the large number of articles published weekly and the difficulty in ascertaining relevance and quality, a number of automated tools will be used to optimize the updating process. One technique that will assist in the maintenance and updating of the site is presented in Sarnikar, Zhao, and Gupta (2005). This method selects articles ranked by relevance using a combination of both rule-based and content-based methods, using the following principles: 1. 2.
3. 4. 5. 6.
Profiles are modeled in the form of rules. The purpose of rule-based profile use is to identify a subset of documents of interest to a user. Each role has a set of predefined rules associated with it. Rules specify knowledge sources to access (for example, nursing journals for nurses). Rules can specify knowledge depth and knowledge breadth. Rules can specify semantic types of primary importance to roles.
Profiles are used in the gastrointestinal motility context to separate information into categoriesfor example, new clinical findings vs. basic science. Articles could be assigned a category and a weight, given categorization rules based on Unified Medical Language System (UMLS) synonym lists and the categories sign or symptom, diagnostic procedure, therapeutic or preventive procedure, and disease or syndrome semantic types. These tools can form the basis for an RSS XML news feed or to efficiently assemble relevant articles for use by the editors or Web site administrators. While these tools will aid the edi-
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tor, there is no replacement for the role of humans in selecting and classifying information. Ontologies and semantic networks are necessary prerequisites to the development of and classification of information repositories. Ontologies serve many purposes including to: reuse and share domain knowledge, establish classification schemes and structure, and make assumptions explicit. They also allow analysis of information and complement the stricter terminology that is used in straightforward text searches, with or without synonyms. Examples of ontologies in use today include the National Library of Medicine’s Medical Subject Heading (MeSH), disease-specific terminologies such as the National Cancer Institute’s PDQ vocabulary, drug terminologies such as the National Drug Data File, and medical sociality vocabularies such as the Classification of Nursing Diagnoses and the Current Dental Terminology. In Gastrointestinal Motility Online, the ontological hierarchy will be used to make distinctions between parts of the gastrointestinal tract and the different sections of the stomach and the esophagus (Kumar, 2005). One of the keys to developing an automated system is the set of ontologies presented in the UMLS semantic network that relies on the concepts built into the UMLS concept hierarchy. An overview of the UMLS is available at http://www. nlm.nih.gov/research/umls/presentations/2004medinfo_tut.pdf.
the unIFIed MedIcAl lAnguAge systeM: whAt Is It And how to use It? UMLS is an aggregate of more than 134 source vocabularies, including the classifications from such lists as ICD-10 and DSM: IIIR-IV. It represents a hierarchy of medical phrases that can be used to classify articles and textbook entries. The system described in Sharma (2005) uses techniques of Natural Language Processing
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(NLP) to construct a semantic understanding that goes beyond text searching. Using the ATIMED (Automated Integration of Text Documents in the Medical Domain) system, the content and order of phrases are related lexically using a concept called Word-Net. Word-Net operates on the verbs, subjects, and objects of the sentences, comparing sets and subsets of subject-verb-object collections in order to determine relatedness to a desired topic. Sharma (2005) uses the following two sentences as examples: Dysphagia is a disease and defined as a sensation of sticking or obstruction of the passage of food. Dysphagia is related to obstruction of passage of food. Since both sentences use similar objects and subjects, and use the verb “is,” the sentences would be deemed similar. However, the phrase “Dysphagia relates to obstruction of passage of food” would not result in potential match because the action verb is not similar (Sharma, 2005). Developing a schema to accurately represent journal abstracts and determine the relevance of those abstracts is one method of exchanging contexts. Innovation in this domain allows Gastrointestinal Motility Online to maintain updated, consistent, quality references without requiring an editor to read all journal articles published immediately. Knowledge-mining tools are being developed to utilize this information as it becomes available to add fast, relevant access and other utility to the information repository. Advanced technologies to aid in the conversion and integration of articles and research into the mainstream science are being integrated and look to impact the breadth and speed of knowledgebase upgrades. These activities involve the use of medical and computer professionals, both in the U.S. and abroad. The base site is hosted by Nature Publishing Group. As this site was being developed, it was found that commercial tools were available to handle the production of electronic journals and static textbook efforts like AccessMedicine (http://www.accessmedicine.com/) and WebMD.
Outsourcing in the Healthcare Industry
The gastrointestinal knowledge repository falls somewhere in between these two cases; accordingly, few off-the-shelf tools and algorithms were available for immediate use. As such, a significant fraction of the necessary material had to be generated and refined through experimentation. An interesting addition to the above system is the addition of a “Gastrointestinal Guru,” based in part on a suggestion from one of the reviewers. In specific cases where a person needs access to a human expert, the system will facilitate access to such experts who can provide support on an instantaneous basis. The situation is somewhat similar to the one we experience when we try to make a travel reservation online, experience difficulty, and feel relieved when we are able to connect to a human being, either by phone or online. However, the level of expertise and the degree of structure with respect to the desired knowledge are vastly different in the two cases. This difference is highlighted in Figure 6 (later in this article) and its accompanying text.
and practical importance of this model in today’s scenarios is more significant. This is happening for several reasons including the following: •
•
•
MultI-Pronged APProAch While the five scenarios discussed above are drawn from different aspects of medical practice, they have several aspects in common. In all cases, the advent of new information technologies is making a major impact on how the particular task or medical specialty is performed (Siau, 2003; Wachter, 2006). Further, in all cases, automation applies only to part of the effort. Human beings still need to be involved, though to varying degrees in the five examples considered. In some cases, a significant part of the work needs to be performed in very close proximity to the patient, whereas in others, the concept of remote tasks can be applied to a large extent. Finally, in some cases, the off-site work is medical in nature, whereas in others it is largely non-medical in character. While similar approaches have been followed in the healthcare industry to some extent in the past, the relevance
The technology that is available now did not exist earlier. A growing number of previously underserved, remote locations are increasingly able to access medical services through the Internet; and PACS systems are improving rapidly; data and image transfer methodologies are becoming less expensive, more effective, and more error-free. This is resulting in a corresponding need for embarking on international telemedicine endeavors, instead of regional collaborations. There is a growing awareness of the advantages of having interoperable health information systems, especially in addressing mass casualty situations, where fast and timely diagnosis, via telemedicine, attains paramount importance. The increasing incidence of persons moving across national borders for work or other reasons, as well as the continued trend towards globalization, are making national boundaries lose their traditionally strong importance. As such, one needs the ability to ensure the safety of citizens when they are traveling in foreign countries and taking drugs that were prescribed for them by doctors in the U.S., and to support allied functions. For example, the creation of new global drug efficacy monitoring systems could enable Americans with the same ethnicity or ancestral homeland to be grouped by predictable responses to drugs based on findings by researchers in their native countries.
We consider in the following paragraphs the significance of the diverse examples highlighted throughout this article.
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In the case of mammography, a technician needs to attend to the patient in order to take the mammogram; the doctor can be off-site, either in the same country or a different one; and the computer-based data mining algorithms will be executed on an off-site basis too. This is perhaps the earliest example in healthcare where the concept of doing part of the work on-site, part off-site, with the computer providing active decision-support capability, was mooted as the most accurate and the most cost-effective way. In the case of integration of medical records in heterogeneous systems, either for emergency needs or for routine needs, computer-based techniques can be of significant help, but human experts are needed at the initial stage as well as on a continuing basis. Integration of major systems in other fields, such as logistics and manufacturing, is being increasingly done on an offshoring basis. Banks and financial institutions located in the U.S., Switzerland, and other countries were very reluctant in the eighties and nineties to let such work be performed abroad; by the late nineties, many of them accepted the offshoring concept, after they were satisfied that the evolving security and privacy protocols were adequate for their needs. The same is expected to occur for the integration of heterogeneous hospital information systems; we will consider the legal and regulatory aspects later in this article. In addition to experts in information technology, medical personnel from multiple subspecialties will need to be involved, both on-site and off-site, in order to integrate the concerned systems based on the specific characteristics of the concerned medical institutions. In the current versions of teleradiology, the technician can be in the U.S. or another developed country, and the radiologist can be in India or another less expensive country; in addition, there is a second radiologist in the same state (or nation) as the patient who issues and signs off on the final report. Technology is used almost entirely for transmitting the image from the developed
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country to the less expensive one. Over time, technology could be used to partially analyze the images, to compare the image to an earlier one involving the same part of the body of the same patient, and even to compare the image with images of the same part of the body of other patients, in order to make a diagnosis and to evaluate how the symptoms may change over time. In the case of monitoring for adverse drug effects, the MedWatch system needs to be augmented. Some of the new tasks need to be performed by pharmacists in the U.S. Other tasks, such as reconciliation of duplicate records, need to be performed using inexpensive manpower, wherever available, with support from computerbased techniques. Further, individuals in the U.S. are increasingly obtaining less expensive equivalent drugs from Canada and other countries. Such drugs must also be taken into account while designing any comprehensive system for monitoring adverse drug effects. Ultimately, this system will need to be implemented across multiple systems, as a harbinger of a global system. A growing percentage of clinical trials are now being conducted in India and other countries because of lower costs, availability of drug-naïve persons (individuals who had not taken other drugs in the past for addressing the same disease), and access to persons with different heritages. The ability to conduct these clinical trials at lower costs increases the probability that a drug company would decide to take a potential new drug from the lab to the clinical trial stage. This can also reduce delay in the launch of the new drug. However, this also implies transforming local systems for monitoring adverse drug effects into international ones. In such a case, both medical personnel and other personnel need to work from multiple countries. In the case of dissemination of healthcare information, the initial endeavor focused on getting reputed experts from multiple countries to contribute material for inclusion in the evolving knowledge repository. The idea was to gradu-
Outsourcing in the Healthcare Industry
ally support automated updates to such material on a continuing basis. So, if new results from a trusted clinical study became available, such results should be incorporated into the appropriate chapters. While part of this work can be done using computer-based techniques, the experience of the development team is that high quality and accuracy will only be accomplished if the suggested edits and updates were reviewed and approved by human experts. The use of domain experts and editorial personnel located in less expensive countries is more appealing, as it makes the overall endeavor more viable (see Table 1). While improvements in Internet communication have made the multi-pronged approach described above possible, the lack of standardization in messaging protocols is a roadblock to the creation of a global healthcare model. We now describe how standards can be applied effectively to each of the five operational scenarios discussed, to reduce costs and improve clinical outcomes: 1.
2.
3.
In the area of CAD mammography and teleradiology, the communication of radiological images and other data clearly depends on the standards used for creating, maintaining, and exchanging medical images (such as PACS and DICOM). The problem on data exchange and integration from heterogeneous data sources can be solved by the effective use of standards such as HL7. Though the current scenario does not easily allow the adoption of a single data standard among all hospital information systems nationwide, using a standard message development framework as a mediating schema could eliminate some of the problems and make the system more portable and scalable. The area of drug monitoring and post-market surveillance could also benefit from the use of standards. Using standards to create and store medication and adverse effects reports and experimental results sent from various
4.
participating agencies would create a much richer database allowing for better analysis and quicker response times. Finally, while considering the issue of dissemination of medical information, the use of standards (not medical standards, though) for storing and displaying the information to the end users can increase the productivity and usefulness of search portals.
24-hour Knowledge FActory Earlier in this article, we discussed the scenario of seeking immediate assistance from an expert in a particular specialty; the geographic location of that specialist was totally irrelevant. The same is true of situations related to some tasks related to mammography and radiology. Finally, in the other two examples of the integration of medical information systems and the creation of global drug monitoring systems, it would be appropriate for the concerned pieces of work to proceed on a continuous basis, around the clock. In all such scenarios, the paradigm of a 24-Hour Knowledge Factory bears relevance. The University of Arizona has signed a threeparty collaborative agreement with the Wroclaw University of Technology in Poland and the University of Technology located in Sydney, Australia. Under the aegis of this agreement, researchers at the University of Arizona can work from 9:00 a.m. to 5:00 p.m., Arizona time. At around 5:00 p.m., Arizona time, the research-in-progress can be transferred to fellow scientists at the University of Technology in Australia, who can work from around 9:00 a.m. to 5:00 p.m., Sydney time. At the end of the “research shift” in Sydney, the professional work can be transferred to the Wroclaw University of Technology in Poland where researchers can conduct incremental activities over the next period of approximately eight hours, and can then transfer the evolving endeavor to the first set of researchers in the U.S. This process is
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akin to the passing of a baton in a relay race, with the notable difference that the baton is returned back to each participant exactly 16 hours after that participant transfers it to a colleague located on a different continent. We believe that this model will be gradually adopted by the healthcare industry, and further analysis of the historical and structural aspects will determine what subset of healthcare tasks can benefit most from the adoption of this evolving paradigm. In general, the 24-Hour Knowledge Factory paradigm is appropriate for situations where the healthcare endeavor can be broken down into components, the underlying knowledge can be digitized, different individuals can potentially work on such components with minimal support from their peers, and the work-in-progress can be transferred at minimal cost from one collaborating center to another.
IntellectuAl ProPerty And legAl Issues The performance of medical tasks in a collaborative fashion, on a regular basis, by individuals located across state and national boundaries, raises new issues. Who owns the intellectual property such as patents on new medical or drug inventions? Who can be sued for medical malpractice, and under which set of laws and regulations? How should the charges for medical services be apportioned? What are the corresponding avenues for seeking reimbursements from insurance companies? And what are the mechanisms for seeking redress if and when it becomes necessary? Besides these, there are also other related social and policy-related concerns such as quality control, and assurance and intensity of workflow across boundaries. In the case of the United States, the FDA plays the dominant role at the national level on issues related to drugs. However, medical professional credentialing and registration are done almost
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entirely at the state level. As mentioned in the section on radiology, the radiologist can render an initial opinion from outside the particular state or country, but the final opinion is still issued by another radiologist who resides within the particular state and is licensed to practice there. The use of two radiologists, though providing quicker action, increases overall costs. In the case of patents and intellectual property, there is a common feeling among patent holders around the world that others are exploiting your work. In the U.S., there is a feeling that companies in foreign countries are exploiting U.S. inventions and patents without authorization and payment of royalties. On the other side, there are people in India and China that feel the same way; there are instances of patents issued by the U.S. patent office on items of indigenous nature that have existed for thousands of years. This is somewhat akin to the situation where different states in the U.S. would render conflicting decisions on the same case, creating confusion. For example, until the 1970s, child custody cases were handled entirely at the state level. So in a case of divorce involving two parents residing in two different states, the first state might well give the custody of the child to the father (who resided in that state), and the second state would likely give custody of the same child to the mother (who resided in the latter state). Finally, in 1992 the Uniform Interstate Family Support Act (UIFSA) was drafted., According to this act, states have the power to reach beyond their borders for the establishment and enforcement of support orders. A similar type of action is now warranted in the healthcare domain. Let us analyze the issue based on how laws, regulations, and norms have evolved over history. Three thousand years ago, all rules were at the village level. The village was the basis of the economy. If a person did something undesirable, the person could be ostracized from using the village well. Without water, the person could not survive. Therefore, the person had to plead with his
Outsourcing in the Healthcare Industry
or her peers. This was one of the mechanisms, then prevalent, to enforce conformity with the norms and mores of that era. As time progressed, the size of the geographic unit increased. In England, one saw the advent of the concept of the manor, typically a collection of a dozen villages, that functioned as a unit for economic and security purposes. The manor was replaced by still larger entities in the form of principalities, which were ultimately replaced by nation states. The lawmaking and enforcement evolved too, sometimes with overlapping provisions. For example, a person residing in Tucson today may be governed by up to four sets of regulations, of the City of Tucson, Pima County, the State of Arizona, and the United States of America, respectively. (In some areas, such as intellectual property, there may be a supranational layer as well, that is, the WTO’s Trade Related Intellectual Property Agreement, which although not applied directly in the United States affects U.S. intellectual property law). Being governed by laws of the U.S. does not imply having to go to Washington, DC, to seek redress; benches of U.S. federal courts exist in most large and medium-sized cities in the United States. Similarly, in the case of healthcare, the ultimate solution may be an international regulatory system that maintains offices in large cities around the world. This organization could deal with issues related to performing healthcare work across national boundaries. This could include credentialing, registration, medical malpractice, medical accounting, and reimbursement. Such an international regulatory system could be operated under the aegis of the World Health Organization. Issues of trade and intellectual property are currently coordinated at the international level by the World Trade Organization (WTO) and the World Intellectual Property Organization, respectively. These organizations could serve as the nucleus for establishing streamlined mechanisms that would enable better coordination of emerging types of practices, in healthcare and in other disciplines, perhaps under the aegis of the
WTO’s General Agreement on Trade in Services. The Agreement on Trade Related Aspects of Intellectual Property is another mechanism of IP protection. Healthcare services will increasingly transcend national boundaries as efforts are made to perform them with speed, efficiency, and in the most cost-effective manner.
conclusIon The traditional model of healthcare required medical personnel to be in immediate proximity to patients being attended to. This model will gradually be replaced, for a growing number of healthcare applications, into a three-faceted model that requires: some personnel to be onsite, other personnel to be off-site, and the use of evolving technologies to render support in a manner that is beyond the capabilities of the best medical personnel available anywhere in the world. Computers can look at millions of images of mammograms in very short periods of time to locate ones that match the key characteristics of the one currently in the clinic; such power is clearly beyond the capability of a single doctor or even groups of doctors. Off-site personnel can be located in the same state (such as physicians and surgeons of the Arizona Telemedicine program assisting doctors in clinics in Navajo Nation and in other Native American nations), in a different state or a different country. If the support is being provided from a different country, it could be in the same time zone (to provide good overlap) or in a different time zone (to provide complementary advice, especially advice from specialists, during the night in the patient’s country). The time difference was initially perceived to be a hindrance; today, it is considered an asset, as it enables better usage of medical and other personnel in both countries. Initially, outsourcing will be embraced using the notion of two collaborating groups that are 10-12 hours apart in terms of time. Gradually, the model of three collaborating
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centers will be embraced. The use of this 24-Hour Knowledge Factory paradigm allows three centers located in three countries to continue work on a round-the-clock basis, with all the tasks being performed primarily during the day in the respective countries. New international systems must evolve to address the intellectual property, legal, accounting, and other issues related to the various forms of outsourcing. Medicine is geared to assist mankind as a whole. The offshoring of medical services will benefit developed countries because it can lower overall costs, provide quicker response, and facilitate load balancing. Such offshoring will be advantageous to developing nations because it can widen the range of available medical expertise and enhance the knowledge of healthcare professionals in developing countries. At the same time, one must be conscious of the fact that there is a shortage of medical professionals both in developed and developing countries, and the diversion of such resources to address the needs of foreign patients can potentially aggravate the shortage in their respective home countries. These issues will be partially resolved by market forces. Over time, we will witness more cooperative endeavors involving on-site and off-site activities in the healthcare arena.
AcKnowledgMent The authors acknowledge, with sincere thanks, valuable information, comments, suggestions, and assistance provided by many persons, including Shiu-chung Au, Harvey Meislin, Elizabeth Krupinski, Kurt Denninghoff, Rick McNeely, Richard Martin, Surendra Sarnikar, Yan An, Shawna Sando, David Branson Smith, Kit Cheong, Georgina Apresa, and Zak Campbell. Their insights have contributed to enhance the breadth and depth of this article.
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This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 1-26, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.18
Governing Health Care with IT Reima Suomi Turku School of Economics and Business Administration, Finland
INTRODUCTION The pressures for the health care industry are well known and very similar in all developed countries: altering populations, shortage of resources as it comes to staff and financial resources from the taxpayers, higher sensitivity of the population for health issues, new and emerging diseases, just to name a few. Underdeveloped countries have different problems, but they also have the advantage of being able to learn from the lessons and actions the developed countries made already, maybe decades ago. On the other hand, many solutions also exist, but they all make the environment even more difficult to manage: possibilities of networking, booming medical and health-related research and knowledge produced by it, alternative care-taking solutions, new and expensive treats and medicines, and promises of the biotechnology.
From the public authorities point of view, the solution might be easy: outsource as much as you can out of this mess. Usually, the first ones to go are marginal operational activities, such as laundry, cleaning, and catering services. It is easy to add information systems to this list, but we believe this is often done without a careful enough consideration. Outsourcing is often seen as a trendy, obvious, and easy solution, which has been supported by financial facts on the short run. Many examples show that even in the case of operational information systems outsourcing can become a costly option, not to speak of lost possibilities for organizational learning and competitive positioning through mastering of information technology. In this article, we discuss how information technology and health care industry work together. Information technology is a valuable resource that must be managed within the health care industry. At the same time, information technology has
the potential to renew the whole industry. Good practices in both must be supported by good IT governance. Health care is a big resource user in every country. In Table 1 we have percentages of health care expenditures in relation to gross domestic product in selected countries, where the percentage is very high (WHO, 2004). As one can see, the cost explosion phenomenon hits both rich and poor countries, even though the wealthiest countries are well presented in the list. Health care costs can be born by different parties within a national economy. Shares of different potential cost carriers vary from national economy to economy: •
The national government, directly or through different indirect arrangements such as separate funds or public insurance institutions Municipalities or other local public actors
•
Table 1. Top 20 percentages of health care expenditure in relation to gross domestic product in 2001 in selected countries (WHO, 2004) USA Lebanon Cambodia Switzerland Uruguay Germany Timor-Leste Marshall I slands France Jordan Argentina Canada Greece Surimare Australia Palau Portugal Iceland Croatia Belgium
Private insurance institutions Employers The patients themselves
For example, in the United States, the raising costs of health care born by the employers have been a topic of much academic and industry discussion (Berry, Mirabito, & Berwick, 2004). Sadly enough, there is controversial evidence whether information technology can lower the total costs of running health services (Ammenwerth, Gräber, Herrmann, Bürkle, & König, 2003; Ko & OseiBryson, 2004). There are few other forces than modern information technology that could cut down costs in the health care industry. In addition to cost cutting, information technology can provide extended productivity and is an ingredient in the processes that cumulate towards better care practices. But advantages from information technology are not to be harvested without constant focus on IT governance issues in the industry.
BACKGROUND We have found the following reasons for the late adoption of modern information technology in the health care sector (Suomi, 2000): • • • • • • •
Fragmented industry structure Weak customers Strong professional culture of medical care personnel Hierarchical organization structures Handcrafting traditions One-sided education Big national differences in processes
We will next discuss each of these issues in greater detail.
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Fragmented Industry Structure
Hierarchical Organization Structures
Good competitors and customers are a key to success for any company and industry (Porter, 1990). Unfortunately, the health care sector has not been able to enjoy from neither of them. For a long time health care has been considered as a faceless public service, where normal competitive forces are not in effect. Health care organizations have not felt each other as competitors, and neither have they documented productive cooperative behavior. First with penetrating privatization the situation is starting to change.
A part of hospital organization has always been a strong hierarchical, professional and specialized structure. Work on the computers, unfortunately, is low on the hierarchy list, especially of course in the activities of keying in patient data that would be a natural thing to do for the doctors. As EITO (1995, p. 46) put it: “for many Health Care applications, the most difficult obstacles can be social and cultural.” It is well known that information system development and application can be very difficult or at least different from less bureaucratic organizations than the health care.
Weak Customers Handcrafting Traditions As it comes to customers, most often they get into touch with the industry when in a critical and sensitive situation, where bargaining power is very low. Bad service has just to be suffered. First during the last few years the concept “customer” has started to substitute the word “patient.” Regulative bodies have become active in this respect, and for example in Finland a special patient-ombudsman has been institutionalized and legislation on patient reclamation and insurance has been introduced. In general, new technology is seen as a method to empower patients (Beun, 2003).
Even when we conclude that health care is a very information intensive industry, it has not been considered as such one. A good doctor is valued because of his handcrafting skills, especially in surgery, and it is not being understood that behind the handcraft operations a vast amount of knowledge is needed. Some, anyway, have understood that human body is the most complex entity in the world and of which information and knowledge has been collected over thousands of years.
One-Sided Education Strong Professional Culture of Medical Care Personnel Professional cultures can have a profound outcome on organizational outcome. Within the health care sector, there are many strong professional cultures, the strongest of them being those of doctors and those of the nurses. People seeking to these professions usually value human interaction, and are not much up for abstract systems such as computers.
Education of health care personnel has traditionally not focused on computer skills. Even the classical university tradition has kept medical and natural science (and thus computer) faculties apart from each other. Fortunately, during the last years, the drive for deeper cooperation between different science fields has begun to bear fruit.
Big National Differences in Processes Patient care is very culturally bound, and especially the administrative processes behind vary
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greatly from one country to another. This, of course, makes standardization very difficult and the industry a bad target for suppliers of standard software and platforms. Neither do we have any dominant players in the field that would behave in the market as strong customers and trend setters. Currently, however, not even the health care industry can not escape the tsunami of modern IT. IT has to be governed within the industry and IT and governance structures meet in two ways. At one side, IT enables new governance structures for the health care industry. On the other, it is an object needing governing. As both sectors offer a multitude of new possibilities, innovations are called for in the industry. IT governance thinking matures in organizations as any other discipline. Van Grembergen, De Haes, and Guldentops (2003) defined the following stages in their IT Governance Maturity Model: • • • • • •
Nonexistent Initial/ad-hoc Repeatable but Intuitive Defined Process Managed and Measurable Optimized
Needless to say, in the health care industry, IT governance thinking is nonexistent or initial/ ad hoc in the best situation.
HEALTH CARE, GOVERNANCE, AND IT The Meaning of IT Governance Structure in Health Care IT is an old acronym for information technology. Very often it is now replaced with the term ICT, referring to information and communication technology. This is to emphasize the communication services that are developing very fast, such as the
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Internet and mobile services. The letter “C” is often upgraded to the second dimension—alongside communication it can refer to contents. IT or IT governance is defined (IT Governance Institute, 2001) as follows: IT governance is the responsibility of the board of directors and executive management. It is an integral part of enterprise governance and consists of the leadership and organizational structures and processes that ensure that the organization’s IT sustains and extends the organization’s strategies and objectives. (p. 10) For many there is a temptation to understand governance as just a synonym for management. This is an oversimplification. Management is a goal-oriented activity, whereas governance is often given from outside, and organizations just have to live with it. This is not to say, that all governance structures would be beyond management control: most governance structures management can influence—at least on the long run. The long run is a key term in many aspects: When referring to governance structures, we talk about structures that are semipermanent and are not changed very frequently. Structure is a term closer to architecture than to infrastructure: governance structures are architectural terms, and are then implemented into infrastructures through different organizational forms. Therefore, the terms organization form and governance structure are not synonyms. Organizational forms are more formal and touch upon one organization, whereas governance structures are found in a richer selection of forms and organize themselves over a number of organizations. Table 2 summarizes our discussion here. Governance structures are present in almost any human decision making situation. In Table 3, we have a collection of key aspects of IT governance structure issues in health care.
Governing Health Care with IT
Table 2. Comparison of terms management, organizational form, and governance structure M anagement Time perspective Focus
Short
Management Control Metaphor
In a ction
Character
Action
Communication channels Concrete
Organizational Form Medium
Governance Structure L ong
Internal organization Easy
Interorganizational structures Difficult
Infrastructure
A rchitecture
F ormal
Abstract
Table 3. IT governance structure issues in health care I T as an enabler Health-related information on the Web Private-public s ector c ooperation Allocation of patients to different levels of care Customer contacts distribution between electronic and classical means Ownership, structure and allocation of patient, population-level and other critical data Electronic forums for patients to interact Electronic prescription systems IT as an object to be governed New legislation needs because of the new data processing possibilities Data privacy and security Structure and status of the information resource management in health care units IT-general management partnership Sourcing decisions of IT Charging arrangements on IT-services
IT AS A TOOL TO BE GOVERNED IN HEALTH CARE Information and communication technology needs management in health care organizations as in any other organization. Yet the issue seems to be very difficult for the health care organizations. Morrissey (2003, p. 6) paid attention to the fact that health care organizational culture is often hostile to new information technology: “The expression ‘Culture eats Strategy for lunch’ has never been more accurate than with physician order entry.” At the same time he documents the frustrations
many hospitals and health care organizations have felt in the case of information technology: “We have bought enough technology and we’re not getting the expected value out of it.” Haux, Ammenwerth, Herzog, and Knaup (2002, p. 19) have paid attention to the weak management of information technology and systems in health care organizations: “The health care institutions, especially hospitals, must emphasize professional information management more strongly in their organizations.” Ross and Rockart (1996) have defined the following success factors for successful IT management: 1251
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• • • • • • • •
Achieve two-way strategic alignment Develop effective relationships with line management Deliver and implement new systems Build and manage infrastructure Reskill the IT organization Manage vendor partnerships Build high performance Redesign and manage the federal IT organization
Next, we discuss these issues in the health care IT context. Two-way strategic alignment means that the organizational strategy affects the IT strategy, and vice versa. The current tumult of health care IT is partly a result of the fact that the effect of IT on health care processes has been denied for too long. Effective relationship with line management means that communication is fluent and the parties aim at common goals. Effective communication needs a common language. Unfortunately, medical people and IT professionals do not always speak the same language. The applications the staff members use are the face of the information technology to the whole organization. A deliberate balance with investments to the infrastructure as well is needed. Functional applications can not be built on a flimsy base, but overinvestment in infrastructure is always a danger threatening organizations (Broadbent, 1999). Typical key applications of a hospital are electronic patient records (EPRs) and picture archiving and communication systems (PACSs). Even in the health care organizational environment, IT professionals are under constant educational and skill renewal pressure. One of the big challenges meeting them is that patient data must move over traditional organizational boundaries and therefore must be able to deliver professional services in networked and often virtual organizational settings. The same issue is central in the management of vendor relationships:
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health care organization’s IT staff must be able to integrate solutions from several vendors or, even better, they must be able to put enough pressure to vendors to self integrate their solutions. Performance of IT solutions is dependent on many factors. Typical critical resources are time and money. Lack of money can be seen in undersized hardware and software solutions, and lack of IT-professionals time culminates in bad designs for the solutions. Federal IT organization means that there are both centralized and decentralized IT units in the organizations. Even in big hospitals there is usually just one big IT unit. The federal structure problematic comes more into the foreground in the interorganizational settings of systems.
IT AS A TOOL FOR GOVERNANCE IN HEALTH CARE How can information technology help in governing health care? We can approach this issue by taking a look at the application areas of IT in health care organizations. We propose the classification as shown in Figure 1, as adapted from (Suomi, 2000). The classification is a conceptual one, and actual information systems met in health care settings might fit several categories of the framework’s systems. The heart of our classification is in the interaction between the medical personnel and the patient, a kind of basic value-adding chain. In addition to the basic value chain in the middle of the figure, there are certain supporting functions and systems needed. The figure divides the systems into systems for the use by the patient/customer (patient domain) and by the medical staff (medical staff domain). We further differentiate between two basic use scenarios of these systems: 1. (patient) self-care scenario 2. (patient-medical staff) interaction scenario
Governing Health Care with IT
Figure 1. Classification of IT tools in health care
In addition we have the activities of the health care professional or organization, that are not connected to any specific individual patient interaction, but they are of less interest for our analysis here.
SELF-CARE SCENARIO The self-care scenario means that the patient tries to manage his or her disease or illness without individual professional help. Decision support provision in the self-care scenario helps in selfdiagnosis and in deciding whether professional help is needed or not. Internet-provided information is a key component in this category. Customer support tools help the patient with the daily management of the disease or illness. For example, easy-to-use tools to make different measurements (such as blood pressure) belong to this category. Process support tools are related tools, but focus in the self-care scenario more on the total life cycle of the disease. An example might be computerized tools for keeping track of different measurements. Financial administration tools help in managing the disease or illness condition financially.
INTERACTION SCENARIO In the patient-medical staff interaction scenario, decision support helps to diagnose the patient and to decide what kind of care he or she needs. Now the decision is made in cooperation between the medical staff and the patient, not just by the patient, as in the self-care scenario. Customer support tools are used in the same way as in the self-care scenario, but there they also help the patient to prepare for the interaction with the medical professionals. Interaction support tools are active in the situations where the medical staff and the patient meet. This meeting can take many forms: it can be a physical meeting, a virtual meeting through electronic means, or some combination of these. Doctors often want to keep physical meetings technology free, but technology can help even in these cases, say to facilitate communication in the case of sense disabilities or language problems. In a virtual meeting, different systems such as phone or e-mail services belong to this category as well as those different applications of telemedicine. Consultation support tools and preparation tools are to be used by the medical staff. Consultation support tools help the medical staff members during an individual customer consultation, whereas preparation tools are active outside the actual customer interaction. An example of consultation support systems might be a system used to support surgery operations. In our analysis, the information domains are important. Customer support tools contain information for the patient and are used by him or her. Interaction support tools contain joint information and are used by both patients and medical staff. Consultation support tools contain patient-specific information that is targeted just for the medical staff. To clarify the proposed value chain, take the example of a laboratory test. For the test, the customer might have to prepare himself or herself by not eating anything. The customer
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might obtain this information the hospital’s Web site or a customer-support tool. An electronic patient card that would help in identifying the patient during the testing would be an interaction support tool. Analyzing the test would be a back-office function for the preparation tools. Analyzing the laboratory results and working out how to tell the results of the test to the customer in a comprehensive way could be facilitated by a consultation support tool. Process support tools in the interaction scenario help in organizing the interactions between the patient and the medical staff (e.g., different consultation time reservation, queue management systems). Financial administration of the patient-medical staff interaction is one part of this. Electronic systems for handling prescriptions also belong to this category. Finally, a health care organization has to maintain a lot of management routines that are not connected to any individual patients. Resource planning and management systems and statistics keeping are examples of this domain.
The information in Figure 1 is not to say that the different health care systems would be independent isles of automation. All the systems included in the figure should be integrated by a comprehensive electronic patient record.
FUTURE TRENDS In Table 4, we list the most dramatic changes we will see in the health care sector because of modern IT and the challenges these changes cast on the IT governance. One of the biggest changes in the industry is that information related to health, diseases, sickness, and medicines is not scarce. Internet is a rich source of such information, at different levels of expertise, and in different languages. The gap between what information is available and what a health care professional should know is growing fast (Weaver, 2002); similarly, the pressures for laymen to know about medical is-
Table 4. Future changes in the field of health care introduced by modern IT and the challenges to IT governance produced by them
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Future c hanges i n the field of h ealth ca re introduced b y modern IT
Challenges to IT gover nance
The amount of fre e medical information will grow very fast
Mechanisms to rate d ifferent information sources have t o be developed
Patient self-care will gr ow in impo rtance
Systems to s upport self- care must be developed
Patient empowerment will gain in importance
Customer right s and de cisions mu st be tracked in m edical infor mation s ystems
Interaction between patients and m edical staff will increasingly tur n away from physical meetin gs to electronic m eans
Electronic me ans to fac ilitate patientmedical staff commun ication must b e developed
Data c ollected about patients will grow in amount and quality
Data p rivacy needs e ven more concern
Medicalization of the society
Medical and ot her inform ation systems w ill have to be linked sophisticall y
Costs of med ical c are will continu e to r aise
Cost monitoring will grow in importance
Focus should turn from i ndividual caretaking epi sodes and co nsultations to lon gterm car e-taking relatio nships and processes
Pressures to develop e lectronic patie nt records
Resources of the area will not grow as f ast as demand
Information systems mu st be us ed for process redesign
Governing Health Care with IT
sues grow. Decision support is needed more than ever in this plentitude of information. Different solutions should be found to differentiate right information from wrong, especially in the case of information targeted for laymen, such as most of the information found on the Internet. Free information will shift the power balance between health professionals and patients: More often, the patients are the best experts on their disease, and self-care will grow in importance. Systems to support self-care must be developed. Different electronic forums or virtual communities will offer the patients forums to share experiences and peer advice, to the healthy ones as well as to the chronic and acute sick (Utbult, 2000). If the patients get more empowered, they should too get more responsibility. Health care information systems should not just keep track of medical staff decisions, the decisions taken by the patients should also be recorded to the systems. Similarly, the interaction between the patients and health care professionals is going to change: Electronic means are going to take share from face-to-face meetings (Cain, Sarasohn-Kahn, & Wayne, 2000; Gilson, 2003). A key survival factor for all the electronic sources of health information and all communication channels to be used by the patients is how they can build and sustain customer/patient trust (Luo & Najdawi, 2004). Medicalisation of the society (Conrad, 1992) is a strong trend. Increasingly more issues in human life are seen as belonging to the sphere of medical expertise. If and when we accept this trend, medical decision makers need information about our lives in many aspects. As patient data can be electronically cumulated into huge databases, these databases can be used for different statistical, research, and other purposes. This calls for care and proper legislation giving the ramifications for data usage. For example, often the need of integrating data about one’s health and social life arises, if effective care is looked for. Needless to say, we enter a difficult area where data privacy issues gain in importance.
Science and industry will continue to produce increasingly effective cure methods and medicines, but not always without increased costs. It is clear that not everyone can be granted the best possible care with public finances. Systems for keeping track of costs and making cost-informed care-taking decisions will be needed in the future. For organizing patient flows through the health care system modern IT offers many possibilities. A key issue is to follow the long-term development of the patient, not to focus just on short-term episodes of care. This puts pressures on the electronic patient record systems. Resources can be saved or wasted through care-taking decisions. It is for sure that in many nations the total share of health care costs is at its top already, so current resources should be used more efficiently. Efficiency, among other things, means that patients are taken care of in the best and most effective places, be they public or private, and of right level of expertise. This all calls for extensive process redesign and system support for that. Should patient data be all the time available anywhere though electronic means, would the Healthcare Supply Chain be much more effective (More & McGrath, 2001).
CONCLUSION Health is undoubtedly among the most important issues for all people. In a modern society, the threats towards health are changing all the time, but at the same time the possibilities to maintain health and to cure illnesses also grow exponentially. The task is to make needs and solutions to meet in an effective way. This is about information and communication technologies and governance structures. Modern IT allows health care organizations to structure themselves in new, innovative ways and simultaneously to empower the customers to interact with the organizations, with fellow
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patients and information sources in revolutionary new ways. In this environment, health care professionals too have to adjust their roles. Managing and building governance structures for IT in health care organizations is not that much different from other organizations. Even in health care organizations the scope and status of information resource management has to be decided. Issues such as sourcing decisions, charging arrangements and data privacy and security issues all deserve their attention. There are, anyway, certain problems that need to be solved in this area: •
• •
Data privacy and security needs are extremely important and might sometimes conflict with optimal care. As the area is new, legislation is often lagging behind. The field is a meeting place for two strong professional cultures, that of medical doctors and IT professionals, which might bring along difficulties.
REFERENCES Ammenwerth, E., Gräber, S., Herrmann, G., Bürkle, T., & König, J. (2003). Evaluation of health information systems—Problems and challenges. International Journal of Medical Informatics, 71(2-3), 125-135. Berry, L. L., Mirabito, A. M., & Berwick, D. M. (2004, Summer). A health care agenda for business. MIT Sloan Management Review, 56-64. Beun, J. G. (2003). Electronic healthcare record; a way to empower the patient. International journal of Medical Informatics, 69, 191-196. Broadbent, M., Weill, P., & St. Clair, D. (1999). The implications of information technology infrastructure for business process redesign. MIS Quarterly, 23(2), 159-182.
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Cain, M. M., Sarasohn-Kahn, J., & Wayne, J. C. (2000). Health e-people: The online consumer experience. Oakland: California Health Care Foundation. Conrad, P. (1992). Medicalisation and social control. Annu. Rev.Sociol., 18, 209-232. EITO. (1995). European Information Technology Observatory. Gilson, L. (2003). Trustnext term and the development of health care as a social institution. Social Science & Medicine, 56(7), 1453-1468. Haux, R., Ammenwerth, E., Herzog, W., & Knaup, P. (2002). Health care in the information society. A prognosis for the year 2013. International Journal of Medical Informatics, 66(1-3), 3-21. IT Governance Institute. (2001). Board Briefing on IT Governance (2n d ed.). Retrieved from www.itgi.org Ko, M., & Osei-Bryson, K.-M. (2004). Using regression spline to assess the impact of of information technology investments on productivity in the health care industry. Information Systems Journal, 14(1), 43-63. Luo, W., & Najdawi, M. (2004). Trust-building measures: A review of consumer health portals. Communications of the ACM, 47(1), 109-113. More, E., & McGrath, G. M. (2001). Reengineering the healthcare supply chain in Australia: The PeCC Initiative. In R. Stegwee & T. Spil (Eds.), Strategies for healthcare information systems (pp. 114-125). Hershey, PA: Idea Group Publishing. Morrissey, J. (2003). An info-tech disconnect. Modern Healthcare, 33(6), 6-48. Porter, M. E. (1990). The competitive advantage of nations. New York: Free Press. Ross, J. W., & Rockart, J. F. (Eds.). (1996, December 16-18). Enabling new organizational forms: A changing perspective on infrastructure.
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Proceedings of the 17t h International Conference on Information Sytems, Cleveland, OH. Suomi, R. (2000). Leapfrogging for modern ICT ssage in the health care sector. Paper presented at the Proceedings of the Eighth European Conference on Information Systems, Vienna, Austria. Utbult, M. (2000). Näthälsa. Internetpatiente möter surfande doktore—uppstår konfrontation eller samarbete? Stockholm, Sweden: Reldok och KFB—Kommunikationsforskninsgberedningen. Van Grembergen, W., De Haes, S., & Guldentops, E. (2003). Structures, processes and relational mechanisms for IT governance. In W. Van Grembergen (Ed.), Strategies for information technology governance (pp. 1-36). Hershey, PA: Idea Group Publishing. Weaver, R. R. (2002, March). Resistance to computer innovation: Knowledge coupling in clinical practice. Computers and Society, 16-21. WHO. (2004). The world health report 2004. Geneve, Switzerland.
KEY TERMS Electronic Patient Record: All health-related information related to a patient in electronic form, assembled as a single entity. Electronic Prescription: Prescriptions created and handled in electronic form in an integrated information system. Health Care Supply Chain: A managed set of activities related to the health care activity of a patient organized so that all information needed is all the time available and that the participants in the chain have a complete picture of the total process. Picture Archiving and Communication System: A system for capturing, storing and distributing medical images. These systems are fast turning from storing analog images to storing digital images. Sourcing Decision: Whether to buy goods/ services from the market or to make them self— alone or in different alliances. Virtual Community: A social aggregation on the Internet when people interact long enough to form personal relationships.
This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 537-544, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.19
The Role of Multinationals in Recent IT Developments in China Michelle Rowe Edith Cowan University, Australia
INTRODUCTION Many multinational firms have located in developing countries to develop their overseas and industrial markets and to take advantage of the low cost environments that exist there. In addition to locating internationally, companies like Philips, Microsoft, Siemens and others also are outsourcing globally and have chosen China as an attractive base for the Asian market and as a growing market in its own right. Outsourcing implies obtaining goods or services by contract from an external source. U.S. firms find it profitable to contract IT software and services in developing countries such as China. A recent study by McKinsey estimated that every dollar spent in outsourcing offshore represents a cost saving of 58c to U.S. businesses (Datt, 2004). China’s reform and opening up in the late 1970’s gave the impetus to rapid economic growth. This
reflects such outsourcing as well as its source of cheap labour, high-skilled workers, modern factories. Increasingly domestic demand and the size of the Chinese market provide a growth mechanism for the economy. However, limited resources and employment opportunities may impede sustainability of economic development.
CHINA: AN OVERVIEW In 2003, China’s GDP was around 11.7 trillion yuan (US$1.325 trillion) and, with a population of over 1.3 billion, its GDP per capita for the first time exceeded US$1,000 (Han, 2004). The economy therefore ranks sixth behind the US $10.2 trillion. The Chinese economy grew at an average of 10% pa during the 1990’s–faster than the 3.4% average annual growth in the U.S. for the same period.
The Role of Multinationals in Recent IT Developments in China
IT has been a significant industry underlying this growth. IT spending in China is expected to total $30 billion in 2004, which accounts for 3.3% of the world market. The Chinese expenditure in IT is expected to grow by around 20% in 2004four times the rate of growth for the rest of the world (Nee, 2004). Other statistics that demonstrate the rate of growth in China, especially IT, are as follows: •
•
•
•
China’s electronic and IT industry ranked third in the world in 2003 with sales reaching approximately US$230 billion (an increase of 34% in 2002). Profits from this revenue approximated US$13 billion. There were 17,500 Chinese electronic enterprises employing 4.08 million people in 2003. Some Chinese enterprises were placed at the top in relation to worldwide semiconductor manufacturing and investment. For example, China Semiconductor Manufacturing International Corporation was ranked seventh out of the top 10, ahead of IBM. There are 8,582 software manufacturers in China with 18,000 product offerings. (Emerging Market Economy Reporters, 2004).
Total imports and exports reached US$800 billion accounting for two-thirds of GDP (Han, 2004, p.6) in 2003. Despite this, it could be argued greater emphasis in exporting value-added products is required. Certainly this in part is behind the government’s support of the IT sector. China’s Ministry of Information recently announced its vision to make the country a great power in IT. This vision is embodied in “the 11th five-year plan, commencing in October 2003” (World IT Report, 2004). China is emerging as one of the major manufacturers of digital products-it is the leading manufacturer of laptops (making around half of the world’s supply) and mobile phones (making
around 35% of the present world supply). Yet many of these manufacturing firms are not Chinese firms but rather Taiwanese or multinationals who have located offshore. China is poised to be the world’s number two manufacturer of semiconductors in the next few years.
EXAMPLES OF RECENT IT ACTIVITY IN CHINA Atos Origin, Europe’s biggest IT consulting company and number five in the world, aims to quadruple its business in China over the next two years, thereby doubling its Asia Pacific business. To achieve this, Atos Origin acquired Schlumberger Sema which in China serviced four state owned banks as well as provided IT services to six China bank credit card businesses (Liu, 2004). This acquisition will enable Atos Origin to infiltrate China’s finance and high-tech manufacturing sectors. In addition as the IT partner to the International Olympic Committee, Atos Origin will take an active role in the 2008 Olympics. Recently, Microsoft signed an agreement with Powerise Information Technology Co. Ltd., its second global strategic partner in China, in its quest to develop its overseas and industrial markets (Liu, 2004). This agreement facilitates training and co-operation, software development, sales and marketing and international projects. Microsoft, through its agreement with Powerise, will seek to access telecom, finance, social security and government sectors. Through its initial partner, Beijing’s China National Computer Software and Technology Service Corp. (CS&S), it seeks to access e-government and industrial application markets (Liu, 2004). Microsoft is looking to align shortly with a third global strategic partner, Neusoft Group Ltd., one of China’s leading software solution providers,
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based in Shenyang, a large industrialised city in north-eastern China. Intel Corporation in April 2004 signed a Memorandum of Understanding (MOU) with Neusoft Group Ltd. with a view to establishing a Beijing Solution Innovation Centre and a Product Research Laboratory in Shenyang. The purpose of the latter will be to develop key technologies for the next-generation Internet and support the modernisation of the rapid industrialisation taking place in that city (M2Presswire, 2004). General Electric (GE) to date has invested US$1.5 billion into the China market expanding into aircraft generators, power generators, finance, medical equipment, plastics and television (Xie, 2004) alone and in concert with Chinese enterprises. China is GE’s fastest growing market with revenues growing in excess of 20% over the past decade (Xie, 2004). Sourcing from China is also expected to increase dramatically to around US$5 billion in 2005 (Xie, 2004). GE hopes to maintain this growth after the 2008 Olympics as it is a major sponsor.
•
Development of a supply chain to facilitate movement of goods to market.
Notwithstanding these, acceleration of these initiatives are seen by many to be required. In addition the role of the market in facilitating such development is recognised and is evident in many of the examples of IT activity outlined earlier. A recent U.S.-China Business Council survey found that U.S. companies considered supply chain issues to be problematic for their business. Some of the reasons for this are as follows (Bin, 2002): •
• • • •
Foreign firms required to import products through officially sanctioned trading companies. Third party foreign trading companies are not able to enter the market or provide a complete range of distribution services; Difficulty in finding qualified suppliers; Underdeveloped IT and ICT infrastructure; Unreliable transportation infrastructure; and Damage/loss in transit.
FUTURE DEVELOPMENT IT in China needs to be better integrated into the nation’s industrialization. While IT adoption has greatly improved productivity and lowered costs of production (Han, 2004), improved infrastructure is required. A number of developments and investments are being made as the country seeks to support industry, especially the IT industry: •
• •
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Industrialization of core information technology, for example, large-scale integrated circuits and new generation mobile ICT; Equipping traditional industries with IT; Adoption of science and management education to better utilise knowledge and skills; and
It would appear that IT improvements especially in terms of infrastructure would help to overcome a number of these issues. To this end, initiatives are occurring in industrial cities such as Shenyang-outlined later in this article. In Beijing, a consortium of Chinese corporations has been set up and is laying an urban communication pipeline network (SinoCast China Business Daily News, 2004) to facilitate ICT use in that city. While many firms are outsourcing or locating in China to take advantage of the low costs of production and to enable easier access to the large market especially in IT, supply chains need to be set up and managed (Bin, 2002). However, logistics is only recently emerging, with supply chains in China being relatively immature.
The Role of Multinationals in Recent IT Developments in China
SHENYANG: A COMMUNITY DEVELOPING AROUND ICT The Shenyang Economic and Technological Development Area was established in 1988 as a region dedicated to industrial development. Foreign investors from 40 nations have invested there including 83 multinationals, 21 from the Fortune 500 Enterprises. 1,347 projects have been approved by the State Department of the People’s Republic of China since its inception. Shenyang, a city of over seven million people, is considered to be the “capital of Manufacture in China” (Administration Committee of Shenyang, 2004, p. 2). It comprises 1,586 enterprises (around 75% of medium-to-large enterprise in the city) and contributes 66% of the value of industrial output and 66% to tax income from manufacturing in Shenyang. Development in the development area focuses around five industries: • • • • •
Equipment manufacture; Automobile and electric train manufacture; Medicine and chemical manufacture; Food and beverage manufacture and associated packaging; and Textile printing and dyeing.
Alongside infrastructure such as water, electricity, road, rail, gas and telecommunications services, fibre optic cables underpin the area providing broad-band network services throughout the region. The infrastructure provided in this development area however is considered to be “basic” (Administration Committee of Shenyang, 2004, p. 12). In a visit to Shenyang recently, Intel Corporation’s CEO Craig Barrett has encouraged northeastern China, within which Shenyang is situated, to use IT to bring about a transformation and to advance the region’s competitiveness in an
expanding global digital economy (M2Presswire, 2004). Barrett argued that deploying and maintaining a modern IT infrastructure in the region will lead to improved efficiency and productivity, better access to markets, especially expanding global markets, and the promotion of long term growth (M2Presswire 2004). In his view, IT will create new capabilities for the region, including wireless network connectivity, collaboration capabilities, business analytics and security (M2Presswire, 2004). Barrett asserted that for the northeast to become more prosperous, higher levels of investment were needed in computing and ICT infrastructure, research and development and education to take advantage of the industrialisation that was already taking place in cities such as Shenyang (M2Presswire, 2004). Government policies will need to be shaped to facilitate this. In this environment (of rapid technology) northeast China must have the infrastructure in place to sell products, communicate with customers and employees and deliver information electronically around the clock and around the world. This is the key to growth in northeast China (M2Presswire, 2004). As stated earlier, Intel has signed a MOU with Nuesoft Group Ltd. to assist in the modernisation of industrial development in Shenyang.
CONCLUSION While much investment has been channeled into the development area in Shenyang to attract foreign investment, outside of the region infrastructure such as ICT is disparate. This will have an impact particularly on collaboration capabilities, efficient access to global markets and logistics. China’s entry into the World Trade Organisation no doubt will have an impact on accessibility of investors into the market and are expected to place pressure on infrastructure and logistics providers. Investment in IT such as that expressed
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by Intel Corporations CEO Craig Barrett is required. Local logistics providers have responded to this challenge–such as COSCO–the largest Chinese ocean carrier, and Sinotrans–the largest inland carrier–which are developing intermodal and integrated services as well as investing in port and infrastructure facilities including electronic tracking (Bin, 2002). An urban communication pipeline network is being established in Beijing to facilitate ICT use in that city. Recently, the Ministry of Communications announced a restructuring of ports was underway to improve logistics facilities. This upgrade is to include improved information technology so as to increase efficiencies (Bangsberg, 2003). In addition, the Ministry of Commerce has introduced reforms in the nation’s national logistics system– “the government will intensify efforts to cultivate large logistics enterprises with nationwide networks and strong international competitiveness” (Bangsberg 2003, p.1). The country is looking to grow “from a manufacturing powerhouse into the world’s procurement centre” (Bangsberg 2003, p.1) with multinational’s procurement in China likely to reach US $50 billion by 2005 from a figure of US $30 billion in 2002 (Bangsberg 2003). This will be facilitated by greater investment in IT and improved computing and ICT infrastructure; examples of which have been cited in this article. Connections and relationships between organisations, including multinationals, and relevant authorities are important to future growth and success of the ICT industry in China, especially in regional communities. Personal relationships established with government officials in the past have often overcome or expedited problems that have arisen and are essential for organisations to enter into the marketplace. The Chinese Government has a vision for China as a world power in IT and steps are underway to bring this vision to a reality, as evidenced in the future developments outlined in this article
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and the support for development in regional communities, such as Shenyang.
REFERENCES Administration Committee of Shenyang. (2004). Guide to investment - The capital of manufacture in China–Shenyang Tiexi New District, Shenyang. Bangsberg, P.T. (2003). China plots port, logistics upgrades. Journal of Commerce, 10, 1. New York. Bin, J. (2002). How international firms are coping with supply chain issues in China. Supply Chain Management: An International Journal, 7(4), 184-188 Datt, R. (2004). Outsourcing, nationalism and globalisation. In Businessline, March 10, 1. Chennai. Emerging Market Economy Reporters. (2004). China’s electronic and information technology boosts revenues. EME, March 22, 1. London. Han, B. (2004). Striving for sustainable growth. China Daily (North American ed.), February 27, 6. New York. Lui, B. (2004). Acquisition aids IT firm’s growth. China Daily (North American ed.) March 16, New York, 10. M2Presswire. (2004). INTEL: Intel CEO Barrett sees information technology transforming northeast China. M2Presswire, April 8, 1. Coventry. Nee, E. (2004). The China Syndrome: China is flexing its muscles to gain a say in worldwide technology standards. CIO Insight, March 1, 1. SinoCast China Business Daily News. (2004). Beijing’s communication pipelines network to be built. SinoCast China Business Daily News, January 20, 1. Dallas.
The Role of Multinationals in Recent IT Developments in China
World IT Report. (2004). China plans to become great power in information technology. World IT Report, February 8, 1. London. Xie, J. (2004). Olympics to lift firm’s fortunes. China Daily (North American ed.), May 27, 9. New York.
KEY TERMS ICT Infrastructure: The underlying facilities, services and installations needed for information communication technology (ICT) to operate.
Multinational Corporation: A company that owns or controls production or service facilities in more than one country and, therefore, conducts business globally. Next-Generation Internet: The use of third generation technologies such as advanced multimedia wireless communication via the Internet. Supply Chain: When organisations supply or purchase product or raw material from other organisations in business-to-business relationships, the relationship between these firms is said to be a “supply chain”.
This work was previously published in Encyclopedia of Developing Regional Communities with Information and Communication Technology, edited by S. Marshall, W. Taylor, and X. Yu, pp. 614-617, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.20
E-Business Deployment in Nigerian Financial Firms:
An Empirical Analysis of Key Factors Uchenna C. Eze Multimedia University, Malaysia
ABSTRACT This research provides empirical evidence on factors that influence e-business deployment among financial firms in Nigeria. It explores possible differences that exist among financial firms using in-house e-business capabilities and those that outsource their e-business capabilities. This research contributes to the few pieces of literature on e-business (EB) experiences among firms operating in Africa, particularly Nigeria. technology-organization-environment [TOE] model underpins the framework and hypotheses development for this article. The independent variables are the firm, technological and environmental factors while EB use constitutes the dependent variable. The findings reveal that all the factors were significant, but that environmental factors were key determinants of EB use among the firms. In addition, this study reveals practitioners’ interests in Nigerian government agencies to maintain and enhance the existing EB legal, regulatory and security frameworks
in the country. By extension, this could enable greater EB use in firms, which could improve the overall economy.
INTRODUCTION Globalization, enhanced by the proliferation of information system (IS), has increased national and regional markets integration, international production, distribution, marketing, and consumption. A recent eGlobal report indicates that as access to the Internet improves throughout the world, the number of active (those who spend at least 1 hour per week online) users rose to about 640.2 million in 2004 (eGlobal Report, 2005). Similarly, the eGlobal report reveals various forecasts of total world e-commerce revenues by year 2004 ranging from a conservative value of $963 billion to $4 trillion. International Data Corporation (IDC) projects e-commerce revenue by 2004 at $2.8 trillion while Goldman Sachs & Co. estimates $3.48 trillion (IDC, 2002). The
report also indicates that 2003-2005 growth of e-commerce will be driven by the B2B segment not business-to-consumer (B2C) transactions. In 2002, the B2B sector accounted for 79.2% of total global e-commerce activity, but would grow to about 87% of total e-commerce in 2004 (IDC, 2002). Based on the foregoing, this article examines e-business (EB) use and performance in Nigerian financial firms using the technologyorganizational-environment framework (TOE). E-business is often regarded as focused on e-commerce, however, the true definition is much broader. The Aberdeen Consulting Group defines e-business as the automation of the entire spectrum of interactions between enterprises and their distributed employees, trading partners, suppliers and customers (Intel, 2003). E-business encompasses the application of electronic systems to transform functional processes. Both definitions include a broad range of business processes such as multi-entity product design collaboration, electronic product marketing and information sharing, e-commerce sales of product to consumers or between firms or governments, internal business process re-engineering, multi-entity supply chain collaboration and customer relationship management. The operational definition of EB in this article includes all business transactions firms conduct using open standard (e.g., the Internet) or closed standard networks (e.g., Electronic Data Interchange (EDI)). The reason is to provide for most businesses in Nigeria that still run their operations on EDI. Revenue generated from EB support and related services grow at a rapid rate in Nigeria, despite the insecurity in online economic transactions. With the liberalization of the telecommunication sector and the introduction of GSM services, experts predict a boom for EB activities across Nigeria including Lagos. Lagos is the commercial and economic hub of Nigeria attracting key investments in financial activities and information and communication technology (ICT). As the fastest growing industry in Nigeria,
the ICT industry is projected to be the next foreign direct investment driver in the next decades. EB value was USD8.3billion in 2002 up 22% from USD6.8billion in 2001. EB values for 2004 was USD11.5billion (Ujah, 2005). The financial services industry (FSI) is a significant source of development and growth in Lagos. The Lagos corporate sector, especially the financial and oil industries are all expected to experience increased growth in their future EB activities. Notwithstanding enormous corporate interest and many success stories on EB, there are few contextual studies on factors that determine its deployment in Africa. In addition, prior studies on e-business (EB) focused primarily on the statistics and growth patterns of e-business (EB) in terms of usage across industries and countries located in the European Union, United States of America and Asia (Eze & Gilbert, 2004). Similarly, Nigeria, like most African countries, provides little empirical studies that explain the dynamics of EB deployment in firms (Eze, 2006; Eze and Gilbert, 2004). The goal of this article, however, is to contribute empirical material to the literature on EB development in Africa by investigating factors that determine EB use among Nigerian financial firms. It also examines the dynamics of outsourced and in-house EB applications among Nigerian firms. These may provide some bases for additional future researches that might address specific issues in EB developments among firms from a comparative perspective.
THE CONTEXT FOR E-BUSINESS AND THE FINANCIAL INDUSTRY Nigeria is located at the southwestern coast of West Africa, consists of 36 states, and covers an area of about 923,768 sq km. Nigeria shares borders with Benin, Cameroon, Chad and Niger. Its population, estimated at 130 million (comprising about 250 recognized groups, many divided into subgroups of considerable social, economic and
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political significance), is sparsely and densely distributed in rural areas and cities (land: 910,768 sq km, water: 13,000 sq km). Nigeria is slightly more than twice the size of California, which makes it extremely difficult to provide universal communications access to its entire population. EB activities between government agencies and private entities have not taken strong roots except in the case of government agencies such as the Central Bank of Nigeria and the private banks including oil companies. There is the potential for growth in this area and evidence suggests that more sectors of the economy are following the examples set by the banking and other financial services firms in deploying EB innovation. As noted earlier, Lagos, the specific site for this research, is the industrial and commercial capital of Nigeria, regionally known as the growth pole and center for local/international financial institutions and IT headquarters (Ujah, 2004). Lagos has a population of 13.6 million and is the most important city in Nigeria because of its strategic position in the country’s development process. EB development in Lagos is driven mainly by the private sector. Firms, particularly banks, oil, and telecommunication players, are very active in EB operations supported by quasi-governmental agencies such as the National Communication Commission and the Nigeria Internet Group. The government of Nigeria is gradually developing a solid EB infrastructure to enhance operational activities among business partners. Over 75% of manufacturing and trading firms in Lagos use Electronic Data Interchange (EDI) as their key operating platform. With the rapid diffusion of the Internet, greater numbers of firms in Nigeria are moving their operations from the proprietary networks to the World Wide Web. EB systems have the potential to add significant value to all key functional areas in Nigerian financial firms, especially the potential for integrated Web-based applications to improve customer services. Loan applications and insurance forms can be filed out, stock trades initiated, bills, and
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fund transferred online. Customers can now access research tools such as mortgage calculators or retirement planning applications, credit status, and account information online. Applications based on open Internet standard can enable data sharing across firms in this industry. Internally, e-business applications can also improve integration of various proprietary systems. The challenge, however, is for the Nigerian government to strengthen its social, economic, technical and legal infrastructure to enable accelerated growth of EB, not only in the FSI but also in key sectors of the economy.
CONCEPTUAL FRAMEWORK The TOE framework, developed by Tornatzky and Fleischer (1990), identifies three aspects of an enterprise that influence the process by which the enterprise implements an innovation. These aspects are technology, organization and environment. The technology factors describe the external and internal technology relevant to the firm, which includes existing technologies in the firm and those technologies available in the market. Organization factors define the size, scope and the management structure: the quality of human resources, risk taking ability, management policies and support and available slack resources. Environment factors define conditions in which the firm conducts its business, which includes competitors, customers, suppliers, and the government. These three factors influence innovation deployment process and consequently the performance of the firm. Although a firm has its contextual strategic approaches to address its environment, identifying the prevalent factors, which firms consider when making investment decisions on an innovation, is very important (Teo & Pian, 2003; Zhu et al., 2002, 2004). The context and TOE factors firms consider when deploying innovations vary depending on their
E-Business Deployment in Nigerian Financial Firms
specific needs, internal and external constraints, and the objective of the respective firms. Applying TOE framework in IS research underscores the significance of matching informationprocessing requirements, often determined by environmental and firm factors, with information processing capabilities of the firm. Researchers apply this framework extensively in various areas like economics, finance, and planning (Eccles & Crane, 1988), theorizing new emerging network firms and innovation deployment. Grover (1993), for example, derived empirically a model of five factors (firm policy, technological, environmental, interfirm and support factors), which influence a firm’s decision to deploy customer-based interorganizational systems. Weill and Olson (1989), on the other hand, identified seven useful factors (environment, technology, task, individual, strategy, structure, and size) in their meta-analysis of contingency research in business information systems. In addition, King and Sabherwal (1992) studied variables in the environmental, firm, and the IS contexts. Several other researchers including Rogers (1995) identified few factors that influence the adoption of innovation including. Although, some factors identified within the TOE contexts may vary across studies and research samples, the framework has consistent empirical support. Building on the empirical evidence and literature review, TOE framework is considered appropriate for this study, and this article extends the theoretical framework to e-business practices in a region less researched, Nigeria. The review in this research indicates that existing literature focused mainly on technology adoption (Zhu et al., 2004). Only a few researches have directly examined how TOE factors affect the ability of firms to derive value from e-business innovation use (Zhu et al., 2002, 2004; Ramamurthy et al., 1999). Zhu et al (2004) argue that the impact of e-business on firm performance is a consequence of technological, organizational, and environmental factors. Their results were significantly affected by these factors. Based on
the foregoing, this research uses the TOE framework to determine factors that may influence e-business use and performance among Nigerian financial firms. This research model (see Figure 1) depicts nine factors within three contexts of the TOE framework: competitive intensity, regulatory policy, uncertainty, technology capability, fit, relative advantage, technology policy, top managers’ support, and risk taking. These factors are proposed to influence EB use and performance among financial firms (Zhu et al., 2004; Kohli & Devaraj, 2003). As indicated earlier, literature identifies several factors that could influence technology implementation. The choice of the specific factors for this study, particularly the environment factors, was informed by the contextual and innovation deployment dynamics specific to Nigeria, the industry and the region. Nigerian political and economic conditions are quite different from those of the developed societies such as the United States, Canada, United Kingdom, Finland, Australia and Singapore where EB frameworks are much stronger, developed and are of strong international standard. The next section describes the TOE factors in this article as they pertain to the Nigerian financial services firms including the hypotheses development.
BUSINESS ENVIRONMENT FACTORS Environmental factors entail those that create opportunities as well as threats to a firm. These factors are typically beyond the control of management, where the firm has to adjust to adapt to any change in the environment. This article identifies three environmental factors that could influence EB use and performance: the intensity of competition in the industry; regulatory policy; and uncertainty in the environment. Competitive intensity: Researchers perceive competitive intensity as an important factor in
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E-Business Deployment in Nigerian Financial Firms
Figure 1. The conceptual model Business Environment
Technology Policy Top Managers’ Support Risk Taking
the innovation adoption literature (Grover, 1993; Iacovou et al., 1995). It refers to the extent that competitors in the marketplace affect the firm. Porter and Miller (1985) analyzed the strategic rationale underlying the relationship between competition intensity and IS innovations. A business environment characterized by an increase in competition fuels the tendency for IS deployment in firms (Zhu et al., 2002; Rogers, 1995). For Nigerian financial firms to be competitive in the region, it is imperative they venture into emerging economies such as Southern Africa, China, and India, for new markets, because international experience and knowledge would create core competencies for development, expansion and growth for Nigerian financial services firms. Nonetheless, the costs and risks firms encounter in foreign investments are extremely high. Using EB to reach, coordinate, and integrate those markets, therefore, would save enormous resources. In this regard, EB offers a critical low-cost option for a firm to reach wider markets, collaborate with partners and possibly remain competitive in, at least, the region. Hence, the hypothesis: H1: The greater the competition intensity in the industry, the more likely a firm will deploy EB.
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Regulatory policy is recognized as a critical country factor affecting innovation use and performance. For example, Williamson (1983) summarized two ways in which government regulation could affect innovation deployment: (1) by taking specific actions to increase or decrease payoffs via tax and other measures to encourage research and development (R&D), (2) by taking actions that influence innovations via altering the climate in which they are received. Accordingly, Nigerian government could help financial firms to implement strong e-business by regulating the Internet to make it a more trustworthy business platform and establishing supportive business and legal frameworks to protect e-business activities. Sato et al. (2001) posited that regulatory environments, together with communication platform, are supporting infrastructures critical for EB, highlighting the importance of regulatory environment for efficient EB use and performance in the financial services industry. These theoretical assertions and empirical evidence leads to the next hypothesis: H2: An enabling regulatory environment will positively influence the capacity of a firm to use EB.
E-Business Deployment in Nigerian Financial Firms
Uncertainty describes the condition in which reasonable knowledge regarding risks, benefits, or the future is not available. It is a measure of how poorly we understand or can predict something such as a parameter or future behavior; in some cases, this is the same as a lack of precision. Uncertainty places time constraints upon decisionmaking and forces firms to invest in technology for coping mechanisms. Decision-makers, for example, may turn to more sophisticated information analysis such as group collaborative systems, data mining and knowledge management systems (Holsapple & Whinston, 1996). This article posits that EB will enable Nigerian financial services firms to obtain more and richer information at faster pace compared to, say, 20-30 years ago. EB also tends to enable better functional area visibility and better access to customers and suppliers. Experience from practitioners indicates that firms are able to manage the level of uncertainty in the business environment when they deploy e-business systems for coordination and collaborative business processes improvement. Hence the hypothesis: H3: High uncertainty in the environment will positively influence EB use and performance among firms.
Technology Factors Technological factors delineate the perceived features of the innovation. Teo et al. (1997) and Tornatzky and Klein (1982) observed that in addition to the many perceived innovation features in prior IS research, technology capability, fit, and relative advantage tend to predict innovation deployment. Technology Capability IS literature indicates that IS capability comprises infrastructure, human resources, and knowledge (Mata, Fuerst, & Barney, 1995; Zhu et al., 2005). Consistent with past research, technology capability in this article consists of technology infrastructure and IS hu-
man resources, where technology infrastructure refers to technologies that enable Internet-related businesses (e.g., EDI, EFT, intranet, extranet), and IT human resources refer to IT professionals with the knowledge and skills to implement Internet-related applications. By this definition, technology capability is conceptualized as an integrative construct that is reflected not only by the physical assets but also by human resources that are complementary to physical assets (Zhu & Kraemer, 2005; Mata et al., 1995). Technology infrastructure establishes a platform on which EB can be built; IT human resources provide knowledge and skills to develop EB applications. Therefore, Nigerian firms with a higher degree of technology capability would enjoy greater capacity and readiness to use EB in their business processes. As a result, they would be more likely to achieve a greater depth in EB use. Hence: H4: A firm would use EB if it [the firm] has a strong technology capability. Fit entails the agreement between an innovation and a firm’s culture, experiences and potential needs (Rogers, 1995). It is common for a firm to deploy innovations that align closely with its specific needs, values and the business processes, which are expected to meet specific requirements of future technological developments in the industry and those that the firm deploys (Ettlie, 1983). The agreement of a technology with the tasks and processes of potential users appear to be the widely researched facet of fit between technology and the firm (Tornatzky & Klein, 1982). This is because in Nigeria, as it is in some countries, firms encounter change resistance irrespective of the size, type of business and location of the firm, and therefore, would deploy an innovation when there is greater possibility of fit between the innovation and the firm culture, structure, existing processes and IS infrastructure. In contrast, Kwon and Zmud (1987) observe that inconsistency of new IS initiatives with existing business processes
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E-Business Deployment in Nigerian Financial Firms
and IS infrastructure adversely affect users’ attitudes and increases change resistance, which may impede innovation deployment. Hence: H5: The more fit EB is with a firm’s culture and existing IS infrastructure, the more likely the firm will use the innovation. Relative advantage is the level at which potential customers observe the innovation as superior to existing alternatives. Kwon and Zmud (1987) define relative advantage as the degree to which innovation deployment provides greater firm advantage than to maintain the status quo. The degree of relative advantage is usually denoted in economic terms: savings in time and effort, costs reduction, or better reputation in innovation application. The celebrated potential benefits of using EB include creating a worldwide clientele base, rapid information access, global scale information dissemination, cost-effective document transfer, global market reach, and groundbreaking business models (Rawn, 1994). Nigerian financial services firms will derive greater value from conducting business transaction via EB systems compared to using traditional approaches, such as the telephone. Hence, the following hypothesis: H6: A firm will likely use EB if it [the firm] perceives greater relative advantage accruing from the innovation.
Firm Factors Firm factors include those variables that affect the firm structure, and which the firm could adjust or change to fit its changing environmental needs. Three factors this research discusses include technology policy, top managers’ support and risk taking. Technology policy: Ideally, technology policy is a type of long-range environmental scanning and coping mechanism, and entails actions a firm takes to outperform other firms on technology
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(Ettlie, 1983). Ettlie (1983) observed that firms with aggressive technology policies constantly experiment with available processing systems; actively recruiting the best possible technical, production and marketing personnel, and often showing strong commitment to technological forecasting. This suggests that these firms tend to have specialized groups who evaluate new process innovations, which may lead to the implementation of key initiatives. Therefore, firms with aggressive technology policies would consider using EB in response to the technological trends and market conditions; consistent with arguments on the contexts of IS management. Thus, this article proposes: H7: The more aggressive a firm’s technology policy is, the more it will use EB. Top managers’ support: Lederer and Mendelow (1988) observed that top management influence and commitment during the assessment of an innovation and the deployment of any IS initiative is often significant. Top management support for innovation initiatives tends to enable a firm’s commitment in investment needs and accelerate project-planning processes (Teo et al., 1997). Without strong top managers’ support for an innovation, it becomes difficult to secure the interest and motivation of the Chief Executive Officer (CEO), which may lead to possible rejection of the initiative. Top management influence is also vital to overcome corporate barriers and resistance to innovations and corporate changes in Nigerian financial services firms, which will enable efficient overall change management. Top management influence, therefore, is crucial in EB application decisions. Hence, the hypothesis: H8: The greater the extent of top managers’ support, the more likely the firm will use EB. Risk taking entails a firm’s willingness and ability to take risks associated with business
E-Business Deployment in Nigerian Financial Firms
including changes in the firm’s structure, processes, and strategy (Eze & Kam, 2001). When a firm deploys EB, it faces complex and dynamic changes in communication culture and reporting patterns (Lederer & Mendelow, 1988). In the context of Nigerian financial firms, a related concern is productivity; if employees are hooked on improper use of the systems, then expensive firm time and other vital assets may be used for less productive ends. Therefore, if top management is willing to accept firm restructuring, deploy novel technologies and invest resources in IS applications then the firm may be likely to use EB for greater value. Hence: H9: The higher the risk-taking propensity of top management, the more likely the firm will use EB.
METHODOLOGY The data collection for this article was conducted using survey questionnaire. The questionnaire was designed based on the research conceptual model (see Figure 1). Previous empirical studies on innovation deployment and diffusion provide key reference for the research variables and items (Chau & Hui, 2001; Eze, 2003; Zhu et al., 2002, 2005). Table 1 illustrates the operationalization of each independent variable, the items and their sources. The dependent variable, EB use and performance was operationalized by asking the respondents to assess the improvement in their EB use and performance. Responses to the survey questions on the variables were entered on a fivepoint Likert-type scale as follows: 1 = Strongly Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, and 5 = Strongly Agree. Respondents were also requested to identify whether they were users with in-house EB systems, users with outsourced EB systems or nonEB users. In addition, the survey questionnaire includes data on participants’ profile
including firm type (commercial banks, finance houses, merchant banks, and insurance firms), number of employees and annual revenues. Several steps were taken to ensure data validity and reliability. Initially, the questionnaire was pretested with two academics and two business executives selected from the IS industry. The questionnaire was then revised for any potentially confusing items. Before the administration of the final survey, a random subset of 10 respondents was used for pilot testing to determine further areas in the questionnaire that may need improvement. Six questionnaires were returned, and their recommendations for improvement and thus the content validity of the questionnaire were incorporated into the survey questionnaire. The questionnaires were then mailed to CIOs of the 400 firms from the Nigerian financial industry. In the cover letter, the author assured confidentiality and offered an executive summary of the findings as an incentive for participation. Prepaid reply envelopes were provided for the return of the responses. Follow-up calls were made to the participants who had not replied to the survey after the specified period. To establish the absence of nonresponse bias, it is desirable to collect data from a set of nonrespondents and compare them with data supplied willingly. For a meaningful number of surveys and for all survey items, this method is rarely achievable. A practical preference, that has been argued to provide reliable results, is to compare the mean values of responses for earlier returns with the means from later returns (Compeau, 1995). This approach has the capacity to reveal any differences between early and late responders who required prompting. Tests were conducted on first week responses and responses after 5 weeks, and the differences between the two groups were insignificant (two-tailed t-test P<0.05), indicating that time had no apparent effect on the perceptions and that nonresponse bias was remote.
There is stiff competition based on costs There is stiff competition based on product quality and novelty There is increasing number of competitors in the industry
Grover (1993); Zhu et al. (2002)
Regulatory Policy (RP)
V4 V5 V6
Government provides incentive Legal protection for online purchases Required for government businesses
Eze (2006) Teo et al. (1997)
Uncertainty (U)
V7 V8 V9
There is enormous diversity in customers’ buying habits There is enormous diversity in the nature of competition There is enormous diversity in product designs
There are adequate IT professionals with requisite skills in the firm There are functional ICTs in the firm There are Internet and W3 capability in the firm
Mata et al., (1995); Zhu & Kraemer (2005)
Fit (F)
V13 V14 V15
EB use consistent with firm’s culture Favorable attitudes towards EB deployment present in the firm EB use consistent with firm’s IT infrastructure
Reich & Benbasat (1990); Rogers (1995).
Relative Advantage (RA)
V16 V17 V18 V19 V20 V21 V22
Convenient access to worldwide information Creation of worldwide electronic presence Selling and buying products through EB Extend global market reach New business models and opportunities Improve customer service Lower operational costs using EB
Cockburn & Wilson (1996); Rawn (1994); Rogers (1995); Kendall et al. (2001)
V23 V24 V25 V26
Firm’s tradition of being the first to try out new technologies Firm’s expenditure on developing new products as compared to competitors Firm’s recruitment of technical personnel Firm’s awareness of the latest technological developments
Teo and Pian (2003); Zmud (1984); Eze (2006)
Top Mangers’ Support (TMS)
V27 V28 V29
Top management interested in EB use Top management considers EB use as important Top management has shown support for EB use
Grover (1993); Premkumar & Ramamurthy (1995); Teo et al. (1997)
Risk Taking (RT)
V30 V31 V32
Top management’s willingness to accept organizational changes Top management’s willingness to accept unfamiliar technologies Top management’s willingness to invest funds in IT
Clemons & McFarlan (1986); Teo et al. (1997)
Firm Variables Technology Policy (TP)
ANALYSIS There were 148 completed responses in this research, producing a 37% response rate. The profile of participants is shown in Table 2. About 83% of the participants are CIOs and they have an average working experience of 6.5 years in their firms and 12.5 years in their respective industries. More than 65 percent of the participants are large,
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with more than 600 employees and average annual revenue ranging from $101 million to more than $500 million. Out of 148 firms, 67.6% have sophisticated EB systems while 32.4% do not possess such EB systems. Over 80% of the participants have been using EB systems for about 8 years (This includes firms using EDI and EDI over Internet for business). Those firms with EB systems are
E-Business Deployment in Nigerian Financial Firms
regarded as EB users while those without the systems are regarded as nonusers. Out of the 100 users, 57% have in-house EB solutions while the remaining 43% outsourced theirs. Among the nonusers, about 69% intend to deploy EB within the next year.
Results: Model Goodness-of-Fit There is no universally accepted indicator of goodness-of-fit, so it is usual to present several statistics as collective indicators. The Chi Square (χ2) statistic is a fundamental measure but because it is sensitive to sample size, it is advisable to complement this measure with other measures of fit. The indicators chosen are ones used in previous IS research. These are the Non-Normed Fit Index (NNFI), the Comparative Fit Index (CFI), the Root Mean Square-Error of Approximation (RMSEA), the Root Mean Square Residual (RMSR), and the Tucker-Lewis Index (TLI). The χ2 statistic, also a measure fit, is subject to distortion and is
often replaced with the ratio of χ2/d.f. Indexes that exceed 0.09 are acceptable for the NNFL, CFI, and TLI. Values of less than 0.06 for RMSEA and less than 0.10 for the RMSR are acceptable. The preferred value for the χ2/d.f. ratio is below 2 (Nunnally, 1979). The probability for the χ2 for the final measurement model was marginal (P=0.05). Nonetheless, all other goodness-of-fit measures for the final measurement model suggest a strong fit of the study data to the proposed model. Because the ratio of χ2 to d.f. was low (1.47) and all other indexes were well within the prescribed range, the results support the overall goodness-of-fit (see Table 3).
Construct Validity and Reliability To assess the extent to which a particular empirical indicator represents a given theoretical concept, it is pertinent to assess the validity and reliability of the indicators. Therefore, to ensure rigorous
Table 2. Participants profile Items
Value
Percent of Respondents
Number of Employees
>600
65.76
Annual Revenue
101- 500 and above
65.76
Duration of EC Use
8 year and above
>80
Annual Expenditure on EC
6% and above
57.56
N = 148
Table 3. Goodness-of-fit for the final measurement model Item
Suggested Range
Measurement Model Value
χ2
P>0.05
P =0.05
χ2/d.f.
<2.00
1.47
Non-Normed Fit Index
>0.90
0.99
Comparative Fit Index
>0.90
0.96
Tucker-Lewis Index
>0.90
0.98
RMSEA
<0.06
0.04
RMSR
<0.10
0.07
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E-Business Deployment in Nigerian Financial Firms
research protocol, construct validity and reliability assessments were conducted (see Table 4). Construct validity focuses on the extent to which a specific measure relates to other measures in accordance with theoretically derived propositions. Construct validity may be determined in terms of convergent and discriminant validities.
Convergent validity assesses the consistency across multiple operationalizations. While convergent validity assesses whether all the items measuring a construct cluster together to form a single construct, discriminant validity measures the extent to which a construct diverge from other constructs, and is indicated by a measure having
Table 4. Rotated factor matrix of the variables Items
low correlation with other measures from which it should theoretically differ (Gerbing & Anderson, 1988). Factor analysis can be used to evaluate both convergent and discriminant validities. Considering the sample size and the number of items in this article, individual factor analyses were performed on the firm, technological, and environmental factors to ensure that the ratio of variable items to the sample size is maintained at 1:10. This rule-of-thumb suggested by Kerlinger (1986) has also been used previously (Grover, 1993; King & Sabherwal, 1992; Premkumar & Ramamurthy, 1995; Teo et al., 1997). Separate factor analysis was performed to ensure stability of the factor loadings of the research constructs. During factor analysis, items were retained according to the following criteria: (i) factor loadings greater than 0.5 and (ii) no cross-loading of items. In other words, items were dropped where they have a loading of less than 0.5 or where their loadings are greater than 0.5 on two or more factors (King & Teo, 1996). The results of two rounds of factor analyses for the firm, technological and environmental variables are shown in Table 4. Both convergent and discriminant validities were satisfied as the items measuring each factor clustered together to form distinct factors and there were cross-loading
of items. With respect to reliability, Cronbach alpha was computed for each variable. Nunnally (1978) suggested that average reliability scores of 0.7 are sufficient for basic research. From Table 4, we see that the Cronbach alpha scores range from 0.68 to 0.89. Because the lowest score is fairly above 0.70, all the constructs are considered to have adequate reliability. Table 5 illustrates the correlation matrix for the factors. The table indicates that the factors—top managers’ support (TMS) and fit (F) relatively correlated highly. A probable explanation is that it is unlikely that top management would support the adoption of EB, if its use is considered inconsistent with the firm’s culture, business processes and existing IS infrastructure. In testing the hypotheses, multiple regression analysis was conducted using hierarchical regression procedure. The first regression performed was on firm and e-business value variables, and the second regression was on environment and e-business variables. The level of significance to enter the framework was set at 0.20 and the level of significance to stay in the framework was set at 0.10. Being a directional hypothesis, these values are equal to the one-tailed test with values of 0.10 and 0.05, respectively. The research data supported all the hypotheses (see Table 6). However,
Table 5. Correlation matrix SOURCE
CI
RP
U
TC
F
RA
TP
TMS
CI
1.0000
RP
0.0878
1.0000
U
0.6734
0.1100
1.0000
TC
0.5678
0.2295*
0.0924
F
0.0899
0.1119
0.2231
0.6233**
1.0000
RA
0.1100
0.1299
0.0310
0.4320**
0.3782
1.0000
TP
0.3991
0.0098
0.1269
0.7560**
0.6512**
0.3782
TMS
0.0764
0.1287
0.0876
0.4829**
0.8611**
0.4102
0.7600**
1.0000
RT
0.0986
0.1199
0.0564
0.5673**
0.0328
0.0437
0.5253**
0.0277
RT
1.0000
1.0000
1.0000
*p < 0.05; **p < 0.01
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E-Business Deployment in Nigerian Financial Firms
the strengths of the coefficient of determination vary among the factors. The data supported H1 indicating that industry features characterized by competitive intensity tend to enable firms to generate value from e-business, which confirms Grover and Lederer (2004) findings. Also, the data supported H2, which indicates that efficient regulatory environment would enable more possibilities for firms to generate greater value from e-business. The findings also supported H3, suggesting that environmental uncertainty tend to enable greater EB and performance. The research indicates that firms operating strong technology policy have the tendency to use EB for greater business performance. This result underscores the importance of a solid framework for IS systems planning in firms to compete effectively in this 21st century. H8 was supported as well by the analysis and suggests that, as in most business decisions, top manager’s support for the deployment and use of EB is very important to enable firms derive the best performance from an EB initiative. This is consistent with the findings of Zhu et al. (2004). The data also supported H9, indicating that for firms that are proactive and less risk averse, the chance of deriving greater advantage from EB use and performance is would be very high (see Eze & Kam, 2001). The data
support for H9 was stronger compared to H7 and H8.
ANOVA FOR EB USE BEHAVIOR Table 7 presents the results of one-way Analysis of Variance (ANOVA) used to compare the three categories of participants along the nine factors. Comparisons were made between three groups of firms (users with in-house EB systems, users with outsourced EB systems, and non users). Post-hoc analysis using Turkey procedure was carried out to determine which groups are significantly different from the others. Based on Table 7, the analysis indicates significant difference with respect to the respective factors with the exception of regulatory policy and uncertainty. This result suggests that environment factors tend to affect equally the financial services firms in Nigeria (discounting the surprise result for competitive intensity), irrespective of the category of EB participants.
Discussions The results reveal significant difference among the three groups in terms of competitive intensity.
Table 6. Results of regression analysis Standard Error
E-business Use Coefficient of Determination
H1. Competitive Intensity
0.13
0.32**
H2. Regulatory Policy
0.17
0.36**
H3. Uncertainty
0.21
0.43**
H4. Technology Capability
0.16
0.35**
H5. Fit
0.11
0.23 *
H6. Relative Advantage
0.13
0.27*
H7. Technology Policy
0.11
0.25 *
H8. Top Managers’ Support
0.17
0.24 *
H9. Risk Taking
0.09
0.42**
Hypotheses
*p < 0.05; **p < 0.01
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E-Business Deployment in Nigerian Financial Firms
Table 7. ANOVA testing Users with In-house Systems Mean (S.D.)
Users with Outsourced Systems Mean (S.D.)
Nonusers Mean (S.D.)
F-Ratio
Turkey Test
CI
4.09 (0.61)
3.93 (0.68)
2.67 (0.57)
12.87**
[1]>>[2]>>[3]
RP
3.87 (0.62)
3.91 (0.72)
3.74 (0.83)
1.66
Not significant
Factors
U
2.99 (0.87)
2.84 (0.91)
2.81 (0.87)
1.52
Not significant
TC
3.98 (0.63)
3.67 (0.61)
2.76 (0.58)
11.37**
[1]>>[2]>>[3]
F
3.91 (0.65)
3.71 (0.59)
3.32 (0.66)
16.36**
[1]>>[2]>>[3]
RA
4.11 (0.51)
3.79 (0.63)
3.69 (0.77)
4.54*
[1]>>[2]>>[3]
TP
3.63 (0.54)
3.37 (0.59)
2.91 (0.73)
12.33**
[1]>>[2]>>[3]
TMS
3.87 (0.71)
3.70 (0.78)
3.21 (0.71)
14.65**
[1]>>[2]>>[3]
RT
3.34 (0.49)
3.11 (0.62)
3.13 (0.80)
7.91**
[1]>>[2]>>[3]
All three groups perceive that they operate in relatively different competitive sectors. This result is consistent with the findings of King et al. (1989), who found that pressure from competition is an important facilitator of a firm’s effort to deploy strategic information systems. However, Thong and Yap (1995) and Teo et al. (1997) observe competitiveness of the environment to be insignificant in the decision to deploy IS. This article establishes firms deploying B2B e-commerce do so, partly, because of the business environment they operate in, because both users and nonusers of EB may have different strategies and orientation regarding their business environments. Hence, the competitive intensity in an environment is a key determinant for firms deploying EB. Regulatory policy is a significant determinant for EB use among financial services firms in Nigeria, but it is not a significant dedifferentiating factor among EB users and nonusers. The relevant authorities in Nigeria such as the Nigeria Internet Group and the Information and Communication Technology Agency, should work very closely with the industries to develop comprehensive information technology frameworks that could support both national and global business operations. This could be done by using benchmarks
from, say, Singapore, United States and Finland. Similarly, the results indicate that uncertainty is a significant factor in firms EB use, which illustrates the growing necessity for businesses to employ electronic systems to enable business operations in unstable emerging markets, such as Nigeria. However, uncertainty was not a significant factor determining differences among financial firms use of EB. This may be because of the relatively stable political structure and governance in the country for the past 8 years following the inception of civilian governance in Nigeria. Technology capability emerged as a significant determinant of EB deployment and performance in the firms. This indicates the prominent position advances in technology takes in business dealings. New technology applications such as the Internet and wireless applications are driving significant changes in business landscape and direction for future business opportunities. Technology capability also emerged as a differentiating factor among the business groups. The stronger and advanced the technology used by the firms, the greater the tendency for better performance. The results depict that fit is a strong determinant of EB system deployment. Post-hoc analysis indicates significant differences among the three
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E-Business Deployment in Nigerian Financial Firms
groups. Users with in-house solutions view EB as an innovation more consistent with their firms’ culture and information system infrastructures, compared with users with outsourced EB solutions. Similarly, users without in-house solutions perceive EB to be more consistent with their firms’ culture and information system infrastructure compared to nonusers. This result reveals the significance of fit between EB and the firm, which is consistent with the findings of Tornatzky and Klein (1982). The result also corroborates the contention that firms would deploy technologies with features that relatively match the firms’ business processes and experiences (Ettlie, 1983). Similarly, Relative advantage of the innovation is a significant determinant in EB deployment. The results in Table 6 indicate significant difference among the three groups. This implies that users with in-house solution perceive their firms as having a relative advantage, by way of the benefits of EB deployment. In addition, users with outsourced systems gain relative advantage using EB. The results also illustrate that technology policy is a significant determinant in the deployment of EB. Further, Post-hoc analysis suggests that all the three groups of firms are significantly different from one another. EB users without in-house solutions tend to have more aggressive technology policy compared to non-users of EB (Teo et al., 1997; Ettlie & Bridges, 1982). Early users of innovation will thus consider technology policy to be a key component of their corporate strategy formulation. In addition, Top managers’ support is a significant EB use determinant in Nigerian firms. In addition, Post-hoc analysis reveals that all three groups of firms are significantly different from one another. Users with in-house EB tend to have the highest level of top management influence, followed closely by users with outsourced systems, and nonusers. The results illustrate that risk taking is a significant determinant in EB use and performance. This implies that the risk-taking propensity of top management has enormous impact on the
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implementation of EB. The participants in this research perceive EB deployment as risky because it commands substantial financial investment and often, requires changes in the firm and management structure, strategy and practices, but are willing to take the challenges because of anticipated competition intensity. In addition, security and standardization issues are currently being resolved, and with the commitment from the government, commercial activities involving EB will grow even stronger.
CONCLUSION AND IMPLICATIONS FOR PRACTICE This article illustrates that all three TOE constructs are very important in EB use and performance among financial firms in Nigerian. This article identifies 9 significant determinants of EB use in firms within Nigerian context. They are technology policies, top managers’ support, risk seeking, fit with firm culture, beliefs and IS infrastructure, relative advantage, technology capability, competitive intensity, uncertainty, and regulatory policy. The outcome of this article would be critical for the financial services industry in Nigeria as they plan further investments in EB systems. By applying the TOE framework, firms could successfully identify and address key factors in the environment, in the enterprise and related EB issues necessary to enable effective and functional financial firms in Nigeria and at the international level. The intensity of competition in the financial industry increases with every new technological application and therefore, it is imperative for financial practitioners in Nigeria to be cognizance of the fact and prepare their firms for the business challenges of the next decade of 21st century. In essence, although the competitive use of EB is permeating all businesses today, firms that are more sophisticated and aggressive in deploying and using advanced EB systems would be
E-Business Deployment in Nigerian Financial Firms
able to keep up with the competition if not gain competitive advantage. The pressure to provide unique and acceptable services and products at reduced costs means increased deployment of EB innovations even in traditionally low information and knowledge intensive sectors. The outcome of this article will also be useful to the Nigerian government and its agencies. All the economic sectors of Nigeria recognize government’s role in facilitating EB deployment, however, existing regulatory policies are at best inadequate and less comprehensive to enable the complex dynamic legal and structural frameworks needed to, successfully allow maximum business use of EB innovation. In this regard, the Nigerian government, as a matter of urgency, needs to work closely with the private sector to determine the gaps in ICT policy implementations and initiate concrete directions for a stronger EB processes.
EB, suggest that although the external environment appears to push firms to deploy EB, the internal environment (firm and technological factors) is still important in determining innovation systems deployment. This indicates that while the external environment are critical key factors in the deployment of EB, the firm’s internal environment complexities tend to be significant considerations in IS deployment decision processes among Nigerian financial firms. Finally, this article contributes to EB literature and creates additional poll of resources practitioners and academics could use to further enrich and extend our knowledge of the evolving phenomenon. Empirical data on EB development and growth in Nigeria is a small step, a step nonetheless, toward enhancing and extending the discussion on EB as a global platform for business, economic and industrial activities.
Implications for Research
Limitations of this Research
Findings in this article are consistent with traditional academic models of technology-organization-environment [TOE] framework (Zhu et al., 2002; Eze & Kam, 2001) in a new substantive area, Nigeria. In this regard, it extends the field of IT, EB, and the diffusion and TOE perspectives of the firm. In addition, this research builds on previous innovation research, and corroborates some of the findings of these studies indicated earlier (e.g., the importance of top management influence), and raises some vexing questions as well. For example, in the context of Nigeria, are uncertainty and regulatory policy still significant factors differentiating financial firms deploying EB from those that do not, given the complexities in the Nigerian economy? This puzzle is one already being addressed in a follow-up research within the African region to determine the extent environmental uncertainty, regulatory policy, and competitive intensity influence ICT deployments in firms operating in West Africa. These findings, based on the perception of users and nonusers of
There were some study limitations. First, the conclusions drawn from the data, while theoretically sound, are based upon perceptions of single informant. While CIOs are expected to be knowledgeable, study results would have been more reliable if paired with a second informant outside the IT area. Although all responses were anonymous, it is still possible that the CIO responses are biased in favour management information systems benefits. Second, the survey instrument relied primarily on perceptual data. Although, Venkatraman and Ramanujam (1987) and Dess and Robinson (1984) argue that subjective data correlate with objective data, further studies may consider a mix of both subjective and objective data. Third, the sample composition was, on average, large firms and as a result, inferences on the findings would be most appropriate in related cases such as South Africa and Malaysia with respect the firms that participated in this investigation.
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Agenda for Future Research Possible further research areas from this article include; first, it would be useful to gain greater understanding of EB deployment in small firms from multiple industries. Comparison between these categories of firms in terms of EB implementation purposes, and usage patterns, may be useful for the firms to, properly chart the direction of the innovation implementation. Second, extending future studies to include comprehensive performance impacts of EB, how such impacts can be evaluated, and the evolution of EB, would be useful for firms competing in 21st century. In addition to using a static cross-sectional approach, a longitudinal study on the EB deployment may provide insights on the dynamics of the innovation implementation processes that may be more useful. Future research may also consider a comparative study involving Asian, African and European or American firms to determine any underlying dynamics across business cultures, policy issues and entrepreneurial activities in e-business deployment. This would provide some contingency frameworks for practitioners and policymakers at an international level as EB continues to evolve into a universal business phenomenon across the globe. Finally, future studies may consider using additional TOE factors and possibly revising some of the factors in this article to provide for more content coverage and generalization. This, however, should be done with particular respect to the research circumstance.
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This work was previously published in the International Journal of E-Business Research, Vol. 4, Issue 2, edited by I. Lee, pp. 29-47, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.21
Fotogenika.com:
A Small Virtual Organization Serving the Mexican Market Esperanza Huerta Instituto Tecnológico Autónomo de México, Mexico
EXECUTIVE SUMMARY
ORGANIzATION BACKGROUND
Fotogenika is a small e-business that was born out of the idea of two young Mexican entrepreneurs. It started its operations in March 2004, and after a few months, it managed to successfully create a small customer base. Fotogenika.com is the commercial name of a company established in New York City that delivers digital pictures in Mexico. The company serves Mexicans living out of their country who want to keep in touch with their families in Mexico. Owned by Mexicans living in the U.S., Fotogenika understands the strong ties among Mexican families and their need to keep in touch with their family. Fotogenika shows how culture is important to serve customers in America and how to focus on a profitable market niche. Also, this case presents the technology and marketing challenges that small startup e-businesses face, as well. Finally, Fotogenika’s business proposition demonstrates the advantages of displacing a product digitally to where it will be produced and delivered at a low cost.
Gabriela Perezcano, co-founder of Fotogenika. com, was quite satisfied with what her company had accomplished. In June 2004, just a few months after starting operations, Fotogenika had successfully created a small customer base. A virtual organization, where most of its processes were outsourced, Fotogenika printed and delivered digital pictures in Mexico from orders based in the U.S. After proving that Fotogenika’s business proposition was successful, Perezcano was ready to expand her business. Perezcano was born in Mexico City and migrated to the U.S. because her husband had a job there. Having a strong business background and an entrepreneur mentality, she detected a profitable business niche. As a Mexican living in a foreign country, she understood the need to keep in touch with her family. Family ties are strong among Mexicans. Mexicans living in the U.S. are concerned about the welfare of their families in Mexico. This concern leads Mexicans to continu-
ously send money to their families. In fact, in 2003 Mexicans in the U.S. sent $13,266 million to their homes (Ingresos por Remesas Familiares, 2004). That same year, the money Mexico obtained from their citizens living in the U.S. was second only to the money Mexico obtained from oil (Ingresos por Remesas Familiares, 2004). People keep in touch with their loved ones by different means. Phone calls, e-mails, and other communication media are commonly used. However, people like to share their experiences through pictures, as well. At present, two photography technologies exist: analogue and digital. The capability of storing digital pictures in electronic devices has not diminished people’s need to have their pictures printed. In fact, important dealers in the photography industry, like Kodak, have increased their investment in printing digital photography (Barret & Carr, 2004). Aware of the growing number of Mexicans living in the U.S. with increasingly higher income levels, Perezcano decided to deal with that market (See Appendix 1 for statistics on Mexicans living in the U.S.). Customers in the U.S. would place their orders, and the company would print and deliver their digital pictures to Mexico. Fotogenika’s service was simple and straightforward. Customers uploaded their pictures to their personal album on Fotogenika’s Web page. They ordered the pictures that were later printed and delivered to Mexico. In order to provide a value-added service for customers with slow Internet connections, customers were able to burn their pictures onto a CD and send it to Fotogenika’s office by mail. Fotogenika would upload the pictures at no cost and return the CD to the customers. Also, customers without digital pictures could send the pictures to Fotogenika. Fotogenika would scan and upload the pictures for a fee. Then, Fotogenika would return the pictures to the customers. With the clear concept of concentrating on core activities in mind, Perezcano decided to establish Fotogenika as a virtual organization, outsourcing
most of its business processes. The term virtual organization has been used to define different concepts, all of them involving the distribution of work across geographical or organizational boundaries (Ariss, Nykodym, & Cole-Laramore, 2002; DeSanctis, Staudenmayer, & Wong, 1999). First, an organization is considered virtual when it employs telecommuters (Ariss et al., 2002; DeSanctis et al., 1999; Markus, Manville, & Agres, 2000). Second, an organization is considered virtual when it involves several companies to perform a task (Lawton & Michaels, 2001). Third, an organization is considered virtual when most of its processes are outsourced, keeping in-house only the core activities (Ariss et al., 2002; Lawton & Michaels, 2001). The latter definition applies to Fotogenika. However, the term virtual organization is better understood as a continuum in a range of different types of relationships rather than a pure organizational form (DeSanctis et al., 1999). DeSanctis et al. (1999) identify four dimensions that define different types of relationships: space, time, culture, and boundaries. Virtual organization companies, compared to traditional companies, are more likely to establish distributed, asynchronous, multicultural, and external relationships. As a continuum, companies can have different degrees of virtuality. Fotogenika heavily relied on the pure virtual organization spectrum. In the space dimension, traditional organizations are colocated, whereas virtual organizations are distributed (DeSanctis et al., 1999). Fotogenikas’ office was located in the U.S., whereas production facilities were located in Mexico. In the time dimension, traditional organizations operate synchronously as opposed to virtual organizations that operate asynchronously (DeSanctis et al., 1999). Fotogenika’s portal processed customer orders in 24 hours. As soon as an order was placed, it was sent to the Mexican lab for printing and delivery. The Mexican lab operated during the day, and the commitment was to
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process customer orders within 24 hours from receiving the order. In the cultural dimension, traditional organizations share a common culture, whereas virtual organizations are multicultural (DeSanctis et al., 1999). Fotogenika was related to a multicultural environment. The company had links with American and Mexican organizations. Also, customers, mainly Mexicans, are immigrants who have developed a particular cultural identity (chicano culture) different from that of Mexicans living in Mexico. In the boundary dimension, traditional organizations establish mainly internal relationships as opposed to virtual organizations that establish external relationships (DeSanctis et al., 1999). Most of Fotogenika’s business processes were outsourced. Thus, the company mainly had established external relationships in order to fulfill its needs. One of the main advantages of a virtual organization is that it allows managers to focus on core activities (Matthews, 2004). But what constitutes a core activity has changed over the years (Matthews, 2004). For Fotogenika, customer service and logistics were its core activities. This allowed the company to deal with marketing and customer preferences. This strategy had been used successfully before by Dell and is called direct business model (Lawton & Michaels, 2001). With the direct model, Dell establishes a direct link with individual customers and gets a great deal of information on customer preference trends, which Dell shares with its providers (Lawton & Michaels, 2001). Dell observes customer preferences on a daily basis (Lawton & Michaels, 2001). If, for instance, customer preferences were shifting to larger PC monitors on a certain customer segment, Dell would share that information with its suppliers, allowing them to adjust their inventory (Lawton & Michaels, 2001). Similarly, Fotogenika would be able to assess market trends and know about customers’ demands. If customers were to demand frames for their pictures or specific
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products, such as pictures printed on calendars, Fotogenika would assess the need to provide new services. By June 2004, Fotogenika had no employees. The founders rendered all services from Perezcano’s house. In the future, Fotogenika might need to rent an office and hire employees to provide services for its increasing customer body. Fotogenika’s business proposition was based on the following three strategies: 1.
2.
3.
Print at the delivery point. Transmitting digital information is faster and cheaper than transporting physical information. This is not a new concept. For instance, USA Today, the top-selling U.S. newspaper, sends the digital version of the newspaper to its national and international sites where it is printed (McMeekin, 2002). Locate production facilities where costs are low. Again, this is not a new strategy. For instance, it is well-known that the software industry oustources systems development to India, where costs are lower than in the U.S. Establish cultural affinity. Companies that focus on specific market segments provide services and products close to what their customers are used to. Fotogenika’s Web site was in Spanish and displayed pictures of Mexican people. A Spanish portal not only allowed Mexicans who do not speak English to use the service but also transmitted cultural affinity. Customer service also was provided in Spanish, which developed a close relationship with its customers.
Fotogenika’s strategies were not new, but when applied to the company’s service and target market, it gave it a competitive advantage. As opposed to large firms, small organizations “must start out in a niche market with some means of differentiating themselves from their competition (differentiation focus)” (Jeffcoate, Chappell, & Feindt, 2002, p 27).
Fotogenika.com
Fotogenika used both service and price as a competitive advantage. In terms of service, Fotogenika rendered its services in Spanish and used its cultural affinity to develop a sense of trust in its customers. In terms of price, Fotogenika’s services were cheaper than those provided by its competitors. The total price paid by customers had two components: the price for the printouts and a shipping charge. For the pictures, Fotogenika’s prices were slightly lower than those of its competitors in most print sizes. Having lower printing costs provided the company with an attractive marginal income. The shipping charge is what really made the difference for the customers. Fotogenika shipped from Mexico City at substantially lower prices. A customer shipping to Mexico City would pay approximately $20 for delivery if ordered within the U.S. Ordering through Fotogenika, the shipping price was $2. Fotogenika’s competitors can be divided into two groups: (1) American companies delivering pictures worldwide, such as ofoto.com1 (owned by Kodak), snapfish.com, and shuterfly.com; and (2) Mexican companies such as upfoto.com and mifotodigital.com (owned by Kodak). American companies shipping to Mexico charged international delivery prices. Even Mexican companies charged more for shipping than Fotogenika did. The major threat might be Kodak, who had worldwide facilities. Kodak had proprietary sites
in the U.S. as well as in Mexico. However, both sites were operated independently; that is, pictures ordered through ofoto.com to be delivered in Mexico were charged international shipping fees. See Appendix 2 for a summary of prices offered by Fotogenika’s competitors. Being a virtual organization had allowed Fotogenika to start as a small business, requiring a small investment. Brick-and-mortar companies move toward a virtual organization in order to take advantage of cost savings, flexibility, and other benefits (DeSanctis et al., 1999). Fotogenika was born as a virtual organization. No transition from brick-and-mortar was made. Figure 1 depicts Fotogenika’s organizational structure as a virtual organization. To sum up, Fotogenika had been established as a small e-business in terms of investment. However, the margins that had been obtained from printing and delivering at low costs had made Fotogenika an attractive investment. Proxy income statements are shown in Appendix 3. Information on type of customers and market growth are shown in Appendix 4. Perezcano was satisfied, because Fotogenika was achieving its goals.
SETTING THE STAGE Perezcano’s partner was an expert in photographic technology. He had a thorough knowledge of the
Printing Lab in Mexico •Printing Fotogenika •Logistics •Customer Service Fed Ex or similar •Delivering
ISP •Hosting
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Mexican photography market and personally knew people who worked in the most important Mexican labs. The management of relationships in virtual organizations is a strategic variable (Lawton & Michaels, 2001). He had established an alliance with the lab in Mexico based exclusively on a preestablished fee per picture and delivery. There had been no fixed costs associated with the alliance; that is, Fotogenika only paid for the pictures it sent, and there was no commitment to send any minimum number of pictures. Due to the large volume of operations, UPS and FedEx charged the Mexican lab discount prices that Fotogenika by itself would not have been able to apply for. In this sense, the strategy of the firm had been to successfully manage a network of relationships (Lawton & Michaels, 2001). When business areas are outsourced, the outsourcer transfers the provider not only the task itself but also the knowledge to complete the task. (Lawton & Michaels, 2001; Matthews, 2004). The outsourcer then relies on the provider to perform a task. The risk for the outsourcer, therefore, is that the provider underperforms (Matthews, 2004). When a provider is not performing at the expected level, the outsourcer either can switch providers or re-establish in-house control (if it is still feasible). Either option is costly and time-consuming. The dependence on the provider increases the risk for the outsourcer (Matthews, 2004). Fotogenika’s alliance involved a low risk. If the alliance with the Mexican lab failed or if it became unable to fulfill Fotogenika’s orders, Perezcano’s partner would be able to reach an agreement with a different lab. Just like Dell computers, Fotogenika was competing as a network of alliances. Being a small startup business, Fotogenika had faced the challenge of how to actually get people to order products from its Web site. People need to trust that an online business will deliver a satisfactory product. The perceived reputation and size of the store influences consumer trust in an Internet store (Jarvenpaa, Tractinsky & Vitale, 2000). People trust large organizations more than
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small business (Jarvenpaa et al., 2000). However, the effect of size perception might depend on the type of merchandise (Jarvenpaa et al., 2000). When there is not too much at stake, the size of the company might not be important. The amount of money spent in each order of digital printouts is generally low, usually less than $100. As such, customers’ perceived risk on the transaction might be low, and they might be willing to try out Fotogenika’s service just to see if it works. In terms of reputation, people favor companies with which they are already familiar (Quelch & Klein, 1996). Therefore, Fotogenika was at a disadvantage compared to big names in the industry such as Kodak. Fotogenika needed to build up a reputation and to transmit to its customers that the company was able to fulfill their expectations. Information Technology (IT) is the critical enabler for virtual organizations (DeSanctis et al., 1999; Strader, Lin & Shaw, 1998). Virtual organizations, as a network of firms, require a great deal of integration and coordination (Strader et al., 1998). IT is a cost-effective tool that provides the capabilities to store and share information among participants. According to Strader et al. (1998) the information infrastructure for virtual organizations should include the following components: “1) a global information network for electronic brokerage, 2) electronic access to external environment data, 3) electronic connections between organization partners, 4) electronic access to virtual organization operational data, and 5) intra organizational information system support” (p. 82). The Internet is a technology that can be used in all components. However, the Internet lacks the security to hold communications among virtual partners. For interorganizational communications, an intranet provides a solution to security concerns (Strader et al., 1998). Small organizations such as Fotogenika usually lack the skills or the time to implement an e-business application (Wagner, Fillis & Johansson, 2003). Therefore, Perezcano decided to
Fotogenika.com
completely outsource the IT function. The web site was developed by a third party and was hosted by an Internet Service Provider (ISP) for a fixed monthly payment. The ISP took care of basic security measures, such as backing up information and securing server’s operations. The initial development of the site cost approximately $4,000. Updates to the site would have to be agreed upon on a one-by-one basis. In terms of interorganizational communication, Fotogenika did not need to transfer customers’ credit card information to the Mexican lab. For each order, the Mexican lab needed access only to the pictures to be printed and the customer’s delivery address. To deal with interorganizational communication, Fotogenika had an intranet developed by the third party as part of the initial project. Within the intranet, the Mexican lab had secured access to Fotogenikas’ customer database and was able to download directly the orders to be processed. Fotogenika’s philosophy was to provide customers with a simple, short, and friendly buying experience. Therefore, Fotogenika’s Web site was small, well organized, and easy to use. Fotogenika’s functionality was simple. The Web site was able to do the following: • • • •
Display information Register customers Administer customer electronic albums Execute transactions
For security reasons Fotogenika did not store customers’ information online. This meant that every time customers wanted to place an order they were required to type in their information. Also, since all order information was kept offline, customers who wanted to know about the status of their orders had to contact customer service directly.
CASE DESCRIPTION One of the main challenges that Fotogenika faced was to compete in terms of functionality. American residents were already used to high levels of service doing e-transactions. For instance, returning customers are not asked to provide their information every time they do a transaction. However, at Fotogenika, as a security measure, no credit card information was accessible after a customer placed an order. This practice protected the company and its customers against phishing attacks. In a phishing attack, customers get an e-mail, supposedly sent by a company with whom they are customers, asking them to update their personal information. The e-mail is really sent by a hacker who replicates the company’s Web site and obtains customer information. Phishing attacks are costly, not only in terms of the frauds resulting from stolen information but also in terms of customer service. For instance, EarthLink estimated that one phishing attack cost the company at least $40,000. These costs come from providing services to customers calling call centers and resetting customer information (Dragoon, 2004). Storing customer information is, without any doubt, a feature highly convenient for returning customers. However, storing customer information exposed Fotogenika and its customers to costly risks that small businesses can hardly afford. So far, the company did not know whether customers valued this security measure or considered it inconvenient. Functionality was also an issue in terms of customer service. The Web site did not offer automatic order tracking. Customers needed to contact customer service directly to inquire about the status of their orders. The lack of automatic tracking might be inconvenient for some customers. Also, it increased the workload of customer service. Perezcano had been assessing whether the limited functionality of the Web site would be an
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obstacle to acquiring and retaining customers. A better functionality would imply an increase in costs. The current Web site would need to be redesigned and implemented. However, estimating the costs would be easier than estimating the real impact of providing more functionality. Perezcano wondered whether such increased functionality would pay back. As a small startup e-business, Fotogenika had faced other challenges. Fotogenika had not developed a reputation yet. Therefore, the company had to rely on different strategies in order to build trust with potential costumers. Consumers need to assess the seller’s competence (Tan & Sutherland, 2004); that is, customers need to believe that the seller has the abilities, skills, and expertise to provide the service (Papadopoulou, Kanellis, & Martakos, 2003; Tan & Sutherland, 2004). For this reason, Fotogenika displayed the Kodak logo on its Web site and indicated that Kodak paper was used to print the pictures. Another strategy to build consumers’ trust is to display privacy and consumer protection principles (Lee & Turban, 2001; Patton & Josang, 2004; Shneiderman, 2000; Tan & Sutherland, 2004). Therefore, Fotogenika displayed its customer satisfaction policies, including privacy protection and consumer refund policies. Third-party trust certifications are key to building consumer trust in Internet shopping (Hoffman, Novak, & Peralta, 1999). Fotogenika needed to ensure its customers that its store was a secure site and that its transactions were handled securely. For this reason, Fotogenika obtained a third-party trust certification with trustlogo.com. Shneiderman (2000) also suggests disclosing patterns of past performance and providing references from past performance. Fotegenika’s site did not offer this information. These features could be added to the site. It also has been suggested that culture might be an important factor in the disposition to trust (Jarvenpaa & Tractinsky, 1999; Tan & Sutherland, 2004). Customers develop trust when interacting
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with salespersons with similar background (Jarvenpaa & Tractinsky, 1999). Culture is manifested, among other things, by the language used (Luna, Peracchio, & De Juan, 2002). Language not only transmits cultural affinity but also reduces the cognitive effort to process the site (Luna et al., 2002). Fotogenika’s site was in Spanish. It also stated that it was a company created and owned by a Mexican. The company, therefore, expected its Web site to generate a sense of cultural affinity in potential customers. Along with the technical measures and the cultural affinity, Fotogenika believed that being an American company would increase the customers’ levels of trust. If Americans happened to order digital printouts from a Mexican company and run into some problem, they would not be protected by American laws. Americans, therefore, would prefer to deal with an American company. Since Fotogenika operated across borders, the company needed to deal as well with the managerial issues that arise when companies operate internationally. According to Sheldon and Strader (2002) there are at least four internationalization issues: (1) standardization of content and appearance; (2) financial issues; (3) transportation issues; and (4) legal issues. Standardization of content and appearance implies that all information must be understandable by users worldwide (Sheldon & Strader, 2002). By June 2004, Fotogenika’s target market was focused on Mexicans living in the U.S. However, telephone numbers, times, dates, and forms were displayed on an international form that was understandable worldwide. In terms of measurement, Mexico uses the metric system. For this reason, The company’s site informed customers about picture sizes in both the metric and the English system. Financial issues refer to the method of payment (Sheldon & Strader, 2002). Fotogenika accepted credit card payments only. Money orders and personal checks were not allowed. Accepting payment methods other than credit cards would
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certainly give customers more option payments, especially for those who distrust providing their credit card information. On the other hand, it would also require modifying not only the site functionality but also the managerial procedures in order to handle payments. Transportation issues refer to shipping and complaining with the import regulation (Sheldon & Strader, 2002). Shipping is not a relevant issue on digitized products such as pictures. Fotogenika’s compliance with import regulation was not complex. Customers owned the pictures, and Fotogenika charged for the printing services. The international transaction was held between Fotogenika and the Mexican lab. Therefore, international issues for professional service payments abroad were managed by Fotogenika. Customers did not need to worry about customs and taxes. Reverse logistics was not an issue, either. If customers were not satisfied with the printing service, the company would reprint the picture or reimburse the money without requiring customers to return the pictures. Legal issues refer to compliance with local laws (Sheldon & Strader, 2002; Wijnholds & Little, 2001). Fotogenika complied with privacy, advertising, and content regulation in the U.S. However, if the company decided to expand its current target market to focus on Mexicans worldwide, it would have to review these issues. In terms of legal protection, as already stated, U.S. customers can sue sellers in their own states (Wijnholds & Little, 2001). In addition, being a small company with limited money to invest in marketing, Fotogenika needed to define a cost-effective strategy to let people know about the company. Fotogenika’s first idea was to send ads to e-mailing lists of Mexicans living in the U.S. The advantage of this method was that it would reach the target market. However, there was a risk that potential customers might consider Fotogenika a spammer. Perezcano was sure that she had to establish a marketing plan in order to assess different marketing channels.
CURRENT CHALLENGES FACING THE ORGANIzATION In short, Perezcano was quite satisfied with Fotogenika’s performance so far. But as an entrepreneur, she also had been thinking about the many challenges that Fotogenika might face. She had to share her ideas with her partner and to develop future strategies. Small businesses cannot afford big mistakes. Every decision in terms of technology, marketing, and service must be explored thoroughly. Fotogenika had a successful start, but it needed to expand its business. It could expand its market to provide printing services to Mexicans not only in the U.S. but also around the world. However, the company needed to assess the changes that would be required in Web site functionality and in managerial procedures. It also could expand its business to deliver pictures around the world. So far, Fotogenika delivered pictures in Mexico. If Fotogenika wanted to deliver pictures around the world, it must determine which business model it would use. The company could still print the pictures in Mexico and deliver them worldwide through international delivery. Or it could also replicate its business model to establish alliances with local printing labs or even other online printing services. Fotogenika was also aware of other sources of competition. Online printing services were not the only way customers could print their photos. Home and kiosk printing were more popular than online printing (see Appendix 5). There was also the threat of a war price from retailers such as Wal-Mart and Costco2 and, in general, by printing kiosks (see Appendix 6). Along with the cultural affinity strategy to reach customers, the company needed to consider that women print the most digital pictures (Biederman, 2005). For instance, for kiosk printing, 60% of consumers were women (Biederman, 2005). The marketing strategy and Web site design could be affected if this fact was deemed important.
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Every change in strategy certainly would imply changes in the Web site functionality. Without in-house IT expertise, Fotogenika had to rely on a third-party provider. Fotogenika needed to reassess this alliance continuously in order to determine the effectiveness of the relationship and to evaluate different alternatives. So far, Fotogenika’s business model had profited from IT. The company ultimately had delivered a physical product — a printed picture. However, Fotogenika had displaced the product digitally up to where the picture would be printed and distributed at low cost. In addition, Fotogenika’s knowledge of the Mexican culture had allowed it to focus on a profitable niche of the digital photography market — Mexican migrants in the U.S.
REFERENCES Ariss, S., Nykodym, N., & Cole-Laramore, A. A. (2002). Trust and technology in the virtual organization. S.A.M. Advanced Management Journal, 67(4), 22-25. Barret, L., & Carr, D. F. (2004, September 1). Eastman Kodak: Picture imperfect. Retrieved October 1, 2004, from http://www.baselinemag. com/article2/0,1397,1655499,00.asp Biederman, M. (2005, March 17). Self-service printing is redefining the camera store, and even the maternity ward. The New York Times, p. G 1. Bulkeley, W. M. (2005, March 17). A price war hits digital photos. Wall Street Journal, p. D 1. DeSanctis, G., Staudenmayer, N., & Wong, S. S. (1999). Interdependence in virtual organizations. In C. L. Cooper, & D. M. Rosseau (Eds.), Trends in organizational behavior (Vol. 6, pp. 81-104). Chichester, NY: John Wiley & Sons. Deutsch, C. H. (2005, January 28). Kodak bets old strategy can go digital. The New York Times, p. C 2. 1292
Dragoon, A. (2004, September 1). Fighting phish, fakes and frauds. Retrieved September 30, 2004, from http://www.cio.com/archive/090104/phish. html Hoffman, D. L., Novak, T. P., & Peralta, M. (1999). Building consumer trust online. Communications of the ACM, 42(4), 80-85. Ingresos por Remesas Familiares. (2004, February 3). Retrieved October 14, 2004, from http://www. banxico.org.mx/fBoletines/Boletines/calendario 2004/03feb2004remesasfamiliares.pdf Jarvenpaa, S. L., & Tractinsky, N. (1999). Consumer trust in an Internet store: A cross-cultural validation. Journal of Computer-Mediated Communication, 5(2), 1-35. Jarvenpaa, S. L., Tractinsky, N., & Vitale, M. (2000). Consumer trust in an Internet store. Information Technology and Management, 1(1), 45-71. Jeffcoate, J., Chappell, C., & Feindt, S. (2002). Best practice in SME adoption of e-commerce. Benchmarking, 9(2), 122-132. Lawton, T. C., & Michaels, K. P. (2001). Advancing to the virtual value chain: Learning from the Dell model. Irish Journal of Management, 22(1), 91-112. Lee, M. K. O., & Turban, E. (2001). A trust model for consumer Internet shopping. International Journal of Electronic Commerce, 6(1), 75-91. Luna, D., Peracchio, L. A., & De Juan, M. D. (2002). Cross-cultural and cognitive aspects of Web site navigation. Academy of Marketing Science, 30(4), 397-410. Markus, M. L., Manville, B., & Agres, C. E. (2000). What makes a virtual organization work? Sloan Management Review, 42(1), 13-26. Matthews, J. (2004). The rise of the virtual company. Supply Management, 9(15), 32-33.
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McMeekin, T. (2002, January). One year later, USA Today is going strong with CTP workflow at all 36 print sites. Retrieved October 1, 2004, from http://www.newsandtech.com/issues/2002/01-02/ nt/01-02_usa.htm Papadopoulou, P., Kanellis, P., & Martakos, D. (2003). Designing electronic commerce environments on trust-building principles. Revue S.I.M., 8(3), 55-74. Patton, M. A., & Josang, A. (2004). Technologies for trust in electronic commerce. Electronic Commerce Research, 4(1-2), 9-21. Quelch, J. A., & Klein, L. R. (1996). The Internet and international marketing. Sloan Management Review, 37(3), 60-75. Sheldon, L. A., & Strader, T. R. (2002). Managerial issues for expanding into international Web-based electronic commerce. S.A.M. Advanced Management Journal, 67(3), 22-30. Shneiderman, B. (2000). Designing trust into online experiences. Communications of the ACM, 43(12), 57-59.
organization management. Decision Support Systems, 23(1), 75-94. Tan, F. B., & Sutherland, P. (2004). Online consumer trust: A multi-dimensional model. Journal of Electronic Commerce in organizations, 2(3), 40-58. U.S. Census 2000. (2000). Retrieved October 1, 2004, from www.census.gov Wagner, B. A., Fillis, I., & Johansson, U. (2003). E-business and e-supply strategy in small and medium sized business (SMEs). Supply Chain Management, 8(4), 343-354. Wijnholds, H. D. B., & Little, M. W. (2001). Regulatory issues for global e-tailers: Marketing implications. Academy of Marketing Science Review, 2001(9), 1-12.
ENDNOTES 1
2
Strader, T. R., Lin, F.-R., & Shaw, M. J. (1998). Information infrastructure for electronic virtual
Ofoto changed its name in 2005 to kodakgallery.com. This threat became real in 2005 (Bulkeley, 2005).
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APPENDIX 1 Target Market: Mexicans Living in the U.S. (U.S. Census, 2000) Figure 2. Percentage of Latinos living in the U.S.
Total Population 35,305,818 Hispanic or Latino (of any race) Not Hispanic or Latino 246,116,088
Figure 3. Percentage of Mexicans in the Latino population Hispanic or Latino by Type Mexican 10,017,244
1,241,685 3,406,178
Puerto Rican 20,640,711
Cuban Other Hispanic or Latino
APPENDIX 2 Prices (Delivered in Mexico City Including Shipping through FedEx or Similar) Table 1. Prices including shipping Wallet 4X 5X 6X 8X
ofoto.com shuterfly.com upfoto.com mifotodigital fotogenika.com 21,78 21,78 8,98 NA 3,68 20,28 20,38 7,28 3,2 2,34 20,98 20,98 7,74 3,4 3,18 NA NA 8,49 3,7 3,58 23,98 23,98 9,98 5,7 5,68
NA — not available Prices accessed on June 2004
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APPENDIX 3 Proxy Income Statements Table 2. Proxy income statements Fotogenika Proxy Income Statement U.S. dollars
Net sales Cost of goods Gross margin Operating expenses Net income
2004 23,208 14,675 8,533 8,475 58
2005 73,853 46,622 27,231 10,794 16,437
2006 138,115 86,833 51,282 19,348 31,934
2007 181,170 113,819 67,351 18,063 49,288
2008 202,388 127,110 75,278 18,511 56,767
Notes: Income statements consider only services offered by Fotogenika at that time of the teaching case setting (June 2004).
APPENDIX 4 Types of Customers Classified by Average Products Ordered Table 3. Types of customers Quantity A B C
The percentage represents how many orders for each type of customer are out of the total number of orders. The type of customers and percentages have been estimated, based on Perezcano’s partner’s knowledge of the photography market.
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Table 4. Estimated number of daily orders Year
# of orders 1 2 3 4 5
7 9 10 12 15
The estimated number of daily orders has been determined, based on a conservatively estimated growth of the customer base.
APPENDIX 5 Digital Photography Market in Number of Printed Images by 2004 (Biederman, 2005) Table 5. Digital photography market in number of printed images Digital images printed by all methods Home printing Retail locations Online services
1.9 billion 57% 33% 10%
Estimated number of printed images for 2007
10.7 billion
Table 6. Digital photography market in dollars (Bulkeley, 2005)
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Consumer expenditure in prints by 2004
$8.2 billion
Digital pictures printed from the pictures taken
20%-30%
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APPENDIX 6 Kiosks Printing Services (Bulkeley, 2005) Table 7. Kiosks printing services Number of kiosks in 2004 Estimated number of kiosks by 2008
75,000 121,000
The main players in kiosk printing services are Kodak, Fuji, and Sony. Kodak is the leader (Deutsch, 2005). A recent player entering the market is Pixology, a software developer firm for the kiosks at Cotsco (Biederman, 2005).
This work was previously published in the International Journal of Cases on Electronic Commerce, Vol. 2, Issue 2, edited by M. Khosrow-Pour, pp. 64-80, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.22
Xceed:
Pioneering the Contact Center Industry in Egypt Sherif Kamel The American University in Cairo, Egypt Maha Hussein The American University in Cairo, Egypt
EXECUTIVE SUMMARY The global spending on outsourcing has exceeded one trillion U.S. dollars in 2000 and it is expected to reach much higher heights by 2010. Outsourcing represents a major opportunity for developing nations with different capacities and skills in the field of information and communication technology (ICT) coupled with communication, business, and marketing capacities of their human capital. Contact centers are one of the growing trends that can benefit from the opportunities enabled through outsourcing. Over the last decade, India, the Philippines, and Mexico took the lead in the contact center industry in the context of developing nations. Moreover, in the 1990s Egypt, through its massive efforts to position itself as one of the ICT hubs in the Middle East, had started its efforts to develop itself as a destination for offshore outsourcing as well as penetrating the global marketplace for contact centers. This case
demonstrates the process of establishing Xceed, the pioneer contact center in Egypt serving a global community of customers and excelling to become one of the brand names of the industry worldwide.
ORGANIzATIONAL BACKGROUND On a sunny afternoon, Adel Danish, president and CEO of Xceed, sat in his office, with his two vice presidents, Ahmed Refky and Alaa El-Shafei. They had been discussing the future of the company. Danish stood up and went to look out the window. The sight he met was of vast desert, with a number of scattered state-of-the-art buildings and several others still under construction. All of the company’s achievements and future aspirations came into view. They had done so well in the past, and the future looked promising. One
of the challenging formulas that they managed to realize, and made the case unique and different, was to successfully manage Xceed as a private company although being a purely public establishment. However, despite the achievement of the past, management needed to strategize which road should they travel, and what was best for the business to grow and compete? Xceed, Egypt’s pioneer and leading contact center, premises were located in a smart village complex, which was inaugurated in 2004 to be Egypt’s premier technology park, built on 450 acres on the outskirts of Cairo (Egypt). Located approximately 20 minutes from the center of one of the busiest capitals of the world and a few kilometers from the great pyramids, the smart village is central to all major destinations within greater Cairo. The idea behind the smart village initially conceived in 1989 was to create a space where information technology companies could operate within a community conducive to their business needs. Microsoft, Alcatel, Hewlett-Packard, Ericsson, and Vodafone Egypt represent a sample of the IT organizations that have moved premises to the smart village. Once all the phases of development were completed, the smart village would accommodate 67 office plots and approximately 30,000 employees within a total office area of 1,336,000 square meters. Ninety percent of the smart village had been designed to encompass an expansive green area, lakes and streams, making it an ideal location for doing business. In an effort to promote and encourage public private partnership (PPP), the Ministry of Communications and Information Technology (MCIT), established in 1999, relocated its premises to the smart village (www.mcit.gov.eg). The mandate of MCIT was to support and empower the information society in Egypt. This was reflected in its involvement in different projects related specifically to business and industry development in the information and communication technology (ICT) sector and in its commitment to providing universal access to telecommunications services
(Kamel, 2005b). MCIT supported the expansion of the telecommunications services through deregulation, liberalization, and government-private sector partnerships. It also encouraged foreign direct investment (FDI) as well as the transfer of technology into the nation to support in the overall business and socioeconomic development (Kamel, 2006). In 2002, the World Trade Organization (WTO) granted Egypt permission to liberalize its telecom market. Accordingly, the government set a deregulation plan towards the end of 2005, identifying a number of objectives to be realized. These included setting-up the environment for multi-operators and multimedia services while reiterating the telecommunications regulatory authority organizational structure, regulatory rules, and directives. This involved the liberalization of basic and international voice services along with the introduction of new services and technologies (MCIT, 2005). Egypt rapidly developed a sophisticated telephone network and a modern and reliable fixed line; mobile and Internet networks have already been established and moving at a fast pace. Such advancements constituted optimum conditions for a strong and promising contact center industry in Egypt. Since 1999, MCIT had taken steps to ensure the deregulation of the telephone market. Telecom Egypt (TE) monopoly over communications services was disintegrated and the company was scheduled for liberalization in December 2005. In a special effort to develop the contact center industry, the government dropped telephone rates to Europe and North America rates, standing at approximately 0.07 U.S. dollars and 0.05 U.S. dollars per minute, respectively. In order to guarantee that Egypt would remain competitive in the telecommunications sector, MCIT is continuously developing partnerships with several major global communications firms including Siemens, Alcatel, and Cisco, to train engineering graduates and to establish an IT-literate workforce as part of the overall efforts to build Egypt information
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society (Kamel, 2005a). Ahmed Nazif, prime minister of Egypt said in 2004 “we have taken long and steady steps towards achieving our goal of becoming an information society, but we feel that this is only the beginning. Creative professionals, a supportive government, and a healthy business environment have been the key to our current success, and they will continue to be fundamental to our future achievements.” It is important to note that when Xceed first started their call center operation in 2003, their vision was to become the foremost provider of outsourced customer contact solutions for commercial and government customers in Egypt and the region, with aspirations to attract other opportunities globally. From the start, Xceed developed an extensive customer list that included the likes of local telecommunications giant TE, with a customer base of more than 10 million subscribers as well as leading local and global ICT companies such as Microsoft EMEA, Microsoft Egypt, Oracle Global Product Support Center, EDS, NetOne, Nestle Waters, and France Cegetel Neuf Telecom. Moreover, the list included local ministries such as MCIT and the Ministry of State for Administrative Development (MSAD) in addition to the Aviation Information Technology, Carrefour, and CIT Global. In 2005, Xceed managed an average of 1.6 million customer contacts per month both live and via electronic interaction. Nearly 840 Xceed employees operated from the company unique state-of-the-art facility, and services were offered in nine different languages: Arabic, English, French, German, Spanish, Italian, Portuguese, Greek, and Hebrew (www.xceedcc.com).
SETTING THE STAGE The story of Xceed started long before the current smart village location was inaugurated. When MCIT was established in 1999, significant transformation took place and numerous opportunities
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began to present themselves. A new board was appointed in June 2000 to cope with these changes. This is when Danish joined the board of directors of TE, the sole fixed line telecommunications operator in Egypt. One year later, Nazif, the minister of communications and information technology at the time, expressed the need for establishing a company which would function as the IT arm of TE, a second entity that would work as the data communication arm, and a third to become the mobile operator. Accordingly, Masreya (Arabic translation for Egyptian) Information Systems, the IT arm of TE, was established in September 2001, and the 10-employee company was set up in rented offices in a commercial building downtown Cairo. Masreya had a mandate to design and develop solutions for the two problem areas facing TE: the billing system and the customer relationship management (CRM) program. The recommendation to replace the in-house developed system with a state-of-the-art off-the-shelf package capable of handling billing system problems was swiftly resolved with the in-house development of an application that tracked the subscription status. The CRM program presented more of a challenge. When the team looked to see what the existing resources were to develop the program, they found that none was available. In the absence of any frame of reference, they had to come up with a solution that would address the problem, from scratch. After undertaking further research into the possibilities of implementation, it was realized that it was necessary to create a call/contact center. With a vision for long-term success, Danish, a veteran of initiating major and successful IT projects in Egypt, France, and the United States, started to entertain the possible provision of such a service in Egypt, not only to serve the local market but also to provide worldwide offshore outsourcing services. Danish decided to study the concept further. In taking his decision, he had several models in mind including the Indian and Irish models. His previous experience with Eircom,
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the telecommunications company, led him to visit them and explore their business model. At the time, customer support for TE was provided by numerous local homegrown call centers and a different phone number was allocated to each TE branch. The decision was made to eradicate all these separate customer support lines and group them into one call center. The initial number of seats suggested was between 500 to 600 seats, which were to be divided between fixed line and mobile phone services with 200-300 seats for fixed lines and 300 seats for mobile lines. During that time, TE was in the process of launching a mobile operator; however, due to market and economic reasons at the time, the plan was postponed to a later date. When the Xceed team realized the magnitude of the operation and the quality of service they had in mind, it became apparent that they could not continue to operate from within a small office space and the search for a more suitable location began. The team visited several locations but could not find anything that would adequately accommodate their needs. Eventually, it was decided that in order to promote and further develop the smart village complex as a growing and promising technology park, the call center would be built on its premises. This would enable it to be better positioned in the local market and be able to compete in an ever-growing global marketplace that has long been characterized as both dynamic and subject to fierce competition and rapid development. The decision to build the call center involved a major change in strategy. Instead of the call center operating mainly for TE, the management thought of expanding its scope and transforming it into revenue generating contact center. This meant that the contact center would maintain its role as the call center support for TE while expanding its seats to enable it to sell its services to other opportunities in the global marketplace. In May 2002, the design of the premises commenced and contractors began working on
the location at the smart village. The design of the building had to take into account the fact that Masreya Information Systems was still the IT arm of TE and not solely a call center. A division in the business objective had to be clear and manifested in the physical location. This distinction is quite apparent: one building houses, the management of Masreya Information Systems and the other building houses Xceed, the contact center. The two adjacent buildings are joined together by a bridge to allow flexibility in the future. When the company was first established, it was 92.5% owned by TE, the remaining amount was equally owned by the three major local state banks; National, Misr, and Cairo banks, at 2.5% per bank. Capital was later raised in 2005, making TE’s share at 98.5% and the bank’s at 0.5% each. The decision to put the mobile operator on hold freed up almost 300 seats in the contact center capacity, making it a 25%-75% share between TE and possible accounts from the global market. The decision was made to market the 75% at the global level for export. The call center was designed to accommodate 1,000 seats by 2005 and 1,200 by 2007 or earlier should the need arise, based on market needs and opportunities enabled. The official inauguration of the contact center took place on September 22, 2003. In an attempt to find a suitable name for the contact center, the management carried out a survey within the company, where people had to choose one out of five names they considered to be catchy, interesting, marketable, global, and in some way representative of the service. The final decision was Xceed, and true to its name since its establishment, the company had been exceeding its expectations in terms of the quality of service provided, exposure, and in its capacity to reach out to the global market and take the lead in providing a supreme customer service. According to Danish “Xceed was chosen for its dynamism and the implications of the name. We are not in the business of satisfying the customer; we are in the business of delighting them
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and exceeding their expectations.” Xceed was not just a contact center, it was the seed of a growing industry. It is important to note that in 2005, the company was by far the largest capacity contact center in Egypt and the region. Furthermore, the Xceed contact center was ready to operate and compete in the global market, attracting customers from different regions around the world. The unwritten vision of the business was that it would provide opportunities for the youth and future generations; every seat accommodated approximately three employees, which translated into 3,000 job opportunities. The use of IT was intended to boost call center performance whereas making targeted improvements involving more cost-effective technologies help boost operations and increase revenues using IT (Pietraszek & Ramchandran, 2006).
The Industry The literature review of the outsourcing industry indicates that among the reasons for successfully outsourcing contact centers is explaining that the customer service strategy needed to be well defined and progressive and not just to provide a good service (Khandelwal & Gilson, 2005). Companies successful in outsourcing their call centers normally increased their revenue by 20% to 35%, cut costs by 15% to 25%, and improved the quality of their customer relationship management. Exhibit 1 portrays the key offshore motivators for customer care investors. The case explained that the concept of call centers was designed to enable companies to respond to customer questions. Initially, call centers were not seen as a business opportunity but simply a tool for handling inquiries. The change came in the 1990s when call centers became automated and CRM packages were integrated into call center technologies. There is no doubt that call centers have become essential to the marketing and customer care strategies of many businesses over the past 30 years (Khandelwal & Gilson, 2005).
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Moreover, there is no doubt that outsourcing of information services is transforming the nature of business in the information industry (Clark, Zmud, & McGray, 1998). The global offshore-outsourced contact center market will grow from 138,000 agent positions in 2004 to 241,000 agent positions by the end of 2007 due to the cost saving schemes that many western companies have implemented, as indicated by a research study conducted by Datamonitor in 2005. Egypt is currently considered a viable customer service choice for companies wanting to reduce overhead costs, while maintaining a very high degree of customer interaction quality. “Call centers are going to move to Mauritius, they’re going to move to Egypt, where they have a call center of 1,000 people now that works for Microsoft.” This statement was made by Thomas Friedman, the New York Times columnist, in an IT convention in India (Friedman, 2005a, 2005b). He continued, “A call center that would have gone to Bangalore 5 years ago; now it’s in Cairo.” Currently, all Fortune 500 companies have at least one call center (Gilson & Khandelwal, 2005). By 2007, domestic and foreign outsourcers would be expected to employ about 12% of all call center agents serving North America, and offshoring to foreign markets would account for 7% of the total number of positions. Datamonitor estimates that the total market size for the Egyptbased outsourced contact centers in 2005 is 655 agent positions. This number was expected to rise rapidly over the next 5 years, at a compounded annual growth rate (CAGR) of just over 50%, to 3,775 agent positions by 2009. Agent positions in Egypt were at par with key near shore markets including Poland, the Czech Republic, and Hungary. The Datamonitor study also noted that despite the fact that the number of agent positions forecast was relatively small, Egypt contact center offshore outsourcing had the potential to exceed projected levels. This would depend on the ability of local outsourcers to sell their services to foreign firms, overcome existing perceptions of the do-
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mestic business climate, and compete with other offshore destinations. As indicated in exhibits 2 and 3, in 2005, Egypt was very competitive as an offshore-outsourced contact center destination. The total cost included the cost paid for and the wages earned by the particular customer care agent listed. Specifically, Egypt, at 54% of the cost of a U.S. inbound voice-based customer care agent, was a less expensive option than central European locations including Hungary and Poland. Egypt was less costly on an agent basis than Canada and Mexico; both favored locations of U.S.-based outsourced customer care (Datamonitor, 2005). The only market that was still cheaper than Egypt was India. However, it should be noted that the cost difference between the two locations was marginal and was offset by the additional costs incurred in India, such as telecom transportation. In addition, the overall cost to the outsourcer should take into account the extra cost of the high attrition rates in India (80%-100%) compared to Egypt (Datamonitor, 2005). Given the mentioned industry profile, it is important to note that at the time this case was developed, Xceed was not the sole player in the local marketplace; there were three local competitors, namely: •
•
C-3 provided a variety of multilingual services to both domestic and global customers, serving callers in Europe and the United States. Languages serviced at C-3 included Arabic, English, and French. Both inbound and outbound calls were handled at C-3 offices which were located in Cairo. Global customers include Wall Street Journal Europe, Tele-2, and Banque de Poste Belge. Raya Contact Center was established in 2000. Raya contact center belonged to Raya holdings, one of the leading local IT companies in Egypt. The contact center provided outsourcing services to both domestic and global firms. Located in Cairo, Raya agents handled both inbound and outbound services in Arabic, English, French, and German.
•
Raya operated to serve manufacturing, logistics, and petroleum production. Ecco was established in 2000 as a subsidiary of the National Telecommunications Corporation (NTC), an Egyptian IT and Telco firm. The company is located in the cyber center commercial zone. Ecco serviced domestic and international customers in a variety of languages including Arabic, Italian, and English. Key vertical markets served included financial services, telecoms, and the public sector. Both inbound and outbound services were available.
Egypt, as a resourceful nation, was competitive in terms of providing well-educated potential contact center agents. This was due to the 250,000+ university graduates each year. Such a large number was accentuated by the focus on IT within these institutions, with an increasing percentage of students graduating in this discipline annually reaching close to 1.5%. The labor force is also known for its proficiency in western languages, because the university instruction is carried out predominantly in English, with some institutions also focusing on French and German. In addition, there were several very large postsecondary institutions located in Egypt, funded by foreign governments, including the United States, UK, Canada, France, and Germany, each of which produce many multilingual graduates annually (Moheeb, 2006). Being a top tourism destination for decades helped in creating a multilingual, customer service oriented workforce.
CASE DESCRIPTION Xceed began its operation of the contact center business around mid-2003 as the pioneers of outsourcing in Egypt in the call center industry, with an array of state-of-the-art inbound and outbound services that were customized to meet their customers’ needs (Bossone, 2006). In ad-
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Xceed
dition to customized service solutions, Xceed provided customer relationship management services and Internet-based customer care and technical support services. Xceed depends on five pillars in conducting their business including high performance and quality assurance, cross cultural management, business continuity plans, ultimate business solutions, and multilingual capabilities.
The Business Model Through global sourcing, Xceed had extended an offshore arm to offer its portfolio of services to customers around the globe. Xceed’s ultimate business formula was to realize a business ratio of 60% local and 40% offshore by the end of 2005. This formula would shift to 20% local and 80% offshore by the end of 2008. Xceed identified its target market in terms of two essential factors: its recruitment capacity and the availability of resources, in addition to the existence of outsourceability culture in different markets reflecting the readiness of different human capacities to deal with different cultures, values, and attitudes and cater for their needs. Addressing the local market,
Xceed identified multinationals as the sector most prone to outsourcing in 2005. At the international level, Xceed decided to maintain a wider span of customers and include several possible sectors. Figure 1 depicts the strategic vision of Xceed. The Xceed team was aware that as processes became more complex, quality improvement in services would become a key driver for growth. There would be a move from low-end and back-office work to high value-added services. Outsourcers would increasingly be looking for one-stop solutions, whereby they could retain cost advantages while adding value in terms of service and quality. Cost arbitrage would stay but suppliers would have to scale up to extend benefits beyond cost. Xceed management considered themselves as key players of the contact center business in Egypt and recognized that they functioned as a pulling force for the whole contact center industry. Exhibit 4 demonstrates a SWOT analysis developed by the Xceed business development unit. With one targeted visionary goal, Xceed aimed to place Egypt alongside India and the Philippines in the contact center industry. In order to achieve that vision, acquiring the business of multinationals residing in Egypt, as well as acquiring small and
Figure 1. Xceed strategic vision Possible End State Peer to India and the Philippines with broad capabilities and substantial customers relationships
Possible End State Another call center with high scale but limited breadth of offering
Scale
Offshoring customer care, transaction processing and IT support for Fortune 1000 firms Outbound offshoring for SME in Europe/US
Possible End State Moderate sized Middle Eastern BPO player with broad functionality
Customer care and transaction processing for Customer care for Egyptian and Arab multinational firms in the region Egyptian firms Breadth of Offering
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Xceed
medium-sized enterprises (SME) outbound business from Europe and the U.S., would ultimately position Xceed as a capable contact center with a record of accomplishments that would be ready for Fortune 500 company business acquisition. As for the local market for 2006, as shown in exhibits 5 and 6, Xceed forecasts revenues for newly acquired local businesses at 2% of the total projected new business revenues.
•
The Product Xceed did not exclusively serve its parent company, TE. Rather, it served an array of customers and for that reason it had to be flexible and adaptable as an intermediary between different customers and where the specialization of services depended on each customer. The product was defined based on the needs of each customer, and each agent responsible for an account was trained accordingly. Xceed offered a number of products and services to customers, including (but not limited to) the following: •
Complaints management: fast response and catering to customers changing needs is an important factor that needs to be well addressed rather than focusing on specific problems faced that leads to customer dissatisfaction. Xceed management believed that the prime purpose of designing and developing robust and effective complaint management systems was to deliver enhanced profits by increasing revenues and reducing costs. In order to turn every complaint into a profit, a specialized, personalized team was made available to support a complaint line that was dedicated to receiving and replying to all customers complaints. Xceed agents were trained to make the situation right when handling both live and virtual complaints, including fax, Web chat, or e-mails. Xceed management were proud that the two major attributes that set them apart were the quality
•
•
•
•
of training their agents received and their reporting accuracy. Customer retention programs: customer retention was vital for all companies because the cost of acquiring new customers was far greater than the cost of maintaining current customers. Xceed supported its customers in launching a retention program by conducting outbound phone surveys that capture specific data. Such data was then analyzed using distinctive software to determine which customers the firm was most interested in retaining, along with their needs, interests, and perceptions of the product. Xceed would help evaluate the customers’ retention program using a similar strategy. Order handling: according to the New York Times, the Internet research firm Jupiter Media Metrix stated that response times measured from 250 Web sites indicated that only 30% of the retailers surveyed responded to online customer service requests within hours. More than 30% took longer than 3 days or did not respond at all. Xceed could guarantee that requests do not slip through. Agents were available 24/7 on all channels (phone, Web, e-mail, and fax) if needed, to take orders from customers, answer product inquiries, and process them directly. Tele-survey services: the challenge was not obtaining information about customers, but obtaining the right information by reaching the right people in order to serve the following purposes: customer-related opinion surveys, customer satisfaction measurement, and general surveys. Telemarketing services: agents acted as the marketing arm of the customer’s organization and reached potential customers. The scope includes lead generation and lead qualification. Welcome calls: the outbound service was initiated by the agents on behalf of the customers to welcome new members to the
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•
•
services offered. New member welcome calls aimed to build customer loyalty straight away. Technical support: Xceed’s contact center team were technology savvy agents who were available around the clock to support incoming calls, faxes, and e-mails in one or more of the following areas: hardware, software publishers, original equipment manufacturers, and Internet service providers. Database cleansing and enhancement: an outbound service performed by agents to maintain up-to-date prospect lists and customer databases for customers.
Commitment to Quality Commitment to quality and customer satisfaction was the essence of Xceed contact center operations. Xceed addressed quality in all aspects of its operations and considered it an entity-wide responsibility. Processes were designed according to customer requirements and with customer satisfaction in mind. Full process documentation and detailed work instructions were made available to ensure the consistency and effectiveness of operations. Processes were regularly audited to ensure that they were being performed as intended and in a consistent manner. The key performance indicators (KPI) were examined regularly to maintain control over processes and initiating process improvements took place whenever required. Transaction monitoring was essential and ensured that all customer contacts adhered to specific standards. Therefore, Xceed deployed a quality monitoring system that catered for a quantified and statistically valid representation of accounts’ overall quality down to the individual agent’s performance. To ensure the objectivity of the monitoring process conducted, Xceed deployed several layers of calibration. These calibrations ensured consistency among monitors. Furthermore, quality scores were calibrated with
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customer satisfaction data to obtain a complete picture of the customer contact experience. In order to balance its internal controls, Xceed established various feedback mechanisms to ensure that customers and end users’ feedback remained a key input and business driver. Xceed’s voice of the customer (VoC) program catered to the measurement of both customer and customer satisfaction through regular surveys; it catered to response management to both customer and customer complaints. This commitment to quality was manifested in Xceed adherence to the world class standards. Xceed is an ISO 9001:2000 certified company. Additionally, Xceed aimed to be the first contact center in Africa and the Middle East to be certified against the rigorous customer operations performance center (COPC) standards. The certification was completed in December 2005 and Danish was all praise to his team, and he attributed the achievement wholly to them (Bossone, 2006).
The Team Danish was very proud of the expansion of the team at Xceed. On December 31, 2005, there were 1,000 employees, 140 of whom were working in management and support. Exhibit 7 depicts the current organizational chart. Xceed was a pioneer at succeeding with managing public money using a private sector mentality; a model example replicating a number of successful models already in place in the UK public sector (Cronk & Sharp, 1998), but leading the pack in the developing countries context. The management style was invaluable in making the model so successful, magnified by the fact that the company drew on local experience and management expertise. Xceed was managed by two extremely high caliber vice presidents and a visionary chief executive officer (CEO). Adel Danish was the chairman and CEO responsible for directing and controlling the operations. He guided the company’s strategic objectives and kept the financial targets in line with those agreed upon
Xceed
with the board of directors. Danish coordinated with TE and its subsidiaries in seeking business opportunities to ensure continuous growth. Appointed to the Board of TE in late 2000, Danish brought over 30 years of unique business experience from the IT and telecommunications sectors in France, Egypt, and the United States. He had fulfilled the role of founder, co-founder, and managing director of several corporations throughout the world. Danish began his career as a researcher at the IBM Scientific Center in Paris, France. He then held several technical and marketing positions within IBM before starting Standardata SA, a hardware and software services provider in France, in 1978. Danish is a member of the U.S.-Egypt Business Council, a bilateral organization created by both governments to facilitate private sector business growth in Egypt and to strengthen trade and investment ties between the U.S. and Egypt. Ahmed Ref ky, Xceed’s VP for strategy and business development, holds a bachelor of science degree in computer and automatic control. He has over 20 years experience in the IT industry. Refky’s career included a number of senior management positions, corporate business development, business and IT consulting, project management and planning, systems analysis and design, programming, customer support, and enterprise resource planning implementation. Prior to joining Xceed, Refky was the Middle East regional IS director for ABB, a leader in power and automation technologies. Alaa El-Shafei, Xceed’s VP for operations holds a bachelor of science degree in electronics and communication. During the course of 19 years, El-Shafei held technical, managerial, and consulting positions in which he managed and oversaw the development of software applications, data and voice networking, and data centers’ infrastructure. Prior to his senior role at Xceed, El-Shafei founded Bayanet, a systems integrator and software provider. Prior to that, El-Shafei was the general manager of Standardata SA, an implementer of enterprise
resource planning (ERP) applications in Egypt and the Middle East. Finally, special attention was given to the selection process of the middle management team to whom all contact agents report. Danish always refers to them as “my dream team.” One major rule that Danish never breaks is “each manager is the only one responsible for hiring people reporting to him/her. I never ever forced a manager to hire someone in specific. I do have the right of veto for some key positions. Fortunately, I have never used it. It is a blessing and a delight to know everyday, when I am heading to my office in the smart village that I will be interacting with such a wonderful, talented, and motivated team.” The 700 contact center agents vary in age between 20 and 26, with 60% female. On average, agents work between 7 to 8 hours per day. In the contact center business, the attrition rate is quite high, meaning that enormous human resources capacities are required in order to handle the turnover. The recruitment and selection cycle for Xceed ensures a strong and balanced approach to hire the best talents in the market. The initial forecasted time-span for the start-up human resources cycle of selection, testing, hiring, and training is usually 2 months.
The Recruitment Process Xceed had access to good caliber agents; their selection process ensured that the best talents were chosen. Because Xceed was aware that the attrition rate was usually high in the contact center business, they developed motivational programs to complement their induction and provided onthe-job training programs. In addition, fringe benefit plans and a relaxing working environment ensured that lower turnover rates in the industry were maintained. The recruitment and selection process for the call center agents is designed to assess both the candidates’ skills and attitude as demonstrated in Figure 2. Based on the competency profile of each job, the assessment process
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Figure 2. Recruitment process Manpower Planning
Sourcing
Selection
provides an objective way of measuring critical inbound and outbound call center skills before the hiring decision is made. The prospective agents undergo a rigorous selection process designed to match their qualifications with the required position. The process includes a basic skills test that taps into IQ, simulation, customer service attitude, and spelling. Each agent is required to sit for a language and accent test carried out by two reputable international language institutes in Egypt. The final stage is a one-on-one interview with the human resources department personnel. The contact center ratio of supervisors, including team leaders, to customer service representatives was 1 to 10. The ratio of trainers to customer service representatives was 1 to 40. The layout of the contact center is very conducive to the maintenance of agent/leader relationship. Every group of agents is seated in a cluster, and their leader was positioned in the outer shell so that they could provide immediate support. Based on the level of complexity of the customers’ product, each employee had to complete stipulated training hours through a combination of classroom and computer/technology-based training, and was required to pass very stringent evaluative tests. Xceed’s training program consists of five primary phases to ensure optimal knowledge transfer to the staff, which is demonstrated as follows. 1.
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Induction Training: a 2-day session that introduces the candidates for recruitment to the contact center industry in general and familiarized them with the organizational culture.
2.
3.
4.
5.
Contracting
Induction
Behavioral Training Program: the program develops and emphasizes the appropriate attitudes and behavioral skills that all contact center agents are required to possess to exceed customer satisfaction. The inbound-program is a 3-day session for all agents. Team leaders and supervisors normally require an additional leadership program. Product and Service Training Program: the program is a combined effort between Xceed and the respective customer, whereby each customer delivers their specific trainthe-trainer (TTT) program for selected trainers, which is disseminated to all concerned personnel. On-the-Job Training: agents work in a controlled environment under supervision before being allowed on to the floor to work on their own. Language and Culture Training: the program is designed to integrate specific language and cultural differences between Xceed agents and the prospective customer.
The Technology Xceed was built to accommodate the highest levels of technology in both telecom architecture and the physical facilities provided. The total of 16,000 square meters surface area were spread out over four acoustically engineered stories, accommodating a flexible, modular partition system, which allowed for the reconfiguration of agents’ work space, depending on customer requirements. The 20,000 square-meter underground basement
Xceed
hosted the data center, equipment room, and garage. Exhibit 8 gives a descriptive analysis of the technology platform. The building façade was constructed with double-glazing and a structural-curtain-wall to ensure a high degree of sound insulation, with raised floors and high ceilings throughout the entire building. The central security room was connected to an all-digital CCTV system and an access-card control system was installed throughout the building. The building had been designed to be earthquake resistant. All Xceed front-end servers ran on Windows 2000 with an MS-ISA firewall, MS-Exchange server, and Norton Antivirus and MS-Web servers. The back-end servers ran on Microsoft and UNIX platforms with MS-SQL and Oracle databases, while connected to network-appliance storage units. Xceed LAN was based on AMP cabling and CISCO routers, switches, and an intrusion detection system. Xceed’s first line support team included certified professionals in Windows 2000/ XP, MS-Office suite 2000/XP/2003, MS-servers including MS-Exchange, MS-ISA, MS-SQL, and MS-Web server, in addition to other communications facilities including hardware, connectivity, facsimile, e-mail, telephony, and networking systems. It is important to note that Xceed collaborated with major vendors including Microsoft, IBM, Cisco, and Fujitsu Siemens, amongst others for the development and deployment of the ICT infrastructure of the contact center. Xceed takes security concerns seriously. Consolidated with other vendors security solutions, Microsoft and Cisco capabilities were heavily used to maximize network and data security, including central antivirus protection with automatic updates (servers and workstations), group policy, strict policy for user rights, patch management (SUS and SMS), hardware firewall between all network segments, and IDS systems in all segments. Xceed’s entire facility and infrastructure strategy was built to mitigate risk and ensure business continuity. In addition to Xceed’s hot
site located at El-Shorouk city, which serves as a disaster recovery location, Xceed will continue to deploy this strategy and add more facilities over the next 3 years to ensure comprehensive support for its customers. Xceed’s Cairo site was connected through TE carrier with two connection types—Microwave: STM-1 connection terminated at a STM-4 multiplexer that provided 63 E1 links and copper cables: 50 pairs of copper cables connected to Xceed MDF, of which 16 E1 links were provided via HDSL rack termination. Exhibits 9 and 10 are graphical representations of the topology. Moreover, Xceed contracted with TE to provide optical fiber connectivity while the STM-4 will be upgraded to STM-16. To ensure no traffic congestion would occur (even on the carrier level), ISDN PRI lines were provided by TE tandem exchanges. Both voice and data connectivity links were distributed on the microwave, copper cables, and fiber link to ensure redundancy and no single point of failure. Partnerships with a number of telecommunication providers, including EsatBT, Deutsche Telecom, Cable and Wireless, MCI, and Arcor have been consigned for international connectivity.
The Xceed-Microsoft Partnership On December 5, 2003, Danish called Refky and El-Shafei into his office. He closed the door and told them that he had big news to share. Danish told them that the Microsoft European operation center in Ireland was looking to outsource a big contact center operation to cover Europe, the Middle East, and Africa. The contact center would be responsible for Microsoft product activations. All three had mixed feelings of happiness and fear. As a company, Xceed was still too small to respond to such an extensive request for proposal (RfP), especially that the major contact centers all over the world were participating. However, the challenge seemed interesting and motivating. Their collective final decision was to participate
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and win the project. Danish told Refky and ElShafei “you have a free hand, do whatever you want to do, partner with whomever you want to partner with, just win this project.” Refky and El-Shafei left Danish’s office with an enormous challenge. After deliberation, they decided to collaborate with Arvato, a large German company that had experience in running the business of contact centers. They thought that by working with Arvato, they had a better chance of winning, especially that they could offer a new low-cost, high quality destination like Xceed. They managed to secure an appointment with Arvato 5 days later. At the same time, negotiations with Merkur Systemhaus AG, a subsidiary of Deutsche Post Worldnet, had been ongoing since late August 2003, for the development of a strategic alliance between the two organizations. It is important to note that identifying a partner was crucial since the portfolio of 19 languages required by the project was quite large for Xceed to handle on its own. Moreover, Xceed wanted to offer different locations for service provision, in order to ensure ultimate business continuity. Refky left for Germany after many discussions with El-Shafei, regarding the choice of partner. Refky planned open meetings with both companies: Arvato and Merkur Systemhaus AG. One morning on his trip, as Refky sat in a coffee shop in Gottingen (Germany), he sipped his hot cup of coffee and a million thoughts were going through his mind. Having not slept well the night, he knew that he could not make this decision based only on the rational of calculating the risks and benefits. He needed to follow his business intuition. He picked up the phone, called El-Shafei and told him that he decided not to go to Arvato. He asked him to call for a meeting with Merkur Systemhaus AG the following day. El-Shafei agreed and they planned to inform Danish of their decision and to proceed accordingly. Refky called Danish to explain the reason for the decision. Refky could not find a good justification except that it was a gut feeling and he knew it was the right way to
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go, building on the previous experiences and track records of both companies. The following morning, Refky had the meeting with Merkur Systemhaus AG. He explained the business opportunity at hand and that Xceed was interested in having them on board this project. At the end of the meeting, Merkur Systemhaus AG was interested in collaborating with Xceed to respond to the RfP. The next day, a cross-country telephone meeting took place; one team was in a conference room at the Sheraton Frankfurt Hotel, including Refky, three Merkur Systemhaus AG representatives from Germany, and a fourth from a subsidiary of Merkur Systemhaus AG in Ireland. The other team was in a conference room on the third floor of the Xceed premises in Cairo, including El-Shafei and a large team from Xceed. Both teams spent the whole day discussing the project details and the roles and responsibilities of each team. Working teams from the three companies were created, each responsible for separate tasks. The teams planned to work remotely, with the option of face-to-face meetings if needed. A steering committee was formed and they agreed to communicate on a weekly basis, through conference calls. A meeting was planned in Cairo, prior to the submission of the proposal near the end of January 2004. The teams worked very hard and they felt they were on the right track for a job well done. The proposal was submitted on time. By midFebruary, Xceed was informed that they were short-listed, and were invited to present their proposal at the Microsoft Corporation premises in Ireland. The whole team gathered in Dublin, five Xceed representatives, two Merkur Systemhaus AG representatives from Germany, and one from their subsidiary in Ireland. They rehearsed the presentation, agreed on the scenario, and set the plan. The presentation was perfect and represented just another piece of instrumental teamwork. A week later, Microsoft Corporation informed Xceed that they would like to send out a team to visit the Xceed premises. The visit took place during the
Xceed
period of March 10-11, 2004. During the following month, on April 7, Xceed was invited back to present the proposal to Microsoft’s higher management. This meeting was followed by a series of conference calls and discussions to reach the best plan of action and pricing strategy. On April 30, the decision was conveyed to Xceed that they won the biggest portion of the project, the portion that Xceed had primarily promised to deliver in the proposal. The portion to be delivered by Merkur Systemhaus AG was not awarded to them. The Xceed team celebrated their achievement putting forward the bigger challenge of delivering what they promised to deliver. The kickoff meeting was planned in Dublin on May 21, 2004. The project started with a number of difficulties, however, all team members were completely dedicated. Emphasis had to be put in place by both Refky and El-Shafei to facilitate the communication with Microsoft Corporation, which appeared to make or break the success of this offshoring project. Delays in meeting deadlines by global telecom vendors put more burdens on the project team. The customer service team lacked the experience to deal with a new relationship with a new vendor in a new country, on a big project. A demanding customer like Microsoft Corporation put pressure on the project. Xceed was supposed to go live on the third week of August. This date was not met. Microsoft Corporation asked for a conference call with Xceed’s senior management. Refky started the meeting with a full analysis of the situation and the solution proposed by Xceed. Microsoft Corporation felt that Xceed was aware of the problems they faced, and accordingly, both entities put together a concrete plan to deliver the project. An extension of the go live date was granted to Xceed. It is important to note that Xceed’s senior management later discovered that the conference call was a go/no go decision. The project started on the agreed date, full-fledged go live was achieved in a shorter period than promised, and Microsoft Corporation was satisfied with the achievement. The contact center
was later inaugurated by Bill Gates in January 2005. Due to the successful performance of the project, Xceed was awarded extra languages to its portfolio near the end of 2005. Exhibit 11 demonstrates an e-mail sent from John Garett, the Microsoft vendor account manager at EOC, to Xceed, on September 9, 2004.
CURRENT CHALLENGES/ PROBLEMS FACING THE ORGANIzATION This case might give the impression that things were on the right track for Xceed. In a way, they were, but the company was facing a number of challenges that had to be addressed in order to maintain the quality of the product they were planning to provide. Contact center performance was measured using the annual uptime percentage. The standards that govern the technology were extremely high, with annual uptime set at 99.9%. This meant that contact centers were only allowed a maximum of 2 hours downtime a year. For that reason, continual investment in ICT was required as well as regular human capital capacity building. The contact center business—and particularly an operation of that magnitude—was relatively new to Egypt. Accordingly, the management team needed to be constantly assured that the technical support of local companies would be sufficient during times of crisis, being identified as one of the critical success factors in the overall performance of the contact center. Egypt was misrepresented and misperceived in western countries, and contact center customers have low expectations when they were approached by an Egyptian firm. This made it more difficult for Xceed to market its products on the global level. However, the situation differed significantly when customers visited the premises and were in direct contact with the management and contact center agents. Xceed then became a success story. The company represents a suc-
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cessful business model for call centers that have been designed and managed by local capacities in the context of developing nations with world class vision, business intuition, entrepreneurial skills, management capacities, and a committed and competitive human capital. In general, the re-emergence and explosive growth of a thriving information services industry has changed today’s information services landscape dramatically and portends even more sustainable changes in the future (Clark, Zmud, & McGray, 1998). Respectively, it is important to note that Xceed plans to have a more active role in the contact center industry in Egypt and the region, with an eye to a global outreach. There are many options available with diversified challenges to overcome and turn into opportunities. Therefore, it is vital for Xceed management to decide where to go from here.
What is Next? In the meantime, Xceed is considering what it should do next, considering the growing local and global competition in the contact center industry. Xceed’s management is faced with a number of challenges that need to be addressed. These challenges are demonstrated in the following questions. •
•
•
•
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Based on the information provided in the case, would it be a strategic advantage if Xceed brands and/or franchises its operation? Should Xceed continue to perform horizontally its CRM services or would it rather function as a provider to a specific vertical given the growing market outreach? Would it be an advantage if Xceed establishes partnerships with large global contact centers? Would it be better if Xceed focuses on specialized and more sophisticated customer contact services like technical support or
•
•
•
perform the whole spectrum of call center services? Should Xceed diversify its services by adding insourcing and/or back office services model? Is it feasible if Xceed focuses on consultancy services for the design and development of building call centers? In terms of exit strategy, should Xceed seek a buy out by a major global outsourcer?
Xceed’s management would be willing to hear alternative suggestions and ideas. One thing that they are focused on and determined to do is to lead continuously the call center industry in Egypt and the region and to expand it way beyond the current status due to the availability of the required building blocks that exist in the nation and more importantly to the potentials the industry has to put Egypt on the global map of contact center outsourcing destinations.
ACKNOWLEDGMENT The authors would like to thank Adel Danish, CEO and chairman of Xceed; Ahmed Refky, vice president for strategy and business development; Alaa El-Shafei, vice president for operations, and Ossama Nazmi Hanna, business eevelopment manager, for their continuous support and cooperation throughput the development of this case study.
REFERENCES Bossone, A. (2006). Seal of approval. Business Today, April, 48-50 Clark, T., Zmud, R., & McGray, G. (1998). The outsourcing of information services: Transforming the nature of business in the information industry. In L. P. Willcocks & M. C. Lacity (Eds.),
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The strategic sourcing of information systems perspectives and practices (pp. 45-78). Chichester: John Wiley and Sons. Cronk, J., & Sharp, J. (1998). A framework for IS outsourcing strategy in private and public sector contexts. In L. P. Willcocks & M. C. Lacity (Eds.), The strategic sourcing of information systems perspectives and practices (pp. 163-186). Chichester: John Wiley and Sons. Datamonitor. (2005, February). Emerging opportunities—offshore outsourcing in Egypt, a growing contact center market looks to build global business. White Paper. Friedman, T. (2005a, June 3). A race to the top. New York Times Friedman, T. (2005b, June 8). Bangalore: hot and hotter. New York Times Gilson, K. A., & Khandelwal, D. K. (2005). Getting more from call centers. Retrieved on April 7, 2007, from www.mckinseyquarterly.com Kamel, S. (2005a). The evolution of information and communication technology infrastructure. In G. Hunter & A. Wenn (Eds.), Egypt in information systems in an e-world (pp. 117-135). The Information Institute.
Kamel, S. (2005b, May 15-18). Assessing the impacts of establishing an Internet cafe in the context of a developing nation. In Proceedings of the 16th Information Resources Management Association International Conference on Managing Modern Organizations with Information Technology (pp. 176-181). San Diego, California: Kamel, T. (2006). Egypt reforms: An update from the ICT sector, June Ministry of Communications and Information Technology-MCIT (2005) Building Digital Bridges: Egypt’s Vision of the Information Society Moheeb, H. (2006, July). Long distance— language and computer skills and geographic proximity are making Egypt a hub for offshore outsourcing. Business Today, July, Nazif, A. (2004). Government programs, the American Chamber of Commerce in Egypt. Retrieved on September 28, from www.amcham. org.eg Pietraszek, W. E., & Ramchandran, A. (2006). Using IT to boost call-center performance. McKinsey on IT, Spring, Xceed Contact Center (2007). Retreived March 20, 2007, from www. xceedcc.com
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EXHIBITS Exhibit 1. Key offshore motivators for customer care investors (Datamonitor, 2005) cost of labor
4.0 3.0 access to multilingual workforce
educated/skilled workforce
2.0 1.0 0.0
Government subsidies
“follow the sun” call center
Exhibit 2. Agent cost analysis: Type of agent and cost per hour (Source: Datamonitor, 2005) U.S. Dollars
Offshore Outsourced Agent Positions in Egypt (2004 – 2009)
Agent positions (000s)
2004
2005
2006
2007
2008
2009
CAGR
450
665
965
1,455
2,300
3,775
50.4%
46%
47%
51%
58%
64%
Annual growth
Exhibit 4. SWOT Analysis for Xceed Contact Center Strengths Being owned by Telecom Egypt People caliber/ homogeneous Having a strong reference Work environment Top management as a support system Infrastructure Location Quality culture belief Government support
Opportunities ITO Consulting Strategic alliance Arab region market Self service trend adoption Government/ aid funds Buy out/ Joint venture Deregulation of telco sector
Weaknesses Lack of delegation / empowerment Low readiness/ time to market Lack of succession plans Misconception of Egypt Telecom Egypt monopoly
Threats Lack of favorable telco rates in the Arab region Attrition Political stability Lack of industry data Currency fluctuation New entrants with similar value proposition
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Exhibit 5. Xceed forecasts for 2006 Revenue Streams
%
Offshore seats (IB, OB, BO)
EGP 5,232,500
Local seats (IB, OB)
42%
EGP 400,000
3%
Existing Accounts Expansions
EGP 5,070,000
41%
Consulting (Local, Arab region)
EGP 1,750,000
14%
EGP 12,452,500
100%
Total Expected New Business Income Breakdown of Total Income 2006
Existing Business
EGP 68,270,000
Existing Business Expansions
EGP 5,070,000
New Business
EGP 5,632,500
Consulting (Local, Arab region)
EGP 1,750,000
Total Income
EGP 80,722,500
Budget Extrapolation (Type of Service)
%
Outbound
EGP 1,782,500
34%
Inbound
EGP 3,105,000
59%
EGP 345,000
7%
EGP 5,232,500
100%
BO Total
To convert Egyptian Pounds to U.S. Dollars, $1 U.S. = 5.75 LE
Existing Business Existing Business Expansions New Business Consulting (Local, Arab region) 85%
Services - New Business 7%
34%
59%
Outbound
Inbound
BO
1317
1318 U.S.$910,000
Total Offshore U.S.$
Local seats (IB, OB) X
X
7
10
May
Jun
Jul
Aug
X
Projected Accounts
6
IB/OB*
10
BO—UK/U.S./FR Months live
4
XX
Apr
50
9
10
Mar
Months live
11
Feb
IB—UK/U.S./FR
10
Jan
Months live
EGP 5,632,500
Total Acquired New Business
100%
7%
59%
34%
OB—UK/U.S./FR
EGP 400,000
Total Local EGP
Offshore seats (IB, OB, BO)
EGP 5,232,500
Total Offshore EGP
5.75
U.S.$60,000
BO—UK/US/FR
Exchange Rate U.S.$ to EGP
U.S.$540,000
IB—UK/US/FR
U.S.$1,000
Seat average monthly income BO U.S.$310,000
U.S.$2,700
Seat average monthly income IB
OB—UK/US/FR
U.S.$1,000
Seat average monthly income OB
Acquired New Business 2006
3
10
Sep
X
Oct
1
10
Nov
X
Dec
10
50
50
Seats
EGP 400,000
US$60,000
US$540,000
US$310,000
Revenues
Xceed
Exhibit 6. Xceed Forecasts for 2006
Maintenance Manager
Security Manager
Administration Manager
Procurement Manager
Procurement and Administration Director
Operational Support Systems Manager
Data Center Manager
Communication Manager
Office Automation Manager
Information Technology Director
Contact Center Managers
Planning and Decision Support
National Account Manager
Deputy Contact Center Director
Contact Center Director
Vice President Operations
Key Accounts Manager
Programs Manager
Chairman and Managing Director
Marketing Manager
Sales Manager
Quality Assurance Manager
Financial Planning and Control Manager
Research and Development Manager
Organizational Development Manager
Training Manager
Personnel Manager
Recruitment Manager
Business Development Manager
Financial Manager
Human Resource Director
Sales and Marketing Director
Financial Director
Vice President Strategy & Business Development
Xceed
Exhibit 7. Xceed organization chart
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Xceed
Exhibit 8. Technology platform - high availability The Xceed site holds the data center that is 200 square meters, equipped with a redundant power source, redundant generators, redundant UPS, redundant network backbone, redundant air conditioners, fire suppression system (gaseous system), and highly secure physical access. The system is occupied by the CRM application (E-point) based on N-Tier to reach the maximum availability architecture: •
•
•
•
Back-end tier Network appliance cluster storage system Redundant SAN network Fujitsu Siemens Cluster UNIX servers Oracle 9i RAC Database (real application cluster) Business logic tier Redundant and load balance application server Front-end tier Redundant and load balance web server farm High speed backup system
From a different perspective, the high availability and serviceability introduced can be seen:
Servers • • •
Servers are connected to intranet through redundant network cards. Servers are supplied with redundant power sources "2 DPU in each rack" Servers operate as minimum on RAID1 disk structure
Power • • •
Two power sources Two generators for supplying electricity incase of failure Two UPS systems to recover any failure
Clustering • • •
Unix server are clustered for highly serviceability Oracle 9i RAC database (Real application Clusters) Exchange
Backup • •
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Storage Tek L80 tape library is designed to provide ultra-reliable backup and recovery for distributed Windows & UNIX environments VERITAS NetBackup, a leading enterprise data protection solution, providing centralized tape
Xceed
•
library control from a single management interface NetApp storage for robust and highly available data service for business-critical environments, Vendor adopted NetApp Clustered Failover to store customers data, installed on a pair of NetApp filers.
Storage System •
Cluster failover
Clustered failover ensures data availability by transferring the data service of an unavailable storage to storage in the cluster. The transfer is transparent to end users and applications, and the data service is automatically resumed with no visible interruption to business operation. •
Snapshot
Snapshot creates a virtual read-only copy of a file system. A snapshot copy of the complete Oracle database file system can be taken in less than 5 seconds with no discernible impact on the performance of the E-point application. A similar copy function is executed to a tape library. •
Snaprestore
Snaprestore enables an entire file system to be restored to the status of a specific Snapshot. The Snaprestore takes less than 10 seconds to restore the data that reduce the backup window. This architecture ensures that the application requests are always serviceable, even in the event of a failure. If the failure occurs in the primary system back-end tier, the production oracle DB (using RAC) protects from host and instance failure, and the load balance in the business logic tier and front-end tier protect from the host failure.
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Xceed
Exhibit 9. Cairo: Egypt site security logical topology
Exhibit 10. Cairo: Egypt site network logical topology
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Xceed
Exhibit 11. John Garett (Microsoft Vendor Account Manager at EOC) e-mail sent to Xceed on September 9, 2004 Well done, You are now in full live operation, Xceed are taking 100% of calls, we will continue to route 100% of calls to Xceed from now on. We have some contingency still in place in Arvato, we can call on this contingency if the need arises, please contact me immediately if you feel we need to activate the contingency. Well done to all involved, a lot of very hard and good work has been done to get to this stage. It is a very impressive achievement to get to this stage within thirteen days of switching in the first calls, especially for a brand new vendor. All indicators are green, healthy PSL, very good feedback from live Csat survey, very good feedback in the IVR Csat survey, no negative feedback from customers through the subsidiaries, no negative impact apparent on CPE, all performance reports checked and accurate, excellent analytical and quality in daily performance report, robust telephony solution via IPLC. All you need to do now is to continue with the excellent work you have all done so far. I am sure you will all be glad that I am returning home on Friday, you will be able to concentrate on your work without me interfering and always asking questions, you might even get home a bit earlier. Well done and the very best of luck for the future, somebody once described luck as being when “ readiness and quality coincides with opportunity”, I am not sure who said it but I think it’s very true. Very Best Regards John
This work was previously published in the Journal of Cases on Information Technology, Vol. 10, Issue 1, edited by M. KhosrowPour, pp. 67-91, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.23
IT Outsourcing Practices in Australia and Taiwan Chad Lin Curtin University of Technology, Australia Koong Lin National University of Tainan, Taiwan
INTRODUCTION Globally, information technology (IT) outsourcing has spread quickly in many countries and spending by organizations in IT outsourcing is increasing rapidly each year. According to Gartner (Blackmore, De Souza, Young, Goodness, and Silliman, 2005), total spending on IT outsourcing worldwide is likely to rise from US $184 billion in 2003 to US $256 billion in 2008. However, defining IT outsourcing is not an easy task as it can mean different things to different organizations. Hirschheim and Lacity (2000) define IT outsourcing as the “practice of transferring IT assets, leases, staff, and management responsibility for delivery of services from internal IT functions to third-party vendors.” Willcocks and Lester (1997) define outsourcing as the “commissioning of thirdparty management of IT assets or activities to deliver required results.” The scope and range of outsourcing services have also increased as well,
as evidenced by the promotion of BPO (business process outsourcing), ASP (applications service providers), global outsourcing, R&D (research and development) outsourcing, and web and e-business outsourcing (Gonzales Gascon and Llopis, 2005; Huang, Lin, and Lin, 2005). While there is already much research on the economics of IT outsourcing, critical success factors for IT outsourcing decision-making and for outsourcing vendor management (Barthelemy and Geyer, 2004; Hirschheim and Lacity, 2000), there is very little literature on the actual linkage between IT outsourcing and the use of evaluation methodologies in organizations, especially in how these organizations evaluate their IT outsourcing contracts and ensure that the benefits expected from these contracts are delivered eventually. The aim of this paper is to examine issues surrounding the evaluation and benefits realization processes in Australian and Taiwanese organizations undertaking IT outsourcing. The paper
first reviews relevant literature with respect to IT outsourcing, the evaluation of IT outsourcing, and IT benefits realization. Key findings from a survey of the top 2000 Australian organizations, as well as a survey to top 3000 Taiwanese organizations, will then be presented. The paper examines these findings and issues in light of these large organizations’ evaluation practices.
BACKGROUND IT Outsourcing Whatever the objective, the possibility of IT outsourcing tends to generate strong emotions among the senior executives and external contractors. There are many reasons contributing to the growth of the outsourcing. A review of relevant IT outsourcing literature reveals the following organizational goals for their IT outsourcing projects: lower costs, access to world class expertise, economies of scale, risk sharing, increased efficiency/service level, elimination of internal irritants, higher quality of goods and services, greater focus on core functions, increased flexibility, and reduction in technological obsolescence risk (Aubert, Rivard, and Patry, 2003; Barthelemy, 2003; Kakabadse and Kakabadse, 2001). There are several important factors that govern successful and less successful outsourcing decisions. These include: differentiation of the business from the competitors, strategic direction of the business, degree of uncertainty of the business environment, scope of outsourcing services, quality of outsourcing contract, technology maturity, level of IT integration, in-house capabilities, and trust (Barthelemy, 2003; Hormozi, Hostetler, and Middleton, 2003). In addition, there are other factors that are more critical for offshore outsourcing than for domestic outsourcing. According to Adelakun (2004), the following critical success factors are very important for offshore outsourcing: people factors (e.g., language skill and project
management skill), technical factors (e.g., workers technical skill), business infrastructure factors (e.g., service level agreement details), regulatory factors (e.g., travel and visa restrictions), and client interface factors (e.g., security and trusting relationship). In particular, the traditional approaches to security are failing as we move to open networks and business models due to IT outsourcing (Grimshaw, Vincent, and Willmott, 2002; Wright, 2001). In addition, IT outsourcing also forces organizations to extend the boundaries of trust outside of their former closed spheres (Wright, 2001). According to Khalfan (2004), these two issues are the most prominent risk factors that would affect the attitudes of organizations to IT outsourcing. Furthermore, despite the promised savings from the IT outsourcing contracts, there have been problems. These include constant budget blowouts, dubious savings claims, deep dissatisfaction, and non-delivery of service levels (Aubert, et al., 2003; Sullivan and Ngwenyama, 2005). Reasons for this include failing to properly monitor and evaluate IT outsourcing contracts and projects, especially the performance of contractors (Lin, Pervan, and McDermid, 2005; Perrin and Pervan, 2004).
IT Investment Evaluation in IT Outsourcing Complexity and scope are often the major constraints and difficulties in IT investment evaluation and benefits realization processes (Tallon, Kraemer, and Gurbaxani, 2000; Ward and Daniel, 2006). Many IT projects fail to deliver what is expected of them because organizations focus on implementing the technology rather than tracking and measuring the performance of IT projects (Lin and Pervan, 2003). One reason for this is that most organizations fail to properly monitor and evaluate their IT outsourcing projects (Perrin and Pervan, 2004; Willcocks and Lester, 1997). According to Kakabadse and Kakabadse (2001),
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IT Outsourcing Practices in Australia and Taiwan
the development of suitable methodologies for IT outsourcing has been very slow. For example, McIvor (2000) found that most organizations had no formal process to evaluate their IT outsourcing decision and, instead, relied on limited cost analysis associated with the outsourcing decision. Beaumont and Costa (2002) found that evaluating all costs relevant to outsourcing was a very difficult task. According to Hsu, Wu, and Hsu (2005), most large organizations (52.4%) in Taiwan do not perform evaluation on a regular basis and those organizations which do evaluate tend to do so irregularly. In fact, 15.1% of organizations surveyed did not evaluate at all (Hsu, et al., 2005). Organizations that make extensive use of IT evaluation methodologies or measures have higher perceived payoffs from IT (Tallon, et al., 2000). Misra (2004) found that outsourcing organizations need to choose the evaluation methodologies which: (a) lead to the desired behavior by both outsourcers and outsourcing contractors; (b) are within the outsourcing contractors’ control; (c) can be easily measured by both the outsourcers and outsourcing contractors; (d) can be evaluated by objective criteria rather than subjective criteria; and (e) can be aligned with business objectives.
IT Benefits Realization While IT investment evaluation is important, it does not guarantee that the benefits identified and expected by organizations are realized (Lin, et al., 2005). This is because IT is just one enabler of process change and it only enables or creates a capability to derive benefits. The essence of benefits realization is to organize and manage so that the potential benefits arising from the use of IT can actually be realized (Changchit, Joshi, and Lederer, 1998). The identification of expected benefits of a proposed IT outsourcing project is a challenging task. According to Lin and Pervan (2003), very few organizations have a benefits realization approach. Ironically, much attention is paid to ways
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of justifying investments with little effort being expended in ensuring that the benefits expected are realized. As benefits are frequently long term, uncertain and intangible future benefits are too wide-ranging to be estimated with any accuracy. After all, the critical role of benefits realization depends on external IT outsourcing contractors’ ability to not just deliver excellent service, but also to turn this service into organizational consequences such as control of costs, meeting organizational goals, flexibility, and focusing on core functions (Rouse, Corbitt and Aubert, 2001). While there is a clear indication in the literature of a greater reliance on IT outsourcing by organizations, the importance of outsourcing evaluation and benefits processes has received limited attention, as has the linkage between IT outsourcing and the use of IT investment evaluation and benefits realization methodologies.
RESEARCH METHODOLOGY AND FINDINGS Research Objectives and Methodology Corporate spending on IT outsourcing is increasing at a rapid rate. In Australia, there is an increasing push by businesses for offshore IT outsourcing (to India, in particular), although many industry executives believe that Australia can also become an offshore destination as it is at least 25% cheaper to run a commercial undertaking in Australia than in the US or Western Europe (Hollands, 2004). In Taiwan, foreign companies spent a total of US $66 billion on IT outsourcing to Taiwan in 2005 and over 70% of Taiwan’s IT output was actually outsourced to China (Burns, 2006). However, no research has been carried out to obtain an overview of IT investments and benefits management processes and practices in these two economies. The research aims to provide new empirical evidence comparing Australia (a developed economy) and
IT Outsourcing Practices in Australia and Taiwan
Taiwan (a newly industrialized economy) on their IT outsourcing investment evaluation and benefits realization practices. The survey approach was chosen as it has the advantage of being able to focus on problem solving and pursue a step-by-step logical, organized, and rigorous method to identify problems, gather data, analyze the data, and draw valid conclusions (Sekaran, 1984). Specifically, the survey sought to: 1.
2.
establish current practices and norms in managing IT outsourcing benefits and evaluation by organizations in Australia and Taiwan; and investigate the usage of the IT outsourcing investment evaluation and benefits realization methodologies or approaches by organizations in Australia and Taiwan.
The sample for the Australian study was obtained by mailing questionnaires in 2005 to the IT managers and CIOs of 900 Australian organizations randomly selected from the top 2000 Australian organizations (Dun and Bradstreet mailing list). Prior to determining the sample size for the survey, a pilot survey of IT managers/ CIOs of ten companies in Australia and Taiwan was conducted. Comments about the pilot questionnaire were all positive and so no significant changes were made to the questionnaire. The survey elicited a total of 176 responses and a response rate of 19.6%. The sample in Taiwan was selected from a list published by a semi-governmental organization, the Institute for Information Industry (III, 2005). Questionnaires were sent to top 3000 organizations in Taiwan in 2005 and 889 questionnaires were returned (a response rate of 29.6%). In the absence of objective data on the organizations’ evaluation practices, the IT executives’ perceptions were used. Although there has been some debate regarding the legitimacy of perceptual measures as a proxy for objective measures, re-
search has succeeded in alleviating some of the concerns by showing that perceptual measures of organizational performance has a strong positive relationship with more traditional objective measures (Tallon, et al., 2000). For example, a study by Venkatraman and Ramanujam (1987) showed that there was a high degree of correlation between perceptual and objective performance measures in the process of measuring performance of several competing organizations. Chi-squared Goodness of Fit tests, on industry sector, net revenue, and total number of employees, showed that the sample respondents were statistically similar (at the 1% significance level) to the target population. Late returns were compared with other response received earlier in order to check for non-response bias. No significant differences were detected between two samples (Armstrong and Overton, 1977). Therefore, the respondents can be considered representative of the population as a whole. Most of the information presented below is based on descriptive statistics (i.e., frequencies) but some comparisons between groups were made using crosstabs, ANOVA, and correlation statistics. In the following discussion of results the percentages referred to normally represented the proportion of valid (answered) cases only and did not indicate missing values. A statistical software package, SPSS (v11.05), was deployed to analyze the quantitative data collected through the survey.
Survey Findings and Discussion In the following discussion of results the percentages referred to normally represented the proportion of valid (answered) cases only and did not indicate missing values. Additionally, most of the information presented below was based on descriptive statistics. Overall, the responding Australian organizations were large in revenue and number of employees, typical of the large corporate sector with
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IT Outsourcing Practices in Australia and Taiwan
Table 1. Background information of the respondent organizations – industries & IT budget Australia Percent (%)
Taiwan Percent (%)
(a) Industries Wholesale and retail Government and utilities Construction, mining & engineering Health and pharmaceutical services Manufacturing Financial and Insurance Services IT and communication Education Transportation Other Total
18.2 15.3 11.9 11.4 9.7 6.9 6.8 5.1 4.5 10.2 100
25.3 2.1 0.7 1.2 31.7 3.6 20.2 6.6 7.1 1.5 100
(b) IT budget (A$m) <1 1-5 6-10 11-20 21 and above Unsure/do not know Total
18.8 25.0 13.6 18.2 19.9 4.5 100
9.5 20.9 23.1 10.7 12.7 23.1 100
Range
Table 2. Background information of the respondent organizations – IT budget & employees Range (c) Total revenue (A$m) <6 6-10 11-50 51-100 101 and above Unsure/do not know Total (d) Total number of employees <51 51-250 250-500 501-1000 1001-5000 5000 and above Total
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Australia Percent (%)
Taiwan Percent (%)
4.0 5.1 7.4 16.5 63.1 3.9 100
1.4 10.5 13.1 16.5 57.9 0.6 100
7.4 7.4 6.8 21.6 46.0 10.8 100
16.1 11.9 26.0 6.6 16.3 23.1 100
IT Outsourcing Practices in Australia and Taiwan
large numbers from wholesale and retail (18.2%), government and utilities (15.3%), construction, mining, and engineering (11.9%), and health and pharmaceutical services (11.4%) (Table 1). On the other hand, most Taiwanese organizations were from manufacturing (31.7%), wholesale and retail (25.3%), and information technology and communication industries (Table 1). More than half of the responding organizations had more than US $50 million in total revenue and 250 employees (Table 2).
IT Investment Evaluation and Benefits Realization for IT Outsourcing Respondents were asked about adoption, usage and success with formal methodologies or processes for various IT outsourcing activities. The Australian results revealed a reasonably high adoption of methodology for IT investment evaluation (67.6%), but less for IT benefits realization (41.5%). However, the results also showed that 15.3% had failed to adopt an IT investment evaluation methodology while 32.4% of responding organizations failed to adopt an IT benefits realization methodology. Therefore, overall, their use was found to be commonplace, but by no means universal. In particular, a significant majority had a formal methodology or process for their IT investment appraisal. On the other hand, the survey results in Taiwan also revealed lower adoption rates for IT investment evaluation (43.9%) and IT benefits realization (42.1%). The ANOVA revealed that both Australian and Taiwanese organizations tend to adopt either both methodologies or none at all. In addition, Australian respondents indicated that IT investment evaluation methodology was widely used in 50.6% of cases. However, only 29.0% of the respondents had pointed out that an IT benefits realization methodology was widely used in their organizations. On the other hand, the Taiwanese respondents reported that both
methodologies were widely used in only 38.9% and 39.9% of cases, respectively. In terms of effectiveness of those methodologies in ensuring successful IT outsourcing, 46.1% and 32.4%, respectively, of the Australian organizations pointed out that they were effective. Overall, the IT investment evaluation methodology was not effective in ensuring successful IT outsourcing. Furthermore, IT benefits realization methodology was neither widely used nor effective in ensuring successful IT outsourcing. The figures for the effective utilization of these methodologies by the Taiwanese organizations were 40.6%, and 38.7%, respectively.
Motivation for IT Outsourcing Almost all organizations surveyed had outsourced at least part of their IT functions. Cost reduction (70.0%) due to lower salaries was considered an important factor for IT outsourcing by Australian organizations. However, this was given a very low priority by the Taiwanese organizations. Instead, time saving (68.7%) and ability to focus on core activities (68.4%) were the most often mentioned benefits for IT outsourcing in Taiwan. Furthermore, most Australian and Taiwanese organizations preferred those external IT outsourcing contractors which had a good track record and extensively skills and experience in outsourcing. The size of external IT outsourcing firms was not an important selection factor for both Australian and Taiwanese organizations.
FUTURE TRENDS IT outsourcing spending will continue to rise in the future. The rising price of oil will put increasing pressure on organizations to both utilize technology and outsource to remain competitive. Despite the recent debates in the US and other western countries about outsourcing of skilled IT jobs to other low-cost countries such as India
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IT Outsourcing Practices in Australia and Taiwan
and China, and about organizations’ obligations to the broader stakeholder community, offshore IT outsourcing has often been employed by most large organizations to reduce the cost of future IT investments and to improve the cash flow of the organizations (Burns, 2006; Hollands, 2004; Rottman and Lacity, 2004).
research has relied on the information provided at a particular point in time. Further research could take a longitudinal approach as the perception and evaluation of benefits are likely to change over time. Alternatively, our study could be replicated in a few years time in other countries.
REFERENCES CONCLUSION This paper seeks to provide new empirical evidence of IT investment evaluation and benefits realization practices in large Australian and Taiwanese organizations undertaking IT outsourcing projects. The results indicate that while the usage of IT investment evaluation methodologies by Taiwanese organizations is lower than organizations in Australia, the usage of IT benefits realization methodologies is about the same for both groups of organizations. In addition, large Australian organizations are more able to conduct IT investment evaluation methodologies more widely and effectively, whereas large Taiwanese organizations are more likely to deploy IT benefits realization methodologies widely and effectively. The surveys also show that the extent of outsourcing is quite high in large Australian and Taiwanese organizations. Furthermore, Australian and Taiwanese organizations differ on their motivation for IT outsourcing. Cost reduction is the number one reason for IT outsourcing for large Australian organizations while time saving and ability to concentrate on core activities are the most often mentioned IT outsourcing reasons for Taiwanese organizations. A key contribution of this exploratory comparative study is to provide new empirical evidence on IT outsourcing practices as well as IT investment evaluation and benefits realization processes in large Australian and Taiwanese organizations. The findings here can assist senior executives in making their IT outsourcing decisions. Finally, our study took place at a particular point in time. This
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Adelakun, O. (2004). IT Outsourcing Maturity Model. The 12th European Conference on Information Systems (ECIS2004). Turku, Finland, June 14-16. Armstrong, J. S. & Overton, T. (1977). Estimating Nonresponse Bias in Mail Surveys. Journal of Marketing Research, 14 August, 396-402. Aubert, B.A., Rivard, S., and Patry, M. (2003). A Transaction Cost Model of IT Outsourcing. Information and Management, 41, 921-932. Barthelemy, J. (2003). The Hard and Soft Sides of IT Outsourcing Management. European Management Journal, 21(5), 539-548. Barthelemy, J. and Geyer, D. (2004). The Determinants of Total IT Outsourcing: An Empirical Investigation of French and German Firms. The Journal of Computer Information Systems, 44(3), 91-97. Beaumont, N. and Costa, C. (2002) Information Technology Outsourcing in Australia. Information Resources Management Journal, 15(3), 14-31. Blackmore, D., De Souza, R., Young, A., Goodness, E., and Silliman, R. (2005). Forecast: IT Outsourcing. Worldwide, 2002-2008 (Update), Gartner, 8 March. Burns, S. (2006). IT Industry Spends $66bn in Taiwan. VNU Business Publications, VNUNet. com. Changchit, C., Joshi, K.D., and Lederer, A.L. (1998). Process and Reality in Information
IT Outsourcing Practices in Australia and Taiwan
Systems Benefit Analysis. Information Systems Journal, 8, 145-162. Grimshaw, D., Vincent, S. and Willmott, H. (2002). Going privately: partnership and outsourcing in UK public services. Public Administration 80(3), 475-502. Gonzalez, R., Gasco, J. and Llopis, J. (2005). Information Systems Outsourcing Reasons in the Largest Spanish Firms. International Journal of Information Management, 25(2), 117-136. Hirschheim, R. and Lacity, M. (2000). The Myths and Realities of Information Technology Insourcing. Communications of the ACM, 43(2), February, 99-107. Hollands, M. (2004). Status of Offshore Outsourcing in Australia: A Qualitative Study, AIIA Report. Australian Information Industry Association. Hormozi, A., Hostetler, E., and Middleton, C. (2003). Outsourcing Information Technology: Assessing Your Options. SAM Advanced Management Journal, 68(4), 18-23. Hsu, C., Wu, C., and Hsu, J. C. (2005). Performance Evaluation of Information System Outsourcing in Taiwan’s Large Enterprises. Journal of American Academy of Business, 6(1), 255-259. Huang, Y., Lin, C., and Lin, H. (2005). Technoeconomic Effect of R&D Outsourcing Strategy for Small and Medium-sized Enterprises: A Resource-Based Viewpoint. International Journal of Innovation and Incubation, 2(1), 1-22. III (2005). Institute for Information Industry (III), Source: [On-Line] http://www.iii.org.tw. Kakabadse, A. and Kakabadse, N. (2001) Outsourcing in the Public Services: A Comparative Analysis of Practice, Capability, and Impact. Public Administration and Development, 21, 401-413.
Khalfan, A. M. (2004). Information Security Considerations in IS/IT Outsourcing Projects: A Descriptive Case Study of Two Sectors. International Journal of Information Management, 24, pp. 29-42. Lin, C. and Pervan, G. (2003). The Practice of IS/IT Benefits Management in Large Australian Organizations. Information and Management, 41(1), 13-24. Lin, C., Pervan, G., and McDermid, D. (2005). IS/IT Investment Evaluation and Benefits Realization Issues in Australia. Journal of Research and Practices in Information Technology, 37(3), 235-251. McIvor, R. (2000). A Practical Framework for Understanding the Outsourcing Process. Supply Chain Management, 5(1), 22. Misra, R. B. (2004). Global IT Outsourcing: Metrics for Success of All Parties. Journal of Information Technology Cases and Applications, 6(3), 21-34. Perrin, B. and Pervan, G. (2004). Performance Monitoring Systems for Public Sector IT Outsourcing Contracts. Proceedings of the 15th International Conference of the Information Resources Management Association (IRMA 2004), New Orleans, LA, USA. 23-26 May. Rottman, J. W. and Lacity, M. C. (2004). Twenty Practices for Offshore Sourcing. MIS Quarterly Executive, 3(3). Rouse, A. C., Corbitt, B. and Aubert, B. A. (2001). Perspectives on IT Outsourcing Success: Covariance Structure Modelling of a Survey of Outsourcing in Australia. Cahier du GreSI, no 01-03, HEC, Montreal, Canada, 1-18. Sekaran, U. (1984). Research Methods for Managers: A Skill-building Approach. John Wiley & Sons, New York, USA.
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Sullivan, E. W. and Ngwenyama, O. K. (2005). How Are Public Sector Organizations Managing IS Outsourcing Risks? An Analysis of Outsourcing Guidelines From Three Jurisdictions. Journal of Computer Information Systems, 45(3), pp73-87. Tallon, P. P., Kraemer, K. L., and Gurbaxani, V., (2000). Executives’ Perception of the Business Value of IT: A Process-Oriented Approach., Journal of Management Information Systems, 16(4), 145-173.
KEY TERMS Benefits Realization: It is a managed and controlled process of checking, implementing, and adjusting expected results and continuous adjusting the path leading from investments to expected business benefits. IT Benefits Realization Methodologies: Approaches that are used to ensure that benefits expected in the IT investments by organizations are eventually delivered.
Tallon, P. P., Kraemer, K. L. and Gurbaxani, V. (2000). Executives’ Perceptions of the Business Value of Information Technology: A ProcessOriented Approach. Journal of Management Information Systems, 16(4), 145-173.
IT Investment Evaluation: This is the weighing up process to rationally assess the value of any in-house IT assets and acquisition of software or hardware which are expected to improve business value of an organization’s information systems.
Venkatraman, N. and Ramanujam, V. (1987). Measurement of Business Economic Performance: An Examination of Method Convergence. Journal of Management, 13(1), 109-122.
IT Investment Evaluation Methodologies: Approaches that are used to evaluate and monitor organizations’ IT investments.
Ward, J. and Daniel, E. (2006). Benefits Management: Delivering Value from IS & IT Investments. John Wiley & Sons Ltd., Chichester, UK. Willcocks, L. and Lester, S. (1997). Assessing IT Productivity: Any Way Out of the Labyrinth?, In Willcocks, L., Feeny, D.F. & Islei, G. (Eds.). Managing IT as a Strategic Resource, Ch4, The McGraw-Hill Company, London, 64-93. Wright, A. (2001). Controlling Risks of E-commerce Content. Computers & Security, 20(2), 147-154.
IT Outsourcing: The practice of transferring IT assets, leases, staff, and management responsibility for delivery of services from internal IT functions to external contractors. SPSS: It is a statistical and data management software package for analyzing collected questionnaire data. Survey Research: It is a research method using questionnaires to obtain the required information.
This work was previously published in Encyclopedia of Information Science and Technology, Second Edition, edited by M. Khosrow-Pour, pp. 2291-2297, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.24
Information Systems / Information Technology Outsourcing in Spain: A Critical Empirical Analysis1 Felix R. Doldán Tié University of A Coruña, Spain Paula Luna Huertas University of Sevilla, Spain Francisco Jose Martínez López University of Huelva, Spain Carlos Piñeiro Sánchez University of A Coruña, Spain
ABSTRACT The practice of information systems/information technology (IS/IT) outsourcing is a major issue which has received much attention, as shown by the extensive literature on the topic. However, most works on outsourcing have focused on theoretical topics, and there are but a few empirical, quantitative studies. This chapter presents an empirical study of IS/IT outsourcing in Spain, which has been conducted along the lines of prior research carried out in different countries, and which
focuses on the types, functions and targets of outsourcing contracts. We also attempt to examine the influence that this practice may have on the organizations’ management structure. A survey carried out on 530 Spanish firms has shown that 50% of Spanish large firms have outsourced part of their IS/IT, whereas outsourcing is practiced by 20% of medium-sized enterprises. Finally, it has been observed that the most frequently outsourced activities in Spain are hosting and Internet-related services.
Information Systems / Information Technology Outsourcing in Spain
STATE OF THE ART: THEORETICAL FRAMEWORK FOR IS/IT OUTSOURCING The practice of information systems/information technology (IS/IT) outsourcing is a major issue which has received much attention in both the managerial and the academic spheres, as shown by the extensive literature on the topic. Following Eastman Kodak’s IS/IT outsourcing decisions in 19892 , the outsourcing market grew at an annual rate of 15%, until it expanded to more than $40,000 million in the 1990s. Outsourcing is practised, or at least considered as a medium-term option, by half of the firms whose annual turnover is equal to or more than $5 million3 , which contradicts the common belief that outsourcing is characteristic of big corporations with efficiency problems. Traditionally, it has been argued that outsourcing helps firms reduce costs, since the external provider benefits from economies of scale and from its own experience. This advantage is even greater in the case of IS, which are frequently defined as an intrinsically cost burden activity, full of management problems and with a dubious contribution to businesses4 . Outsourcing of IT-related activities has been indeed the area of greater expansion in the last few years, and that with the best expectations in the medium term. In a first stage, organizations outsourced complementary functions such as consulting, training or maintenance until, in a second stage, they also outsourced corporative mainframes and end-user support. More recently, outsourcing practices have expanded in two new trends: the requirements derived from electronic businesses — network management, creation and maintenance of Web sites and management of electronic shops — and the ASP (application service provider) sector, which is expected to generate a business volume of $7,000 million in 2004 (Young, 2000). Similarly, according to IDC consulting, IT outsourcing is expected to reach $177.2 billion in 2004 (Lingblom, 2002). Accord-
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ing to Burkhart (2003), in a near future the trend will move from IT outsourcing to a combination of business processes and outsourcing. There are nevertheless some issues clouding this brilliant panorama. There is evidence to question the magnitude and even the existence of cost saving5 , and it has become obvious that certain crucial aspects should be carefully considered: the quality of the service, the benefits offered by the outsourcing project, its strategic implications6 , and the risk derived from transferring an activity that is critical for business performance. Moreover, outsourcing has become more complex with the emergence of new contractual types that — as in the case of pay-per-use — attempt to meet the demands of an increasingly competitive market.
Information Services Organization Models According to Wibbelsman and Maiero (1994), the main decision that the organization must take is not whether or not an activity should be outsourced, but rather determining the most suitable outsourcing project according to the cost of the internal service, the economic value of the external offer, and the costs of co-ordination or agency. We agree with Hsu, Chiu, and Hsu, (2004) that, in order to predict IS outsourcing success, a number of factors must be taken into account, such as the combinations of internal and external activities, different degrees of responsibility transfer, material resources, management capacity, and different levels of centralization. IS were originally configured as rigidly centralized structures so as to exploit the economies of scale propounded by Grosch’s Law7 , which have been proved erroneous thanks to the improvement in the cost/performance ratio of IT and to the recognition of their limitations from the point of view of decision support and business processes. Facing an ever-increasing competency, organizations adopted the re-engineering projects
Information Systems / Information Technology Outsourcing in Spain
marketed by consulting firms: the organization should adapt and optimize its structure to the new economic environment in order to control the growth of costs and ensure its competitiveness. These notions gave rise to such phenomena as downsizing, rightsizing, and a wide range of projects that attempted to simplify organizational structures and to transfer those functions and activities that are alien to the business core8 . In the case of IT, re-structuring projects were fostered by the managers’ frustration of being unable to justify the profitability of IT investments, since the arguments supporting business benefits were weak and the cost of IS implementation was high. Very often, organizations developed outsourcing projects so as to make the role of IS clear — or to get rid of an apparently insoluble management problem9 . From a financial point of view, outsourcing represents the last link in a chain of techniques intended to clarify and justify the economic value of information services, known as IS cost recovery, or chargeback techniques (Figure 1); the organization can make use of outsourcing (or other similar practices) to clarify the total cost derived from information functions and to assess their contribution to the business objectives. However, as we will see below, these techniques do not eliminate the uncertainty inherent in medium and long-term forecasting and, moreover, they introduce a clear bias towards cost economics at the expense of other management factors1 0 . Lacity and Willcocks (1998, 2001) argue that outsourc-
ing acts as a catalyst to improve the quality of the assessment of the IS and its services.
Outsourcing Models According to Lacity and Hirschheim (1995), organizations can procure a given service in three generic ways: by internally providing the service (insourcing), by contracting an external provider to perform certain activities (selective outsourcing)11 , or by transferring the service to the external provider (total outsourcing), sometimes including the organization’s material and/or human resources. Total outsourcing has been defined as a specific instance of selective outsourcing in which the contract implies transferring at least 80% of the total cost of the service. A special case is that in which the organization outsources just the execution of a specific project, for example, the development of an application or the management of disasters. Lacity and Hirschheim (1993a) call this practice Project Management, and they also distinguish those contracts with which the organization intends to meet sporadic needs (Body Shop). Lacity and Willcocks (1998) add some other interesting outsourcing types, which they call “emerging sourcing arrangements”:
• •
Multi-sourcing, in which the service is provided by multiple co-ordinated and specialized providers. Co-sourcing, where the remuneration perceived by the external provider is indexed to
Figure 1. Internal service assessment techniques
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Information Systems / Information Technology Outsourcing in Spain
certain parameters expressing the quality of the service; this model is equivalent to that which Millar (1994) calls Business benefit contracting (Table 1). Spin-offs, where the internal IS department splits off the organization and turns into a business unit1 2 . Creative contracting, which encompasses those practices intended to personalize services, functionalities, and operative conditions to the client’s specific requirements.
• •
The most limited type of outsourcing consists in contracting material resources in order to meet certain specific, exceptional information management requirements1 3 : the vendor provides technical resources such as processing capacity or printing resources (and maybe some human resources too), but responsibility for the activity lies exclusively on the organization. The advantages of this outsourcing model are, first, that the organization has access to material resources whose internal maintenance would be unfeasible, and second, the cost savings as compared to other alternatives of temporary contracting as, for example, renting14 . Providers share the same infrastructure with several clients, and for this reason they are called timeshare vendors.
The organization may contract the performance of a function or an information service to an external provider, for example, accounting or payroll management; in this case, the external vendor supplies both the material resources and the service itself — which in the case discussed in the above paragraph was kept within the organization. This is a limited type of outsourcing called selective outsourcing (Payton & Handfield, 2003), in which the organization keeps control of major information services1 5 and only transfers those functions with a satisfactory competitive risk/cost saving ratio. Selective outsourcing has been traditionally identified with transactional or management functions but, according to Lacity, Willcocks, and Feeny (1996), the only criterion to determine the strategic character of functions is their relatedness to the company’s competitive basis. The main problem with this type of outsourcing is the individualized evaluation of the performance of every service or function of the system, which requires the application of portfolio management techniques. Millar (1994) calls this business process outsourcing, and points out that this alternative is considered by a great number of organizations, including public government, banking, insurance companies, and logistic companies.
Table 1. Outsourcing types (Millar, 1994) General outsourcing
Specific outsourcing types
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Selective outsourcing
The target of outsourcing is limited according to economic efficiency and competitive relevance criteria
Value added outsourcing
Based on the hypothesis that the external provider will be able to supply a specific value which cannot be obtained internally, for example, better quality of adaption capacity
Co-operative outsourcing
Responsibility for outsourced functions is shared by the internal service and the external provider
Transactional outsourcing
All or part of the activities related to the transition from one computer system to another are carried out by the external provider
Business process outsourcing
The external provider is responsible for the provision of a function or information activity
Business benefit contracting
Maintenance of the external service, and its retribution, depend on certain parameters expressing its quality
Information Systems / Information Technology Outsourcing in Spain
A step forward towards outsourcing is represented by facilities management (FM) contracts, which transfer the management of infrastructures to the external vendor. The external provider’s degree of involvement in the system may vary depending on the terms of the contract, which usually includes explicit points about the quality, nature and duration of the service16; this flexibility is particularly attractive for the outsourcer when there are doubts about the IS area, or when the organization wishes to transfer the management risk. The most “radical” model of outsourcing is that in which the organization contracts the entire information service to an external vendor; this is not a very frequent practice because it has evident competitive risks. Our own findings show that only a very limited segment of micro-companies, with a notable internal simplicity, choose these contractual types. It can be concluded that FM — in its different varieties — is the most suitable outsourcing model for relatively stable business types in which the services have been established some time before and the information needs are well defined; the main problems lie in R+D development and management, particularly in the control of technological innovation, placed in between (external) service management and (internal) control of technological platforms.
of the service and transfer the responsibility for IT management to the external provider. In the context of IS, outsourcing offers some potential benefits17 :
•
• •
•
Arguments for Outsourcing Projects Organizations’ IS have been a recurrent target for outsourcing projects because of their impact on the cost structure: IT represents a substantial proportion of production costs, and the magnitude of IT investments has direct effects on the financial structure — particularly, on indebtedness and leverage. Additionally, IT investments are usually difficult to justify from a financial point of view, thus the external offer in general, and FM contracts in particular, are an attractive alternative because they simultaneously ensure the provision
•
It represents an opportunity for optimizing the cost structure, and improving business performance18 . These advantages are particularly relevant for small businesses, which have difficulty in designing economies of scale. Lacity and Hirschheim (1995) and Ang and Straub (1998) found evidence of a negative relationship between outsourcing and business size, which was later corroborated by Ang and Straub (2002). Outsourcing may help re-establishing financial balance, improving leverage and reducing financial distress. It may reveal the company’s intangibles, and turn them to liquidity1 9 . The application of accounting criteria prevents intangible assets (or invisible assets; Itami, 1991) from being included in balances and financial statements; an outsourcing contract implies taking these assets into account and transforming them into liquidity (McFarlan & Nolan, 1995, p. 13). It can introduce a change in management perspective. The IS, which has long been regarded as a service or investment centre, is gradually being managed as a profit centre which has to prove its efficiency and its contribution to businesses. The most common outsourcing criterion is that of systematic comparison to the market offer (Dibbern & Heinzl, 2002)2 0 . Outsourcing helps evaluate the company’s IS. The decision to outsource implies assessing the IS’s relative efficiency and its contribution to the success of the business2 1 — two issues that managers tend to avoid because of their apparent complexity.
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Information Systems / Information Technology Outsourcing in Spain
•
Finally, outsourcing favours the development of a model of competence between the internal function and the market. Lacity et al. (1996, p. 16) describe how the operative inertia of the internal service may become an obstacle for its efficiency; the threat of outsourcing may soften the resistance to introduce operative or strategic changes in the system 2 2 .
Cost Economics According to the neoclassical argument, an organization is a production system ruled by criteria of maximizing profits, and which produces goods or supplies services to the extent to which it can act with greater efficiency than other mechanisms (Williamson, 1981); hence it follows that the organization will transfer those services in which it has disadvantages in terms of costs, thus the decision to outsource will be taken in accordance with the comparative advantages of insourcing in terms of operational and co-ordination costs2 3 . The dominant argument for outsourcing projects is indeed the saving of labour, real estate, and equipment costs2 4 : the most common hypothesis is that outsourcing helps lightening the cost structure and that it causes a more satisfactory behaviour of financial leverage. This hypothesis is supported by empirical evidence, particularly when there are internal inefficiencies2 5 and the assets are not specific (Ang & Straub, 2002)2 6 ; however, there is some controversy over the economies’ intensity. Lacity and Hirschheim (1993a) found that saving is often overvalued because of an excess of optimism on the part of external vendors and, sometimes, because of the managers’ desire to justify the transaction of a function that is complex and little attractive in terms of management. The work of Beaumont and Costa (2002), based on a wide sample of Australian firms, suggests that, generally, savings are less significant than expected, and that sometimes the total cost of the service is higher than estimated.
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Lacity et al. (1996) also observed irregular behaviours in the cost structure when the service is transferred to an external provider; similarly, Hirschheim and Lacity (2000) point out that the internal service may be as efficient as — or even more efficient than — external offers, thanks in part to its awareness of the company’s actual problems. The existence of idiosyncratic elements, particularly of the specificities of human resources, seems to be a relevant argument in favour of insourcing, a factor that can be examined in the light of Itami and Roehl’s (1990) characterization of experience and know how as invisible assets. There are also certain cost factors that are not made explicit in the external provider’s commercial offer and that, very often, are not taken into account by the company (Barthelemy, 2001), namely, the efforts made in the search and evaluation of offers, the inefficiencies during the process of transaction to the new model, monitoring the quality of the service, and re-assuming the function once the contract expires2 7 . The internal service’s efficiency depends on business size, which in turn determines the possibility to exploit economies of scale, the access to qualified personnel, and the intensity of financial restriction (a topic that will be dealt with below); it could be hypothesized that there is an inverse relationship between business size and outsourcing, but this factor does not establish differences in the tendency towards outsourcing, but rather in the types of outsourcing contracts: big companies tend to demand facilities management contracts, whereas SMEs prefer selective outsourcing practices (Lacity & Hirschheim, 1995; Lacity & Willcocks, 1998), which are intended to supply the skills or professional competences lacking in the internal service (Ang & Straub, 2002). Cost savings attributed to outsourcing could be illusory, partly due to the vendor’s effort to present an attractive offer2 8 , but also to the contract itself: outsourcing contracts usually stipulate a fixed cost that is revised annually according to
Information Systems / Information Technology Outsourcing in Spain
a representative price index — but, actually, the value of many facilities and resources, and even labour costs, are constantly decreasing. Therefore, the estimation of costs carried out by the external provider could be excessively generous for the vendor’s interests, and hence financially prejudicial for the organization; additionally, it seems obvious that the external provider will attempt to maximize his own benefit, so the services he provides could be those with the lowest possible quality. Another relevant aspect in the sphere of cost economics is that of transaction costs, a concept that is related to the effort, time, and burdens involved in designing, negotiating, supervising, and enforcing a contract between the company and the vendor (Coase, 1937) 2 9 . From this perspective, outsourcing is an attractive alternative when, even if transaction costs originated by the transfer are taken into account, insourcing is antieconomic; on the contrary, the organization may opt for insourcing if transactional diseconomies invalidate the benefits in production costs (Bakos & Brynjolfsson, 1993).
pay-per-use (the use of computer facilities and infrastructures): offices, computer equipments, Internet services, backup services, etc. However, it seems reasonable to expect that, in periods of capital restriction, organizations may feel compelled to reduce the size of those functions that do not form part of the business core — among them, the IS — so as to lighten the cost structure and preserve the financial balance. One of the main features of outsourcing is precisely that it allows for transforming the uncertainty characteristic of an IS into the certainty of a fixed cost contractually stipulated; even when the external offer does not show evidence of comparative efficiencies, the expectation of stabilizing costs and suppressing uncertainty may be enough to justify outsourcing. Hirschheim and Lacity (2000) found that a number of organizations adopted massive outsourcing decisions as a consequence of different kinds of financial imbalance; notice that downsizing, rightsizing and outsourcing decisions, especially when they involve the transfer of facilities or infrastructures, imply cash flow for the client3 0 .
Financial Issues Further Arguments Historically, organizations have used their surpluses basically to finance their growth, particularly to create their IT infrastructures, rather than share profits among the stakeholders (Jensen, 1989). In the ’70s and early ’80s, the baking, transport and distribution sectors, and part of the industry applied their financial slack to the development of transactional infrastructures which, besides being convenient for businesses, conferred an image of dynamism and originality on executives; the success of certain operations — American Airlines, American Hospital Supply, etc. — also contributed to the creation of internalized services. Capital restrictions have caused the emergence of some growing outsourcing practices, such as
The work of Lacity and Willcocks (1998), later supported by further evidence (Lacity & Willcocks, 2003), offers some interesting findings about the reasons which have justified outsourcing of activities related to the IS; apart from the already mentioned cost saving, especially in IT (which, according to Lacity and Hirschheim (1993) ranges between 10% and 50%), companies give a number of reasons: the desire to attain professional skills, experience and other resources which are not available in internal services (59%), concentrating on the business core (31%), altering the cost structure, by transforming fixed burdens into variable burdens (31%), demonstrating the relevance and contribution of the internal service (30%), and even the eagerness to follow the
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Information Systems / Information Technology Outsourcing in Spain
outsourcing trend for no specific reason (38%). Similar results are presented in Choudhury and Sabherwal (2003).
The Risks of IS/IT Outsourcing IS/IT outsourcing as a management strategy has not only advantages, but also certain disadvantages or possible risks, some of which have been mentioned in the paragraphs above. The first of those risks is related to data security and confidentiality (Collins & Millen, 1995). Another noticeable risk is hidden costs, that is, not specified in the contract or added by the vendor as additional services. Willcocks and Currie (1997) point out that hidden costs were the greatest risk of outsourcing. The same conclusion is drawn by Hendry (1995), who also detected hidden costs, especially in the long term. Other risk factors are the client’s loss of flexibility (Clark, Zmud, & McCray, 1995; Earl, 1996) and of control, particularly in long-term contracts. Khalfan and Gough (2002) also mention the lack of experience in outsourcing and the loss of the ability to innovate. During the last several years, a critical movement against IS/IT outsourcing has emerged. Forrester Consulting (2003) has found evidence that 60% of U.S. big companies show considerable reluctance to support this practice, particularly in the most critical functions, despite the fact that outsourcing is actually practised by most of them. Additionally, certain economic and political sectors do not trust such countries as India, China or Brazil when they consider IS/IT outsourcing.
AN EMPIRICAL STUDY OF IS/IT OUTSOURCING IN SPAIN The Spanish IT outsourcing market has grown steadily over the last years; industry turnover has increased at a 20% annual rate from 2001, and is expected to rise as SMEs and the Public Admin-
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istration undertake outsourcing arrangements. Spain is an attractive location for offshoring, given the growing number of Spanish-speakers in the U.S.A. and the increasing demand of teleservices in Latin America. At the same time, Spanish and Latin American companies are potential clients for American outsourcing services providers. However we know very little about the actual outcomes of offshoring projects; some firm-level studies have been conducted among companies from the U.S. and some European countries (e.g., Germany and France) but our view about the current situation of IT outsourcing in Spain is still incomplete. The research presented in this chapter has been conducted along the same lines of other empirical investigations of IS outsourcing carried out in different countries, for example, Australia (Hurley & Schaumann, 1997; Beaumont & Costa, 2002); Kuwait (Khalfan & Gough, 2002); France and Germany (Barthelemy & Geyer, 2001) and the United States (Collins & Millen, 1995). The attempt is to obtain information about the current situation of IS/IT outsourcing in Spanish firms31 . With this purpose, we have conducted a number of surveys, whose technical details will be described in the following paragraphs. Three different groups of companies took part in this study, which finished in 2002. The first group (OUTSOURCING-E) is composed of 395 Spanish firms from all sectors with an annual turnover of more than $1.45 million, chosen by means of random sampling3 2 . The second group (OUTSOURCING-G) is formed by 91 large Spanish firms; these are major Spanish organizations because of their turnover, or they are one of the first five in their respective sectors. They were selected with random sampling directed by an expert criterion. Finally, we have analyzed a specific sector for which IS outsourcing is particularly relevant: the banking sector. Forty-four banks (one out of every five Spanish firms) have been surveyed, after being selected by means of directed random sampling.
Information Systems / Information Technology Outsourcing in Spain
In all cases, the relevant information has been gathered by means of a questionnaire aimed at organizing and structuring the data so as to allow for their automatic processing. However, we have also held personal interviews with managers and CIOs in order to clarify some responses or to obtain additional comments on topics of special interest. This was the case of some specific outsourcing areas, such as computer security; personal interviews also granted us access to concrete references about contractual arrangements that managers would never express in a questionnaire because of their confidential nature. Meetings also revealed that SMEs’ attitude about outsourcing has substantially changed during the last decade; this evolution is more palpable in inno-
vative high-tech SMEs, new-founded companies, and professionally — managed organizations. Family and individual enterprises companies, as well as SMEs focused to local markets, tend to perceive outsourcing as a costly, complex and unsuitable option. The technical features of the surveys are shown in Tables 2, 3 and 4.
The Firms Surveyed OUTSOURCING-E includes companies from all Spanish regions; Catalonia, Madrid and Valencia were those from which the largest number of responses was obtained. This is not surprising because these are the Spanish regions with the
Table 2. Outsourcing-E Spanish firms
Universe Target population Frame Sample error Confidence level
Spanish firms with an annual turnover of more than $1,45 million Database “España 25.000” +/– 0.05 95.5%
Hypothesis
Z-2 and P-Q-0.5
Sample size
395 firms
Sampling method
Random sampling
Surveying method
Questionnaire sent by post, e-mail, telephone, fax, or personal interview
Table 3. Outsourcing-G Universe
Large Spanish firms
Target population
Spanish firms among the first five in their sector, plus those with the highest turnover
Frame
Expert sampling per target population from the database “España 25.000”
Sample error
+/– 0.1
Confidence level
95.5%
Hypothesis
Z = 2 and P = Q = 0.5
Sample size
91 firms
Sampling method
Random sampling
Surveying method
Questionnaire sent by post, e-mail, telephone, fax, or personal interview
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Table 4. Outsourcing-F Universe
Spanish banks
Target population Frame
Spanish banks registered in the Bank of Spain Spanish banks, savings banks, and credit unions
Sample error
Since the number of organizations is small, one out of every five was taken
Sample size
11 firms
Sampling method
Random sampling
Surveying method
Questionnaire sent by post, e-mail, telephone, fax, or personal interview
Table 5. Distribution of responses across geographical areas (Outsourcing-E and Outsourcing-G) Outsourcing-E Frequency
%
Frequency
%
Centre
135
34.18%
34
59.34%
East
181
45.82%
25
27.47%
North
35
8.86%
4
4.40%
South
44
11.14%
8
8.79%
Total
395
100.00%
91
100.00%
highest degrees of economic activity and concentration of industries. Because the largest Spanish companies are located in Madrid and Catalonia, these two regions represent three quarters of the sample OUTSOURCING-G 3 3 . Concentration of industries is particularly relevant in the case of Madrid, a region where the biggest firms have been traditionally established for geographical and political reasons. The wide range of activities represented in OUTSOURCING-E allows our research to cover almost all economic sectors3 4 ; Table 6 lists the distribution of companies across sectors in OUTSOURCING-E and OUTSOURCING-G. Since the sample includes companies of different sizes, we used data such as turnover, number of workers and funds to classify them in four groups3 5 : micro-, small, medium-sized and big enterprises. As regards OUTSOURCING-E, the average turnover is $21.78 million, and the average number of employees is 110, although it should
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Outsourcing-G
Area
be kept in mind that the sample is extraordinarily wide and diverse. Table 7 shows that the Spanish business sector is primarily composed of small and medium-sized enterprises (SMEs)3 6 and that the group of large firms, despite its economic relevance, is numerically inferior. The sample OUTSOURCING-G is composed exclusively of big-sized companies, which are those with more than 250 workers and a high turnover. We have surveyed a large part of all Spanish big firms; the sample contains 91 companies (see Table 5) although, if the number of employees is solely considered, 12 of them (13.2%) could be classified as medium-sized enterprises. The remaining 86.8% is formed by big corporative, national but mainly international, firms. Finally, the companies that form part of the sample are national and international; as regards OUTSOURCING-E (a representative sample of Spanish businesses), 43% of them are national companies, whereas 35% are international. Additionally, there is a significant number of regional firms.
Information Systems / Information Technology Outsourcing in Spain
Table 6. Distribution of firms across sectors Outsourcing-E
Outsourcing-G
Sector
Frequency
%
Frequency
%
Food
47
11.90%
7
7.69%
Construction
20
5.06%
6
6.59%
Distribution
107
27.09%
13
14.29%
Heavy industry
18
4.56%
7
7.69%
Chemicals
31
7.85%
10
10.99%
Textile industry
10
2.53%
2
2.20%
Services
81
20.51%
23
25.27%
IT services
22
5.57%
8
8.79%
Basic industry
59
14.94%
15
16.48%
Total
395
100.00%
91
100.00%
Table 7. Business size: Outsourcing-E Business type
Frequency
Percentage
Accumulated percentage
Micro-enterprises
24
6.1%
6.1%
Small enterprises
181
45.8%
51.9%
Medium-sized enterprises
154
39.0%
90.9% 100%
Big enterprises
36
9.1%
Total
395
100%
OUTSOURCING-G is predominantly composed of international companies (two-thirds of the total); regional or local businesses are poorly represented, which must be attributed to the size of the enterprises included in this sample. To sum up, it has been shown that the samples analyzed are sufficiently representative of Spain’s economy, since they include all Spanish regions, business sizes, economic sectors and business scopes.
IS/IT OUTSOURCING IN SPANISH FIRMS Prior research on IS/IT outsourcing has repeatedly shown that this is a growing phenomenon. Our own results, which will be detailed in the present section, are consistent with this idea. Our data show that 20% of Spanish firms have outsourced part of the activities, functions or tasks of their IS/IT; this proportion is substantially greater in the sample OUTSOURCING-G, composed of large companies, and also in the banking sector, where outsourcing is practised by 54% of firms. Notice that the results point to the existence of outsourcing decisions, but they do not reflect the scope, financial magnitude or
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Figure 2. Scope of the firms surveyed
Figure 3. Proportion of firms that outsource their IS/IT
importance of these decisions. For this reason, we have carried out a qualitative analysis of IS/ IT outsourcing, by examining which types of activities are outsourced and their relevance for the organization.
Outsourced Activities and Functions Our results regarding the types of outsourced IS/IT activities are similar to those obtained in studies carried out in other countries (Teng, Cheon, & Grover, 1995; Beaumont & Costa, 2002). Thus, the results derived from the general sample (OUTSOURCING-E) show that the most frequent outsourcing operations are software development (19.59%) and maintenance in different modes: software maintenance (15.46%), hardware maintenance (9.28%) and entire maintenance (15.46%). The development and support of networks is also significant (8.25%), although one of the most interesting findings has to do with Internet services: 8.25% of firms outsources part
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or all of the activities involved in the creation and maintenance of Web sites; the average percentage of Spanish companies present in the Internet is slightly higher than 60%, thus the proportion of Spanish firms that have outsourced the management of their corporative sites does not reach 15% of the total. This result contradicts the relevance granted by authors such as Young (2000) to this outsourcing practice, and can be explained by the relatively backward situation of Spanish companies with regards to Internet access, as compared with other European countries or the United States3 7 . The second group of outsourced activities is formed by management IT support services and payroll management and processing, a traditional outsourcing target that is currently practised by 5% of Spanish companies. The outsourcing of accounting and other economic-financial management functions is comparatively less frequent (2%), due in part to the fact that it implies the transfer of confidential
Information Systems / Information Technology Outsourcing in Spain
Figure 4. Types of outsourced activities (Outsourcing-E)
information to the supplier; nevertheless, companies do outsource essentially transactional activities, which do not affect the business core, such as the input of data related to operations in those cases in which the firm does not have a system that allows for direct input into the management information system (2.06%). The third group of outsourced activities involves subcontracting equipments that host corporative databases. These systems have substituted data processing centres (DPCs) in a wide range of firms, part of which have chosen to outsource the management of these infrastructures by means of facilities management (FM) contracts. The outsourcing of the entire system is less frequent, because of the strategic risks this practice implies. Other outsourced activities are user support services (2.06%), which are usually contracted together with telemarketing services and telephone sale. In Spain, the vendors of these services are very often the result of spin-off operations, that is, business units that become independent corporations. Spin-off practices are basically motivated by the existence of cost savings, which result from altering the legal framework applicable to
salaries and working conditions3 8 . It has also been observed that, following spin-off, contracting corporations rotate outsourcing contracts with different suppliers so that the employees’ length of service disappears and the cost of the provision of the service is reduced, something that would be impossible if the service were supplied internally. This is not, therefore, a multi-sourcing practice but rather a selective strategy that attempts to induce competitiveness between different suppliers — although it causes serious disturbances in the market. In 2% of cases, the firms have contracted external suppliers to procure massive printing services for advertising campaigns, leaflet distribution or similar activities which involve the occasional but intensive use of equipments whose internal maintenance would be economically unfeasible; these contracts are of the same type as the Body Shop deal described by Lacity and Hirschheim (1993a), that is, ad hoc contracts intended to meet sporadic needs — although in some cases the contractual relationship with the supplier is kept because the printing needs are recurrent. Finally, 1% of firms (1.4% of large firms) have outsourced all the IT activities, functions and processes by means of FM contracts or massive
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outsourcing contracts.
Outsourcing Strategies in Large Firms IS/IT outsourcing has traditionally been considered a characteristic practice of large companies, although it has been shown that outsourcing is practised by firms of every size in all sectors. However, big businesses do constitute a special case. The results obtained from the sample of large firms (OUTSOURCING-G) are summarized in Figure 5 below, together with the general results of OUTSOURCING-E. Rather unexpectedly, the most frequently outsourced activity is the massive processing of data in DPC, or the latest host-based resources management, which amounts to 20% of large firms – a phenomenon that would have seemed impossible 20 years ago. The proportion is substantially greater than that observed in the general sample (3.09%), which is explained by the different IS architectures of large and small companies: small companies are organized around systems (such as peer to peer networks) that are suitable for basically local activities in which a relatively small
Figure 5. Outsourced activities (OUTSOURCING-G)
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number of people and departments are involved; on the contrary, corporative systems must face massive data processing needs, what justifies specializing the service. The second group of frequently outsourced activities is software development, which is transferred to the market in approximately 20% of cases. Outsourcing adopts two models: purchase of standard software, or the external development of software tailored to the specific needs of the firm3 9 . Our data do not suggest that large companies behave in a peculiar way towards software development outsourcing, since the rate at which they practise this type of outsourcing is similar to the average4 0 . The evolution of IS from the organization’s DPC to client-vendor architectures has caused a growing interest in microcomputers, PC networks, and the use of decision support systems (DSS and GDSS). In terms of physical equipments, organizations seem to be focusing their efforts on microcomputing, an activity that is frequently outsourced in large firms (11%) because of its high cost. This result suggests that organizations are concentrating on information resources management (IRM). On the contrary, SMEs often develop
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this activity internally, because their systems are substantially smaller and simpler both in physical and logistic terms — the physical and logic standardization of PCs is obviously a key factor in facilitating insourcing. Another outsourced activity is user support, more often practised in the sample of big firms (11%) than in the general sample (5.15%); the information centre is usually converted to a business unit or an independent company in an attempt to evaluate its efficiency by comparing the costs of the internal and external provision of the service. Other outsourced activities are network support (9.6%) and the development and maintenance of the corporative site and related services (9.6%), sometimes including e-commerce. The rate of outsourcing of this type of activities is higher in the largest firms, which nevertheless do not often transfer maintenance and advising services. None of the medium-sized and big firms surveyed had outsourced accounting, what establishes a clear difference between these enterprises and SMEs and points to the relevance of the accounting IS for management and decision-making. All the practices described so far are limited,
selective outsourcing decisions, in which the company transfers only certain activities because of strictly economic motivations, that is, cost saving. However, there is a small group of organizations that have signed massive outsourcing contracts involving all IT activities, processes and functions. This group accounts for approximately 1.4% of large firms — a proportion that is clearly higher than that observed in the general sample41 . As regards outsourcing in the banking sector, more than half of the banks surveyed carry out outsourcing operations. As in the general sample, the most frequently outsourced activity is software development (21%), followed by printing (17.2%); not only are documents for the bank’s clients printed, but also documents with information from corporative databases, so as to minimize the consequences of a serious computing error. The functions related to e-banking are also outsourced (13.8%), as well as the maintenance of equipments, software and telematic services (13.8%), in this case by means of ad hoc contracts involving the entire transfer of this function to one or more vendors. Finance companies often outsource or even share the equipments that con-
Figure 6. Outsourced activities in the banking sector (Outsourcing-F)
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stitute the core of transactional and tele-processing systems, so as to reduce management costs. The outsourcing of payroll management and accounting reaches 7%; backup copying is another outsourced activity, which is frequently carried out with geographically distant computers so as to allow for online performance of management systems and transactional applications. Finance corporations keep the internal performance of activities such as data saving, which is carried out within their own tele-processing networks, and other functions that are considered as essential from a managerial and/or competitive point of view, namely, system security and IT advising: protecting the confidentiality of corporative data and of the clients’ transactional data is a basic requirement for the banking business. Additionally, with the advent of e-commerce and ebanking, innovation has become a key competitive factor for the banking sector; as a consequence, these activities have been insourced. To sum up, our data show that an interesting phenomenon has taken place with relation to IS/ IT outsourcing, since this practice was initially presented as a suitable option for small firms which could not face the high costs derived from the everchanging computer equipments and programs. On the contrary, large firms are precisely those which practise outsourcing more frequently.
An Outlook on Offshoring in Spain Outsourcing has come along with increasing worries about the effect of subcontracting over employment, more specifically about possible changes in the regional distribution of labour. Offshoring is the term coined to express the devolution of internal activities, through outsourcing arrangements, into several countries or economic areas, in order to exploit their comparative advantages in terms of cost, skills, and/ or infrastructures. In a wide perspective, cross-border trade in business services should lead to a more efficient
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global division of labour and to improvements in productivity4 2 ; nevertheless offshoring has given rise to increasing concerns about job stability in the industrial countries4 3 , and to reservations among companies because it might entail a drop in the quality of subcontracted services. Social pressures and political resistance might cause a protectionist reaction in developed countries. This geographical redistribution can be interpreted as a natural consequence of the dynamics of the market system — many developed countries are shifting their manufacturing activities to developing economies, such as China, to lower production costs — and an outcome of the flexibility allowed by information and communications technologies (ICT)4 4 . Offshoring usually requires also a certain degree of cultural match; for example, the Philippines have been selected by many American companies for outsourcing financial services (e.g., Procter and Gamble, or Citibank) because a large number of Filipino accountants are trained in U.S. accounting standards. The potential impact of the vanishing of geographical boundaries is particularly evident in the case of the Spanish-speakers community: American companies can take benefit from the availability of skilled Spanish-speakers to offer different teleservices in the Spanish and Latin America markets4 5 ; Spanish-speakers in the U.S. are also a very attractive market niche both for European and American companies, given the sustained rise of their net income. However, Spanish companies primarily rely on IT services providers located in the European Union (EU), that is, domestic IT providers. This is due to the relative newness of IT outsourcing in Spain — out interviews revealed that companies primarily trust in local providers because they offer higher apparent reliance; we have also verified that large and focused outsourcing contracts are usually signed with local subsidiaries of large American and European IT services providers4 6 . These arrangements can be viewed as an atypical form of offshoring where IT services are locally
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sourced by a foreign supplier.
A Case Study Only one of the companies in the sample significantly relies on offshored IT services. This firm is the leading telecommunication services provider in Spain, and it is among the ten major European telecos (in advance, PC); a decade ago, telemarketing services were branched out and turned into a subsidiary company (in advance, SC), in order to lessen personnel costs. SC was the unique provider of telemarketing services for its parent company for several years, but the increasing competition led PC to adopt a free market strategy for outsourced services. SC has implemented several measures to remain competitive; one of the elements of the new strategy was to create two new telemarketing platforms in Morocco (Tanger & Casablanca), and discharge about 20% of the staff in Spain. The company estimated a saving of 50% of total labour costs, and a huge cash flow as a result of the transfer of facilities and buildings in Spain. However, why Morocco? For the last five decades, the Spanish government has been supporting 10 “Spanish Institutions” in Morocco. Apart from acting as promoters of the Spahish culture, these institutions offer several educational services exclusively in Spanish — they are, in fact, high schools. Therefore, we can found many Spanish-speaking people in several cities in Morocco, such as Casablanca or Tanger. Moreover, the government of Morocco offered the company several financial advantages, including tax deductions and public grants. The initiative has not been completely successful due to several reasons. The opposition of trade unions and the Spanish government was hard, because offshoring had a very relevant impact on employment — dismissal of about 4,000 workers in several Spanish cities. However, the “critical failure factor” was the cultural gap between Spanish clients and tele-
operators in Morocco; regardless their ability to speak Spanish, teleoperators were frequently unable to understand some of the issues raised from Spain not only because Spanish clients used some colloquial or unusual expressions, but also because their lifestyle and their environment were radically different. In broad terms, clients and teleoperators did not share a common view of the problems, therefore the whole system failed and the company was compelled to disclose and cancel its offshoring arrangement by 2004. Now, the platforms in Tanger and Casablanca carry out back-office services and offer focused telemarketing activities in Morocco, Tunisia, and other African countries. The company also offers several telemarketing services in Latin America, through a network of subsidiary firms; cultural match has been taken into consideration, and most clients are served from local platforms. This case offers some interesting insights about the rationale of offshoring, and the hindrances of the adoption process. Even if we skip over the (likely) future increase of income and wages in the less-developed countries, social and political resistance to change in industrial countries might hinder the adoption of offshoring. Cultural mismatches are also relevant, because they may erode confidence and lead to reluctance or even client dismissal.
CRITICAL ANALYSIS The leading motivation for IS/IT outsourcing is cost reduction, although there are other secondary motivations such as the ability to innovate, the reduction of technologic risks, business process restructuring (BPR) or the access to professional expertise and competence. A particularly clear case is that of Web sites and services, which give rise to problems that managers consider complex and difficult to understand. The outsourcing of these activities is generally justified by the com-
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plexity of Web technology — especially, when it is compared with traditional management systems — and by professional shortage in the internal IS department. These factors have originated a business niche for firms that specialize in Internet management services (hosting, e-commerce, mobile work, etc.) whose turnover was more than $50,000 million in 20034 7 . However, there seems to be a certain tendency towards using outsourcing as a strategic instrument — rather than a management option aiming at cost saving — in an attempt to maintain or modify the organization’s competitive scope; this evolution is clearly observed in the case of e-commerce and in Internet-based banking services. Some issues especially relevant for large organizations are those related to contingency plans in computing disasters; the crisis of September 11, which intensified hackers’ attacks on corporative systems4 8 and multiplied the number of viruses in the Internet, brought these recurring problems to the foreground. In general, firms perform security-related functions internally — backup, network security, access to resources, etc. — although major banking corporations contract backup copying to external providers in order to benefit from cost savings derived from massive data processing. Our results are notably more modest than those obtained in studies carried out in other geographical areas such as Australia, Canada, Europe or the United States4 9 ; while Hurley and Schaumann (1997) reported the insourcing of 57% of data centre operations in Australia, in Spain this rate increases to 80% of large firms. Similarly, outsourcing of network services is considerably lower in Spain than in Australia (6.9% vs. 50%). The crisis of digital economy and repeated accounting and finance frauds (WorldCom, Enron, …) have brought radical changes in the organizations’ outsourcing strategies and, more importantly, in the assessment of outsourcing projects: organizations demand external provid-
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ers with accredited financial stability, potential longevity, experience and reliability5 0 . Additionally, benchmarking is increasingly being used to compare insourcing with outsourcing and to assess the economic suitableness of external offers, and there is a growing demand for pay-per-use services and adaptable infrastructures, which facilitate adapting the service to the client’s specific needs at any given moment.
CONCLUSION Our results show that 20% of Spanish firms have outsourced part of their IS, and that IS/IT outsourcing is practised by 50% of Spain’s large companies and banks. From the point of view of transaction costs, the motivations of large companies for IS/IT outsourcing are the economic advantages obtained thanks to the external procurement of services and functions which are poorly specific in material and human terms. The main outsourced activities are software development — a function in which the absence of specificities originates an obvious economic advantage — and the maintenance of IS technical resources, both by means of entire transfer contracts and ad hoc contracts involving computer applications, equipments, and network infrastructure. Other frequently outsourced activities are those related to the Internet, an emerging area whose importance increases when the firms decide to implement sites for e-commerce or even when the objective is just to develop a non-transactional corporative site. The tendency towards outsourcing Internetbased resources is particularly interesting because, from the point of view of resources theory, organizations are supposed to be reluctant to transfer any activity with competitive implications. Besides the strategic relevance of the new models of Internet-based businesses and organizations, a topic beyond the scope of our research, it can
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be observed that the transfer has frequently been granted to external companies established ad hoc by the outsourcer; in other words, the vendor is an independent organization but most of its stakes are held by the outsourcer. Thus, this may be considered a special type of insourcing. As regards small and medium-sized enterprises, the outsourcing of Internet services is a consequence of the lack of internal human resources, and of the technologic challenges and the risks underlying this type of activities. The lack of human resources also explains the increasing rate at which the organizations choose external advising services to assist them in issues of computing technology and information resources management. This practice does not seem to depend on business size, but there are obvious differences in the types of advising — basically technological and operational for SMEs, and corporative and strategic for larger firms. A similar practice is that of outsourced user-related services, that is, information centres. In a fourth group, we have classified diverse transactional activities such as payroll management, accounting, data saving, computer security or massive printing; these contracts are motivated by the absence of specificities and/or strategic implications that could invalidate the cost advantages offered by external providers, who in turn benefit from economies of scale. Host-type equipments which hold corporative databases are also often outsourced, but in this case it is difficult to distinguish between outsourcing contracts and other contractual types based on financial renting or leasing. A small proportion of firms have transferred the management of information resources, or they even have outsourced the entire IT, that is, all IT functions, tasks and activities. Our empirical data show that these massive outsourcing projects are developed by large firms; however, our findings do not allow us to conclude that the observed relation is systematic or statistically consistent. IS/IT outsourcing is indeed being practised
by large firms, where DPCs and mainframes are increasingly being outsourced; this strategy, together with software development, suggests that large firms are directing their efforts towards procuring microcomputers. However, we observe again that intranet- and PC-related activities are often outsourced, which points to the fact that organizations are focusing on the management of information resources. This is even more obvious in the banking sector. Some emerging areas are those related to the design and management of Web sites and e-commerce systems, as well as the use of equipments through pay-per-use contracts, what is known as office outsourcing.
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ENDNOTES 1
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The authors wish to thank Mª Isabel Fijo León (University Pablo de Olavide, Sevilla, Spain) for revising the final version of the text in English. In the late 1970s, Electronic Data Systems (EDS) signed contracts with Frito-Lay and General Motors; however, the outsourcing market started growing in the 1980s with the deals Continental Airlines, First City Bank and Enron awarded EDS. The IBM-Kodak deal is particularly relevant because, apart from inaugurating the age of megadeals, it provided the first financial support for outsourcing. Source: Outsourcing Institute. The pressures towards outsourcing can be felt in all areas of activity. Lacity and Hirschheim (1993) observed that the managers who were more reluctant to outsourcing projects had to face conflictive situations when the internal systems could not demonstrate their contribution to businesses. See, for example, Lacity and Hirschheim (1993b); Lacity et al. (1996); Hirschheim and Lacity (2000); Beaumont and Costa (2002). Di Romualdo and Gurbaxani (1998); Greaever (1998); Zerrenner (1999). Collaboration between client and vendor, and the concept of strategic alliance, have also been largely debated (Willcocks and Choi, 1995; Sacristan, 1996; Sabherwal, 2003; Ripin, 1999; Lopes, 1997; Grover et al., 1996; Feeny & Lacity, 2003). Pre-implementation tasks, such as project design, have been identified as critical for success (see Lee & Kim, 1992). This principle established that computer power increases as the square of the cost. Rightsizing is the process of choosing an adequate dimension for IS/IT infrastructure.
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Downsizing expresses the migration of IS from mainframe to minicomputer or PCbased platforms; downsizing is the organizational consequence of our technical ability to develop smaller and more distributable hardware and software infrastructures. One paramount research concern has been the analysis of the outsourcing decision process. See Loh and Venkatraman (1992), Lacity and Hirschheim (1994), Smith et. al. (1998), Yang and Juang (2000), and Lee and Kim (2001). For example, the choice between renting and outsourcing can be stated in terms of cost-volume-benefit analysis, according to the system’s break-even point; for a given period of time, the efficiency of renting often grows according to the use given to the equipment, although the weight of fixed costs — licences, infrastructure, salaries — may incline the decision towards outsourcing; however, this view tends to configure the IS as a cost centre rather than a profit centre, and relegates business requirements and opportunities to the background. One specific case is value-added outsourcing, described by Millar (1994). See Hindle et al. (2003). One special situation is that of outsourcing within conglomerates and financial groups. See Lee and Kim (1997). These “exceptional” requirements were relatively common during the first years of computer processing, but they have gradually disappeared with the improvement of the cost/benefit rate of equipments; for this reason, the market offer has concentrated in specialized business niches, such as the management of disasters, commercial mailing, computer-assisted design (CAD), supercomputing, or telematic services in technologic parks. The cost of renting is inversely proportional to the duration of the contract: A factor that
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should be considered is the cost of software licenses, which can be practically impossible to bear if the needs for information management are exceptional; depending on the contractual conditions, outsourcing can offer unbeatable economic advantages. One of the most common current practices is the physical and logical maintenance of personal computers and their peripheral components (peer to peer), an expensive but little compromising practice in terms of competitiveness; some other emerging trends are the management of disasters and the provision of network services, such as the development and maintenance of Web sites. In some cases, the facilities are kept under the company’s control or, at least, they are purchased in accordance to the organization’s directions. General issues on IS/IT outsourcing have been extensively described. See for example Grover et al. (1994), Mylott (1995), Graham and Meuse (1997), Looff (1997), Antonucci et. al. (1998), Grover (1998), or Lacity and Willcocks (2001). See Grover et. al. (1998). See Lee (2001) and Willcocks et. al. (2003). Dibbern et al. (2002) summarize the arguments for outsourcing projects in seven theoretical trends: 1) transaction cost theory, the dominant reference theory; 2) resourcebased theory; 3) agency theory; 4) power theory; 5) resource-dependence theory; 6) institutional theory; and 7) innovation diffusion theory. The dominant argument is that, even when transaction costs are generated, the external provision of a service can be more efficient than the internal service and can contribute to improve the company’s financial structure. The links between transaction costs and outsourcing have been
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extensively studied (see Aubert et al., 1996; Ngwenyama and Bryson, 1999). The method is similar to that used in the SESAME technique for evaluating IS technical projects (Lincoln, 1988; Lincoln & Shorrock, 1990). According to the Outsourcing Institute (1998), the reasons for outsourcing are, firstly, the desire to reduce and control operative costs; secondly, the focus on the business core, the access to professional skills and competences, and the liberation of financial resources; finally, the third group of reasons is related to corporative re-structuring: accelerating BPR benefits, disengaging from a complex, difficult to manage function, or sharing risks. The argument lies on the relationship between cost efficiency and competitiveness, which is a common principle in the literature on strategy: the company must produce goods or supply services at the lowest possible cost because, in this way, it favours the businesses’ economic performance and it creates a solid financial basis to increase competitiveness and ensure survival in the long term. Lacity and Willcocks (1998, p. 369) found that 80% of the companies that had outsourced all or part of their functions had done so in the hope of attaining costs economies. Ang and Straub (1998) found that cost saving is one of the main reasons for outsourcing in the U.S.A. banking, in spite of the fact that transaction costs are generated. Friedberg and Yarberry (1991) point out that internal data processing centres often present inefficiencies that represent between 10% and 30% of their costs. Williamson (1990) defines specificity as the extent to which the market cannot create a replica of the asset with the ability to generate value added.
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See Harris et al. (1998). A key factor for outsourcing success is the external vendor’s reliability (Lee & Kim, 1999). The theories of Ronald Coase (1937) are very relevant for outsourcing; he might be termed a prophet of what is happening with business management in the early 21s t century. This argument is supported by the conclusions of the General Accounting Office about outsourcing in the banking sector (GAO, 1992). Some previous works have rendered a basic, but incomplete, vision of outsourcing in Spain. See Claver (1999), Claver et al. (2000), Sacristan (1996, 1998). Some activities, such as health, are missing in our work because they are dominantly developed by public institutions in Spain; even though, health care organizations (and workers’ safety implications) have been analyzed in detail in outsourcing literature (see, for example, Chen & Lin, 1998; Chin, 1997; Helppie, 1998; Mayhew & Quinlan, 1999; Yates, 1997). Barcelona represents 19.8% of the sample. Except public government, although we have surveyed some private companies whose capital is mostly public. The companies have been classified according to the following criteria: the group “micro-enterprises” is composed of businesses with less than 10 employees; “small enterprises”, those with 10-50 workers; “medium-sized enterprises”, those with 50-250 workers; and “big enterprises”, more than 250 employees. Turnover and funds have been used to assign certain companies to a specific group when the number of workers did not allow for direct classification. The concept of SME has been criticized because it often encompasses micro-enterprises; for this reason, we have deliberately distinguished micro-enterprises from
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SMEs. 80% of firms with 10 or more employees have access to the Internet, however, only half of them is present in the Internet with at least a Web page (Source: Instituto Nacional de Estadística de España; www.ine.es). See Slaughter and Ang (1996). Notice that the interest here does not lie on the degree to which software is standardized, but on whether or not software development is outsourced. Nevertheless, it is true that SMEs tend to use standard software for a number of reasons: limited financial resources, lack of internal professionals, limited processing volume, etc. More specifically, it is 40% higher. These improvements have been rated in a 20%. According to OECD, 75% of the Spanish workers are worried about the future of their companies; 30% of the workers of outperforming and profitable Spanish companies feel uncertainties about the stability of their jobs (OECD, 2001, p. 26).These percentages are quite different in the U.S.A. (57% and 42%). India has emerged as a relevant software manufacturer because of the high mathematical skills of graduated professionals but, also, because remote activities can be effectively controlled and coordinated by means of ICT. According to IMF data, the exports of “business services” grew a 43% in India during the second half of the ’90s; 20% or the Fortune 500 companies outsource software development activities to India. AOL Time Warner has created a call-center in Mexico to support its Spanish-speaking clients; the company claims this decision has yielded savings of 25-40%.. Some of the companies included in our sample are IT providers. Very few of them are currently offering offshoring services
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outside the European Union (in the U.S.A. and Latin America) because, as it has been said, they are local subsidiaries of international providers. Source: Forrester Research (www.forrester. com). A detailed statistic report of these attacks can be found in the Computer Crime and Security Survey of the FBI and the Computer
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Security Institute (www.gocsi.gov). See Willcocks et. al. (1995), for a comparison of Europe and U.S.A. companies, in terms of outsourcing strategies. Thus, outsourcing contracts include guarantees and rights previous and subsequent to possible bankruptcy; they limit subcontracting without previous notice, and the client can keep control of hardware, software and
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 372-402, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 4.25
E-Government, Service Transformation, and Procurement Reform in Canada John Langford University of Victoria, Canada Jeffrey Roy Dalhousie University, Canada
INTRODUCTION1 New organizational arrangements are required to underpin emerging public sector service transformation initiatives with a substantial electronic government (e-government) dimension. These arrangements are both internal to government, involving new collaborative relationships among service delivery agencies and reform of procurement processes, and external, involving the formation and management of strategic relationships between private sector information technology (IT) vendors and public service providers. This article explores the relational context of service transformation by first examining some current initiatives in Canada—at both provincial and federal levels. These case studies reveal the nexus between digital technologies, internal organizational change, and public–private sector
interactions. They also reveal the emergence of new collaborative mechanisms between both sectors, especially in the initial phase of relationships where the IT-enabled service transformation is being mutually defined. This heightened level of collaboration also represents a significant departure from traditional government procurement models—where inputs are defined by public authorities and then secured in the marketplace from qualified vendors. E-government—and service transformation initiatives in particular—are consequently driving a rethinking of the role and purpose of procurement mechanisms in an increasingly digital and interdependent environment. Many political and administrative quandaries remain, however, as governments struggle to achieve a balance between traditional public interest principles such as probity, transparency,
E-Government, Service Transformation, and Procurement Reform in Canada
and accountability, and the rising importance of strategic collaboration. Building on the case studies and a review of current efforts at procurement reform, this article offers and assessment of how this interrelationship between service transformation and public–private collaboration is likely to shape future e-government-based service transformation efforts in Canada.
SERVICE TRANSFORMATION AND COLLABORATION As more citizens have flocked to the Internet for online services in areas such as banking and retail shopping, governments have begun to identify parallel opportunities for the application of online services in the public sector. Initially, the impetus for utilizing online channels to deliver information and services was couched in terms of financial savings: many business models were developed by government officials and consultants demonstrating the savings accorded to online methods of service delivery versus more traditional channels such as face-to-face facilities or telephone call centres. Most of these initial models proved to be wildly optimistic due to forecasts predicated on massive transaction cost savings from Internet communication (relative to paper and telephone) or strong, short-term growth in demand for online services, relative to other channels (Roy, 2003). Nonetheless, new organizational and technological models for delivering services both online and via more traditional channels are taking hold—and beginning to generate encouraging results. One of the most widely recognized examples of a unique service transformation involving the internal integration of government services and the establishment of a public-private partnership is that of Service New Brunswick (SNB). SNB is a crown corporation of the provincial government that has a dual role: to provide the people and business owners of New Brunswick with the
greatest ease and access to government services, and to maintain authoritative public information through its three registries (real and personal property and corporate affairs). SNB has been aggressively making use of its autonomy as a crown corporation (in comparison to a traditional line department) to forge collaborative relationships with industry. Central to its citizen-centric mission is the formation of “gBiz” in partnership with CGI (a Canadian technology solutions provider), a comprehensive and integrated framework for transactional service delivery. The company and the government shared in the financing of the development of this system, much as it is now sharing the revenues from licensing arrangements between CGI and other governments in Canada and elsewhere.2 SNB now conducts more than 40% of its transactional business online and it is expanding into a variety of other collaborative projects with companies designed to jointly develop solutions for New Brunswick that can be marketed and sold elsewhere. One notable model in the United States is New York City’s NYCServ Epayment Project that is indicative of the parameters of a service-delivery architecture predicated on more citizen-centric services using a range of integrated channels: The NYCServ application streamlines and integrates three key business processes for the city of New York—processing payments, conducting adjudication hearings, and tracking towed vehicles. It has four separate revenue channels: walk-in payment centers, Internet, interactive voice response (IVR) and kiosks. The system processes 1.9 million receipts for a total of over $6 billion in 2003. … It was developed by an integrated team of approximately 20 per cent Finance Department staff and 80 per cent IBM staff.3 These examples are exciting and provocative, but in general, such fundamental electronically based service transformations have been problem-
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atic. Although one can envision the potential for some form of efficiency gains through automated work practises, it is hardly a straightforward calculation—as any financial savings incurred over time must be weighed against the upfront investment costs of new technological systems and the corresponding training, organizational development, and inevitable technological upgrading requirements. Within the Canadian context there are few examples of genuine long-term service transformation collaborations. One such example is a current collaborative undertaking between BC Hydro and Accenture Consulting that illustrates the evolution of outsourcing into new relational forms of governance tied to joint management and results-based accountability including costs and compensation. This unique, 10-year partnership arrangement is predicated on the formation of a new organizational entity, a limited liability partnership jointly accountable to both parties. BC Hydro is contractually guaranteed to realize $250 million in cost savings over the 10-year period (by virtue of spending $1.45 billion for services that would have cost $1.74 billion under existing internal systems), as well as agreed-upon measures of performance improvement in customer service (as determined by customer service mechanisms, comparative benchmarking, and a service-level metric system formulated and utilized in concertedly by both partners). In order to generate these sorts of results, the formation of the new entity (with limited and specified functional responsibilities4) enables Accenture to develop new and more innovative business processes aimed to the desired outcomes. Notably, all of the previous employees from the government agency have been offered private sector employment on equivalent salary and benefit terms, and labour representation and collective agreement terms remain unchanged. Despite the relative novelty of this level of complexity and relational activity, the stakes in such initiatives are enormous since if partnerships
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fail, so too does e-government. This message was underscored some time ago: if IT projects cannot be managed well, the infrastructure for broader organizational renewal and performance improvements can only suffer (OECD, 2001). Moreover, the track record of managing IT has not been encouraging and as discussed above, there is no quick solution for how governments should organize themselves to partner, nor is there agreement as to the optimal scope of partnering activity. To address such concern and risk, two important trends are becoming apparent in service transformation initiatives. First, affected government agencies are spending far more time up front working out the shape of the long-term service transformation. Second, government and industry are engaging in much higher levels of collaboration earlier on in the partnership development process, not only defining objectives but also preparing the groundwork to achieve them. These shifts are notable departures from traditional public sector management processes that have typically internalized preparation within the government body looking to procure outside services of one sort or another—defining the need in isolation from the very organizations with whom the work will ultimately be undertaken (Dutil, Langford, & Roy, 2005). Two case studies below explore this shift in more detail.
TWO CASE STUDIES The first case study comes from the Ministry of Sustainable Resources in the Provincial Government of British Columbia which was faced with the challenge of electronically integrating the collection and delivery of land, resource, and geographic information of 19 separate agencies (in order to make use of this information on cross-ministry issues and provide more accurate, integrated informational resources to external stakeholders in industry and communities).
E-Government, Service Transformation, and Procurement Reform in Canada
An integrated land and resource registry (ILRR) for British Columbia (BC) will be a spatially enabled, efficient, and accessible electronic register of all legal interests in crown and private land and resources, which serves the business needs of a diversity of users and clients. The major objectives of the project are to first, design and implement an integrated system of registries (including a business architecture redesign), and second, outline an implementation plan and initiate the building of a new system meeting government’s expectations for a single registry that is accessible, efficient, and affordable, thereby securing public interests in effective land and resources management. There was no simple IT solution because:
the new lead consultant for ILRR Project. The Business Requirements document (completed by Sierra Systems on February 23, 2004, and available under Program Documentation) includes:
•
Implementation of the proposed system is proceeding on time and on budget as a result of the foundational elements jointly arrived at via two separate, planning stages—each involving a different private sector partner. This experience underscores the degree to which the business model can be developed in a collaborative fashion and it is possible for the work to be compartmentalized into different phases with different partners thereby avoiding supplier dependency and taking advantage of a wider range of private sector skills and competencies. Ministry officials worked with Fujitsu Consulting in order to develop clarity about the organizational needs of the project before commencing with an eventual procurement tendering process that resulted in a long-term collaborative arrangement with another technology company, Sierra Systems. Representatives from both companies and the government reported that it was only through openness, transparency, and constant communication between the sectors that the right model was executed to guide the approach now being put in place. The government of Canada is proceeding in a similar manner in preparing for an eventual service transformation initiative on a government-
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Determining ownership and rights for a parcel of crown land requires converting transactions into registry-like information. The complexity of transactions leading to rights increases daily as government changes processes in response to business needs. Such technology would be very complex, ever changing, and costly.
In 2002, a phase one contract to complete the business strategy and transitional plan for Integrated Registry Project was awarded to Fujitsu Consulting. The business model and transition strategy were assembled using information gathered from internal and external stakeholders on current business practices and future requirements. It documented the best practices observed elsewhere, the conceptual solution and the reason for adopting this solution in preference to other alternatives. In 2003, a request for proposals (RFP) was issued seeking to establish a partnership with a lead project consultant. The RFP was built on the recommendations put forth in the Business Strategy and Transition Plan done by Fujitsu. Sierra Systems won the competition, becoming
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ILRR goals, objectives, and principles; Expected use cases; business process that result in creation, maintenance, update, or removal of registered interest in land and resources; Existing business process and where they interface with ILRR, as well as required changes to business processes; Legislation, regulation, and policy requirements; and Business transition plan.
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wide scale. Known as Modernizing Services for Canadians (MSC), this project is a 3-year business transformation initiative (2002-2004) that was undertaken in order to “renew HRDC5 policies, programs, services, and service delivery by focusing on what citizens need in a way that supports citizen’s full participation in the workplace and community.” By building a new citizen-centred foundation for HRDC policy, programs, and service, MSC is changing the focus of HRDC from the business of conducting transactions to a new emphasis on building relationships with citizens. It is transforming the current complex delivery network into a single integrated service delivery network that provides seamless, multichannel service to Canadians. Government managers responsible for this initiative are taking a very deliberative approach to defining exactly what a citizen-centred transformation should look like in the context of their core business lines and their relationships with key stakeholders inside and outside of government. In order to do so, the lead department responsible for this initiative has engaged the expertise of four leading IT consulting companies (IBM, CapGemini, CGI, and Accenture) to assist in defining the vision, clarifying the objectives, and establishing strategies for proceeding with change. One result of this type of preparation has been a detailed business plan that—among other things—sets out a comprehensive approach to planning, testing and deploying core IM and IT foundational elements to support the business transformation. The unique aspects of the collaborative relationships underpinning MSC centre primarily on the level of upfront preparation and investment focused on both conceptualizing the opportunity to use ICT to transform service delivery and creating a detailed business plan to move down this path: typically governments define their needs internally within the confines of their own planning processes and then proceed to procure external services and solutions. The
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four companies were selected in 2003 through a competitive RFP process that awarded each firm with a 2-year agreement for deliverables defined within the MSC strategic framework. Many of these companies had also participated in the initial, Year One (2002) MSC visioning and preliminary research phase. Conceptualizing the opportunity involved building on the government of Canada’s previous and ongoing experiences with related initiatives— notably GOL. At the same time, however, engaging the affected service agencies and private sector companies became central to preparation for the next steps. Those leading MSC within the federal government sought to: •
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Learn from best practises around the world (via leading companies with global reach extending across diverse public sector clienteles) and build support across government through education and preparation; Actively engage the private sector companies in the management and governance of MSC initiatives; and Leverage the early experiences of pilot initiatives within a single department (HRSDC) in terms of integrated, multichannel service delivery.
These three directions form the nucleus of the collaborative effort within government and between government and its industry partners. This collaborative work contributed directly to the preparation of the MSC vision, the major output of MSC Year One. Global research undertaken with the private sector produced key findings, lessons learned, and proven approaches. This knowledge was then applied to the foundational work of Year One in developing citizen-centric service strategies, privacy, client segmentation, integrated channel management, enterprise-wide-enabling solutions, and organizational change. The collaborations within the federal government and between the government and its industry
E-Government, Service Transformation, and Procurement Reform in Canada
partners have been largely focused on mapping out the requirements of MSC as it evolves into the single largest service transformation process in the Canadian public sector. A key to the success of this effort has been to undertake a highly deliberative and analytical approach to developing both a vision of service delivery and a comprehensive business case for investments and change in moving toward that vision. A comprehensive set of elements for the business plan have been fostered in concert with industry experts, including IT/IM renewal; human resource management; change management; risk management; and a performance evaluation framework. One of the key challenges of both designing and pursuing the MSC vision is the significant cultural transformation required to work across traditionally separate units within the affected departments, as well as across the various departments themselves. This type of change requires leadership and champions at the political level—as well as within the public service. There have been three major impacts of these collaborative relationships: •
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First, early results from pilot initiatives have demonstrated the potential of integrated, multichannel service delivery strategies to improve services improvements and save money; Second, significant organizational capacities have been developed (across IM/IT, HR, change management, and performance measurement) within the federal government that are necessary elements of the foundation for pursuing the wider service transformation agenda, both within the lead MSC departments and on a governmentwide basis; and Third, in moving forward to leverage these opportunities and capacities, MSC has been instrumental in laying the groundwork for a more ambitious government-wide effort at service transformation.
The nexus of the first and second points underscores the significant dimensions of undertaking an enterprise-wide approach to service transformation for the government of Canada. Traditionally accountability structures that reinforce individual ministerial accountability and thus separate organizational structures (or silos) have shaped for some time the decision-making culture of government. Shifting to a citizen-centric approach on a government-wide scale is thus a major effort, and one that also underscores the importance of not viewing the service transformation agenda as a technology project (i.e., electronic service delivery within a multichannel environment), but rather as an encompassing agenda for organizational adaptation and performance improvement (Oliver & Sanders, 2004). With regards to the third point, the potential emergence of a new Service Canada model in 2005 would mark the transition to realizing the goals of convergence and better government-wide coordination capacities to realize citizen-centric service delivery. As a result, the government has begun to augment its analysis and understanding of citizen demand for online service delivery and the evolution of multichannel usage that will drive the next phases of service transformation (Roy, forthcoming).
PROCUREMENT REFORM QUANDARIES In response to this widening scope of collaboration, new procurement and relational capacities are being sought by governments. Comparative research would suggest that no single option is without difficulty (Dunleavy, Margetts, Bastow, & Tinkler, 2003; Gronlund, 2002; UNDPEPA, 2003). Accordingly, a partnership-based approach to procurement has been slower to emerge in Canada, with the government of Canada in particular preferring a more cautious approach to such issues (Charih & Robert, 2004). The results
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are significant levels of concern and frustration caused by ongoing difficulties that have plagued large IT projects (Borins, 2004; Langford, 2002; Weil & Broadbent, 1998). The necessity of significantly reforming procurement systems in the Canadian public sector is now widely agreed upon as a key issue—even as agreement on specific changes remains elusive (Allen & Roy, 2002; Jordan, 1999; Kieley et al., 2002; Langford & Harrison, 2001; Mornan, 1998).6 The governments of Canada and the province of Ontario have both responded in late 2004 with separate but similar reviews of IT management and procurement in order to probe both root causes and potential solutions. The presentation of the technology sector’s leading industry association (Information Technology Association of Canada [ITAC]) to the Ontario review panel offers insight on the current situation in terms of both challenges and potential avenues for reform: •
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Many business transformation projects have not met expectations in terms of schedule, cost and requirements; IT enabled transformation projects are seen as high risk; The reputation of the IT industry and its customers as a whole is impacted by these troubled projects; and This has occurred in the private sector as well as government (ITAC, 2004).
In their presentation, ITAC presents a study of IT project failures for which the top three causes are: a lack of clear link between the project and the organization’s key strategic priorities including measures of success, a lack of clear senior management and ministerial ownership and leadership, and a lack of effective engagement with stakeholders. In terms of making headway in such an environment, ITAC suggests a range of improvements that while varying in scope and purpose tend to converge around the creation of more flexibility and trust between industry
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and government. This will be achieved through procurement process reform and a shift to a more inclusive and participative governance approach for each project in order to adapt to changing circumstances while ensuring an ongoing and mutual commitment to agreed-upon objectives, constraints, and degrees of freedom. ITAC points to the province of British Columbia, which has been among the most aggressive subnational jurisdictions in encouraging publicprivate partnerships, as an example of the type of procurement to partnering reframing that is required: The Province of British Columbia has developed a Joint Solutions Procurement Process for the evaluation and selection of vendors in large IT projects. Its basic principle is to engage the private sector bidders in a joint discovery of the risks and benefits of the initiative to assess the capacity, commitment and capability of the private sector bidders. The procurement process follows defined gates where information is disclosed and discussed and the field of potential vendors is finally reduced to two. The final stage engages the finalists in competing bids based on a range of criteria relevant to the business outcomes sought by the government. (ITAC, 2004, p. 13) This type of procurement approach—emphasizing results and outcomes and innovative solutions for achieving them, is consistent with a lessening emphasis on static, upfront measures of cost and price and a greater reliance on more performance-driven and collaborative-based project management. Although rather novel, the BC government is committed to using such an approach in the future formation of IT partnerships. Similarly, it is this type of approach that will likely be required within the contours of the next phases of the federal MSC initiative—and the emergence of a new Service Canada model to more aggressively pursue citizen-centric service delivery on a government-wide scale. In moving toward models allowing for greater relational flexibility and creativity, the challenge
E-Government, Service Transformation, and Procurement Reform in Canada
is to rebalance procurement’s control emphasis with the necessity of collaboration. The following distinction is reflective of the tone of the dialogue that is emerging in many jurisdictions and it points to the importance of creating meaningful and tangible linkages that recognize and structure interdependence in an appropriate fashion: •
Cooperation: Informal relationships that exist without any commonly defined mission, structure or planning; and Collaboration – A more durable and pervasive relationship involving shared structures and joint authority, a full commitment to a common mission and pooled resources, risks and rewards (Mattessich, Murray-Close, & Monsey, 2001).
Incremental reforms to traditional procurement mechanisms have often sought to facilitate some cooperation between industry and government—but collaboration has been extremely limited, particularly in terms of upfront planning and solutions designing. In contrast, due to growing complexities of new technologies and organizational transformations, the importance of strategic relations is increasingly recognized as an imperative for effective public sector performance: indeed, such a philosophy has been driving BC’s reforms (Andison, 2004). A current review of procurement at the federal level underlines the point as well, contrasting the public sector’s emphasis on a competitive and adversarial culture with suppliers to the approach used by successful companies and even some governments elsewhere: “successful private sector companies and other jurisdictions avoid an adversarial approach by adopting more strategic relationships with their suppliers” (PWGSC, 2004, p. 24). Prodded by international experiences and growing provincial reforms, such as those being pursued in BC, federal recognition of such issues is encouraging. Two key tests of more holistic public sector reform in Canada will be (1) whether political leadership will emerge to oversee a more
strategic orientation with industry partners than has been the case to present; and (2) if such political support is forthcoming, whether the procurement function will be significantly reorganized and bolstered in strategic importance to reflect a new mix of competition and control on the one hand, and strategic collaboration and relational management on the other. These issues are central to the public sector as a whole since next stages of e-government service transformation initiatives are envisioned to be multijurisdictional, raising the stakes considerably for such matters.
CONCLUSION A key question that will determine the effectiveness of the Canadian public sector in achieving the promise of e-government is the extent to which such encouraging, collaborative practises within government and between the public and private sectors, as illustrated in the cases above, represent a sufficiently powerful force to alter the broader institutional environment within which such partnering occurs. While the level of discussion and consultation ongoing presently would suggest a widening appetite for reform, both the structural and cultural barriers to more collaborative governance are deeply engrained and extremely difficult to alter (Allen, Paquet, Juillet, & Roy, 2005b). Such considerations become more consequential when you realize that the service transformation and e-government agendas of most governments result in a widening scope of partnering since governments are under pressure to achieve government-wide capacities for information sharing and service integration. Unlike previous eras of reform that encouraged individual departments and agencies to tailor their own policies and management systems to their own specific mandates and needs, the necessity of more horizontal governance essentially creates the need for two simultaneous and interrelated levels of
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collaboration—one within governments and the other between the public and private sectors.
REFERENCES Accenture. (2004). E-government leadership: Engaging the customer. Retrieved from www. accenture.com/. Allen, B. A., Juillet, L., Paquet, G., & Roy, J. (2005a). E-government and private-public partnerships: Relational challenges and strategic directions. In M. Khosrow-Pour (Ed.), Practicing e-government: A global perspective (pp. 364-382). Hershey, PA: Idea Group Publishing. Allen, B. A., Paquet, G., Juillet, L., & Roy, J. (2005b). E-government as collaborative governance: Structural, accountability and cultural reform. In M. Khosrow-Pour (Ed.), Practicing e-government: A global perspective (pp. 1-15). Hershey, PA: Idea Group. Allen, B. A., & Roy, J. (2002). E-governance and the partnership imperative. Optimum, 32(2), 7-12. Andison, S. (2004). IT Procurement Chapter—EBC Strategic Plan. Retrieved January 20, 2005, from http://www.cio.gov.bc.ca/ebc/discussion/ SRmodel_ver7_ Final.pdf Borins, S. (2004, June 16). Smart practises in managing public sector IT: Evidence from Ontario. Paper presented at the Conference on Smart Practises Towards Innovation in Public Management, IPSA Research Committee on the Structure and organization of Government, Vancouver, Canada. Charih, M., & Robert, J. (2004). Government online in the federal government of Canada: The organizational issues. International Review of Administrative Sciences, 70(2), 373-384.
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Dunleavy, P., Margetts, H., Bastow, S., & Tinkler, J. (2003, April 15–17). E-government and policy innovation in seven liberal democracies. Paper presented at the Political Studies Association Annual Conference, Leicester University, Leicester, UK. Dutil, P., Langford, J., & Roy, J. (2005). E-government and service transformation relationships between government and industry: Developing best practises. Toronto: Institute of Public Administration in Canada. Fountain, J. E. (2001). Building the virtual state: Information technology and institutional change. Washington, DC: Brookings Institution Press. Gronlund, A. (Ed.). (2002). E-government— Design, applications and management. Hershey, PA: Idea Group Publishing. ICCS. (2003). Integrated service delivery: A critical analysis. Retrieved from www.iccs-isac. org/. International Technology Association of Canada (ITAC). (2004). Task force on large IT projects. Presentation to the Government of Ontario Sponsored Review Panel. Ottawa: Information Technology Association of Canada. Jelich, H., Poupart, R., Austin, R., & Roy, J. (2000). Partnership-based governance: Lessons from IT management. Optimum, 30(1), 49-54. Jordan, M. (1999). Ontario’s Integrated Justice Project: Profile of a complex partnership agreement. Canadian Public Administration/Administration Publique du Canada, 42(1), 26-41. Kieley, B., Lane, G., Paquet, G., & Roy, J. (2002). e-Government in Canada: Services online or public service renewal? In A. Gronlund (Ed.), Electronic government: Design, applications and management (pp. 340-355), Hershey, PA: Idea Group Publishing
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Langford, J. (2002). Managing public-private partnerships in Canada. In M. Edwards & J. Langford (Eds.), New players, partners and processes: A public sector without boundaries? (pp. 72-87). Canberra: NIG/CPSS. Langford, J., & Harrison, Y. (2001). Partnering for e-government: Challenges for public administrators. Canadian Public Administration, 44(4), 393-416. st
Lawther,W.(2002).Contracting for the 21 century: A partnership model. Washington, DC: PricewaterhouseCoopers Endowment for the Business of Government. Mattessich, P.W., Murray-Close, M., & Monsey, B.R. (2001). Collaboration: What makes it work (2nd ed.). Amherst, MA: H. Wilder Foundation. Mornan, R.G. (1998). Benefits-driven procurement: A model for public and private sector collaboration. Optimum, 28(1), 38-43. Oliver, L., & Sanders, L. (Eds.). (2004). E-government reconsidered: Renewal of governance for the knowledge age. Regina, Canada: Canadian Plains Research Center. Organisation for Economic Co-operation and Development (OECD). (2001). The hidden threat to e-government, avoiding large government IT failures. OECD Public Management Policy Brief. Paris: PUMA Policy Brief No. 8. Pavlichev, A., & Garson, G.D. (Eds.). (2004). Digital government: Principles and best practises. Hershey, PA: Idea Group Publishing. PWGSC. (2004). Parliamentary Secretary Task Force: Government wide review of procurement— Concepts for discussion. Ottawa: Government of Canada. Roy, J. (2003). The relational dynamics of egovernance: A case study of the city of Ottawa. Public Performance and Management Review, 26(2), 1-13.
Roy, J. (forthcoming). E-service delivery and new governance capacities: “Service Canada” as a case study. International Journal of Services Technology and Management. United Nations Division for Public Economics and Public Administration (UNDPEPA). (2003). Benchmarking e-government: A global perspective. New York: United Nations. Weil, P., & Broadbent, M. (1998). Leveraging the new infrastructure—How market leaders capitalize on information technology. Cambridge, MA: Harvard Business School Press.
KEY TERMS Business Process Outsourcing (BPO): BPO is the outsourcing of back-office and front-office functions typically performed by white-collar and clerical workers. Examples include accounting, human resources, and medical coding and transcription. Contract: A contract is an obligation, such as an accepted offer, between competent parties upon a legal consideration, to do or abstain from doing some act. Co-Sourcing: Co-sourcing is where a business function is performed by both internal staff and external resources, such as consultants or outsourcing vendors, with specialized knowledge of the business function. E-Government: The public sector usage and deployment of information and communication technologies across both policy-making and service-delivery processes. Governance: Formal or informal mechanisms for coordination either within or between organizations. Insourcing: Insourcing is the transfer of an outsourced function to an internal department of a company, to be managed entirely by employees.
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E-Government, Service Transformation, and Procurement Reform in Canada
The term has also been used to describe foreign companies locating facilities in the United States and employing U.S. workers.
3
Joint Solutions Procurement: For procurements of large-scale, long-term services contracts or where some form of transformation to the business is taking place, a more collaborative process may be the preferred approach. Outsourcing: Outsourcing is the management and/or day-to-day execution of a business function by a third-party service provider. Outsourcing can be provided on or off premises, in the same country or in a separate country. Procurement: The process of obtaining materiel and services which includes the determination of requirements and acquisition from a supply system or by purchase from the trade.
4
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Public-Private Partnership (P3 or PPP): A public–private partnership is an arrangement for service delivery, whereby government and private enterprise pool their skills and resources to meet a particular objective. Request for Proposal (RFP): An RFP is a document that requests prospective service providers to propose terms and conditions for a solution (or solutions) addressing a set of requirements.
ENDNOTES 1
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The authors are grateful for the helpful comments of the blind reviewers. Examples include the municipality of Kingston, Ontario, and Suffolk Country in the United Kingdom. Interestingly, the new business model formed by Accenture and BC Hydro is also envisioned to be marketable to other utility organizations (although no financial revenue sharing between these
6
parties has been stipulated at the outset of this example). This New York City initiative, though large on a municipal scale, is hardly unique: it was recognized as a leading example of such schemes, indicative of a trend of such efforts emerging in cities and states across the country. For a complete profile of all initiatives, see “Effectiveness Through EPayments: Current Learning and Suggested Best Practises,” available online at the National Electronic Commerce Coordinating Council (www.ec3.org). They include customer services, IT services, network computer services, human resources, financial services, purchasing, and building and office services. HRDC stands for Human Resource Development Canada, until 2004 the largest federal department in terms of program and service delivery responsibilities (including areas such as skills training, employment insurance, pensions, child assistance programs, student loans, and others). In 2004, the new government split this entity into two, distinct departments (Human Resource and Skills Development Canada on the one hand, and Social Development Canada on the other). This organizational change has had no direct impacts on the governance of MSC, a project that remains jointly managed by both of these units. The evolution of private sector language is revealing in this regard. IBM views itself increasingly as a consulting company and a provider of solutions (disengaging itself from many of its previous production functions), EDS speaks of Co-sourcing, and Accenture consulting points to Business Process Outsourcing—a mix of outsourcing and jointly managed organizational mechanisms.
This work was previously published in Encyclopedia of Digital Government, edited by A. Anttiroiko; M. Malkia, pp. 595-602, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.26
Development and Use of the World Wide Web by U.S. Local Governments Carmine Scavo East Carolina University, USA
INTRODUCTION San Carlos, California (www.cityofsancarlos.org) claims to have developed one of the earliest local government Web sites in the world, posted on May 10, 1994 (San Carlos, 2006). From this early effort, United States (U.S.) cities moved rapidly onto the Web. Norris and Moon (2002), for example, report that some 4.4% of U.S. cities in a 2000 survey by the International City Management Association (ICMA) reported developing Web sites before 1995; 27.1% reported developing their Web sites in the 1995-’96 time period, and 68.5% reported their Web site developed after 1997. San Carlos’ original Web site comprised one page; its current Web site now contains some 8,000 pages and uses some of the Web’s most modern technology available, such as really simple syndication (RSS) and Flash Paper.1 This article uses the example of San Carlos’ Web site, along with two surveys of local government Web sites in the U.S., to illustrate the
experience that U.S. local governments have had in developing and using Web sites in the pursuit of bettering governance. The article examines four local government Web applications—bulletin boards, promotions, service delivery and citizen input—and assesses their use by U.S. local governments. The article then addresses current issues of outsourcing Web site design and maintenance, and future issues of privacy, security, the digital divide and the possible effects of increased local government Web sites on U.S. civil society.
BACKGROUND Some idea of the expanse and number of city Web sites can be obtained by consulting one of several search engines to locate local government Web sites. One such engine, containing links to some 10,235 Web sites, is State and Local Government (www.statelocalgov.net). This site
Development and Use of the World Wide Web by U.S. Local Governments
provides not only links to local government Web sites in the U.S. but also to national organizations that represent state and local governments (e.g., U.S. Council of Mayors) and a functional area listing of service Web sites for state and local government (economic development, tourism, etc.). Another such engine is Official City Sites (www.officialcitysites.org), which not only lists local governments (towns, cities, counties, etc.) in the U.S. but also in Australia, Canada, France, Germany, Japan, The Netherlands, New Zealand and the United Kingdom. The Official City Sites Web page is particularly attractive, with clickable stylized maps of the individual countries leading to individual maps or lists of sub-units within that country (states, provinces, etc.) and then to the local Web sites within those sub-units.2
LOCAL GOVERNMENT WEB APPLICATIONS In previous work (Scavo & Shi, 1999; Scavo, 2003), we identified four types of Web applications that local governments tended to use: bulletin board applications; promotion application; service delivery applications; and citizen input applications. Bulletin board applications involve the use of a Web site to provide information about the services, personnel, programs and so forth provided by a government agency. Promotion applications have to do with the provision of information about the area—population characteristics; climate data; tourist attractions; and so forth. Service delivery applications are much more interactive than the previous two; involving the use of the Web to do such things as apply for licenses, pay taxes and make appointments. Last, citizen input applications allow citizens to communicate directly with government officials and personnel and also with each other (Scavo, 2005). The four applications demonstrate an increasing level of Web application sophistication—the base is bulletin board usage. Posting basic infor-
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mation on government was the original function of local government Web sites—at first, some of this information was simply posted; later, much of the information became clickable, meaning that clicking on the name of the mayor, for example, would open a dialog box that would allow the user to send an e-mail to or chat with the mayor. Promotion applications are only somewhat more sophisticated than bulletin board applications. With these latter applications, information is posted, as with bulletin boards, but the information has a somewhat different focus and audience. Service delivery and feedback applications are more sophisticated than the previous two, with feedback being even more specialized than service delivery. Both of these applications require more technically sophisticated Web sites which, in turn, require more highly trained Web site designers and maintenance people, faster servers and, most likely, a greater financial investment by the local government in Web site design and operation. Scavo and Shi (1999) found empirical support for this hierarchy of applications and concluded that it seemed likely that local governments would introduce themselves to the Web by developing bulletin boards and promotion applications and then move into service delivery and feedback applications. Scavo (2003) found that while U.S. local governments had generally improved their Web sites across the four utilizations from 1998 through 2002, there was a great deal of random movement within this increase. The mean score for all local governments on the overall Web feature scale increased dramatically between 1998 and 2002, as did the scores (some much less dramatically) for the sub-scales for the four utilizations, indicating improvement. However, the across-time correlations for the four sub-scales were low, varying between 0.00 and +.25, indicating a great deal of random variation among the Web sites. And, five local governments that had Web sites (one county and four municipalities) in 1998 did not have them in 2002, indicating some retrenchment. The four applications are of varying interest
Development and Use of the World Wide Web by U.S. Local Governments
to constituencies inside the city or those outside the city; promotion utilizations being the most interesting to external constituents (who may be considering relocating to the given area and want to investigate weather, schools, transportation facilities, etc.), and service delivery applications are of the greatest interest to internal constituents, who have the largest stake in the services local government provides (see Table 1). San Carlos’ Web site demonstrates good use of the four utilizations described above. Sections of the city’s main Web page address the bulletin board utilization (headlines, agendas and minutes, city newsletters, municipal code, news releases, job announcements, etc.), promotion (business guide, restaurant guide, schools, transportation, etc.), service delivery (garbage and recycling, guide to utility services, service requests and compliments, parcel and zoning information, permits by fax, etc.) and citizen input (forms on the Web, report traffic complaints, comment on development proposals, etc.). Users can click on any of the items and are directed to relevant Web pages for further information or contact. In 2004, Brown University’s Center for Public Policy surveyed federal, state and local government Web sites around the U.S. to examine the features that the Web sites provided. Some 1,873 Web sites in the 70 largest cities3 in the U.S. were assessed for the types of features they offered to the user. The Brown study found that the most common types of services provided by these city Web sites were the renewal of library books and the payment of utility bills and parking tickets. Barriers to the increased use of Web sites to provide services were shown to be the inability
to use credit cards and digital signatures on Web financial transactions. Only 14% of the Web sites allowed credit card use, while 6% allowed the use of digital signatures (West, 2004). These numbers, however, were a marked increase from those in the 2003 version of this survey.
CURRENT ISSUES IN LOCAL GOVERNMENT WEB SITE DESIGN AND MANAGEMENT The evolution in Web site design by local government across the four applications described above was a phenomenon of the 1990s that may not have survived the transition to the new century. In the early 1990s, Web site design was often something that local government IT professionals learned on the job; few if any academic programs existed that taught such skills. Even as late as 1998, some city Web sites were designed as university class projects. By the early 2000s, much of this tentative introduction to the Web had been abandoned and even cities’ initial forays into Web site use were quite sophisticated. Part of the reason for this is the changing nature of local government Web site administration and management. In 1998, national or regional Web-hosting companies did not administer a single one of the Web sites surveyed; by 2002, those same-type companies administered some 8% of the Web sites. As city Web sites became more sophisticated (and more expensive to design and maintain) and it became increasingly more difficult to recruit and retain IT professionals, an increased number of cities began contracting out the design and maintenance of their
Table 1. City Web utilizations by type of constituency Type of Utilization Constituency
Bulletin Board
Internal
Primarily
External
Promotion
Service Delivery
Citizen Input
Almost Wholly
Almost Wholly
Primarily
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Web sites to national or regional companies who specialize in such activities. A 2001 ICMA survey found that 80% of U.S. city managers queried reported outsourcing Web site hosting, while 64% reported outsourcing Web site design and/or Web site operations and management (Norris, Fletcher & Holden, 2001). Web hosting companies, such as ProjectA (www.projecta.com), NIC (www.nicusa. com), the Alpha Group (http://alphais.com) and egovt.net—now part of cboss (www.cboss government.com), have all aggressively moved into local government Web management and design. Scavo (2003) found, however, that outsourcing of Web design and maintenance was much more popular for small cities in the U.S. than it was for larger ones. As of 2002, local governments that maintained their own Web sites showed a mean population somewhat more than 300,000; those that used local organizations showed a mean population of slightly less than 150,000; and those that contracted out Web design and maintenance showed a mean population of just more than 40,000. Early criticisms of outsourcing of Web site design and management stressed the need to retain the expertise in Web-related matters that might be lost if the services passed out of the hands of local government into those of contractors. In partial response to this, professional associations like ICMA have developed low-cost or free Web design software (e.g., GovOffice) that can be easily adapted to a variety of city Web design uses (www.govoffice.com). Additionally, various organizations that support local governments in the U.S. have sought to reduce the costs of building internal Web expertise by publishing online manuals and offering other free or low-cost resources on Web site design and management. Some of these relevant organizations and their Web sites are The Center for Technology in Government (www.ctg.albany.edu), Government Technology (www.govtech.net) and Public Technology Inc. (http://pti.nw.dc.us).
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FUTURE ISSUES IN LOCAL GOVERNMENT WEB SITE DESIGN AND MANAGEMENT In recent years, one of the major issues surrounding Web usage has been the so-called digital divide—the difference in Internet and Web usage between relatively advantaged and disadvantaged groups in the population. While early differences in Internet and Web access usage between men and women, minorities and the majority, wealthy and poor, and even urban and rural dwellers have either narrowed greatly or largely disappeared, newer gaps persist. Several of the more pernicious problems that U.S. local government Web sites have yet to address are meeting the needs of users who are disabled, those who speak languages other than English and those with lowered literacy. The Brown study, for example, found that the cities they surveyed were not particularly successful in addressing these needs. Only some 21% of the Web sites surveyed passed the “Bobby” test (http://bobby.watchfire.com)4, a widely used test of the accessibility of Web sites to the disabled, while only 17% of the Web sites provided some accommodation for non-English speakers.5 And the mean grade level at which the Web sites were aimed was approximately 11.1, with some 71% of the Web sites aimed at the 12th-grade level at a time when the typical American is reading at the 8th-grade level (West, 2004). For all of these, however, there was a large degree of inter-city variation. Cities with the most accessible sites for the disabled were Cincinnati (95% of sites meeting the Bobby test) and San Diego (94%); those with the most accessible sites for non-English speakers were Houston (93%) and Kansas City (92%); while those with the most accessible sites for those with lowered literacy rates were Salt Lake City (mean grade level of 8.5) and Grand Rapids, Michigan (8.6). Security and privacy are also issues that U.S. local government Web sites have shown varying degrees of success in addressing. For
Development and Use of the World Wide Web by U.S. Local Governments
users to develop similar levels of trust in using the advanced features of service provision and feedback in local government Web sites as they have in the analogous features of business Web sites, local governments need to provide similar levels of security. Many users who would not give a second thought to ordering books online from Amazon.com hesitate when it comes to paying their local taxes online. Perhaps some of the reason for this has to do with the earlier evolution of e-business to e-government, but some of it may have to do with the lowered level of trust in U.S. government in general as opposed to business (Holzer, Meltiski, Rho, & Schwester, 2004). It is still odd, however, that users would, for example, input their credit card information into an e-business Web site with far more trust than they would input their voter information into an e-government Web site, when it would be far more troublesome to the user for the credit card information to be misused than it would be for the voter information to be misused. Web site security has two different meanings— the first, discussed above, is the confidentiality of the information provided by the user to the Web site. The second, however, is the potential dangers in the information actually posted on the Web site. In the wake of the September 11, 2001 (9/11) terrorist attacks in the U.S., this second aspect of Web site security became a much greater issue in the U.S. than it had before. One immediate consequence of these attacks was a reevaluation by many local governments about the openness of their Web sites, especially the provision of large amounts of information to potential terrorists. Earlier efforts—commonly known as community right-to-know laws—required U.S. local governments to publicly list potentially harmful chemicals (these lists moved from paper listings to Web-based listings over time). These requirements were relaxed since, in some places, such information was thought to be too useful to potential terrorists. For many years, government Web sites were touted as ways to inexpensively
increase the amount of information the public could access; in response to 9/11, even such openness advocates as Steve Aftergood, the director of the Federation of American Scientists’ Project on Government Secrecy, rethought the organization’s stand on how much information should be made available to the public. In late 2001, Aftergood said in an interview, “I have had to come to terms with the fact that government secrecy is not the worst thing in the world … There are worse things” (Toner, 2001, p. B4). The managers of U.S. local government Web sites have also become much more cognizant of the sensitivities of user privacy. As more Web sites are being used to gather information on users, many U.S. cities have responded with elaborate privacy statements addressing the use of their Web sites. Several are indicative—Austin, Texas, for example, contains a 650-word policy statement that describes the types of information the site gathers on users (time of day of contact, day of week of contact, URL of site consulted before the city Web site, etc.), how that information is used (it will not be sold for commercial purposes but may be surrendered to law enforcement agencies requesting the information), the nature of the site’s security routines, and that the site uses cookies. Austin’s nearby neighbor, San Antonio, Texas, states in its privacy policy that it does not gather any personal information about users, except in the most general fashion—number of hits, for example. Other U.S. city sites take positions between these two, for example, certifying that they do not use cookies but that Web sites linked to the city Web site may indeed use cookies. Thus, there does not appear to be one standard for cities in terms of the types of information the sites gather about users, but there does appear to be an evolving standard that the user should be informed about what types of information is being gathered, how that information will be used and so on. One additional future issue needs to be addressed—that of the type of local culture that increased use of Web-provided services may be
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creating. As more local government services are moved online, physical interactions between citizens and employees become less frequent. A result of this may be a lowered sense of empathy by citizens with local government employees. This tendency brings with it a larger question—can an Internet-based community replace a physical one? Will future citizens, whose predominant interactions with local government are on the Web, understand and appreciate physical problems and issues occurring in the communities in which they live? While there has been much speculation about the effect of Web-based interactions on civil society (Cain, 2001; Levine, 2002), there has been little empirical research on this issue; thus, this is a subject crying out for future research.
CONCLUSION This article has examined the development and use of Web sites by U.S. local governments. The article demonstrates that local governments in the U.S. have been and remain very active in the development and use of Web sites to deliver services, promote local government activities, communicate with citizens and so forth. However, while there is a great deal of activity, there could be more—local government use of Web sites has not yet attained the level that U.S. business, for example, makes of the Internet. Beyond the question of resource availability, a good part of the reason for this lowered level of development in government Web sites in the U.S. has to do with low levels of trust in U.S. government in general. Internet users who trust e-business to maintain the confidentiality of electronic financial information might not trust local e-government to do the same with other forms of electronic information. But the causality may run both ways—U.S. local governments that inspire trust from their citizens may also have an easier
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time implementing advanced Web functionalities that those citizens will use, while local governments that inspire lower levels of trust would have a more difficult time. Local government Web usage does not arise nor does it function in a vacuum; it is part of local government culture. Where that culture features mutual trust, local government Web sites can develop into very sophisticated instruments of e-government. When the culture features mistrust, that development will be stilted.
REFERENCES Cain, B. (2001). The Internet in the (dis)service of democracy? Loyola of Los Angeles Law Review, 34, 1005-1021. Holzer, M., Melitski, J., Rho, S., & Schwester, R. (2004). Restoring trust in government: The potential of digital citizen participation. Washington, DC: IBM Center for the Business of Government. Levine, P. (2002). The Internet and civil society. The International Media and Democracy Project. Retrieved June 28, 2005, from www.imdp.org/ artman/publish/article_29.shtml Moon, M. (2002). The evolution of e-government among municipalities: Rhetoric or reality? Public Administration Review, 62(4), 424-443. Norris, D., Fletcher, P., & Holden, S. (2001). Is your local government plugged in? Highlights of the 2000 electronic government survey. Washington, DC: International City Management Association. Norris, D., & Moon, M. (2002). Electronic government at the American grassroots—2002. Retrieved October 25, 2004, from www.digitalgovernment.org/dgrc/dgo2003/cdrom/PAPERS/ citsgovt/norris.pdf
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San Carlos. (2006). City of San Carlos: The city of good living. Retrieved May 5, 2006, from www. cityofsancarlos.org/is/citywebsite.asp/ Scavo, C. (2003). World wide Web site design and use in public management. In G. David Garson (Ed.), Public information technology: Policy and management issues (pp. 299-310). Hershey, PA: Idea Group Publishing. Scavo, C. (2005). Citizen participation and direct democracy through computer networking: Possibilities and experience. In G. David Garson (Ed.), The handbook of public information systems (2nd ed., pp. 255-280). New York: Marcel Dekker. Scavo, C., & Shi, Y. (1999). World wide Web site design and use in public management. In G. David Garson (Ed.), Information technology and computer applications in public administration: Issues and trends (pp. 246-266). Hershey, PA: Idea Group Publishing. Toner, R. (2001, October 27). Reconsidering security, U.S. clamps down on agency Web sites. New York Times, B4. West, D. (2004). Urban e-government: 2004. Retrieved December 3, 2004, from www.insidepolitics.org/egovt01city.html
KEY TERMS Blog: A Web log; basically, a diary posted on the Web available for users to access. Blogs can provide first-hand observations of events, reflections on current events and so forth. Bobby Test: An online test of a Web site’s accessibility to the disabled. The test reports the site’s conformance with either the World Wide Web Consortium’s (W3C) Web Content Accessibility Guidelines 1.0 or the U.S. Americans with Disabilities Act Section 508 Guidelines.
Branding: A marketing concept in which all pages on a Web site have a consistent, unique visual appearance, thus associating all of them with the agency or institution that sponsors the Web site. Cookies: Short text files generated by a Web server and automatically stored in the user’s computer for future access. Cookies store information about how the user has used the Web site in the past so that future use can be more customized. They can also store other personal information about the user; this information is transmitted to a relevant Web site when the user accesses that site. Digital Divide: Differential Internet and Web access and usage by different groups—originally men and women or minorities and the majority; now rural and urban, non-native speakers and native speakers; disabled and non-disabled; and so forth. Flash Paper: A program developed by Macromedia that allows documents to be formatted in a way that they can be easily transmitted to users over the Web. Really Simple Syndication (RSS): A way of retrieving information on the Web where the user subscribes to a Web site or blog and information is delivered automatically to the user’s e-mail address in conformance with the information supplied by the user in his or her subscription.
ENDNOTES 1
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A history of the evolution of San Carlos’ Web site can be found at http://web.archive. org/web/*/http://www.ci.san-carlos.ca.us/. Official City Sites has recently changed its Web site since it has come under the management of bigdaddydata.com. The new version of the Web site does not function
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3
4
in the same way as the old one, and the information stated in this paragraph may not be able to be retrieved. The Web sites represented executive offices, legislative offices and major service delivery agencies, such as health, human services, police, fire, taxation, and so forth. Oddly, the San Carlos Web site also does not pass the Bobby test. The site showed
5
two Priority One Accessibility errors and six Priority One User Checks. A variety of Priority Two and Three errors also were reported for the Web site. These accommodations ranged from providing text translations into commonly used second languages to routing a user to one of several Web translation services.
This work was previously published in Encyclopedia of Digital Government, edited by A. Anttiroiko and M. Malkia, pp. 296300, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 4.27
A Government Insurer Enters the Brave New World Delyth Samuel University of Melbourne, Australia Danny Samson University of Melbourne, Australia
INTRODUCTION Governments provide a wide range of services, and the digital economy provides both threats and opportunities in this sector. The Transport Accident Commission (TAC) is a compulsory, government owned and operated insurance scheme for third-party, no-fault liability insurance for transport accident victims, operated in Victoria, Australia. E-business has now been widely used in all sectors from small business (Loane, McNaughton, & Bell, 2004) to emerging economies (Li & Chang, 2004), and in very different industry sectors (Cagno, Di Giulio, & Trucco, 2004; Golden, Hughes, & Gallagher, 2003). Major steps forward and applications have occurred in retailing (Leonard & Cronan, 2003; Mackay, Altmann, & McMichael, 2003; Starr, 2003). Applications need to be highly customized as the business-to-consumer (B2C) and business-
to-business (B2B) environments are very different, and requirements of industries such as retailing and mining, and indeed government, differ substantially (Carter, 2003; He & Lung, 2002; Rotondaro, 2002). Government provides a particularly different environment for e-business applications because government services are often delivered in monopoly circumstances, with no real profit motive behind them. At the height of the technology boom in October 1999, Tony Marxsen joined the TAC as head of IT to develop a new IT outsourcing contract for the organization as the current 5-year contract was due to end in July 2000. He quickly realized that the TAC IT systems were out of date, lacked IT process integration, and were constraining improvement in business processes, and that no significant investments had been made for some time. Renewing or redesigning the outsourcing contract, the basis for which he had been employed, would only be a short-term solution.
The problem was that the cost of new infrastructure would be high, and return on technology investment would mainly be realized from redesigned business processes enabled by the new technology. Tony wanted to propose a business transformation, with process changes as well as significant investment in IT infrastructure. Together, these would take the TAC from 1970s technology into the 21s t century. The problem was that their (investments in such transformation) payoffs are not easily and quickly achieved. Their value does not come from installing the technology; it comes from changing both operating and management processes—perhaps operating and managing cultures too. (Ross & Beath, 2002, p. 53) Tony knew he would have to win the support of the board and senior management, but he could not immediately give them a concrete business case for the investment. He also knew that any infrastructure investment had to be linked with a major process-improvement initiative from the start to avoid the double investment of building new applications to support old processes, and then undertaking major modifications or even replacement when the need for improvement became obvious to the board and management team. He compared investing in IT infrastructure to rewiring and replumbing your house:
Tony knew that the first hurdle he would have to overcome would be getting the board to agree to give him the opportunity to put together a team to develop a business case for the board’s further consideration.
BACKGROUND The economic and social costs associated with road accidents have made the issue of road safety a major concern and cost for the community. In 1986, the Victorian Parliament passed the Transport Accident Act 1986, establishing the TAC from January 1, 1987. The purpose of the act was to establish a compensation scheme “in respect of persons who are injured or die as a result of transport accidents,” as well as promoting road safety in Victoria and improving Victoria’s trauma system (Marxsen, personal communication, September 4, 2003). Operating as a commercial insurer, the TAC is funded by payments made by Victorian motorists when they register their vehicles each year, and by premiums charged to managers of tramways and railways, as well as from investment income generated on reserves. As such, the TAC operates as a state-owned enterprise of the Victorian government.
CONCEPTUAL FRAMEWORK as far as visitors are concerned, there’s no visible difference, everything’s behind the walls, but as the owner you get the benefits of things like cheaper electricity and water bills because of efficiencies in the new redesigned systems. The problem is convincing people that they will get these results in the future, but that they need to hand over the money now, when there’s no hard evidence for the benefits they’ll get, just a bunch of assumptions and no guarantees. It’s a big ask for any Board. (Marxsen, personal communication, September 4, 2003)
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Timmers (1998) specified a number of e-business models, and Rappa (2003) more recently defined nine categories for e-business models: advertising, affiliate, brokerage, community, infomediary, merchant, manufacturer, subscription, and utility. TAC is clearly a manufacturer of insurance policies and claims processing services, many of which are quite complex. Joyce and Winch (2005) provided a comprehensive conceptual framework posing that the firm’s business strategy, emergent and realized, should combine with
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the firm’s dynamic capabilities to form a business model within which the business processes and the enabling technologies should be chosen and implemented. This framework has valuable insights, which TAC learned to some extent the hard way, for it began its e-journey looking closely at the technological opportunities and then realized that it needed to step back and consider its business processes (and their reengineering) first. Then it realized that at an even higher level, future organizational strategy needed to be well formulated in order to drive the business model, and only then can process and technology choices be sensibly made in an existing organization that is mature in its life cycle and in an established industry. While technological opportunities may be a major driver in a private-sector Greenfield or start-up company or industry, in a governmentowned services organization, which primarily exists to implement an act of parliament (which is very detailed in its prescriptions of what and how it must act), the board of the TAC and the eTAC project team realized that e-business choices must be governed and constrained by a primarily top-down approach.
TAC Business Processes and Information Systems The TAC processes around 18,000 new compensation claims per year covering transport accidents directly caused by the driving of a car, motorcycle, bus, train, or tram. The organization pays benefits to people injured in an accident as a driver, passenger, pedestrian, motorcyclist, or cyclist. The accountability and administrative issues surrounding claims management means that the TAC sends around 1,200 letters and 350 faxes per day, and issues around 800 checks and electronic funds transfers (EFTs) per day. On top of this, it is estimated that the organization receives around 4,000 inbound correspondence items and 550 pages of faxed items per day.
Administrative costs are around $64 million per annum, whilst claims payments made are in the order of $500 million per annum.
A Changed IT Environment Whilst overall the 5-year TAC contract with DMR outsourcing had been successful, with a number of financial savings, project phases delivered on time and on budget, and successful Y2K (year 2000) work amongst other things, a number of changes in the marketplace had taken place during the life of the contract. The changed environment meant that major savings could probably be achieved if the current contract was broken into smaller parcels going forward. However, in order to write effective tender documents for the various services that could be unbundled and outsourced, various organizational systems and processes needed to be reviewed.
Developing the New TAC IT Strategy A review in late 1999, in conjunction with the board and with input from the Boston Consulting Group and Deloitte, confirmed that significant changes to the organization’s information-technology systems were needed to move forward. It was proposed that a new IT strategy had to be designed that would deliver the following important organizational requirements: • • • • • •
Systems and infrastructure to deliver quality information for effective liability control Systems to support process improvements aimed at efficiency and service delivery Best-practice security of all information Active management of technology at risk Purchase of IT services by competitive tender Cost-effective investment
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In addition, the services purchased should enable the TAC to accomplish the following:
•
•
•
• •
•
Maintain control of the transaction at all times At all times have at least one suitable supply option available Maximize price pressure both in the purchase process and through the life of the contract Build in risk protection (alternatively, buy insurance)
A number of changes to the business would be required, in particular, moving from and to as presented in Example 1.
The Business Case The essential elements of the original business case for the TAC’s technology strategy had remained constant since 1999, when Tony had initially presented his proposals to the board. The benefits of the new e-business strategy proposed would include improvements to the following: • • • •
Access: To keep customers informed Transparency: To show clearly the basis of decisions Timeliness: To enable fast decisions and payments Efficiency: To require less paper, less time, and less errors, and enable outplaced work
Relationship Management: To enable the influencing of provider markets and the management of long-term claimants Brand Management: To influence community views
The first business case analysis for the technology upgrade was presented to the board in February 2000, estimating a cost of $20 million for the program proposed, leading to anticipated savings in the range of $10 million per year. Some benefits were expected to be realized in year 2 of the program (i.e., 2001/2002), but overall, the payback was estimated to be seen in 4 years, using the assumption that the mainframe would be retained and that avoided costs would be included in the benefits. On the basis of the case presented, the board in principle approved the proposed program of work, which included investment in basic infrastructure activities that were expected to quickly realize financial and other benefits for the business. The board also endorsed management’s proposal to move from a fully bundled IT-services contract to multiple purchase contracts for different services based on the premise that breaking up the outsourcing contract would enable the capture of cost and service benefits from what had become a highly competitive market for the supply of IT services. Management projected that this new approach alone would yield net annual savings of around $3 million when compared to the previous contract.
Example 1. − − − − − − −
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From An enclave business operation Paper files File based claim management Boundary security Applications centered IT strategy IT for transactions and analysis IT used to automate work
− − − − − − −
To A networked business operation Electronic files Process based claim management Information security Environment centered IT strategy IT for collaboration and learning IT used to enable change and improvement
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Getting Started
•
In early 2000, the major technology upgrade started, with three highly interlinked and interdependent streams of activity in the project:
•
1.
2.
3.
Replacement of the previous purchase agreement for the supply of IT services (for which the current agreement was coming to an end) Replacement of obsolete mainframe systems and reduction of the TAC’s reliance on paper documents Selection of high-priority business-improvement projects to address key TAC goals of liability control, client satisfaction, and operational efficiency
While efficiency gains through process improvement were expected to return the greatest benefits in the long run, the major costs would be incurred in technology replacement in the short term, although neither type of work could feasibly proceed in the absence of the other.
Unbundling the Current Contract In order to break up the current bundle of services, IT services were segmented by technical skills and management processes as it was considered that this was the best approach for efficient and effective service delivery. The services ranged from commodity type (distributed and application platforms) to potentially competitive (application development) and noncommodity types (application support and security).
•
The Y2K program cost close to $2 million, and simple code-table changes typically cost $10,000. The system required the support of a new claim form in 1999, costing around $400,000 to implement. Most of the costs being incurred were to interface the new system to the mainframe. Even relatively minor changes to the TAC’s core payment system are expensive. For example, the move by the Department of Human Services (DHS) to a new injury coding system (ICD 10) is expected to result in $250,000 in programming costs for the TAC system to align.
Early Initiatives Complete mainframe exit became the only viable strategy, representing the major capital cost of the e-commerce strategy, estimated at around $25 million. A number of quick-win opportunities were identified and implemented during the early stages of the project. These initiatives were mainly internal or business to business, and were designed to introduce staff to the idea of change in a nonthreatening way. Projects implemented included establishing Lotus Notes team rooms for the posting of meeting agendas (whilst people printed copies off for themselves, they no longer had to be filed subsequently), developing electronic leave forms, replacing the generation of checks with EFT, and outsourcing the printing of remittance advice and putting around 3 million pages of operational management reports onto Lotus Notes attached as PDF (Portable Document Format) files.
The Future of the Mainframe Care Online The 700 programs with 2.5 million lines of handcrafted code on the mainframe with no data-archiving facility meant that the existing mainframe system had both high development and operating costs. Examples are as follows:
A significant early project was the introduction of Care Online, which involved the reengineering of the administration processes associated with
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managing the TAC’s relationships with attendantcare service providers such that the majority of the administration work associated with this group is now transacted electronically.
•
•
A security expert group to manage the required upgrade of security controls and practice Detailed project-management controls on all significant IT development projects
Management and Control Communicating Change For the first 9 months of implementation, Project e-ch@nge operated relatively separately from the business. The executive team was briefed weekly on issues and developments, and the board received a number of presentations and reports. Then, from early 2001, the work program was integrated into the broader TAC organizational operations, and a more traditional control framework was established, which included the following: • •
•
•
An executive steering committee that met fortnightly Independent funding-control processes, and benefit-monitoring and -reporting arrangements Reference groups comprising a range of employees and managers for the major process-improvement projects A technology architecture expert group to manage technology risk
Figure 1. TAC key business-process groups
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One of the most time-consuming aspects of the Project e-ch@nge implementation has been the communication activities associated with project ownership and development, both internally and externally. Internally, management has to address board membership changes during the development and life of the project; it was faced with implementing a reeducation program to bring the new board up to speed with the very significant investment being undertaken. Externally, the variety of different service providers and their differing market concentration levels and modes of operation (especially private vs. public) have meant that solutions have had to be tailored for each service-provider group and, as such, negotiated with each provider group. The highest level of security of the systems developed has been critical in achieving buy-in, especially
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Table 1. TAC core process issues Core Process Payment and benefit processing Contact and communication management Impairment determination
Litigation case preparation Return to work HR management
Claims management for liability control and client outcomes Knowledge and information management
Provider market and clinical influence
Issues − Time consuming and costly to change the business rules − Lack of system flexibility results in a high proportion of “held” payments requiring manual intervention − No tracking of what communication is coming in and out − Ineffective process for determining who should respond to communications − Inconsistent approaches to communication responses − Client is disempowered − Complex assessment process − Most of the process steps are external to TAC − Subject to scrutiny and litigation as the impairment score is the “gateway” to common law − VWA has same interests − Process has high document generation and management content − Process is highly influenced by external event/triggers − Lots of process steps, few systems − ‘Reactive’ triggers to the process − Limited integration between performance management and business performance − Training & development focused around induction on mainframe systems – expensive − “Noise” in the process − Service culture and outcome focus − Data integrity is poor − Data structure adds to assembly & analysis costs − Tools & skills limit access to data − Very little unstructured knowledge is captured − No data archiving − TAC data gathering is time consuming − Limited flexibility in “views” of TAC data − No connection to claims management knowledge (data)
where shared transaction data and client personal information is at stake.
the new IT strategy were identified, and strategies were developed to manage those.
Risk Management
The TAC Business Processes
The TAC deliberately chose not to use leadingedge technology or techniques, except perhaps for the use of secure e-mail using digital signatures. The lack of an integrated repository had been identified early on as a key cause of failure for other companies attempting to implement e-commerce strategies, so an integrated document-management and customer relationship management (CRM) system as part of the backoffice systems was therefore seen as essential to support the TAC’s IT strategy implementation. Several risks to the successful implementation of
The TAC has broadly characterized its systems and processes into interrelated key businessprocess groups. The grouping in Figure 1 was done as part of a review of existing and future IT priorities. Considerable work was involved in defining the groups and the processes involved.
Business-Improvement Projects The replacement of obsolete technology provided the opportunity to build new systems around im-
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proved business processes rather than automating existing processes. An analysis of each core process uncovered a number of issues, as summarized in Table 1.
•
Benefits of Process Improvement Experience from early projects (such as care online, e-admin) backed by extensive analysis showed that significant potential benefits would be available if the TAC applied a systematic approach to the improvement of its core business processes. These benefits included improvements against all TAC business objectives, including estimated operational efficiency savings sufficient in themselves to pay for the total cost of the combined technology replacement and process-improvement program over a period of some years. For example, instead of the traditional filebased claims-management system, the TAC now has the chance to look at, say, surgery processes in such a way as to enable an analysis of how the organization manages surgery risk, benchmarks against surgery best practice and costs, and provides the input and feedback needed to improve processes. The best-practice process information developed will also be used as an input to managing costs more effectively for individual claim files. To decide which order the processes should be addressed in, the business processes had to be assessed to identify which ones could be made more effective for the best returns according to the size of the opportunity identified, the potential administration and claims savings, the potential gains in customer satisfaction, and estimates of implementation costs and associated risks. Prioritizing Business-Process Improvement In late 2000, the TAC’s key business processes were put forward for review by the executive team. For each opportunity, three sets of information were required to define relative priority.
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•
•
The Context: The size of the opportunity. • The administration cost per annum • The benefits and payments per annum • The liabilities and client segments affected • The number of TAC personnel involved in the process • The issues with the current process The Value Assessment: In terms of the administration and claims savings and any gains in client satisfaction. • The opportunities available • Desirable attributes and vision of a new approach The Cost-Risk Estimate: The cost, delivery time, return risk, and the cost-time risk. • The prerequisites that would need to be in place to deliver this • The key project components that would have to be undertaken
All the processes were examined using the same approach, and this enabled management to identify the two key processes that were selected to get the ball rolling. 1. 2.
Payment and benefit processing Contact and communications management
A key consideration in the selection of these two key business processes was that most of the other seven key processes, including high-priority ones such as liability control and legal case management, could not proceed without the infrastructure that these two would deliver, especially e-file (the main thrust of reducing the organization’s reliance on paper documents, which is described in the section on contact and communication management) and improved payment systems.
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Payment and Benefit Processing The existing payment- and benefit-processing processes were time consuming and costly, with people employed to manually check that invoices for treatment received and recorded on the mainframe system tallied with approved treatment plans or information held on paper file. Each year, about 800,000 transactions are manually checked. To manage mismatches between individual claim profiles and the way the system operated meant that the business rules needed to be changed, which was very costly. To move forward, management saw significant administration efficiency gains could be made if the rework associated with payments on hold could be eliminated whilst retaining control over claims payments. The Vision for Payment and Benefits The vision for the new process was agreed as redesigning processes and information capture to do the following: • • • • •
Pay the right amount for the right things the first time Provide prompt feedback to clients and providers Separate processing from decision making Capture and validate data at the source Use people only where true judgment is needed
This would be likely to impact claimants regarding the following aspects: • • • • •
Initial eligibility Income benefits and RTW programs Treatment and support services for clients Assessments and referrals to suppliers Lump-sum payments and settlements
The TAC needed processes that reflected the market concentration of the service providers,
the rules for each type of provider or benefit, and the volume of transactions. From a systems perspective, the business rules needed to be separated from the paying engine. Current payment processes vary depending on supplier or provider type. The most complex group to work with is hospitals because of their funding rules.
Public Hospitals There are around 200 public hospitals in Victoria, and TAC treatment undertaken at these hospitals includes outpatient specialist services and inpatient (case mix) services.
A New Claim Intake Process A new claim intake management approach will enable much more efficient and effective claims processing. Analysis and action research highlighted that although the existing claim intake process was “one size fits all,” there were significant differences in the needs of particular client groups at this early stage of their claims, and furthermore there was recognition that the TAC required different amounts and types of information from clients. A new telephone-based intake process will be implemented to improve service delivery, risk identification, and efficiency. Rather than completing the 16-page form, the client’s first experience will be a conversation with a TAC staff member. During this conversation, the client will be provided with assistance and information regarding their entitlements, and the TAC will be able to gather the information it requires. Further efficiencies will come from the following: •
•
Screening out many of the claims (currently 2,000 each year) for which the TAC makes no payment at all Collecting a limited set of mandatory information from clients seeking coverage for a single ambulance trip and brief treatment in
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•
a hospital emergency department (between 4,000 and 5,000 claims a year) Gathering only relevant information for other claims; for example, whilst only 20% of clients are eligible for income benefits, many more complete the detailed questions on the claim form regarding their income and dependants. This data was entered into TAC systems even though they are not required.
Contact and Communications Management In 2001, the TAC did not adequately track incoming and outgoing communication and could not guarantee consistent responses to calls and correspondence. Processes for determining who should respond to what communications were ineffective, with clients and providers often dealing with a range of different people before they had the information they needed. Management saw the need for systems that would track inbound and outbound communication, and that efficiency benefits would be realized if new processes could get communications to the right person the first time.
characters of each text and all the indexes used to categorize the item. A Java interface, accessed by a browser, presents the user with a summary of the claim using the 256 characters from each entry. The most recent 20 items are displayed automatically, and the user accesses earlier items by clicking “next 20 items” in much the same way as an Internet search engine operates.
Rolling Out E-File Changeover to e-file successfully took place on March 12, 2002, when a major part of the mainframe system was shut down and mainframe text was copied across into the new e-file system. Outgoing correspondence, phone calls, and other documents are no longer put on the paper file, but are stored in the new system for immediate access. In order that the transition from the old system to the new system ran as smoothly as possible, 650 people were trained for 2 hours each during the 2 weeks prior to the implementation date. TAC staff has responded positively to the new system, and though much more work will be required to back-capture the existing paper documents, this first stage was a significant milestone for the overall transformation.
E-File Initiatives to reduce the TAC’s dependence on paper documents would be centered on the integration of a document-management system and a CRM system into a new system, know as e-file. The concept developed by the TAC would have to bring together the electronic and paper-based information so that there could be a single point of access to any particular claim file: all communication, documentation, and transaction history. The e-file system uses a Domino database to enable document attachments and image files to be stored as well as text notes. For every document on the document system, an entry is also made into a DB2 database, which holds the first 256
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FUTURE TRENDS AND CONCLUSION Following the completion of the transfer of documentation into e-file and the back-capture of paper documents for active claims, the next challenge was implementing projects associated with the process improvement of the TAC payment system. The digitalization of this important government authority has thus begun with the finishing of old mainframe-based legacy systems, the creation of an e-file system for going forward, and hence a new technology platform that is expected to
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improve outcomes for all stakeholders. Lessons learned included first framing the initiative based on considerations of the organization’s future strategy. Furthermore, it was clearly the case that legacy systems had brought a lot of inertia to business processes over the past years. So, the big opportunity was to understand what is possible through enabling e-technologies, and to then translate strategy into business processes that make the most effective use of such e-technologies. This can be considered as a case of trying to fit top-down strategic considerations to bottom-up technological capabilities. In addition, careful consideration of where the most effective “bang for the buck” is is always warranted, and intuition proved to be wrong on some occasions about whether there was most scope for business improvement in B2B or B2C spaces; hence, careful analysis is clearly worthwhile before proceeding.
Leonard, L. N. K., & Cronan, T. P. (2003). Website retailing: Electronic supply chain replenishment. Journal of End User Computing, 15(3), 45.
REFERENCES
Ross, J., & Beath, C. (2002). Beyond the business case: New approaches to IT investment. MIT Sloan Management Review, 43(7), 51-59.
Cagno, E., Di Giulio, A., & Trucco, P. (2004). State of art and development prospects of e-procurement in the Italian engineering sector. Project Management Journal, 35(1), 24-30.
Li, P. P., & Chang, S. T. (2004). A holistic framework of e-business strategy. Journal of Global Information Management, 12(2), 44-63. Loane, S., McNaughton, R. B., & Bell, J. (2004). The internationalization of Internet enabled entrepreneurial firms: Evidence from Europe and North America. Canadian Journal of Administrative Sciences, 21(1), 79-97. Mackay, D. R., Altmann, G. L., & McMichael, H. (2003). How intimate are Australian e-business supply chains? Logistics Information Management, 16(1), 48-56. Rappa, M. (2003). Business models on the Web. Retrieved August 2005 from http://digitalenterprise.org/ models/models.html
Rotondaro, R. G. (2002). Defining the customers expectations in e-business. Industrial Management and Data Systems, 102(8/9), 476-484.
Carter, R. (2003). Mining e-commerce goes mainstream. Engineering and Mining Journal, 204(1), 24-28.
Starr, M. (2003). Application of POM to e-business. International Journal of Operations and Production Management, 23(1), 105-125.
Golden, W., Hughes, M., & Gallagher, P. (2003). Online retailing: What drives success? Journal of End User Computing, 15(3), 32-38.
Timmers, P. (1998). Business models for electronic markets. Electronic Markets, 8(2), 2-8.
He, M., & Leung, H. (2002). Agents in e-commerce. Knowledge and Information Systems, 4(3), 257-266.
KEY TERMS
Joyce, P., & Winch, G. (2005). Consideration of options from an entrepreneurial technical and operational perspective: An e-business design framework approach. Australian Accounting Review, 15(3), 44-55.
Business Transformation: Significant change in the organization’s business model, including its enabling technologies as required. E-Business Models: Types of business forms enabled by e-business, such as affiliate, brokerage, community, infomediary, and merchant.
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IT Process Integration: Digital connectivity of data sets and information availability across software and database applications within or across collaborating organizations.
IT Strategy: An overall direction of investments in IT that fits the business and operating processes and guides IT investments and characteristics to achieve technical capabilities and business goals.
This work was previously published in Encyclopedia of Digital Government, edited by A. Anttiroik and M. Malkia, pp. 906-913, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Section V
Organizational and Social Implications This section includes a wide range of research pertaining to the social and organizational impact of outsourcing around the world. This chapter begins with an analysis of the role of social capital in outsourcing, while later contributions offer an extensive analysis of organizational development, process improvement, and workplace ethics. The inquiries and methods presented in this section offer insight into the implications of outsourcing at both an individual and organizational level, while also emphasizing potential areas of study within the discipline.
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Chapter 5.1
Outsourcing Information Technology: The Role of Social Capital James J. Hoffman Texas Tech University, USA Eric A. Walden Texas Tech University, USA Mark L. Hoelscher Illinois State University, USA
ABSTRACT The current chapter explores the role that one factor, social capital, may have on the success of IT outsourcing. It extends current understanding of outsourcing success and failure by examining the effect of social capital on outsourcing success. The chapter proposes that social capital has potential impact on information technology (IT) outsourcing success. Specifically, it is theorized that social capital has an inverted “U” shape relationship with outsourcing success.
outsourcing market in 2004 was over $350 billion (Study, 2004). Firms have now started considering IT outsourcing as a strategic activity. Firms that earlier outsourced only minor information system (IS) services are now outsourcing entire IS departments (Mazzawi, 2002). Because of this senior executives who use to be concerned with whether or not to outsource information technology (IT) resources, are now more concerned with figuring out what factors can lead to the success or failure of outsourcing relationships.
SOCIAL CAPITAL THEORY INTRODUCTION Factors that affect the success of the outsourcing of information technology (IT) resources is an important issue since over 90% of U.S. companies outsource some activity and the total
The term social capital first arrived on the scene in the sociology literature. It initially appeared in community studies, highlighting the central importance of networks of strong, crosscutting personal relationships developed over time that
provide the basis for trust (Nahapiet & Ghoshal, 1998). The literature suggests that social capital can be separated into five distinct dimensions. They are information channels, social norms, identity, obligations and expectations, and moral infrastructure. Listed below are the separate dimensions and a more complete description of their makeup.
unknowns. They also contain shared knowledge and history for an organization. They are the accumulated history of the organization in the form of social structure appropriable for productive use by any member of the social network in the pursuit of his or her interests (Sanderfur & Laumann, 1988).
Obligations and Expectations Information Channels Information channels are social networks within the organization and also are the mechanisms that connect them to the outside world. Information channels are the most obvious example of social capital. They are the directly observable inventory of social capital. Information channels also contain the formal structure of an organization. This dimension of social capital consists of personal relationships that people develop with each other through a history of interaction. The major benefits that a well-developed information channel provides are abundant and strong ties within the network. These ties, in turn, provide closure (Coleman, 1988). Closure can be described as the existence of sufficient ties within a social network to guarantee the observance of social norms. Within businesses, closure provides for more intense adherence to norms, a stronger feeling of obligations and expectations and a heightened sense of identity.
Social Norms Social norms provide for social control in an organization. They are general, internalized sets of accepted behavior for members of the social network. Social norms are a common belief system that allow participants to communicate their ideas and make sense of common experiences (Adler & Kwon, 2000). They are shared strategic visions, systems of meanings, and normative value orientations (Nahapiet & Ghoshal, 1998). Social norms increase efficiency of action and reduce external
Lesser (2000) viewed this dimension of social capital as the positive interactions that occur between individuals in a network. These interactions have been viewed as positive largely because of the levels of trust and reciprocity that they engendered (Putnam, 1993). The existence of these obligations and expectations of future benefit are nurtured in an organizational environment containing strong social ties and are hampered by the absence of these ties. Within a network, obligations and expectations lead to collective trust, which becomes a potent form of expectational asset (Knez & Camerer, 1994; Nahapiet & Ghoshall, 1998). Collective trust allows group members to rely on each other more generally to help solve the everyday problems of cooperation and coordination (Kramer, Brewer, & Hanna 1996). With collective trust present, group members can rely on one another to follow through with things expected of them and obligations owed by them. Group members are then more willing to work for the group with the knowledge and expectation that the group will work for them when the time comes. Collective trust strengthens obligations and expectations.
Identity Identity occurs when individuals see themselves as one with another person or group of people (Nahapiet & Ghoshal, 1998). The individual takes the values or standards of other individuals or groups as a comparative frame of reference (Merton, 1968; Tajfel, 1982). Identity with a group or collective
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enhances concern for collective processes and outcomes, thus increasing and strengthening group norms and collective goals. This group identity increases perceived opportunities for information exchange and enhances frequency of cooperation (Lewicki & Bunker, 1996). In contrast, where identity is not present there are significant barriers to information sharing, learning, and knowledge creation (Child & Rodriques, 1996; Pettigrew, 1973; Simon & Davies, 1996).
Moral Infrastructure The fifth dimension of social capital is moral infrastructure. While support for the dimension of moral infrastructure as a part of social capital is somewhat limited in the management literature, there is support for it in the sociology literature. A moral infrastructure is identified as the structure or network, which allows an organization to encourage norms of conduct within the organization’s scope of influence. Putnam (1993) refers to this dimension at the community level as networks of civic engagement. Civic engagement refers to people’s connections with the life of their community and includes such things as membership in neighborhood associations, choral societies, or sports clubs (Blanchard & Horan, 1998; Putnam, 1995). These networks, whether existent within an organization, or within a community, provide an additional pathway for network actors to learn of the trustworthiness of individual actors within the network. This provides additional closure for social norms and gives individuals, acting in their own rational self interest, solid reasons to act in ways that adhere to formal and informal codes of conduct in their organization (Blanchard & Horan, 1998). Portes (1998) notes that members of communities with a substantial stock of social capital find it much easier to work. This is largely a result of the trust engendered through social capital effects such as the existence of closure and social norms (Coleman, 1988). These items, then, provide the
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structure from which organizations can pin their belief systems and from which formal and informal codes of ethics can flow. This is the moral infrastructure of an organization.
A Multidimensional View of Social Capital Without strong information channels which create strong ties between individuals within the organizational network, there is no opportunity for the organization to experience closure (Coleman, 1988). Without closure, there is no opportunity for the organization to develop strong social norms and for identity to begin to take hold. And, finally, without strong social norms, there is no opportunity to develop a system of obligations and expectations and to provide for the adherence to a set of ethics, both formal and informal (the moral infrastructure). While each of these dimensions is separate and each provides distinct benefits to the organization, they are mutually dependent on each other for their development. Lesser (2000) summed it up nicely when he said, social capital, at its core, is about the value created by fostering connections between individuals.
SOCIAL CAPITAL, KNOWLEDGE MANAGEMENT, AND INCREASING OUTSOURCING SUCCESS Social Capital and Knowledge Management Most organizations possess valuable knowledge relating to their products, processes, management, and technologies. However, often these organizations do not communicate as well as they might or apply this knowledge for maximum advantage (King, Marks, & McCoy, 2002). Organizations that are able to manage this knowledge and communicate it to their information technology
Outsourcing Information Technology
vendors often have a competitive advantage over those organizations that are not as adept at knowledge management. Knowledge management has been defined as the process of accumulating and creating knowledge, and facilitating the sharing of knowledge so that it can be applied effectively throughout the organization (Turban, Rainer, & Potter, 2003). Knowledge management involves four main processes. The first process is the generation of knowledge which includes all activities that discover “new” knowledge. The second process is knowledge capture which involves continuous scanning, organizing, and packaging of knowledge after it has been generated. Knowledge codification is the third process and it is the representation of knowledge in a manner that can easily be accessed and transferred. The fourth process, knowledge transfer, involves transmitting knowledge from one person or group to another person or group, and the absorption of that knowledge (Pearlson & Saunders, 2004). It can be theorized that social capital can enhance an organization’s ability to manage knowledge because it has the capacity to do a variety of things. In terms of knowledge creation, social capital helps to facilitate the development of collective intellectual capital by affecting the conditions necessary for exchange and combination to occur. In this vein collective intellectual capital is defined as the knowledge and knowing capability of a social collectivity, such as an organization, intellectual community, or professional practice (Nahapiet & Ghoshal, 1998). Social capital can also facilitate the development of intellectual capital. Since intellectual capital depends on the combination of knowledge and experience of different parties, intellectual capital’s creation is greatly facilitated by the existence of social capital. Social capital has also been theorized to play a role in the development of core competencies (Kogut & Zander, 1996) which are vital to knowledge creation.
The presence of social capital can also enhance knowledge capture, knowledge codification, and knowledge transfer. Social capital enhances these knowledge management processes because it contributes to a firm’s ability to create value in the form of innovation through the facilitation of combination and exchange of resources in a firm (Kanter, 1988; Kogut & Zander, 1993; Schumpeter, 1937). Social capital also increases the efficiency of action (Lesser, 2000) and encourages cooperative behavior (Coleman 1988; Nahapiet & Ghoshall, 1998). Additionally, social capital has been theorized to serve as an important element in the development of human capital (Coleman, 1988) and to provide access to resources through network ties (Burt, 1992). From an overall perspective social capital can enhance the entire knowledge management process because it makes collective action more efficient, because it becomes a substitute for the formal contracts, incentives, and monitoring mechanisms that are necessary in systems with little or no social capital among organizational members (Fukuyama, 1995; Leana & Van Buren, 1999). In the language of economics, social capital can reduce transaction costs, thus making the knowledge management process more efficient. However, social capital also introduces rigidities into the interactions among knowledge workers. When individuals share the same norms, identity, and communication channels their ability to come up with novel solutions to problems is limited (DiMaggio & Powell, 1983). Thus, social capital provides strong, but specific support for knowledge sharing. If a new type of knowledge is required, social capital will limit the ability of organizations to develop new knowledge. Effectively using IT requires two types of knowledge: business knowledge and technical knowledge (Walden, 2005). Business knowledge is concerned with what the IT needs to do in order to support the business goals of the organization. Technical knowledge is concerned with how the IT needs to be configured to do what the business
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needs. These two types of knowledge are different. Business knowledge is stable, but is often focused on people, and thus, is soft knowledge. Technical knowledge changes rapidly, but focuses on scientific artifacts, and hence, is more concrete. Few organizations are good at developing and managing both types of knowledge. Usually, an organization outsources its IT specifically because its social capital is geared toward the development and management of business knowledge. Conversely, IT vendors’ social capital is geared toward the development and management of technical knowledge. Social capital has the capacity to enhance the management and communication of knowledge between firms and their IT vendors, and thus allows for better communication of both what should be done and what can be done. However, the creation of social capital requires that clients and vendors establish similar identities, norms and communication channels, which undermine each organization’s specific strengths. We believe that moderate levels of social capital will facilitate the sharing of vital knowledge between organizations, but high levels of social capital will compromise each organization’s ability to offer a unique contribution of knowledge to the relationship. Thus, we propose: Proposition 1: Social capital has an inverted “U” shape relationship with outsourcing success.
The Creation of Social Capital Before firms and their IT vendors can benefit from social capital, the firms and their vendors must first create social capital. Time is important for the development of social capital since social capital depends largely on stability and continuity of the social structure. Long standing outsourcing relationships may be deriving a large part of their success from this underlying prerequisite for social capital. New outsourcing relationships, on the other hand, must expend large amounts of
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resources and time in order to achieve the same level of social capital. Because, at its core, social capital is about relationships, it is eroded by those factors that make people less able to be interdependent (Lesser, 2000). Factors that enhance interdependent relationships are trust (Adler & Kwon, 2000; Lesser, 2000), reputation (Coleman, 1988), reciprocity (Lesser, 2000), and closure (Coleman, 1988). Interaction, which promotes things like trust and reciprocity, is a precondition for the development and maintenance of dense social capital (Bourdieu, 1986; Nahapiet & Ghoshall, 1998). It is quite likely that many variables that are described in the literature as outcomes of social capital, in fact, operate reciprocally with it, that is, trust (Leana & Van Buren, 1999). Adler and Kwon (2000) went so far as to suggest that trust might actually precede social capital. It is also quite likely that organizations can also develop social capital by selecting only those vendors who share its values and goals. Once social capital is created between a firm and its IT vendors, use of social capital is also an important factor in its growth since, unlike many forms of capital, social capital increases, rather than decreases, with use. This is a result of the close connection between social capital and relational and network ties (Burt, 1992). These ties, necessary in the creation and maintenance of social capital (Adler & Kwon, 2000) are maintained, extended, and strengthened through use (Sanderfur & Laumann, 1988).
DISCUSSION This chapter examines the relationship between social capital and IT outsourcing success. Theoretical work in the field of social capital was used as the foundation on which to examine this relationship (Adler & Kwon, 2000; Burt 1992; Coleman, 1988; Nahapiet & Ghoshal, 1998; Putnam 1993). Because there is no existing literature that has
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examined the relationship between social capital and outsourcing success, this chapter extends prior research on outsourcing by providing a new theory of how social capital can impact the probability of outsourcing success. The theories developed in this article have practical implications for managers of firms engaged in outsourcing relationships. This article argues social capital has an inverted “U” shape relationship with outsourcing success. Since resources within all businesses are relatively limited, and particularly so when the business is small relative to its competitors, the revelation that certain levels of social capital between firms and their vendors can lead to a sustained competitive advantage makes the decision to support and nurture it much more credible. Outsourcing firms can then make a more informed decision on whether to commit a portion of their limited resources toward its creation and maintenance. Overall, it is hoped that this chapter will serve as a point of reference for future research on the relationship between social capital and outsourcing success. Additionally, it is hoped that it will serve as a foundation for future studies looking at possible competitive advantages that some firms engaged in outsourcing have over other firms engaged in outsourcing.
and research for the sociology of education (pp. 241-258). New York: Greenwood.
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This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans; D. Schniederjans and M. Schniederjans, pp. 188-197, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.2
Characterization and Classification of Collaborative Tools Javier Soriano Universidad Politécnica de Madrid (UPM), Spain Rafael Fernández Universidad Politécnica de Madrid (UPM), Spain Miguel Jiménez Universidad Politécnica de Madrid (UPM), Spain
INTRODUCTION Traditionally, collaboration has been a means for organizations to do their work. However, the context in which they do this work is changing, especially in regards to where the work is done, how the work is organized, who does the work, and with this the characteristics of collaboration. Software development is no exception; it is itself a collaborative effort that is likewise affected by these changes. In the context of both open source software development projects and communities and organizations that develop corporate products, more and more developers need to communicate and liaise with colleagues in geographically distant places about the software product they are con-
ceiving, designing, building, testing, debugging, deploying and maintaining. Thus, work teams face sizeable collaborative challenges, for which they have need of tools that they can use to communicate and coordinate their work efficiently. The response is the collaborative development environment (CDE), a virtual space where all the software project stakeholders, possibly distributed in time and space, can negotiate, brainstorm, discuss, share knowledge and resources and, generally, labor together to carry out some task in the context of a software development process (Booch & Brown, 2003). The collaborative needs of a team depend largely on factors related to the environment, such as the team’s organizational structure, its
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geographical and temporal distribution, the target software domain, the software product structure and the actual team members. Each of these factors highlights a different aspect of collaboration. All existing collaborative development tools have been conceived considering different aspects of collaboration, each one meeting particular sets of needs and considering the particular functional, organizational, temporal and spatial characteristics of this collaboration. As part of Morfeo (2005), we conducted a survey of existing software products and collaborative sites. This survey suggests that the likelihood of being able to develop a CDE meeting all the collaborative needs of the software process is remote, especially taking into account that these needs change depending on contextual factors such as the above. In this respect, the “contextual” approach to collaboration is gaining strength. This approach enables the holistic integration and deployment of collaborative components and services in a CDE suited for a particular context, as opposed to a monolithic conception of such an environment. Therefore it is worth examining existing classification frameworks. There are different classification frameworks that order collaborative tools by the needs they satisfy, each from a different viewpoint. A team that is acquainted with these frameworks can contextualize the range of available collaborative tools, and compare them from different viewpoints and on the basis of assembled criteria sets. This way it can make a grounded decision on what collaborative tools best meet its needs. This chapter starts with a definition and preliminary characterization of collaborative tools and CDEs. Without claiming to be exhaustive, it goes on to describe some of the most representative frameworks that have been developed to date. The chapter then shows the resulting categorization for each approach and presents some representative tools for each particular category. Finally, it suggests ideas on how to use these frameworks to select the best collaborative tools for a particular work team and development project. 1400
COLLABORATIVE TOOLS AND DEVELOPMENT ENVIRONMENTS The issue of CDEs was taken up perhaps for the first time back in 1984, when Iren Greif and Paul Cashmand organized a workshop that brought together an influential of group of people to examine how to apply technology within a collaborative work environment. This meeting was the source of the “computer-supported cooperative work (CSCW)” concept (Grudin, 1994), which aimed to find an answer to how computer systems can support and coordinate collaborative activities. A few years later, after further research into the concept of CSCW, Malone and Crowston (1994) introduced coordination theory. This theory was conceived on the basis of research in several different disciplines like computer science, organization theory, management science, economics, linguistics, and psychology. The theory defined coordination as the way of managing dependencies between activities. By characterizing the different types of possible dependencies between task activities, Malone and Crowston were able to identify and, consequently, manage the so-called coordination processes. This investigation identified some of the problems that future CDEs would have to deal with, such as resources allocation, as well as possible solutions. Years later, when the technology was far enough evolved and after the Internet had materialized, these coordination processes and all the years of CSCW research led to collaborative tools capable of improving not only the development of software applications, but also the networked exchange of information and ideas from different branches of knowledge. Such an exchange often involved users who had possibly never worked together before and did not even know each other based at geographically distant places and even had to overcome time differences. This, in turn, led to the concept of groupware (Baecker, 1993), that is computer-based systems that support groups of people engaged in a common task
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(or goal) and that provide an interface to a shared environment. Groupware came about thanks to the enabling technologies of computer networking, software and services that materialized the ideas that had emerged from CSCW research (Engelbart, 1992). Predictably, this activity yielded the first tangible definition of CDEs as “virtual spaces wherein all the stakeholders of a project—even if distributed by time or distance—can negotiate, brainstorm, discuss, share knowledge, and generally labor together to carry out some task, most often to create an executable deliverable and its supporting artifacts” (Booch & Brown, 2003). We can add to this definition by saying that a CDE holistically integrates multiple collaborative tools and resources thanks to which it offers a set of services to aid all the stakeholders in the software development area, including managers, developers, users, commercial software manufacturers and software product support enterprises, to communicate, cooperate and liaise. CDEs consider software development’s social side and assure that the people who design, produce, maintain, commercialize and use software are aware of and communicate about the activities of the others simply, efficiently and effectively, also encouraging creativity and driving innovation.
CLASSIFICATION FRAMEWORKS: A SURVEY As previously mentioned, the contextual approach to collaboration enables the holistic integration and deployment of collaborative components and services in a CDE suited for a particular context as opposed to a monolithic conception of such an environment. It is, therefore, worth examining the existing classification frameworks that order collaborative tools by the needs they satisfy, each from a different viewpoint. Considering these frameworks in a coordinated fashion, a team can compare the range of collaborative tools avail-
able from different viewpoints and on the basis of assembled criteria sets to be able to make a grounded decision on what collaborative tools best meet its needs. Groupware typologies (Grudin, 1994). The first of the frameworks that we analyze is Grudin’s classification, also known as “groupware typologies.” The term “groupware” refers to the set of CSCW applications used to do collaborative teamwork. From a multidisciplinary viewpoint and based on an earlier framework (DeSanctis & Gallupe, 1987), Grudin elaborates a groupware typology based on a space-time categorization. To implement this classification, Grudin considers that the activities can be performed at a single site, at different sites, all of which are known to participants, via e-mailing or at different sites, not all of which are known to participants, as in messaging through newsgroups. Additionally, an activity, for example a meeting, can be performed in real time, but also at different times, albeit within a more or less scheduled or expected time interval, such as sending an e-mail and getting the response within a day. Finally, an activity can be carried out at different and unpredictable times, as in open-ended collaborative writing projects. This approach is outlined as a 3x3 grid in Figure 1. This is a very easy-to-use framework and is therefore widely employed. It facilitates communication, especially by groupware developers, but not without risk: it obscures an organizational perspective. Most real work does not fall into any one category, because face-to-face meetings, for example, often take place at the same time as distributed and asynchronous communications as a task progresses. Malone and Crowston (1994) research an area called coordination theory, which focuses on the interdisciplinary study of coordination. Research in this area uses and extends ideas about coordination from disciplines such as computer science, organization theory, operations research, economics, linguistics, and psychology.
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Figure 1. Grudin’s classification
They define coordination as the process of managing dependencies among activities. They then use that concept to shape a framework to characterize different kinds of dependencies (such as managing shared resources, managing producer/ consumer relationships, and so on) and identify the coordination processes that can be used to manage them (i.e., priority order, notifications, tracking, goal selections, task decompositions). They give us examples of how different disciplines have analyzed coordination processes, identifying similarities among concepts that suggest how ideas can be transported back and forth across disciplinary boundaries. In that way, they proclaim the use of coordination concepts from other disciplines (philosophy, artificial intelligence, etc.) to suggest design ideas for cooperative work tools. The framework they
suggest provides a natural way of classifying existing cooperative work systems according to the coordination processes they support. Table 1 shows some of the typical coordination processes that collaborative tools support. Nutt (1996). There are several approaches to how computer technology should assist collaboration across the network. They range from approaches where the coordination of work is uniquely human-controlled, referred to as situated work, to workflow-based approaches where the computer is involved in scheduling the group’s work. Workflow technology has evolved from a modeling focus to flexible model-based systems to support collaborative work. A groupwork procedure is defined in a workflow system by a workflow model composed of a set of discrete work steps with explicit specifications of how a unit of work flows through the different steps. Workflow models have also been used to describe how the procedure performs the work and to analyze how a procedure behaves. Workflow languages contain constructs to define a set of steps to represent a unit of work, a sequential computational language to provide an interpretation for each step, and a coordination language to define how the work flows among the steps. The fundamental purpose of a computational representation language is to enable one person to describe how a step is accomplished for the benefit of other human readers. The coordination language specifies how a workcase passes
Table 1. Coordination processes typically supported by collaborative tools
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from step to step; this is a distinctive feature of workflow languages. Within this workflow system framework, Nutt defines a 3D domain space based on the underlying workflow model and more specifically on the mode in which the workflow model represents a work procedure. Therefore, a workflow model can represent parts of the process that must be performed for the process to be acceptable, and parts that can be performed by a computer or human. Models should represent procedures according to the way the model is to be used, as defined by three different criteria: conformance level that is required by the organization for which the process is a model, the detail level of the description and the operativity of the model. Consequently, the resulting framework can classify the models that represent just structured or explicit work, models conceived to deal with unstructured work, descriptive and analytical workflow models and conventional workflow models. Conradi and Westfechtel (1998) developed a framework to classify collaborative tools based on their experience in software configuration management (SCM). This framework is based on a taxonomy used originally to classify SMC systems. The framework classifies SMC systems according to a three-layer hierarchy. The first level defines categories (e.g., “general,” “product space,” etc.). Each category includes multiple features, where each category is a dimension of the classification scheme (“environment,” “object management,” etc.). A feature can have values based on some sort of enumeration (“languagebased,” “structure-oriented,” etc.), and be singleor multi-valued. Continuous coordination (Van der Hoek et al., 2004; 2006) introduces and explores an alternative approach to computer-supported cooperative work called continuous coordination. It blends the best aspects of the more formal, process-oriented approach with those of the more informal, awareness-based approach. The classification framework they propose organizes
collaborative tools into tools that fit the formal pattern, tools that fit the informal pattern and tools that combine both approaches. The tools that follow the formal, processoriented approach define process models that implicitly or explicitly divide work into periodically resynchronized multiple independent tasks according to the specific tool. In this approach, the tool is responsible for the coordination protocols that developers are to follow. This approach can be characterized as inherently group-centric: it makes the group as a whole the important entity by providing a scalable, predictable, and dependable solution that promotes tightly controlled coordination and insulates different activities from each other. Its drawback is that the insulation provided by the workspaces quickly turns into isolation, as developers are not aware of the activities of others that may affect their work (Sarma, 2005). Nevertheless, this is the only drawback, as any formal process is inevitably surrounded by a set of informal practices according to which the formal conditions are negotiated and evaluated. The informal approach can be characterized as inherently user-centric, and the term awareness is defined as an informal understanding of the activity of others that provides a context for monitoring and assessing group and individual activity. The tools that follow this approach should provide coordination by means of explicit or implicit dissemination of information to the other members of the group. It is the responsibility of the team members to interpret this information and proactively know how to go about coordination. This approach also has a drawback: if they are continuously receiving a lot of information, users are likely to ignore a lot of it. As already mentioned, these two approaches have strengths and weaknesses. This is why the continuous coordination approach is proposed. The aim of continuous coordination is to support collaborative work by combining the strengths of the formal and informal approaches. The tools that adopt this approach should be highly flexible
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instruments capable of adapting the support for coordination they provide depending on the needs of the task to be performed. Booch and Brown (2003) define one of the simplest and clearest frameworks for classifying collaborative development environments. CDEs are composed of a number of tools that really define the features the CDE supports. These characteristics are, for example, instant messaging, centralized information management, project self-administration, and so forth. What the proposed framework does is to divide these features into three categories of functionalities needed for any CDE. These functions are informally known as the “three Cs,” as they are based on the CDE’s coordination, collaboration, and community building nature. Note that none of these features are on their own particularly complex or difficult to implement, and hence a rich CDE is the emergent creature that rises from a hundred small things, using the Web as the centre of the user experience. Collectively, however, this set of features is complicated to integrate in one and the same environment. Therefore collaborative environment users get the satisfaction of completing a task thanks to the joint use of all these features in the environment.
Figure 2. Sarma’s classification framework
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Sarma (2004; 2005) provides a novel criterion for classifying existing development environments. This is to categorize these environments according to user effort. Effort is defined as the time it takes to configure, monitor and interpret the information the tool offers. Sarma’s framework is based on two key features of collaborative tools: (a) the level of support for coordination offered to users, and (b) the tool’s approach to one of the three key components of collaboration: communication, artifact management, and task management. Combining these two features, the framework uses a pyramid structure to classify CDEs. The level of support for coordination takes up five vertical levels in the pyramid: (1) functional, (2) defined, (3) proactive, (4) passive, and (5) seamless. All the possible tool approaches are arranged as three horizontal levels: (1) communication among team members, (2) artifact management, and (3) task management. Figure 2 illustrates the use of this framework. From the viewpoint of the layers, the level of support provided by collaborative tools increases as we go up in the pyramid, whereas the user effort it takes to enable collaboration decreases. Tools towards the top of the pyramid provide advanced automated support to users, can handle large and complex team structures, and reduce action and
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information overload on users, as compared with tools at the lower layers, which allow cooperative development with little technical support. Development teams at the functional level are small and work with a bare minimum of tool support. Developers can manage to collaborate, but it still takes a lot of manual effort. Tools at this level allow different developers to access the same set of artefacts or communicate via e-mail, but developers at this level are chiefly responsible for the actual coordination activity of determining who changed which artefacts and when. If much more coordination support is needed because there are a great many developers working at the same time on a complex project, we have to move up the pyramid to get more powerful tools that provide full-featured, seamless coordination support that places a minimal burden on the user. From the viewpoint of the possible tool approaches, those classed into the communication level will help teams to keep each other up to date with the tasks that have been completed, to communicate changes in schedules, to query or provide solutions to problems, to schedule meetings, and fulfill several other purposes. If a CDE does not have good communication features, this often leads to considerable project delays. Tools classed at the artefact management level will be responsible for managing the changes to software artefacts to ensure the correct program behavior. Artefacts in software systems are highly interdependent on each other. Developers therefore depend on tool support to version their code, coordinate parallel development, resolve conflicts, and integrate code, among other things. Finally, tools within the task management level will help teams to decompose the projects into smaller units, identifying developers with expertise, assigning tasks to developers, and creating a development schedule. In most projects, task management is time-consuming and difficult, and should therefore be highly automated.
ON CLASSIFYING COLLABORATIVE TOOLS: A CASE STUDY So far we have given an overview of what collaborative tools and development environments are and how they are used. We also illustrated a survey of the most important classification frameworks developed to date. However, this section has a more practical goal. It aims to develop a short case study showing how the four most representative classification frameworks classify different collaborative work tools. Figure 4 shows the findings of having classed instant messaging, calendar and scheduling, online polling, e-mail, and messaging board according to a number of classification frameworks. Specifically, we have used Grudin’s, Booch’s and Sarma’s frameworks, and continuous coordination. As we can see, the results of classifying a collaborative tool differ from one framework to another. This suggests that these frameworks should be used jointly to discriminate tools better. Tools that are classed in the same group according to Grudin’s framework, that is the calendar and scheduling and the online polling tools, are clearly differentiated in Booch’s framework. Calendar and scheduling is classed as a coordination tool, whereas online polling is classed as a collaborative tool. Using the continuous coordination framework, the calendar and scheduling tool would fit both formal and informal approaches (i.e., following the continuous coordination model). On the other hand, the online polling tool will be classed as an informal approach. Finally, if we compared both tools using Sarma’s framework, they would be classed at the task management level. We should stress that the calendar and scheduling tools would be classed as a basic functional-level tool, except for tools that support event notification services. These tools would be classed several levels higher, as passive level tools. Note, therefore, that the same tool can be classed in more than one specific place within the same framework at a time.
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Figure 3. Example of coordinated use of a number of frameworks
CONCLUSION The collaborative needs of a team depend largely on environment-related factors, such as the team’s organizational structure, its geographical and temporal distribution, the target software domain, the software product structure and the actual team members. Each of these factors highlights a different aspect of collaboration. All existing collaborative development tools have been conceived considering different aspects of collaboration. Each tool meets a particular set of needs and considers the specific functional, organizational, temporal and spatial characteristics of this collaboration. Bearing this in mind, this paper has stressed, based on a survey of existing software products and collaborative sites, that it is
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unlikely to be possible to build a CDE that meets every possible collaborative need of the software development process, especially since these needs change depending on contextual factors such as the above. A team should know and holistically consider the existing classification frameworks, the most representative ones have been outlined in this chapter, to be able to contextualize the range of available collaborative tools, and compare them from different viewpoints. On the basis of the assembled criteria sets, the team will be able to make a grounded decision on what collaborative tools best meet its needs. In this sense, the article has shown the resulting categorization for some of the approaches and has suggested ideas on how to use these frameworks as a holistic means to select the best suite of collaborative tools for
Characterization and Classification of Collaborative Tools
a particular work team and development project. We view this approach as a highly influential and important line of future research.
REFERENCES Baecker, R. (1993). Readings in groupware and computer-supported cooperative work. San Mateo: Morgan Kaufmann. Booch, G., & Brown, A. W. (2003). Collaborative development environments. In M. Zelkowitz (Ed.), Advances in computers (pp. 59). San Diego, CA: Academic Press. Conradi, R., & Westfechtel, B. (1998). Version models for software configuration management. ACM Computing Surveys, 30(2), 232–282. DeSanctis, G., & Gallupe, B. (1987). A foundation for the study of group decision support systems. Management Science, 33(5), 589-609. Engelbart, D. C. (1992). Toward high-performance organizations: A strategic role for groupware. Bootstrap Institute. Retrieved from http://www. bootstrap.org/augdocs/augment-132811.htm Grudin, J. (1994). CSCW: History and focus. IEEE Computer, 27(5), 19-27. Nutt, G. (1996). The evolution towards flexible workflow systems. Distributed Systems Engineering, 3(4), 276–294. Morfeo Project. Open source community. http:// www.morfeo-project.org/lng/en Malone, T., & Crowston, K. (1994). The interdisciplinary study of coordination. ACM Computing Surveys (CSUR), 26(1), 87-119. Morfeo. (2005). GForge Roadmap Survey. Retrieved November 23, 2007, from http:// ezforge.mor feo -project.org /w p - content / uploads/2007/11GForge-Roadmap-Survey.pdf
Sarma, A. (2004). A need-based collaboration classification framework. In proceedings of Workshop on Eclipse as a Vehicle for CSCW Research (pp. 16-20). Chicago, IL. Sarma, A. (2005). A survey of collaborative tools in software development (ISR Tech. Rep. UCIISR-05-3). Irvine, CA: University of California, Irvine. Van der Hoek, A., Redmiles, D., Dourish, P., Sarma, A., Silva Filho, R., & de Souza, C. (2004). Continuous coordination: A new paradigm for collaborative software engineering tools. In Proceedings of Workshop on WoDISEE (pp. 2936). Scotland. Van der Hoek, A., Al-Ani, B., Sarma, A., Bortis, G., Almeida da Silva, I., Trainer, E., & Redmiles, D. (2006). Continuous Coordination (CC): A New Collaboration Paradigm. In Proceedings of CSCW Workshop on Supporting the Social Side of Large Scale Software Development (pp. 69-72). Banff, Canada.
KEY TERMS Collaboration: Refers to the different processes wherein people, from small groups to larger collectives and societies, work together, possibly in ubiquitous environments like Internet. A number of useful and effective collaborative environments and methods have emerged from the study of such processes and their distinctive properties. Collaborative Development Environment: A virtual space wherein all the stakeholders of a project, even if separated by time or distance, may negotiate, communicate, coordinate, brainstorm, discuss, share knowledge, and liaise to carry out some task, most often to create an executable deliverable and its supporting artifacts, holistically integrating multiple collaborative tools and resources.
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Characterization and Classification of Collaborative Tools
Computer-Supported Cooperative Work: A field of study addressing the way collaborative activities and their coordination can be supported by means of software and computer systems commonly referred to as groupware, as well as their psychological, social, and organizational effects. Collaborative Tool: A software module conceived to assure that the people who design, produce, maintain, commercialize and use software are aware of and communicate about the activities of the others simply, efficiently and effectively, also encouraging creativity, driving innovation, and considering software development’s social nature. Coordination: The management of dependencies between activities (generally representing independent subtasks as a result of the division of a cooperative task) and the support of (inter) dependencies among actors involved in carrying them out.
Groupware: Computer-based systems that support groups of people engaged in a common task (or goal) and that provide an interface to a shared environment, thanks to the enabling technologies of computer networking, software and services. Open Source Community: A loosely organized, ad-hoc community of contributors from all over the world who share an interest in meeting a common need, ranging from minor projects to huge developments, which they carry out using a high-performance collaborative development environment (CDE). The concept represents one of the most successful examples of high-performance collaboration and community-building on the Internet. Software Configuration Management: The discipline of managing the evolution of large and complex software systems.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik and M. Cunha, pp. 167-174, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.3
Outsourcing and Offshoring:
Issues and Impacts on Venture Capital Alev M. Efendioglu University of San Francisco, USA
ABSTRACT
INTRODUCTION
Recently, outsourcing/offshoring has gained significant exposure in the popular as well as academic publications, with authors arguing the many different facets of the concept and its implications. The ongoing debates have revolved around issues related to cost of operations, benefits for outsourcing countries and countries that are recipients of outsourcing, the types of skills and associated unemployment, the types of industries that are being most effected, and even its political implications. This chapter discusses various issues related to outsourcing/offshoring and presents the findings of a research study (a survey of 364 individuals from 101 San Francisco Bay Area venture capital firms) attempting to validate (or disprove) some of the most widely discussed and presented points of view.
In September 1989, Jack Welch, then General Electric Co.’s chairman, flew to India hoping to sell products like airplane engines and plastics to the Indian government. During a breakfast meeting with top government advisers, Sam Pitroda, chief technology adviser to the late Indian Premier Rajiv Gandhi, surprised Mr. Welch by saying “We want to sell you software.” Mr. Welch, by agreeing to start this business relationship, became the impetus that started India on its way to becoming one of the bastions of outsourcing and sparked a global outsourcing revolution (Solomon & Kranhold, 2005). Since then, this revolution has sparked major debates around the issues of operating cost advantages and country benefits, as well as the possible financial, social, and political ramifications of such industry wide practice, on both countries involved in the process.
Even though Jack Welch may have been the impetus that started the revolution, outsourcing is not an U.S. only phenomenon. It is a process that has been used and continues to be used by most developing countries. A recent survey by N. Aggarwal (2004) shows that 40% of Western Europe’s 500 largest companies have already begun moving their service operations abroad. According to Forrester Research, the Cambridge, Mass., consulting and research company, European spending on outsourcing is expected to rise to more than Euro 129 billion (U.S.$156 billion) in 2008 from Euro 82 billion (U.S.$99.16) in 2002, and the number of firms that spend more than 20% of their outsourcing budget abroad will go from 7% in 2004 to 20% in 2008. Never the less, despite the growing interest, European companies still outsource far less than their U.S. counterparts, of which more than 20% will spend over 20% of their outsourcing budget offshore this year (Campoy, 2004). The primary reason for these differences may be the rigid labor laws in Europe that make relocating jobs a long and costly process. For example, while it’s relatively easy for companies in the U.S. to fire employees whose jobs they want to outsource, to lay off an employee in Germany, a company first has to justify its decision to the union and then give its worker a notice period of four weeks to seven months.
COST BENEFITS OF OUTSOURCING To most executives in the U.S. and Europe, offshoring means cheaper wage rates for labor-intensive activities. Discussions of wage rate differentials between Asia, on the one hand, and the U.S. and Europe, on the other, tend to focus on less skilled jobs. However, even in the more skilled jobs the differentials can be compelling as well. In electronics, the wage rate ratio between the U.S. and China for product engineers is about
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10:1. For software developers, the ratio between the U.S. and India is about 8:1. These wage rate differentials, undeniably, generate cost savings. However, the really compelling gains come from pairing savings with top-flight skills. While it is true that only a few Asian countries offer enough English-speaking call-center representatives to deal with U.S. customers, many other skills are more abundant in Asia than in the U.S. China, for example, produces 350,000 graduate engineers every year, compared with 90,000 for U.S. engineering schools. According to a recent GAO report, “despite the widespread belief that global sourcing is driven primarily by companies chasing after low-wage workers, ‘low-wage’ India ranked only eight in 2002 among countries to which the United States sends business, professional and technical service tasks. Ranking ahead of India were Canada, UK, Japan, Germany, France, Mexico and the Netherlands” (Economic Times, 2004). Other authors also argue and support the position that, as labor arbitrage opportunities begin to disappear, the primary reason for offshoring is becoming strategic rather than cost (Shah, 2004). Offshoring is not confined to a few manufacturing industries but rather utilized across many industries, even by non-manufacturing industries trying to decrease their operating or support costs. Biotech industry is one such industry. They have recently awakened to an international climate where firms can get qualified workers for as little as a tenth of the U.S. cost and are on the verge of an offshoring wave of its own, A brief look at the companies in the San Francisco Bay Area turned-up biotech companies that are already testing the offshore waters, among which are Stanford University spin- off SRI International signing an outsourcing deal with a research firm in Shanghai and South San Francisco’s Genentech Inc., founder of the biotech industry, manufacturing some supplies of an innovative cancer drug in Spain.
Outsourcing and Offshoring
This same trend can also be seen in the financial sector. A recent report by Deloitte Research forecasts that by 2010, the world’s 100 largest financial institutions will also move $400 billion of their cost base offshore, saving an average of just under $1.5 billion annually each. The survey forecasts that by 2010 more than 20% of the financial industry’s global cost base will have gone offshore (Wu, 2004). Even though that there are significant cost saving opportunities for Europe (where offshoring is not as prevalent as it is in U.S.), with services costs dropping by 50% to 60%, the cost savings potential seem to have a geographical bias. On one hand, IBM estimates that European companies have so far outsourced less than 8% of the U.S.$19 trillion they spend each year on sales, general, and administrative expenses, and many companies have stated that they can offshore more than one-half of this work (Tyson, 2004). On the other had, according to McKinsey Global Institute, there are significant differences in cost savings by U.S. companies (save U.S.$0.58 of every dollar) versus German companies (save Euro 0.52 for every euro) of corporate spending on jobs they send abroad to India (the largest recipient of latest offshoring activities). When German companies send their offshore work to Eastern Europe (where 59% of their offshoring goes), they save even less. The primary reason for this difference seems to be the cost to coordinate projects across different languages and cultures.
Country Benefits: Unemployment/ Employment There are contradictory arguments on country benefits (or costs) of offshoring. On one side of the argument are projections about the types of jobs that will be offshored and their negative employment consequences for the outsourcing country. A compelling supportive argument uses the advances in the digital revolution and the dramatic
fall in international telecommunications costs as the impetus that provides the opportunity for white-collar jobs — once insulated from global competition — to be offshored to low-wage nations such as India, where labor can be hired for as little as one-tenth its cost in the United States. Among the jobs listed are call-center agents, data processors, medical technicians, and software programmers. According to Forrester Research, an estimated 315,000 U.S. services jobs had been moved overseas by the end of 2003, and by 2015, roughly 3.3 million U.S. business-processing jobs will be performed abroad. However, although this number might seem startlingly large, it is not a significant number when one looks at the total number of 150 million employed workers in United States. Furthermore, in 1999 alone — at the peak of the economic bubble — 15 million workers lost their jobs through mass layoffs as companies restructured their operations (Brainard, 2004). On the other side of the argument is the contention that the industries that are moving jobs out of the U.S. are the more backward industries and U.S. remains the cheapest place in the world to produce for many of the more advanced industries. Peter Drucker, the well known management professor and consultant, represents this camp. He argues that wage cost is of primary importance today for very few industries, namely ones where labor costs account for more than 20% of the total cost of the product — like textiles, and the proportion of the cost of a typical American product attributable to labor costs are continuing to shrink. Using his consulting experiences with one of the world’s biggest auto-parts makers as an example, he states that their internal cost structure show that it is still very much cheaper to produce in this country than to import, because the parts, while labor-intensive, are also very skill-intensive to design and make. He continues to argue that we import twice or three times as many jobs as we export, jobs created by foreign companies coming
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Outsourcing and Offshoring
into the U.S. and as such, we are exporting lowskill, low-paying jobs but are importing high-skill, high-paying jobs (Schlender, 2004). There are also mutually gained benefits through skilled workers that are brought into U.S. and employed by U.S. firms. At the request of firms mainly located in the Silicon Valley (San Francisco Bay Area where significant number of biotech and IT clusters exist), the H-1B (temporary work permits for professionals) were increased from its original 65,000/year to 190,000/year in 2000. U.S. Citizenship & Immigration Services figures show that by the end of September 2004, there were 46,000 petitions for 2005, making it very likely that the 65,000 cap (the increased cap will expire at the end of 2004) will be met even before the new year (Bernstein, 2004). In one sense, the activities these temporary imported workers undertake can also be considered as offshored work. Part of their earnings continue to support their families in the countries they come from and create wealth for those countries, while creating wealth and contributing to the productivity of the companies that employ them and are located in the U.S.
Country Benefits: Financial Impacts There are some figures that support creation of mutual economic benefit for the outsourcing and outsourced countries, presenting a case against offshoring being a zero-sum game. A 2003 study by the McKinsey Global Institute (MGI) showed that offshoring creates wealth for the U.S. as well as for India, the country receiving the jobs. Their findings show that, for every dollar of corporate spending outsourced to India, the U.S. economy captures more than three-quarters of the benefit and gains as much as $1.14 in return (transfer to India creates around $1.46 in new wealth, with $0.33 going to Indian companies). Unfortunately, for German companies the recaptured wealth is only Euro 0.80 for every euro of corporate spending on service functions moved offshore (Agrawal & Farrell, 2003). 1412
In addition to wealth creation, there are benefits gained from increased exports by the offshoring countries. MGI estimates that for every dollar of U.S. corporate spending that moves to India, U.S. exports there increase by five cents, which partially may explain the significant increase of exports to India (from U.S.) from $3.7 billion in 2000 to $5.0 billion in 2003. For Europe, it is estimated that for every euro of spending on work outsourced to India or Eastern Europe, Germany gains Euro 0.03 from new exports (Bailey & Farrell, 2004). There are also other benefits, primarily in employment and earnings, for companies and countries that host these outsourcing firms. Outsourcing firms, U.S. and foreign, with operations in India, Eastern Europe and other parts of Asia are seeing a swift increase in business. In India, Wipro, and Indian outsourcing firm, is continuing to hire staff rapidly and it has added more than 5,500 employees in the recent quarter, lifting its total work force to about 37,000. U.S.-based outsourcing companies also are growing. Electronic Data Systems Corp., which is based in Plano, Texas, with operations all over the world, states that its pipeline of potential deals is robust and growing and, last quarter, signed a $1.1 billion outsourcing deal with Bank of America Corp. of Charlotte, N.C. EDS primarily services the bank inside the U.S. (Drucker & Solomon, 2004). India today earns more than $17 billion from corporations worldwide seeking low-cost overseas talent to do everything from write software to collect debts to design semiconductors (Solomon & Kranhold, 2005).
Other Issues: Political and Regulatory Environments, Security, and Investment Risks Offshoring is frequently blamed for the agonizingly slow pace of recent job growth in the United States, despite a recovering economy; the response from Congress has been to include in a
Outsourcing and Offshoring
fiscal 2004 spending bill a provision prohibiting federal agencies from outsourcing some kinds of work to private companies that use workers in foreign countries. Twenty-three states are also considering similar restrictions and 4 have already passed them. An example of one such effort is the proposed state Senate bill in Colorado, which was intended to bar the use of offshore workers to perform services such as call-center operations. It was only shelved because the Senators thought the price tag of $24 million was too high. Nevertheless, this was the second year that Colorado had weighed such legislation before killing it (St. John, 2005; McDougall, 2005). Outsourcing also remains a hot political issue in Europe. Around 30% of the companies polled in a recent survey by Munich-based Roland Berger Strategy Consultants and the U.N. Conference on Trade and Development said they considered public backlash to be a risk to offshoring. In the U.S. and European countries, in addition to wages (which are direct labor costs), there are employment related costs, such are pension costs, benefits and health-care costs, costs associated with complying with regulations, taxation, and labor relations requirements, that are quickly beginning to be more significant than direct labor costs. Even though we have not come across any studies that have measured these costs, these costs might also encourage offshoring/outsourcing by organizations that have to bear these costs. There are also identifiable investment risks that companies have to consider as part of their decision to offshore. These risks have been identified and quantified annually since 2000 by Kurtzman, Yago and Phumiwasana (2004). They have studied 50 countries to create a country-by-country ranking (data complied from 70 different sources, 40 of which were directly comparable) of opacity — the degree to which the country lacks clear, accurate, easily discernible and widely accepted practices governing the relationships among businesses, investors, and governments. They have identified and used five items as components of their opacity
index: corruption, efficacy of the legal system, deleterious economic policy, inadequate accounting and governance practices, and detrimental regulatory structures. Based on the “opacity rating”, they determine the interest rate premium or discount derived from doing business in a given country as compared to the risk of doing business in the U.S. Their system and analysis is intended to create an awareness of the investment risk factors and enable companies to make better portfolio and direct investment decisions regarding where to develop markets, locate productive resources, or find the best outsource partner. Finally, there are broad security issues that will impact organizations that offshore to countries that have more turbulent environments than the ones one might be used to seeing in the U.S. and Europe. A case in point is the bomb threats against two Indian outsourcing companies, Wipro Technologies and Infosys Technologies, both of which were received during March 2005 (Krishnadas, 2005). Since the largest U.S. target of IT offshoring is India, comprising nearly 25% of the global IT and business process offshoring, for U.S. companies (McKinsey, 2003), these types of threats create environments for interruption and delay of ongoing projects, loss of data, compromised technical know how and personal information, and increase the risk of doing business with companies in such environments.
RESEARCH STUDY To shed some light into these differing perspectives on costs and benefits of outsourcing/offshoring, and to identify specific a survey issues for and the concerns of venture capitalists, was sent to 364 individuals (venture capitalists) from 101 San Francisco Bay Area venture capital firms. Of the 364 mailed questionnaires, 53 were returned, of which, 42 were usable. The primary objective of the study was to determine if the issues that are generally associated with offshoring were the same
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Outsourcing and Offshoring
issues for the venture capitalists and to understand the “impact of this business practice on funding decisions by the venture capitalists”. The study questionnaire was designed to focus on offshoring’s impact on availability of capital for expansion or start-up, impact of potential duplication of effort and loss of centralization of business process on the valuation of a company, impact of the decision to outsource/off-shore on long term shareholder value, impact of outsourcing/offshoring on company’s perceived liability exposure, potential risk/ cost of noncompliance (Sarbanes-Oxley, etc.) affect financial valuation of outsourcing/offshoring. We also tried to identify the perceptions the study participants’ on whether outsourcing programs have generally attained the expected magnitude of improvements in cost bases (managerial and coordination costs versus wage benefits). The secondary objective was to test the validity of some of the claims made through various publications. The study was conducted during December 2004 and January 2005 and the following sections present and discuss the findings as they apply to the general issues related to offshoring, as presented above, and perspectives of venture capitalists on these issues.
DISCUSSION OF FINDINGS Our survey responses show that offshoring is increasingly an integral strategy for businesses in the U.S. (90.4% of our respondents had funded companies that have used offshoring) and offshoring is seen to provide significant a competitive advantage. When asked the types of off-shored activities, 19.5% of respondents identified “Software Development”, 16.9% “Support”, 14.3% “R&D”, 11.7% “Quality Assurance”, 14.3% “Manufacturing”, 11.7% “Engineering”, and the remaining 11.7% of respondents identified “Other” functions that consisted of responses such as healthcare field trials, data entry, marketing, collection, and consulting.
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Study respondents echoed the importance of labor arbitrage but also indicated that the availability of skilled labor is an important factor for sustainability and growth of company operations. In a follow-up discussion, this point was succinctly presented by Mr. Ismael Ghalimi (2005), chief strategy officer and co-founder of Intalio, who stated “outsourcing development and quality assurance for a software company is not so much about short-term cost reduction as it is about long-term output scalability”. Nevertheless, our study group identified cost savings as the primary benefit of offshoring, and the average of the expected cost savings by our respondents was 31.77%. However, the expectations were not evenly distributed, 51.3% of respondents would accept a minimum 20% to 30% cost savings and 38.5% a minimum of 40% to 50% cost savings. Unfortunately, the survey data did not show how many times these expectations were realized in investments made by survey participants. Our respondents were not as concerned with a timely and flexible supply chain and nearly 95% expected some time slippage in offshored deliverables. They were willing to tolerate an average of two weeks of project delay time, with 79% willing
to tolerate one to two weeks delay and 21% three to eight weeks. Only two respondents identified that they expected no delay (these two respondents had utilized offshoring five times to date). The study participants had funded companies that primarily offshored to India and China and, based on their experiences, they identified six
major areas of concern associated with offshoring which included managerial issues, loss of U.S. jobs, project risk (time loss), intellectual property, regulatory issues, and quality assurance. The most commonly cited managerial issues included communication, coordination, and control. Other areas, such as staff retention, cultural challenges,
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Outsourcing and Offshoring
company culture, labor quality, and trust were also mentioned as areas of concern. While strongly agreeing that cost savings outweighed the specter of unexpected hidden costs, the study respondents indicated a very low tolerance for added investment risk associated with offshored outsourcing, and they were able to quantify the additional risk premium as 6.94%. This number is comparable to the risk premium calculated using the “Opacity Index — the degree to which the country lacks clear, accurate, easily discernible and widely accepted practices governing the relationships among businesses, investors, and governments” by Kurtzman, Yago and Phumiwasana (2004). These researchers have calculated the “opacity premiums” as 6.09% for India and 6.49% for China, identifying the interest rate premium or
discount from doing business in a given country as compared to doing business in the U.S. However, the majority of our respondents’ expectations diverged significantly from the calculated risk premium of the Opacity Index. Unfortunately, all of our respondents did not provide a numeric risk premium and, because our sample size was not large enough, we could not calculate any correlation (or lack of it), between expectations of cost savings and additional acceptable investment risk. Finally, our findings did not support the perspective that presents causality between increasingly rigid regulatory environments and for increased offshoring, especially for start-ups. 78.5% of our study group responded as neutral or disagreed with the statement “U.S. regulatory compliance was a reason for offshoring.”
Table 1. Summary of questionnaire responses IMPACT OF OFF-SHORING ON INVESTMENT DECISION
N E U -
AVERAGE
AGREE
2.26
22
16
4
Off-shoring can be a competitive advantage.
1.83
36
5
1
Off-shoring has generally attained the expected magnitude of cost savings.
2.31
31
6
5
Off-shoring programs have achieved the desired return on investment.
2.50
26
11
5
2.19
34
6
2
3.36
9
14
19
I think off-shoring increases a company’s liability exposure.
3.24
5
21
16
Decentralizing business processes negatively affects valuation.
3.74
2
11
29
2.81
14
14
13
2.98
13
17
12
I would be more inclined to invest in an established firm that utilizes offshoring.
TRAL
DISAGREE
SUPPORT OF OFF-SHORING
The expectation of significant cost savings outweighs the specter of unexpected hidden costs. The financial burden of U.S. regulatory compliance costs is an important reason for off-shoring. AGAINST OF-SHORING
WHERE & WHAT TO OFF-SHORE Companies should only offshore to countries that company management has cultural ties. Off-shoring is primarily useful for standards based functions.
SCALE: 1 = Strongly Agree; 2 = Agree; 3 = Neutral; 4 = Disagree; 5 = Strongly Disagree Strongly Agree and Agree responses, and Disagree and Strongly Disagree responses are aggregated for presentation purposes.
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Outsourcing and Offshoring
CONCLUSION As was previously stated, the primary objective of the study was to determine if the issues that are generally associated with offshoring were the same issues for the venture capitalists and to understand the “impact of this business practice on funding decisions by the venture capitalists” and the results of the study present a mixed picture, by supporting some perspectives associated with offshoring, while contradicting other. However, when one looks at the question of possible impact of offshoring on funding and valuation of the offshoring companies, there is no conflict or confusion. The results of the VC survey reinforced the points of view that argue offshored outsourcing can create a competitive advantage and can yield very significant cost savings for the offshoring company. It also reinforced that there are major, identifiable costs associated with low quality product and information from the offshored company, lost sensitive data and know-how, and investment risk posed by a host of other local environment factors. Some of the findings were contrary to other claims made through various news programs and prevailing popular beliefs. Our respondents did not see increased government regulations, for example, Sarbanes-Oxley, as a compelling reason for offshoring or thought that a cultural connection to the offshored country was critical. The results also show that venture capitalists do not view offshoring as a major impediment or negative for funding new or ongoing business enterprises, or see it as having a negative impact on the valuation of the offshoring company or increase its liability exposure. Even though they recognize the practice as an element that increases the “investment risk”, this increased risk was not seen as a factor that would eliminate or significantly limit their funding of organizations that utilize offshoring as a business practice. The investment risk premium identified by our
respondents (6.944%), who had primarily funded companies that offshored to India and China, was very much in line with the Opacity Index risk premium of 6.09% for India and 6.49% for China, which were calculated by other researchers of offshore investment. Unfortunately, the claims of cost savings and competitive advantage could not be tested or their validity determined for the venture capitalists (that were part of the study) or the companies utilizing offshoring as a business practice. This requires access to company documents that can provide specifics on the cost of operations, before and after outsourcing, including start-up costs, quality issues, and the communication and managerial costs associated with this new extended enterprise, and we did not have such access. Another aspect of offshored outsourcing that was interesting but could not be identified and modeled was the set of decisions and activities involved in this process. Researching and understanding of these two areas, among others can provide a greater understanding of this concept and enable us, as managers, to deal with some of the critical issues associated with true globalization of business enterprises.
REFERENCES Aggarwal, N. (2004, June 21). Outsourcing takes off in Europe in a major way. Straits Times. Agrawal, V., & Farrell, D. (2003). Who wins in offshoring? The McKinsey Quarterly, 2003 Special Edition: Global Directions, 36-41. Baily, M., & Farrell, D. (2004, July). Exploding the myths of offshoring. The McKinsey Quarterly. Retrieved October 22, 2004, from http:// www.mckinseyquarterly.com/article_ print. aspx?L2=7&L3=10&ar=1453 Bernstein, A. (2004, September 27). Still hungry for foreign hires. Business Week. Retrieved September 30, 2004, from http://www.businessweek.
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com/magazine/content/04_39/c3901020_mz003. htm#ZZZFX9XQ6ZD Brainard, L. & Litan, R. E. (2004). Offshoring service jobs: Bane or boon and what to do? The Brookings Institution, policy brief #132–2004. Campoy, A. (2004, September 27). Think locally. Wall Street Journal, R8. Drucker, J., & Solomon, J. (2004, October 18). Outsourcing booms, although quietly amid political heat. Wall Street Journal, B1. Ghalimi, I. (2005, March 5). Interview of Ismael Ghalimi of Intalio by Kris Cejka. India 8th in U.S. outsourcing list. (2004, December 29). Times News Network. Retrieved March 9, 2005, from http://economictimes.indiatimes. com/articleshow/974176.cms Kletzer, L. G. (2001, September). Job loss from imports: Measuring the costs. Institute for International Economics, Washington, DC. Krishnadas, K. C. (2005, March 15). After Wipro, Infosys now gets bomb threat. Retrieved March 22, 2005, from http://www.outsourcingpipeline. com/news/159900306 Kurtzman, J., Yago, G., & Phumiwasana, T. (2004, October). The global costs of opacity. MIT Sloan Management Review. Retrieved February 25, 2005, from http://www.milkeninstitute.org/ publications/publications.taf ?function=detail& ID=378&cat=Arts
McCarthy, J. C. (2002, November 11). 3.3 million U.S. services jobs to go offshore. Forrester Brief. McDougall, P. (2005). Even in government, dollars And sense prevail on outsourcing. Retrieved March 22, 2005, from http://informationweek. outsourcingpipeline.com McKinsey & Company. (2003). Globalisation of the ICT sector. In Information technology outlook 2004 (pp. xx-xx). CITY, STATE: PUBLISHER. McKinsey Global Institute. (2003, October). New horizons: Multinational company investment in developing economies. Schlender, B. (2004, January 12). Peter Drucker sets us straight. Fortune. Shah, S. (2004, September 1). India’s dwindling IT labor advantage. Optimize, 66-71. Solomon, J., & Kranhold, K. (2005, March 23). In India’s outsourcing boom, GE played a starring role. Wall Street Journal, A1. St. John, D. (2005). Offshore outsourcing: Realities and battles. Retrieved February 16, 2005, from http://www.outsourcingpipeline.com/trendwatch/ trendwatch.jhtml Tyson, L. D. (2004, December 6). Offshoring: Pros and cons for Europe. Business Week. Wu, A. (2004, July 6). Looking offshore. San Francisco Chronicle, C-1.
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 197-208, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.4
Enterprise Alignment and the Challenge for Organization Development Brian H. Cameron The Pennsylvania State University, USA Shaun C. Knight The Pennsylvania State University, USA
INTRODUCTION In today’s global, hyper-competitive business environment, enterprise alignment is a top concern with senior management. With mergers, global joint ventures, outsourcing/off-shoring, and increased global competition, organizations are struggling with a host of enterprise alignment issues, particularly around information technology (IT) strategy alignment. Well-aligned systems and processes can provide an organization with a powerful source of competitive advantage. According to Gartner Group, the number one concern of business and IT professions world-wide is the alignment of IT and business strategies. Unfortunately, according to Whittle and Myrick (2005), less than 10% of the Global 2000 have well integrated systems that are aligned with the strategy
of the business. In addition, according to Worren, Ruddle, and Moore (1999), organization development (OD) efforts are also often misaligned with the strategy of the business. These strategic misalignments are becoming an increasing concern to senior management and are areas of opportunity for OD and IT organizations. From the early eighties through today, as technology has become an ubiquitous part of the enterprise, there has been a dichotomy between technology centric frameworks for enterprise improvement and business centric frameworks. Unfortunately, to-date, no one framework or school of thought has been successful at bridging the divide between business and technology, whether at the enterprise level, or at the more micro business area- system. Despite the growing dependency of business
Enterprise Alignment and the Challenge for Organization Development
on technology, there is a great misalignment between the strategy of the IT organization and the strategy of the overall business. The influence of IT has become pervasive, with technology no longer just supporting key businesses but in many cases driving them.
BACKGROUND The demands of a knowledge- and informationbased economy will continue to keep these efforts at center stage, but a shift is already underway that positions organizations to evolve from being producers of phase-one style projects--which deal with understanding channels and business process optimization--to taking on the role of implementing and deploying complex technologies in support of supply chain management, Web-based distribution, and customer relationship management. An expanded scope of IT activities--due to the extension of IT to the larger world of suppliers, customers, and consultants, and the management of information, documents, and processes--is increasingly part of internal enterprise-wide technical architectures. These new ways of using IT will continue to put stress on already-strained human capital, causing the IT organization to continue partnering or sourcing projects through internal or external specialists. According to Whittle et al. (2005), through 2006-12, significant phenomenon in IT and business will emerge that will affect IT’s influence on business. Technologies of permanent, major, or disruptive influence will emerge to drive new business megatrends. This phenomenon will precipitate leverageable derivative imperatives, in which leading executives will make ongoing investments. By 2007, the taxonomy of these megatrends, and derivative imperatives, will lay permanent, new ground rules in business/IT investment planning and strategy. These megatrends will also dramatically affect OD investment planning and strategy. New thought leaders will
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emerge and they will learn how to best interpret and react to these changes for competitive advantage. By 2012, pervasive connectivity and information utility ubiquity will result in 24x7 supply chain and customer relationship management (CRM) activities for most companies. According to Sledgianowski and Luftman (2005), traditional boundaries between companies will not be as apparent, as enterprises focus on their core competencies and core contributions to a complex web of partnerships, interfaces, and relationships that make up the enterprise value network. Following the keiretsu model, there will still be separate companies, with evolution taking place around external interfaces and relationships. Global business community consolidation could result in an era of “coapetition on steroids.” Business community consolidation is defined as the structured networking of companies with complementary customers/products around common themes. Globalization and cultural changes create workforces of temps, part-timers, free agents, contractors, and suppliers. These enhanced response capabilities are matched by lack of corporate culture and institutional knowledge that can result in such environments. Continuing to focus on aligning workforce management and development to be able to address these challenges is key for OD as the need for versatile knowledge workers continues. This requires companies to become expert human capitalists, proficient in “right sourcing”--that is, finding the right skill level as well as the right numbers of staff, whether from external or internal sources. Indeed, in the information economy, success will depend on being able to leverage the right intellectual and human capital and the degree to which this human capital understands and relates the basic tenants of strategic alignment to their work. The recognition that people are the drivers for innovation does not automatically result in the higher levels of organizational responsive-
Enterprise Alignment and the Challenge for Organization Development
ness that are necessary for OD to meet business needs. Innovation is difficult without the organizational agility that enables transformation of the business processes needed to achieve competitive advantage. Agility drives greater facility to change technologies rapidly, allowing organizations to respond quickly to new threats and opportunities. Organizations will achieve this type of agility by aligning the activities of the organization with current strategic objectives and through this process achieving a high degree of enterprise alignment (Grant, 2003). OD and IT organizations should be the strategic enables of the agile organization. However, in many organizations, the OD and IT functions are not viewed as strategic enablers. IT is often viewed as a reactive organization that is brought into the picture after strategic decisions have been made. The same can be said for OD. A major objective of both organizations (IT and OD) should be the ascension to that of a strategic partner that is at the table when decisions are made. Achieving this objective requires greater agility from IT and OD personnel in terms of thought, actions, and coordination of behaviors, combined with a clear understanding of fundamental business processes and objectives. However, IT organizations historically have focused more on technology and OD organizations have focused more on training programs rather than on business processes and therefore may find these basic concepts difficult to implement. Execution of these business fundamentals requires OD and IT organizations to move from a reactive to a proactive stance as fully enabled business partners. For OD and IT professionals, the value of their organizations to the enterprise is clear; however, for individuals in the lines of business or in the non-IT and non-OD communities, recognition and acceptance of this value is not always straight forward. Both organizations are under substantial pressure, in light of mounting costs, to demonstrate value to the enterprise on
virtually a daily basis. This entails demonstrating credibility through a central value proposition that uses human capital to drive the creation, capture, and communication of value throughout the processes and services that each organization delivers. One of the most frequently cited reason for this lack of perceived organizational value and alignment is a lack of well rounded OD and IT professionals that “understand the big picture” and take an enterprise perspective when making decisions (Worren et al., 1999). The implications for organization development (OD) professionals are immense. In order to be able to hire, train, and develop the IT and functional business professionals needed in today’s environment, OD professionals must first develop an in-depth understanding of the concepts, issues, and enabling strategies surrounding enterprise alignment and be able to relate these concepts, issues, and strategies to their enterprise. This foundation will enable the OD professional to more effectively contribute to a strategic mission of the enterprise and gain a seat at the table with the strategic decision makers and will assist the IT organization in making the same ascension. While the idea of the organization development professional as an integral partner in development and implementation of organizational strategy is not a new concept, little literature exists that describes how to enable this transformation. According to Becker and Gerhart (1996), organizations need to evaluate their internal human resource strategies (which include the OD function) to ensure that there is adequate horizontal and vertical alignment. Becker et al. (1996) describe the horizontal alignment as the ability to provide internal congruency with its own policies and practices. More importantly and relevant is the notion of vertical alignment which Becker et al. (1996) denote as the congruency of human resource polices and practices how they align with organizational strategy. Rose and Kumar (2006) note several “authors have attempted to develop
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prior typologies for human resources and organizational strategy” (Arthur, 1992; MacDuffie, 1995; Miles & Snow, 1984). While OD may seem to be an invisible, undefined role within the human resources function through the viewpoint of the key strategists within the organizational structure. As this concept relates to organizational strategic alignment, the lacking ability to validate the importance of this strategic partnership tends to arise from a lack of full understanding of core competencies and its relation to the accomplishment of the strategic mission and continues to plague many organizations today. The information presented in this article lays the strategic foundation for the ascension of the organization development role to that of strategic contributor to the organization and suggests a strategic partnership and alignment model for OD and IT in relation to the rest of the enterprise.
ENTERPRISE ALIGNMENT Enterprise alignment refers to the ongoing process every company should go through to keep the elements of the organization aligned with the organization’s strategy and goals (Ndede-Amadi, 2004). Vertical alignment is used to assure that process and activity measures and the measures used to evaluate managerial performance are all aligned with corporate goals. Horizontal alignment, or process improvement, focuses in assuring that all of the activities that take place in a process are aligned with the goals of the process. In most organizations, change is constant and thus, the organization is always working to realign, vertically and horizontally, to keep everything in sync with the changing strategy and aims of the organization. One function of the business strategy is to define the constraints that are imposed on the IT and OD solutions. A business strategy that calls for differentiation by providing the highest, most-innovative levels of service is very different from a strategy that calls for increasing market
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share by being the lowest-cost provider. Each strategy is equally valid, but the characteristics of the business relationships that the enterprise supports will be dramatically different, and so will the IT and OD solutions that result. The lack of business/IT alignment and business/OD alignment are common laments in today’s companies (Luna-Reyes, Zhang, GilGarcia, & Cresswell, 2005). The relationship between IT and the business (as well as OD and the business) is often antagonistic. The business community complains that IT and OD don’t align with the business; the IT and OD communities complain that the business declines to contribute in a meaningful way to ensure that alignment. The business units regard IT and OD as cost centers populated by people with little business understanding. The technologists lament the lack of discipline that leads the business to push for technology solutions that add to the complexity of the technical landscape rather than abiding by corporate standards. The training professional is often not trained to adequately address both key constituents (IT and OD personnel) in a meaningful way that also adds value to the adaptive strategies that are needed to be implemented by officers of the firm. The key to effectively bridging the IT and OD worlds resides in the ability of training professionals and HR representatives to understand all facets of the IT strategy and finds tactical ways to integrate corporate needs and talent. For the IT organization, alignment must assess the current and future cause-and-effect relationships among four basic elements: business goals, business structures, IT infrastructures, and IT applications. Each of the four basic elements can be in or out of alignment with the others. IT infrastructures, for example, can be aligned with business operations (the business organization and its processes), IT applications (the services delivered to the organizations), and business goals (the strategies and goals for the business). Taken together, the alignment of IT to the business is
Enterprise Alignment and the Challenge for Organization Development
the combination of the relationships among IT (applications and infrastructure) and business (goals and structures) (Lockamy, & Smith, 1997). For the firms integrating OD as a strategic effort, tactical organizational alignment should be accomplished through a process analysis approach. Specifically, Bullinger (1999) indicated that high performance organizations encompass five elements including core competence, networks and co-operations, process orientation, free margins, and learning organization structures. As industries undergo radical change and senior business managers devise new strategies to meet changing circumstances, management often discovers that the IT and OD resources needed to implement the strategy (upon which the health--and perhaps the survival--of the enterprise depends) has been deployed elsewhere. All IT and OD organizations are busy, but why are so many busy doing the wrong things? Too frequently, IT and OD organizations give higher priority to “customer satisfaction” projects than to “value to the business” initiatives. For years, “customer satisfaction” has been the Holy Grail of IT and OD organizations. No one wants unhappy customers--especially ones that loudly complain to management. As a result, service organizations (including IT and OD organizations) often give the highest priority to the most critical--and most vocal--customers. However, “customer satisfaction” is not the same as “value.” Some customer dissatisfaction is inevitable. Customer dissatisfaction can also be healthy. It tells us what is “broken” and therefore where to place emphasis to improve service levels. The problem arises when too much (or all) of our “investment resources” are spent fixing customer satisfaction problems and not enough are addressing “alignment/value” initiatives (i.e., we are prioritizing based on “happiness” rather than “value”) (Lockamy et al., 1997). How much “customer happiness” is enough? In many cases, “good enough” is good enough. On the other hand, a reasonable degree of end-user and middle manager stability
is needed. Without it, IT and OD organizations can spend so much time “putting out fires” that no resources remain for more strategic initiatives that deliver high value to the enterprise. Perhaps as important, too many unhappy customers can kill an IT or OD organization politically. In the final analysis, we may need to accept users that are “sullen but not mutinous”; that is, those who are quiet enough to enable resources to be reallocated to more strategic initiatives. To put it another way, the vision of the future should define what (primarily) external factors the organization needs to “sense,” and how the organization will be designed to “respond” to those changes. Sensing the information is relatively easy. As information sources multiply, they generate more information in shorter cycle times. Gathering data and transforming it into decision-quality information is merely the first step. Doing something with the results of the analysis is an entirely different story. Responding appropriately and rapidly can be difficult. Responding is all about changing business processes, organization, and culture, none of which is easy. Leading organizations have and will continue to reduce product and process life cycles. What took five years to develop in the late 1990s may take only two or three years now, and may take only a year in 2015. As organizations improve their ability to “sense”, the time to respond will become the key differentiator (Pettigrew, Woodman, & Cameron, 2001). While various functions of the IT & OD organizations continue to grow, the fact is that most organizations contain a great deal of idle capacity at any given time. In an adaptive organization, the old rules of how these organizations operate cannot remain acceptable. Enterprises can no longer have business decisions decoupled from IT & OD decisions. (IT & OD must drive business innovation, quickly, rather than running to keep up with the business) (Turner, 1997). An environment of high fixed costs, relatively inflexible investments, and no insight into the
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overall operation is unacceptable. In addition, IT & OD - particularly their value and their ability to relate value to business in terms of revenue and service delivery, cost management, innovation, and support - needs to be transparent. If this can be achieved, the result will be a more flexible, adaptive, aligned organization.
CONCLUSION Everyone in the organization should have a working knowledge of the basic tenants of enterprise alignment and be able to articulate how what they do contributes to the strategy of the business. The employees of the organization should also understand the basics of enterprise alignment and recognize areas for improvement. It is the role of OD to create this broad organizational view in employees at all levels of the organization and create the culture of an adaptive organization. An adaptive organization is one that focuses on dramatically improving the economics of business changes to enhance the organization’s performance (e.g., profitability, growth, liquidity, integrity). An adaptive organization is one that has a dynamic IT and OD functions that support dynamic business functions. This is accomplished by harnessing IT and OD to implement new forms of collaboration, innovation, resource sharing, and sourcing to dynamically optimize loosely coupled modular resources (e.g., people, products, services, technologies, processes) in a timely fashion to a constantly changing competitive market. The value of both organizations, then, must be thought of in terms of the value provided the business. Obviously, it is difficult to arrive at an accurate real value for the IT and OD organizations. But value, perceived and real, sets the stage for each organization’s role in its ability to enable, support, or drive business change. For the IT organization, value in this context primarily comes from the
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ability to apply technology to increase the effective use of information to drive positive innovation and increase the strategic importance of the organization. For the OD organization, being able to supply a pipeline of talent to enable or even enhance the strategic objectives to increase organizational efficiency and competitiveness is imperative. Market demands for business agility justify new approaches toward organizational development, but few organizations have recognized the need to establish a holistic approach to enable knowledge workers to add greater value to business processes (Turner, 1997). Given the ongoing structural changes within enterprises (e.g., virtualization of the workplace, ability to synchronize activities across a global marketplace), such an approach is fundamental to sustain the level of business agility required to succeed in virtually any market. Organizations failing to invest in their workforce and next-generation workplace environment will face erosion of products and services (e.g., throughput, R&D, defect rates, market share), as well as diminished capacity to compete globally as a result of growing employee malaise. To meet the need for better business process management and to thrive in the current economic climate globally, it is imperative to elevate OD strategy as a core competency of the organization, and where possible, to team with other part of the organization, especially IT. The OD organization should encourage and develop an understanding/ awareness of the strategic value that OD brings to the business. Although these are ambitious goals, the OD organization ultimately has an opportunity to demonstrate enterprise leadership and, by applying the information outlined in this book, transfer its success throughout the enterprise. The challenge for OD is complex. First, OD must determine if enterprise alignment are topics of importance to senior management. According to (Whittle et al., 2005), only approximately 20% of the global 2000 have addressed enterprise
Enterprise Alignment and the Challenge for Organization Development
alignment issues in a meaningful manner. This fact, presents great challenges and opportunities for OD. If enterprise alignment is not on the radar screens of senior management, then OD must find ways to get these critical topics on the radar screen and understood by the senior leadership of the business. In many cases, the strategic concepts behind enterprise alignment will be understood by senior management but not by lower levels of management within the organization (Peak, Guynes, & Kroon, 2005). In many cases, these people may not be able to articulate the business strategy of the organization, let alone understand how well they are aligned with the strategy. Organizational assessments can be used to determine the degree to which various parts of the organization understand the business strategy of the organization and to determine how well the activities of the origination are aligned with the strategy. The results of these assessments should be used to formulate an OD strategy for aligning various parts of the organization. There are at least two levels of assessment to perform--one at the organization level, the other at the individual level. Prior to the actual assessment, senior management must be part of (and will likely be the primary sponsor of) an assessment process as a precursor to change. This will require the ability to lay out the case to be made for change. For example, are there specific values or drivers that must be considered or evolved, such as the capability of the organization to deliver product or service excellence? Any assessment of the organization must begin with an awareness of values. Values are defined as “beliefs; those concepts that indicate why we take a particular course of action:” (Vicere, 2003). Values are psychological elements associated with individuals; in an organization, values are the expression of the culture of that group of individuals, expressed most often as part of a vision and mission. Effectively, values become the guidelines or principles for attaining
the goals articulated by the vision and mission. Most organizations take the time to establish vision and mission statements; however, as the case of Enron demonstrated all too vividly, not all organizations actually live by their stated values. These disconnects cause dislocation, disruption in the workforce, and in some cases, as with Enron, the type of fraud that can lead to dissolution of the business. Values combine personal and organizational capabilities with integrity. When one type of value is stressed to the exclusion of others (e.g., a task or production focus that inhibits teamwork, more individual goals than one person can keep up with), the system breaks down, causing confusion and ineffectiveness. Unfortunately, in many organizations, values have an immediate and personal nature as well as a longer-term, institutionalized aspect. Thus, the stated values of the organization, such as a commitment to excellence, or respect for the individual, must mesh with the individual employee’s perception of the manifestation of those values in the immediate team of which he or she is a part. This image will determine how the organization actualizes (or not) its goals and objectives. If the stated image is highly positive (excellence, awareness of individual contribution, team orientation) but the reality is that people do not see these values executed, the vision and ultimate attainment of objectives are negatively impacted (Teo & Ang, 1999). For an effort of this magnitude to be successful, senior management must understand and fully support OD’s involvement in strategic alignment initiatives. In fact, OD should be working with senior management as a strategic partner in planning and implements such efforts. If the OD organization is viewed as a reactive organization that is typically brought into the picture after strategic decisions have been made, the value perception of OD will need to be significantly changed before senior management will view OD as a strategic asset.
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This will likely require any alignment effort to begin within the OD organization. It will require OD professionals that possess a strong understanding of the business and are able to think and act enterprise-wide. Technology is often at the center of most enterprise alignment initiatives and approaches for the OD organization to strategically partner with the IT organization are needed. Both the OD and IT organizations are often undervalued in many companies, yet both organizations can and should be key enablers of the business strategy. By recognizing the potential synergies that exist between these organizations and aligning their efforts, the OD and IT organizations can position themselves as critical enablers of enterprise agility and competitiveness. Unfortunately, the vast majority of the global 2000 organizations are nowhere near ready to embrace such a holistic view of OD and IT and they continue to struggle with managing human capital and technology around the issue of the moment. In fact, fewer than 10% of global 2000 organizations have implemented an integrated strategic alignment initiative involving OD (Worren et al., 1999). This will progressively change with the increasing importance of strategic alignment as strategic imperatives critical for organizational success. The implications and challenges for OD are immense. The OD professional must be able to ascertain the level of importance placed upon strategic alignment by the senior management of the organization, as well as the level of understanding that senior management possesses in these areas. Depending on the results of this analysis, executive-level development on these topics may be needed in order to get senior management on the same page and build the senior level support needed to create the adaptive enterprise. At the same time, OD must do a self analysis to determine if the OD organization has the right people with the right perspective and knowledge in place to effect enterprise-wide change. In most cases, ad-
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ditional development and some internal changes will be needed before the OD organization is ready to be an effective change leader. Once these two critical factors are in place (senior management education and buy-in and internal OD education and re-alignment), the organization is ready to put a plan in place for the long-term strategic alignment of the enterprise.
REFERENCES Arthur, J. (1992). The link between business strategy and industrial relations systems in American steel mini-mills. Industrial and Labor Relations Review, 45, 488-506. Becker, B., & Gerhart, B. (1996). The impact of human resource management on organizational performance: Progress and prospects. Academy of Management Journal, 30, 779-801. Bullinger, H. J. (1999). Turbulent times require creative thinking: New European concepts in production management. International Journal of Production Economics, 60-61, 9-27. Grant, G. G. (2003). Strategic alignment and enterprise systems implementation: The case of Metalco. Journal of Information Technology, 18, 159-175. Lei, D., Hitt, M., & Bettis, R. (1996). Dynamic core competencies through meta-learning and strategic context. Journal of Management, 22(4), 549-570. Luna-Reyes, L. F., Zhang, J., Gil-Garcia, J. R., & Cresswell, A. M. (2005). Information systems development as emergent social-technical change: A practice approach. European Journal of Information Systems, 14, 93-105. MacDuffie, J. P. (1995). Human resource bundles and manufacturing performance: Organizational logic and flexible production systems in the world auto industry. Industry and Labor Relations Review, 48, 197-221.
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Miles, R. E., & Snow, C. C. (1984). Designing strategic human resource systems. Organizational Dynamics, 13, 36-52. Ndede-Amadi, A. A. (2004). What strategic alignment, process redesign, enterprise resource planning, and e-commerce have in common: Enterprise-wide computing. Business Process Management Journal, 10(2), 184-199. Peak, D., Guynes, C. S., & Kroon, V. (2005). Information technology alignment planning—a case study. Information and Management, 42, 619-633. Pettigrew, A. M., Woodman, R. W., & Cameron, K. S. (2001). Studying organizational change and development: Challenges for future research. Academy of Management Journal 44(4), 697713.
Worren, N. A. M., Ruddle, K., & Moore, K. (1999). From organizational development to change management: The emergence of a new profession. The Journal of Applied Behavioral Science, 35(3), 273-286. Yukl, G. A. (1989). Leadership in organizations (2nd ed.). Englewood Cliffs, NJ: Prentice-Hall, Inc.
KEY TERMS Chief Information Officer (CIO): The individual in an organization that is responsible for the strategic use and management of information, information systems, and information technology within that organization.
Sledgianowski, D., & Luftman, J. (2005). ITBusiness strategic alignment maturity: A case study. Journal of Cases on Information Technology, 7(2), 102-120.
Chief Learning Officer (CLO): The individual in an organization that is responsible for developing a culture for organizational learning, continuous learning, or knowledge management.
Teo, S. H., & Ang, J. S. K. (1999). Critical success factors in the alignment of IS plans with business plans. International Journal of Information Management, 19, 173-185.
Enterprise Alignment: The alignment of an organization’s information technology (IT) strategy with its business strategy.
Turner, R. (1997). The versatile organization: Achieving centuries of sustainable growth. European Management Journal, 15(5), 509-522.
Information Technology: A term that encompasses all forms of technology used to create, store, exchange and utilize information in its various forms.
Vicere, A. A. (2003). Leadership and the networked economy. Human Resource Planning, 27-33. Whittle, R., & Myrick, C. B. (2005). Enterprise business architecture: The formal link between strategy and results. Boca Raton, FL: CRC Press LLC.
Knowledge Worker: A member of the organization who uses knowledge to be a more productive worker. Organization Development: The field of organizational development (OD) is concerned with the performance, development, and effectiveness of human organizations.
This work was previously published in Encyclopedia of Human Resources Information Systems: Challenges in e-HRM, edited by T. Torres-Coronas and M. Arias-Oliva, pp. 350-356, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.5
A Study of Software Process Improvement in Small and Medium Organizations Deepti Mishra Atilim University, Turkey Alok Mishra Atilim University, Turkey
ABSTRACT
INTRODUCTION
Presently, the majority of software development, including outsourcing, is carried out by small and medium size software development organizations all over the world. These organizations are not capable to bear the cost of implementing available software process improvement models like CMMI, SPICE, ISO, and so forth. Therefore, there is a need to address this problem. In this chapter, various software process assessment and software process improvement models for small and medium scale organizations are discussed and compared. This will lead towards development of standardized software process improvement model for small and medium sized software development organizations in the future.
Quality models and standards have been developed to improve product quality. Software quality is defined as all characteristics of a product that bear on its ability to satisfy explicit and implicit needs of the user (ISO/IES 9126, 1991). According to Pressman (2002), software quality is defined as conformance to explicitly documented development standards and implicit characteristics that are expected of all professionally developed software. Therefore, this definition suggests three requirements for quality assurance that are to be met by the developer (Galin, 2004): •
Specific formal requirements, which refer mainly to the outputs of the software system.
A Study of Software Process Improvement in Small and Medium Organizations
• •
The software quality standards mentioned in the contract. Good software engineering practices (GSEP), reflecting state-of-the-art professional practices to be met by the developer even though not explicitly mentioned in the contract.
The way with which we develop software impacts the quality of the software and hence software process is one of the most crucial factors in determining the quality of the software. A software process is a set of activities, together with ordering constraints among them, such that if the activities are performed properly and in accordance with the ordering constraints, the desired result is produced. The desired result is high quality software at low cost. As each software development project is an instance of the process it follows, it is essentially the process that determines the expected outcomes of a project (Jalote, 2002). Improving the process automatically results in improved quality of the product (software). Today only few software organizations around the world achieve a high quality level for their development process. A considerable amount of software is produced worldwide by small and medium sized enterprises (SMEs) ranging from 1 to about 50 employees (Gresse von Wangenheim, Punter, & Anacleto, 2003). In this context, the German and Brazilian software market of these companies was around 77% and 69% during 2001 (Ministerio da Ciencia e Tecnologia, 2001). This is further supported by Richardson (2002) that there is need for small software companies in the Irish sector to improve their software process. The term small setting has been defined as an organization or company of fewer than approximately 100 people and a project of fewer than approximately 20 people (Software Engineering Institute, n.d.). As mentioned on the Software Engineering Institute (SEI) Web site for small settings, a major aspect to be considered in these environments is that the amount of resources used to support a process improvement effort would be a large percentage
of an organization’s operating budget. Johnson, Johnson, and Brodman (1998) define a small organization as fewer than 50 software developers and a small project as fewer than 20. A vast majority of software producers, which have not yet implemented a methodology for software process improvement, are paying high costs of production and systems maintenance, and therefore being displaced from the global market, not being on the same competitiveness level as companies that possess a process improvement method (Herrera & Trejo Ramirez, 2003). There are several models for software process improvement, such as the Capability Maturity Model Integration (CMMI), the software process improvement and capability determination (SPICE), and the ISO 9000 norms from the International Standardization Organization (ISO). These models provide quality patterns that a company should implement to improve its software development process (Herrera & Trejo Ramirez, 2003). Unfortunately, the successful implementation of such models is not generally possible within the context of small and medium-sized software organizations because they are not capable of bearing the cost of implementing these software process improvement programs. The proper implementation of software engineering techniques is difficult task for small organization as they often operate on limited resources and with strict time constraints. Cultural issues like resistance to change from the employees or management who regard the extra work required for quality assurance as a useless and complicated burden put on the developing team. According to Biro, Messnarz, and Davison (2002), national culture also affects the process improvement methods. Due to budget constraints, services of a consultant organization to improve the software quality is not possible; still the need for a good quality assurance program is becoming more evident, and managers are striving to achieve international quality standards that, in the long run, result in lower production cost (Herrera & Trejo Ramirez, 2003).
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The remainder of this chapter is organized as follows: The following sections discuss some software process improvement models for small and medium scale organization. Later, these models are compared. Finally, the chapter concludes with directions for future research in this area.
SOFTWARE PROCESS IMPROVEMENT MODELS FOR SMALL AND MEDIUM ORGANIzATIONS In order to get an edge in the ever-growing highly competitive software development world, it is significant for an organization to regularly monitor the software process. It is important for an organization to continuously improve its software process on the basis of feedback from various stakeholders. Some software process improvement models for small and medium scale organizations are discussed in this section.
staff has to spend time for these appraisals away from work which is costly for the company. This methodology can generate a simple diagnosis or help generate an action plan. This methodology has tried to adapt CMM for small scale organizations by adding some additional questionnaires to help the organizations to understand their current status and find out the areas for improvement. With the help of these questionnaires, small and medium scale organizations will be able to use CMM. The main goal of this methodology is to gather facts that help in taking a “snapshot” of the current processes implemented by the organization, so it is possible to understand it, and then the goal is to identify strengths and areas of improvement, thus determining the degree of completeness of every one of the KPAs (key process areas) of the CMM model. In order to gather this information related to the current processes of the organization, researchers have created three questionnaires (Herrera & Trejo Ramirez, 2003): •
The extended maturity questionnaire (EMQ) The goals, activities, and responsibilities matrix (GAR) The directed questionnaire
A METHODOLOGY FOR SELF-DIAGNOSIS FOR SOFTWARE QUALITY
•
The first step to implement any software process improvement strategy is to assess the current quality level of process and finding the potential areas of improvement. This methodology for self diagnosis is based on concepts, goals, and activities defined by the Capability Maturity Model (CMM) which can be used by a small or micro organization as a part of internal audit plan before the official appraisal. It is difficult for a small or medium scale organization to assess its current capabilities by using SCAMPI A (the only method in CMMI product suite that can result in a rating) appraisal method because it takes more time and consumes more resources. It is costly to hire lead appraisers and also company’s own
The CMM describes activities and practices required to achieve a maturity level within the software developing processes. A company that wishes to improve its processes through CMM must achieve the mentioned levels in a progressive, continuous, and ascending manner; that is, the lower levels are the basis for the upper levels. The first step is to assess the maturity level of the organization and for this purpose, official questionnaires are designed as a list of nonhierarchical, binary questions so that figuring out the maturity level of the company is straightforward. Once the current maturity level is known, this model helps to identify the key practices required to increase the maturity of processes.
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•
A Study of Software Process Improvement in Small and Medium Organizations
The Extended Maturity Questionnaire EMQ is based on the maturity questionnaire developed by SEI. This questionnaire includes some questions about specific KPAs, allowing for “yes,” “no,” “I don’t know,” and “not applied” as answers. All questions are related to goals and commitments for each KPA, but not to specific activities which should be performed to achieve such goals. The direct application of the maturity questionnaire in small and micro organizations results in a great majority of questions answered with a “no.” The main reason for this tendency is that many of the goals proposed in the questionnaire are only partially achieved. Therefore, EMQ is modified by researchers, allowing for “yes,” “no,” and “partially” (for describing incomplete goals) as answers. The purpose of EMQ is to guide the system’s administrator of a small organization so that he or she can answer the questions in a way that reflects more accurately the status of the organization. With this questionnaire, the administrator is capable of identifying the goals and commitments that are being only partially fulfilled so that they can be included in the improvement plan by the audit leader in charge of the self-diagnostic process.
The Goals, Activities, and Responsibilities Matrix The success of a model based on CMM depends on the complete achievement of certain goals and commitments for every KPA. These goals include measuring, documenting, reviewing, and validating activities for software quality assurance. There is a close relationship among goals, activities, and abilities, which are not that immediately apparent from the 344-page description of the CMM standard (Bush, 1995). It is obvious, then, that assimilating and interpreting this amount of information is a long and difficult process. In order to facilitate the task of the software administra-
tors, a matrix is proposed. This matrix includes the relationship between abilities (variables), activities (practices and subpractices associated to each KPA), goals, and commitments (objectives to achieve in each KPA) as well as the responsible individuals (the client, the requirement analyst, the software engineering group, the manager, the quality assurance group) for each KPA. When this matrix is used as a control within the life cycle of the project, it works not only as a diagnosis on the quality of the project, but also as a guide of action that helps the project manager to correct deficiencies and achieve the goals required by the KPA, thus providing an improvement in the overall process. The GAR matrix can be automated by means of an expert system by transforming the relationships between rules, the responsible person (the person concerned), and activities into inference rules that can be triggered by a knowledge base consisting on the answers given to the questions inside the matrix. The expert system could help an internal or external auditor in evaluating the maturity of the development processes by determining the degree of satisfaction of each KPA according to CMM. In this way, by having the knowledge base and by filling the questionnaire, we could get a rating of the state of the organization with no extra work, except for the documentation of activities. The original CMM is representing as a text. The GAR provides a visual representation, which simplifies comprehension of the vast amount of information required for the evaluation of goals.
The Directed Questionnaire The last format of the self-diagnosis methodology is a direct questionnaire with which a lead auditor can construct a knowledge base. This questionnaire has the essence of the original maturity questionnaire from CMM, but in this case, each new question is generated based on the answer of the previous questions, so a new question may be directed to complement information obtained
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earlier or to confirm such information. In any case, useless questions are discarded.
Evaluating the Result of the Self-Diagnosis The results obtained from the questionnaires answer the basic question: Are the key process areas required by CMM for a certain level achieved? For each KPA, there are four possible answers: The KPA is either fully achieved, partially achieved, not achieved, or it does not apply. The KPAs that are partially achieved or not achieved are the areas of opportunity for improvement and that should be part of an action plan.
SOFTWARE PROCESS MATRIX MODEL The SPM provides the organization with a ranked list of actions which can be input to their software process improvement strategy. SPM is based on quality function deployment (QFD). This model helps the organization in finding the relative importance of software processes. For the high priority processes, the practices that need to be worked on are determined by software process matrix. The SPM model uses self-assessment within the organizations and demonstrates the following characteristics (Richardson, 2002): • • • • • • • •
Relates to the company’s business goals Focuses on the most important software process Gives maximum value for money Proposes improvements which have maximum effect in as short a time as possible Provides fast return on investment (ROI) Is process oriented Relates to other software models Is flexible and easy to use
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The SPM can be used to establish an improvement strategy based on QFD. QFD is a way to assure the design quality while the product is still in the design stage (Akao, 1990, p. 4) and as a “quality system focused on delivering products and services that satisfy customers” (Mazur, 1994). In order to collect and maintain the voice of the customer throughout the production life cycle, QFD uses a series of matrices which convert the customer’s voice into a final product. Different models are available for use, and according to Cohen (1995), the model adapted by American Standards Institute (four-phase model) and containing four matrices (Hauser & Clausing, 1988) is probably the most widely described and used model in the United States. The SPM is based on the first matrix of this model, the house of quality. Initially, the “voice of the customer” is collected, and the relative importance of each customer requirement is measured. In the house of quality matrix, these requirements are used to identify design characteristics which have the greatest impact on customer requirements. Although QFD consists of many matrices, the main focus is often this matrix, as using it alone can have a significant effect on the product development process (Fortuna, 1988). The matrix is normally broken down into six rooms: • • • • • •
Customer requirements (WHATs) Design characteristics (HOWs) Overall importance of customer requirements Relationship between customer requirements and design characteristics Importance of design characteristics Inter-relationships between design characteristics
Using QFD, the software process model is treated as the customer where software processes are the customer requirements. These processes
A Study of Software Process Improvement in Small and Medium Organizations
were identified from the software process literature. Examples of processes are:
the overall importance of the software process considering the following (Richardson, 2002):
• •
•
• •
Define and document processes. Systematic assessment of suppliers’ software process suitability. Systematic implementation of software design. Systematic planning of project workflow and estimates.
The design characteristics are the practices which must be followed for processes to be successful. These practices were also identified from the software process literature. Examples of practices are: • • •
Test the customer’s operation before software implementation. Prototype or simulate critical elements of the software. Maintain and trace product item histories.
A crucial part of the development of the software process matrix was to identify the relationships between processes and practices. Those which are explicitly mentioned in the literature were easily identified. Using expert opinions and various statistical techniques, other relationships between processes and practices were identified, resulting in the development and verification of the software process matrix which was then validated in the industry. For a small company to use any software process model to its advantage, it is imperative that the effort expended is minimal. The SPM provides it with a generic section that has been completed previously and can be used in the company. A questionnaire is provided to assess the current performance, planned future performance, and importance to the company for every process. From the company’s point of view, all they need to provide are the measurements for calculating
• • • •
Current capability as assessed using a selfassessment questionnaire. Future capability as input from management. Importance of software process to the business. Competitive analysis Market leverage for company specific requirement, for example, ISO certification.
Allowing management to choose whether or not to include figures for competitive analysis and market leverage allows flexibility within the model. Using standard QFD calculations and referring to Table 1, which contains specific company data, the Importance of Process (D) is calculated as [1+ (B – A)∗0.2] ∗C (adapted from Richardson, 2002). In the example given in Table 1, it can be seen that they are ranked from most to least important as: 1. Development of detailed design 2. Development of system requirements and design 3. Systems acceptance testing Using the value of the relationships between processes and practices, the importance of each practice is calculated as: ∑ Importance of process ∗ Relationship value which, in the case of “user requests determine requirements,” is (3.6 ∗ 9) + (7.0 ∗ 9) + (2 ∗ 0) = 95.4. This provides the following prioritized list of practices:
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Table 1. Specific company data (adapted from Richardson, 2002) Practices
Processes Development of system requirement and design Development of detailed design S y s t e m s acceptance testing Importance of Practice
User requests determine requirements
•
Define interfaces of the software system
(1 – 5) B
C
(1 – 5) D
2
3
3
3.6
°
2
4
5
7
∇
∇
3
3
2
2
34.4
14.6
•
1. User requests determine requirements 2. Define interfaces of the software system 3. Develop and document unit verification Practices with the highest values are the most important, and therefore it is suggested that these should be worked on first in the organization. From this, the priorities to be included in any software process improvement action plan are established and can help the organization to determine its improvement strategy. The complete SPM provides the organization with a ranked list of actions which can be input to their software process improvement strategy. This ranked list can be combined with cost figures and timeeffective calculations, thus taking these factors into account when determining the action plan for the organization.
AN APPROACH FOR SOFTWARE PROCESS ESTABLISHMENT IN MICRO AND SMALL COMPANIES An ASPE-MSC is defined by integrating and adapting existing approaches (Ahonen, Forsell, & Taskinen, 2002; Becker-Kornstaedt, 2001;
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Future achievement
Importance of process
(1 – 5) A
•
95.4
Current achieve ment
Improvement to company (1 – 5)
Develop and document unit certification
Becker-Kornstaedt, Hamann, & Verlage, 1997; Curtis, Kellner, & Over, 1992; Kellner et al., 1998; Madhavji, Holtje, Hong, & Bruckhaus, 1994; Scott, Zettel, & Hamann, 2000; Gresse von Wangenheim, 2006) to the characteristics of small software companies. As illustrated in Figure 1, the principal phases of the approach are diagnosis, strategic analysis, definition, and implementation, which can be executed in an iterative and incremental way in order to establish step-by-step one or more process(es) within an organization. In addition, the approach also covers the management of the establishment of the software process(es), including planning, monitoring, and control and postmortem. The establishment of the process in the context of small companies is done by a process engineer, typically an external consultant, if the company does not have competence in this area. In this case, one employee of the organization should be assigned (at least part-time) as process engineer assistant in order to enable knowledge transfer and to facilitate the process establishment. Other participants are the sponsor, typically one of the directors of the company, and all process performers, who are involved in the respective process(es).
A Study of Software Process Improvement in Small and Medium Organizations
Figure 1. Overview on ASPE-MSC approach (adapted from Gresse von Wangenheim, Weber, Hauck, & Trentin, 2006)
The principal phases of the approach are (Gresse von Wangenheim, 2006): Planning. In the beginning, the process establishment is planned on a high level. Later on, during strategic analysis, the plan is revised, completed, and adapted in accordance with the decisions made. During planning, all involved parties are informed and motivated and commitment should be obtained. If necessary, the process engineer assistant is trained with respect to basic aspects of software process establishment and improvement. Phase 1: Diagnosis. The objective of this phase is to contextualize the organization and to obtain a high-level snapshot of the actual software process in place. Such a baseline can be established through a software process assessment using, for example, MARES (Gresse von Wangenheim, Anacleto, & Salviano, 2006), an ISO/IEC 15504 conformant process assessment method tailored to small companies. Assessment results specifically relevant for the process establishment may include: • •
A context description on the organization A high-level description of the actual software process indicating which processes are executed and how
•
•
Target process capability profiles indicating high-priority processes and their capability level to be achieved in order to meet the organization’s business and improvement goals Observations and/or assessed process capability profiles and strengths and weaknesses of the software process(es) identified, including the indication of potential risks and improvement opportunities.
Phase 2: Strategic analysis. The objective of this phase is to specify the scope and to prioritize candidate processes to be established based on the results of the diagnosis and in accordance with the organization’s business and improvement goals. This can be done by using, for example, an adaptation of the SWOT (strengths/weaknesses/opportunities/threats) analysis technique (Johnson, Scholes, & Sexty, 1989) relating the importance of processes and their assessed/estimated capability. Based on the decisions made, measurable goals are defined to be achieved by the establishment of the selected process(es) in accordance with the business and improvement goals of the organization. Actions are planned, revising and completing the plan. This includes also the definition of measures necessary to monitor progress in accordance with
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the defined goals, using, for example, the GQM approach (Basili, Caldiera & Rombach, 1994a). The strategic analysis is typically done by the director(s) of the company and guided by the process engineer and assistant. In each iteration cycle, decisions should be revised. If any of the information or artifacts to be produced in phase 1 and 2 is already available, the results may just need to be revised and, if necessary, completed or updated. Phase 3: Definition. The objective of this phase is to define the selected software process(es) in the form of a process guide in order to support process performers. Generally, the definition of the selected process(es) begins with the descriptive modeling of the actual process(es) in place. This activity is composed of a process familiarization phase and a detailed elicitation phase (Becker-Kornstaedt, 2001). During the process familiarization phase, an overview of the software process and its general structure, interaction, and sequence is obtained and documented, for example, in a process flow diagram. In a next step, roles, competencies, and responsibilities related to each activity are identified. Associated work products are identified and templates for these artifacts are elicited. The objective of the process is defined in quantifiable terms identifying measures in accordance with quality and management goals, as well as the goals to be achieved by the process establishment. This includes also the definition of performance characteristics for the process and associated work products. The initial process representation is then completed during the elicitation of details on the process, such as entry/exit criteria, techniques and tools used, tailoring guidelines, examples, warnings for potential problems, required infrastructure, checklists, and so forth. This is done by the project engineer and assistant in close cooperation with all process performers in order to capture their understanding and know-how on the process through interviews, observations, or workshops (Ahonen et al., 2002; Becker-Kornstaedt, 2001;
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Moe, Dingsoyr, & Johansen, 2002) and the examination of existing artifacts. Once defined, an initial version of the process as-is, the process representation can be analyzed, restructured, completed, or adapted, aiming at the improvement of the process in accordance with the organization’s goals (Scott et al., 2000). Alternative solutions can be identified taking into consideration best practices, standards, or reference models. Analyzing various aspects, appropriate alternative(s) can be selected and integrated into the process representation. As a result of this phase, the process is represented in form of a process guide, which is then revised by the process performers. Once the process has been defined, tools used during the execution of the process have to be adapted or developed in accordance with the process definition. In addition, related processes, such as management processes, have to be revised and, if necessary, adapted. This phase may have to be repeated several times until a satisfactory process representation has been defined and/or reiterated in order to continuously adapt and improve the process representation. Phase 4: Implementation. First, the evaluation of the defined process(es) is planned in parallel to their implementation. This includes the revision and/or definition of measures in order to monitor and determine the effectiveness and suitability of the process(es) and whether the expected benefits are achieved. The implementation plan is also revised and refined. Required resources, information, and infrastructure are made available and allocated. Process performers are motivated and trained with respect to the process(es) to be implemented. In the beginning, the process engineer and assistant closely follow the implementation, provide support, and collect data in accordance with the planned evaluation. The collected data and experiences are analyzed and interpreted. Based on these insights, the process representation may be improved or new cycles started repeating the diagnosis phase and/ or strategic analysis. Captured experiences on
A Study of Software Process Improvement in Small and Medium Organizations
how the process definition is being adapted to specific projects may also serve as a basis for the continuous evolution of tailoring guidelines. In the context of small companies, we do not explicitly separate between a pilot and organization-wide deployment, as piloting in most cases, due to its small size, already takes place across the whole company. The only difference here is a stronger focus on assistance and data collection in the beginning of the implementation of the process(es), which continually evolves into a less intensive routine monitoring and maintenance. Monitoring and control: The complete establishment of the process(es) is monitored and controlled. Therefore, data are collected and analyzed by the process engineer and assistant. If necessary, corrective actions are initiated and the plan is updated. Postmortem: Once a complete process establishment cycle is terminated, the process establishment approach is evaluated as a basis for continuous improvement. This is done by collecting and analyzing feedback from process performers, sponsor, and the process engineer and assistant in a feedback meeting or by questionnaires.
•
•
•
to heated discussion as different interpretations of the existing process specification are uncovered.) Early in the PRISMS program, the business goals are defined by management. These goals drive much of the subsequent activity, especially the selection and prioritization of key process areas for improvement and the selection of measurements. A consultation exercise is carried out, involving all members of development teams. This is a useful exercise which plays to the strengths of small, flexible teams found in smaller organizations. A brainstorming session, and/or questionnaire-based survey, helps the developer’s team to take ownership of the SPI program and to be involved in the program from the earliest stage. A tailored version of the CMM assessment is carried out by members of the research team, primarily to help identify key process areas for
Figure 2. The PRISMS process (adapted from Allen, Ramachandran, & Abushama, 2003)
PRISMS: An Approach to Software Process Improvement for Small to Medium Enterprises PRISMS is an action research project, with a team of three researchers working alongside managers and developers in participating companies advising and assisting with the planning and implementation of software process improvement programs over a three-year period. The PRISMS process model is summarized in Figure 2. The key features of the process are (Allen et al., 2003): •
The existing process, however informally defined, is examined, and if resources permit, an explicit model is created. (This often leads
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•
•
improvement. This also indicates the CMM level of the software process, which is often of less immediate usefulness to SMEs but still useful as a baseline from which to measure future progress. This is in agreement with the observation of Paulk (1998) that maturity levels should be measures of improvement not goals for improvement. Using these inputs, the KPAs for improvement are identified and prioritized. The main criteria here should be the extent to which the KPAs are likely to contribute to the identified business goals. One company has found a weighted selection approach of the type described by Martin (2002) to be useful. The process/practice matrix approach described by Richardson (2001) could also be used. Measurements are defined as an integral part of the SPI planning process. Managers are generally keen to have more precise ways of tracking key resource and quality indicators. The goal question metric paradigm can be used to measure selected attributes based on the business goals defined for the SPI program (Briand, Differding, & Rombach, 1996).
•
The SPI plan is periodically reviewed, and mechanisms are put in place to collect feedback from stakeholders.
MESOPYME MESOPYME is a continuous software process improvement method (Calvo-Manzano et al., 2002). It is oriented to SMEs and provides a working guide to implementing improvement. MESOPYME has been defined, taking into account a generic SPI model defined by ISPI (ESSI, 1994) with four stages. The objectives are similar to those of the IDEAL model (McFeeley, 1996) from the SEI. •
•
Stage 1: Commitment to improvement. Its objective is to obtain the support of senior management to carry out the improvement project. Stage 2: Software process assessment. Its objective is to obtain strengths and weaknesses of the process assessed with respect to a software process model—CMM. From this assessment, processes (usually one to three) to be improved are selected.
Figure 3. MESOPYME’s process improvement method (adapted from Calvo-Manzano et al., 2002)
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•
•
Stage 3: Improvement solution. Its objective is to provide the needed infrastructure to carry out improvement (in selected processes) and to create the plan to follow in order to define and implement improvement in these selected processes. The improvement solution stage is performed through the application of a generic set of components that we have called an action package. An action package is a general solution to a particular software process area that should be customized to a company, taking into account its business goals and assessment results. An action package is implemented in some selected pilot projects. Stage 4: Institutionalize. Finally, improvement must be institutionalized.
Goal Question Metric Lightweight The main idea behind this model is “software measurement is a necessity for controlling software projects and improving quality (Gresse von Wangenheim, 1995.)” This model is based on
GQM. “GQM Lightweight” is a customized GQM model that combines the existing model adapted to specific characteristics and limitations of small software companies. The goal question metric paradigm (Basili, Caldiera, & Rombach, 1994b; Basili & Rombach, 1998; Basili & Weiss, 1984) has been proposed as a goal-oriented approach for the measurement of products and processes in software engineering. It is a mechanism for defining and evaluating a set of operational goals, using measurement. GQM represents a systematic approach for tailoring and integrating goals with models of the software processes, products, and quality perspectives of interest, based upon the specific needs of the project and the organization. This model is a result of adapting the existing GQM process models to the specific characteristics and limitations of small software companies. GQM lightweight is based on Gresse von Wangenheim (2002) and Gresse von Wangenheim, Hoisl, and Wüst (1995) with respect to its principal phases and activities. However, each of these activities has been customized keeping in view limited
Figure 4. Architecture of the action package (adapted from Calvo-Manzano et al., 2002)
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resources and predominant informality in small software companies. The planning phase prepares the establishment of software measurement in the organization. In SMEs, no separate measurement team will be established due to the small number of employees and informal structures of the organizations. Kick-off session is important to get the approval and opinion of all the people. A feedback session can be helpful towards motivation. According to Gresse von Wangenheim et al. (2003), identification and selection of measurement goals is easier in SMEs due to the fact that less people are involved in the pilot project and often the goals definition process is more restricted. During the data collection phase, the data are collected according to the procedures specified in the measurement plan. By developing suitable data collection instruments and integrating into the software process, effort can be reduced substantially. The interpretation phase aims at the periodic analysis of the collected data and interpretation during feedback sessions involving project personnel following the GQM plan bottom-up. In the packaging phase, the measurement results, including the collected data and its interpretation, are analyzed, packaged, and stored
in a way suited to the organizational context so that this knowledge can be reused in future software projects and measurement programs. Here focus should be on documenting the GQM plan, the results of the feedback sessions, and cost and benefits report.
DISCUSSION As these SPI models are difficult to compare due to their divergent characteristics, we have tried to find out some significant but common attributes so that we can find a comparative view of all available SPI models. These models for small and medium organizations are based on some existing methods like CMM, GQM, QFD, and so forth. These approaches are adapted and simplified either by incorporating some additional questionnaires (in the self-diagnosis model) or matrix (in the SPM model) or process guides (in ASPE-MSC) or action packages (in MESOPYME) so that they can be used by small and medium scale organizations. One key point is that all methods except selfdiagnosis model considers business objectives of the organization while making the SPI plan. Moreover, these methods (excluding self diagno-
Table 2. Overview of GQM Lightweight (adapted from Gresse von Wangenheim et al., 2003) Phases
Approach for SMEs GQM Lightweight
Planning
Introduce measurement program
5.
Define measurement goals, Goal formalization Define questions Define metrics Produce GQM plan, Define data collection procedures, Define data instruments Produce data collection plan, Create metrics base
Data Collection
1. 2.
Collect and validate data Store data collected
Interpretation
1. 2.
Data analysis Data interpretation, Feedback session
Definition
[Reuse of Quality Resource Models]
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&
1. 2. 3. 4.
EMQ questionnaire for assessment. Also, relationship among abilities, activities, goals, and commitments for every KPA in matrix format is given which can be automated with expert system.
First, the current situation of the company is assessed with EMQ questionnaire. This can help to identify which KPAs are partially achieved or not achieved at all to attain a particular CMM level. Once KPAs for improvement are identified, goals and commitments for every KPA can be found out with the help of GAR matrix. Not flexible. Defined methods and tools. Elimination is not preferred.
What is new?
Implementation details
Flexibility
Where am I? What should I do?
Key question
Self-diagnosis
CMM
↓
SPI
Based on
Criteria
Models →
Flexible Company is not required to include all factors of measurement for overall importance of software processes and only processes important for company need to be considered for improvement.
First, prioritized list of processes for software process improvement according to the business objectives and other factors are made. Then a ranked list of actions is made with the help of SPM to improve abovementioned processes.
SPM (software process matrix) that identifies practices needed for software processes
be to
Function
What needs to improved? How improve?
Quality Deployment
SPM Model
Flexible Methods for assessing current capabilities and to prioritize processes are suggested but organization can use other methods also. Only processes important for company need to be considered for improvement.
First diagnosis of current capabilities is done, then prioritized list of candidate processes is made according to the diagnosis and business objectives and improvement goals. Later, these processes are defined in the form of a process guide. Thereafter, implemented with the help of their process guide and evaluated continuously.
Iterative-incremental approach for assessment, identification, and implementation of SPI plan.
Where am I? What needs to be improved? How to improve?
Integration and adaptation of many existing approaches
ASPE-MSC
Flexible Methods to identify and prioritize KPAs for improvement are suggested but organizations can use other methods also.
First, current process is examined and assessed. Then KPAs for improvement are identified based on current capabilities, business goals given by the management and after consultation with developers. Later, process improvement plan is made and implemented.
Adapting CMM by incorporating business objectives with the help of GQM paradigm
Where am I? What needs to be improved? How to improve?
CMM and GQM
PRISMS
Flexible Can be tailored to the specific need of an organization
First, current process is assessed and then action package for each process area consisting of action plan, infrastructure needed, techniques, tools, metrics, etc. is developed according to the business goals and assessment results. Later, this action package is implemented in some pilot projects. Finally, improvement is institutionalized.
Emphasis on SPI implementation step with the help of action packages developed by problem domain experts.
Where am I? what needs to be improved? How to improve?
CMM
MESOPYME
Flexible Can be tailored for the specific need of a project or organization
First, measurement goals, questions, and metrics are defined. Then, GQM plan is developed. Later, data collection procedures, data collection instruments are defined. Afterwards, metrics base is created and data are collected, stored, and analyzed for future reuse.
It enhances GQM by including planning, reuse of quality and resource models, data collection, interpretation, and packaging phases.
What should I do? How to do?
Goal Question Metric
GQM Lightweight
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Table 3. Comparison of various SPI models for small and medium scale organizations
continued on following page
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Phased
On CMM standards.
Actions, goals that needs to be achieved for software process improvement
Can only be used for internal assessment before official assessment by CMM. If the CMM adoption is not intended, then its application is limited.
Latin America
Main focus
Outcome
Constraints
Origin
Does not need much experience. Easy to use.
Criteria ↓ P r a c t i t i o n e r ’s knowledge level
Continuous/ phased
Self-diagnosis
SPI
Models →
Ireland
Measuring the importance of software processes needs considerable experience
Ranked list of actions for software process improvement
On business objectives of the organization and processes most important to the business
Continuous
Needs considerable experience to assess current capabilities and planned future performance of a software process and importance of process to company.
SPM Model
and
Mexico
Considerable experience is needed for process assessment, process prioritization and development of process guides.
Process guide for processes selected for improvement that contains entry/exit criteria, techniques, and tools to use, examples, required infrastructure, checklists, etc.
On business improvement goals
Continuous
Needs considerable experience to assess current capabilities, process prioritization, process definition, and implementation.
ASPE-MSC
Britain
Considerable experience is needed to identify current process model and process improvement plan.
Process improvement plan and later revised process model after implementation of process improvement plan.
On business objectives
Phased
Needs considerable experience to assess current process, identify KPAs for improvement. Also development and implementation of process improvement plan requires experienced person.
PRISMS
Spain
Needs assistance of domain expert to develop action package according to the organizations’ business goals and current capabilities
Action package for each process area consisting of action plan, infrastructure needed, techniques, tools, metrics, etc. according to the business goals and assessment results.
On business goals and organizations’ current capabilities
Continuous
Does not need much experience as action packages are developed by domain experts according to the organizations’ business goals and current capabilities.
MESOPYME
Germany and Brazil
Reuse is done in an ad hoc informal manner. Knowledge management and organizational learning should be systematically integrated.
Information after analysis of collected data that can be reused to take decision for future improvement
More likely to address the specific needs of an organization than universal models
Phased
Certain measurement experience is required.
GQM Lightweight
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Table 3. continued
A Study of Software Process Improvement in Small and Medium Organizations
sis) are flexible enough that although methods for identifying and prioritizing areas of improvement are suggested but organizations can choose any other method also. Also, organizations have the flexibility to select processes more important to them for the SPI plan. These methods not only detect what needs to be improved but also provide the roadmaps for how to improve. These SPI models are specifically developed for SMEs as these organizations do not have the resources and cannot bear the cost to implement CMMI, SPICE, and so forth, but whether a small or medium scale organization can implement these methods without the help of some external quality consultant is yet to be proven. As far as the practitioner’s knowledge level is concerned, self-diagnosis and MESOPYME do not require much experience, while other models need much knowledge and experience to assess current capabilities of the process. Small and medium scale organizations generally do not have people dedicated for quality work alone. A person has many roles in these organizations; for example, people who are doing software development are also responsible for the SPI initiative. These individuals may or may not have experience dealing with the SPI initiative, so it is not easier for them to use any of these models without the help of some external consultant. The self-diagnosis method is easier to use as it gives the list of KPAs that are partially achieved or not achieved at all to attain a particular CMM level. To achieve these KPAs, a list of actions can also be generated by the GAR matrix but how to implement these actions is not discussed in this method which may be problematic for a small or medium scale organization. It can only be used for self-assessment before an official appraisal.
CONCLUSION
ensuring quality due to their limited resources for investment in providing such infrastructure. Existing software process models are not easily applicable in small and medium organizations and requires extensive infrastructure. In this context, we had studied available software process improvement models for small and medium software development organizations and compared their significant characteristics. Each model has its benefits and limitations. Organizations should select the specific process model keeping in view their objectives, constraints, and expectations. Further work in this area is directed to perform case studies and empirical validation in real software development settings. It would be interesting to study the impact and comparison of these approaches on software process quality.
REFERENCES Ahonen, J.J., Forsell, M., & Taskinen, S.K. (2002). A modest but practical software process modeling technique for software process improvement. Software Process Improvement and Practice, 7, 33-44. Akao, Y. (1990). QFD: Integrating customer requirements into product design. Portland, OR: Productivity Press. Allen, P., Ramachandran, M., & Abushama, H. (2003, November 6-7). PRISMS: An approach to software process improvement for small to medium enterprises. In Proceedings of the 3rd International Conference on Quality Software (QSIC ’03) (pp. 211-214). Dallas, Texas. Basili, V., Caldiera, G., & Rombach, D. (1994a). Goal question metric paradigm. In J. Marciniak (Ed.), Encyclopedia of software engineering (vol. 1, pp. 528-532). New York: Wiley.
Small and medium size software development organizations are facing severe problems in
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Basili, V., Caldiera, G., & Rombach, D. (1994b). The experience factory. In J. Marciniak (Ed.), Encyclopedia of software enginering (vol. 1, pp. 469-476). John Wiley & Sons. Basili, V., & Rombach, D. (1998). The TAME project: Towards improvement-oriented software environments. IEEE Transactions on Software Engineering, 14(6), 758-773. Basili, V., & Weiss, D. (1984). A methodology for collecting valid software engineering data. IEEE Transactions on Software Engineering, 10(6), 728-738. Becker-Kornstaedt, U. (2001). Towards systematic knowledge elicitation for descriptive software process modeling. In Proceedings of the 3rd International Conference on Product Focused Software Process Improvement (PROFES) (pp. 312-325). Germany. Becker-Kornstaedt, U., Hamann, D., & Verlage, M. (1997). Descriptive modeling of software processes (IESE-Report 045.97/E). Germany: Fraunhofer Institute IESE. Biro, M., Messnarz, R., & Davison, A.G. (2002). The impact of national cultural factors on the effectiveness of process improvement methods: The third dimension. Software Quality Professional, 4(4), 34-41. Briand, L., Differding, C., & Rombach, H.D. (1996). Practical guidelines for measurementbased process improvement. Software Process: Improvement and Practice, 2, 253-280. Bush, M. (1995). The capability maturity model: Guidelines for improving the software process (SEI Series in Software Engineering). Carnegie Mellon University, Software Engineering Institute. Addison-Wesley. Calvo-Manzano, J.A., et al. (2002). Experiences in the application of software process improvement in SMES. Software Quality Journal, 10, 261-273.
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Cohen, L. (1995). Quality function deployment: How to make QFD work for you. USA: AddisonWesley. Curtis, B., Kellner, M.I., & Over, J. (1992). Process modeling. Communications of the ACM, 35(9), 75-90. ESSI. (1994, February). IBERIA, LAE, SPIE: Software process improvement and experimentation (ESSI Project No. 10344). Fortuna, R.M. (1988, June). Beyond quality: Taking SPC upstream. Quality Progress, 21(6), 23-28. Galin, D. (2004). Software quality assurance, from theory to implementation (1st ed.). Pearson, Addison-Wesley. Gresse von Wangenheim, C. (2002). Planning and executing GQM based software measurement (Tech. Rep. No. LQPS001.01E). Sao Jose, Brazil: UNIVALI. Gresse von Wangenheim, C., Anacleto, A., & Salviano, C.F. (2006, January/February). Helping small companies assess software processes. IEEE Software, 23(1), 91-98. Gresse von Wangenheim, C., Hoisl, B., & Wüst, J. (1995). A process model for GQM based measurement (Tech. Rep. No. STTI-95-04-E). Software Technology Transfer Initiative, University of Kaiserslautern, Germany. Gresse von Wangenheim, C., Punter, T., & Anacleto, A. (2003). Software measurement for small and medium enterprises: A Brazilian-German view on extending the GQM method. Retrieved December 12, 2007, from http://www.sj.univali. br/prof/Christiane%20Gresse%20Von%20Wangenheim/papers/ease2003.pdf
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Gresse von Wangenheim, C., Weber, S., Hauck, J.C.R., & Trentin, G. (2006). Experiences on establishing software processes in small companies. Information and Software Technology, 48, 890-900. Hauser, J.R., & Clausing, D. (1988, May-June). The house of quality. Harvard Business Review, 63-73. Herrera, E.M., & Trejo Ramirez, R.A. (2003). A methodology for self-diagnosis for software quality assurance in small and medium-sized industries in Latin America. The Electronic Journal on Information Systems in Developing Countries, 15(4), 1-13. ISO/IES 9126 (1991). Information technology: Software product evaluation, quality characteristics and guidelines for their use. Jalote, P. (2002). An integrated approach to software engineering (2nd ed.). Narosa Publishing House.
Martin, S. (2002). Business process improvement. McGraw-Hill. Mazur, G. (1994, November). QFD for small business: A shortcut through the “maze of matrices.” Transactions from the 6th Symposium on Quality Function Deployment, Michigan (pp. 375-386). McFeeley, B. (1996, February). IDEALSM: A user’s guide for software process improvement (Handbook CMU/SEI-96-HB-001). Software Engineering Institute, Carnegie Mellon University. Ministerio da Ciencia e Tecnologia. (2001). Quality and productivity of the Brasilian software sector (in Portuguese). Brazil: Ministerio da Ciencia e Tecnologia. Moe, N.B., Dingsoyr, T., & Johansen, T. (2002). Process guides as software process improvement in a small company. In Proceedings of the EuroSPI Conference (pp. 177-188). Germany.
Johnson, D.L., & Brodman, J.G. (1998). Applying the CMM to small organizations and small projects. In Proceedings of the 1998 Software Engineering Process Group Conference, Chicago, IL.
Paulk, M. (1998). Using the CMM in small organizations. In the Joint 1998 Proceedings of the Pacific Northwest Software Quality Conference and the Eighth International Conference on Software Quality, Portland, Oregon (pp. 350-361).
Kellner, M.I., Becker-Kornstaedt, U., Riddle, W.E., Tomal, J., & Verlage, M. (1998). Process guides: Effective guidance for process participants. In Proceedings of the 5th International Conference on the Software Process (pp. 11-28).
Richardson, I. (2001). Software process matrix: A small company SPI model. Software Process: Improvement and Practice, 6, 157-165.
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Richardson, I. (2002). SPI models: What characteristics are required for small software development companies? Software Quality Journal, 10, 101-114. Scott, L., Zettel, J., & Hamann, D. (2000). Supporting process engineering in practice: An experience based scenario. In Proceedings of the Conference on Quality Engineering in Software Technology (CONQUEST) (pp. 160-169), Germany.
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Software Engineering Institute. (n.d.). Improving processes in small settings: A research initiative of the SEI’s IPRC. Retrieved December 12, 2007, from http://www.sei.cmu.edu/iprc/iprc-overview. pdf
This work was previously published in Software Process Improvement for Small and Medium Enterprises: Techniques and Case Studies, edited by H. Oktaba and M. Piattini, pp. 140-157, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.6
IT Service Departments Struggle to Adopt a Service-Oriented Philosophy Aileen Cater-Steel University of Southern Queensland, Australia
ABSTRACT
INTRODUCTION
Many IT service departments are adopting IT service management best practice frameworks such as the IT Infrastructure Library (ITIL) to improve the quality of service to customers. This study reports on recent surveys and case studies of organizations which have embarked on IT service management improvement. It highlights specific difficulties experienced by organizations. Six factors were found to be critical in achieving an effective service-oriented philosophy. The factors are support from senior management; the threat or opportunity to outsource IT services; integration of processes to provide end-to-end service; involvement of business stakeholders; culture change of IT staff to service excellence; and the redesign of processes prior to investing in tools. Emergent IT service frameworks such as ISO/IEC 20000, and the CMMI® for Service Delivery are discussed.
It is becoming increasingly recognised that the provision of high quality and competitive service requires organizations to adopt a customer-centric, service-oriented philosophy. The growth of the service economy has seen a paradigm shift which has moved the focus from goods to services, and impacts the business processes, management practices, employee policies, engineering knowledge, and culture of organizations (Rust & Kannan, 2003; Rust & Miu, 2006). After analysing a large financial service provider in the Netherlands as an example of a service-oriented enterprise, Janssen and Joha determined that the main critical management issues, apart from a carefully executed strategy, are the ‘redesign and reorganization of activities and roles, the standardization of processes, applications and the underlying IT architecture, and management of the transformation by involving all stakeholders.’ (2008, p. 35).
IT Service Departments Struggle to Adopt a Service-Oriented Philosophy
Information technology (IT) is considered to be the ‘critical enabler’ for transforming service industries (Chesbrough & Spohrer, 2006). As IT systems become more powerful and cost-effective they provide the potential to efficiently gather and analyse data, and to codify and transmit knowledge to the far corners of the globe (Bitner & Brown, 2006; Chesbrough & Spohrer, 2006). Although IT service providers are constituents in the service sector, their total contribution to the service sector can only be grasped by considering that private businesses in the USA spend 50 percent of all invested capital on IT – hardware, software and communications equipment (Laudon & Laudon, 2006). Specifically within the service sector, IT plays an important role in helping organizations provide better customer service, create new products and services, enhance relationships with suppliers, and improve decision making. It has been noted by Johnson et al. (2007) that businesses are demanding more from their IT organizations than ever before. As well as ‘better and more disciplined provisioning of IT services to ensure smooth operation’ (p. 595), IT is expected to respond with agility in light of new business opportunities, to demonstrate responsible financial management and to satisfy internal staff and external customers. This level of service can only be achieved with effective relationships and communication between IT and lines of business. However, despite the fact that organizations are increasingly reliant on IT and the increasing awareness of the need to become service-oriented and customer-focussed, many IT service providers are struggling to change the culture and processes within their own departments or organizations. Many IT service providers are still characterised by a culture which is technology-focused rather than customer-centric. Many of the IT line managers are ‘predominately ex-technologists’ (Bruton, 2004, p. 4). This article considers the people, process and technology issues related to improving IT
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service management. Although there is growing adoption of existing frameworks and standards, such as the IT Infrastructure Library (ITIL) and the IT Service management standard (ISO/IEC 20000), and development of new frameworks such as CMMI-SVC®, many IT service providers find it an almost insurmountable challenge to achieve effective end-to-end service. This article strives to answer the research question: what factors inhibit the transformation of IT service providers when seeking to adopt a service-oriented philosophy? The article is structured as follows. The background provides a summary of popular and emerging standards for IT service management. Then, the research methodology is briefly explained, followed by a discussion of challenges identified through surveys and case studies. The conclusion includes directions for future research.
BACKGROUND Recently, there has been a concerted effort to develop, refine and promulgate frameworks for IT service management. In this section, the current and emerging frameworks are described.
ITIL: IT Infrastructure Library IT Service management standards such as the IT Infrastructure Library (ITIL) are of increasing importance to organizations around the globe. Although the actual number of organizations adopting ITIL is not known, there are many indicators of the growing awareness and adoption of ITIL. For example, there are now 46 national chapters of the IT Service Management Forum (itSMF) with in excess of 100,000 members worldwide (itSMFI); itSMF conferences are enjoying record attendances; the demand for ITIL-qualified staff is increasing, accompanied by an exponential rise in the number of people qualifying for the ITIL Foundation certificate. The core of ITIL version 2, as released in 2001 comprises five service
IT Service Departments Struggle to Adopt a Service-Oriented Philosophy
delivery processes (service level management, financial management, capacity management, IT service continuity management, and availability management); five service support processes (incident management, problem management, change management, release management and configuration management) and one service support function (service desk) (OGC, 2002). Service support processes apply to the operational level of the organization whereas the service delivery processes are tactical in nature. ITIL version 3 was released in 2007 and comprises five core texts: IT Service Strategies; IT Service Design; IT Service Introduction; IT Service Operations; and IT Service Improvement (Service Strategy, 2007). The latest version focuses on the life-cycle of services and attempts to remove process silos.
CMMI-SVC: Capability Maturity Model Integration for Service Delivery In recent years there has been an increasing awareness of the need to integrate models for software development with processes for service support and management. The focus is moving to a lifecycle approach with shared processes rather than the confusing situation today whereby organizations are grappling with multiple models to ensure best practice in development, implementation and ongoing support. The growing realisation of the importance of IT service management is evidenced by the current development work by the Software Engineering Institute on CMMI for service delivery (CMMI-SVC) (Douglass, 2007). Process areas focused on service delivery activities have been initially drafted and will be scheduled for piloting and refinement after the release of the CMMI for Acquisition (CMMI-ACQ) (Hollenbach & Buteau, 2006). The CMMI-SVC comprises 25 process areas spread over four categories: process management,
project management, service establishment and delivery, and support. Of the 25 process areas, 16 are common to CMMI-DEV and CMMI-ACQ. Supplier agreement management is shared by CMMI-SVC with CMMI-DEV. There are five new service process areas: problem management, incident and request management, service delivery, service transition, and capacity and availability management. CMMI-SVC also includes three optional service process areas: organizational service management, service system development and service continuity (SEI, 2006).
ISO/IEC 20000 IT Service Management Standard In December 2005, ISO member countries adopted a standard for IT service management - ISO/IEC 20000, based on BS 15000 which was derived from ITILv2. ISO/IEC 20000 comprises five groups of processes: service delivery processes (service level management, service reporting, service continuity and availability, budgeting and accounting for IT services, capacity management, information security management); relationship processes (business relationship management, supplier management); resolution processes (incident management, problem management); control processes (configuration management, change management); and release management (ISO/IEC, 2005). A comparison of the ISO/IEC 20000 processes with CMMI-SVC reveals that the majority of the ISO/IEC 20000 processes are represented in CMMI-SVC with the possible exception of information security management, business relationship management, and service reporting.
ISO/IEC 15504: IT Assessment Standard In 2005, a team of researchers at the Public Research Centre Henri Tudor in Luxembourg developed a process reference model (PRM)
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and process assessment model (PAM) consistent with ITIL and compliant with the IT Assessment Standard ISO/IEC 15504 (Di Renzo, Barafort, Lejeune, Prime, & Simon, 2005). The Assessment and Improvement integrateD Approach (AIDA) project developed the PAM based on the ISO/ IEC 15504-5 assessment model (ISO/IEC, 2003) and includes process performance indicators for base practices and work products, and process capability indicators. The PRM includes the five ITILv2 service support processes (incident management, problem management, configuration management, change management and release management) and the five ITILv2 service delivery processes (service level management, IT financial management, capacity management, IT service continuity management and availability management). The ITIL books were used to identify input and output work products which were then classified according to relevant processes. In June 2007, two new work items were proposed to the ISO/IEC Standards Working Group responsible for IT Service and Operations Management (JTC 1/SC7 WG25). To form a bridge between the IT service management standard and the IT process assessment standard, an exemplar process assessment model for IT service management is proposed as Part 8 of ISO/IEC 15504, and a process reference model is proposed as Part 4 of ISO/IEC 20000. The completion of these parts will enable compliant assessments of process capability to be conducted on IT service management processes.
RESEARCH METHODOLOGY Since August 2005, researchers at the University of Southern Queensland have undertaken a project in collaboration with the Australian chapter of itSMF. The project aims to investigate the adoption of frameworks for improving IT service management. The project has taken on international significance with the collaboration
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of academics and researchers from many other universities including St Gallen (Switzerland), De Montford (UK), Appalachian State (USA), Carlton (Canada), NHH (Norway), and members of itSMF USA and itSMF Thailand. The IT service management research project has surveyed delegates at the itSMF Australia National Conferences for the past four years (20052008). The survey has been replicated at itSMF conferences in Thailand, Norway and Canada. Over the past three years, IT Service Managers from 17 organizations in the public and private sector have been interviewed to gain a deeper understanding of the benefits and challenges of improving IT service management through ITIL adoption. The interview instrument is based on that developed by Hochstein et al. (2005) for interviews with six German firms. The interviews, conducted in Australia, United Kingdom, New Zealand and United States of America, have been transcribed, checked for accuracy and analysed to extract themes pertaining to the implementation of ITIL and ISO/IEC 20000. This article draws on the findings from the surveys and case studies to investigate factors which inhibit the transformation to a serviceorientation as an objective of ITIL adoption.
DISCUSSION All the organizations who responded to the Australian itSMF surveys had adopted ITILv2 and were making substantial progress in implementing this framework. To date, organizations have given priority to implementing the service desk function, incident management and change management processes. The strongest motivating factor to implement IT service management improvement is to improve the focus on IT service, followed by a desire to improve IT/business process integration, and to a lesser degree, internal compliance, cost reduction, and external compliance.
IT Service Departments Struggle to Adopt a Service-Oriented Philosophy
The 2007 itSMF Australian survey results confirmed that IT service management can help to promote a service-orientation: the highest rating benefit, selected by almost 70 percent of respondents was that IT service management provides improved customer satisfaction (CaterSteel, Tan, & Toleman, 2008). Half of the respondents selected improved response and resolution, closely followed by clear identification of roles and responsibilities. The fourth ranked benefit was that IT services are better coordinated, followed by improved IT resources use. In contrast, the survey of the participants of the 2007 Thai itSMF Conference revealed less than half the respondents were adopting ITIL, although many had internally developed IT service management initiatives (Lawkobkit, 2008). It would appear that ITIL is more established in Australia: 2007 saw Thailand’s first conference but Australia’s tenth. The interviews with IT Service Managers demonstrate that implementing ITIL can transform IT service management and provide benefits to organizations such as a more predictable infrastructure from improved rigour in testing and system changes, improved consultation with IT groups within the organization, smoother negotiation of service level agreements (SLAs), reduced server faults, seamless end-to-end service, documented and consistent IT service management processes across the organization, and consistent logging of incidents. Many of the IT Service Managers interviewed reported that they have not made as much progress with ITIL implementation as they desired, due to problems such as lack of management support, cultural change in terms of resistance from technical staff, and delays in establishing an appropriate tool set. To provide a more detailed discussion of the factors impeding the shift to a service orientation, the four-level IT-service performance management framework developed by Praeg and Schnabel (2006) is used to review the data collected. The rationale underlying the framework is based on the
understanding that the strategic level and process levels determine the performance requirements while the tool level secures the sustainability of the performance.
Strategic Level: Executive Support and Outsourcing Trend It was no surprise that the surveys revealed that commitment from senior management is regarded as the most critical factor for successful IT service management implementation. Managers interviewed also stressed the importance of support from senior management. As well as being necessary to guarantee funding for resources such as training, hardware and software, senior management support is essential to endorse policy and enforce compliance to the standard processes across the entire organization. Effective culture change is not possible without support from the highest level. To gain executive support most of the organizations interviewed sought approval by presenting a business case. However, there was a tendency by some organizations to view ITIL as ‘business as usual’ rather than as a project. Some view ITIL as an ongoing process improvement program (Cater-Steel & Pollard, 2008). This tendency to adopt ‘standards by stealth’ contradicts a basic tenet of IT governance: projects should not commence without an approved business case setting out all known and foreseeable risks, specification, benefits and costs of the project (Musson & Jordan, 2006). Many of the Service Managers interviewed commented on the practice of outsourcing IT services. Increasingly, organizations are outsourcing all or part of their IT infrastructure services. According to Bitner and Brown (2006), standardised processes stimulate growth in off-shoring and will accelerate the trend to source service IT provision from developing nations. The Gartner group has estimated that the worldwide IT outsourcing market will grow from the US$180 billion revenues in 2003 to US$253
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billion in 2008 at a compound annual growth rate of 7 percent (Gonzalez, Gasco, & Llopis, 2006). The IT Service Manager of a large government department stated that the organization wanted to outsource some services but could not as the processes were not adequately documented. In this case, improving IT service management was seen as the pre-cursor to outsourcing. A large financial company reported that ITIL adoption facilitated outsourcing of infrastructure support. This view is consistent with that of Janssen and Joha (2008) who claim that shared service centres based on service level agreements are often a first step towards outsourcing. On the other hand, a large organization in the financial sector saw certification to ISO/IEC 20000 as a defence against outsourcing. This firm successfully changed the culture of the organization by urging IT staff to adopt a service-centric focus to enable the IT department to become the ‘supplier of choice’ for other departments in the organization (Cater-Steel & McBride, 2007).
Business Process Level: End-to-End Service As part of ITILv2 adoption, many organizations found it effective to appoint process owners for each of the ITIL core processes. This certainly provided impetus to define and implement each process but raised the difficulty of integrating these processes to enable a seamless end-to-end provision of service. A large government department reported that each section was performing their processes well but that the users had ‘fallen down the sink in this great big hole between two processes’. Other organizations explained the importance of involving all stakeholders in integration mapping workshops. A significant effort is required to ensure the interfaces between processes are effective. Steinberg warns of the risks of only implementing selected processes and insists that all processes need to be developed simultaneously (2005).
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It is evident that ITIL is providing the means to compensate for the four gaps between users’ expectations and their perceptions of the service provided by the IT department as identified by Pitt et al. (1998). Through better communication and a stronger business and strategic focus, IT managers can understand what the users want. Rather than the time consuming and onerous task of developing their own standards, ITIL provides a convenient starting point for IT Service Managers to set and monitor achievable service quality standards. With the help of effective SLAs, delivery of a structured and integrated service can deliver on the promises made by the IT department.
IT-Service Level The most difficult aspect of ITIL implementation was evident at the IT service level with new terminology, policies, procedures, and employee performance evaluations modified to include ITIL. Managers who reported successful implementation of ITIL stressed the importance of identifying stakeholders and especially gaining the commitment of all IT staff. In one large financial company, the external consultants who were contracted to implement and enforce the new processes were referred to as ‘ITIL Nazis’. A university found it very difficult to persuade technical staff to complete documentation of their activities. This challenge was overcome by a charismatic ‘Doctor ITIL’ who conducted funfilled workshops and training seminars to engage with the IT staff as well as corporate users. One of the difficulties in transforming IT culture is due to the practice of promoting people with good technical skills to management positions (Bruton, 2004). Unfortunately, these people often do not have expertise in customer service management or relationship management. For example, some firms interviewed were grappling with changing their IT service metrics to collect
IT Service Departments Struggle to Adopt a Service-Oriented Philosophy
and report statistics that were meaningful to the customer rather than the technology. Most of the managers interviewed reported that one of the most effective change management activities was the simulation game included in the ITIL Foundations training course. Each training provider has a variation on the experiential learning exercise which might be set, for example in a busy shipping port, railway or space shuttle launch site. During the game, players become aware that delays in providing work-arounds for incidents or solving problems will have dire consequences. As well, the importance of building up a knowledge base becomes apparent. Feedback from interviewees repeatedly indicated that the game resulted in a change of attitude of many technical staff. They realised how their work impacted on the profitability and reputation of the business.
is evidence that many organizations focus on acquiring tools without first designing IT service management processes. The mistake of premature purchase of tools is symptomatic of the culture of focussing on technology as a panacea, instead of first considering the processes the tools are meant to support.
CONCLUSION From the analysis of the surveys and case studies, six factors are identified as critical for IT departments to transform to a service orientation: •
Tool Level According to Praeg and Schnabel (2006), the tool level encompasses methods and instruments. Tools vendors have responded to the increased popularity of ITIL by developing sophisticated, integrated tools. These tools facilitate the endto-end and life-cycle view by integrating the recording of incidents with the configuration management database and change management. There are also discovery tools which monitor the performance of network components and assist in diagnosis, reconfiguration and recovery. However, many managers interviewed described that their initial attempt to adopt ITIL failed because they purchased a tool before understanding and developing their processes. A large government department were many months through a tender process before they realised their specification was totally inadequate. Another government department explained the tool selection process totally derailed the ITIL project. Two of the large finance companies interviewed reported they had a history of purchasing expensive IT service management systems which were never implemented. There
•
•
•
•
Support from senior management is essential to provide resources and enforce compliance to new processes. As in most initiatives involving organizational change and technology, the key is effective engagement of personnel affected coupled with support from senior management. Senior management does not need an in-depth understanding of ITIL but must provide support in terms of resources and authority to enforce new policies. The threat or opportunity to outsource IT service management needs to be considered. Process silos need to be overcome by integration to provide end-to-end service. Each process has critical dependencies with other processes. Business staff and customers need to be identified as stakeholders and involved in process redesign. Effective use of one-onone communication with key stakeholders, backed up with newsletters and workshops helps to promote ITIL to the wider group of stakeholders. The culture of IT staff needs to change in terms of focus from technology to service excellence by understanding how IT contributes value to the business and customers.
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•
Processes should be redesigned prior to investing in tools.
IT Service Managers need to consider these factors when implementing IT service improvements. If IT service providers fail to provide a reliable customer-centric focus, it will impact on their organizations by limiting the potential for IT to add value. The ITIL phenomenon has radically changed the discipline of IT service management. Emerging frameworks such as CMMI-SVC and ISO/ IEC 20000 will extend the impact, and in the future, it is likely that providers will be selected based on capability assessments or certification. Future research will analyse certification records to perform an international comparison of the up-take rate of the international standard. We also intend to track and report on the release and uptake of CMMI-SVC.
ACKNOWLEDGMENT I would like to acknowledge the other members of the USQ IT service management research team: Dr Wui-Gee Tan and Professor Mark Toleman. Special thanks also to others who have contributed to this research effort: Mr Peter Cross (Chair of itSMF Australia), Dr Neil McBride (De Montford University), Dr Carol Pollard (Appelachian State University), Montri Lawkobkit (itSMF Thailand). ®CMMI is registered in the U.S. Patent and Trademark Office by Carnegie Mellon University
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Service Strategy. (2007). London: TSO for the Office of Government Commerce. Steinberg, R. A. (2005). Implementing ITIL: adapting your organization to the coming revolution in IT service management. Victoria, BC: Trafford.
This work was previously published in International Journal of Information Systems in the Service Sector, Vol. 1, Issue 2, edited by J. Wang, pp. 69-77, copyright 2009 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.7
Understanding Outsourcing of Web-Based Applications in Organizations: The Case of E-Insurance Teuta Cata Northern Kentucky University, USA
ABSTRACT
INTRODUCTION
This article has investigated the insurance industry and provided insights into the relationships of organizational size and age with outsourcing and organizational structure. Also, this study investigated the relationship between Web site age, outsourcing, and organizational structure. The main findings are that firm size and maturity is related to the decision of Web-based development approach and the best organizational structure to support online activity. The insights obtained by a new variable: Web site age suggests that insurance companies are trying to develop their Web-based activities within their existing organizational structures, rather than creating new e-commerce divisions.
Electronic commerce (e-commerce) is now considered to be a very important component of a business strategy for sales and customer service. An online presence increases a firm’s credibility if the Web site is able to communicate and deliver the message and services that the firm wants to convey to its online audience (D’Angelo & Little, 1998). An interesting and successful approach to creating and maintaining the smooth operation of Web-based applications is outsourcing them to firms that are able to provide professional and reliable Web services. The financial industry is perceived the one which can reap significant benefits from offshore outsourcing of their IT services (Schaaf, 2004). By outsourcing their IT-based
Understanding Outsourcing of Web-Based Applications in Organizations
services, banks can save 8-12% of their overall cost and insurance companies 10-15%. Financial companies have begun to consider outsourcing as an alternative, and they are considering Web site maintenance as the most efficient approach to a successful Web-based activity (Minkoff, 2000). Practitioners in the insurance industry consider outsourcing of Web-based applications as a potential to reduce costs and risks in the industry (Ahmed, 2002). Applications such as collaborative claims litigation; niche product development, deployment, and administration; and bringing agents and insured services closer to policy holders are only the start of insurance applications that can be outsourced to application service providers (ASPs). Outsourcing makes it possible for companies to have an instant Web environment without increasing traffic on the firm’s LAN/WAN or putting more pressure on its Information Technology (IT) staff to support the 24x7 Web environment. At the same time, outsourcing allows companies to focus on their core competencies, provide better Web service, and reduce the cost of online activity (Sibley, 2001). While all of this is true, companies may very well have different strategies for outsourcing. This research will address the issue of developing Web-based applications as one of the most important decisions in e-commerce initiatives. Investigating Web-based applications in the financial industry has a specific importance because this industry is an information-intensive industry, where the adoption of technology has a significant impact not only on the products and services offered, but also on business strategies and the process of business core redesign (Dos Santos & Peffers, 1995). At the same time, the insurance sector is lagging the banking sector in e-commerce (Burger, 2005). As online banking has been growing dramatically in the last 10 years, online sales have just gotten started.
The research problem of our study has focused on two main areas aspects: first, how firm size and age influence the decision to outsource the development of Web-based applications and second, what organizational structures are suitable for supporting Web sites for e-commerce. Reasons to investigate the impact of organization variables in sourcing e-commerce activities come from the need to identify how organizational context influences important decisions related to participate or not in Web-based applications. Organization variables such as organization maturity and size has been under investigated in e-commerce context. This study has aimed to answering the following questions: •
•
•
•
What approach to Web development do insurance companies tend to apply? Do they develop it in-house? Do they outsource it? Do they use a combination of these two approaches? What organizational structure do insurance companies choose to support e-commerce initiative? Do they develop it as part of existing structure or as a separate division? How do the insurance company’s size and age relate to decisions on how to develop the Web site? How do the company’s size and age relate to different organizational structures for e-commerce?
The remainder of this paper is presented in four sections. First, we discuss outsourcing, organizational structure for e-commerce, and organizational variables. Then, we describe the sample and the methodology used to capture data. The third section presents the findings from this study and relates them to the hypotheses of this research. In the final section, we draw conclusions from these data and identify the limitations of the study.
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LITERATURE REVIEW Information Systems Outsourcing IS outsourcing is the process of contracting out the firm’s products or activities to another organization that agrees to provide and manage these products for a set fee over a set period (Kern & Willcocks, 2002). Dibbern, Goles, Hirschheim, and Jayatilaka (2004) suggest two reasons for outsourcing: first, IS functions are considered as non-core functions, which can be better managed by outside vendors; and second, IS functions are considered an overhead cost that has to be minimized. Research in IS outsourcing has attempted to identify the forces that motivate firms to outsource their IT functions. Loh and Venkatraman (1992) suggest that the degree of IT outsourcing is related to both the structure of the business and the IT cost structure. The IT cost structure is related to expenditures for the purpose of keeping up with the latest developments in IT. Most of the time, companies find difficulties in efficiently controlling this cost and, therefore, try to delegate these expenditures to IT vendors. Ang and Cummings (1997) suggest that the decision to outsource IS functions is related to company size. Large companies consider IT functions more complex and more strategic than in small firms. Small firms use IT functions as “backroom cost machinery” where they are used to reduce cost. Goo, Kishore, and Rao (2000) suggest that there are internal and external drivers. Beyond the business and technology drivers within each company, outside drivers, such as competitors, customers, and technological innovation are the factors that lead companies to negotiate with IS vendors for managing their IS functions. Interestingly, contradictory results are found in analyzing outsourcing trends in the financial industry. McFarlan and Nolan (1995) suggested that service firms were not interested in outsourc-
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ing IS functions. However, recent research shows that even service firms, such as financial firms, are outsourcing their IS functions. The outsourcing trend in financial firms has been focused more on front-and-back office applications in functions such as finance, accounting, human resource management, and customer support (Tas & Sunder, 2004). Trade journals support the potentials of outsourcing Web-based applications in insurance industry. Ahmed (2002) suggests that insurance companies can outsource many of their Web-based applications to ASPs and obtain significant benefits from outsourcing. Another important issue related to the decision of whether to outsource or not is related to the resources that the firm has. Lee, Huynh, Kwok, and Pi (2003) tried to generalize the patterns of outsourcing by investigating outsourcing of IS services over time. The historical data suggest that, in the past, the small companies with problematic and mismanaged IS departments were the companies which were outsourcing their IS functions. Recently, the IS outsourcing trend has included even large companies with mature IS departments. Recent research attempted to explain the decision to manage IS resources based on the stage of a firm’s technological development. Kishore, Agrawal, and Rao (2004) investigated the sourcing of e-commerce technology for firms in early and late stages of technological maturity. The results of this study suggest that in the early stages, companies try to source by using a hybrid approach: they try to develop the Web-based applications in-house and outsource part of them to vendors. As technology matures, the companies try to increase their relationships with vendors. These results suggest that companies need to develop some expertise in-house and develop tacit knowledge about e-commerce applications. Another study on sourcing of technology applications (Al-Qerim & Bathula, 2002) suggests that the complexity of IT applications and the dependency on the supplier
Understanding Outsourcing of Web-Based Applications in Organizations
are the main factors which lead companies to the decision to totally outsource, use hybrid sourcing, or in-source their IT applications. The retail industry is a good example of this sourcing strategy. Retailers such as Marks & Spencer (M&S) (Brooks, 2006) are delegating the e-commerce operation to other companies (Amazon) to operate it more efficiently, after they setup the operation by themselves. The hybrid approach will allow M&S to control the management of the site by itself and reduce cost by allowing a third party to operate it more efficiently.
Organizational Structure for E-Commerce E-Commerce initiatives have raised organizational-structure issues because companies are aware that the online channel is not only a technology solution, but it is a business strategy, or a “moving target.” The best solution is to have a flexible integrated platform (Sauer & Willcocks, 2002) and a business model which will address the organization goals, strategies, and objectives for the e-commerce project (Wang, 2000). Some organizational structures are considered to better support such Web initiatives. Solutions vary from supporting Web activities totally inhouse by the organization’s IS department, to creating a separate division which will totally integrate all functions related to an online business in a single division, and to the separation of the online business as a totally new independent business (or a spin-off) created by an existing company. Several attempts have been made to understand what the best approach is to managing e-commerce activity and how companies can best make such decisions. Grant (2003) conducted an exploratory study that tried to investigate how Canadian companies designed the organizational structure of their e-commerce initiative. The results of the study suggest that companies prefer to trust their
business applications to their existing IT structures rather than to a specific e-business division. Barthelemy and Geyer (2005) tried to identify the relationship of internal and external factors that leads companies to the decision of whether they need a separate division to support their e-commerce applications. Results of the study suggest that a company will create a spin-off IS division if its IS activities are highly asset-specific, its IS departments are large and perform as profit centers, and if a high degree of interconnectedness exists between financial companies and manufacturer firms. Another interesting perspective in this research stream is the investigation of what happens with organizational structure once a company has made its outsourcing decision. Chu and Smithson (2003) conducted a case study of changes that two organizations undertook in order to create an e-commerce solution. The authors observed that neither company under study was satisfied with having new organizational structures created for the e-commerce initiative, and so, these were changed back to the traditional in-house approach, in which the e-commerce was better understood by manufacturing, sales, marketing, and other divisions. A reason for the reversal could be a gap that IT creates between business units if it takes the leading role (Gordon & Gordon, 2000). The e-commerce initiatives are established in order to get more information about the company’s customers. If this information is located within a separate division or a new company branch, then companies are not reaping the entire benefit from their online channel.
Organizational Variables This study investigates the relationship between the decision of outsourcing Web-based applications and e-commerce organizational structures with two of the most important organizational variables: organizational size and age. Research in
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IS has examined the impact of organizational variables on issues related to technology assimilation, technology adoption, and technology innovation in general. Unfortunately, there is little evidence of investigating how these two organizational variables influence adoption of Web-based technologies in particular. The following discussion of organizational variables is based on findings of technology innovation in general. Hopefully the findings of this research will help to fill the gap in literature and help understanding of the relationship between organizational variables and e-commerce technologies.
Organizational Size The literature offers contradictory findings about the relationship and direction between organizational size and innovation (Camison-Zornoza, Lapiedra-Alcami, Segarra-Cipres, & BoronatNavarro, 2004; Lee & Xia, 2006). An organization’s size affects not only business structure and processes, but also managerial decisions to apply technology innovation in organizations. There is a stream of research that argues that large organizations are more innovative and better equipped to apply new technology developments. This argument is based on the fact that large organizations have a greater potential for the application of new technology because they have more technical, human, and financial resources to support the adoption of new technologies (Yap, 1990). Small firms lack the managerial resources and technical expertise required to implement and use network technologies (Min & Galle, 2001). Two recent meta-analysis research of 54 and 53 empirical studies focus on the relationship between organization size and IT innovation adoption (Lee & Xia, 2006; Camison-Zornoza et al., 2004) suggest that a positive effect exists between the indicated variables. This positive relationship exists for profit organizations and is stronger if the adoption is considered as IT process innovation, IT mixed
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innovation, adoption stages, and so forth (Lee & Xia, 2006). On the other hand organization size affects the decision for organizational structures. Harris and Katz (1991) contend that small organizations have simple and flexible structures, which makes them more adoptable to change. As the organization grows larger it becomes more structured, hierarchical, bureaucratic, and less flexible and able to adapt to changes.
Organizational Age How does a firm’s activity change with maturity? This question has been investigated many times and is important to understanding the changes that firms adopt over the course of time. Henderson (1999) advocates that there is a strong relationship between a firm’s maturity and the IT strategy it adopts. Mature firms, through in-house R&D, are more likely to develop proprietary solutions, while younger firms show a tendency towards purchasing off-the-shelf solutions. Following this discussion stream, Thornhill and Amit (2003) suggest that young firms possess different resources and suffer different managerial issues than older firms. Less mature firms are at risk due to a lack of valuable resources, while mature firms are at risk because they are not able to adapt themselves to a changing competitive environment. The relationship between a firm’s maturity and the adoption of new technological innovations is very intriguing and interesting. Sorensen and Stuart (2000) meticulously investigate this relationship. They present two scenarios related to the relationship between a firm’s age and technological innovation. On the one hand, older firms are more stable and focus on innovation more frequently. Their innovations are more incremental and comply with the firm’s existing technologies. Furthermore, technology adoption tends to be self-reinforcing, which puts older firms in a positive situation because they have already perfected their routines, structures, and
Understanding Outsourcing of Web-Based Applications in Organizations
incentives (Cohen & Levinthal, 1990). Support for this theory lies in the large number of patents held or pursued by older, Fortune 500, firms. On the other hand, young firms are more willing to adopt new technologies, especially if these technologies provide radical technical changes. Research on IS has not yet addressed the impact of the Web site age on the different strategic decisions that organizations make. Companies have consistently changed their strategies for their Web-based activities as online sales volume increased and as the companies were more confident in applying the latest Web technologies. The Web site age is a new organizational variable which has to be involved as a way to collect information on how business strategies have changed as Web technology matures. Web site age is considered as a positive factor to increase the legitimacy of the business and increase ranking in some search engines, such as Google (Melbourne, 2005) and shows firm’s commitment to e-commerce activities (Kowtha & Choon, 2001). Another study (Vaughan & Wu, 2004) made the first effort to explore the relationship between the Web site age and the links that a Web site has. Both those variables were used to test if the Web site age impacts the business performance measures such as profit, R&D, revenue, and so forth. Results of the study show the older Web sites have more links to them, but Web site age is not a confound variable between number of links and the business performance measures.
In summary, literature suggests that IS outsourcing is related to organizational variables (Ang & Cummings, 1997). Small organizations with limited or mismanaged IT departments (Lee et al., 2003) and young companies (Henderson, 1999) are the ones who prefer to buy off-the-shelf or outsource their applications. Large and mature companies are more stable and can better support in-house development of applications. Organizational structure variable is basically discussed from the business perspective, how a new business division is related to organizational goals and strategies (Wang, 2000), and only few attempts are made to investigate this variable in light of organizational variables (size and maturity). A European study (Barthelemy & Geyer, 2005) suggests that companies with large IT departments are more willing to create spin-off IT divisions. Mature organizations possess more managerial resources and are not able to adopt themselves to environmental changes (Thornhill & Amit, 2003), which was very evident in the first wave of e-commerce.
METHODOLOGY In order to address our research problem and questions discussed previously, given the evidence and gaps identified in the literature, we have tested several hypotheses as follows. Figure 1 shows the hypothesis tested in this study.
Figure 1. The hypothesis and relation of the variables in the study Organization Size
H1
Outsourcing WebBased Applications
H2 H3 Organization Age
H4
Organizational Structure
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Understanding Outsourcing of Web-Based Applications in Organizations
•
•
•
•
H1: Organizational size is positively related to the decision to develop the Web-based applications in-house. H2: Organizational size is negatively related to the decision of creating new organizational structures for e-commerce activity. H3: There is a positive relationship between organizational age and the decision to develop Web-based applications in-house. H4: There is a positive relationship between organizational age and the decision to develop Web-based applications in the existing structures.
Our study used a survey of insurance companies that have Web sites. A preliminary pilot study with four insurance experts helped us better understand the insurance process and ensured that items in the questionnaire were easily understood. The unit of analysis is organization. We did not attempt to perform an in-depth analysis of either the technical implementation of Web-based activities or other technical details and problems. This study used quantitative methodology. The first step was to identify which insurance services would be the target of this study. The various types of insurance coverage were carefully analyzed and two types—automobile and life—were selected for inclusion in this study. These two types of insurance are considered as the most appropriate products for e-commerce (“Web News,” 2003). Participants in this study were identified from two sources—the Internet (Yahoo.com, Google. com, and Hoover.com) and Best Key Rating Guide (2002) published by AM Best. Companies identified on the Internet were invited to participate in the study by e-mail. Each received an invitation letter with a survey questionnaire attached. The invitation letter stated IT managers or other managers related to Web-based activity should complete the questionnaire. A total of 522 e-mails were sent to companies that provided e-mail addresses on
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their Web sites, and 97 online forms were completed for companies that did not provide e-mail addresses. Thirty-seven e-mails were returned as undelivered. Those companies were invited to participate in the study by traditional mail in the second round of data collection. Due to the low response rate obtained by the e-mail survey, the data collection phase of the study continued by sending traditional mail to life insurance companies identified in Best’s Key Rating Guide (2002). A total of 385 companies were invited to participate in the study by sending a letter of invitation and a printed questionnaire. In this phase, careful consideration was taken to invite companies that were not contacted via e-mail survey, companies whose e-mails were returned, and companies whose service rate was above an F rating (in liquidation). The identified companies operate in almost every state in the United States. Twenty-three postal questionnaires were returned as undelivered due to either dissolution or simple changes of address. A total of 109 questionnaires were completed and returned, 53 via e-mail, and 56 via traditional mail. Two questionnaires were partially completed and could not be used for statistical analysis and hypothesis testing. Fifteen respondents were engaged in auto insurance, 63 in life insurance, and 29 provided both types of insurance (see Table 1). Survey respondents hold a variety of positions in their respective organizations. As shown in Table 2, 72% of participants were associated with the IT function in their organization or with the firm’s e-commerce/Web site activity. The remaining questionnaires (25%) were completed by managers with other responsibilities for their organizations, mainly marketing managers. Three questionnaires did not provide information about the job title of the respondents. A survey questionnaire was created in order to obtain information about each company’s age; size; insurance types served; Web site charac-
Understanding Outsourcing of Web-Based Applications in Organizations
Number of responses included in statistical analysis
51 (9.6)
56 (15.45)
Life
24 (47%)
39 (69.6%)
Auto
15 (29.4%)
0 (0%)
Life and Auto
12 (23.6%)
17 (30.4%)
Responses according to insurance types:
Table 2. Profile of job title of survey respondents Criteria
IT-related positions
Management-related positions
Job Title
Number of Respondents
% of Respondents
CIO IT director Vice Director of IT Web manager E-commerce manager Totals
3 21 19 24 10 77
2.8 % 19.6% 17.8% 22.4% 9.3% 71.9%
CEO President Vice President Other managers (mainly marketing) No response Totals
4 1 3 19 3 30
3.7% 0.9% 2.8% 17.8% 2.8% 25.2%
teristics age; the percentage of sales which come from Web-based activity; Web development approaches; and the organizational structure supporting e-commerce operations. Data analysis has involved several measurement-related issues. The dependent variable outsourcing is measured by three ordinal values: (1) in-house, (2) partly outsourced, and (3) partly in-house, and totally outsourced. The dependent variable related to a new organizational structure
related to Web-based activity, named in statistical analysis as “eDepartment,” is measured as an ordinal variable with three levels: (1) part-oforganization, mixed-approach, and new-division. In the survey questionnaire this variable was broken in two categories: part of organization and new-department. Several respondents reported a mixed approach as well. Therefore, in statistical analysis this variable is included as an ordinal variable with three levels. Moreover, firm age
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Understanding Outsourcing of Web-Based Applications in Organizations
and Web site age are measured in years. Based on the suggestions given by insurance experts who participated in the pilot study, companies are grouped as new companies if they are younger than 20 years old, moderate-age if they are between 21 and 100 years old, and mature if they are more than 100 years old. The Web site age has two groups based on the very limited time insurance companies have been operating online. Companies are considered to have a new Web site if they have been operating online for fewer than 4 years and mature if their activity is 4 or more years. Insurance experts suggested the following classification based on the experience with operating the Web site and other problems related with the adoption of Web-based applications. It was intended that organizational size be measured by the number of employees and sales. Unfortunately, few companies agreed to share sale figures with us. Therefore, organizational size is operationalized as the number of employees reported. Insurance firms are considered small if they have fewer than 50 employees, medium if they have more than 51, and less than 500 employees, and large if the firm has 500 or more employees. This study uses crosstab analysis as the best method for analyzing the relationship between two ordinal variables and a third as a control variable (Agresti, 1996).
FINDINGS Table 3 summarizes the mean values and standard deviation of the company’s age, Web site age,
organizational size, and online sales investigated in this study. As Table 3 shows, the companies participating in this study vary according to the time they have been operating in the insurance industry (from 7 to 293 years old) and the length of time they have been conducting business online (one to 10 years). Crosstabs analysis is used to identify any relationship between the decision to outsource Webbased functions and create new organizational structure and independent variables related to organizational size, organizational maturity, and Web site age. The three levels of the outsourcing decision (in-house, mixed, and outsourced) and new organizational structures (part-organization, both, new-division) are considered as ordinal variables. The independent variable firm size is controlled by measuring the time-varying variables (firm age and Web site age) and online-sales variable because of a strong positive correlation that exists between the variables (Barron, West, & Hannan, 1994). The strong correlation between variables can be avoided by using one of them as the control variable in order to identify if any relationship exists between the second variable and the dependent variable. Crosstab analysis for the firm-size variable has been tested to explore firm size in its relation to both dependent variables: Web site development and organization structure (Table 4, 5, and 6). Firm age is used as the controlling variable in order to get a clear relationship between the independent and the dependent variables. Results of chi-square value show different approaches of Web development based on the
Table 3. Descriptive statistics for firm age, Web site age, firm size
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Variables
N
Firm age Web site age Firm size (employees) Online sales (%)
107 107 107 107
Minimum 7.00 1.00 11.00 0.00
Maximum 293.00 10.00 320,000 100.00
Mean 75.1028 5.2523 7,199 16.24
Understanding Outsourcing of Web-Based Applications in Organizations
Table 4. Results of crosstab analysis for firm size by controlling firm age Variables
Table 5. Count table of the relationship between organizational size and decision of outsourcing Webbased activities (Hypothesis H1) Firm Age Firm size Smal l
Young 5 11
19
Mature 6
Total 30
6
1
18
2
7
5
14
18
32
12
62
3 0
2 1
2 3
0
6
3
3
9
8
7 4 9 20
in-house
2
9
11
both
8
5
outsource
1
0
13 1
11
14
25
in-house both outsource Total in-house
Medium
both Total Large
outsource
Med
Total
Table 6. Count table of the relationship between organizational size and decision of creating new organizational structures (Hypothesis H2) Company Age Firm Size Small
part-organization spin-off Total
Medium
part-organization spin-off Total
Large
Young 18
Med 25
Mature 8
Total 51
0
7
4
11
18 3
32 8
12 5
62
0
1
3
16 4
3
9
8
20
part-organization
6
9
mixed
3
3
15 6
spin-off Total
company size. Small size insurance companies develop the Web site applications not only inhouse or partly in-house but also outsource them at third parties. Those companies have considered seriously the three approaches, where outsourc-
2
2
4
11
14
25
ing is not determinant but still is considered as a trend by chi-square test (p<.01). The count table shows that in-house development for small size firms has the majority by 30 counts, followed by mixed approach with 18 counts, and outsourcing
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Understanding Outsourcing of Web-Based Applications in Organizations
by 14 counts (Table 5). Medium-size firms overall do not show any trend towards which approach is more favorable. Within this group of firms, the medium size and medium age subgroup shows a clear trend towards outsourcing the Web-based functions (6 counts). Large insurance companies show a clear trend towards in-house or partly inhouse development of Web-based applications (11+13 counts). The other organizational decision tested in this study: to create a new e-commerce division or keep it within the existing organizational structure, shows a positive trend to create spinoff (p<.05) for small insurance companies. The reason that this group, in particular, wants to create spin-off structure may be related to the fact that small size companies are more flexible and less bureaucratic and they were able to follow the hype of e-commerce developments late in 20th century. The counts table (Table 6) clarify the Pearson chi-square results and clearly shows a trend to keep Web-based applications as part of
the organization in the two groups of firm size (medium = 16 counts, and large 15= counts). The variable firm age is tested toward the dependent variables on the three levels of controlling variable (firm size). Chi-square test shows significant trends toward using different approaches for Web-based development (p<.001 and p<.05) for two groups of firm age (medium and mature) (Table 7). To better clarify chi-square results, this study will use the counts tables to pertain detailed information as to which Webdeveloping alternatives the insurance companies had chosen (Table 8). Counts table shows young firms prefer to develop their application in-house or partly in-house (8+11 counts). Some subgroups hesitate on trusting only one approach of Webbased application development (young-small group and medium-large group). Therefore, those groups have preferred the mixed approach of developing their Web-based applications in-house and outsourcing some functions to third parties. Interestingly, only mid-age mid-size companies
Table 7. Results of crosstab analysis for firm age by controlling firm size Variables
Chi-Square
Hypotheses
Comp. age * Outsourcing decision *(Control: Firm size)
Understanding Outsourcing of Web-Based Applications in Organizations
have chosen outsourcing as the main approach to Web site development (6 counts). The reason of applying a mixed development approach (inhouse and outsourcing) may be related to the fact that medium and mature companies have legacy systems which are hard to integrate to new technology developments. For this reason they may need specialized help from vendors. As far as the decision to develop the Web activities within the company or create new Web division, young and mature insurance companies show a clear trend toward keeping them as part of the organization. Chi-square test shows a trend of medium-age companies to create new divisions (p<.05) (Table 7), which indicates an inclination toward trying new organizational forms for managing Web-based activities (Table 9, counts = 10). This trend is evident for mature group as well (count = 9), but chi-square test does not confirm this trend. The reason may be the small sample size for the mature group.
The analysis of this study will continue with another variable: Web site age, which is not previously investigated in IS research. The gap in literature does not allow us to build hypotheses for this new IS variable, but the analysis in this section will allow us to shed some light on how this variable is related to organizational variables: firm size and firm age. The analysis of the variable Web site age is interesting because it tries to investigate the trend of how Web sites are created and managed as the Web-based technology matures. Chi-square test (young p<.001 and mature p<.05) shows that insurance firms have developed and continue to develop their Web sites based in different approaches (in-house, outsourced, and both). The crosstab table (Table 11) shows that large companies trend more towards in-house or partly in-house applications and do not prefer outsourcing approach (large-young = 0, large-medium= 1). The other
Table 9. Testing the relationship between organizational age and decision of creating new organizational structures (Hypothesis H4) Firm Age Young
part-organization
Small 18
Total Med
part-organization both
Mature
part-organization both
Total 21
3 8
6
0 7
0 1 9
3 2
32 8
21
11 9
5
0 4
new division Total
Large
18 25
new division Total
Firm Size Medium 3
0 3 8
12
39 3 10 52
3 2
22 3 9
14
34
Table 10. Results of crosstab analysis for Web site age by controlling firm size Variables
Chi-Square
Web site age * Outsourcing decision * (Control: Firm size) (Young, Mature)
Young 19.460 ***
Mature 10. 068*
Web site age * Org. structure * (Control: Firm size) (Young, Mature)
Young 3.644
Mature 17,731**
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Understanding Outsourcing of Web-Based Applications in Organizations
Table 11. Testing the relationship between Web site age and decision of outsourcing Web-based activities Firm Size Website Age Young
in-house both outsource Total
Mature
in-house both outsource Total
Small 12
Medium 2
10 5
Large 4
Total 18
0
0
10
8
0
13
27 18
10
4
41
5
7
30
8
4
13
25
9
1
1
11
35
10
21
66
Table 12. Testing the relationship between Web site age and decision of creating new organizational structures Firm Size Website Age Young
part-organization new division Total
Mature
part-organization both new division Total
two groups (small and medium size) prefer both in-house and outsourcing approach. Interesting insights are obtained at observing the different organizational structure approach as Web-technology matures. Crosstab analysis shows that the mature Web site shows a clear trend (p<.01) toward new e-business organizational structures. With the development and maturity of e-commerce activity, firms are considering bringing or creating the Web-based activities within their existing organizational structures (Table 12). In particular medium and large size firms are integrating their Web-based applications with their existing structures (new-division young-medium counts = 0, new-division younglarge counts = 0).
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Small 21
Medium 10
Large
6
0
0
Total 35 6
27 30
10 6
4
41
11
0
0
6
47 6
4
5
4
4
13
35
10
21
66
DISCUSSION OF FINDINGS This study reveals many interesting findings related to the decisions of Web site development and organizational structure. The size of firms is related to the decision of what approach will be used when they develop their Web-based activity. Findings in this study suggest that small companies and mid-size mid-age companies are the ones experimenting with external sources for Web development. These groups are not totally depending on their IT department, but they are using the external expertise that outsourcing companies provide. Large and medium size companies depend more on internal resources to develop their Web-based applications. These findings support previous studies (Min & Galle, 2001; Yap, 1990) that suggest that large companies, which have
Understanding Outsourcing of Web-Based Applications in Organizations
more technical and managerial support, are in advantage to apply technology innovation. Results of the analysis indicate that as an organization matures it attempts to trust third parties to develop their Web sites totally or partially. Interestingly, this study found that financial companies are considering outsourcing of the front-office applications, where the leaders are medium-age and mid-size companies. The findings support the suggestions by Kishore et al. (2004) who suggest that both companies and outsourcers are maturing and that companies are delegating more responsibilities to the outsourcing companies and reaping more benefits of their expertise developed in the last few years. Other reasons that might have pushed the medium and mature segment of the insurance industry to outsource their Web-based functions might be related with the scarcity of IT resources. Insurance companies are transaction-oriented firms where their IT staff is mainly oriented on supporting and maintaining their legacy systems, and the knowledge and expertise to support the Web environment might be missing. Interesting findings are to be found even in the trends of organization structures that support e-commerce initiatives. Small size firms were more willing to create new organizational structure for their Web-based activities. The reason is related to the flexibility that small size brings to companies in case they need to rearrange their structure. As Harris and Katz (1991) suggest, large size firms are unable to be flexible and adaptable to structural changes. Interestingly, the findings suggest that as organization matures, it tries new ways to manage its functions. Organizations that have been in business for a considerable time (medium and mature firms) are more willing to create new business divisions, which will manage the Web-based activity. The reason might be that they want to bring the new technology development in the most incremental and visible way to their business partners and customers.
Web site age is an underdeveloped variable in IS research. Therefore, understanding the trends of Web site development as the technology and business approach mature requires a notable consideration. Web site development shows that insurance firms do not have any specific preference for Web-based developments. The three development approaches (in-house, mixed, and outsourced) are applicable. A close-up investigation by crosstabs suggests that large companies have tried to develop all or part of their Web-based functions in-house. Small and medium size insurance companies are still considering IT departments as a major developer for their Web-based application in cooperation with outsourcing companies. Results of this study suggest that in the first steps of e-commerce activities, companies came up with new organizational structures which divided those operations from existing organizational departments. As the online activity matures, insurance firms understand that online sales are part of the firm and therefore they have to be integrated with the “brick and mortar” operations of the company.
CONCLUSION AND LIMITATIONS In summary, this research indicates that the insurance industry still hesitates to rely on third parties to develop their Web-based applications and prefers to consider online sales as an enhancement of the current activity rather than to adopt a totally new and different sales approach. Part of the reason is that the insurance sector has, already, a well-developed IS infrastructure and a skilled IT staff, which are able to support Web-based activities. Data collected on Web site age clarify this issue further. The results suggest that companies that were the pioneers of online sales were more willing to come up with new organizational divisions, which were going to take care of their e-commerce
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part of the activity. The recent trend shows that insurance companies feel more comfortable with developing the Web-based applications and are trying to keep this expertise in-house. This study identified a very specific group within the insurance industry: mid-size mid-age companies, which are exhibiting new approaches related to Web site development and management. This study contributes to both practitioner and research community. The findings of this research help practitioners to understand the trends of ecommerce sourcing and realize the best course of action for them based on the maturity and size of their company. These findings will contribute to the academic community as well to increase the body of knowledge on e-commerce and understand patterns of decision making based on organizational variables. This study did not identify the reasons that push insurance companies to outsource their Web-based functions. Do insurance firms feel comfortable on sharing sensitive data about their customers to the third parties and if so, how do they make sure that those data are not sold to their competitors by the outsourcer? A follow-up research will focus in-depth on these issues and will try to explore the relationship between the nature of information collected and saved via Web-based activities and the decision to outsource those activities. Certain limitations should be noted when considering these findings. The major limitation of this study is the sample size. As mentioned previously, the population of auto and life insurance firms is limited, and it is difficult to secure a large sample size. Insurance firms were contacted via e-mails and the postal mail to increase the sample size. The number of insurance firms that are conducting a major portion of their businesses online is still quite limited. Another limitation is generalizability of the results of this study. The data collected for this study are entirely from American insurance firms; thus the findings identified in this study may not
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apply to other service industries or other regions of the world. Also, this study is snap-shot research rather than a longitudinal study. These results do not indicate the current trends of the e-insurance adoption process, and therefore they do not provide any insights into what their strategies might be in the future.
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This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 4, edited by M. KhosrowPour, pp. 1-17, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.8
Virtual Integration:
Antecedents and Role in Governing Supply Chain Integration Jeffrey C. F. Tai National Central University, Taiwan Eric T. G. Wang National Central University, Taiwan Kai Wang Ming Chuan University, Taiwan
ABSTRACT The integration and coordination of strategic suppliers becomes increasingly important as the manufacturer relies on external transactions to build up collaborative advantages. By conceptualizing virtual integration as an efficient and effective vertical coordination mechanism, the study discussed in this chapter developed a model to examine the role virtual integration plays in improving manufacturing performance and the antecedent factors that can lead supply chain members to rely on virtual integration to govern supply chain integration. Based on the resource-based view and transaction costs theory, the suppliers’ specific investments and environmental uncertainty are identified as critical antecedents to virtual integration. The results
show that the suppliers’ specific investments can significantly improve the manufacturers’ achievement of manufacturing goals, thereby motivating the manufacturer to rely on virtual integration to better coordinate with the suppliers who made significant idiosyncratic investments for enhancing transaction value while controlling the potential hazards.
INTRODUCTION There has been a relative shift from capacity to specialized subcontracting by large original equipment manufacturing (OEM) makers when they were facing increasingly fragmented and uncertain demand (Whitford & Zeitlin, 2004). With eroded operating margins and shortened
product life cycles, modern manufacturers have increasingly leveraged outsourcing practices for the benefit of low-cost manufacturing, global logistics services, and accelerated product development. Moreover, other than fabrication services, suppliers have been more and more involved in the manufacturers’ value chain activities to provide add-on values to buyers and to construct higher entry barriers against competing suppliers (Carter & Narasimhan, 1990). Although strategic sourcing has become an important instrument for realizing the ideal of “externalization of the core,” careful management of such supply chain integration efforts are required to reap the expected profit (Narasimhan & Das, 1999; Nesheim, 2001). The management of supply chain integration has been increasingly addressed in academic research as the practice of supply chain management continues to proliferate in industrial networks. Two themes predominantly examined by prior research were practices of supply chain integration and the impact of supply chain integration on performance improvement. For the former case, prior studies examined the scope, sophistication and focus of supply chain integration, which aimed at illuminating the essence of supply chain integration (Frohlich & Westbrook, 2001; Morash & Clinton, 1998; Narasimhan & Jayaram, 1998; Simatupang, Wright, & Sridharan, 2002). For the latter, supply chain integration was shown to be positively associated with manufacturing and operational performance improvements (Frohlich &Westbrook, 2001; Narasimhan & Jayaram, 1998). Although the fundamental importance of supply chain integration is widely accepted given the aforementioned studies, important questions remain open about how to manage supply chain integration. In particular, our knowledge is still weak concerning the kinds of mechanisms suppliers and customers use to govern supply chain integration under different transacting circumstances. Moreover, we know little about the causal linkages between governance mechanisms choices and resulting performance implications
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in the context of supply chain integration. Such questions motivated this research to focus on exploring the use of information and communication technology (ICT)-enabled coordination as an alternative governance mechanism to managing supply chain integration. As outsourcing practices gradually proliferate in modern business environments, ICT-enabled interorganizational integration has also been increasingly adopted to facilitate the implementation of such practices (Malone, Yates, & Benjamon, 1987). Since the inception of electronic data interchange (EDI), the use of ICT-enabled coordination has evolved from electronic monopoly to electronic partnership, allowing the customersupplier relationship to develop toward a more cooperative mode (Clemens, Reddi, & Row, 1993; Hart & Saunders, 1998). Furthermore, ICT is utilized to support communication and operation of a supply chain as if the OEM makers and their suppliers functioned as an extended enterprise, advancing ICT-enabled coordination toward a “virtual integration” mechanism (Chandrashekar & Schary, 1999; Magretta, 1998). The success of Dell’s direct model, in particular, demonstrates that virtual integration indeed is a viable means to facilitating integration of physically separated units and permitting coexistence of centralization and decentralization within an operating system (Stapleton, Gentles, Ross, & Shubert, 2001; van Hoek, 1998). Therefore, instead of common ownership, ICT has become more and more emphasized in implementing supply chain integration (Frolich & Westbrook, 2001). The research question of this study is to explore the role ICT-enabled coordination plays in managing supply chain integration. Drawing on both resource-based perspective (RBV) and transaction cost theory (TCT), ICT-enabled coordination is regarded as a governance mechanism to managing supply chain integration. The construct representing ICT-enabled coordination is construed as virtual integration, which captures the extent to which ICT is used by a manufacturer to coor-
Virtual Integration
dinate with its suppliers. As such, the objectives of this study are to: (1) evaluate the effectiveness of virtual integration in governing supply chain integration, and (2) investigate the antecedents to which virtual integration is utilized in governing supply chain integration, thereby contributing to our knowledge as to the contingencies of utilizing virtual integration as a viable governance mechanism. The remainder of the chapter is organized as follows. Next, we provide related supply chain integration literature, theoretical foundation and research framework. The following section develops the research hypotheses and model. Research method and measurement are then described, followed by data analysis. Finally, we provide concluding remarks and address the limitations of the study.
CONCEPTUAL BACKGROUND AND RESEARCH FRAMEWORK Supply Chain Integration: Ideal and Reality The central theme of supply chain integration is the integration of relationships, activities, functions, processes, and locations of a firm within itself as well as with its customers, suppliers, and other channel members (Bowersox & Morash, 1989; Lambert & Cooper, 2000). For example, Narasimhan and Jayaram (1998) proposed that supply chain integration is the confluence of supplier integration, strategic integration, and customer integration. Frohlich and Westbrook (2001) showed that inward-facing, peripheral-facing, supplier-facing, customer-facing, and outwardfacing strategies were commonly adopted in supply chain integration practices. Morash and Clinton (1998) suggested that the locus of supply chain integration could be intraorganizational process integration, interorganizational collaborative integration, and interorganizational operational
integration. These studies all proposed that the more completed and sophisticated supply chain integration is, the greater the improvement in supply chain performance. However, they also pointed out that gaps exist between the rhetoric and reality of implementing supply chain integration. Through a multimethod empirical study, Fawcett and Magnan (2002) found that few companies achieved complete forward and backward integration from their suppliers’ supplier to their customers’ customer. In most instances, true collaboration only occurs between the firsttier members and the focal manufacturer either upward or downward on its supply chain. The responsibility for managing members outside the first-tier circle is often handed off to the first-tier members of the focal company. This in turn results in limited execution and poor performance of the overall supply chain because the operation and information of the whole supply chain are not fully synchronized. In addition, SCM practices such as linked information systems, integrative interorganizational processes, aligned goals, consistent measures, and shared risks as well as rewards are commonly agreed upon, yet several barriers still can prevent these practices from being widely adopted by supply chain members (Frohlich, 2002). For example, Wagner (2003) indicated that setting up intercompany communication and information systems, co-locating supplier personnel, sharing technology, or investing in physical assets would consume enormous amounts of manufacturer investment. Since firms’ resources are inevitably limited, they can only integrate a small number of carefully selected suppliers. Moreover, supply chain integration involves considerable interorganizational changes. Serious commitments must exist among corresponding supply chain members or the necessary process changes cannot be fully materialized (Fawcett & Magnan, 2002). As a result, the reality is that most companies implement supply chain integration only in a limited
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and fragmented manner, with the result being that the expected benefits are unable to be realized.
Supplier-Specific Investments, Environmental Uncertainty and Coordination Requirements in Supply Chain Integration The adoption of supply chain integration has much to do with individual member’s role within a supply chain (Halley & Nollet, 2002). Usually, supply chain integration processes inevitably require idiosyncratic investments by either party of the supply chain members. The roles suppliers play are directly associated with the coordination efforts required in the supply chain integration processes. Large OEM manufacturers often segment their suppliers and trading partners into several categories by how much coordination effort is needed (Dyer, Cho, & Chu, 1998; Krause, 1997). The preferred suppliers play a central role in the value-creation process. They are usually logistical extensions of a large OEM maker’s production system and may play the role of product and system design specialist, flow specialist, and relational specialist (Halley & Nollet, 2002). In such a transaction context, exchanges between OEM manufacturers and preferred suppliers often extend beyond assets and physical goods to include both information and knowledge (Giannakis & Croom, 2004; Simatupang et al., 2002). In contrast, regular suppliers only integrate with their manufacturers in a limited manner due to the commodity nature of the exchanges. As such, the considerations of supply chain integration not only hinge on the scope and sophistication of the implementation but also on the management of coordination problems associated with idiosyncratic investments made (Jap, 1999). In addition, supply chain system dynamics caused by environmental uncertainty also bring about further coordination problems that require cooperation among supply chain parties (Lee, Padmanabhan, & Whang, 1997; Towill, 1996).
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The concept of the “information enriched supply chain” has been increasingly noticed and leads to many innovative supply chain integration practices to counter the negative impacts of bullwhip effects, deterministic chaos, and parallel interaction among supply chain parties (Mason-Jones & Towill, 1999a; Wilding, 1998). For example, the development of collaborative planning, forecasting, and replenishment (CPFR) initiatives aims to increase the agility and responsiveness of a supply chain through enhanced information visibility and transparency among supply chain parties (Raghunathan, 1999). In such a collaboration context, suppliers can receive forecasting and replenishment plans from customers to improve their production plans and reduce stock levels, whereas customers can benefit from increased sales as their suppliers can supply the right goods in the right place at the right time (Seifert, 2003). Nevertheless, the collaboration processes inevitably require suppliers’ idiosyncratic investment and the sharing of sensitive cost and process information on the part of the customer, which accordingly changes the dependency and information structure of customers and suppliers and leads to further coordination issues and concerns (Buvik & Gronhaug, 2000; Lusch & Brown, 1996). The aforementioned realities lead to the questions of what circumstances are suitable for supplier-manufacturer cooperation for supply chain performance improvement and how they manage the associated coordination problems. The fundamental assumption underlying a closely collaborative relationship is that this kind of relationship makes both the manufacturer and supplier better off than when there is no such relationship (Iyer & Bergen, 1997). If the joint profits achieved through collaboration are less than the sum of uncoordinated individual profits or the allocated profits are less than the profits attained by individual member without such coordination, then the coordinated efforts among supply chain parties would not last for the long run (Kim, 2000). Therefore, the decision as to whether or not to
Virtual Integration
join a collaborative relationship and the stability of such collaborative relationship largely hinge on how the “pie” could be expanded and divided by the supply chain members (Jap, 1999; 2001). Due to the uncertain nature of exchanges and bounded rationality of decision makers, however, there is no such perfect solution that can once and for all effectively govern interfirm collaboration process ex ante and ex post (Williamson, 1975). Accordingly, the existence of flexible coordination mechanisms to support both pie expansion and the division process becomes an important governance design issue to supply chain integration (Jap, 1999; 2001).
Theoretical Foundation: ResourceBased View and Transaction Cost Theory The governance of interfirm collaboration has been well studied in terms of resource-based view and transaction cost theory (Dyer & Singh, 1998; Rindfleisch & Heide, 1997; Tsang, 2000). Resource-based view (RBV) provides insights regarding value creation and dynamic efficiency of interfirm collaborative relationships, whereas transaction cost analysis (TCA) enriches our knowledge as to designing governance mechanisms with maximized value and minimized transaction costs. Both theoretical explanations are incorporated as the foundation for justifying the role virtual integration plays in supply chain integration and for identifying the relevant antecedents to virtual integration in the later part of the paper. According to Penrose (1959), firms are rentseeking institutions and tend to expand whenever profitable opportunities exist. Firms that are able to accumulate resources and capabilities that are rare, valuable, non-substitutable, and difficult to imitate will achieve a competitive advantage over competing firms (Barney, 1991; Dierickx & Cool, 1989; Rumelt, 1984). Amit and Schoemaker (1993) further argue that specialization of assets is “a
necessary condition for rent” and “strategic assets by their very nature are specialized.” Because firms must do something specialized or unique to develop a competitive advantage, a firm may choose to seek advantages by creating assets that are specialized in conjunction with the assets of an alliance partner (Klein, Crawford, & Alchian, 1978; Teece, 1987). As a result, productivity gains and relational rents in the value chain are possible when firms are purposely establishing idiosyncratic interfirm linkages (Dyer & Singh, 1998). The key to creating relational rents is the presence of relational-specific assets, complementary resource endowments, knowledge-sharing routines, and effective governance (Dyer & Singh, 1998). Relational-specific assets include site-specific, physical asset-specific and human capital-specific investments (Williamson, 1985). Through relational-specific investments, relational rents are generated in terms of reduced inventory and transportation costs, enhanced product differentiation and quality, greater communication efficiency of transactors, and faster product development cycles (Asanuma, 1989; Clark & Fujimoto, 1991). Complementary resource endowments can create synergy among alliance parties because the combined resource endowments are more valuable, rare, and difficult to imitate than they have been before they are combined (Oliver, 1997). Interfirm knowledge-sharing routines are a pattern of interfirm interactions that permit the transfer, recombination, and creation of specialized knowledge (Grant, 1996). With superior institutionalized interfirm processes to facilitate knowledge exchanges, alliance partners can learn through collaboration and are more able to result in performance-enhancing innovations (Von Hippel, 1988). Governance plays a key role in the creation of relational rents, but it also influences transaction costs as well as the willingness of alliances parties to engage in value creation initiatives (Dyer, 1996). According to Coase’s (1937) theorem, in the absence of transaction costs, parties to an
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exchange will devise joint value-maximization exchanges regardless of their power differentials or resource endowments (Williamson, 1996). However, transaction costs are never really at zero in the real world; devising exchanges with maximized joint value inevitably involves minimizing transaction costs of the exchanges. Especially when considering the fact that transaction parties are self-interested, they would not involve the exchanges unless their own share of the joint value exceeds their previous profits. Even though they have been engaged in the exchanging process, transacting parties with disadvantageous ex post bargaining position would scale back investment, adapt less, and forgo activities, and hence reduce value creation of the exchanges (Grossman & Hart, 1986). Therefore, value claiming also matters in addition to value creation, and TCA complements RBV in that TCA provides detailed explanations regarding how transactors deal with value claiming problems associated with transaction costs through governance design (Ghosh & John, 1999; Williamson, 1991). Theoretically, the design of governance mechanisms should consider securing specific investments, adaptation problems, and performance measurement issues (Rindfleisch & Heide, 1997). Securing specific investments is necessary for increasing joint value creation of an exchange, yet it also poses a dilemma that transaction parties may incur ex post bargaining costs and enforcement costs of contracts (Poppo & Zenger, 1998). TCA approaches this problem by devising forms of governance that possess sufficient safeguards to secure these valuable but vulnerable investments in order to get as close as possible to joint value maximization (Ghosh & John, 1999). Adaptation problems arise because transacting parties continuously encounter uncertainties that require them to change previously planned courses of action and decisions about the exchange. Given that uncertainty may bring transacting parties with opportunity costs of maladaptation or coordination costs of haggling, governance design should either
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facilitate fast abandonment of an exchange or facilitate faster revision of the exchange relationship (Young-Ybarra & Wiersema, 1999). Performance measurement problems happen when transacting parties have difficulties assessing the contractual compliance of each other due to bounded rationality and behavioral uncertainty (Rindfleisch & Heide, 1997). Because performance evaluation problems incur screen and selection costs ex ante as well as measurement costs and productivity losses issues ex post, governance design should either support alleviation of the problems resulting from bounded rationality and behavioral uncertainty or fall into the choice of vertical integration to avoid transaction costs (Heide & John, 1990; Williamson, 1985). Based on both RBV and TCA, governance design of interfirm exchanges should, on the one hand, facilitate the creation of relational rents and, on the other hand, provide mechanisms to minimize the problems of safeguarding specific investments, adaptation, and performance evaluation difficulties. Additionally, both RBV and TCA point out that specific investments and uncertainty are critical antecedents to value creation and value claiming. Therefore, this study will incorporate both constructs as antecedent variables to examine the role virtual integration played in supply chain integration.
Governing Supply Chain Integration: Virtual Integration as Means to Enhancing Transaction Value and Economizing on Transaction Costs Virtual integration uses technology and information to blur the traditional boundaries in the value chain between suppliers, manufacturers, and customers (Magretta, 1998). The firm begins by defining what it does best and focuses on that, and then partners with other companies for capital and labor-intensive services using the same quality and performance standards it uses.
Virtual Integration
Instead of governing exchanges through common ownership, virtual integration coordinates a series of transactions based on open information-based partnerships that speed the flow of data, improve efficiency, add customer value, and provide benefits to the partners (Stapleton et al., 2001). Based on the principles of market orientation, core competence, collaboration, and information partnership, virtual integration provides benefits such as systems that become easier to form and expand, lower capitalization requirements, maximization of local control and autonomy, more streamlined decision making through fewer layers of corporate bureaucracy, and more agility in identifying and responding to local market growth opportunities (Stapleton et al., 2001). The power of virtual integration originates from the ability of ICT to improve (inter)organizational information processing capabilities (Bensaou & Venkatraman, 1996). From the governance design viewpoint, virtual integration can improve value creation and reduce ex post transaction costs of interfirm exchanges. As to value creation, the utilization of ICT is complementary to the specific investments made by exchanging partners. Through its electronic communication and integration effects, ICT can play a role in helping to create and support a set of governance arrangements that enable exchanges of information and other goods to be carried out without large transaction costs (Clemons et al., 1993; Gurbaxani & Whang, 1991; Malone et al., 1987). For example, many innovative supply chain integration practices were introduced and implemented with interorganizational information systems, such as postponed manufacturing, vendor-managed inventory (VMI) and CPFR (Raghunathan, 1999; van Hoek, 1998; Waller, Johnson, & Davis, 1999). Additionally, ICT also has great potential in facilitating timely interfirm joint decision making, coordination, process control, and feedback, all of which are essential for implementing learning-by-monitoring mechanisms in a pragmatic collaboration context
(Helper, Macduffie, & Sabel, 2000; Scott, 2000). As such, ICT-enabled virtual integration can facilitate interfirm knowledge sharing and, thus, create the benefits of enhancing transaction value through interfirm learning. In addition, ICT has been argued to be able to reduce ex post transaction costs through alleviating relation-specific investments and accommodating adaptation problems. Regarding the former case, ICT-mediated transactions break the limitations imposed by time and distance and make large scale relation-specific investments less necessary. Even though ICT investments are required to substitute for idiosyncratic physical or site-specific assets, ICT assets are less likely to be relationship-specific than other investments designed to reduce coordination costs between firms (Brynjolfsson, 1993; Clemens et al., 1993). As a result, the threats of holdup and opportunism are alleviated through the coordination of virtual integration. As to adaptation problems, the communicative and integrative effects of ICT improve the coordination between transacting parties and facilitate greater modification flexibility of the exchanging relationships (Young-Ybarra &Wiersema, 1999). When the costs of haggling are too expensive to maintain the exchanging relationships, transacting parties can more easily exit the transacting relationships without the bonds of ownership and hostages of considerable specific assets (Williamson, 1985; Young-Ybarra & Wiersema, 1999). Accordingly, transaction adaptation problems can be addressed through efficient and flexible coordination enabled by ICT. To examine the potential effects of ICT in governing supply chain integration, the construct “virtual integration” is developed to capture the extent to which the trading partners use ICT to implement two aspects of vertical coordination in the supply chain: collaborative operation execution and collaborative process planning and control (Buvik & Gronhaug, 2000; Buvik & John, 2000; Morash & Clinton, 1998). These two aspects of vertical coordination have been widely addressed
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in prior studies and are combined to frame the domain of virtual integration activities in this study (Narasimhan & Kim, 2001; Raghunathan, 1999). Collaborative operation execution refers to the extent to which ICT facilitates the common operations between supply chain partners, such as purchasing, production, and logistics operations, while collaborative process planning and control represents the degree to which ICT is used to support collaborative decision and performance control by the partners.
of supply chain integration, that is, manufacturer performance. Second, the exchange attributes can lead to numerous coordination problems, such as knowledge sharing, interfirm learning, safeguarding investments, and mutual adaptation. Such problems cause the supply chain parties to rely on virtual integration in governing the exchange relationships to achieve higher transaction value as well as reduce transaction costs. Finally, virtual integration can provide supporting mechanisms to supply chain integration, and accordingly lead to greater supply chain integration performance.
Conceptual Framework This study aimed at investigating the antecedents and the role virtual integration plays in supply chain integration. Through the theoretical lens of RBV and TCT, virtual integration is reinterpreted to be a kind of governance mechanism. Whether manufacturers rely on virtual integration to govern their suppliers becomes a matter of governance mechanism choices. Therefore, based on the conceptual developments and theoretical background provided in the above subsections, the conceptual framework of the study is depicted in Figure 1. The central themes of the above framework are threefold. First, the exchange attributes such as uncertainty and asset specificity are essential sources of transaction values and costs to supply chain integration. Hence, they are identified as one of the major sets of antecedents to the performance
RESEARCH HYPOTHESES AND MODEL This section draws on resource-based view (RBV) and transaction cost theory (TCT) to develop hypotheses that link transaction attributes and manufacturer performance with virtual integration. The first group of hypotheses identifies the direct effects of environmental uncertainty on virtual integration and manufacturer’s manufacturing goals achieved; the second group identifies the direct effects of suppliers’ specific investments on virtual integration and manufacturers’ manufacturing goals achieved; finally, the third group relates virtual integration to manufacturer’s manufacturing goals achieved.
Figure 1. Conceptual framework Transaction Values and Costs
Effects of Environmental Uncertainty The major challenge that environmental uncertainty imposes on a supply chain is the increased coordination costs (Bensaou & Venkatraman, 1996). As a manufacturer encounters demand volatility, a natural response to it is to raise stock levels or to change ordering patterns frequently (Pagell, Newman, Hanna, & Krause, 2000). These certainly would result in increased inventory and coordination costs for both manufacturers and suppliers (Lee et al., 1997). When taking into account industrial dynamics and time-varying behaviors of industrial organizations, the demand expressed at each subsequent stage upstream in the supply chain becomes even more cyclical and extreme in variation. Consequently, not only are coordination efforts increased, but also other serious cost and performance problems are incurred. For example, manufacturers and suppliers may incur excess raw materials costs or material shortages due to poor product planning and forecasting. Consequently, they are forced to spend additional manufacturing expenses caused by excess capacity, inefficient utilization, and overtime. Furthermore, excess warehousing expenses also arise as higher stock levels are required to serve as buffers to countering uncertainties (Towill, 1996). H1 : The greater the degree of environmental uncertainty faced by a manufacturer, the less is the extent to which its manufacturing goals are achieved. Several remedies have been proposed to increase information processing and coordination capabilities of a supply chain in response to poor supply chain performance caused by environmental uncertainty. For example, just-in-time (JIT) production practices, flexible manufacturing systems, logistical integration, postponed manufacturing, and total cycle-time compression across the supply chain are suggested as viable means to mitigate the influence of industrial dynamics
(Mason-Jones & Towill, 1999b). However, many of these practices require the involvement of ICT to provide complementary information-processing capacities. In fact, electronic integration along the supply chain is increasingly important to firm performance in that “it is futile to spend millions of dollars to reduce the manufacturing cycle time by one day while leave untouched two to threeweeks of ordering time that dominates the total turnaround cycle” (van der Vorst, Beulens, de Wit, & van Beek, 1998). Similarly, van Hoek (1998) emphasized the important role of ICT-enabled integration in implementing manufacturing postponement for effective mass customization. Mason-Jones and Towill (1999b) also demonstrated the critical role of electronic integration in bypassing informational distortions and thereby improving supply chain visibility. The proliferation of several well-known ICT-based integration programs has manifested themselves in their ability to cope with demand volatility. For example, the adoption of EDI has been proven useful in reducing the occurrence of erroneous ordering information and accelerating ordering processes, thus mitigating information distortions between trading firms (van der Vorst et al., 1998). The implementation of VMI and CPFR programs can also fulfill the idea of “substituting information for inventory,” and thus improves resource utilization for both manufacturers and suppliers (Raghunathan, 1999; Waller et al., 1999). With the aid of ICT-enabled integration programs, virtually integrated firms can benefit from better common operations execution and joint planning and control without necessarily being governed under common ownership. By improving interfirm information processing and coordination, virtual integration can be seen as a strategy to reducing the influence of uncertain environments (Forster & Regan, 2001). Lastly, environmental uncertainty causes information asymmetry to emerge and therefore creates opportunities for either transaction party to behave opportunistically. To reduce
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the increased transaction costs associated with higher environmental uncertainty, some forms of vertical coordination mechanism should exist (Buvik & Gronhaug, 2000). Since the proper use of ICT for supply chain coordination can enhance manufacturers’ control capacity over suppliers and the changeability of supply chains in responding to environmental uncertainties, supply chain companies tend to have strong motivation to implement electronic integration mechanisms for more efficient mutual adaptations, especially when the environment is highly uncertain. H2 : The greater the degree of environmental uncertainty faced by a manufacturer, the greater is the extent to which it is virtually integrated with its supplier.
Effects of Suppliers’ Transaction-Specific Investments The role of specific-investment made by suppliers is growing in importance as manufacturers increasingly externalize their core to seek collaborative advantages (Dyer, 1996; Nesheim, 2001). Traditionally, proponents of the resourcebased view emphasized that a firm’s competitive advantage originates from those resources and capabilities that are owned and controlled within the firm. However, this notion has been challenged in that internal co-specialized resources may become rigid and hamper performance when technological change is rapid (Poppo & Zenger, 1998). Evidence also suggests that more and more companies transact with external suppliers for tapping into a network of qualified suppliers, accessing competent personnel, and acquiring capacity in response to unexpected demand volatility (Jones et al., 1997). Therefore, external transactions are also regarded as extensions of a firm’s strategic core as long as transacting parties make relation-specific investments and are able to combine resources in unique ways (Dyer & Singh, 1998). Furthermore, external transactions can also
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create the potential for gaining competitive advantages if transacting parties specialize their relationships through interfirm knowledge-sharing routines, complementary resource endowments and deploying effective governance mechanisms (Dyer & Singh, 1998). Actually, numerous supply chain practices demonstrate the importance of a supplier’s transaction-specific investments on improving supply chain performance. Early supplier involvement is the one frequently adopted by strategic suppliers in the automobile industry. As illustrated by Womack and Jones (1990), first-tier suppliers of Toyota usually invest in developing a variety of parts and present all the alternatives to Toyota before the carmaker decides on its own vehicle concepts. With the specific investments made by the early-involved suppliers, Toyota can solve problems in its product development process and hence reduce the time-to-market on new product introduction (Levy, 1997). Another example is the global logistics system that is commonly implemented in the PC industry (Chen, 2002). With the PC industry’s efforts towards reduction of lead time to market, coupled with lower production and inventory costs requested by customers, many subcontractors are forced to upgrade their positions within the global production system. They have gradually taken over the essential functions of coordinating the global supply chain originally played by their OEM customers, and, in turn, have participated in cross-border supply chain management, logistics operations, and after-sales services. Because these subcontractors had no prior experience in setting up a global-scale and quick-response production and logistics networks, they have had to incur huge initial sunk costs in order to meet the contractual requirements of their customers. Owing to specific investments made by the suppliers to accommodate their customers’ requests, the OEM makers reduce the need to handle inventory and transportation costs, and hence can re-configure
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a leaner, more agile supply chain (Huang & Lo, 2003; van Hoek, 2001). Both examples illustrate suppliers’ contribution to overall supply chain performance improvements through their idiosyncratic investments. Therefore, this study proposes the following hypothesis: H3 : The greater the degree of specific investments made by a supplier, the greater is the extent to which its customers’ manufacturing goals are achieved. Although suppliers’ transaction-specific investments are rare, valuable, non-substitutable, and difficult to imitate strategic resources for manufacturers in creating relational rents and competitive advantages, when the “price” of using such a governance mode is being considered, interfirm cooperation is not necessarily the only choice for arranging exchanges with significant investments (Dyer & Singh, 1998; Williamson, 1991). In particular, transaction-specific investments can lead to information asymmetry and holdup problems, which in turn may incur considerable transaction costs (Alchian & Demsetz, 1972; Klein et al., 1978). To deal with these problems, transacting parties need to devise corresponding governance mechanisms to minimize information costs and to control opportunism (Kulkarni & Heriot, 1999; Stump & Heide, 1996). Vertical coordination has been argued to permit ongoing adjustments and bargaining for transacting parties to split up transaction profits (Buvik & John, 2000). Through harmonized interaction patterns of vertical coordination, activity sets of transacting parties can be revised or shifted without formal reassignment of roles. Thereby, tightly coupled activities can be accomplished more smoothly without one party inadvertently stepping on the other’s toes. Meanwhile, the information flow aspect of vertical coordination induces the “cheap talks” effect, or the tacit understanding among parties engaged
in frequent interaction (Buvik & John, 2000). With cheap talks among transacting parties, the receiver is able to shift activities to accommodate changes occurring on the sender’s side (Farrell & Gibbson, 1995). As such, transaction parties who need to make transaction-specific investments can retrieve information and learn from the other parties more effectively through the mechanism of vertical coordination (Hult, Ketchen, & Slater, 2004). Consequently, transaction hazards resulting from idiosyncratic investments could be greatly minimized. Nevertheless, vertical coordination incurs coordination costs. Considering the impact of supply chain dynamics, without accurate information processing capacities vertical coordination can waste large amounts of communication and maladaptation costs in the coordination process. In addition, transaction parties need to closely cooperate and transfer knowledge with each other when idiosyncratic investments are involved in an exchange (Germain, Droge, & Christensen, 2001). Because interorganizational information systems can enhance information processing capability and support interorganizational learning requirements, transacting parties may rely on ICT-enabled integration mechanism to vertically coordinate with each other (Huber, 1991; Malone et al., 1987). Therefore, H4 : The greater the degree of supplier’s specific investments, the greater is the extent to which manufacturer is virtually integrated with this supplier.
Virtual Integration and Manufacturing Performance As pointed out by prior studies, today’s buyersupplier relationship is characterized by the very nature of interdependence (Turner, LeMay, Hartley, & Wood, 2000). Once a supplier fails to perform, the buyer’s performance may be adversely affected (Shin, Collier, & Wilson, 2000). The ma-
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jor advantage virtual integration can bring about for managing supply chains is enhanced visibility (Allem, 2000). With seamless information channels connected to suppliers, manufacturers can track variations in suppliers’ production, product quality, inventory levels, and delivery capability more easily. And, by receiving such information in a more timely fashion, manufacturers are able to plan and adjust their own operations more rapidly and thereby achieve greater adaptability to any expected events caused by suppliers. By providing suppliers with timely information regarding changes in their own plans, manufacturers also make suppliers more responsive in making timely adjustments to such changes. On the other hand, virtual integration is also critical to the implementation of certain manufacturing practices that are regarded as important to increasing manufacturing flexibility. For example, van Hoek (1998) empirically demonstrates the important role of ICT in facilitating postponed manufacturing; Koufteros, Vonderembse, and Doll (2001) put great emphasis on the role of concurrent work-flow and early involvement in implementing concurrent engineering, which may also benefit considerably from proper use of ICT. Thus, this study suggests that a manufacturer’s manufacturing changeability to environmental uncertainty should be significantly affected by the extent to which its production and supply chain operations are electronically linked with suppliers. Implementing virtual integration can also help manufacturers achieve low-cost advantage in terms of efficient resource utilization in production and supply chain operations (Christopher & Towill, 2000). Through the enabling effect of ICT, supply chain costs can be lowered, speed of feedback and error correction increased, agility of supply chain operations improved, and relationships between trading partners enhanced. As such, existing bottlenecks in the supply chain may be removed and variability of production flows leveled. According to “the theory of swift, even
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flow,” improvements in procurement-production processes should in turn lead to better manufacturing performance such as reduced production cost (Schmenner & Swink, 1998). Also, with electronically integrated interfirm processes, the performance of manufacturers’ production function and supply chain operation can be greatly improved due to the elimination of waste in time, inventory, and transportation (Mason-Jones & Towill, 1999b). H5 : The greater the manufacturer’s reliance on virtual integration to manage its supplier, the greater is the extent to which manufacturer’s manufacturing goals are achieved. Based on the above hypotheses, the research model of the study is depicted in Figure 2. Note that we also incorporate normative contracts and buyer power as control variables in the research model. Normative contracts reflect the transacting parties’ social consensus or norms as to how to interact or deal with each other in the transacting process (Macneil, 1978). Interfirm relational behaviors such as cooperation are usually governed by normative contracts. Normative contracts may affect virtual integration and supply chain performance through its effects on interfirm relational behaviors, and hence is included in the research model (Lusch & Brown, 1996). In addition, power structure is argued to have profound impact on the results of profit division (Watson, 2001). It can also lead to different interfirm relational behaviors if power imbalance exists (Anderson & Weitz, 1989). As a result, this study includes both constructs as control variables to eliminate potential confounding impacts on the dependent variables.
METHOD This section first describes the survey procedure and discusses sampling and data collection meth-
Virtual Integration
Figure 2. Research model Normative Contracts
H1
Environmental Uncertainty H2
Virtual Integration Supplier Specific Investments
H5
Manufacturering Goals Achieved
H4 H3
Normative Contracts
ods. It then explains how the research constructs are operationalized and measured.
Survey Procedure A cross-sectional mail survey was administrated for collecting data from randomly selected large and medium-sized manufacturing firms in Taiwan. A draft survey was developed based on measures that were identified in the literature as suitable for the current study. After compiling the English version of the questionnaire, the draft survey items were first translated into Chinese by a bilingual research associate and then verified and refined for translation accuracy by one MIS professor and two senior PhD students. The Chinese version of the draft was then pretested by two senior IS managers and two senior purchasing managers for face and content validity, resulting in wording modifications of several survey items. The final version of the survey was distributed to the senior purchasing managers of 980 manufacturing firms randomly selected from the directory of the 2001 Top 5000 largest firms in Taiwan
published by China Credit Information Services, Ltd. This directory contains comprehensive and authoritative data regarding the larger companies in Taiwan. The low response rates typical in Taiwan and the resource constraints led us to adopt the singleinformant approach for the survey, even though a multifunction, multi-respondent design is more effective for mitigating the threats of method variance and informant bias. This limitation, however, can be partially alleviated by choosing an informant who is the most knowledgeable about the research issues in a company (Huber & Power, 1985). Since the purchasing function plays a critical boundary-spanning role across trading companies (Stanley & Wisner, 2001) and its senior managers should also have a firm grasp of the conditions in sales and manufacturing, it is believed that senior purchasing mangers should be the most knowledgeable and reliable single informant within a company to respond to our survey. This conjecture was confirmed by the senior managers we interviewed during the pretesting phase of the survey instrument.
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Sample Through the procedures described above, 154 surveys were returned, with 145 having completed data usable for subsequent analysis, yielding an effective response rate of 14.79%. Table 1 presents the characteristics of the responding firms. Although the response rate is not high and may be somewhat lower than that of typical mail surveys conducted in UK and U.S., given the fact that many companies in Taiwan are more conservative in answering surveys, our response rate is in fact higher than that of similar studies conducted in Taiwan, which according to our
Table 1. Demographic characteristics of the responding firms (n = 145) Percentage of Firms Total Assets (NT$) Less than $0.8 Billion
1.4
$0.8 Billion - $1.2 Billion
12.4
$1.3 Billion - $2 Billion
20.0
$2.1 Billion - $4 Billion
30.3
$4.1 Billion - $8 Billion
12.4
Over $8 Billion
23.4
Number of Employees Less than 100
4.1
101 - 500
44.8
501 - 1000
17.2
Over 3000
33.8
Industry Automobile
7.6
Chemical
5.5
Computer & electronics
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55.2
Machine & tool
6.2
Molds
8.3
Textile
6.2
Others
11.0
experience is typically around 10%. In addition, we believe that demonstrating a lack of response bias is more important than a high response rate. To ensure the representativeness of the responding firms, two statistical analyses were conducted (Armstrong & Overton, 1977). First, we compared the responding and nonresponding firms in terms of company assets and number of employees; no significant differences between the two groups were found based on the independent sample t test (p = 0.003 and 0.007, respectively). Then, the respondents were further divided into two halves based on the dates of return. The comparison on company assets and employee numbers of the two groups again showed no significant differences based on the results of χ2 test (p = 0.556 and 0.558, respectively). Accordingly, the non-response bias should not be a problem in this study.
Measures Multi-item scales were used for measuring the four research constructs and two control variables, all designed to use five-point scale (see the Appendix for the scale items).
Environmental Uncertainty (EU) As discussed earlier, demand volatility is the primary source of environmental uncertainty encountered by supply chain companies. Demand volatility, resulting from bullwhip effect and clockspeed amplification, leads to unpredictability of market demand. Four items about demand unpredictability have been enclosed in the survey to measure environmental uncertainty: sales volume, purchase volume, product specification or features, and required service supports. These four items were selectively adapted from Artz and Brush (2000) and Cannon et al. (2000), and constitute the formative scale of the construct (Chin, 1998).
Virtual Integration
Supplier’s Specific Investments (SSI) According to Williamson (1996), transactionspecific investments encompass site specificity, physical specificity, dedicated specificity, human specificity and time specificity. The operationalization of this construct aims at assessing the magnitude of investments made by suppliers. Therefore, eight items adapted from Artz and Brush (2000), Joshi and Stump (1999), and Buvik and Gronhaug (2000) were encompassed, forming a formative scale of the construct.
Virtual Integration (VI) This construct attempts to capture the extent to which ICT-enabled integration mechanisms are implemented and relied on by trading partners in a supply chain to support common operation execution and joint process planning and control. Based on past works on supply chain interaction, this study developed measurement items corresponding to ICT-based interfirm integration activities including order processing, market information sharing, production capacity coordination, inventory level coordination, and support for logistics integration, material or component design, conflict resolution, and quality control (Frohlich & Westbrook, 2001; Morash & Clinton, 1998; Narasimhan & Kim, 2001).
Manufacturing Goals Achieved (MG) To date, there is still no consensus regarding how supply chain performance should be properly operationalized though numerous approaches have been proposed (Beamon, 1996). This study, however, took a dyadic view to assess manufacturer’s manufacturing goals achieved to evaluate the impact of transaction attributes and virtual integration. Such an approach has been suggested by several SCM studies, and it can reflect that the ultimate benefits of supply chain integration come from buying firms and suppliers (Krause,
1999; Narasimhan & Jayaram, 1998). Based on these works, this study evaluated the extent of improvements in the quality, dependability, and manufacturing flexibility of the buying firm. These aspects of manufacturer performance link to the supply base of a manufacturing firm in that they influence strategic outsourcing decisions and management of suppliers in pursuit of these manufacturing goals (Narasimhan & Jayaram, 1998).
Normative Contracts (NC) This construct assesses manufacturer’s and supplier’s reliance on informal agreements to govern their transaction relationship in the aspects of role specification, planning, adjustment processes, monitoring procedures, incentive system, and means of enforcement (Heide, 1994). Measurement items were adapted from Lusch and Brown (1996) and Heide (1994).
Buyer Power (BP) This construct attempts to capture manufacturer’s power relative to supplier to reflect the degree of buyer’s dominance in a dyadic transacting relationship (Cox, 2001). The measures assess the degree of supplier’s dependence on the manufacturer for providing product specification and design, market information and technical support. Operationalized items were primarily adapted from Cox (2001) and Boyle and Dwyer (1995).
ANALYSIS Data analysis was conducted in two parts: measurement validation and hypothesis testing. For measurement validation, the measures were examined by exploratory factor analysis (EFA) and the Cronbach reliability test to ensure the measurement properties of the scales were sufficiently satisfied. Then, a structural equation
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model was constructed for hypothesis testing. The software packages used to perform the above statistical analyses were SPSS for Windows 8.0 and EQS for Windows 5.3.
Measurement Analysis Because the formative nature of the scales and the limitation of sample size, exploratory factor analysis (EFA), instead of confirmatory factor analysis, was carried out individually for each construct to assess the underlying factor structure of the measurement items. The measurement items were divided into two groups for factor analysis with a varimax rotation. The threshold employed for judging the significance of factor loadings was 0.50 (Hair, Anderson, Tatham, & Black, 1992). Subjective methods used to determine the number of latent variables included latent root criterion, scree test, and percentage of variance explained.
The results showed that items for measuring site specificity (SSI1), legal remedies (NC6), standard of operational procedures (NC8), and purchasing price (NC9) failed to load on the same factor as the other items, and thus were dropped out from the subsequent analyses. In so doing, a clear factor structure was obtained for all the items as shown in Table 2 and Table 3, demonstrating convergent validity and thereby undimensionality of all the scales (O’Leary-Kelly & Vokurka, 1998). In addition, all the scales explained more than 50% of the data variances and thus were considered capturing sufficient data variations and thus of acceptable quality (Heck, 1998). Given the unidimensionality of the scales, Cronbach’s alpha was then used to determine an unbiased estimate of measurement reliability (Nunnally, 1978), which indicates the degree of internal consistency among the measurement items and is inversely related to the degree to
Notes: EU—Environmental uncertainty; SSI—Supplier’s specific investments; NORM—Normative contracts; BPWR—Buyer power
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which a measure is contaminated by random errors (Bollen, 1989). The value of coefficient alpha higher than the threshold level of 0.70 was deemed to provide satisfactory reliability, which was satisfied by all the scales as shown in Table 4 except for Buyer Power (BP). The reason for
lower reliability of BP may result from the fact that only three items were employed to measure this construct. For subsequent analysis, a composite score for each of the measures was obtained by averaging their corresponding items and used as the indicant
Table 3. EFA results of the dependent variables VI1 VI2 VI3 VI4 VI5 VI6 VI7 VI8 VI9 QTY1 QTY2 QTY3 QTY4 QTY5 SP1 SP2 SP3 SP4 MF1 MF2 MF3 Eigenvalue % of Var.
VI 0.852 0.878 0.827 0.885 0.883 0.876 0.889 0.870 0.853
Table 4. The intercorrelations, means, standard deviations and reliability of the composite scores Construct
EU
SSI
NC
BP
EU
(0.820)
SSI
-0.190**
(0.942)
NC
-0.125
0.274*** (0.925)
BP
-0.149
0.487*** 0.114
VI
QTY
SP
MF
(0.691)
0.378
***
0.305
***
0.263
***
-0.041
0.272
***
Mean
2.359
3.250
3.905
3.117
3.208
3.766
3.669
3.726
S.D.
0.859
0.888
0.600
0.798
0.959
0.577
0.632
0.671
VI QTY SP MF
-0.042 -0.049 -0.008
0.232
***
0.371*** (0.963)
0.181
**
0.210**
0.259*** (0.899)
0.201
**
0.121
0.288*** 0.577*** (0.862)
0.223
***
0.114
0.194**
0.558*** 0.609*** (0.908)
Notes: EU—Environmental uncertainty; SSI—Supplier’s specific investments; NC—Normative contracts; BP: Buyer power; VI—Virtual integration; QTY—Quality; SP—Supplier performance; MF—Manufacturing flexibility; *** p<0.01, **p<0.05, Cronbach’s alphas are in parentheses
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of the underlying construct. The intercorrelations, means, and standard deviations of the composite scores are shown in Table 4. Further, according to the test recommended by Gaski (1986), the level of discriminant validity can be demonstrated by showing that the correlation between any pair of scales is lower than the reliability of both the scales. Since Table 4 demonstrates this pattern, discriminant validity among the research variables clearly holds. Overall, it was then concluded that all the scales were acceptably reliable and valid.
Hypotheses Testing The structural equation modeling approach was applied to test the proposed hypotheses. Since a full structural equation model including both the measurement model and the structural model is too complicated with our sample size and because the scales are largely formative in nature, a model in which each construct was measured with a single indicant (i.e., the composite score) was constructed, as depicted in Figure 3. To avoid clutter, all the error terms were omitted in the figure. After this simplification, the model satis-
fied the typical requirements of five-to-one ratio and sample size larger than 100 for structural equation analysis (Bentler & Chou, 1987). Even though all the constructs were represented by a single indicant, the measurement errors can still be estimated. The measurement errors of each scale were estimated as the product of (1-α) and the variance of the composite score (Joreskog & Sorbom, 1982). Also, all the path coefficients from error variance to construct were constrained to unity for model identification. Further, as quality (QTY), dependability (SP), and manufacturing flexibility (MF) are three dimensions of manufacturing goals achieved, the composite score of the three constructs were used as indicators of this higher order factor. The results of model estimation using EQS are shown in Table 5. As shown in Table 5, all the overall model fit indexes indicate an excellent fit of the model, and the estimates of the structural parameters can then be used for hypothesis testing. Of the five structural paths (hypotheses) analyzed, four are significant with one-tailed test (p < 0.01). Meanwhile, the explained variance (R 2) of the two endogenous variables are all relatively high (R 2 > 0.204),
Figure 3. Structural equation model with path estimates NC EU
1
1
Normative Contracts
Environmental Uncertainty
-0.039 -0.202**
0.102*
0.208*
*
VI
1
0.078**
Virtual Integration
Manufacturing Goals Achieved
1
0.200*
Supplier Specific Investments 1
0.137***
0.513*** Buyer Power
SSI
1
BP
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*
QTY SP MF
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indicating that most of the endogenous variables are well explained by the factors proposed in the study. The following subsection provides a more detailed discussion of the findings.
Findings and Implications As shown in Table 5, environmental uncertainty has an insignificant negative effect on the manufacturing goals achieved. Although such result does not support H1 , the statistical effect is consistent with our proposition yet. Meanwhile, further investigation finds that the factor score of environmental uncertainty reported by the responding firms was relatively low, which may decrease the degree of negative impact of uncertainty imposed on manufacturing performance (Pagell & Krause, 1999). The same problem may also cause environmental uncertainty to have a significant negative effect on manufacturer’s reliance on virtual integration, which is in opposition to our proposition suggested in H2 . In fact, transaction cost economics suggests that either market or hybrid mode are alternative governance structures for managing transactions under low uncertainty, whereas market and firm are alternative governance structures under the condition of high uncertainty (Williamson, 1991).
The necessity of vertical coordination mechanism as a means for facilitating mutual adaptation by transacting parties is contingent on other factors such as asset specificity or behavioral uncertainty (Anderson & Buvik, 2001). Without considering the initial conditions of transaction parties and boundary conditions associated with adaptation requirements, empirical results concerning the effects of environmental uncertainty on vertical coordination mechanisms are often inconclusive (John & Weitz, 1988; Klein, 1989). In other words, our empirical result regarding H2 might indicate that adaptation is not so much a critical problem under conditions of low uncertainty and medium asset specificity (cf. Table 4). Hybrid governance mechanisms such as normative contracts or longterm relationship might suffice for providing adaptation capabilities for both transacting parties (Macneil, 1978). In contrast, vertical coordination mechanisms such as virtual integration might be too costly a governance mechanism for providing adaptation capability in this situation, and, thus, are negatively associated with environment uncertainty in this study. The second set of hypotheses deriving from supplier’s transaction-specific assets receives greater support from our empirical data. Supplier’s transaction-specific investment is shown to have
Table 5. The results of model estimation Construct Manufacturing estimate Goals Achieved S.E. (MG) z value estimate Virtual Integration S.E. (VI) z value Overall model fit indexes:
significantly positive effects on both manufacturing goals achieved (H3) and virtual integration (H4). Support for H3 confirms this study’s conjecture that transaction-specific investments made by a supplier is essential to improving supply chain performance in general and manufacturer performance in specific. Support for H4 , however, validates our proposition that manufacturer and supplier would rely on virtual integration as a viable vertical coordination mechanism when the exchange requires higher levels of the supplier’s transaction specific investments. Because the supplier’s transaction-specific investments require closer coordination and cooperation with the manufacturer to realize its potential value, the manufacturer needs to control and monitor its suppliers’ performance when the supplier holds asymmetric information derived from its transaction-specific investments. The significantly positive effect exhibited in H4 also corroborates the resource-based and transaction-cost theory in that enhancing transaction value while controlling opportunism are both important considerations in an exchange relationship. Further, virtual integration, as hypothesized by H5 , is indeed significantly and positively associated with the achievement of manufacturing goals, indicating that ICT-enabled integration is a useful mechanism for the manufacturer to enhance its manufacturing flexibility, manufacturing
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Supported?
quality and dependability. By taking H4 and H5 together, we can see the important role of virtual integration in mediating the effect of supplier’s specific investments on manufacturing goals achieved; that is, supplier’s specific investments tend to motivate the manufacturer to electronically integrate with suppliers that have made such idiosyncratic investments, which once again can enhance manufacturing goals achieved. Actually, this also demonstrates the fact that formal coordination mechanisms enabled by ICT can be beneficial to supply chain integration, resulting in greater mutual adaptability between trading partners when there is strong need to learn from each trading partner and to control potential hazards under the condition of specific investments involved. Another implication of the above result is that although most studies emphasize uncertainty reduction as the primary reason for implementing ICT-enabled coordination mechanisms, this study demonstrates that learning and control requirements are also important considerations to implementing virtual integration (Mason-Jones & Towill, 1999a, 1999b; Towill, 1996). Finally, although this study did not hypothesize the substantial relationships of normative contracts and buyer power on the other variables in the research model, the empirical results shown in Table 5 exhibit that both variables do have significantly positive effects on virtual integration and
Virtual Integration
manufacturing goals achieved. Particularly, when the effects of normative contracts on both virtual integration and manufacturing goals achieved are controlled, virtual integration still has significant positive impact on manufacturing goals achieved, indicating that virtual integration indeed is influential to manufacturing performance even in a relational exchanging relationship (Lambert, Knemeyer, & Gardner, 2004). Virtual integration is also affected by buyer power and normative contracts in addition to supplier specific investments. These facts reveal that power and social relationships might be other critical antecedents to implementation of virtual integration (Hart & Saunders, 1998). Nevertheless, power is criticized to be an ambiguous concept and is somewhat connected with the concept of asset specificity (Williamson, 1996). Normative contracts often exist in a long-term exchanging relationship, and its development relies on repeated or enduring transaction relationships (Lambe, Spekman, & Hunt, 2000; Macneil, 1978). To validate the relative explanatory power of transaction costs/resourcebased, power, and social relationships factors on virtual integration more precisely, further research should explicitly delineate the interrelationships among these factors and incorporate other contingency variables of the transaction relationship, that is, previous relationships, as control variables to exclude potential confounding effects.
CONCLUSION By conceptualizing virtual integration as a vertical coordination mechanism, this study contributes to the literature by demonstrating the pivotal role that virtual integration plays in effecting the achievement of manufacturing goals in supply chain integration. First, the supplier’s idiosyncratic investments significantly affect manufacturer’s manufacturing goals achieved. Since the supplier’s specific investments are critical to the manufacturer’s own performance, manufacturers
are motivated to effectively manage their suppliers who made considerable idiosyncratic investments. Second, the value of idiosyncratic investments is highly dependent on the cooperation and coordinated efforts made by transacting parties. To facilitate mutual adaptation while controlling potential hazards, the manufacturer can rely on virtual integration to integrate its strategic suppliers that make significant idiosyncratic investments. Third, the manufacturers’ manufacturing goals can be greatly achieved owing to the fact that virtual integration can facilitate exploring and exploitation of supplier’s specific investments through learning-by-monitoring mechanisms embedded in the interorganizational information systems. In addition, as virtual integration brings complementary collaboration between supplier and manufacturer, manufacturing goals can be much more easily attained. As to managerial implications, this study contributes to our understanding that ICT-enabled collaboration can also be regarded as alternative governance mechanism, that is, virtual integration. With ICT-enabled collaborative operation execution and process planning and control, virtual integration supports both value creation and transaction cost reduction. Therefore, virtual integration is particularly an effective and useful governance mechanism for integrating supply chain under the condition of significant asset specificity. Although the empirical results are largely supportive to the effects of asset specificity as indicated by TCT and RBV, the hypothesized effects of environmental uncertainty not only do not receive empirical support but also exhibit unexpected results in that environmental uncertainty and virtual integration are significantly and negatively associated. Such an unexpected effect is opposed to the majority of SCM and IOS literature that suggests that environmental uncertainty would result in greater information-processing requirements and hence lead to a greater level of ICT-mediated coordination (Mason-Jones, 1999a;
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Towill, 1996). Since many other interfirm factors that have been shown to influence interorganizational information systems adoption are not included in this study (for example, trust, commitment and dependence), potential confounding effects may exist (Kumar & Crook, 1999; Kurnia & Johnston, 2000). Therefore, further studies are suggested to incorporate contingency variables of interorganizational relationship to further explore the substantial relationship between environmental uncertainty and virtual integration (Ramamurthy, Premkumar, & Crum, 1999). Finally, this study has several methodological limitations that may undermine the validity of the results. First, because the study adopted a singleinformant approach based on the manufacturer’s perspective, respondent bias is possible. Second, the study used perceptual measures, which might not accurately reflect the objective or real relationships among the theoretical constructs examined. Given the proposition that it is the perceptions of managers that largely determine their actions and decisions, such a limitation might not be so serious. Still, further development and validation of the measures utilized here are needed. Fourth, the response rate of the survey appeared to be somewhat lower than the usual cases. Even though the possibility of non-response bias had been checked and ruled out at least statistically, the representativeness of the sample, and thus the generalizability of the results, could still be limited, especially as the data were collected only from manufacturing firms in Taiwan.
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APPENDIX Survey Items All survey items are five-point rating scales anchored as follows: • •
Environmental Uncertainty, Supplier Specific Investments, Virtual Integration, Manufacturing Goals Achieved: 1, very low; 5, very high Normative Contracts, Buyer Power: 1, strongly disagree; 5, strongly agree
Environmental Uncertainty Evaluate the following aspects of environment facing your company: • • • •
(EU1) The unpredictability of your company’s sales volume (EU2) The unpredictability of volume purchased from your primary supplier (EU3) The unpredictability of product specification or features from your primary supplier (EU4) The unpredictability of service supports required from your primary supplier
Supplier’s Transaction-specific Investments Evaluate the extent to which your primary supplier has made the following specific investments to your company: • • • • • • • • •
(SSI1) Plant proximal to your company (SSI2) Tooling and equipments (SSI3) Logistics and warehouse facilities (SSI4) Adjustments of manufacturing process to fit your company’s specification of technology and standard (SSI5) Technology investments to produce components demand by your company (SSI6) Business processes reengineering to improve the performance of the trading (SSI7) Significant time and money on training to work with your company (SSI8) Significant time and money on product and process qualification approved by your company (SSI9) Significant time and money on timeliness of the trading
Normative Contracts Evaluate the extent to which your primary supplier and your company rely on the following shared norms to regulate each other’s trading behavior:
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• • • • • • • • • • •
(NC1) Role played (NC2) Responsibility (NC3) Behavior (NC4) Dealing with unexpected events (NC5) Dealing with conflicts (NC6) Legal remedies (NC7) Performance evaluation (NC8) Standard of operational procedures (NC9) Purchasing price (NC10) Purchasing volume (NC11) Purchasing duration
Buyer Power Evaluate the extent to which you agree with the following statements about the relationship between your company and your primary supplier: • • •
(BP1) Your primary supplier needs your company to provide suggestion on product specification and design (BP2) Your primary supplier needs your company to provide market information (BP3) Your primary supplier needs your company to provide technical support
Virtual Integration Evaluate the extent to which your company and your primary supplier rely on the supply chain information system to coordinate on the following: • • • • • • • • •
(VI1) Issuing purchasing order (VI2) Tracing purchasing order (VI3) Exchanging price and market information periodically (VI4) Quality control on the purchased goods (VI5) Cooperating on new material and component testing (VI6) Dealing with complains and solving conflicts (VI7) Coordinating production plan (VI8) Coordinating Inventory (VI9) Coordinating Logistics
Supply Chain Performance Evaluate the extent of improvements in the quality, dependability and manufacturing flexibility of buying firm after launching and operation of the supply chain information system:
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• • • • • • • • • • • •
(QTY1) Product features (QTY2) Product reliability (QTY3) Product durability (QTY4) Product performance (QTY5) Conformance to the product specification (SP1) Speed of delivery (SP2) Reliability of delivery (SP3) Inventory costs (SP4) Shortage costs (MF1) Process flexibility (MF2) Volume flexibility (MF3) Mix flexibility
This work was previously published in Supply Chain Management: Issues in the New Era of Collaboration and Competition, edited by W. Wang, M. Heng, and P. Chau, pp. 64-105, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.9
Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery Shawna Sando University of Arizona, USA
ABSTRACT With rising and often unreasonable costs in the U.S. healthcare system, Americans are becoming more inclined to seek cheaper alternatives. In some cases, Americans do not have to search for such alternatives on their own because their employers are offering them incentives to receive care from a foreign institution. Employees can go abroad to countries, such as India, in order to receive medical services for prices that are at least half of what the procedure would cost in the U.S. This emerging market seems to be beneficial to all involved except U.S. healthcare providers; however, this outsourcing of healthcare services sends a powerful international message. It seems that the U.S. has a healthcare system that cannot adequately serve all economic classes of the American public. In contrast, though India has the proper facilities and professionals, there are concerns regarding malpractice litigation,
postoperative care, and possible negative effects on the Indian public. Having given consideration to all affected constituencies, it seems that the outsourcing of medical procedures is in the best interest of lower- and middle-class Americans as well as medical professionals in India. In reality, though medical tourism is receiving much attention, it will most likely not be a pressing concern for the American market in the near future. A widening discrepancy in the Indian public may, however, be cause for nearer concern. This new trend does foreshadow a push for more preventative changes in the business of U.S. healthcare, such as the development of information technology specific to the growing international healthcare market. Whereas, it will initially be beneficial to send patients abroad, with the evolution of technology, the latter ideal will instead be to have medical professionals abroad that care for patients located in the U.S.
Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery
INTRODUCTION The cost of healthcare in the United States seems to be approaching a level that is beyond the economic means of the general public. Even with insurance, expensive surgeries sometimes require thousands of dollars in out-of-pocket costs. Americans have found the cheaper alternative of seeking less expensive healthcare in a foreign country. This practice, which is often coupled with sightseeing and actual tourism, is appropriately referred to as medical tourism. Since there are plenty of advantages for both Americans and their foreign counterparts, medical tourism seems like the natural solution in the short run, and has the potential to become a rapidly growing market. However, when taking all constituencies into consideration, in the long run, this growing market could have some indirect, unfavorable side effects.
operations in New Delhi, India. The 60-year-old needed both his gall bladder removed and his rotator cuff mended, and was delighted at the opportunity to avoid paying $10,000 in deductibles and out-of-pocket fees (Milne-Tyte, 2006). The cost for Blue Ridge was so low in comparison to the charge that the company would have incurred from U.S. medical fees that they actually offered to return a portion of their savings to Garrett. In another case, Howard Stabb, a successful business owner, sought physicians in India rather than in the United States. Stabb had chosen not to have health insurance and found that he could save over $150,000 by receiving heart surgery out of the country. He brought a patient advocate with him, and both of them agreed that his decision to seek services abroad was best for both his personal well-being and for the financial stature of his company (U.S. Senate Hearing, 2006).
ENCOURAGEMENT OF FOREIGN PROCEDURES
THE PREFERENCE TOWARDS INDIA
Perhaps the largest instigators in this recent trend are the employers. They could be playing a large role in the development of medical tourism simply by introducing the idea to their employees and, in some cases, even offering some economic incentive. In an effort to save on insurance fees, several companies have begun to promote foreign healthcare options. Blue Ridge Paper Products, based in Canton, North Carolina, is one such venturous company. Their healthcare claims were initially projected to be $36 million by 2006; however, due to these foreign alternatives, their actual claims in 2006 were closer to $24 million (U.S. Senate Hearing, 2006). These savings will be to the advantage of the company and its employees because they will be able to internalize more revenue as well as keep wages reasonable. Carl Garrett is a technician at a Blue Ridge paper mill who had plans to receive two medical
One might wonder, of all the third-world countries where one might be able to receive care, why would India be a good choice? Why would the global leader in importing foreign patients be half-way around the world? Though a possible reason could be coincidence, as in, Indians were the first to create such a market, there are more likely, tangible reasons for this phenomenon. For instance, there is less of a language barrier in India as opposed to some other possible foreign destinations. Most Indians begin learning English in school at a young age, so odds are that the healthcare professionals would be able to communicate with an American in English. Also, helping to make their foreign patients feel secure with the care that they will be receiving, many Indian physicians have been trained in the west (Rai, 2006). Much American hesitation to travel abroad for care comes from uncertainty about the quality of care and knowledge and experience of the foreign physicians.
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Thus, knowing that an Indian physician has an American medical education would make the possibility more appealing. Not only might the qualifications of the physicians testify to the care that they can provide, but the experiences of former patients can also be a strong point of persuasion. If individuals that are considering receiving care abroad know someone that can give a recommendation based on experience, they are much more likely to do it themselves. With the volume of medical tourism in India, half a million patients per year and growing, they have a large constituency that can vouch for the quality of care provided in the country (Hutchinson, 2005). Maggie Ann Grace, patient advocate for Howard Stabb, has stayed with patients both in India and the United States. She noted in a statement to the U.S. Senate that she, “would sooner leave her loved ones in the care of doctors and nurses in the Indian Hospital” (U.S. Senate, 2006). She attributed this opinion mostly to the fact that nurses in the U.S. are too busy and because of this, care is given based on the level of the patient’s severity and the nurse’s schedule. Cost is also to India’s advantage, not only in comparison to U.S. prices, but to other countries as well. In a 2005 comparison of estimated fees for a coronary artery bypass graft surgery, India’s more expensive hospital was still $15,000 less expensive than a Mexican hospital and $5,000 cheaper than Thailand (U.S. Senate, 2005). Thus, for reasons that range from financial to human interaction, India is a strong competitor in the international market for medical tourism.
THE AMERICAN PERSPECTIVE American disdain for the healthcare system has the potentional of becoming a detriment to U.S. society. The situations of both Carl Garrett and Stabb seem to favor medical tourism. It is a favorable option for the patient and their employer,
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but are there possible adverse affects? On a larger scale, considering all constituencies both directly and indirectly involved, there is a variation in those that benefit from this particular form of outsourcing. For the growing constituency that benefits from and is in favor of medical tourism, there is an opposing set of constituencies that will find this disadvantageous. From 2002 to 2005, there was an increase of 350,000 foreigners that traveled to India for care, this number is projected to increase by 30% each year (Hutchinson, 2005). If this pattern of receiving healthcare abroad does continue to progress, it does not present a sustainable future for the present state of our domestic healthcare system. Howard Stabb was operated on in India, stayed for a month, and returned with a positive impression of the care provided. His cardiologist in the States reported that he was healthy and that the operation had been successful (U.S. Senate, 2006). That was the best option for Stabb personally, but on a societal level, Stabb’s, advertisement for medical tourism may have a negative impact. Carl Garrett received his operations in the U.S. instead of in India as intended, due to strong opposition. Garrett is part of the United Steelworkers Union, who saw this growing trend toward medical tourism as an excuse to lower the quality of care and a denial of the right to safe healthcare. Stan Johnson, a speaker for the Union, stated that outsourcing healthcare would lead to corporate profiteering and that if we allow traveling abroad for treatment to remain a feasible option, it may one day become the only option (Milne-Tyte, 2006). Bruce Cunningham, president of the American Society of Plastic Surgeons, presented other concerns, while providing what would most likely be the shared opinion of many American physicians on this subject. He could understand the desire to receive healthcare at a lower cost, but warned of the potential to increase risks (U.S. Senate, 2005). Travel done shortly after having surgery can be risky. Also, many procedures require follow-up care; if an American provider will be
Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery
administering postoperative care, they should be found and agree to provide care before the patient leaves the country. There was no evidence found that would justify American physicians having a fear of losing revenue. On the contrary, American physicians and hospitals may begin to feel some reprieve from a diminished patient load. This seems to be the optimistic view of UK physicians. In 2002, it was the National Health Service (NHS) of the UK that began to encourage citizens to seek care abroad in order to alleviate long wait lists (Maini, 2005). Also, patients that would not be eligible for a procedure under NHS would travel abroad to receive it. Thus, it seems that for the present time, such outsourcing is beneficial. For long-term concerns, there is comfort in the fact that for many procedures, proximity is essential. For instance, childbirth and emergency care are not services that could withstand the 20-hour flight. IndUSHealth, one of many companies that coordinate visits for medical tourists, caters to interested Americans by providing direct information and offering assistance with planning the trip and procedure. Their Web site will most likely convince Americans with limited financial resources that this is their best option for receiving medical care. The company assigns each patient a personal case manager that handles the details of their visit (IndUSHealth site, 2005). Their Web site is subjective; it sheds a positive light on all aspects of receiving care in India. Interested patients should investigate their own reasons for going and whether or not they find any ethical bias against it. Overall, the American perspective is torn. Not necessarily a question of quality vs. cost, there are several factors and variables to consider.
THE INDIAN PERSPECTIVE The healthcare system in India is complex. The healthcare facilities are divided first into two cat-
egories, government and private, and under each of those two categories are three main branches: tertiary, secondary, and primary (the lowest level of care) (Van Hollen, 2003). The government institutions are generally considered inferior to the private due mostly to overcrowding, less funding, and less expensive care. As one goes further from the city, the medical facilities become less technologically advanced, have minimal staff, and lowered sanitation standards. The divide between the private and public sector is growing. In fact, the spending on public healthcare is the sixth lowest in the world. On the other hand, India is among the top 20 nations for spending in the private sector (Nundy & Sengupta, 2005). This is due to spending on healthcare being a lower priority. To compensate, the government encourages growth in the private sector. The government uses subsidies and tax exemptions as some methods of encouraging the private sector. This increasing divide between public and private healthcare factors into not only the care provided, but also the providers of the care. Healthcare professionals prefer working in the private sector due to higher wages and a more pleasant working environment. It is this lack of interest in public sector employment that has propelled entrepreneurial endeavors such as venues for medical tourism, because the Indians involved in the development and implementation of these endeavors do benefit from them. Unfortunately, there does also seem to be negative repercussions for Indian patients both in the private and public sectors. It seems probable that their care and access to the best physicians might be compromised by the influx of foreigners with more elastic checkbooks. One large downfall of the private sector is that it is not regulated so there are no standards of quality or costs (Nundy & Sengupta, 2005). Thus, their success is measured by profit rather than the actual care being provided. Unfortunately, the private sector also tends to pull the focus away from the public health situation. Since India has plenty of internal health concerns such as widespread diseases and rural
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communities with minimal healthcare facilities, it seems that a greater focus should be put on the public sector. The problem is that the attraction to the private system is prevalent both to the care providers and patients. In such a profit driven situation, to make this shift from privately to publicly focused is challenging.
$11,500 (Fitzpatrick, 2004). That means that the premium was greater than the gross earnings for a full-time minimum wage worker. It would be economically impossible for them have insurance, which explains why 43 million people in the U.S. do not have health insurance (Hutchinson, 2005). This trend of forcibly keeping people from having insurance seems to be a force that is perpetuating the outsourcing of medical care.
COMPARATIVE DATA All Indian hospitals involved are approved by the WHO supported Joint Commission International. The mission of the Joint Commission International is to improve the safety and quality of care in the international community. Many contributing Indian hospitals are part of a private national chain; for instance, the Apollo Hospitals in Chennai and New Delhi and the Wockhardt Hospitals, one of which is in Mumbai. There is also a chain in Delhi, Fortis Healthcare. Just as the market for medical tourism has grown in India due to enticing profit margins, reciprocally, American consumers are similarly convinced by the savings. All of these options have a major financial advantage over U.S. providers. Americans also benefit from some insurance relief since some insurance companies that traditionally only covered emergency, out of country procedures have evolved to a coverage plan for non-emergency situations. BCBSAZ, Cigna, Humana, and Aetna are examples of providers that support the concept of receiving healthcare abroad (personal communication, March 3, 2007). Aetna would only be willing to cover a non-emergency if it is proven to be medically necessary. Perhaps the growing popularity of coverage for procedures conducted abroad has a correlation to the rising insurance premiums. According to the Kaiser Family Foundation, insurance premiums have risen 87% in the last 6 years (Galles, 2007). In 2006, the average annual premium for coverage for a family of four was
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THE MALPRACTICE ISSUE Speaker of the Union, Stan Johnson, expressed an additional concern that most would not consider, having already been strongly convinced by the savings that receiving care abroad affords. However, consumers should consider the possibility of a malpractice lawsuit and who, if any, would be the responsible party. In accordance with their agenda, IndUSHealth has a reasoned response to concerns about malpractice litigation. They claim that India has a similar court system to the U.S. and American patients have the right to file cases there. In reality, however, it seems that though American patients would have the right to file a case in India, the proceedings of a lawsuit would differ from the American process. The major difference between the systems of the two countries is that in the U.S., such a case would be tried in a state court, while in India there are more specific consumer courts. The trend in U.S. courts is to present the patient as victimized and almost guilt the jury into awarding the patient a large sum of the rich doctor’s income. In India, on the other hand, there is a less-biased perspective. Awards are given based on damage; lawyers are not permitted to accept cases that may have facetious intentions. Culturally, doctors in India are so highly respected that most patients would not challenge the decision of their doctor, though there is a possibility that India’s system may be swaying toward the favor of the consumer. In 1992, the Kerala High Court proposed an exten-
Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery
sion to the Consumer Protection Act to include malpractice and negligence. Due to opposition from physicians, the proposal was reviewed by the supreme court but, to the favor of consumers, was upheld. It was not only upheld in Kerala, but courts were established in all states to handle the complaints of consumers (Studdert, Mello, & Brennan, 2004). However, there has not been much change toward the American mentality of a more persuasive litigation process. This is dually reflected in the contrasting price of malpractice insurance. According to the Pacific Research Institute, Indian doctors pay $4,000 per year for insurance while American doctors have been known to pay 25 times that amount (Brunell, 2007). Although this may seem to correlate with the view of foreign malpractice laws as being too relaxed, within both healthcare systems there is a problem of keeping record of errors and any resulting injuries. There is currently an emerging program in the U.S. to hold doctors and hospitals accountable for recording errors (Studdert, et al., 2004). No such program has been initiated in India, but perhaps that will change with an increased influx of foreign patients. A responsible system to track liability would, in turn, keep malpractice suits in both countries honest and less biased. Overall, even if an American patient were willing to chance a system that had no tendency to be in the consumers’ favor, considering the financial aspect of such a process may cause them to reconsider. Financially, there is the added cost of traveling back and forth, as well as lawyer’s fees. Also, if compensation is awarded, it would be a much smaller amount than one would expect in the U.S. (Milne-Tyte, 2006).
TECHNOLOGICAL INNOVATIONS Consider a more cooperative approach to crosscultural care, where liability is spread amongst providers in two separate countries; there are
several technicalities that tend to hamper innovation in healthcare. However, new developments may also serve as solutions to greater struggles. It seems that advances in technology will correlate with the popularity of medical tourism. Telesurgery, a specific branch of telehealth, provides the opportunity for surgeons that are physically located in different locations to communicate through operative videoconferencing. One surgeon observes the procedure through a camera and then offers visual and auditory feedback to the surgeon at the operating site (Cheah, Lee, Lenzi, & Goh, 2000). Among the more developed teleradiology, telepathology, and teleoncology, telesurgery seems to be the branch of telecommunications that is directly applicable to medical tourism. International telesurgery proved to be successful in two laparoscopic cases between the United States and Singapore. More specifically, an experienced U.S. surgeon observed a less experienced surgeon perform both a radical nephrectomy and a varicocelectomy (Lee, Liew, Fabrizio, Li, Jarrett, & Kavoussi, 2000). This practice would be beneficial to the medical tourism market both by alleviating the distrust of foreign physicians, as well as keeping cost minimal by still undergoing the procedure in a foreign institution. A more recent 2003 study of procedures conducted between the United States and Brazil noted a feasible future for telesurgery. In two cases of telepresence surgery, a U.S. surgeon directed a robot attached to a laparascope in a bilateral variococelectomy, and the other robot was used for needle placement in a percutaneous nephrolithotomy (Rorigues, Mitre, Lima, & Fugita, 2003). However, there are barriers to implementing this technology, the language divide, for one. One would assume the physicians in this example corresponded in English, but it cannot always be assumed that that will be feasible. Additionally, the cost of higher bandwidth communication lines is still expensive, which makes it difficult for such technology to access foreign countries (Lee, &
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Png, 2000). The financial emphasis on healthcare is truly an overpowering barrier, which explains why the success of telehealth relies on the private sector. It seems that an established relationship with a university that is willing to do research and provide resources, as well as a partnership with several private healthcare organizations to incorporate, is key to establishing a successful telehealth program. Not only is a structural foundation necessary, but a substantial need for such an innovation is also required. The success of the UltraClinics telehealth solution to mammogram screening was due to the yearly demand of over 48 million mammograms and the one million additional that require biopsy (Weinstein, et al., 2007). As of now, though there are crowded emergency rooms and stymied appointment schedules in the U.S. and UK, the demand is not overpowering, thus, there has been no push for the combination of medical tourism and telesurgery. Beyond financial barriers it seems that in the future, when demand as well as technology has increased, this may be a strong asset to the growing medical tourism market. Telesurgey supplements both problems of communication and postoperative care. Comprehensive hospital information systems, such as the system implemented at the U.S. Veterans’ Affairs institutions, have initiated electronic health records. With the correct considerations of patient privacy, the ability to transfer records with such technological ease will improve communication and understanding across country borders. Based on the UltraClinics example, increased use of technology can keep the patient more informed, accelerate their care, and
allow more time for the physician to care pre- and postoperatively (Weinstein, et al., 2007). There are more benefits than detriments to the globalization of healthcare, but it will require a more cooperative attitude toward sharing advances in research, techniques, and technologies.
CONCLUSION Medical tourism will most likely continue to grow in popularity. Though it is negative propaganda for the arguably outrageous cost of healthcare in the U.S., it is helping to ease some strain on the American system. Essentially, American physicians are keeping most of the patients that can afford the procedure, losing middle-income patients that opt to save money abroad, but still have the burden of the low-income population that cannot afford the less-expensive option. This seems to prove that the medical environment in the U.S. is now driven by money rather than the desire to provide quality care to each patient. However, the money lost (see Table 8.1) to foreign markets seems to have little effect on the U.S. healthcare market. As long as there are overcrowded emergency rooms and the need to schedule doctor’s visits months in advance, like the UK, the U.S. will probably consider this new trend to be beneficial. The fact that the market in India has a 30% consumer increase yearly is significant, but not enough to severely damage the American market in the near future. If we do come to a breaking point where benefit becomes burden, the U.S. healthcare system would be forced
Table 8.1. (Chart: U.S. Senate, 2005)
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Procedure
U.S. Cost (appr)
Indian Cost
Airfare (appr)
Money Saved
Heart Bypass
$70,000
$6,000
$2,000
$62,000
Angioplasty
$41,000
$6,000
$2,000
$33,000
Hip Replacement
$37,000
$5,000
$2,000
$30,000
Spinal Fusion
$55,000
$8,000
$2,000
$47,000
Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery
to make some changes, such as the compromise of telesurgery, that would attract the middle-class constituency and minimize the outsourcing of medical services. No major preventative changes have been made as of yet, due mostly to one major barrier; policymakers and government officials cannot agree on the best way to control costs. Some possible solutions would be implementing price controls or strict budgets (Fitzpatrick, 2004), although it may be time to consider a system that provides healthcare to every American citizen. With millions of uninsured citizens, people will avoid seeking care until it is necessary. The U.S. still spends more on healthcare than any other industrialized nation. As with many shifts toward outsourcing, the need for change originated in the home country, which led to the need to seek out supplementation, not substitution, in foreign markets.
in the effort to heighten the quality of care that they can provide. Though this may reduce some of the competition in the market, it will increase the appeal to American consumers who are wary about the quality of care provided abroad. Telesurgery, an innovative technology that may prove to be a solution to several problems, has already been successful in a few operations. However, there will have to be a great deal more data collected to ensure the usefulness of this innovation. Additionally, the cost of such a procedure would have to be reduced before it would be willingly adopted into the market. Overall, since this market is still in its fledgling stages, there is little data from which concrete conclusions can be made, making further research essential to future progress.
REFERENCES FUTURE RESEARCH There is still much to be determined about the future of medical tourism and economic solutions to healthcare, domestically. Though price difference and the savings to be had abroad are well advertised, there are few documented patient experiences. It would be beneficial, both for prospective patients and providers, to have a well-rounded description of the medical tourism industry. Inclusive in such a description should be what drove each patient to seek care abroad, their experience throughout the process, whether they benefited overall from the savings and what recommendations they would give to prospective patients. Such documentation should also include reasoning behind choosing the country in which care was given, it seems that regional specificity may emerge along with this growing trend (i.e., for cardiac surgery one would seek care in Mexico, while facilities in India would specialize in dentistry). Realistically, it would be to the advantage of foreign providers to specify their fields of care,
Brunell, D. (2007). Medical tourism creates global competition. The Columbian. Retrieved April 21, 2007, from http://www.columbian.com Cheah, W., Lee, B., Lenzi, J., & Goh, P. (2000). Telesurgical laproscopic cholecystectomy between two countries. Surgical Endoscopy, 14(11), 1085. Fitzpatrick, C. (2004). Facts on cost of health care. Retrieved March 11, 2007, from http://www.nchc. org/facts/cost.shtml Galles, J. (2007). Unsustainable health care premium increases. Greater Charlotte biz. Retrieved March 11, 2007, from http://www.greatercharlottebiz.com/article.asp/id=62 Hutchinson, B. (2005). Medical tourism growing worldwide. UDaily. Retrieved April 25, 2007, from http://www.udel.edu Indushealth Web site. (2005). Retrieved April 24, 2007 http://www. indushealth. com
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Lee, B., Png, D., Liew L., Fabrizio, M., Li, M., Jarrett, J., & Kavoussi, L. (2000). Laparoscopic telesurgery between the United States and Singapore. Annals Academy of Medicine Singapore, 29(5), 665-668. Maini, A. (2005). India: Untapped potential in the medical tourism market. Healthcare Management, Issue dtd. Janurary 15-31. Milne-Tyte, A. (2006). Medical tourism meets healthy opposition. American Public Media. Retrieved September 13, 2006, from http:// marketplace.publicradio.org/shows/2006/09/13/ PM200609137.htm Milstein, A., & Smith, M. (2006). America’s new refugees seeking affordable surgery offshore. The New England Journal of Medicine, 355, 1637-1640. Nundy, S., & Sengupta, A. (2005). The private health sector in India. BMJ Journal, 331, 11571158. Rai, S. (2006). Union disrupts plan to send ailing workers to India for cheaper medical care. The New York Times, October 11. Retrieved February 13, 2007, from http://www.boston.com/yourlife/ health/other/articles/2006/10/11/ Rodrigues Netto Jr., N., Mitre, A., Lima, S., & Fugita, O. (2003). Telementoring between Brazil and the United States: Initial experience. Journal of Endourol., 17(4), 217-20. Studdert, D., Mello, M., & Brennan,T. (2004). Medical malpractice. New England Journal of Medicine, 350, 283-92.
We Care Health Services. (N.D.). The comparative costs between India and other developed countries like U.S., UK, and Singapore approximate figures in U.S. dollars. Retrieved February 15, 2007, from http://content.nejm.org/cgi/content/ full/355/16/1637 Weinstein, R., López, A., Barker, G., Krupinski, E., Descour, M., Scott, K., et al. (2007). The innovative bundling of teleradiology, telepathology, and teleoncology services. IBM Systems Journal, 46(1), 69-84.
ADDITIONAL READINGS Bradley, W. G., (2004). Offshore teleradiology. Journal of the American College of Radiology, 6, 244-248. Firth-Cozens, J., & Cording H. (2004). What matters more in patient care? Giving doctors shorter hours of work or a good night’s sleep? Quality and Safety in Healthcare, 13, 165-166. Fontanarosa, P. B., Rennie, D., & DeAngelis, G. D. (2004). Postmarketing surveillance: Lack of vigilance, lack of trust. Journal of the American Medical Association, 292, 2647-2650. Franken, E. A., Berbaum, K.S., Brandser, E.A., D’Alessandro, M.P., Schweiger, G.D., & Smith, W.L. (1997). Pediatric radiology at a rural hospital: Value of teleradiology and subspeciality consultation. American Journal of Roentgenology, 168, 1349-1352.
U.S. Senate Hearing. (2006). The globalization of health care. Retrieved March 12, 2007, from http://www.medicaltourisminsight.com/ articles/0701-senate.htm
Graschew, G., Roelofs, T. A., Rakowsky, S., & Schlag, P. M. (2006). E-health and telemedicine: Digital medicine in the virtual hospital of the future. International Journal of Computer Assisted Radiology and Surgery, 1, 119-135.
Van Hollen, C. (2003). Birth on the threshold: Childbirth and modernity in South India. Los Angeles: University of California Press.
Halliday, B. E., Bhattacharyya, A. K., Graham, A. R., Davis, K. R., Leavitt, S. A., Nagle, R. B., et al. (1997). Diagnostic accuracy of an international
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static imaging telepathology consultation service. Human Pathology, 28(1), 17-21. Herzlinger, R. E. (2006). Why innovation in healthcare is so hard. Harvard Business Review 84, 5, 55-66. Kayser, K., Szymas, J., & Weinstein, R. S. (2005). Telepathology and telemedicine—Communication, electronic education and publication in e-health. Berlin: VSV Interdisciplinary Medical Publishing.
Weinstein, R. S., Bhattacharyya, A., Halliday, B. E., Yu, Y-P, Davis, J. R., Byers, J. M., et al. (1995). Pathology consultation services via the ArizonaInternational Telemedicine Network. Archives d’Anatomie et de Cytologie Pathologiques, 43, (4), 219-226. Wysocki, W. M., Komorowski, A. L., & Aapro, M. S. (2005). The new dimension of oncology:Teleoncology Ante Portas. Critical Reviews in Oncology/Hematology, 53(2), 95-100.
Olszak, A. G., & Descour, M. R. (2005). Microscopy in multiples. IEEE oe magazine 5(5), 16-18.
This work was previously published in Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy, edited by A. Gupta, pp. 157-166, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.10
Managed Services and Changing Workplace Ethics Alan Sixsmith University of Technology Sydney, Australia
INTRODUCTION Organizations use various types of outsourcing for many reasons, and these have been widely documented in the research literature. However, the impact on both the employees remaining with the organization and those who move to the service provider is often neglected. Prior to the outsourcing arrangement coming into effect, the employees all work for the same organization, but now with two (or more) organizations in place, professionalism and workplace relationships are drastically changed. In this article, the impact of changing workplace relationships on individual professionalism and workplace ethics will be explored. The article will begin by briefly discussing managed services and outsourcing, and ethical workplace practices and how these may be impacted by an outsourcing arrangement. Included in this discussion are associated areas of trust, professionalism, workplace relationships, and employee mindset change. The mindset change is of particular interest as employees in both organizations are now guided by commercial
arrangements. For example, the simple phone call to a former colleague asking for assistance or information may now cross organizational boundaries and therefore lead to potential ethical conflicts
MANAGED SERVICES AND OUTSOURCING Various definitions of outsourcing prevail. Outsourcing “reflects the use of external parties to perform one or more organisational activities” (Dibbern, Goles, Hirschiem, & Jayatilaka, 2004, p. 9). Pearlson and Saunders (2006) describe outsourcing as “the purchase of a good or service that was previously provided internally” (p. 229). From an information systems and technology (IS&T) perspective, outsourcing is the contracting out or selling of an organization’s IS&T assets, people, and activities to a third party for an agreed time period and monetary payment (Oza, Hall, Rainer, & Gray, 2004; Kern, Willcocks, & van Heck, 2002). IS&T outsourcing covers many areas, for example the use of contract staff, the contracting
out of various IS&T functions such as managing and operating data centers, software development, and hardware and network support (Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). Sanders and Locke (2005) define managed services as an engagement where a third-party company has responsibility for design, implementation, and management of a total solution. The engagement can vary and may include responsibility for equipment, facilities, staffing, software, and management (Sanders & Locke, 2005). As such a managed services engagement is a form of outsourcing. The value of such an engagement is that the client is buying specific industry experience that it does not possess. Based on these definitions, there are marked similarities between managed services and outsourcing. The differences are in the context of the contract, the business environment, and how the parties see their relationship and the achievement of their business goals.
Commercial Focus Mindset Change With commercial arrangements in place, internal IS&T staff must change their work practices to become more commercially focused. However, IS&T staff have often struggled to adopt a commercial focus in the way they perform their activities. They are often perceived as having no real understanding of what the business needs are and of being primarily concerned with technology (hence some reasons for the move to outsourcing). This is mostly due to a support function mentality (Kingsford, Dunn, & Cooper, 2003) and most IS&T staff having minimal contact with the commercial aspects of the organization. Having a commercial or customer-oriented focus will permit the IS&T department to promote its products and services, provide value to the organization, and realize its full potential within the organization.
By adopting a commercial or customer focus, the IS&T department can move away from the cost center or support function mentality and potentially become a profit center within the organization. For this to be successful, challenges such as considering users as customers, building and developing ongoing relationships with these customers, providing value for money services and fee-for-service costing models, and catering for selective product and service requirements by business units will surface. However, a workplace dilemma may surface for IS&T staffthat is, focus on profit and return on investment or focus on professionalism and ethical practice.
ETHICAL WORKPLACE PRACTICE Ethical practice in the workplace can cover many aspects of any individual’s role, for example providing the correct information to a customer, not taking advantage of working relationships (both internal and external), taking a bribe vs. receiving a gift, or revealing confidential company information to others. In most instances ethical workplace practices focus on the work-related conduct of the employee (Marchewka, 2006), however most employees and managers receive little (if any) training in workplace ethics and ethical behavior (Pearlson & Saunders, 2006). Organizations develop policies, procedures, and guidelines related to workplace conduct which employees are expected to follow (Marchewka, 2006; Reynolds, 2003). Conversely an employee expects the management of an organization to also follow ethical practices. Unethical acts by management or employees could mean breaking the law or contravening professional standards (Marchewka, 2006; Reynolds, 2003).
Professionalism A profession is “a calling requiring specialised knowledge and often long and intensive academic
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preparation” (Reynolds, 2003, p. 27) and consists of members known as professionals. Reynolds (2003) and Edgar (2003) identify a professional as someone: • • • • •
having advanced training and experience exercising judgment and discretion in the course of his or her work contributing to society participating in lifelong learning whose job cannot be standardized
The IS&T industry has many professional roles and people with wide-ranging backgrounds, experience, and education. Many relationships are developed at an individual level during an IS&T professional’s career. However the following classification of relationships can be identified: the professional and (1) employer, (2) client, (3) vendor, (4) professional, (5) user, and (6) professional society. For further details, see Reynolds (2003). The professional-employer relationship is the most important, and is often documented in employment contracts and company policies and procedures which detail the responsibilities of both parties (Marchewka, 2006; Reynolds, 2003). The professional-client relationship is normally based on a contract that specifies the work to be performed and the rewards to be provided. In the professional-to-professional sense, most professionals have a degree of loyalty to fellow professionals and hence may assist fellow professionals when opportunities become available (Reynolds, 2003). Conflicts could arise when a fellow professional is in fact a client. Trust in these relationships is then a crucial element for an employer.
ingly place themselves in a position where they may be at risk from or be vulnerable to another party (Brown, Poole, & Rodgers, 2004). Integrity, ability, and predictability are components of trust (Cockcroft & Heales, 2005). After reviewing trust literature, Spector and Jones (2004) found trust to be linked to performance, cooperation, and the quality of communication. Trust is the basis for creating and developing relationships (Brown et al., 2004; Kern & Willcocks, 2002), and also for managing long-term relationships. Dibbern et al. (2004) note that relationship building and structure are distinct from relationship management. However, in practice, relationship building is the basis for relationship management.
Workplace Relationships Workplace relationships are built between staff in various departments, staff and management, and staff and external contacts. These relationships are built over time during the course of work-related interactions. From an IS&T perspective these relationships involve the IS&T staff management and the various internal and external stakeholders such as users, management, vendors, and clients (Marchewka, 2006). These relationships are built at an individual level rather than departmental or organizational level. Improving relationships with all parties (both internal and external) is an important strategy for an organization’s management and can be a critical component of business success. Poor workplace relationships can seriously impact an individual’s contribution to the organization (Ward & Peppard, 2002).
Trust THE CASE While trust is commonly used in everyday language, an exact definition is difficult as trust has many interpretations. However, most definitions of trust share the theme that one party must know-
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In order to understand the impact outsourcing or managed services has on workplace practices and relationships a case, from the telecommunications sector will be presented.
Managed Services and Changing Workplace Ethics
A telecommunications Supplier sold its manufacturing business to a venture capitalist and contracted to purchase equipment back from the new company. The Start-up took on all manufacturing employees and limited support staff from areas such as finance, information technology (IT), and human resources. In essence the Supplier outsourced the manufacturing component of its business to the Start-up through this sale. This case will concentrate on the IT division where a managed services operation was implemented. For the Start-up to become operational as soon as possible, the sale was negotiated with a clause allowing the Start-up to use the IT environment of the Supplier. A considerable amount of work was undertaken by IT staff from the Supplier to partition the IT environment into two mirror image segmentsone for each company. The Supplier retained ownership of the IT environment. The Start-up paid for services provided by the Supplier’s staff and for usage of the IT environment. From an IT staffing perspective, the Start-up took on two IT development staff members from the Supplier (with one becoming the IT manager). The Start-up operated its IT environment in its own right even though most services were provided by the Supplier. From an IT applications perspective, there was some confusion as to the specific contents of the contract, that is, what the Supplier would provide and what the Start-up would pay for. The Start-up undertook its own development and maintenance work for all manufacturing and store-related applications. However, for several specialist applications or when human resource constraints prevented the Start-up from undertaking its own work, services were provided by the Supplier on a contract basis. A contentious point became who was liable for maintenance to the existing application base (where both the Supplier and the Start-up used the applications). When application development services were to be provided by the Supplier, the Start-up’s IT manager would request the Supplier’s
IT development manager to quote on a certain piece of work; the quote would be compiled by the appropriate staff and returned to the Startup. If the Start-up decided to proceed, it would request the IT development manager to schedule the work and provide an expected timeframe for completion. This had obvious repercussions on the project work and individual workloads of the Supplier’s IT development staff. Ethical workplace practice and professionalism was required in the quoting and scheduling process to ensure that the Start-up was not being taken advantage of (i.e., quote too high) and that the work requested would be undertaken in a timely fashion (i.e., fit in amongst current workload).
DISCUSSION In the case presented all employees encountered major changes in work practices and relationships. As former colleagues now working for different organizations, the staff members faced different challenges and issues when working on assignments for the “other” organization. No longer could a simple phone call or a discussion in the hallway lead to work being undertaken. With commercial contracts in place, all activities being undertaken for the other company must be documented, budgeted, signed off, resourced, and scheduled. Relationships that had previously been developed through workplace interactions, while potentially still in place at a personal level, had changed dramatically with the introduction of the new organization. Workplace relationships and practices now cross organizational boundaries. Therefore a more formal approach to work practices must be implemented which is in essence dictated by the contract. Figure 1 outlines the actual relationship ingredients in the given case, based on the Dibbern et al. (2004) model of Management of Relationships in Outsourcing. In conjunction with
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Managed Services and Changing Workplace Ethics
Figure 1. Actual relationship ingredients in the case (adapted from Dibbern et al., 2004)
The Supplier
Needs & Expectations of Vendor
Basis of new relationship Managed Services or Outsourcing Contract
Adapt existing workplace relationships
New commercial relationships Psychological Contract
The Start-up
Products & Services of Supplier
a formal contract, a psychological contract is an unwritten mutual commitment and perception of stakeholders and staff on either side as to their individual expectation of what each party gives and receives from the relationship based on a reciprocal exchange (Oza et al., 2004; Koh, Ang, & Struab, 2004). It is this notion of the psychological contract that is of most interest. The psychological contract is the institution of trust and grows over time as the formal contract gains momentum with both business and technical commitment. Trust coupled with control (the formal contract) tends to prevent opportunistic or unethical behavior on either side during the contract’s life. Research has highlighted that a lack of trust inhibits vendor performance. Koh et al. (2004) indicate that IS&T outsourcing is not only controlled by legal contracts, but the parties involved also rely on the “spirit of the contract”that is, individual beliefs and perceptions of their obligations. Outsourcing relationships focus on cooperation and commitment to an agreement to work together for mutual gain and benefit which is akin to trust.
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Ethical Workplace Practice
Client companies should consider outsourcing as more than a contract for IS&T services: it is in fact the management of business relationships (Kishore et al., 2003). With regards to the workings of the IT contract between the Supplier and the Start-up, all areas except applications development and maintenance were well understood. The Start-up would pay for the services provided and their usage of the IT environment. Applications development was a so-called gray area as the formal contract lacked detail in this area. The phrase “spirit of the contract” was certainly fitting as the appropriate staff from either company had little knowledge of the contract’s contents. A new commercial relationship had to be developed and was based on the psychological contract and ethical workplace practices rather than the formal contract.
AN ETHICAL FRAMEWORK It is hard to define a standard approach to help an individual faced with an ethical problem. Laudon
Managed Services and Changing Workplace Ethics
(1995) stated: “There is an ethical vacuum in cyberspace” (p. 33), and this still appears to be the case today as “well-accepted guidelines do not exist” (p. 193) to assist managers and employees with ethical and moral issues (Pearlson & Saunders, 2006). Ethical frameworks are available to help an individual make sound ethical decisions, and several approaches are detailed in undergraduate and postgraduate textbooks (e.g., Marchewka, 2006; Edgar, 2003; Reynolds, 2003). No matter which approach is undertaken, a number of key areas must be considered when attempting to determine ethical workplace practices that ultimately form the basis for making ethical workplace decisions. Ethical workplace practice must encompass the following steps: 1.
2.
3.
4.
5.
Obtain all the available relevant information: To ensure that the situation is fully understand to the best of one’s professional ability. Determine the stakeholders and their stance: This will complement the above point by providing information from the point of view of those who may benefit or suffer depending on the final solution/decisions. Identify and document the possible solutions or decision: Analyze all the information obtained to derive all possible solutions/ decisions. These must be documented and reviewed. Isolate the consequences associated with the solutions or decisions: Any solution/ decision documented will have positive and negative outcomes. The negative outcomes for each stakeholder must be identified for further review. Appraise your interpretation of the situation based on corporate guidelines: The identified solutions/decisions must be considered in relation to existing corporate guidelines or policies and their impact on the stakeholders.
6.
Communicate and review the appropriate solution or decision: Identify and recommended the correct solution/decision. This must then be communicated and reviewed with all stakeholders before implementation.
The above steps should not be considered as a single sequential process. The outcome from one step may require a previous step (or steps) to be revisited to ensure that the solution or decision has been based on accurate and relevant information. When determining the ethical workplace practices in the managed service sector, it may be appropriate to look beyond the contract and the rules of engagement, that it prescribes to focus on the potential consequences of the solution or decision. For example, any solution implemented or decision made by the managed services (or outsource) provider cannot have a detrimental effect on the other party as this may in fact damage both organizations. Putting this into the context of the Supplier-Start-up case, the psychological contract (based on working relationships) may also provide some basis for ethical workplace practices. Hence a consequences-based ethical approach may be more appropriate than a hard-and-fast (the written contract) rules-based ethical approach (Laudon, 1995) in the managed services sector to enable both parties to operate successfully.
FUTURE TRENDS As more organizations move towards outsourcing, managed services, or selective sourcing of IS&T services, there will be continued impact on employee work practices and relationships. As this trend continues and IS&T jobs shift from technical roles to a more business-related role in order to interact with IS&T service providers, employees will become more commercially focused. Ethi-
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Managed Services and Changing Workplace Ethics
cal work practices will become essential for all parties concerned. Research on the social changes in the workplace as a result of an outsourcing or managed services arrangement is worthy of further investigation. Areas such as the psychological contract and the change to ethical work practices and relationships should be explored.
CONCLUSION Ethical workplace practices are essential in today’s changing business environment as organizations adapt to the various methods of obtaining IS&T services. This article presented two components of the changing workplace: ethical workplace practice, and outsourcing and managed services. These components impact other aspects in the workplace, including trust, professionalism, relationships, and changing employee orientation. The case highlights the changing practices in the respective organizations. A model for the development of relationships in the changing workplace identifies that it is more involved than the formal contract in an outsourcing or managed services context. A psychological contract and ethical workplace practice must also be considered when developing new commercial relationships.
REFERENCES Brown, H.G., Poole, M.S. & Rodgers, T.L. (2004). Interpersonal traits, complementarity, and trust in virtual teams. Journal of Management Information Systems, 20(4), 115-137. Cockcroft, S., & Heales, J. (2005, November). National culture, trust and Internet privacy concerns. Proceedings of the 16th Australasian Conference on Information Systems, Sydney, Australia.
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Dibbern, J., Goles, T., Hirscheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The Database for Advancement in Information System, 35(4), 6-102. Edgar, S.L. (2003). Morality & machines (2nd ed.). Sudbury: Jones & Bartlett. Kern, T., & Willcocks, L. (2002). Exploring relationships in information technology outsourcing: The interaction approach. European Journal of Information System, 11(1), 3-19. Kern, T., Willcocks, L.P., & van Heck, E. (2002). The winners curse in IT outsourcing: Strategies for avoiding relational trauma. California Management Review, 44(2), 47-69. Kingsford, R., Dunn, L., & Cooper, J. (2003, November). Information systems, IT governance and organisational culture. Proceedings of the 14th Australasian Conference on Information Systems, Perth, Australia. Kishore, R., Rao, H.R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing. Communications of the ACM, 46(12), 87-92. Koh, C., Ang, S., & Straub, D.W. (2004). IT outsourcing success: A psychological contract perspective. Information Systems Research, 15(4), 356-373. Laudon, K.C. (1995). Ethical concepts and information technology. Communications of the ACM, 38(12), 33-39. Marchewka, J.T. (2006). Information technology project management providing measurable organizational value. Hoboken, NJ: John Wiley & Sons. Oza, N., Hall, T., Rainer, A., & Grey, S. (2004, November). Critical factors in software outsourcinga pilot study. Proceedings of the 2004 ACM Workshop on Interdisciplinary Software Engineering Research (WISER).
Managed Services and Changing Workplace Ethics
Pearlson, K.E., & Saunders, C.S. (2006). Managing and using information systems: A strategic approach (3rd ed.). Hoboken, NJ: John Wiley & Sons. Reynolds, G. (2003). Ethics in information technology. Boston: Thompson Course Technology. Sanders, N.R., & Locke, A. (2005). Making sense of outsourcing. Supply Chain Management Review, 9(2), 38-44. Spector, M.D., & Jones, G.E. (2004). Trust in the workplace: Factors affecting trust formation between team members. The Journal of Social Psychology, 144(3), 311-321. Ward, J., & Peppard, J. (2002). Strategic planning for information systems (3rd ed.). Chichester: John Wiley & Sons.
KEY TERMS Ethical Framework: An approach used to assist an individual in making a sound decision when faced with an ethical problem. Managed Services: A contractual arrangement giving the responsibility of a specified component of an organization’s information systems and technology environment to a thirdparty company.
Outsourcing: The contracting out or selling of an organization’s information systems and technology assets, people, and activities to a third party for an agreed time period and monetary payment. Professionalism: The conduct, judgment, and discretion an employee exhibits during the course of his or her daily work. Psychological Contract: The personal interpretation by one party of the obligations to another party after a formal contract for the provision of services between the two organizations has been agreed upon and implemented. Trust: The belief that one party places in another party to undertake their responsibilities at an expected level of performance. Trust includes components such as integrity, ability, predictability, performance, cooperation, and communication. Workplace Relationships: The relationships developed over time by employees of an organization with other employees and colleagues, and with external contacts such as vendors, suppliers, and clients, which are based on workplace interactions.
This work was previously published in the Encyclopedia of Information Ethics and Security, edited by M. Quigley, pp. 426-432, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.11
The Post-Offshoring IS Organization William R. King University of Pittsburgh, USA
ABSTRACT
INTRODUCTION
In the age in which many traditional IS functions will be taken over by offshore vendors or otherwise outsourced, attention needs to be paid to those functions that will increase in importance and/or need to be developed by IS departments if they are to be effective in this new environment. This article suggests a framework that may be judgmentally applied to IS activities in order to determine if they should be considered for offshoring/outsourcing. The results of applying the framework will be unique to each firm that uses it. However, in using that approach in more than 25 firms, the author has found that most firms will wish to retain a number of functions in-house. Fourteen such activities are discussed in three broad categories: “activities related to external relations,” “activities related to the development, customization, and implementation of systems” and “business and IS strategic activities.”
The offshore outsourcing of IT has become an import aspect of IS management as more and more IT activities are sent offshore. This trend has been driven by the twin imperatives of investment minimization and labor arbitrage. Companies and IS departments are motivated to reduce fast-rising fixed costs, especially of personnel benefits, in order to increase “ROI,” or whatever version of it is applied to the IS function. At the same time, significant labor-cost savings are achievable using vendors in India and other less-developed nations, making cost savings a major opportunity. An Association for Computing Machinery Report (Aspray, Mayadas, & Vardi, 2006) delineates six varieties of work related to IS that are often offshored: (1) programming, software testing, and software maintenance; (2) IT research and development; (3) high-end jobs such as software architecture, product design, project management, IT consulting, and business strategy; (4) physical
product manufacturingsemiconductors, computer components, computers; (5) business process outsourcing/IT-enabled servicesinsurance claim processing, medical billing, accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high-end IT enabled services such as financial analysis and reading of X-rays; and (6) call centers and telemarketing. Some of these are more relevant to future IS organizational management than are others. The rapid growth of offshoring has taken place in a context in which many businesses have been moving away from focusing on a strategy of risk-moderation through a diversified portfolio of activities to a focus on “core” activities, with “commodity” activities being outsourced to specialists. Many aspects of IT are believed to be commodities by business executives who have been persuaded by the logic that much of IT can be obtained through the market, that it is available to anyone, and that it therefore can provide no competitive advantage (Carr, 2003). This may be true for some of the basic IT infrastructure of the organization, but it is not so for many of the other IT-enabled processes of the firm. In fact, a problem that has arisen from the “core vs. commodity” dichotomy is that there are many IT-enabled business activities that are neither one or the other; instead, they are complex combinations of both. Consequently, many firms have outsourced what they believed were non-core, commodity business processes only to find that some outsourced processes contained core IT capabilities that should have been retained (Barthelemy, 2003; Saunders, Gebelt, & Hu, 1997). Nonetheless, the offshoring of IS activities continues unabated. This is likely to continue in the future (Davis, Ein-dor, King, & Torkzadeh, 2007), and it will have profound effect on the IS organization—new skills and capabilities will be needed; the need for some traditional capabilities will virtually disappear; the priorities that need to be placed on other existing capabilities will need to shift radically.
Among the capabilities that will clearly need to be downgraded in this new environment are some of those in traditional systems development, since much of the organization’s software will be purchased from vendors and customized to fit the organization’s unique needs or will be developed on an outsourced basis. But, the desirability of outsourcing/offshoring of many other IS activities is not at all clear. This article attempts to identify those “nonoutsourcable” IS activities that will need to be initiated or given greater prominence in this new post-offshoring environment using explicit criteria that go beyond the simplistic “core vs. commodity” dichotomy.
VIEWS OF IT CORE CAPABILITIES The closest notion to that of a “non-outsourcable” activity is that of a core IT capability. Feeney and Wilcocks (1998) identified three “recurring, fundamental (IT) issues a company faces, whatever the contemporary specifics of business circumstances or IT product” (p. 10): the need for two-way strategic alignment between business and technology, the delivery of IS services at low cost and high quality, and the design of IT architecture. Based on a study of practice in these three areas, they identified core IS capabilities that are “required both to underpin the pursuit of highvalue-added applications of IT and to capitalize on the external market’s ability to deliver costeffective IT services” (p. 12): • • • • • • •
leadership, business systems thinking, relationship building (between is and business people and organizations), architecture planning, making technology work, informed buying, contract facilitation,
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The Post-Offshoring IS Organization
• • •
contract monitoring, vendor development, and project management.1
tion in the post-offshoring environment, consider three broad criteria: 1.
Ross, Beath, and Goodhue (1996) similarly identified three key assets that the IS function must create and leverage: (1) highly competent IT human resources, (2) a reusable technology base, and (3) a strong partnering relationship between IT and business management. Peppard, Lambert, and Edwards (2000) adopted a perspective that transcended the IS function: “The competencies necessary for success with IS are not located within a single function—specifically the IS function” (Peppard & Ward, 2004, p. 176). Peppard and Ward (2004) then identified six “macro competencies:” strategy, defining the IS contribution, defining the IS capability, exploitation, delivering solutions, and supply, as well as 26 specific competencies that make up these six macro competencies. All of the specifications of core IT capabilities should be used as guidance by anyone giving consideration to outsourcing/offshoring.
A POST-OFFSHORING FRAMEWORK At this broad level of granularity, one might conclude that none of the core capabilities defined by Feeny and Wilcocks (1998), Ross et al. (1996), and Peppard et al. (2000) can be outsourced. However, many of these capabilities are made up of a complex combinations of elements, some of which may be considered for outsourcing or offshoring. Although the article deals with the “postoffshoring” era, no distinction is made in the following between domestic outsourcing and offshore outsourcing except where it is obvious which one is being discussed. In order to identify the specific IS activities that will need to be available within the organiza-
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2.
3.
The activity inherently needs to be performed in-house, possibly in the same physical location as users and/or IS personnel, or a policy decision has been made that it would be too risky to outsource it (referred to subsequently as “required proximity” (RP)). The activity is so important to the organization that the risks of outsourcing it are too great; the risks include losing the competence, having the competence appropriated by the vendor, and so forth (King & Malhotra, 2000). The activity needs to be nurtured and further developed for the future.
The formal basis developed here makes use of the latter two criteria—importance and significance for the future in terms of the notions of “core competence” (CC) and “critical success factors” (CSFs) as they may apply to current activities or as activities may have the potential to be so designated in the future. Thus, the approach taken here is that core competence is indeed an important concept in determining the “outsourcability” of an activity, but it must be considered in a nuanced manner in conjunction with the CSF notion, and in terms of both the current situation and likely future circumstances.
Core Competencies The notion of a core competency (CC) is fundamental to the resource-based view of the firm (Wernerfelt, 1984), but it is more widely discussed than it is understood (Quinn & Hilmer, 1994). Barthelemy and Adsit (2003) argue that core competencies are the resources and capabilities of the organization that are valuable, difficult to imitate, and difficult to substitute. In particular, to qualify as a core competency, a strategic capabilityone
The Post-Offshoring IS Organization
that is closely related to the strategy that the organization is pursuingshould have the following attributes (King, 1994, 1995a, 1995b): • • • • • •
evolved slowly through collective learning and information sharing, incapable of being readily enhanced through additional investment, synergistic with other capabilities, not readily duplicable by others, not readily transferable to others, and plays a role in creating a competitive advantage.
Clearly, the conventional “CC” view of activity sourcing is that if an activity meets these criteria, it is a core competence and should not be outsourced. If it is a “commodity”loosely speaking, something that does not meet any, or most, of the core competency criteriait may be considered for outsourcing (Quinn & Hilmer, 1994; Hancox & Hackney, 2000; Insinga, 2000; King, 2001). However, today’s information technologies are so integrated into business processes that it may not be possible to clearly distinguish between what is core and what is not core (Earl, 1996). Most IS functions that might be separable from others, and thus have the potential to be outsourced, also typically have some elements that belong to the core and some that do not (Barthelemy & Adsit, 2003). Thus, it may not be a simple exercise to separate core from non-core activities when deciding about the ‘outsourcability’ of any IS activity. As a result, various studies have suggested that at times organizations may tend to outsource these broad, easily identifiable IT activities, part of which may happen to be a core competency (McLellan, Marcolin, & Beamish, 1995; Hancox & Hackney, 2000).
Critical Success Factors Loosely speaking, critical success factors are those attributes that generally lead to success in a busi-
ness. The notion is imprecise, but it has long been recognized that there are generally a small number of activities that, if exhibited or performed well, will create the opportunity for success (Rockart, 1979). Conversely, organizations that do not possess these attributes or perform these functions well will often not be successful. More precisely, CFSs are necessary, but not sufficient, for success in a particular business context. Success at a CSF, or a set of CSFs, enables an enterprise or unit to “compete for the prize,” but it does not guarantee that it will win it. The CSF notion has been widely used in IS contexts, such as IS strategic planning (Pollalis & Grant, 1994; Bullen, 1995; Rockart & Earl, 1996). Here, it is applied in the context of IS sourcing.
Core Competencies and CSFs Although the notions of core competencies and critical success factors emanate, respectively, from the resource-based and industrial economics views of business, they are not mutually exclusive in their application. Although the former has an internal focus that the latter may not, they can coincidefor example, a core competence may be a CSF. Indeed, this may be thought of as an important goal of management: to create core competencies that are, or can be, critical success factors.
A Taxonomy for Classifying IS Activities This leads to the following taxonomy for designating IS activities (adapted from King, 2001). An IS activity may be judgmentally assessed by management to be in one of five categories as shown in the left column of Table 1. (Other logical combinations may be generated, but are not meaningful in this context). To these, we add the general criterion (above) based on inherent required proximity (RP). If an IS activity is judged to not be in the RP cat-
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The Post-Offshoring IS Organization
Table 1. Taxonomy for applying criteria Categories
Recommended
#1. Not currently or potentially a core competence or a CSF
Consider for outsourcing/offshoring (O/O)
#2. Currently both a CSF and a core competence
Not potential candidates for O/O
#3. Currently a CSF and not currently a core competence
Mandatory development/investment
#4. Currently a core competence and a potential CSF
Retain in-house and improve
#5. Potentially a core competence and potentially a CSF
Monitor for possible future O/O
egory and is judged to be in the first numbered category—not CC and not CSF, either currently or potentiallyit should be considered for outsourcing or offshoring. Similarly, IS activities that are evaluated to be in the second numbered category (currently both a CSF and a core competence) are unlikely to be candidates for outsourcing because of their critical importance. An organization would normally wish to preserve such activities, and continue to develop and refine them in ways that are probably best done in-house. IS activities evaluated to be in the other categories present more complex situations. Activities in category #3 (currently a CSF and not currently a core competence) require mandatory development and investment in whatever manner is feasible and has the best chance of achieving the developmental objectives, since the viability of the IS enterprise will be importantly determined by such activities. Activities in category #4 (currently a core competence and a potential CSF) need to be improved, refined, and scaled so that they may be “ready” for a future critical role in the enterprise. Usually, this is best done in-house. The last category (#5) represents a diverse set of activities that may or may not be appropriately outsourced. Some may be “partnered” in order to obtain the complementary skills of a partner that are necessary for further development. Some may need to be developed to a scale that will permit future exploitation, usually through internal development. Still others may require
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only careful monitoring to determine their evolving potential. Clearly, many of the evaluations that will result from applying these criteria are specific to each organization. Moreover, many of Feeny and Wilcock’s (1998) core capabilities are decomposable into various elements, some of which may be outsourced even though they are part of a core capability. Nonetheless, it is feasible to apply these criteria to specific IS activities and to draw conclusions that are likely to be appropriate for an organization. Such an evaluation presents a preliminary designation that may be an appropriate starting point for managerial evaluation of the costs and benefits of outsourcing each activity.
IS ACTIVITIES THAT WILL BECOME OF INCREASING IMPORTANCE IN THE POST-OFFSHORING ENVIROMENT Based on the author’s experience with outsourcing issues and with the practical application of the framework in more than 25 firms, a number of IS roles have been judged to be “non-outsourcable” in the majority of firms. These are shown in Table 2 in three broad categories: “activities related to external relationships”; “activities related to the development,” “customizing and implementation of systems”; and “business and IS strategic activities.”
The Post-Offshoring IS Organization
Table 2. Common non-outsourcable IS activities Activates Relating to External Relationships • Contract Negotiation and Management • Relationship Management • Developing and Implementing Partnerships, Strategic Alliances, and Joint Ventures • Vendor and Partner Assessment and Selection • Risk Assessment and Management • Technology Assessment and Monitoring • Awareness of National Cultures Activities Related to the Development, Customizing, and Implementation of Systems • Systems Implementation and Integration • Mission-Critical Systems Development and Testing • Systems Testing • Security Business and IS Strategic Activities • Business Process Redesign • Integrated Business and IS Planning • IS Personnel Development
Activities Related to External Relationships Seven activities fall into the category “Activities Related to External Relationships” as shown in Table 2: contract negotiation and management; relationship management; developing, negotiation, and implementing partnerships, strategic alliances, and joint ventures; vendor and partner assessment and selection; risk assessment and management; technology assessment and monitoring; and awareness of national cultures.
Contract Negotiation and Management One of the things that the “early birds” in offshoring quickly realized was that when one offshores an activity, it needs to be replaced by another activity that will focus on developing, implementing, and controlling the contract. Although the basic offshore contract will be drawn up by attorneys, they are usually not well-
informed about IT and leaving the task to them is often problematic. For instance, IS people need to provide expertise on service-level benchmarks that should be put into the contract. IS people will also know which areas of activity are most dynamic and therefore most likely to require changes as the term of the contract progresses. This will permit the contract to be written in a manner that will accommodate reasonable change rather than, as has been the situation in some instances, allowing changes to become so costly that the client believes that the vendor, who is in something of a monopoly position when changes are requested, is taking advantage of their position (King & Malhotra, 2000).
Relationship Management Effective relationship management has been frequently shown to be related to outsourcing success. Many firms that thought they could offshore
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through a contract and then do little to monitor and manage the client-vendor relationship have been surprised with negative results from this style of outsourcing. In these instances, communications and coordination processes and their associated costs often were not given much attention. For success in IS outsourcing, and particularly in offshoring, close attention must be paid to everything about the client-vendor relationship, from the criteria for selecting a vendor, to the frequent monitoring of progress, to the level of control exerted over the vendor, and to the level of trust that is developed in the client-vendor relationship. None of these things can be ignored or taken lightly, since all have been shown to be critical success factors for effective outsourcing (Cooper & Slagmulder, 2004; Choudhury & Sabherwal, 2003; Kim & Chung, 2003; LangfieldSmith & Smith, 2003; Goles, 2001; Lee & Kim, 1999; Das & Teng, 1998; Willcox & Kern, 1998; Klepper, 1995).
Developing, Negotiating, and Implementing Partnerships, Strategic Alliances, and Joint Ventures Although many client-vendor relationships are referred to as “partnerships,” few of them are much more than contractual business relationships. However, this is likely to change in the future as two or more organizations recognize that they have complementary skills and that for one organization to develop the entire range of skills that are necessary for success in an area of IS is excessively expensive. Whether these cooperative ventures are formatted as real partnerships, or strategic alliances or joint ventures, the identification of the need for cooperative effort, the negotiation of the “deal,” and the implementation of an arrangement that provides benefits to all parties is a skill that IS departments increasingly need to develop.
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Vendor and Partner Assessment and Selection Since the days of the early computer era when outside vendors were used primarily for hardware, vendor assessment and selection have played a role in the IS organization. However, in this new era, it becomes of greater importance. The success or failure of the entire IS function can rest on the performance of a few vendors to which critical tasks have been outsourced. So, picking the “right” vendors becomes an IS critical success factor. Having a methodology and people who are skilled in applying it is key to success. The same is true of potential partners and alliance participants. The IS organization must be aware of the array of potential partners and not merely respond to opportunities that are presented in a haphazard fashion. This involves identifying potential partners and their capabilities, assessing each for their “fit” with one’s organization, and for likely new projects for which complementary skills may be required (Goles, 2001).
Risk Assessment and Management Risk assessment and management will become a greater focus in vendor selection and in continuing relationship management. The risks that are involved in performing critical functions in thirdworld countries have not been fully recognized by most firms who have begun offshoring. Everything from political risk, to risks of natural disasters, to the risks associated with marginal in-country communications infrastructures, needs to be taken into account and monitored. After all, India—the primary location for offshore vendorsalmost became involved in a nuclear confrontation only a few years ago, and while international communications from India have improved dramatically, local communications and transportation infrastructures are often marginal. This leads to greater risk, especially when unplanned activities must be performed. Often, this will be addressed using
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“backup” sites, often in the Philippines, but this involves a new layer of complexity in the overall management process (Snow, Straub, Baskerville, & Stucke, 2006; Vijayan, 2004).
Technology Assessment and Monitoring In an outsourcing/offshoring environment, a technology assessment capability must be maintained, or developed, by the outsourcing client since the vendor’s objectives with regard to technology are not always consistent with those of the client. Many vendors wish to consolidate the work of many clients on their own legacy technology to achieve economies of scale and high returns. This may not always well serve specific clients, even if it meets their initial cost goals, since some clients might benefit greatly from greater accuracy, reduced cycle time, or a greater security level than is offered by the vendor (Orlikowski & Robey, 1991). The monitoring of technological advances may, in fact, be performed outside the organization. But the CIO and other IS executives must be certain that they are aware of these developments, if only because it will enable them to anticipate technological changes that a vendor may be able to consider. The need to independently keep abreast of technology becomes apparent to every CIO shortly after he or she outsources operational computing systems. The outer office is no longer filled with vendor salespeople because the outsourcing client is no longer a potential customer for entire categories of hardware, software, and services. Only on recognizing that the outer office is no longer full do many IS executives realize how much important technological information they formerly obtained from salespeople. Those “pests waiting for an appointment” (as one IS executive put it) suddenly are then recognized for their value, and the IS manager realizes that he or she must do something to replace those old sources of information concerning technology. The client must also independently assess evolving technology in order to maintain an
awareness of potential service-level improvements that may become feasible through technological advances. The client must continuously be aware of the offerings and capabilities of other offshore vendors as well. Even if a firm is involved in a long-term outsourcing contract, this is necessary. It also illustrates why negotiations and the terms of the contract are so important. No client should allow themselves to be truly “locked into” a long-term contract in which the vendor might attempt to provide, on a continuing basis, service levels that are less than those which other vendors offer. Contracts must provide for the continuous benchmarking of service levels against other providers (King & Malhotra, 2000).
Awareness of National Cultures Another critical need in the post-offshoring era will be developing an understanding of relevant foreign cultures. For instance, the Indian culture is quite unique. Although the caste system has been officially outlawed, its vestiges remain strong. In many vendor nations, businesses and government agencies operate on the routine basis of bribery, hiring of relatives, unaccountability, and otherthan-merit-based promotions. Of course, large Indian outsourcing vendors are much less traditional and more Westernized, but one need only look at the marriage system to recognize how much traditional cultural practices permeate all aspects and levels of Indian society. Anyone who routinely deals with foreign vendors must recognize these and many other aspects of the national culture of the vendor, in order to understand the proposals of and responses given by the employees of foreign vendors.
Activities Related to the Development, Customizing, and Implementation of Systems Four activities fall into this category as shown in Table 2: systems implementation and integration, 1529
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mission-critical systems development and testing, systems testing, and security.
Systems Implementation and Integration Systems implementation and integration is another area in which competence must be maintained and enhanced by an IT department that is going out of the programming and systems development “business” (which will increasingly be the norm). Increasingly, software will be developed by vendors, purchased by clients, and then customized and integrated with other internal and legacy systems. These implementation and integration processes may be aided by external consultants, but they often cannot be effectively done by outsiders; an internal capability that reflects a deep understanding of the business, its operations, goals, and priorities, is required. Even when external consultants are used in these roles, the goal of the client must be to have their own personnel learn the skills that are necessary to perform these tasks with ever-less levels of outside help (Ko, Kirsch, & King, 2005).
Mission-Critical Systems Development and Testing Some development and testing of mission-critical software/systems must be retained in-house since this is where the essence of one’s informationbased core competence resides. Most organizations have trade secrets and/or critical key processes embedded in their software and systems that they would not wish to be made available to outsiders.
Systems Testing The testing of software is typically performed by the developer, but in the case of offshored development, clients should perform their own post-delivery testing.
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Security Sharing critical processes and software with vendors may increase risk to some degree. Of course, most vendors apply elaborate security systems and procedures. Indeed, in some cases, consultants have found that vendor security is better than client security. Nonetheless, the ultimate responsibility for the security of data, especially customer data, is with the client, so the necessary skills must be available in-house to assure adequate security.
Business and Strategic Activities Three sets of activities fall into the category “Business and Strategic Activities” as shown in Table 2: business process redesign, integrated business and IS planning, and IS personnel development.
Business Process Redesign Business processes cannot be effectively redesigned at a distance; direct contact between analysts and employees who are involved in operating the processes is required. Therefore, while many offshoring contracts relate to operating business processes, the analysis and modeling skills that are required for process redesign must reside in the organization’s internal IS function (Sethi & King, 1998).
Integrated Business and IS Planning Strategic IS planning is the link between the business strategy and the mission, strategy, goals, and architectures for IS in the organization. As such, this planning process requires in-depth understanding of the firm. It should (almost) never be outsourced or offshored. IS strategic planning has been integrated into strategic business planning in many firms (Teo & King, 1997). This activity will need to be
The Post-Offshoring IS Organization
maintained, as no firm can ignore the potential role of IT in its future business strategy. When outsourcing takes place, top managers tend to presume that IT’s role in the business is lessened and they may give less attention to it. IT people must understand business strategy and IT’s role in it (even when large segments of traditional IT have been outsourced) and keep these issues in the mix of those treated in strategic business planning.
IS Personnel Development IS employee development programs involving the IS jobs that are kept in-house as well as the “IS interface” jobs in the marketing, production, finance, and other “user” departments should also be retained in-house. Such programs may involve on-the-job training and/or job rotation through IS and business functional job assignments. In that way, career progressional plans can be developed involving the set of IS functions that are retained.
CONCLUSION Offshoring and outsourcing must be treated as a major and central IS paradigm for determining the content and structure of the IS organization in the future. They can no longer be thought of as interesting appendages to basic IS. The specific skills that are necessary for performing the activities that will remain in the IS portfolio in the new post-offshoring world of outsourcingcontract negotiation and management; relationship management; developing and implementing partnerships, strategic alliances, and joint ventures; vendor and partner assessment and selection; risk assessment and management; technology assessment and monitoring; awareness of national cultures; systems implementation and integration; mission-critical systems development
and testing; systems testing; security; business process redesign; integrated business and IS planning; and IS personnel developmentmust be given central focus in the IT organization of the future. Many of these are typically not major foci of today’s IS departments. This means that IS departments will need to change in the post-offshoring environment. The focus for systems implementation and integration will need to shift from an internal orientation to one that addresses working in joint consultant-client teams. For instance, the typical ERP implementation project, in which joint teams work, often for several years, to customize and implement a vendor-supplied system to meet a firm’s unique needs, is a good prototype for a process that will become increasingly common for an increasingly diverse set of vendor-supplied systems. Thus, inter-firm implementation processes will need to be more fully developed and studied (Ko et al., 2005). This means that in this new post-offshoring era, IS people will need to understand negotiation techniques, contract law, and change management, and develop the “softer” skills that are required in partnering and developing trust between client and vendor. Strategic issues such as understanding the sort of benefits that may be expected from various kinds of potential “strategic alliances” with vendors will become essential. All of the key strategic management conceptscore competencies, critical success factors, and so forthwhich have been little known to IS professionals, must become familiar to them through revised curricula and training.
REFERENCES Aspray, W., Mayadas, F., & Vardi, M.Y. (Eds.). (2006). Globalization and offshoring of software: A report of the ACM Job Migration Task Force. Retrieved from http://www.acm.org/globalizationreport
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Barthelemy, J. (2003). The hidden costs of IT outsourcing. Academy of Management Executive, 17(2), 87-100. Barthelemy, J., & Adsit, D. (2003). The seven deadly sins of outsourcing. Academy of Management Executive, 17(2), 87. Bullen, C.V. (1995). Reexamining productivity CSFs: The knowledge worker challenge. Information Systems Management, 12(3), 13. Carr, N.G. (2003). IT doesn’t matter. Harvard Business Review, 81(5), 5-12. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, 14(3), 291-314. Cooper, R., & Slagmulder, R. (2004). Interorganizational cost management and relational context. Accounting, Organizations and Society, 29(1), 1-26. Das, T., & Teng, B. (1998). Between trust and control: Developing confidence in partner cooperation in alliances. Academy Management Review, 23(3), 491-512. Davis, G., Ein-dor, P., King, W.R., & Torkzadeh, R. (2007). IT offshoring: History, prospects and challenges. Journal of the Association for Information Systems. Earl, M.J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26. Feeny, D.E., & Wilcocks, L.P. (1998). A framework for planning the inhouse IS function and keeping up with the pace of technological change.” Sloan Management Review, (Spring), 9-21.
and perception. Information Systems Journal, 10(3), 217. Insinga, R.C. (2000). Linking outsourcing to business strategy. Academy of Management Executive, 14(4), 58. Kim, S., & Chung, Y.S. (2003). Critical success factors for IS outsourcing implementation from an interorganizational relationship perspective. Journal of Computer Information Systems, 43(4), 81-90. King, W.R. (1994). Strategic outsourcing decisions. Information Systems Management, 11(4), 58. King, W.R. (1995a). Creating a strategic capabilities architecture. Information Systems Management, 12(1), 67. King, W.R. (1995b). Creating internal markets. Information Systems Management, 12(2), 61. King, W.R. (2001). Developing a sourcing strategy for IS: A behavioral decision process and framework. IEEE Transactions on Engineering Management, 48(1), 15. King, W.R., & Malhotra, Y. (2000). Developing a framework for analyzing IS sourcing. Information and Management, 37(6), 323-334. Klepper, R. (1995). The management of partnering development in I/S outsourcing. Journal of Information Technology, 10(4), 249-258. Ko, D., Kirsch, L.J., & King, W.R. (2005). Antecedents of knowledge transfer from consultants to clients in enterprise system implementations. MIS Quarterly, 29(1), 1-27.
Goles, T. (2001). The impact of client vendor relationship on outsourcing success. Unpublished PhD Dissertation, University of Houston, USA.
Langfield-Smith, K., & Smith, D. (2003). Management control systems and trust in outsourcing relationships. Management Accounting Research, 14(1), 281-307.
Hancox, M., & Hackney, R. (2000). IT outsourcing: Frameworks for conceptualizing practice
Lee, J., & Kim, Y. (1999). Effect of partnership quality on IS outsourcing success: Conceptual
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framework and empirical validation. Journal of Management Information Systems, 15(4), 29-61. McLellan, K., Marcolin, B.L., & Beamish, P.W. (1995). Financial and strategic motivations behind IS outsourcing. Journal of Information Technology, 10(4), 299. Orlikowski, W., & Robey, D. (1991). Information technology and the structuring of organizations. Information Systems Research, 2(2), 143-169. Peppard, J.W., Lambert, R., & Edwards, C.E. (2000). Whose job is it anyway?: Organizational information competences for value creation. Information Systems Journal, 10(4), 291-323. Peppard, J.W., & Ward, J. (2004). Beyond strategic information systems: Toward an IS capability. Journal of Strategic Information Systems, 13, 167-194. Pollalis, Y., & Grant, J.H. (1994). Information resources and corporate strategy development. Information Strategy: The Executive’s Journal, 11(1), 12. Quinn, J.B., & Hilmer, F.G. (1994). Strategic outsourcing. Sloan Management Review, 35, 43. Rockart, J.F. (1979). Chief executives define their own data needs. Harvard Business Review, 57(2), 81. Rockart, J.F., & Earl, M.J. (1996). Eight imperatives for the new IT organization. Sloan Management Review, 38(1), 43. Ross, J.W., Beath, C.M., & Goodhue, D.L. (1996). Develop long-term competitiveness through IT assets. Sloan Management Review, (Fall), 31-42.
Saunders, C., Gebelt, M., & Hu, Q. (1997). Achieving success in information systems outsourcing. California Management Review, 39(2), 63-79. Sethi, V., & King, W.R. (Eds.). (1998). Organizational transformation through business process reengineering. Upper Saddle River, NJ: Prentice Hall. Snow, A.P., Straub, D., Baskerville, R., & Stucke, C. (2006). The survivability principle: IT-enabled dispersal of organizational capital. In M. Warkentin & R.B. Vaughn (Eds.), Enterprise information security and assurance (pp. 150-166). Hershey, PA: Idea Group. Teo, T., & King, W.R. (1997). Integration between business planning and information systems planning. Journal of Management Information Systems, 14(1), 185-214. Vijayan, J. (2004). On-the-job hazards: Outsourcing. Computerworld, 38(1), 28-29. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171. Willcocks, L.P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK. European Journal of Information Systems, 7(1), 29.
ENDNOTE 1
Feeny and Willcocks omit “project management” from their list although on the basis of their analysis, it should be there. Their reason is the somewhat idealistic notion that IT project management should be a business, not an IT, function.
This work was previously published in the Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 77-88, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.12
Globalising Software Development in the Local Classroom Ita Richardson University of Limerick, Ireland Sarah Moore University of Limerick, Ireland Alan Malone Siemens Corporate Research, USA Valentine Casey University of Limerick, Ireland Dolores Zage Ball State University, USA
ABSTRACT In the dynamic global economy that exists today the operation and structure of organisations have had to adapt to the reality of the information revolution which has taken place. This has been the case within the software industry where global software development (GSD) has become a popular strategy and software development has become a globally sourced commodity. Given the requirement for graduates to operate in this type of environment, we as educators considered
how our teaching methods could be developed and enhanced to instil GSD competencies within our graduates. We provided students with the opportunity to take part in a learning experience that transcended geographical and institutional boundaries, giving them first-hand experience of working within globally distributed software teams. Two separate projects were undertaken. One was with Siemens Corporate Research which was part of a larger project. The focus of this project was the shadowing of the development of an actual geographically distributed software
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product. The second project was carried out in collaboration with Ball State University, and the focus of this endeavour was virtual team software testing. Extensive qualitative research was undertaken on the data provided by the students. We identified three specific forms of learning which had taken place: (1) pedagogical, (2) pragmatic, and (3) the achievement of specific globally distributed competencies. Our findings would confirm that mimicking real-work settings creates the possibility of giving rise to the range of learning benefits that are associated with truly problem-based learning environments.
INTRODUCTION This chapter explores the reality of the software industry today, which is becoming more virtual and globally distributed in its methods of operation. It discusses the educational implications of these strategies and how they impact graduates. It looks at what measures can be taken to prepare students to operate in this dynamic and virtual environment. It outlines two projects in which masters students participated in that transcended geographical and institutional boundaries. The projects and the students’ experiences were researched and analysed. The results, which are presented here, demonstrate the benefits associated with utilising a hands-on, truly problem-based learning environment.
GLOBAL SOFTWARE DEVELOPMENT GSD has given rise to the implementation of new types of development teams and project structures within organisations. In many software development organisations, teams are no longer local, but operate within a virtual team environment. As a result they are fundamentally different in their structure and modus operandi to those of a
single site team. For educationalists, the emergence of new team and organisational structures require that graduates from software engineering courses be made familiar with these new methods of operation. The number of organisations employing virtual,1 team-based globally distributed software development strategies continues to increase (Powell, Piccoli, & Ives, 2004). GSD in essence allows distributed teams to split up the tasks of a project and distribute them as separate jobs (Grinter. Herbsleb, & Perry, 1999). This allows development decisions about each project task to be made with a degree of independence (Herbsleb & Grinter, 1999). However, managing this type of team is not a straightforward endeavour. Some of the difficulties encountered include the problems of understanding requirements and the testing of systems (Toaff, 2002). These difficulties are compounded by cultural and language differences, lack of communication, distance from the customer, different process maturity levels, testing tools, standards, technical ability, and experience. These issues are further augmented by the lack of “trust-building” communication techniques. Trust is important for software development teams to work together successfully, and it is harder to establish trust within virtual teams than it is with local teams (Robey, Khoo, & Powers, 2000), rising from the fact that faceto-face communication methods that can build trust are generally not present in a distributed team (Pyysiainen, 2003). Equally, established trust gained from co-located experiences can deteriorate over time in a distributed setting (Casey, 2007). To address these substantial issues, project management must change from the traditional to the virtual for a GSD strategy to be successfully implemented.
Making GSD Work As the GSD team is dispersed across geographical locations, it operates differently to the co-located
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team. Regardless of the strategy implemented, distance is responsible for the introduction of barriers and complexity. These directly impact on the management and operation of the GSD team. However, other related factors also come into play. Coordination, visibility, communication, and cooperation are all negatively impacted by distance, and if their impact is not identified and correctly managed, they can produce further barriers and complexity within a project (see Figure 1). Effective coordination is a key element in the success of a geographically distributed software development project. This includes undertaking realistic project planning and risk evaluation given the specific requirements of the GSD environment. Work must be partitioned between sites based on the technical needs of the project and on the capabilities and experience of the team members at different geographical locations. Furthermore, there is a requirement for the effective utilisation of technology across sites and between team members. Procedures should be put in place to facilitate and monitor the level of cooperation between team members in all locations. These should also allow for the identification and addressing of problems if and when they arise.
Visibility is another important factor in the successful operation of the global team. It is important for management to ensure that roles and responsibilities are clearly articulated. Each team member should be informed of work product requirements and due dates. This requires effective reporting schedules and a visible reporting strategy. There is a requirement for continuous visibility into the team’s activities and operation at all locations. Team members should also be aware of the management structure within the team across all sites. Communication issues should not be allowed to become a barrier to the successful operation of a distributed software development team. This necessitates the development and implementation of a common vocabulary for all aspects of the project. Effective communication tools, which are utilised and understood by all team members, should be provided. Communication between remote team members is normally electronic and asynchronous in nature with limited opportunities for synchronous contact, depending on the time zone difference between locations. The global team normally operates in a multicultural and multilingual environment, which may cross
Figure 1. Factors in virtual development (Source: Casey, 2007)
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organisational boundaries (DeSanctis, Staudenmayer, & Wong, 1999). Cooperation within global teams is essential to achieve a successful implementation of a GSD strategy. In distributed teams there are limited opportunities for one-to-one contact between remote colleagues. Project managers need to consider how team relationships can best be developed and fostered. The specific implications of cultural diversity on the project operation must be ascertained, monitored, and addressed. All team members should be given cultural training. The identification of a relevant subject matter expert (SME) is important, and team members should be informed who this is. Once identified the SME must be willing and able to provide the required support to local and remote colleagues.
EDUCATING THE GRADUATE One of our tasks as software engineering educators is to produce graduates for the software market, and with the increase in GSD worldwide, it is incumbent on us as educators to provide these graduates with a background that allows them to work in the global environment. To operate in the global environment students need to be aware of the factors involved in GSD.
Through research carried out by the authors (Casey, 2007; Casey & Richardson, 2005), specific competencies that are needed have been identified. From the perspective of the graduate, these can be broadly divided into two categories: (1) competencies required by both the software developer and manager and (2) those required more significantly by the software development manager (see Table 1).
Competencies Required by the Software Developer and Software Manager When working in the global environment, communication and language takes on greater importance than when working in a local team. English has become the international business language and is extensively used in GSD teams. However, many co-workers will not have English as their first language, therefore, misunderstandings can occur, as there may be different dialects of English and/or a number of regional accents in use (Kiel, 2003). A further consideration is the use of communication tools which must be done correctly and in such a way that it benefits and not hinders the project. Global teamwork is often carried out through asynchronous communication tools like e-mail (Boland & Fitzgerald, 2004).
Table 1. Competencies required by the software graduate Software Developer and Manager
Software Development Manager
Communication and language
Visibility and coordination
Use of communication tools
True cost of GSD
Culture
Technology transfer and knowledge management
Temporal issues
Roles, responsibilities, and competencies management
Cooperation
Partitioning of work
Software process
Management of fear and trust
Use of process tools
Motivation
Reporting schedule
“Teamness” Risk management
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This is not the environment in which graduates or locally experienced software developers are used to working—they need to learn and understand how to use language, communication, and communication tools efficiently and effectively in the global development team. An advantage of having a variety of cultures involved in one team is diversity and bringing diversity together to work toward a common goal can increase the innovation within a project (Ebert & De Neve, 2001). However, those working within global software teams must learn to understand and appreciate cultural diversity. Cultural differences include values, language, approach to authority, concepts of space, regard for material goods, and time keeping (Carmel, 1999; McDonough, Kahn, & Barczak, 2001). Cultural differences, unless understood by all involved, can have a negative impact on the operation of the global team. Those working on GSD teams should also have an appreciation of the temporal issues that may arise. A strategy which has been employed in establishing global teams has been to have team members in two or three time zones around the globe. For individuals working on such teams, this requires them to ensure that their working hours overlap somewhat with their remote colleagues (Casey & Richardson, 2004; McDonough, Kahn, & Barczak, 2001). Furthermore, responses to communications need to be made in a timely manner. Response delays can cause frustration and decreased motivation among team members. These difficulties can be exasperated if the person required is remotely situated (Herbsleb & Grinter, 1999). As mentioned previously, cooperation is required for a global team to be successful. An advantage for GSD is that, given the diversity of global teams, the acquired mix of skill sets and life experiences within a team can result in improved coordination among GSD team members (Ebert & De Neve, 2001). However, geographical distance reduces the level of informal contact that
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can help build better working relationships, and consequently, support cooperation (Herbsleb, Mockus, Finholt, & Ginter, 2000). In the global environment, and without this level of informal contact, software developers need to develop cooperation between themselves and local and remote team members. They need to be able to modify their locally focused competencies to work successfully in the global environment. With the increase in use, internationally, of software processes and the implementation of models such as the CMMI2sm and ISO15504 among others, software developers are becoming more au fait with the implementation of processes. However, processes in the global environment are typically different to those in the local co-site operation. They need to be set up with global information flow, global reporting, and the effective division of labour in mind. For example, if a wiki3 is being used, project members need to continually keep it updated as they will not have the informal contact which, often in the local situation, allows team members to know what is happening on a project. Process tools can help local teams in managing processes such as configuration management, risk management, and testing. In the global environment, they can ensure that even though team members are not discussing issues on a face-to-face informal basis, processes can be efficiently controlled. Along with the technical use of such tools, team members need to understand the tools’ effectiveness and requirements. As mentioned previously, visibility of project activities is important. Culture has an effect on whether overruns in project tasks are reported. Furthermore, teams may be set up so that the project manager is based in one location only. To ensure visibility and to minimise difficulties arising through differences across global teams, it is important that regular scheduled reports are made to all team members. These reports should be timely and accurate and submitted by all team members.
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Competencies Required by the Software Manager In addition to the competencies required by the software developer, the software manager working in the global environment must be able to ensure that the team for which he/she has responsibility can work effectively. This requires them to bring additional competencies and requirements to the team. They are responsible for ensuring the visibility of, for example, tasks, team members, project structure, and reporting structures across the global team. They are likely to be co-located with some team members and may never meet face to face with all their global team. To coordinate the work of a global team in this environment may cause difficulties if they are not dealt with in an effective manner. Companies are not always aware of the “true cost” of GSD, and indeed there is no “silver bullet” that can provide them with that information. However, it is something about which the software development manager should be aware. Negative influences within a global team are high risk and can cause decreases in productivity. For example, lack of communication can reduce the effectiveness of a project and can occur easily through the misuse of communication tools (Casey & Richardson, 2004). Moving from a local co-site team structure to a global team environment requires technology transfer and knowledge management. The global software development manager has to understand how they can do this effectively. If new project members are being employed at an off-site location (normally global), how can these people be given the same transfer of technology and knowledge as would happen in a local environment where there are informal discussions and the availability of experts? This needs to be correctly managed with an effective training strategy put in place. The global project manager must be able to decide upon the roles and responsibilities within
the project team so that the team can work successfully together. In doing this, they must recognise the variety of competencies that individuals are bringing to the project, and they need to manage these competencies for the project’s benefit. Considering the lack or limited opportunity for informal contact between teams, the impact this has in a geographically dispersed group is extremely important, and the failure to be cognisant of these factors can cause the team’s effectiveness to be reduced (Casey, 2007). Once the project team has been structured, the project manager must be able to partition the work in such a manner that the team’s effectiveness is maximised. In some cases, the partitioning can be based around the software development life cycle, where the team members at each location undertake one element of the life cycle, for example, development or testing, while control is maintained at a central location. Another model, which is becoming increasingly popular, is to set up virtual teams, where team members work as one team even though they are located globally. This is not an easy task for the project manager to undertake (Nidiffer & Dolan, 2005). Within countries, such as Ireland, who no longer are considered a low-cost economy, people who work on project teams can perceive the implementation of GSD as a step in the transfer of their jobs to low-cost economies in Eastern Europe and the Far East. This can, in turn, lead to an element of fear and mistrust among the project team members, which would not exist in a local team. The role of the software development manager is to understand these fears and address them where possible. The objective is to ensure that the team does not become de-motivated about the work they are expected to do. Maintaining a level of motivation is an important task that should not be overlooked by the manager. This in turn will facilitate the development of “teamness” within the group, which has to be built across communities and geographical locations. It cannot be done in the informal manner in which local teams can
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gel together, through casual meetings on the corridor, or through more company-based structured activities, for example, starting a sports and social club (Linnane & Richardson, 2006). The GSD manager has to consider all the risks involved in setting up and operating their global software development team. While risk management is an important element within a co-site software process and it is a level three process area of the Capability Maturity Model Integrated (CMMI4sm). The additional risks involved in managing a GSD team are significant and need to be specifically acknowledged and addressed.
Providing GSD Competencies to the Graduate Given the requirements emerging from GSD, the graduate of the 21st century will not only be required to have competencies that are useful in the local development environment; they must also, for the success of GSD initiatives, demonstrate those other competencies that allow them to operate effectively in the global environment. As educators, we considered how our teaching methods could be developed and enhanced to instil these GSD competencies within the graduate. Our experience has shown that we must be prepared to introduce experiential learning to the student through extending education across international boundaries, cooperating globally between educational institutions and others, thus giving the graduate an educational experience which could not be provided in the local classroom. In the light of these principles the projects described in subsequent sections were undertaken. When introducing an experiential dimension to student learning, the features of the learning environment can become different and ultimately more beneficial than they might otherwise be. By creating a learning experience that mimics the dynamics, pressures, and puzzles of “real-life” GSD environments, we present a learning context that has the potential of addressing some of
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the problems that may be associated with more conventional learning modes. In the light of these principles the projects described in the section, Global Software Development in the Classroom, were undertaken.
EDUCATIONAL OBjECTIVES ASSOCIATED WITH INTERVENTION The GSD team structure and process created a problem-based learning environment for students, the benefits of which are well documented, for example, in Savin-Baden (2004) and Barrett (2005). In particular, the benefits of group work in which several students work together to solve a problem or to achieve a task have been evidenced in the educational literature. Joy (2005) has recently shown the particular way in which group working experiences can be beneficial in the context of a computer science curriculum by highlighting learning and experiential outcomes such as the application of knowledge, motivation, advanced cognitive competencies (or deep learning), and self-direction. The importance of ideological development is also relevant in the way that Reynolds (1994) has suggested. It is argued that working on real problems in a group setting can prepare students to become more collaboratively orientated and subsequently more willing to participate in collective effort. By setting up virtual teams for software engineering students, we also argue that it is possible to inject several more specific learning benefits than the ones that have been briefly outlined. By learning from direct and relevant experience, students’ own sense about the plausibility of their learning environment becomes stronger. Levitt and March (1988) and Luo and Peng (1999) are among many who highlight the importance of real-world experience that is applied in the context of a genuinely and realistically problematic task. Being part of a virtual team in which other pedagogical support is also available can bestow
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a reflective dimension on learning that can allow students to learn more about themselves through reflection of the ways in which they engaged with the process. Reflective practice in a “safe” environment is a process that can have both psychological and pedagogical benefits. It dismantles defensive reactions to problems and errors and allows participants to examine them in order to enhance understanding and cognitive command of their features. Indeed, defensiveness in many work environments often prohibits the capacity for learning in ways that are damaging to individuals, teams, and their organisations (Tjosvold, Yu, & Hui, 2004). Setting up early professional experiences in which teams can effectively reflect on and analyse their mistakes as well as their successes in a supported learning environment is one of the beneficial features that we hoped would prevail in this particular learning innovation. We hypothesised that this type of innovation would create professional precedents that would make it more likely that participating students would engage professionally in more learningoriented ways. This innovation went beyond just simulating an environment; it allowed students to become contributory members of GSD teams. This could have also created insights about how a sense of responsibility to deliver their part of the task is experienced, and how this sense of responsibility interacts with their learning. These are the kinds of integrated insights that might not otherwise have been possible using other modes of learning. We argue then that the sense of engagement and responsibility was automatically enhanced. These dynamics of learning are ones that have been highlighted as crucial to the creation of self-directed, responsible learners in higher education (e.g., Hwarng, 2001). These real GSD experiences also have the potential to raise student awareness of the importance of related competencies that they might not otherwise have considered important. Such competencies include those related to communication
and global interaction; language and intercultural awareness; and functioning effectively as part of a team (self awareness; creativity; formulation and implementation processes; problem solving; time management; and task completion). By designing the learning experience described in this chapter, we hoped that we would be able to give rise to the learning benefits outlined previously. The following section captures the insights that participating students provided when asked to reflect on their experiences as part of the GSD team to which they had been assigned.
GLOBAL SOFTWARE DEVELOPMENT IN THE CLASSROOM The University of Limerick (UL) delivers a Master of Science course in software engineering. Participants have previously completed a related undergraduate degree course. To date, one-third of the students are working in software development and are part-time. The remaining students are pursuing the degree in full-time mode—85% of these have no prior industrial experience, having commenced the degree directly after completing their undergraduate studies. When pursuing the MSc degree, students study a variety of modules which include software engineering quality, software engineering requirements, human computer interaction, software design, software development paradigms, software evolution, software engineering system design, and software engineering fundamentals. These modules account for 60% of course credits, and the remaining 40% of course credits are obtained through a final dissertation, encompassing a major study undertaken by the student. As educationalists, and given the importance and growth of GSD within both multinational and small to medium-sized companies in Ireland, we strive to expose graduates from this course to GSD. We do this in some cases through lecturing
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on the topic. However, as we aim to maximise the pedagogic experience for students we have implemented two specific GSD projects for the course, where students were given the opportunity to participate in situated GSD projects. One of these projects, Ard na Croise,5 is carried out in conjunction with Siemens Corporate Research, USA and has been running for 2 years. In each year, there has been one team of five people from the MSc class involved. Of these, nine had no prior industrial experience. The other project, Ainm an Eolaithe,6 is a collaborative project with Ball State University, USA and has run during one course, with 12 full-time students participating in UL. Ten of these students had no prior industrial experience. Four of these students also participated in Ard na Croise. In implementing these projects we aimed to equip students with the competencies required for software developers and managers as given in Table 1, while additionally expecting that at least some of the competencies required by software development managers in working with globally dispersed teams will be attained by the participants.
PROjECT DESCRIPTIONS Ard na Croise with Siemens Corporate Research Siemens Corporate Research, Inc. (SCR) has been conducting research aimed at developing a better understanding of the issues and impact of various practices with respect to GSD. By making this investment SCR hopes to establish itself as a GSD centre of excellence that can assist other Siemens operating companies to cope with the unique complexities of conducting GSD. SCR, in conjunction with Harvard Business School, University of Limerick, Carnegie Mellon University, Monmouth University, Technical University of Munich, the Indian Institute of Information Technology Banga-
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lore, University of Toronto, Penn State University, and the Pontifícia Universidade Católica do Rio Grande do Sul (PUCRS) in Brazil have set up an experimental geographically distributed development project (GSP) using student teams to study associated issues. The project ran for 2 years, with different students involved in the teams each year within the participating institutions.
Organisation of the Global Studio Project The project simulates a hub-and-spoke model. The hub is the central team at SCR in Princeton orchestrating the effort, and the spokes are the remote teams consisting entirely of participating students. The central team is responsible for project management, requirements, architecture, testing, and integration of the system. The remote teams are responsible for design, development, and unit tests for defined work packages that correspond to code modules or subsystems defined by the central team. Interactions between the central and remote teams are managed by the role of a supplier manager. There is a supplier manager for each remote team and the incumbent of this role is a member of the central team. In the first year of the project the central team was staffed by four members of SCR’s technical staff (part time) and two masters students (full time) working onsite at SCR. The team consisted of several roles: architect, requirements engineer, project manager, supplier manager, and build meister. The build meister handled the system testing, integration, configuration management, and delivery of artefacts from the teams. For the second year of the project, the structure of the central team changed. It was staffed with four interns working full time on the project along with one member of SCR’s technical staff working part time in a supervisory capacity. Team roles were similar to the first phase but evolved to include an infrastructure manager, quality assurance manager, process manager,
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integrator, and wiki administrator. The role of a build meister was abolished as it encapsulated several key responsibilities that could be split and assigned to various central team members. Three graduates from the University of Limerick with an MSc in software engineering were central team members in the second year, one of whom became the central team contact for UL. Remote development teams were set up at five universities across the globe in the first year. The teams consisted primarily of masters or graduate students in the field of software engineering. UL, Carnegie Mellon University, Technical University of Munich, and the Indian Institute of Information Technology each had one team while Monmouth University had three teams. In the second year of the project, an additional student team was established in PUCRS in Brazil. Each team member committed a specified number of hours each week on the project, taking the academic commitment within their own university into account. Each team had a direct contact on the central team.
Ard na Croise: UL’s Involvement in the Global Studio Project Participation by the MSc in software engineering students at UL in the Global Studio project has been implemented as part of the MSc dissertation process. Students are expected to research a topic relevant to their degree. Students who chose to participate in the GSP project were expected to become reflective practitioners within the project and use this analysis to compare with their chosen aspect of GSD in the “real world.” For example, dissertations included a comparison of project management in the local versus the global, and how communication is carried out within global project teams. In each year, five students volunteered to participate in the SCR GSP project. In the first year, none of the students had previous industrial experience and did not know each other prior to commencing the course a few weeks earlier.
Each of the students assumed a role within the team—project leader, software architect, technical support, tester, and quality assurance. These roles were decided on by the team members themselves without any input from the supervisor. Internally, within the university, students were given the software and hardware that they required. This was located in a laboratory shared with students studying this course and other postgraduate courses. The UL team was assigned a supplier manager who was based in SCR. All contact for the first 2 months was via Internet or telephone. The supplier manager visited UL at that stage. In the first year, as with all participating teams, the UL teams were engaged in the definition phase of the project. Initial tasks were assigned with the goal of bringing the teams up to speed with the building automation domain. Work breakdown was done considering several factors. The schedule, available weekly student hours, and the geographic proximity of the teams to the central team were all considered when defining the original work breakdown. During the first year, it was decided (as part of the research project) not to allow the UL team to communicate with any other team. Their communication was only with the central team. Work packages were defined and distributed to all of the teams. The initial work packages contained: requirements specification, high level architecture, market intent, specifications, high level project plan, and a description of the tasks to be completed by the team for the first engineering release. In year 2, a new team was formed. One parttime student had significant experience, and he became the project leader of the team. Other roles assumed by each of the team members were defined by the SCR central team. The UL team was also provided with a space that was private to the project team. The SCR central team contact for UL had been the project leader on the UL team the previous year. Prior to this, no member of the UL project team knew him, and none of them had met him. Furthermore, the restriction on the UL
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team communicating only with the central team was removed. A wiki, set up by the central team, was continually updated by students and central team members. Otherwise, the project structure was similar to that in year 1.
Ainm an Eolaithe with Ball State University As with other aspects of GSD, distributed testing is becoming important to the global software development industry. Researchers from UL and Ball State University (BSU) have been involved in studying management and technical issues involved in the distribution of testing across countries within a multinational company who are based in Ireland, USA, and Malaysia (Casey & Richardson, 2005; Zage, Zage, & Wilburn, 2005). As part of this research project, we set up a collaborative teaching project involving MSc students from both UL and BSU. While we were interested in establishing “what works” and “what does not work” when implementing global testing, a further aim of this project was to provide knowledge and education on GSD to individual students in both locations. The time frame for this joint project began with a week of instruction for the UL students. The projected testing time line of the project was to commence with black-box testing7 (UL) in weeks 2 through 4. During the black-box testing time frame, it was expected that the white-box testers (BSU) would review the actual code, would review the unit testing environment, and prepare test scripts. At the end of the semester each BSU team was expected to submit the combined defect reports (UL and BSU), the white-box testing scripts, the white-box test cases accompanied by the testing resources, and a summary report. The black-box and white-box test cases were to be recorded in a collaborative testing tool (GATE), which was used by students from both locations. Within GATE, students had access to a wiki where they were free to enter discussions with
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each other and where they could add information about themselves.
Ainm an Eolaithe: UL’s Involvement in the Testing Project At UL, all full-time students studying software quality engineering (one module) as part of their MSc in software engineering course were randomly selected to participate in testing teams, which comprised two or three students based at UL. Many of these students did not know each other prior to the course, so in some cases they were working with people they had not met before they attended these classes. However, they had been in the MSc class together for 8 weeks before this project commenced. These teams were then paired, again, at random, with student teams from BSU, thus creating virtual teams. Initially some difficulties arose with the provision of the product to be tested. UL students were given a week-by-week oral update of status and were also given regular updates through the class Web page. This impacted on the start of the initial projected time line for testing outlined perviously. The Irish students testing assignment started 3 weeks later than anticipated, which meant that their training was completed 3 weeks before they had an opportunity to start testing.
RESEARCH METHODOLOGY Having instigated and managed both of these projects within the MSc class, both of which required extra collaboration and input from the university lecturers, we were interested to establish the success or otherwise of both of these global projects. We collected and analysed data throughout the lifetimes of each of the projects described previously. The results presented in this chapter are based exclusively on the analysis of data obtained from UL participants.
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Each member of the two UL Ard na Croise teams participated in a semistructured interview with one of the authors. These interviews focused on the expectations and experiences of each of the participants. When the interviews were conducted, five students had completed their dissertations, the remaining five had completed 3 months’ involvement in the project. During the Ainm an Eolaithe UL/BSU collaboration, UL students were required to maintain a log book describing their participation. As part of their continuous assessment submission, they were required, in teams of two or three, to write a reflective analysis on the experience of being involved in a GSD testing team. While the educational objectives (outlined later on) were of interest to the researchers, a semi-structured, grounded approach was adopted, so that students were facilitated in identifying learning-related issues in their own words and on their own terms. However, students were guided in the provision of responses and insights by a variety of prompts, which, for example, in the interviews that were conducted included questions like: Why did you participate in the project? What were your expectations? Were your expectations fulfilled? What did you learn? What was good? What was bad? What was done well? What was done badly? What should be changed? What should I keep? Would you participate again? These prompts had two functions. Firstly, they were designed to help students to make more sense of their experiences and to integrate those insights into their learning. Secondly, they allow us to capture and disseminate (via this commentary) issues that may be of use to teachers and academics planning similar interventions within their own contexts. The interview notes, log books, and the reflective analysis was analysed by the researchers. A qualitative content analysis of these sources of data took place in order to identify overarching themes associated with the students’ experiences of this learning intervention. A broad analysis of
the frequency of different concepts was conducted based on an interrogation of the available data.
STUDENT INSIGHTS The data gathered from students about their insights and experiences were rich and diverse, expressed mainly in their own words in response to various prompts and delivered as part of the reflective requirements of the programme of study on which they were enrolled. We categorised the feedback, reflections, and ideas that they provided, while also attempting to stay true to the student voices and the priorities that they reported. Throughout this process we maintained awareness of the emphases that we had established as educators. We observed certain insights, focusing on either pedagogical process or GSD requirements. Oftentimes, these observations were so intertwined, that they were essentially inseparable in the eyes of the students themselves. Therefore, this section organises these student insights into categories sequenced in order of the frequency and emphasis with which certain response categories appeared in the data. There is no explicit division between pedagogic and GSD issues. Our analysis of the reflective, qualitative data reveals seven overarching categories of student insight into the learning experiences associated with the GSD project process. These categories can broadly be summarised under the following headings: 1. 2. 3.
4.
The importance and subtleties of communication and timing of contact. Interpersonal awareness and team dynamics. The movement from incompetence and uncertainty to confidence and command over ambiguous dynamics. Issues associated with energy and emotion: stress, isolation, commitment, morale, satisfaction, and motivation.
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5.
6. 7.
Awareness of and concern with how students present themselves as individuals and teams, and how they represent their institution Career development advantages. Empowerment, responsibility, and decision making.
Each category is discussed in further detail. This discussion is supported by respondent statements (presented in italics).
Importance and Subtleties of Communication and Timing of Contact A content analysis of student insights shows that the issue of communication was the most frequently invoked overarching “insight category.” A variety of subcategories also emerged here which mainly focused on the inherent value, the subtleties, and the timing of communication. Participants frequently referred to the overall importance of having virtual team communication that was regular and positive, while also revealing perceptions that this was difficult to achieve. General comments about communication often revealed how important the participants considered (or came to consider) it to be: Communication would be the big one. Communication can be helped with emails. Phone calls, Wiki’s, instant messenger etc but require effort and participation from distributed teams. The pragmatic issue of timing of communication was seen generally as a problematic aspect of the experience, but also often recognised both as a realistic and inevitable challenge that needed to be managed. In addition, many of the insights that students provided suggested that “waiting” for responses from the team members in the remote location may have given rise to frustrations and anxieties that affected the group and its work.
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We were told by SCR to sit tight and wait. Timing can be a problem. If the [local] team finds an error at 8am then it won’t be until the next day that team B will tackle the error, leading to delays. One student made a link between early communication problems and a feeling of ambiguity and noted that addressing this would lend clarity and possibly more momentum to the work that they had been assigned: There should be more phone conferences early in the req phase. This probably would help clear up ambiguity. Another respondent recognised the importance of the proximity of certain types of expertise by saying: The remotely located team may have different knowledge and experience than others and therefore communication is a key player to resolve this issue. Subtleties of communication and the nuances, conflicts, and misinterpretations to which it can often be vulnerable, were also regularly invoked in this response category. Several respondents talked about the importance of face-to-face contact and seemed to suggest that tone and patience are more important when communicating with remote team members. Learning point: Know what to say and what not to say. Team in US was not as helpful as they could have been. They made us feel bad about it “Where is it?” I like meeting and talking to people. With the teams so dispersed there was no face to face warming of the teams. This led to a slow start in stimulation of the participants.
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The sense of interdependence between the locations was also invoked: Coordination of effort also came into play after the black-box testing phase as the American teams used our completed tests to form a basis for white box testing. Our performance would obviously have an impact on that. These comments echo with communication competencies that we identified in Educating the Graduate section as essential to facilitate the software developer and manager functioning effectively in the GSD environment. The student teams articulated insights about communication in a global classroom setting, a fact that should equip them to operate more effectively in subsequent GSD work environments.
Interpersonal Awareness and Team Dynamics
I started to understand the importance of group work. I have more of an understanding of different personalities—what we had to deal with—laid back or not. In particular, one of the respondents indicated a need to “get the measure” of people in the remote locations and refers directly to “making up” personalities. [With this project] you never get a sense of what the other guys are like. We have made up a personality for [him] (S8). This suggests the conscious “construction”of individual images along with their own mistrust in their theories about other people. There also seem to emerge “theories” about team functioning. Several comments from respondents suggested that they had generated overall hypotheses about how teams should work, based directly on the experiences that they had with this task: Teams should be more inquisitive.
Commonly, students’ reflective statements about their experiences as a part of the project, invoked the issue of interpersonal awareness and team dynamics. These statements were coded under this category when they specifically referred to issues about “getting to know” the remote team members or themselves more accurately. They were linked to issues of communication too, but the following statement types were deemed to be sufficiently different and more focused on team dynamics and interpersonal awareness issues to merit their own category: We got on very well as a team. We did have problems. Some worked better with each other. Some were really pessimistic—could only see the downside of things. I tried as a team leader to see the upside—sometimes seeing the downside can stop a project too—it does stop the whole thing from happening, or stop the momentum but it gives a reality check.
When there are 5 people there are always problems of someone not there. The development of a sense of “teamness” among all members of the virtual team was also highlighted more particularly as problematic through the following insights: At no stage was a sense of teamness developed. In fact at times it felt very much a case of running test cases and hearing nothing back. The aforementioned statements reflect a rich engagement with the development of insights about team characteristics, and an emerging sense of understanding gained about the strengths of different members of the team. Some of the statements provide evidence of a fine-grained development of knowledge about which team member’s strengths relate to which aspect of the task. In addition, respondents demonsrated the
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feeling of getting to know different emotional orientations towards the processes in which they were immersed (for example, some people could only see the downside of things). It is difficult to see how such fine-grained knowledge of team dynamics could be achieved without the direct participation that they had experienced, and it is unlikely that the curriculum relating to their programme of study specifies this level of understanding and knowledge of the nuances and complexities of team functioning. The statement provided by respondent S8, reveals something even more complex—that is, a sense of caution and awareness about the assumptions made relating to personalities of people that had not yet been met in person. We have made up a personality for [him] is a statement that may reveal the need for team members to apply characteristics to people they have not yet met, accompanied by a recognition that the assumptions are only provisional and cannot be confirmed from a distance. In terms of interpersonal awareness and insight, such statements demonstrate strong and complex learning of some of the intangible aspects of GSD as a process and a task.
The Movement from Incompetence and Uncertainty to Confidence and Command Over Ambiguous Dynamics There is plenty of evidence among the reflective statements provided in this study that a developing sense of competence and confidence started to emerge as part of the GSD experience. Statements that signalled a gradual unfolding of knowledge and engagement with the task included the following: We did not know what they meant. As we went through the course more we got to know what they meant.
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We learned from our mistakes and adapted. It is often said that we learn more from our mistakes than our successes and in that case it has been fair to say that it has been a worthwhile experience. It also seemed clear that part of the journey to competence included encountering an experience of ambiguity and confusion, as revealed by the following kinds of statement: Hard to pin down how code was going to work in a new system. A component was changed so all the work we did before Christmas was wasted. Requirements were not good. We constantly had to read between the lines. Insights about emerging confidence also appeared frequently in students’ responses and reports, particularly in response to prompts that encouraged them to think specifically about what they had learned from the process. Familiarity, comfort, and confidence seem to have replaced the sense of the task having been “daunting” and of feeling out of their depth. The recognition of the importance of experience and the role that it has played in reinforcing and developing their learning seems to be clear: Well now I’ve seen that (req doc) before so it won’t be as daunting . It all comes down to experience. If we could go back and do it again, we’d do it differently. The fundamental purpose of education is to facilitate the journey towards competence. It is clear from the previous statements that students appeared to navigate a kind of pedagogical “jour-
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ney” to competence. When looking back on this experience, their insights suggest that the negotiation of confusion and ambiguity was central, if not essential, to the learning processes in which they were involved. Again this suggests that there was something very crucial about the simulated GSD experience, and that in conventional learning environments the movement from ambiguity to clarity might not be as significant or as realistic as those experienced by this group of students. A link between these insights and the developing sense of “teamness” reflected in other comments suggests that the developing sense of competence might also occur in tandem with a developing sense of teamness. This may be evidence of the students’ enhanced understanding of the sophisticated and complex dynamics of GSD.
Issues Associated with Energy and Emotion: Stress, Isolation, Commitment, Morale, Satisfaction, and Motivation Another common statement category among students suggested that they were readily able to identify “emotionally relevant” aspects of the experience of working in a GSD team. The ability to signal the relevance of difficult feelings associated with stress and isolation as well as the more positive emotions associated with commitment, morale, and motivation demonstrate another dimension of self-awareness that may have developed and become enhanced over the course of the experience. Student references to experienced stress and isolation included the following types of statement: We felt isolated. We felt a bit alone as a small development team. It was time consuming and stressful but at the same time I enjoyed it.
Some of the stress was linked to the time deadlines associated with the learning experience, while one respondent also highlighted that the emotional engagement with the task could be experienced as simultaneously positive and negative. In addition, responding students also seemed to demonstrate an awareness of the commitment required in order to complete the task successfully and on time. Some of them demonstrated this awareness by highlighting that among their team members that commitment was not always present, while others took commitment as one of the learning outcomes of the process: Make sure they understand the commitment they need to give to the project. People not coming in [on] time affects morale. Are you going to be in at 9 a.m. during the 3 week break. It is worth it in the end if you can do it. Others noted how the experience induced commitment by creating inherent motivators into their lives as students. Statements demonstrating this insight included the following: This gave me something to get up and come into college for [even when my lecture schedule did not require it]. I have something to push me along. The realisation of the effective dimension of working seems to have had an effect on students’ recognition of how feelings can impact on projects. An explicit recognition of the added value of intangibles like commitment shows that students are developing a more subtle comprehension of how team dynamics work and how emotions impact on those dynamics in sometimes fundamental ways.
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Awareness of and Concern with How Students Present Themselves as Individuals and Teams, and How They Represent Their Institution A very clear category of statements emerged from respondents that related specifically to the ways in which the local student team presented itself and appeared to the remote members of the GSD teams. A concern for how they came across to their corresponding team members in the other locations emerged as something that was important to students: We didn’t want to look like a bunch of muppets and you were our supervisor. You don’t want to be seen to be proven wrong. Very pleased when we were able to say the other team was wrong. We didn’t want to be seen as a failure. These statements express that students were prevented from availing themselves of useful learning moments during the process. They were reluctant to clarify, question, and learn. This was not because of pressure from lecturers, project supervisors, or central team members but because of an internal pressure that they put on themselves and a concern regarding how they might be viewed by other stakeholders in the process. It also seems clear that once they had met face to face with a representative of the remote team members, this reluctance and concern diminished significantly: Once they met the guy from Siemens they were much happier. This year’s team haven’t got that problem at all because the links are stronger.
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Furthermore, the implementation of the wiki, which is used as a remote communication tool within the Ard na Croise project during year 2 has helped communication—Wiki may be helping too—to break taboo about asking “stupid” questions. The wiki contains questions from all students internationally—so UL students have visibility into queries from other international student teams. This was not the case in year 1 of the project, when UL students were isolated from communicating with other teams. This was a decision of the research project team. The most striking aspect of this category of statements lies in its identification of a learning paradox within the student teams. On one hand, the concern for projecting themselves in a positive light led to them wanting to work hard and appear to be performing at high levels. This may have boosted their motivation and engagement with the task. On the other hand, the need to be seen in a positive light seemed, at least occasionally, to block good learning, as the students were reluctant to ask important questions at key stages in the process.
Career Development Advantages and Practical “Real-Life” Experience Students tended also to invoke the pragmatic and instrumental benefits associated with having participated in the process. Many of them mentioned specifically how being able to say they had participated in the project would be helpful for their career opportunities, indicating particularly that it would give them “the edge” in an interview setting. In addition the benefits of having been involved in an activity that reflected the real life pressures and structures of GSD was something that they invoked explicitly as being positive and beneficial. While we did not hypothesise that this experience would be seen in such pragmatic ways by the participants, our research shows that the pragmatic
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benefits of participating in this kind of educational experience must not be underestimated. We as educators tend to look at the “whole curriculim” as contributing to the overall employability of our students. However, it seems in this instance that the specific GSD experience reported here was heavily weighted by students as having particularly useful career development effects. It is worth noting that out of five participants in one of the GSD projects, three were subsequently employed in GSD environments, a series of choices and opportunities that may not have arisen without their participation while studying.
Empowerment, Locus of Control, and Decision Making Students also highlighted the struggles and issues that they encountered in the development of a more “internal locus of control” for the work that they were doing. They highlighted key questions and problems that seem to indicate that a gradual emerging of empowerment occurred over the course of the project. The worries associated with who was responsible for what were indicated in the following types of statements: I’d feel a good bit responsible. I didn’t think we should go to Ita. One student articulated an emerging conviction that the decision making relating to the task ultimately lay within their own team: We had to learn to figure things out for ourselves. Several noted the issue of responsibility and locus of control as something that needed to be defined and clarified: Something like a contract would be good at the start.
It’s important to assign responsibilities. If we don’t, no-one will take it on for themselves. Another intangible but important aspect of learning and work performance is relevant to this issue of locus of control. Understanding levels of responsibility and empowerment influences individual and group decision making in very significant ways. In grappling with the issue of locus of control and decision making in GSD contexts, students also seem to have gained a possibly deeper level of insight about their engagement with the tasks and processes. The pragmatic effects of student participation can be seen explicitly when we analyse their career development advantages. However, there were other pragmatic effects observed in the study, for example, following their participation in the global projects, they recognise the importance of teamwork (I learned a lot of things that are valuable like working with the group), how they need to change their work practices (It involved changing my mindset from haphazard to process), and how to deal with responsibility (Need to set ground rules and clarify responsibility). As illustrated in Table 1, graduates are expected to demonstrate competencies for use in the GSD environment. Through involvement in the projects discussed, students had exposure to all of the competencies required by the software developer. Through the discussion on interpersonal awareness and team dynamics, students developed communication and language and worked with other cultures. They also had exposure to communication tools and how these are used differently by different cultures (for example, Differences in the Irish and American teams— Irish used email more, but US used discussion boards). The reality of temporal issues became clear (Communication may have been delayed as a result of the time difference). The students were also exposed to cooperation issues. Not only did they have to work together within local teams, they also had to cooperate with internationally
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dispersed teams. Furthermore, in the Global Studio Project, in particular, they were required to report to a “management” team in Siemens Corporate Research. As discussed earlier, this was not always an easy task and participation ensured that the students learned how to cooperate. In our interviews, statements from the students such as—One would make breakthrough, others would put shoulders to the wheel—illustrate this. In the global environment, as in other development environments, software developers should also be aware of processes and process tools. Participants in these projects were exposed to processes such as requirements and configuration management and were expected to continue development even with changing requirements. Global tools were implemented and used by the students. Students were expected to make regular reports to both their internal university supervisor and to the teams with whom they were working. In addition to competencies required by the software developer, students were also exposed to some of those required by the software manager. In particular, they experienced roles, responsibilities, and competencies management. In one case, when the students stated: We didn’t want to look really bad. We all thought that if we kept ringing with questions, we did not want to seem incompetent; they learned that to survive in the global environment, then they needed to do exactly the opposite and have their questions answered.
CONCLUSION AND OBSERVATIONS Through the qualitative analysis of key reflective statements conducted for this chapter, it has been possible to extract several overarching themes that demonstrate participants’ own perceptions of the learning concerns, experiences, benefits, and outcomes associated with being part of a virtual GSD team. We now bring these themes together in an effort to map the student experiences with
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pedagogical interventions and aims associated with this project. Moore and Ryan (2006) remind educators that “Important truths that seem obvious to experienced practitioners can often only be learned by students if they have been encountered in a ‘deep’ as opposed to a ‘shallow’ sense.” In the complex experience of joining an international, virtual GSD team, students gained insights, learned lessons, and acquired understanding that would otherwise have been very difficult, if not impossible to achieve. In an analysis of students’ own words we have seen evidence of both cognitive and affective breakthroughs achieved directly as a result of their experience with a GSD environment and tasks. While students could be given vicarious insights (through lectures, tutorial sessions, and discussion forums) about the importance of knowing the subtleties of communication, team dynamics, and perceptions, we find it difficult to imagine how the range of work-based comprehension that they have reported could possibly be achieved outside of the experiential frame provided by this learning experience. In sketching out the framework of competencies that the literature highlights as central to the needs of GSD developers and managers, we are struck by the parallels found between this competence set and those identified by the students when discussing and explaining their learning outcomes. For several decades now, there have been significant criticisms of conventional higher education environments. Biglow (1983) highlighted a direct link between university classroom norms and the problems faced by graduates on entering the workplace. Passivity, dysfunctional competition, and lack of a sense of responsibility are, he argues, all facilitated by inactive, disengaged educational environments. While conventional educational norms can be active, engaged, and excellent, it is arguably much easier to create these conditions in more experiential settings like the ones described and evaluated in this chapter.
Globalising Software Development in the Local Classroom
By observing the seven outcomes identified previously, it is possible to argue that there are three forms of learning impact experienced by students who participated in this project: (1) pedagogical, (2) pragmatic, and (2) achievement of specific GSD competencies. The pedagogical effects can be tracked most strongly through observed references to the journey from incompetence to competence. The pragmatic effects, while they may derive from this journey, are more closely evidenced by participants’ own insights about the practical and optical value of participation. The specific GSD competency development is demonstrated through the students’ own reported sense of achievement, but still requires confirmation through the normal curriculum assessment process. We do, however, argue that the sense of competence that the students report sets the scene for more positive and engaged learning, even in didactic contexts. In summary, we champion the application of the learning experiences we have described in this chapter, while recognising that the implications of this for GSD learning are that educators need to work interinstitutionally and in tandem with industry where relevant. Mimicking real work settings creates the possibility of giving rise to the range of learning benefits that are associated with truly problem-based learning environments. Adding pedagogical support, opportunities for reflection, and the capacity to revise and develop ideas using experienced teachers as a sounding board creates an added-value environment that we believe should become a standard part of software engineering education curricula.
Limerick, Ireland; by the National Science Foundation (U.S.) within the Software Engineering Research Center, Ball State University, Muncie, Indiana, U.S. (Grant no: EEC-0423930); and by Siemens Corporate Research, Princeton, New Jersey, U.S.
REFERENCES Augar, N., Raitman, R., & Zhou, W. (2004, December 5-8). Teaching and learning online with Wikis. In R. Atkinson, C. McBeath, D. Jonas-Dwyer, & R. Phillips (Eds.), Beyond the comfort zone: Proceedings of the 21st ASCILITE Conference (pp. 95-104). Barrett, T. (2005). Understanding problem based learning. In Barrett, MacLabhrainn, & Fallon (Eds.), Handbook of enquiry and problem based learning: Irish case studies and international perspectives. AISHE: Galway. Bigelow, R. (1983, May). The importance of engagement and responsibility in higher education. Paper presented at the University of Iowa Educational Development Conference, Iowa City. Boland, D., & Fitzgerald, B. (2004). Transitioning from a co-located to a globally-distributed software development team: A case study and Analog Devices Inc. ICSE International Workshop on Global Software Development, Edinburgh, Scotland. Carmel, E. (1999). Global software teams: Collaboration across borders and time zones. Upper Saddle River, NJ: Prentice Hall.
ACKNOWLEDGMENT
Casey, V. (2007). PhD to be published, University of Limerick, Ireland.
The research in this chapter has been funded by Science Foundation Ireland through the Principal Investigator, B4Step project (Grant no. SFI 02/ IN.I/108) and Cluster project GSD for SMEs (Grant no 03/IN3/1408C) within the University of
Casey, V., & Richardson, I. (2004). Practical experience of virtual team software development. European Software Process Improvement (EuroSPI) 2004, Trondheim, Norway.
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Casey, V., & Richardson, I. (2005, September 26-30). Virtual software teams: Overcoming the obstacles. Third World Congress on Software Quality, Munich, Germany, 1-63 to 1-70, Volume 1.
Jarvenpaa, S. L., & Ives, B. (1994). The global network organization of the future: Information management opportunities and challenges. Journal of Management Science and Information Systems, 10, 25-57.
DeSanctis, G., Staudenmayer, N., & Wong, S. S. (1999). Interdependence in virtual organisations, The virtual organization (Trends in organizational behavior). Chichester, England, UK: John Wiley & Sons.
Joy, M. (2005). Group projects and the computer science curriculum. Innovations in Education and Teaching International, 42(1), 15-25.
Ebert, C., & De Neve, P. (2001). Surviving global software development. IEEE Software, 18(2), 62-69. Grinter, R. E., Herbsleb, J. D., & Perry, D. E. (1999). The geography of coordination: Dealing with distance in R&D work. In Proceedings of ACM SIGGROUP Conference on Supporting Group Work (pp. 306-315). Phoenix, AZ. Hayes, I. S. (2002). Ready or not: Global sourcing is in your IT future. Cutter IT Journal, 15(11), 5-11. Herbsleb, J. D., & Grinter, R. E. (1999). Splitting the organisation and integrating the code: Conway’s law revisited. Twenty-first International Conference on Software Engineering, Los Angeles: IEEE Computer Press. Herbsleb, J. D., & Mockus, A., Finholt, T. A., & Ginter, R. E. (2000). Distance, dependencies and delay in a global collaboration. ACM conference on Computer Supported Cooperative Work, Philadelphia: ACM Press. Herbsleb, J. D., Paulish, D. J., & Bass, M. (2005, May 15-21). Global software development at Siemens: Experience from nine projects. In Proceedings of the 27th International Conference on Software Engineering, ICSE ’05 (pp. 524-533). New York: ACM Press. Hwarng, H. B. (2001). A modern simulation course for business students. Interfaces, 31(3), 5-11.
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Kiel, L. (2003). Experiences in distributed development: A case study. ICSE International Workshop on Global Software Development, Portland, OR. Levitt, B. B., & March, J. G. (1988). Organisational learning. Annual review of Sociology, 14, 319-340. Linnane, S., & Richardson, I. (in press). Distributed software development—Difficulties for the SME. In Perspectives in Software Quality, Proceedings of Software Quality Management Conference, SQM2006, (pp. 113-128). Southampton, UK. Lipnack, J., & Stamps, J. (1997). Virtual teams: Reaching across space, time and organisations with technology. New York: John Wiley & Sons. Luo, Y., & Peng, M. W. (1999). Learning to compete in a transition economy: Experience, environment and performance. Journal of International Business Studies, 34, 52-68. McDonough, E. F., III, Kahn, K. B., & Barczak, G. (2001). An investigation of the use of global, virtual, and collocated new product development teams. Journal of Product Innovation Management, 18, 110-120. Moore, S., & Ryan, A. (2006). Learning to play the drum: An experiential exercise for management students. Innovations in Teaching and Learning International, 435-444.
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Nidiffer, K. E., & Dolan, D. (2005). Evolving distributed project management IEEE Software, 22, 63-72. O’Brien, J. A. (2002). Management information systems managing information technology in the business enterprise (6th ed.). McGraw-Hill Irwin. Organisation for Economic Co-operation and Development (OECD). (2004). International investment perspectives. France: Author. Powell, A., Piccoli, G., & Ives, B. (2004). Virtual teams: A review of current literature and direction for future research. The DATA BASE for Advances in Information Systems, 35, 6-36.
Tjosvold, D., Yu, Z., & Hui, C. (2004). Team learning from mistakes; The contribution of cooperative goals and problem solving. Journal of Management Studies, 41(7), 1223-1245. Toaff, S. S. (2002). Don’t play with “mouths of fire” and other lessons of global software development. Cutter IT Journal, 15(11), 23-28. Zage, D., Zage, W., & Wilburn, C. (2005, April). Test management and process support for virtual teams (Tech. Rep. No. SERC-TR-271). Muncie, IN: Ball State University.
ENDNOTES 1
Pyysiainen, J. (2003). Building trust in global interorganizational software development project: Problems and practices. ICSE Workshop on Global Software Development. Reynolds, M. (1994). Groupwork in education and training. London: Kogan Page. Riley, M. (2005, September 13). The proof is out there. Software Development. Retrieved February 2006, from http://www.sdmagazine.com/documents/s=9889/sdm0510b/0510b.html
2
3
Robey, D., Khoo, H. M., & Powers, C. (2000). Situated learning in cross-functional virtual teams. IEEE Transactions on Professional Communications, 43(1), 51-66. Savin-Baden, M. (2004). Understanding the impact of assessment on students in problem based learning. Innovations in Education and Teaching International, 41(22), 221-233.
4
5
Sommerville, I. (2001). Software engineering (6th ed.). Harlow, UK: Addison-Wesley. Technology Foresight Ireland. (2001). Information and communications technologies. Report from the Information and Communications Technologies Panel. Dublin, Ireland: Forfás.
6
A virtual team may be formally defined as “A team whose members use the Internet, intranets, extranets and other networks to communicate, coordinate and collaborate with each other on tasks and projects even though they may work in different geographical locations and for different organisations” (O’Brien, 2002). sm CMMI is a service mark of Carnegie Mellon University. A wiki (from the Hawaiian word meaning quick) is a user-editable Web site. Users can visit, read, reorganise and update the structure and content of a wiki as they see fit. An Internet connection and Web browser are all that are required to read and edit a wiki, (Augar, Raitman, & Zhou, 2004). sm CMMI is a service mark of Carnegie Mellon University Ard na Croise (height of the cross) is a hydroelectric power station built by Siemens, Germany and is located about 8km from the University of Limerick. Its 75th anniversary was celebrated in 2005. Anim an Eolaithe (name of the scientist): In recognition of the scientific achievements in Ireland and the U.S., each of the teams was
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Globalising Software Development in the Local Classroom
7
named after two celebrated scientists—one Irish and one American. Black-box or functional testing is an approach to software testing where tests are derived from the program or from its
specification. Success or failure of the test can only be determined from studying its inputs and related outputs (Summerville, 2001).
This work was previously published in Information Systems and Technology Education: From the University to the Workplace, edited by G. Lowry and R. L. Turner, pp. 82-104, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.13
Perception Gaps about Skills Requirement for Entry-Level IS Professionals between Recruiters and Students: An Exploratory Study Sooun Lee Miami University, USA Xiang Fang Miami University, USA
INTRODUCTION It gets more difficult to specify and prepare for the skills demanded by the profession in advance of beginning work activities (Barley & Orr, 1998; Mirvis & Hall, 1996). The rate of skill and technology change, and the number of factors from which the changes arise are increasing (Weick, 1990). Contemporary job roles require a significant amount of work activity that is contingent and hard to predict (Darrah, 1994). In accordance with this trend, an IS professional shows skill deficiency in various areas (Koh, Lee, Yen, & Havelka, 2001; Lee, Koh, Yen, & Tang, 2002; Lee, Trauth, & Farwell, 1995; Nelson, 1991; Trauth, Farwell, & Lee, 1993). IS Professionals are continuously
adding, replacing, and retrofitting their expertise to ensure an adequate stock of knowledge and work skills (Adler, 1992; Carnevale, Gainer, & Shultz, 1994). IS professionals understand that they need to keep their skills up to date. But doing so requires knowing what skill sets are in demand (Prabhakar, Litecky, & Arnett, 2005). The graduate of an IS program should possess the required skills and training to perform well at an entry-level position and to have a basis for continued career growth as a professional (Couger, Davis, Dologite, Feinstein, Gorgone, & Jenkins, 1995). However, the gaps (from a moderate to a very serious level) between knowledge/skills that are taught in academia and those that are demanded by the IS industry have been reported
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
by researchers (Lee et al., 2002; Lee et al., 1995; Nelson, 1991; Young & Lee, 1996). The evolution of IS technology is the major cause of the dilemma confronting educators and managers as they try to prepare students or to recruit workers for the changing IT environment (Clark, Greer, & Maier, 2002). As technologies continue to change, university IS programs interested in continuous improvement and serving their students must repeatedly revise their curricula to remain current and relevant. The academic curricula changes are often constrained by available credit hour limitations (Braun, Crable, & Tesch, 2003) and lack of resources. Academic institutions are also asked to turn out IT graduates with a very wide range of skills, while there are severe pressures to cut costs and constrain curricula (Van Der Vyver & Lane, 2006). Moreover, an IS recruiter tends to seek individuals with the ability to integrate their technical knowledge with other managerial skills such as communication, interpersonal, and organizational skills (Koh, Lee, & Tang, 2000/2001). An IS professional needs to possess and improve nontechnical skills (Dawn, Dinesh, Medlin, & Vannoy, 2001) to cope with the industry demand. Recent developments in IS industry jobs and career paths have made it more difficult to ascertain the knowledge/skills required of an IS professional (Martinsons & Cheung, 2001). There are a variety of IS career paths, each of which may require somewhat different skill sets. Even within the same career path, IS practitioners are required to have different knowledge and skills as their careers progress (Koh et al., 2001). As a discipline, IS is always changing, with rapid advances in technology, shifting job descriptions, and an increasing number of diverse factors which affect job success in the field. Additionally, shifting industry patterns, intense competition, outsourcing, and rapid globalization are blurring both job requirements and which skills are in demand (Lee & Lee, 2006).
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Since the end of the dot-com boom, time has been rough for IS professionals (Malykhina, 2004; Smith, 2004). According to Forrester Research, offshore outsourcing as a percentage of IT budgets rose from 12% in 2000, to 28% in 2003. This outsourcing trend influences the required skill sets for domestic IS students. The U.S. Bureau of Labor Statistics estimates that there are now 212,000 unemployed computer and mathematics professionals (Keefe, 2003). IS educators should feel the necessity of preparing their students for this adverse job market. In a relatively weak job market, keeping an eye on the skills demanded is increasingly important (Prabhakar et al., 2005). Given the aforementioned changes and problems, the most current knowledge/skill sets required for entry level IS professionals in today’s dynamic and competitive business environment need to be identified. In addition, the potential perception gaps between recruiters and students about skills required need to be investigated. The recognition of the gaps motivates students and faculty to adjust their skill sets and curricula design. Students and faculty know they must keep their knowledge and skills, as well as curricula, up to date, but doing so requires knowing what skills are in demand. To gain a better understanding about the important skills and knowledge needed to succeed in today’s business environment, a survey study was proposed in 2003. The objectives of the study were to: (1) assess recruiters’ and students’ perceptions of the important knowledge and skill sets for entry-level IS professionals; (2) identify and investigate any perception gaps that may exist between the two groups. For the purpose of this study, an IS professional is considered to be a person whose main tasks are to develop information systems, to maintain them, or to help people use them within an organization. An IS student is considered to be a college student who majors in MIS (Management Information Systems) in the business school.
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
A comparative investigation was made between the above two groups based on the following two areas. In the first, the broad spectrum of knowledge/skills required for an entry-level IS professional was investigated. In the second, the specific software tools that an entry-level IS practitioner uses to do his/her everyday jobs were analyzed and compared. The authors believe that the findings in this study can provide IS students, academics, and practitioners with useful information to pinpoint the perception gaps between the two groups about the knowledge and skills that are most important for an entry-level IS professional. The findings of this study can help academic institutions create better curricula to fit the changing demands of the job market, and can help students be better prepared for their IS careers.
BACKGROUND OF THE STUDY MEASURES Various classifications of the abilities, knowledge, and skills which an IS graduate must possess have been suggested (Ashenhurst, 1972; Couger et al., 1995; Lee et al., 1995; Nelson, 1991; Todd, McKeen, & Gallupe, 1995; Young & Lee, 1997). Despite the absence of a universally accepted classification, the literature generally agrees that people regard personal/interpersonal skills as more important than “IS-related” skills (Lee et al., 2002; Lee et al., 1995; Leitheiser, 1992). This is true even for entry-level IS personnel (Young & Lee, 1996). In some research, however, technical expertise is viewed as very important in finding an internship. Young and Lee (1996) found that the level of technical expertise often determines an IS major’s access to an internship, which may directly result in permanent hiring after the internship. Todd et al. (1995) also found that recruiters put more emphasis on technical knowledge than on business or systems knowledge when they recruit IS personnel. Koh et al. (2001) found a transition
in IS skills requirements based on progressive work experience: most first-time hires start with technical jobs, and then move to jobs requiring more “nontechnical” responsibilities as their careers develop. The ACM curriculum planning recommendations on IS education were developed over decades based on a taxonomy of knowledge content classified according to IS technology, IS process, and AACSB Common Body of Knowledge (on business management). There is, however, no generally accepted classification of IS knowledge/ skills, or a consensus on which knowledge/skills are more critical than others. Due to the lack of a common classification taxonomy and terminology, the authors had to rely on sample question items from several sources and on the authors’ understanding of key emerging technologies in this field in order to construct the survey instrument. The emphasis has been placed on finding the skills required for an entry-level IS professional.
Critical IS Knowledge/Skills Used in the Study The broad spectrum of knowledge is classified according to the breadth of context in which the knowledge is applied, based on the prior studies (Koh, et al., 2001; Lee et al., 2002; Lee et al., 1995; Young & Lee, 1996). The broad spectrum of critical IS requirements are classified into four categories: core IS knowledge (managerial and technical), knowledge about organizational/ industrial entities, interpersonal skills, and personal skills. Core IS knowledge denotes the knowledge that differentiates IS personnel from others in an organization. This category is divided further into two subcategories: IS managerial knowledge, and IS technical skills. The IS managerial subcategory corresponds to the knowledge required of an IS manager, such as understanding IT trends, IT vision, and IT industry (Lee et al., 2002). The IS
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
technical subcategory corresponds to the technical specialties an IS manager needs to perform a task successfully. Interpersonal skills denote the skills required to work well in an organization or on a team. IS practitioners should be able to think critically and creatively about technical and managerial issues relating to the design and use of IT in solving business problems, rather than possessing mere knowledge about a narrow subject (Dalal, 1994). Clearly, “creative thinking” and “critical thinking” skills, in addition to personal motivation, are important personal traits valuable to IS practitioners. Organizational knowledge includes the understanding of a business functional area, a company, and a general business industry (Lee et al., 2002; Nelson, 1991). In the second part of the study, the software tools that an entry-level IS employee needs to perform his/her everyday jobs are scrutinized in detail. We made a list of widely used software tools, and from this, extrapolated 20 needed software skills. Recent developments in IS technology, such as data warehouse/mart, Web production (both publication and interactive Web programming), Enterprise Resource Planning (ERP), and so on are included in the software tools list (Table 3). To improve the reflection of the most current perceptions regarding critical IS knowledge/skills, the questionnaire was further refined through three pilot tests.
METHODOLOGY In addition to the questions about demographic information on the subjects of the study, both survey instruments (one for recruiters, and the other for students) consisted of 43 questions about perceived knowledge and skills required for entry-level IS professionals. 21 questions relate to the required knowledge/skills, and the other 22 questions relate to specific software knowledge.
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The 43 questions were primarily based on those used in an empirical study in Lee et al. (2002). Some questions were modified in the pilot study. The two survey instruments are included in Appendices A and B. Three IS professionals pilot-tested the survey instrument used by recruiters; corresponding modifications were made based on their feedback. For recruiters’ data, a random sample of 500 was selected from D&B's North American Million Dollar Database. This database provides the information professional, marketer, and sales executive with data on approximately 1,600,000 U.S. and Canadian leading public and private businesses. Company entries include industry information with up to 24 individual eight-digit SICs, size (number of employees and annual sales), type of ownership, principal executives, and biographies. The questionnaires were sent to the IS/IT recruiters working in the IS/IT department in those 500 companies. The aforementioned recruiters are actually IS professionals, based on the fact that they were employees in IS/IT department for the organizations. In the first round of survey, 38 respondents sent the questionnaires back. In the follow-up survey sent to nonrespondents, 13 subjects returned the survey. A total of 51 valid responses were collected, corresponding to a 10.2% response rate. For the students’ survey instrument, five MIS students participated in the pilot test in the fall of 2002. Based on their feedback, the authors—with the assistance of three statisticians—refined the questionnaire. Some of the demographic questions had been used in an empirical study by Fang, Lee, Lee, and Huang (2004). Senior students from three AACSB-accredited business schools were participants in this empirical study during the spring of 2003. Two schools are in the state of Ohio (one is in an urban area, and the other in a rural area). The third school is located in a metropolitan area in Tennessee. 725 seniors were informed about the survey in the
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
three schools (115, 245, and 365 respectively). 365 seniors participated in the survey (67 and 134 students from the two Ohio schools, and 164 students from the school in Tennessee). The primary focus of the MIS programs in the three schools is on the undergraduate degree program. The undergraduate program curricula and requirements are fairly similar. Each school received AACSB accreditation many years ago. The majority of the MIS students in these three schools started job searches in the fall of year 2002. At the time of the survey (May 2003), the students’ job search duration was about 10 months. Each MIS program actively encourages students to take MIS internships, although internships are not required, and students do not receive course credits for their internships. The majority of the internships are paid internships.
DISCUSSION We used two types of data analysis—rankings based on mean values of variables, and multivariate analysis of variance—to investigate the statistical relationships between IS recruiter and IS student data. For simplicity, variables with the following p-values are marked in Tables 1 and 3 *: for P-value <0.001; **: for P-value <0.05; ***: for P-value >0.05.
Demographics of Employer Profile The majority (80%) of the sample subjects held managerial positions (53% management, and 27% senior management). This data is in line with our expectations since we surveyed managers in the recruiting area of companies. The majority (77%) of the sample subjects worked in the position for less than 10 years (53% less than 5 years, and 24% 5–10 years). Most sample subjects (97%) had post-secondary education degrees, 73% undergraduate, and 24% graduate degrees. 53% were males, and 45% were females. Respondents’
ages were somewhat evenly distributed between 20 and 50. The numbers of employees in each company are widely distributed between less than 100, and more than 10,000. The majority (60%) of the respondents’ companies employed more than 1000. About 25% of the respondents said their companies had 100–499 employees. Although many respondents (35%) report that their company revenue is greater than one billion dollars, 32% reported income of less than 100 million dollars. Various types of industry employers were surveyed, ranging from IT, manufacturing, and financial, to the health care industry. The three largest types of industries surveyed were manufacturing (27%), financial (18%), and IT consulting (14%). Recruiters responded optimistically about the job market next year. 17% said the job market will be better, and 51% said that the job market will stay the same. No responses predicted a market decline. It is very interesting to note that 19 respondents reported that they did not hire any females, while only 2 respondents said all their new hires are females. Most of the respondents’ firms report that females account for less than 50% of their new hires. Similarly, 20% of the firms in the survey hired people of color, and only two respondents reported that all their new hires are people of color. Most of the respondents’ firms report that people of color account for less than 50% of their new hires. About three-fourths of the respondents said that less than 50% of new hires had MIS internships, while about one-fourth said that more than 50% of new hires had internship experience. Included in the one-fourth group are eight respondents whose firms’ new hires had MIS internships. A significant number (86%) of the respondents agree that MIS internships help MIS students receive fulltime MIS entry-level positions. 41% responded positively, and 47% were neutral as to whether double majors help MIS students receive full-time MIS entry-level positions. 30% disagree that early major declaration is advantageous in receiving a
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
full-time job position, while the majority (57%) of the respondents are neutral.
Demographics of MIS Student Participants Demographic backgrounds were solicited in the questionnaire. Student participation in the 2003 survey was anonymous. 365 students participated; 53% of the subjects were male, and 47% were female. 66% had a single major (MIS); 27% had double majors; 6% had three majors. Among those with double or triple majors, the percentages corresponding to non-MIS majors were 82% marketing, 17% finance, and 1% accounting. 60% of the participants declared their MIS majors in the first two years of college, while 39% did so during the last two years of college (1% did not respond). 52% reported that they did not have an MIS internship experience. 31% of the participants had one MIS internship, and 13% had more than one MIS internship experience (4% did not respond). The aforementioned statistics, such as MIS internship percentages, may not be generalized to other schools, because the three universities in this study were not randomly selected.
General Knowledge/Skills for an Entry-Level IS Employee In order to investigate the general knowledge and skills in more detail, the following skill sets were included in the questionnaire. All skill sets were categorized by four major areas: core IS knowledge and skills (both managerial and technical), organizational knowledge, interpersonal skills, and personal skills/traits. The results are tabulated in Table 1 below. The skills are arranged in descending order of recruiters’ rankings. Items with significant differences (five or more in relative rank differences) are marked in bold for detailed investigation. It should again be noted that the knowledge/skills sets surveyed in the study are primarily targeted for an entry-level IS profes-
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sional. The authors expect different outcomes for experienced professionals, as the skill sets required change with the work experience (Lee et al., 2002). It is very interesting to note that both recruiters and students rated the interpersonal and personal skills/traits—such as team skills, communication skills, critical/creative thinking skills, and personal motivation—as the most important attributes for a new entry-level IS employee. This finding is not different than that of the prior study (Young & Lee, 1997). It is even more interesting that these interpersonal/personal attributes are rated higher than any others, such as IS core knowledge and technical skills, as required skills sets for an entry-level IS professional. As IT becomes ubiquitous, and outsourcing is getting popular in most of the industries, it is not uncommon for IT professionals to work in a multiculture and acrossdiscipline environment. Interacting with overseas clients, as well as suppliers and colleagues from different countries, is no longer unusual in today’s global business settings. Thus, interpersonal and personal skills and traits are becoming more and more imperative. Significant perception gaps are found in almost every question item. The averages of student data are consistently lower than those of recruiters. Students view the knowledge/skills as less important than recruiters view them. These differences are statistically significant, with P-value less than 0.001, except for one item: vision about the IS/ IT competitive advantage. The implication of the aforementioned findings is that the bar has been raised, and employers expect a lot. They require a blend of technical, business, and people skills, combined with the right attitude. One of the reasons might be that many IT jobs are being moved offshore, particularly to China and India, where there are many highly skilled IT professionals who can be hired with relatively low cost. Due to the existence of a world marketplace for IS/ IT employment (Weber, 2004), more and more
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
Table 1. General knowledge, skills, and personal attributes for an entry-level IS emRecruiters AVG
Rank
4.81
1
Students Most wanted skills/knowledge/personal attributes for entry-level IS employees Team skills (e.g., ability to work as part of a project group )*
Rank
AVG
3
3.56
4.78
2
Communication skills (oral and written)*
1
3.62
4.77
3
Critical thinking skills (ability to analyze and evaluate)*
4
3.52
4.72
4
Personal motivation*
2
3.57
4.57
5
Creative thinking skills (e.g., ability to generate new ideas)*
5
3.39
4.13
6
Implementation, operation, and maintenance issues (e.g., documentation)*
16
2.83
4.12
7
Operating systems (e.g., Windows2000/XP/NT, UNIX, Novell)*
7
3.21
4.09
8
Packaged software (e.g., spreadsheet, word processing)*
6
3.36
4.02
9
Awareness of IS technology trends*
8
3.15
3.8
10
Database design/development*
9
3.06
3.78
11
Knowledge of general bus. environment (e.g., economic, legal)*
17
2.79
3.78
12
Web Development programming languages*
14
2.91
3.76
13
Object-oriented methodologies*
18
2.64
3.71
14
Knowledge of specific business functional areas (e.g., finance, marketing)*
15
2.9
3.67
15
Hardware concepts (PCs/Server/Routers/Network)*
12
2.98
3.64
16
Network/communication software/program languages*
10
3.04
3.54
17
Knowledge of specific organizations (e.g., your company)*
11
3.03
3.53
18
SDLC (Systems Dev. Life Cycle) methodologies*
19
2.51
3.44
19
Visions about IS/IT competitive advantage***
13
2.97
3.23
20
Programming languages (high level, 3 rd GL such as COBOL)*
20
2.27
3.22
21
Knowledge of specific industries (e.g., retail, automobile, computers)*
21
2.17
***Statistically not significant; P-value > 0.05.
organizations are even now seeking to employ IS/ IT workers who have international experience. Based on the relative ranking system, significant perception gaps are also found in several areas. Recruiters rated implementation, operation, and maintenance issues (e.g., documentation) as 6th most important, whereas students rated them as unimportant, with the relative ranking of 16th. Significant difference is shown in the rankings of general business environment knowledge (e.g., economics, legal). Recruiters view it as the 10th most important requirement, but students rate it as 17th. There is a similar result with object-oriented methodologies; recruiters rank the skill relatively more important than the students do.
Reversed results are found in the perceived importance of network/communication software/ program languages, knowledge of specific organizations (e.g., your company), and vision of the IS/IT competitive advantage. Students view them as relatively more important than recruiters do, although the actual averages of students are still lower than those of recruiters. Authors found little difference in the relative rankings of other question items than those discussed above. In a categorical analysis (Table 2), the interpersonal skills category was rated as the most important category, followed by the personal skills/traits, the core IS skills, and last, the organizational knowledge categories. Both recruiters
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
Table 2. Averages based on categories Highest Category Average: Interpersonal Skills: Recr.
Stud.
4.81
Team skills (e.g., ability to work as part of a project group )
3.56
4.78
Communication skills (oral and written)
3.62
4.80
Category Average
3.59
2nd Highest Category Average: Personal Skills/Traits: 4.77
Critical thinking skills (ability to analyze and evaluate)
3.52
4.72
Personal motivation
3.57
4.57
Creative thinking skills (e.g., ability to generate new ideas)
3.39
4.69
Category Average
3.49
4.13
Implementation, operation, and maintenance issues (e.g., documentation)
2.83
4.12
Operating systems (e.g., Windows2000/XP/NT, UNIX, Novell)
3.21
4.09
Packaged software (e.g., spreadsheet, word processing)
3.36
4.02
Awareness of IS technology trends
3.15
3rd Highest Category Average: Core IS Skills:
3.8
Database design/development
3.06
3.78
Web Development programming languages
2.91
3.76
Object-oriented methodologies
2.64
3.67
Hardware concepts (PCs/Server/Routers/Network)
2.98
3.64
Network/communication software/program languages
3.04
3.53
SDLC (Systems Dev. Life Cycle) methodologies
2.51
3.44
Visions about IS/IT competitive advantage
2.97
3.23 3.77
rd
Programming languages (high level, 3 GL such as COBOL) Category Average
Simulation/Optimization Tools (e.g. Pro Model, Simons)*
20
2.08
2.72
19
Statistics Tools (e.g., SAS, SPSS, and Minitab)*
19
2.09
2.67
20
Expert Systems/Shells [ES (e.g. GURU and Visual Expert)]*
17
2.30
3.55
Total Average
??
***Statistically not significant; P-value > 0.05.
Specific Software Program Skills for an Entry-level MIS Employee Questions about the following software program types (Table 3) were included in the questionnaire. The results are arranged in descending order of rankings by recruiters, and the results were then compared to the rankings by students. Significant perception gaps are found in almost every question item. The averages of students’ data are consistently lower than those of recruiters. Students view the software skills as less important than recruiters view them. These differences are statistically significant (P-value less
than 0.001), except one item: presentation tools. The potential explanation is that employers are more demanding than the students would expect in the current job market. The bar is also raised regarding specific software skills for entry level IS hires. The aforementioned finding is also in line with the findings in Gallivan, Truex, and Kvasny (2004), which identified that employers continue to specify more technical skills per hire. Recruiters rated Web-related tools, such as Internet/Web browsers and interactive Web programming software, as the first and the second most important software skills; they were ranked third and sixteenth respectively in the prior study
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
(Koh et al., 2001). Students rated the same tools as the first and the fourth most important tools, respectively. Students rated the e-mail tools 2nd highest. In the current global business environment, Web-enabled functionality is almost a necessary part of most of the IS applications. Due to the rapid development of the Web technology and its increased popularity, Web-related tools and programming software are becoming vital. The study (Prabhakar et al., 2005) also found the increased importance of the Web-related IS skills, such as Web programming, dot net development, and Java. Both recruiters and students rated Database query language, such as SQL, with relatively high rankings, 3rd and 6th respectively. It is interesting to note that personal productivity tools—such as Electronic mail, PC operating systems, and Word processing—are rated relatively higher than IS specialty tools, such as database, programming language, project management, and CASE tools by both groups. Further investigation is needed to understand this finding. A conceivable interpretation is that some of the skills, such as project management skills and CASE tool-related skills, cannot be taught effectively in the classroom that can hardly replicate the environment of a real IS project. One of the emerging software packages, ERP (Enterprise Resource Planning), is rated relatively low (16th) by both recruiters and students. Authors presume that individual companies may provide the necessary education and training for that skill, although this finding may need further investigation as well. High-level procedural languages, simulation/optimization tools, statistics tools, and expert systems (ES) are rated as the lowest by both groups.
CONCLUSION There are significant perception gaps between IS recruiters and IS students in terms of what
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knowledge/skills are more important than others. Perception gaps exist in almost every knowledge/ skills and software question item in the survey instrument. Students ranked all knowledge/skills consistently as less important than recruiters ranked them. Interesting information is found by comparing the two groups’ data, based on a categorical analysis and relative rankings of each item. Both recruiters and students have similar perceptions about the importance of some category skills, compared to others. Both view all of the interpersonal/personal items—such as team skills, communication skills, critical thinking skills, personal motivation, and creative thinking skills—as the most important skill sets for new entry-level IS employees. More interestingly, both groups rate the interpersonal/ personal category skills above any other category of skills, such as core IS knowledge/skills and organizational knowledge. Considering that the IS curriculum has been developed based on IS core knowledge/skills, this finding offers the motivation for IS educators to emphasize communication and interpersonal/ personal skills within the framework of applying IS knowledge and skill. As the IS knowledge is acquired and applied, communication and interpersonal /personal skills should not be ignored. Based on a relative-ranking type analysis, both IS recruiters and students rate Web-based software skills and personal productivity software skills as more important than the traditional programming/development skills, such as high-level and object-oriented programming skills. Both groups rated other development-related software skills, such as project management and CASE, below interpersonal/personal skills. Simulation, statistics, and expert system skills are rated lowest by both groups. Although further investigation is needed in several areas, the findings of the study can provide IS students, academicians, and practitioners with information about the most desired knowledge/ software skills for entry-level IS hires, and also
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
help all parties understand the significant perception gaps existing between them. Compared to the students’ expectations, employers are demanding more, not just in terms of the depth, but also the mix of the skills and knowledge. Students are expected to be well-rounded in business and technical areas, along with the interpersonal skills and the right attitude. Universities may need to do more to adjust their curricula, such as strongly advocating internships, or even the international program participation. While offering courses focusing on the fundamentals, universities may need to provide students with courses that are vocational in nature. Consequently, students can gain knowledge and skill sets, as well as experience with current IS phenomena.
Limitation of the Study This study is not without its limitations. The study can be strengthened by increasing the sample size. Although the authors received responses from 51 companies, the number (51 of 500) may not be adequate to be representative of the entire IS industry. Another component of the representativeness is nonresponse bias. As nonresponse increases, the potential for a biased sample increase. This means that the obtained responses of a probability sample might no longer be representative of the larger population. The response bias could exist in the responses received. The response bias might affect the sample in such a way that the corresponding findings based on the sample have much less external validity. In short, nonresponse bias could reduce a probability sample to what is essentially a convenience sample, and consequently, the conclusions are less generalizable to the entire IS industry. For future study, authors plan to increase the response rate, and consequently narrow the biasadjusted confidence intervals and facilitate generalizing the statistical analysis results to the whole IS industry. Moreover, there could be a number of explanations for something as fundamental as
“importance.” Whether a skill is important is open to interpretation by IS students and IS recruiters. As a result, some of the findings in this study might not clearly discover the true attitudes of some survey respondents. For future study, the in-depth interviews of students and recruiters are needed to truly discover these attitudes, and then to use appropriate anchor labels on the response categories on the survey questionnaire.
REFERENCES Adler, P. S. (1992). Technology and the future of work. New York: Oxford University Press. Ashenhurst, R. R. (1972). Curriculum recommendations for graduate professional programs in information systems. Communications of the ACM, 15(5), 364–384. Barley, S. R., & Orr, J. E. (1997). Between craft and science: Technical work in U.S. settings. Ithaca, NY: ILR Press. Braun, G. F., Crable, E. A., & Tesch, D. B. (2003/2004, Winter). Evaluating IS curriculum issues through an ongoing alumni assessment mechanism. Journal of Computer Information Systems, 44(3), 40–48. Carnevale, W. A., Gainer, L., & Shultz, E. (1994). Training the technical work force. San Francisco: Jossey-Bass. Clark, W. J., Greer, T., & Maier, J. L. (2002. Summer). The management information systems (MIS) job market late 1970s-1990s. Journal of Computer Information Systems, 42(4), 44–49. Costlow, T. (2003). Globalization drives changes in software careers. IEEE Software, 20(8), 14–16. Couger, J. D., Davis, G. B., Dologite, D. G., Feinstein, D. L., Gorgone, J. T., Jenkins, A. M. et al. (1995, September). IS’95: Guideline for undergraduate IS curriculum. MIS Quarterly, 19(3), 341–359. 1567
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Dalal, N. P. (1994, Summer). Higher-order thinking in MIS. Journal of Computer Information Systems, 34(4), 26–30. Darrah, C. (1994). Skill requirements at work. Work and Occupation, 21(1), 64–84. Dawn, D., Dinesh, S., Medlin, B., & Vannoy, S. A. (2001, Fall). Students’ views of the importance of technical and non-technical skills for successful it professionals. Journal of Computer Information Systems, 42(1), 65–69. Fang, X., Lee, S., Lee, T., & Huang, W. (2004). Critical factors affecting job offers for new MIS graduates. Journal of Information Systems Education, 15(2), 189–204. Gallivan, M. J., Truex, D. P., & Kvasny, L. (2004). Changing patterns in IT skill sets 1988-2003: A content analysis of classified advertising. DATA BASE for Advances in Information Systems, 35(3), 65–87. Keefe, P. (2003). Surviving a sea changes. Computerworld, 37(17), 20. Koh, S., Lee, S., Yen, D. C., & Havelka, D. (2001, Summer). Evolution of IS professionals’ competency: An exploratory study. Journal of Computer Information Systems, 21–30. Koh, S., Lee, S., & Tang, H.L. (2000/2001, Winter). Educational gaps as perceived by IS educators: A survey of knowledge and skill requirements. Journal of Computer Information Systems, 41(2), 76–84. Lee, D. M. S., Trauth, E. M., & Farwell, D. (1995, September). Critical skills and knowledge requirement of IS professionals: A joint academic/ industry investigation. MIS Quarterly, 19(3), 313–340. Lee, S., Koh, S., Yen., D. C., & Tang, H. (2002). Perception gaps between IS academics and IS practitioners: an exploratory study. Information and Management, 40, 51–61.
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Lee, S. M., & Lee, C. K. (2006). IT managers’ requisite skills: Matching job seekers’ qualifications with employers’ skill requirements. Communications of the ACM, 49(4), 111–114. Leitheiser, R. L. (1992, Summer). MIS skills for the 1990s: A survey of MIS managers’ perceptions. Journal of Management Information Systems, 9(1), 69–91. Malykhina, E. (2004, April 19). IT job market causes concern. InformationWeek, 985, 76. Martinsons, M. G., & Cheung, C. (2001, January) The impact of emerging practices on IS specialists: Perceptions, attitude and role changes in Hong Kong. Information & Management, 38(3), 167–183. Mirvis, H. P., & Hall, D. T. (1996). New organizational forms and the new career. In D.T. Hall & Associates (Eds.), The Career is Dead: Long Live the Career. San Francisco: Jossey-Bass. Nelson, R. R. (1991, December). Educational needs as perceived by IS and end-user personnel: a survey of knowledge and skill requirements. MIS Quarterly, 15(4), 503–525. Prabhakar, B., Litecky, C., & Arnett , K. (2005). IT skills in a tough job market. Communications of the ACM, 48(10), 91–94. Smith, S. (2004). Career barriers among information technology undergraduate majors. Information Technology, Learning and Performance Journal, 22(1), 49–57. Todd, P. A., McKeen, J. D., & Gallupe, R. B. (1995, March). The evolution of IS job skills: A content analysis of IS job advertisements form 1970 to 1990. MIS Quarterly, 19(1), 1–27. Trauth, E. M., Farwell, D. W., & Lee, D. (1993, September). The IS expectation gap: Industry expectation versus academic preparation. MIS Quarterly, 17(3), 293–303.
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Van Der Vyver, G. L., & Lane, M. S. (2006). Are universities to blame for the IT careers crisis? Issues in Informing Science and Information Technology, 3, 679–686. Weber, R. (2004). Some implications of the year-2000 era, dot-com era and offshoring for information systems pedagogy. MIS Quarterly, 28(2), 3–11. Weick, K. E. (1990). Technology as equivoque: Sensemaking in new technologies. In P.S.
Goodman, L.S. Sproull, & Associates (Eds.), Technology and Organizations. San Francisco: Jossey-Bass. Young, D., & Lee, S. (1996, Summer). The relative importance of technical and interpersonal skills for new information systems personnel. Journal of Computer Information Systems, 66–71. Young, D., & Lee, S. (1997, Winter). Corporate hiring criteria for IS graduate. Information Systems Management, 47–53.
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APPENDIX A Survey on Critical Factors Influencing MIS/IT job Placement and Required Skills for an Entry-Level MIS/IT Professional Part I (#1-15) Employer profile. Please provide the following background information about you and your company. Your Position: senior management middle management non-management Years in Position: less than 5 5-9 10-19 20-29 more than 30 Education: high school undergraduate degree graduate degree Gender: male female Age: under 20 20-29 30-39 40-49 50-59 over 60 Your Company Number of Employees: less than 100 100-499 500-999 1000-4999 5000-9999 more than 10,000 Gross Revenue ($/Million): less than 50 50-99 100-199 200-499 500-999 more than 1B 1. To which type of industry does your firm belong? IT Consulting firms (Big Four: Accenture, Cap Gemini, Deloitte Touche, and PWC) IT Consulting firms (other than Big Four firms) Computer technology vendors (e.g., Microsoft, Oracle, Cisco, Dell) Manufacturing firms (e.g., General Electric, Proctor & Gamble) Retail firms (e.g., Kroger, Federated Dept. Stores) Financial firms (e.g., banks, investment, insurance) Health Care related firms Delivery service related firm Other (please specify):__________________________________ 2.
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Compared to this year’s job market in MIS, what is your opinion about next year’s job market? Much Worse Worse Same
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
Better Much better
3.
For this year, approximately what percentage of the new hires (full-time MIS entry-level positions) in your organization are female? Percentage: _______________%
4.
For this year, approximately what percentage of the new hires (full-time MIS entry-level positions) in your organization are people of color? Percentage: _______________%
5.
For this year, approximately what percent of the new hires (full-time MIS entry-level positions) in your organization are students who once had MIS internships? Percentage: _______________%
6.
Do you agree that MIS internships help MIS students receive full time MIS entry-level positions? Strongly disagree
7.
Neutral
Strongly agree
Do you agree that declaring a major in MIS in the first two years of college is better than declaring an MIS major in the last two years of college, in terms of receiving full-time MIS entry-level positions? Strongly disagree
9.
Strongly agree
Do you agree that double majors (MIS major plus another major) helps MIS students receive fulltime MIS entry-level positions? Strongly disagree
8.
Neutral
Neutral
Strongly agree
Do you agree that a high overall GPA helps MIS students receive full time MIS entry-level positions? Strongly disagree
Neutral
Strongly agree
10. Do you agree that a high MIS GPA helps MIS students receive full time MIS entry-level positions? Strongly disagree
Neutral
Strongly agree
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
11.
Which qualification do you believe is the most important in your decision to hire a full-time MIS entry-level job candidate? (Please select only one.) Communication skills High overall GPA High MIS GPA Intern work experience Management Skills Recommendations Technical skills Other (please specify):__________________________________
12. Which qualification do you believe is the most important in your decision to hire an MIS internship candidate? (Please select only one.) Communication skills High overall GPA High MIS GPA Intern work experience Management Skills Recommendations Technical skills Other (please specify):____________________________________ 13. Which source does your company normally use to locate potential applicants for its entry-level MIS positions? School’s career planning office Internship fair Internet Newspapers MIS department office Relatives/Friends Instructors’ recommendations Other (please specify):____________________________________ 14.
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In which area does your organization most need new MIS full-time entry-level employees? Systems analysis and design Clerical/data entry Database area IT help desk Networking Programming Web design and development Other (please specify):___________________________________
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
15. Which average salary range does your company offer for full time MIS entry-level positions this year? Less than $30,000 $30,000-34,999 $35,000-39,999 $40,000-44,999 $45,000-49,999 $50,000-54,999 More than $55,000 (If the salary offered is above $55,000, please specify: $______________) Undecided
Part II (#16-58): Required Knowledge/Skills for Entry-Level MIS Professionals. Please indicate how important it is for an entry-level MIS professional in your company to possess the specific job knowledge, skills, and personal attributes listed below. 16. Hardware concepts (PCs/Server/Routers/Network) Unimportant
17.
Neutral
Very Important
Packaged software (e.g., spreadsheet, word processing) Unimportant
Neutral
Very Important
18. Operating systems (e.g., Windows2000/XP/NT, UNIX, Novell) Unimportant
19.
Neutral
Very Important
Network/communication software/program languages Unimportant
Neutral
Very Important
Neutral
Very Important
20. Database design/development Unimportant
21.
Programming languages (high level, 3 rd GL such as COBOL) Unimportant
Neutral
Very Important
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
22. Web Development programming languages Unimportant
Neutral
Very Important
23. SDLC (Systems Dev. Life Cycle) methodologies Unimportant
Neutral
Very Important
Neutral
Very Important
24. Object-oriented methodologies Unimportant
25. Implementation, operation, and maintenance issues (e.g., documentation) Unimportant
Neutral
Very Important
26. Visions about IS/IT competitive advantage Unimportant
27.
Neutral
Very Important
Neutral
Very Important
Awareness of IS technology trends Unimportant
28. Knowledge of specific business functional areas (e.g., finance, marketing, production) Unimportant
29.
Neutral
Very Important
Knowledge of specific industries (e.g., retail, automobile, computers, textile) Unimportant
Neutral
Very Important
30. Knowledge of specific organizations (e.g., your company, your host company) Unimportant
31.
Neutral
Very Important
Knowledge of general business environment (e.g., economic, legal) Unimportant
Neutral
Very Important
32. Team skills (e.g., ability to work as part of a project group ) Unimportant
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Neutral
Very Important
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
33. Communication skills (oral and written) Unimportant
Neutral
Very Important
Neutral
Very Important
34. Personal motivation Unimportant
35. Creative thinking skills (e.g., ability to generate new ideas) Unimportant
Neutral
Very Important
36. Critical thinking skills (ability to analyze and evaluate) Unimportant
Neutral
Very Important
Part III. (#37-58) Please rate the importance of specific software knowledge for a new entry-level MIS employee. 37.
Spreadsheet Tools (e.g., Excel) Unimportant
Neutral
Very Important
38. Word Processing Tools (e.g., Word, WordPerfect) Unimportant
PC Operating Systems (e.g., Win NT/2000/XP, Linux) Unimportant
Neutral
Very Important
58. Mini/Mainframe Operating System (e.g., VMS, UNIX) Unimportant
Neutral
Very Important
THANK YOU for your participation in this survey.
APPENDIX B MIS Student Survey The objective of this survey is to investigate the factors that have impact on students’ full-time job offers in the field of Management Information Systems (MIS). This survey consists of two parts: 1) questions (#1-26) about the internship and job offer, and 2) questions (#27-69) about your perception on the required MIS skill/knowledge set for an entry-level MIS professional. Please fill your answers on the computer answer sheet provided. Please leave identity section, such as name, birth date, id number, special codes of the answer sheet, blank. Your personal information will be kept confidential. The result of this survey will be shared later. Thank you for your cooperation.
Part I. (Question 1-26): Internship Opportunity and Job Offer 1.
What is your primary major? a. MIS b. Majors other than MIS in the business school c. Non-Business major
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
2.
What is your gender? a. Male b. Female
3.
How many majors do you intend to complete? a. 1 b. 2 c. 3 d. 4 or more
4.
You can skip this question if you have a single major in MIS. If you have a major(s) other than MIS, select other major(s): a. Accounting b. Marketing c. Finance d. Decision Science/Management Science e. Economics f. Organization Behavior g. Management (Production/Operation/Human Resource) h. Not business (then specify)______________________________
5. a. b. c. d.
When did you declare your major in MIS? Freshman Sophomore Junior Senior
a. b. c. d. e.
When is your expected graduation time? Spring 2003 Summer 2003 Fall 2003 Spring 2004 Summer 2004
6.
7.
What is your opinion about the next year’s job market in MIS, compared to this year’s market? a. Much Worse b. Worse c. Same d. Better e. Much better
8.
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What factor do you believe is the most important in finding an MIS related full-time job? (Please select only one)
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
a. b. c. d. e. f. g. 9.
Communication skill High GPA Intern work experience Management Skill Recommendation Technical skill Other (please specify:
)
What factor do you believe is the most important in finding an MIS internship? (Please select only one) a. Communication skill b. High GPA c. Intern work experience d. Management Skill e. Recommendation f. Technical skill g. Other (please specify: )
10. What is your current overall GPA (considering all the courses taken so far) a. My GPA is >=3.5 b. >=3.0 and <3.5 c. >=2.5 and <3.0 d. My GPA is <2.5 11.
What is your current GPA in MIS? a. My GPA is >=3.5 b. >=3.0 and <3.5 c. >=2.5 and <3.0 d. MY GPA is <2.5
12. For approximately how many MIS related internships have you applied? a. 1 to 2 b. 3 to 4 c. 5 to 6 d. 7 to 8 e. 9 to 10 f. More than 10 If you never had any MIS related internship, please go to question 20 13. How many MIS related internships have you had so far? a. 1 b. 2 c. 3 d. 4
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
14. From which source did you find your most recent MIS related internship? a. School’s career planning office b. Internship fair c. Internet search d. MIS department office a. Relatives/Friends b. Instructors’ recommendation Other (please specify: ) 15. What is the nature of your most recent MIS related internship? a. Systems analysis and design b. Clerical/data entry c. Database d. IT help desk e. Networking f. Programming g. Web design and development Other (please specify: ) 16. In which type of firms/industry did you have your most recent MIS related internship? a. IT Consulting firms (Big 4: Accenture, Cap Gemini, Deloitte Touche, and PWC) b. IT Consulting firms (other than Big 4 firms) c. Computer technology vendors (e.g., Microsoft, Oracle, Cisco, Dell, etc.) d. Manufacturing firms (e.g., General Electric, Proctor & Gamble) e. Retail firms (e.g., Groceries, department/discount stores, etc.) f. Financial firms (e.g., banks, investment, insurance, etc.) g. Health Care related firms h. Delivery service related firms Other (please specify: ) 17.
To what extent, does your MIS related internship(s) help you perform in MIS courses? a. No help at all b. A little help c. Some help d. A great amount of help
18. To what extent, does your MIS course work help you perform in MIS related internship(s)? a. No help at all b. A little help c. Some help d. A great amount of help 19.
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How much did you receive for your most recent MIS internship? (Please approximate hourly wage if paid a lump sum)
Perception Gaps about Skills Requirement for Entry-Level IS Professionals
a. $10 per hour or below b. $11-13 per hour c. $14-16 per hour d. $17-19 per hour e. $20-22 per hour f. 23 dollars per hour or more Others (please specify:
)
20. To how many companies have you applied for MIS related full-time positions? a. 1 to 2 b. 3 to 4 c. 5 to 6 d. 7 to 8 e. 9 to 10 f. More than 10 21. About how many first round job interviews (MIS related) have you had? a. 1 to 2 b. 3 to 4 c. 5 to 6 d. 7 to 8 e. 9 to 10 f. More than 10 If you have not received any MIS related full-time job offers yet, please go to question 27 on page 7. 22. How many MIS related full-time job offers have you received? a. 1 b. 2 c. 3 d. 4 e. More than 4 23. What is the nature of the MIS related full-time job offer you have received (If more than one job offers, please describe the one you will take)? b. Systems analysis and design c. Clerical / data entry d. Database e. Help desk f. Programming g. Networking h. Web design/development Other (please specify: )
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Perception Gaps about Skills Requirement for Entry-Level IS Professionals
24. Does your job offer come from a company where you had MIS related internship (If you have more than one job offers, use the one that you will take to answer this question)? a. Yes b. No 25. In what type of firms/industry do you receive your MIS related full-time job offer (If you have more than one job offers, use the one that you will take to answer this question)? a. IT Consulting firms (Big 4: Accenture, Cap Gemini, Deloitte Touche, and PWC) b. IT Consulting firms (other than Big 4 consulting firms) c. Computer technology vendors (e.g., Microsoft, Oracle, Cisco, Dell, etc.) d. Manufacturing firms (e.g., General Electric, Proctor & Gamble, International Paper) e. Retail firms (e.g., Groceries, department/discount stores, etc.) f. Financial firms (e.g., banks, investment, insurance, etc.) g. Health Care related firms h. Delivery service related firms Other (please specify: )
26. Please select the salary range for the MIS related full-time job offer you received (if you have more than one job offers, select the range based on the job offer you will take). a. Below 30, 000 b. 30, 000-34,999 c. $35,000-39,999 d. $40,000-44,999 e. $45,000-49,999 f. $50,000-$54,999 g. Over $55,000 h. Undecided (If you’re the salary offered is above $55,000, please specify: $ ) Please go to next page for answering questions on part II.
Part II (#27-69): A Required Skill/Knowledge Set for MIS Professionals In order to perform his/her task professionally and successfully, an IS professional is expected to possess the following set of knowledge/skills (or subjects of knowledge/skills) and personal traits. For each category, please rate how important you think it is for an entry-level MIS professional. Note: The questions (27-69) are the same as the questions (16-58) in the questionnaire used by recruiters in Appendix A.
This work was previously published in the Information Resources Management Journal, Vol. 21, Issue 3, edited by M. KhosrowPour, pp. 39-63, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 5.14
Building Trust in Globally Distributed Teams Julia Kotlarsky University of Warwick, UK Ilan Oshri Erasmus University, The Netherlands Paul C. van Fenema Netherlands Defense Academy, The Netherlands
INTRODUCTION Smith and Blanck (2002) claim that “an effective team depends on open, effective communication, which in turn depends on trust among members. Thus, trust is the foundation, but it is also the very quality that is most difficult to build at a distance” (p.294). Trust is “the willingness of one person or group to relate to another in the belief that the other’s action will be beneficial rather than detrimental, even though this cannot be guaranteed” (Child, 2001, p.275). Trust is widely recognized as crucial for the success of the collaboration and completion of globally distributed team projects (Jarvenpaa
et al., 1998; Rousseau et al., 1998; Jarvenpaa & Leidner, 1999; Child, 2001; Holton, 2001; Evaristo, 2003; Kotlarsky & Oshri, 2005). However, developing trust in global teams often presents significant challenges because it is difficult to assess teammates’ trustworthiness without ever having met them ( McDonough et al., 1999l; Powell et al., 2004). Globally distributed teams consist of professionals working together from different geographical locations to accomplish joint goals. In addition to geographical dispersion, globally distributed teams1 face time-zone and cultural differences such as different language, national traditions, values, and norms of behavior (Carmel, 1999).
Virtual team members rely strongly on ICT-based communications. They often have no prior history of working together and rarely have face-to-face interactions (Zakaria et al., 2004). Irrespective of the advanced technologies that are in place, trust is the main factor that can prevent the transformation of geographical and organizational distances to psychological distances (i.e., individuals experiencing their counterparts as strangers) (Snow et al., 1996). In this article, trust-building in globally distributed teams will be explored. First, some definitions of the key concepts and types of trust will be provided and a review of recent discussions in the literature will be presented. Following this, a discussion about trust-building in globally distributed teams will be developed. Lastly, future research in this area will be suggested and conclusions offered.
BACKGROUND Trust denotes the collaborative dynamic of a learning organisation (Handy, 1995). Several researchers have studied this concept and obtained various definitions and influences of trust: •
•
•
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It is a psychological state comprising the intention to accept vulnerability based on positive expectations of the intentions or behaviour of another (Rousseau et al., 1998). The willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party (Mayer et al., 1995). Having sufficient confidence in a partner to commit valuable resources, such as finance and know-how, to collaboration with that partner, despite the risk that the latter may take advantage of this commitment (Child, 2001).
According to Jarvenpaa et al. (1998), trust is a “dyadic relationship” involving the trustee’s perceived ability, benevolence and integrity and the trustor’s propensity to trust. Ability is defined as the acquired skills that make a trustee competent in the eyes of the team. Benevolence is the willingness to do good to the trustor without having ulterior motives. Integrity is the dependability the trustor feels towards the trustee as a consequence of adherence to a set of principles. The trustor’s propensity to trust is the expectation that the trustor has about the trustworthiness of the trustee. Dirks and Ferrin (2001) propose that trust can affect how individuals measure the future behaviours of their team members or can affect how individuals construe past or present actions of the same members. Adding to this, Evaristo (2003) suggests that trust in past, present and future actions can “reduce some of the uncertainties or ambiguities in relationships”. The benefits of trust as outlined by Child (2001) are: •
•
• •
Members are willing to overcome cultural barriers and put in efforts to eliminate difficulties that arise in collaboration. Members can handle uncertain situations far better when there is trust involved; they are able to adapt to unforeseen circumstances quicker and with fewer conflicts. Trust provides an alternative to the demotivating impact of control. It encourages the open exchange of ideas that lead to innovation in product development.
Different types of trust have been identified in the literature. We will focus on those appropriate to virtual environments: 1.
Swift trust is a fragile form of trust that emerges quickly, has a temporary lifespan and is most common in virtual teams. The concept of “swift trust”, developed by
Building Trust in Globally Distributed Teams
2.
Meyerson et al. (1996), is used for temporary teams whose experiences are formed around a common task for completion of which the team was formed (Jarvenpaa & Leidner, 1999). Swift trust is based on the fact that team members in virtual settings do not have the time or facilities to develop trust in a traditional manner. Instead, team members base their expectations of developing trust on stereotypical impressions from others in their previous experiences from other settings. Swift trust allows members to perform actions that will help them maintain trust in addition to dealing with uncertainty, ambiguity and vulnerability (Jarvenpaa et al., 1998; see Figure 1). Swift trust requires clear role divisions between team members and a well-defined area of specialty for each expert involved. Inconsistent role behaviour or unclear roles will wear swift trust away. Characteristic-based trust is based on attributes (characteristics) identified in the other party (e.g., ethnic group, religious affiliation, age and/or role in an organisation) ( Zucker, 1986; Husted, 1998). This type of trust is related to identification-based trust in those cases when people trust somebody because they share some characteristics (e.g., same cultural background, similar family situation or similar position within
3.
organisation). This trustworthiness between individuals is based on the belief that the parties also share the same values (Husted, 1998). This type of trust develops through personal interactions when the personal characteristics of an individual can be observed (e.g., during face-to-face meetings, formal or informal) or when background information about individuals is posted on an intranet or shared through informal communications. Compared to swift trust, characteristic-based trust is more reliable, as it is based on a variety of personal characteristics identified in a specific individual (rather than other individuals from previous experiences, as in swift trust). Yet, learning about the “characteristics” of an individual can be influenced by bias, as individuals may create an image of themselves that hide some characteristics, something that is easier to achieve in settings that offer limited faceto-face meetings such as globally distributed teams. Knowledge-based trust deals with the ability to predict the behaviour of the trustee based on prior performance (Husted, 1998). It relies on mutual confidence on the basis of mutual knowledge and common experience (Child, 2001) accumulated through various repeated interactions (a history of events) that occur between individuals or teams (
Figure 1. Model of trust in global virtual teams (Adapted from Jarvenpaa et al., 1998) Ot her Member s’ per cei ved abi l i t y, benevol ence, i nt egr i t y
Swi f t Tr ust
I ni t i at i ve/ Act i on/ Resul t t owar d a goal
Tr ust
Member s pr opensi t y t o t r ust ot her s
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4.
Zucker, 1986; Husted, 1998). Ability to predict behaviour often requires understanding cultural elements such as common values and beliefs (Hofstede, 1993) and, therefore, might be more difficult to achieve in globally distributed teams that involve individuals with different cultural backgrounds. While swift trust can dissolve very quickly if team members see signs of unreliability and untruthful behaviour during interactions with their remote counterparts, knowledgebased trust offers higher degrees of reliability, as it is based on the mutual understanding that develops through joint work and common experiences (Child, 2001). This type of trust is most significant for successful collaboration but is also most difficult to develop in globally distributed teams. Knowledge-based trust may develop into bonding, which is considered the strongest degree of trust (Child, 2001). Bonding is associated with a strong personal relationship (friendship) and is based on shared concepts, values and moral obligations (Child, 2001). Bonding can also be found in business relationships. In particular, bonding can be developed in business relationships that last over a long period of time and where parties meet regularly on a personal basis (Child, 2001). There are fewer opportunities for bonding in globally distributed teams.
Other types of trust identified in the literature, such as institutional-based trust (assurance by guarantors) and justice-based trust (assurance through fair procedures), while important for all teams, do not particularly assist in developing trust in globally distributed teams. In their study of virtual teams, Jarvenpaa et al. (1998) found the following strategies that were more apparent in teams with a high degree of trust as opposed to teams with little trust: proactive orientation, positive tone, rotating leadership, task goal clarity, time management, nature of feedback,
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and frequent interaction. Teams with a high degree of trust had a sense of reduced vulnerability as a result of clear expectations and task goal clarity. The more virtual team members interact with one another, the less is the uncertainty and ambiguity between them, leading to higher levels of trust. However, there is also evidence that indicates that trust may not always be necessary for collaboration in globally distributed organisations. For example, Gallivan (2001), in his work on the open source software (OSS) industry as a “prototypical” virtual organization, argues that a set of explicit and implicit control mechanisms ensures effective performance. This argument is based on the observation that most OSS projects are controlled and managed so well that team members never feel at risk when dealing with actions. He goes on to argue that principles and control practices reduce individual vulnerability to “opportunistic behaviours” from other team members. Gallivan (2001) believes that instead of trust, “controlling the conditions for collaboration and norms of behaviour” (p.283) can justify individuals’ confidence in each other. In the following section we will explore ways to develop trust in globally distributed teams.
MAIN FOCUS OF THE ARTICLE Building Trust in Globally Distributed Teams It is commonly accepted that trust-building is easier to achieve in a co-located environment than in globally distributed teams through personal contact, frequent interactions and socializing between teams and individuals (Arino et al., 2001; Ba, 2001; Child, 2001). As globally distributed (virtual) teams do not have such opportunities to build trust, they face major challenges in developing and renewing trust throughout a project lifetime. The more “virtual” the team is, the more difficult it is to obtain and maintain that trust.
Building Trust in Globally Distributed Teams
Researchers stress the importance of face-toface meetings in the development of trust. Indeed, the lack of face-to-face meetings in virtual settings could significantly increase the likelihood and severity of misunderstandings between remote counterparts (Holton, 2001; Andres, 2002; Powell et al., 2004; Zakaria et al., 2004; Kotlarsky & Oshri, 2005). It has been further argued that face-to-face interactions in the early stages of collaborative work could positively affect the cultivation of trust. Progressive meetings and interactions throughout a project lifecycle could indeed facilitate the maintenance of this trust. Face-to-face meetings, though very much needed, still pose challenges to globally distributed teams in creating and sustaining trust between remote counterparts (Oshri et al., 2005). Sometimes face-to-face interactions may not be possible or may be limited to only part of the team. Yet even when remote team members meet in person, such meetings alone may not create the conditions through which interpersonal ties between remote counterparts can be created and renewed. Face-to-face meetings tend to be short and often last only a couple of days. The agendas for these meetings often revolve around project and technical issues that need to be resolved, leav-
ing little space for socialization and one-on-one meetings. Such meetings may be enough to move from swift trust to a relatively superficial level of characteristic-based trust, based on attributes identified in the other party during the meeting. However, such meetings would not provide the conditions required to develop knowledge-based trust. Therefore, while face-to-face meetings assist in acquainting remote counterparts with each other and offer opportunities to discuss project and technical issues in person, these meetings, being sporadic, short, selective, and formal to a great extent, hardly support the long-term build-up and renewal of knowledge-based trust between dispersed counterparts. Consequently, we suggest that globally distributed teams and organisations should move on from the traditional focus on face-to-face meetings as the main vehicle through which interpersonal ties such as trust and rapport are created, and should consider investing in before and after face-to-face (F2F) meetings activities to ensure the maintenance of trust between remote counterparts throughout the project life. In this respect, the full lifecycle of social ties (and evolution of trust as part of this lifecycle) should be considered by managers when planning and
Figure 2. The lifecycle of social ties and trust in globally distributed teams stage 3 Renewal knowledge-based trust towards bonding
stage 2 Build Up characteristic-based trust towards knowledge-based trust
stage 1 Introduction
After F2F
During F2F
swift trust
Before F2F
Newcomers
Tools
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executing collaborative work between remote sites (Oshri et al., in press). Social ties represent the interpersonal relationships between remote counterparts, which can be either work-related ties (e.g., involve a person gathering information, advice and resources necessary to accomplish a task) and therefore rely on the willingness to exchange information between remote counterparts (i.e., based on trust), or expressive ties (e.g., friendship, bonding), which involve expressions of interpersonal solidarity (Umphress et al., 2003). Developing trust in globally distributed teams requires an investment in an array of activities that progress the development of the team, from introduction to build-up, and lastly to renewal (as shown in Figure 2). Each step represents an array of activities that a globally distributed team may apply (see Table 1). During the Introduction stage, as team members learn about the roles of their remote counterparts and their areas of expertise, swift trust develops. Then, during the
build-up stage, as remote counterparts interact over distance they develop history of collaboration, which is the basis for knowledge-based trust. In addition, when team members meet F2F, they see each other, interact, and observe body language, behaviour and other “attributes”, based on which initial characteristic-based trust develops. Later on, as team members travel back to their locations and interact over distance (during the renewal stage), they continue developing and renewing knowledge-based trust. Between some members, trust may even evolve into bonding. To act upon the above model, managers could consider various activities at the individual, team and organizational level (see Table 1). Activities within each level contribute to the development of trust between individuals. For example, language lessons offered at the introduction stage are likely to improve understanding and facilitate knowledge sharing and the ability to understand and predict a counterpart’s behaviour. These in turn will facilitate the development of the foun-
Table 1. Individual, team and organizational activities supporting development of social ties and trust Stages:
Introduction
Build-Up
Renewal
Trust:
Swift trust
Characteristic-based trust towards knowledge-based trust
Knowledge-based trust towards bonding
Activities at the Individual level
• Increase awareness of communication styles • Offer language courses • Offer short visits of individuals to remote locations
• Create space for one-on-one interactions • Provide sense of importance to each member • Adjust communication styles
• Ensure real-time communication channels • Ensure mixed audio and visual cues • Offer short visits to remote locations • Offer temporary co-location
Activities at the Team level
• Introduction of new team members • Increase awareness of team composition • Increase awareness of communication protocol • Appoint contact person per remote team • Set up mini-teams • Offer virtual F2F meetings
• Conduct kick-off meeting • Discuss differences between national and organizational cultures • Offer space for multiple interactions between counterparts • Offer team-building exercises • Organise social events • Discuss organizational structure
dations of knowledge-based trust. One-on-one interactions (during the build-up stage) facilitate the development of characteristic-based trust and the sharing of work-related and personal (e.g., cultural) experiences, which in turn could contribute to the development of knowledge-based trust. Inter-personal relationships and trust developed during the build-up stage, in turn, support direct communications over distance and the renewal of knowledge-based trust. In considering this array of activities, managers should first assess at what stage the dispersed team is, prior to embarking on the introduction of specific activities. For example, dispersed teams that are in the introduction stage require different sets of activities that support the buildup of trust from teams that are in the renewal stage. Furthermore, as the project progresses and remote counterparts get to know each other and have established knowledge-based trust, the renewal of such type of trust may require only a sub-set of the activities offered in Table 1. In this regard, the activities offered in Table 1 are not a recipe for building and renewing trust but rather represent a set of possibilities available to managers from which to make a choice when attempting to strengthen interpersonal ties and facilitate development of knowledge-based trust between team members. We argue that each team and team member differs in the way they bond with others, thus requiring a different set of activities that support the renewal of trust. It is the manager’s responsibility to sense, analyze and apply the most appropriate activity at the right time, to ensure that social ties are renewed and the collaborative work is improved (Furst et al., 2004). Lastly, the renewal of knowledge-based trust and the strengthening of interpersonal ties may benefit from staffing project teams based on the potential members’ past shared experiences in addition to their set of skills and expertise. Through such considerations, organisations may reduce the costs associated with the initial development
of swift and characteristic-based trust and focus more on activities that aim at renewing knowledgebased trust through maintaining already existing interpersonal relationships over distance.
FUTURE TRENDS As discussed above, trust in co-located work groups may be somewhat different from trust developed in virtual organisations (Ridings et al., 2002). However, most existing studies on trust in global and virtual teams are still by and large based on definitions of trust from the co-located team literature. Future research on trust and trust-building in global (virtual) teams should attempt to understand the nature of trust in distributed contexts and how such trust can be obtained. Some of the key questions that research should address are: •
•
How remote counterparts experience “trust”: what feelings, behaviours and expectations constitute “trust” between remote counterparts? What types of trust exist and how can these trust types be developed in global virtual teams?
There is a reciprocal relationship between trust and knowledge sharing (Storck, 2000) and between trust and the ability of globally distributed team members to communicate effectively ( Jarvenpaa et al., 1998; Jarvenpaa & Leidner, 1999). On one hand, it is necessary to maintain some form of trust between two dispersed team members in order for them to share knowledge and communicate openly. On the other hand, for the cultivation of trust in the initial phases, members need to communicate and share knowledge. This reciprocal relationship needs to be studied further. Furthermore, future trends include the development of methodologies to ensure coordination
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activities that will bypass trust-related problems and development of mechanisms that facilitate building of trust in globally distributed teams.
CONCLUSION This article has explored the trust-building process in globally distributed teams. The types of trust appropriate to globally distributed teams were reviewed, and the challenges associated with the development of trust in globally distributed teams were discussed. In particular, we focused on the evolution of trust from swift trust, which is a fragile form of trust, into characteristic-based and knowledge-based trust, two forms of trust that offer more reliability over time and that can be developed through the development of shared histories and experiences. We have discussed the role of face-to-face meetings in building trust between remote counterparts and highlighted the importance of developing trust before and after face-to-face meetings. While research and practice have made significant progress in understanding trust-building in co-located teams, far more investment in understanding the nature of trust and the development of methodologies and trust-building mechanisms is still needed in order to improve collaboration in globally distributed teams.
REFERENCES MEYERSON ET AL., 1996) Andres, H. (2002). A comparison of face-to-face and virtual software development teams. Team Performance Management, 8(1-2), 39-48. Arino, A., de la Torre, J., & Ring, P. (2001). Relational quality: Managing trust in corporate alliances. California Management Review, 44(1), 109-131. Ba, S. (2001). Establishing online trust through a community responsibility system. Decision Support Systems, 31(3), 323-336.
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Carmel, E. (1999). Global software teams: Collaborating across borders and time zones. Upper Saddle River, NJ: Prentice-Hall P T R. Child, J. (2001). Trust—The fundamental bond in global collaboration. Organizational Dynamics, 29(4), 274-288. Dirks, K., & Ferrin, D. (2001). The role of trust in organizational settings. Organizational Science, 12(4), 450-467. Evaristo, R. (2003). The management of distributed projects across cultures. Journal of Global Information Management, 11(4), 58-70. Furst, S., Reeves, M., Rosen, B., & Blackburn, R. (2004). Managing the life cycle of virtual teams. The Academy of Management Executive, 18(2), 6-20. Gallivan, M. (2001). Striking a balance between trust and control in a virtual organization: A content analysis of open source software case studies. Information Systems Journal, 11(4), 227-304. Handy, C. (1995). Trust and the virtual organization. Harvard Business Review, 73, 40-50. Hofstede, G. (1993). Cultural constraints in management theories. Academy of Management Executive, 7(1), 81-94. Holton, J. (2001). Building trust and collaboration in a virtual team. Team Performance Management, 7(3-4), 36-47. Husted, B. (1998). The ethical limits of trust in business relations. Business Ethics Quarterly, 8(2), 233-248. Jarvenpaa, S., Knoll, K., & Leidner, D. (1998). Is anybody out there? Antecedents of trust in global virtual teams. Journal of MIS, 14(4), 29-64. Jarvenpaa, S., & Leidner, D. (1999). Communication and trust in global virtual teams. Organization Science, 10(5), 791-815.
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Kotlarsky, J., & Oshri, I. (2005). Social ties, knowledge sharing and successful collaboration in globally distributed system development projects. European Journal of Information Systems, 14(1), 37-48. Mayer, R., Davis, J., & Schoorman, F. (1995). An integrative model of organizational trust. Academy of Management Review, 20(3), 709-734. McDonough, E., Kahn, K., & Griffin, A. (1999). Managing communication in global product development teams. IEEE Transactions on Engineering Management, 46(4), 375-386. Meyerson, D., Weick, K., & Kramer, R. (1996). Swift trust and temporary groups. In R. Kramer & T. Tyler (Eds.), Trust in organizations: Frontiers of theory and research (pp. 166-195). Thousand Oaks, CA: Sage Publications. Oshri, I., Kotlarsky, J., & Willcocks, L. (2005). Before, during and after face-To-face meetings: The lifecycle of social ties in globally distributed teams. In D. Avison & D. Galletta (Eds.), International Conference of Information Systems. Las Vegas, NV: Association for Information Systems. Oshri, I., Kotlarsky, J., & Willcocks, L. (in press). Missing links: Building critical social ties for global collaborative teamwork. Communications of the ACM.
Smith, P., & Blanck, E. (2002). From experience: Leading dispersed teams. The Journal of Product Innovation Management, 19, 294-304. Snow, C., Snell, S., & Davison, S. (1996). Use transnational teams to globalize your company. Organizational Dynamics, 24(4), 50-67. Storck, J. (2000). Knowledge diffusion through “strategic communities.” Sloan Management Review, 41(2), 63-74. Umphress, E., Labianca, G., Brass, D., Kass, E., & Scholten, L. (2003). The role of instrumental and expressive social ties in employees’ perceptions of organizational justice. Organization Science, 14(6), 738-753. Zakaria, N., Amelinckx, A, & Wilemon, D. (2004). Working together apart? Building a knowledgesharing culture for global virtual teams. Creativity and Innovation Management, 13(1), 15-29. Zucker, L. (1986). Production of trust: Institutional sources of economic structure: 1840-1920. In B. Staw & L. Cummings (Eds.), Research in organizational behavior (pp.53-111). Greenwich, CT: JAI Press.
KEY TERMS
Powell, A., Piccoli, G., & Ives, B. (2004). Virtual teams: A review of current literature and directions for future research. Database for Advances in Information Systems, 35(1), 6-36.
Bonding: Associated with a strong personal relationship (friendship) and based on shared concepts, values and moral obligations and liking each other (Child, 2001).
Ridings, C., Gefen, D., & Arinze, B. (2002). Some antecedents and effects of trust in virtual communities. Journal of Strategic Information Systems, 11(3-4), 271-295.
Characteristic-Based Trust: Based on attributes (characteristics) identified in the other party (e.g., ethnic group, religious affiliation, age and/or role in an organisation) (Zucker, 1986; Husted, 1998).
Rousseau, D., Sitkin, S., Burt, R., & Camerer, C. (1998). Not so different after all: A cross-discipline view of trust. Academy of Management Review, 23(3), 393-404.
Globally Distributed Teams: Consist of professionals working together from different geographical locations to accomplish joint goals.
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Knowledge-Based Trust: Deals with the ability to predict the behaviour of the trustee based on prior performance (Husted, 1998). It relies on mutual confidence on the basis of mutual knowledge and common experience (Child, 2001). Social Ties: The relationships between remote counterparts, which can be either work-related ties (e.g., involve a person gathering the information, advice and resources necessary to accomplish a task), or expressive ties (e.g., friendship), which involve expressions of interpersonal solidarity (Umphress et al., 2003).
Swift Trust: Used for temporary teams whose experiences are formed around a common task for completion of which the team was formed (Jarvenpaa & Leidner, 1999). Trust: Defined as the willingness of one person or group to relate to another in the belief that the other’s action will be beneficial rather than detrimental, even though this cannot be guaranteed (Child, 2001).
ENDNOTE 1
In this chapter the terms ‘globally distributed’ and ‘virtual’ teams are used interchangeably.
This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik and M. Cunha, pp. 92-99, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.15
Government and Corporate Initiatives for Indian Women in IT Monica Adya Marquette University, USA
INTRODUCTION Education of women severely lags behind that of men in many developing nations. Fewer girls go to school, tend to drop out earlier than boys, do not receive the same level of education as their male counterparts, and often choose careers that are female predominant (Kelly, 1987). Without exception, India is quite representative of these gender-biased phenomena in education. However, the recent explosion of offshore outsourcing market in India has created a new recognition regarding the role of women in technological careers. The Indian IT sector has seen a trend contrary to what most western nations are experiencing— predominance of women in IT, particularly in IT-enabled services (ITES). India has acknowledged that extensive and intensive use of information and communications technologies (ICT) alone can help the nation develop its neglected human resources, emerge
as a knowledge-based society, and participate competitively in the global trade and services. Consequently, the development of ICT has become a national issue with strong impetus from the union government in New Delhi (Choudhary, 1999). Explicit in this initiative is the recognition that to progress as an information society, women must be empowered as key players the IT sector. In parallel, two other trends have focused attention on women in the information society—a nationwide movement for women’s rights spearheaded by many non-government organizations (NGOs) and an increased awareness of corporate social responsibility. Consequently, over the last decade, there has been an increased emphasis on education and reskilling India’s female workforce. While many government efforts are targeted toward the overall upliftment of women, many grassroots level initiatives led by NGO’s and corporations emphasize technological training. This article highlights how the intertwining of grassroots and policy level efforts can increase the
Government and Corporate Initiatives for Indian Women in IT
pace at which a nation’s female workforce can be reskilled and prepared for a technological world. The article also addresses concerns about such rapid development and potentially challenging outcomes while making recommendations for improvement.
BACKGROUND In many contexts, India is a representation of paradoxes. Over 44% of India’s population is below the poverty line, its per capita income is under $100, and adult literacy rate is about 44.3%. Yet, the Indian education system churns out young minds that have excellent training in math, science, and technology (MST). While only 25% of India’s urban population and 1.5% of its rural population has access to telephones, India boasts of one of the fastest growing software industries in the world. The role of women in the Indian society remains similarly paradoxical. India was one of the first countries to give voting rights to women subsequent to emancipation from British rule in 1947 (UNESCO, 2002). The country was led by a woman prime minister for several decades, a rarity on a global scale. Religious scriptures lay particular emphasis on the power of the woman to enable a progressive society. However, while the Indian constitution grants many legal rights to women, the socio-economic status of women still seriously lags behind that of men. There has been no dearth of government initiatives in India in the past to promote equalization of gender roles. Yet some of the most meaningful schemes have emerged only in recent years for several reasons: the IT sector has experienced rapid growth due to global sourcing, monetary compensations for IT related positions have increased dramatically, and many NGOs, women’s organizations, and corporations have become more radically involved in female participation to leverage these trends. The next few sections
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examine the role of these entities in the advancement of women in the IT sector.
MAIN THRUST The function of government in India’s workforce development reflects a trend that has been observed in many western nations where the government has gradually withdrawn from the direct delivery of many programs and has increasingly relied on non-profit organizations to take on this role (Zappala, 2000). NGO’s and corporations have stepped in to implement and deliver government policies for improvement of education and working conditions.
Government: An Overall Emphasis on Girls and Women Governments in many developing countries, including India, have been instrumental in providing funding for IT education and training to encourage everyone, not just women, to become technically sophisticated. Women have, however, seized these opportunities willingly because IT work presents an opportunity for women to compete with men cerebrally—rather than physically (Sneddon, 2004). One such initiative in recent years has been making education pervasive in all households. While not an IT initiative, the most common educational policies and goals are not intended to help one group of users more than any others (Klein, 1987). In year 2000, the government initiated a $250 million national program with the objective of enrolling all children between 6-14 years of age in the educational system by 2010 (UNESCO, 2004). Subsets of this program, National Program for the Education of Girls at the Elementary Level (NPEGEL) and Kasturba Gandhi Swantantra Vidyalay (KGSV) focus on bringing girls into the education stream. This program is aimed at developing model elementary schools in 21 states with an emphasis on providing benefits
Government and Corporate Initiatives for Indian Women in IT
for underprivileged and under represented girls in education. This is a start to overcoming one of the most serious barriers to representation of women in the workforce in India—increased and improved education for girls. As a part of these umbrella reforms in the Indian educational infrastructure, the government has established proactive policies for girls’ enrolment in science, engineering, and technology (SET) courses. Computer literacy excellence awards for schools that demonstrate promotion of technological education have been initiated to encourage schools and colleges to examine and improve their IT curricula. The residual effects of widespread women’s movements are evident in the declaration of Year 2001 as the “Women Empowerment Year.” While the general objective of this initiative was to provide self-awareness and generate an environment conducive to development of self-confidence and assertiveness among women, a significant portion of this initiative was devoted to women in technology. Specifically, some plans related to: • •
•
Establishment of technology parks National assessment of technology drudgery reduction, tools and implements income generation for women A traveling exhibition of women in MST
The establishment of the Ministry of Communications and Information Technology (MIT) has provided a significant impetus to the development of India’s IT workforce. The multitude of projects undertaken by this ministry includes: •
•
•
Establishment of a task force with the intent of setting up a long-term strategy for development of a strong IT workforce Provision of employment oriented training for educated youth to meet the shortage of trained IT professionals Development of curricula in cyber security and IT systems management
•
Setting up ERNET, a network for academic and research institutions
The ministry has also instituted the “IT Super Power Group” to promote improvement of IT workforce whose immediate concern is to address issues regarding women in technology and technology development in rural areas. While MIT has been actively involved in the development of broad policy initiatives, many of these are filtering down to women through NGO’s and corporations.
Government Support for Higher Education and Training Initiatives in Technology Recognizing that implementation of many programs must occur from the grassroots, specifically educational institutions and other non-academic training institutes, the government of India began providing more support to private institutions and colleges that impart technology training. The recent establishment of the Department of Education Accreditation of Computer Courses (DOEACC) has enabled accreditation of educational institutions on their technology course offerings (DDSI, 2002). This division of the MIT provides accreditation at four levels—from diploma and certification to MS programs. The government also has plans for Indian Institutes of Technology Management (IITM) modeled after the prestigious Indian Institutes of Technology (IIT) that have produced talented workforce in MST for decades. IITM is expected to continue this effort with focused attention on IT workforce development.
Improving Working Conditions for Women in Technology Outsourcing from the western countries has posed a unique demand on the Indian workforce. IT service providers must now work in 24-hour shifts
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Government and Corporate Initiatives for Indian Women in IT
to complement working hours of their western clients. Women desiring to leverage growth in the IT sector must adapt to these new requirements. Since corporations were not under mandate to provide conducive working environments for women, these long and awkward hours of IT work were discouraging. In recent years, however, working conditions for women in IT have received much attention from state and federal governments. Of particular interest is the State of Karnataka, home of India’s Silicon Valley—Bangalore. Karnataka has instituted policies that require at least five women to be employed during night shift in an IT company, free transportation to and from home, adequate number of women security guards on the premises, privacy for women employees, and provision of day-care facilities for children under the age of six. Similar initiatives have been instituted by the city of Chandigarh, which requires sufficient security and transportation for all women between 18-21 working on night shift in ITES industries. While such policies are not pervasive in India yet, the government’s role in rapid policy creation and of corporations in policy implementation has been encouraging.
Women IT Entrepreneurs With 65% representation, ITES represents a successful sector for women in India. Much of this success can be attributed to involvement of women from lower income strata in setting up IT entrepreneurships. Several government initiatives have been focusing on promoting technology development in rural India with particular emphasis on promoting women IT entrepreneurs. Mother Teresa Women’s University has initiated new courses for promoting high-tech professional entrepreneurship among women. These courses are offered in conjunction with the University Grants Commission (UGC), the only educational grant giving institution in India. The government has also empowered certain banks to provide liberal
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loans conditions such as reduced interest rate and relaxed margins for women.
Non-Government Organizations In an attempt to harness the forces of rural and low-income populations in India, several programs train and educate underprivileged women in IT. One such example is World Bank’s SITA (Studies in Information Technology Applications) program for low income and socially underprivileged women, which is part of a larger initiative for gender empowerment. About 507 women from families with incomes less than $60 were given free intensive hands-on computer training based on real life exercises using MS Office 2000. Some trainees were attached to a potential employer. Trainees were required to offer part-time services as an assistant Trainer, after completing her course in order to provide confidence required in the workplace. MitraMandal, a co-operative enterprise has furthered SITA by continuing to train women from low-income families (Sane, 2001) India’s National Institute of Information Technology (NIIT) was formed in 1981 with the intention of providing certificate training in information technology. Recognizing the alarming trend of low female representation in their own curriculum as well as in the U.S., NIIT’s recent ventures provide basic technology education for women and children. In particular, two initiatives have particularly been focused in this direction—Hole in the Wall and Swift Jyoti. The former program provides training to children in technology while developing their ability to selftrain in technology. The Swift Jyoti program was designed with the intention of “bringing 50,000 women and computers together.” This low cost ($15), three-week program provides functional computer literacy for women in four languages. NIIT recently provided free training to 5000 teachers and principals. Another program initiated by the organization is BOOT IT, a television-based distance-learning project, to bring computer edu-
Government and Corporate Initiatives for Indian Women in IT
cation free to the homes of millions of Indians. In an attempt to bring awareness to these issues, NIIT has launched programs such as World Computer Literacy Day and International Women’s Month (NASSCOM, 2003).
Industrial Partnerships Many corporations are beginning to recognize, as a part of their social responsibilities, the need to provide technical education to underprivileged girls. Examples of such organizations are vMoksha and Xansa. vMoksha has partnered with Navjaeevna, a home for underprivileged girls, to provide basic computer knowledge and awareness of the relevance of computer education. To initiate the program, vMoksha donated computers and employed a teacher to give the girls a basic IT education. Corporations such as Xansa have recognized through their IT initiatives that corporate social responsibilities must extend beyond the provision of IT education. Xansa, a UK based IT outsourcing firm, has consciously been involved in the development of IT workforce through support for underprivileged sections of the Indian population. It initially adopted schools and villages with the intention of providing basic computer education. However, it soon recognized that that lack of basic amenities such as water, clean and hygienic environments, and education were a greater bane for these schools and villages and has subsequently partnered with other social institutions such as Pratham to better provide these amenities to schools and villages. Realizing the important role of technology in adult education and job training, IBM has set up the Gandhi Institute of Computer and Information Technology, in partnership with the Bharatiya Vidya Bhawan. This institute provides free computer education to students from the economically weaker sections of society. IBM has donated PCs and other equipment to open a computer center for imparting training to the visually impaired
students of the Victoria Memorial School for the Blind in Mumbai. IBM has also extended its computer camps for middle-school girls, EXITE (Exploring Interest in Technology and Engineering), to India. In this program, girls receive handson experience and support, while learning how to break down and rebuild computers, construct web sites, build and program a Lego robot, and develop presentations among other tasks. The goal is to encourage girls’ interest in MST and provide an in-depth look at career opportunities in the field of technology (IBM, 2005). India’s leading outsourcing provider, Tata Consultancy Services (TCS) has developed computerized programs to address the adult literacy problem in India. The company has undertaken adult education projects in many states. Microsoft has committed to the provision of academic software worth $1 million for five years to children studying in various schools in the country with the intent of providing basic software training in MS Office, Visual Basic, and other common software packages. These applications are being provided to public schools that typically do not have funds to obtain such resources. With a strong belief that India’s educational system need to be strengthened, Polaris has set up “Ullas” trust, which gives monetary aid to students who cannot afford education on their own. It is also providing them free computer training at its office premises. Many of these corporations such as Infosys, TCS, and Polaris are also providing volunteer time and funds for promotion of general welfare of women and children and have subsumed technological training under this larger initiative.
CONCLUSION Due to recency of many initiatives described above, complete and valid data is not available to describe the success of many of these ventures. Statistics indicate that increasing number of women are entering the IT workforce at various
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professional levels, that increased entrepreneurship initiatives in the form of cybercafe’s as been on the rise, and that internet is now available in many rural areas. Suggestive of successful policy and grassroots level initiatives, these trends are encouraging since they represent a multi-faceted approach to a basic problem more prevalent in the underprivileged sections of the population— women and children. Many of the educational initiatives are encouraging since they promote IT education as a part of an overall improvement in the curriculum. However, the progress must be continuous and progressive and not just in response to market demands. At a lower level, are the corporate and NGO initiatives with regard to computer technology as successful? Many of these programs are attempting to provide IT education to women from underprivileged backgrounds. Often these women have minimal or no education and are more socially constrained than those from more affluent environments. These constraints can reduce the potential of meaningful employment subsequent to a basic computer education. An example of such an initiative is the efforts of the SITA project described above. This project, though successful in training many women from low-income groups, did not result in meaningful employment for an estimated 70-trained women. The demoralizing outcome of this project resulted in its collapse in December 2000. While these initiatives may enable underprivileged women to rise from their current vicious circle of poverty and lack of opportunities, they also run the risk of continuing to promote routine, low skill, and low paying IT initiatives for women while retaining the higher skilled jobs for men who already benefit from greater access to higher education and better training. As Hafkin and Taggert (2001) suggest, the provision of basic education and training for women must be improved in order for them to obtain the true benefit of globalization and IT growth. For this, policies that ensure IT education in early years
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and increased higher education for women must be effectively implemented before benefits of IT training can be achieved. Obstacles faced by women in homes and work environments must be reduced for beneficial outcomes (Gurumurthy, 2004). New forms of these impediments, ironically often promoted through the use of ICTs, must also be recognized and eradicated in its nascency. For instance, a study by the International Labor Organization reports that 3 out of 4 call center workers face repeated sexual harassment over the phone (ILO, 2001). Similarly, promotion of pornography via internet is another looming threat to the equalization of female work conditions in many of these countries. Results of many initiatives discussed above will be slow in emerging. A micro level improvement in women’s education, social, and economic infrastructures must emerge in order for the true benefits of these initiatives to set in. This may take a few decades. However, the increased recognition of women in the workforce by the government, and a grassroots level effort by NGOs and corporations appears to be the right strategy for bringing rapid changes for female representation in IT. For researchers, India provides a unique opportunity to examine issues related to upliftment of women in a specific sector. In stark contrast to the gradual development of IT sector in most developed nations, India’s rapidly expanding IT sector poses unique challenges and opportunities that are ripe for examination in research settings.
REFERENCES Choudhary, T. H. (1999) India’s evolution into an information society. The Journal of Policy, Regulation, and Strategy for Communications, 1(2), 171-176. DDSI—Dependability Development Support Initiative (2002). National dependency policy environments—India. Retrieved February 25, 2005,
Government and Corporate Initiatives for Indian Women in IT
from http://www.ddsi.org/Documents/final%20 docs/DDSI_Country_Reports_Final_India.pdf
Gurumurthy, A. (2004) Bridge development— Gender and ICT. Institute of Development Studies. http://www.bridge.ids.ac.uk/reports/ CEP-ICTs-OR.pdf
Sneddon, J. (2004) Women in information technology. Retrieved February 25, 2005, from http:// www.knighthunter.com/Articles/WomenInIT. asp
Hafkin, N., & Taggert, N. (2001). Gender, information technology, and developing countries: An analytic study. Office of Women in Development Bureau for Global Programs, Field Support, and Research, United States Agency for International Development (USAID).
UNESCO. (2004). From darkness to light: Reaching the un-reached children. Retrieved February 25, 2005, from http://www.unesco.org/education/ efa/EFA_2004/inde_celebration.doc.
IBM. (2005). IBM technology camps inspire worldwide EXCITEment. Retrieved February 25, 2005, from http://www.ibm.com/ibm/ibmgives/ grant/education/camp.shtml International Labor Organization—ILO. (2001). The information technology revolution: Widening or bridging gender gaps? ILO department of Communication. Retrieved from http://www. ilo.org/public/english/bureau/inf/pkits/wer2001/ wer01ch4.htm Kelly, G. (1987). Setting state policy on women’s education in the third world: Perspectives from comparative research. Comparative Education, 23(1), 95-102. Klein, E. (1987). The diffusion of consciousness in the United States and Western Europe. In M. Katzenstein & C. Mueller (Eds), The women’s movements of the United States and Western Europe (pp. 23-43). Philadelphia, Temple University Press. NASSCOM—National Association of Software and Service Companies. (2003). Corporate Social Responsibility—Going beyond the buzzword. Retrieved February 25, 2005, from http://www. nasscom.org/newsline/feb03/feature.asp Sane, K. V. (2001). ICT and Gender Empowerment—SITA project. February 25, 2005, from
UNESCO—Asia Pacific Gender Equity in Science and Technology (India Report). (2002). Retrieved February 25, 2005, from http://www.unesco.or.id/ apgest/countryreports/india.shtml Zappala, G. (2000). Civil society and the nonprofit sector: The role of volunteers. Research and Advocacy Briefing Paper. Retrieved February 25, 2005, from http://www.smithfamily.com.au/ documents/Briefing_Paper_3.pdf
KEY TERMS DOEACC: Department of Education Accreditation of Computer Courses, an autonomous division of the Indian Department of Information Technology tasked with the accreditation of computer courses—http://www.doeacc.org.in/ ERNET: Education and Research Network, a project initiated by Indian Ministry of Communications and Information Technology that has undertaken the establishment of a national network to support research and development in educational institutions—http://www.mit.gov.in/ hrd/ernet.asp MIT: The Ministry of Communication and Information Technology formed by the Indian government to oversee and direct the design, development, and management of technological education and progress in India—http://www.mit. gov.in/
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NPEGEL: The National Program for the Education of Girls at the Elementary Level intended to improve the educational conditions of women and girls in India with special emphasis on technological training.
UGC: University Grants Commission, a government organization with two broad level functions, providing funds to Indian educational institutions and coordination, determination, and maintenance of standards in institutions of higher education—http://www.ugc.ac.in/
This work was previously published in Encyclopedia of Gender and Information Technology, edited by E. Trauth, pp. 739-744, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.16
Understanding Effective E-Collaboration Through Virtual Distance Karen Sobel Lojeski Virtual Distance International, USA Richard R. Reilly Stevens Institute of Technology, USA
INTRODUCTION Virtual distance is a multidimensional perceptual construct resulting from key elements that promote a sense of distance in e-collaborative work environments. Why will virtual distance help to uncover some of the potential downside risks of collaboration using virtual and outsourced resources? Research has shown that the perceived distance between two or more individuals has negative effects on communication and persuasion and promotes a tendency to deceive more than those who do not perceive themselves to be as distant (Bradner & Mark, 2002). Virtual team members and work groups are, by definition, distant from
one another, not only in the physical sense but in other ways as well. Socio-emotional factors, for example, can play a role in perceived distance and these factors may contribute to decreased success (Barczak & McDonough, 2003). The virtual distance model (VDM) was developed after conducting an extensive literature review and combining findings from that effort with executive interview information collected over the course of the first 18 months of this research. The model was tested using a multi-step research method including surveys and follow-up interviews with key executives from a sample of corporations leveraging virtual workspaces.
Understanding Effective E-Collaboration Through Virtual Distance
BACKGROUND While the notion of distance is, by definition, at the heart of virtual team studies, most of the literature has focused on geographic and temporal factors. Virtual teams (VTs) are those defined as having members that are geographically separate, often with vast distances between one another (Alavi, 1994; Townsend, DeMarie, & Hendrickson, 1998; Majchrzak, Malhotra, Stamps, & Lipnack, 2004). Therefore, the idea that physical distance plays a role in VT behavior is well established. However, research also shows that other variables can contribute to a sense of socio-emotional or psychological distance. Interpersonal, social, organizational, and technical factors also play a role and have important implications for the attitudes and behavior of team members and their ability to succeed (Bradner & Mark, 2002). These factors can include, but are not limited by, building trust and motivating one another, cultural diversity and lack of goal clarity (Barczak & McDonough, 2003). Collaboration, whether it is face-to-face (FtF) or computer mediated, occurs within a much broader context than simply geographic and temporal dispersion. So there is reason to expand the research beyond physical distance constructs. One of the basic assumptions of this thesis was that the use of geographic and temporal distance constructs alone, are not enough to explain performance differences among teams in the 21st century. Instead, it was posited that the construct of distance for VTs be expanded to include socioemotional distance factors as well. As Stephen Roach wrote, “it is time to let go of some of our time-honored relationships” (Roach, 2005). While he was referring to macroeconomic relationships, the sentiment applies to micro-economic relationships as well, including virtual teams and globally distanced workforces. A paradigm shift in thinking is required to do so and a new, unifying and parsimonious framework is needed to open up the black box that sits between virtual work and performance outcomes; one that
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reflects the integrative and multi-dimensional nature of the complex interplay of both real and perceived issues at the individual and group level. The development of such a model was the purpose of this thesis and the resulting model has been named, the virtual distance model (VDM). The model was developed through a review of the major research streams primarily in management and technology, combined with some central tenants of the theories of distance, social science, and psychology. In addition, an initial set of field studies was conducted, in the form of executive interviews, to ground the theoretical discussion in real-world terms as perceived by leaders at major, global organizations.
FACTORS INFLUENCING DISTANCE Based on a review of management, information systems and psychological literature, a number of socio-emotional distance factors that influence team members were identified. These include spatial, temporal, technical, organizational and social factors that shape the perceptions of individuals engaged in e-collaborative work. In the present investigation these factors were reviewed in terms of how they collectively impacted work related attitudes, behavior and performance. Eleven factors likely to influence the perceptions of distance between team members are discussed in the following sections (see Figure 1).
Geographic Distance (GD) Research suggests that physical separation or closeness is of great importance to interactions and that the closer one is physically to another, the greater the chance to form social ties (Latane & Herrou, 1996). Physical distance also impacts the tendency to deceive, ability to influence, the likelihood of cooperation (Bradner & Mark, 2002), and has been shown to have some impact on learning behavior (Latane & Bourgeois, 1996;
Understanding Effective E-Collaboration Through Virtual Distance
Temporal Distance (TD) Differences in time zones between VT members are often cited as one of the factors that plays a role in VT interactions (Jarvenpaa & Leidner, 1998; Montoya-Weiss, Massey et al., 2002; Massey, Montoya-Weiss et al., 2003). It has also been suggested that TD be considered when structuring organizations (Orlikowski & Yates, 2002), globalizing an organization (Boudreau, Loch et al. 1998), assessing team boundary issues (Espinosa, Cummings et al., 2003) and coordinating VTs (Montoya-Weiss et al., 2002)
Relational Distance (RD) RD refers to the difference between team members’ organizational affiliations. For example, an employee is relationally closer to another employee of the same company than to employee from a third party service provider. RD has been shown to play a key role in social cohesion (Moody & White, 2003), information systems networks, as well as leader effectiveness (Klagge, 1997).
Cultural Distance (CD) Cultural differences have, to date, been a focus of some research in virtual work and innovation, VTs (Jarvenpaa & Leidner, 1999; Dube & Pare, 2001; Massey, Montoya-Weiss et al., 2001), new product teams (Barczak & McDonough, 2003), risk mitigation (Grabowski & Roberts, 1999), virtual societies (Igbaria, 1999), consensus building using group support systems (Mejias, Shepherd et al., 1997), majority influence (Tan, Wei et al., 1998), software development (Tellioglu & Wagner, 1999) and more. CD has also been used to study foreign investment expansion, entry mode choice, and the performance of foreign invested affiliates, among others (Shenkar, 2001). Following the discussion of social network theory and distance related phenomenon, CD has also been used to interpret network ties amongst managers (Stevenson, 2001). Additionally CD is used to explain how international relationships affect responses and behaviors amongst employees (Thomas & Ravlin, 1995).
Social Distance (SD) SD has been studied in a number of contexts including class or status differences (Akerlof, 1997),
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feelings of social closeness and distance based on social interactions in social space (Bottero & Prandy, 2003), as a factor in direct and networked exchanges (Buchan, Croson et al., 2002), as a function of management (Fox, 1977), a dimension of the systematic multiple level observation of groups (SYMLOG) management behavior assessment (Jensen, 1993), as a perceived measure contributing to the concept of leader distance (Antonakis & Atwater, 2002), and as a factor in friendship networks (Krackhardt & Kilduff, 1999). Wiesenfeld and colleagues found that virtual work environments may weaken ties that bind organizations and their members together (Wiesenfeld, Raghuram et al., 1999) increasing SD. In another case, centrality, or less distance from the center of the social network, was found to mediate the relationship between social status and virtual R&D groups (Ahuja, Galletta et al., 2003). In a virtual organization with no formalized hierarchy at the outset, the emergence of a hierarchy and SD was found (Ahuja & Carley, 1999).
Relationship History Distance Relationship history includes both the extent to which members have had a prior relationship or relationships with some of the same people. RH has been shown to be important in mentoring (Siegel, 2000) and trust building (Rousseau, Sitkin et al., 1998). In his study, “When does the medium matter? Knowledge-building experiences and opportunities in decision-making teams,” Alge showed that FtF teams exhibited higher levels of openness, trust and information sharing than computer mediated teams that did not have a RH. However when computer mediated teams had prior relationships, many of these issues were eliminated. (Alge, Wiethoff et al., 2003).
Interdependence Distance Interdependence distance is the degree to which one individual or group perceives that their suc1604
cess is tied to another individual or group member (Thompson, 1967). Thompson claimed distance was a major factor in his classification scheme on Interdependence (Thompson, 1967). Interdependent tasks require more communication (Bishop & Scott, 2000), which should lead to decreased distance between team members. Task interdependence has also been related to both organizational commitment and team commitment and OCB (Pearce & Gregersen, 1991; Bishop & Scott, 2000). In the virtual realm, goals may become less clear amongst players if they are not directly attached to some sort of organizational mandate (Manzevski & Chudoba, 2000). Interdependent goals have also been found to have importance to international teams (Davison, 1994) and embedded, interdependent goal-setting in GSS has been shown to help team cohesion (Huang, Wei et al., 2003).
Face to Face (FtF) Interaction The notion of social presence has been used in research on virtual work to describe the extent to which team members feel the presence of other group members and the feeling that the group is jointly involved in communicating (Andres & Zmud, 2002; Venkatesh & Johnson, 2002). One end of the continuum of social presence is FtF so frequency of FtF interaction should be related to perceptions of distance. In some cases only email is used and no FtF or phone communications are considered (Jarvenpaa & Leidner, 1999). In other studies, two or more types of mediated communications are investigated. In “Why Distance Matters, Effects on Cooperation, Persuasion and Deception” (Bradner & Mark, 2002), the authors chose instant messaging and video conferencing in an attempt to simulate two ends of the communication spectrum. In other studies it has been found that some FtF meetings blend well with other types of communication mediums. There is some emerging support for the notion that a mix of communication methods improves per-
Understanding Effective E-Collaboration Through Virtual Distance
formance (Aiken & Vanjani, 1997) and produces higher levels of commitment (Alavi, 1994; Alavi, Wheeler et al., 1995).
Team Size Group or team size has been shown to affect one’s sense of belonging (Williams & Wilson, 1997). A sense of belonging is critical to the development of organizational identity, which has been shown to have a direct influence on OCB (Shamir, 1990; Pratt, 1998). Group size in VTs has also been shown to affect team decision making (Baltes, Dickson et al., 2002) and satisfaction (Dennis & Wixom, 2002). Group size in virtual work had impact on group support system processes (Dennis & Wixom, 2002).
Multi-Tasking Multi-tasking is a term used to describe a person working on more than one task at a time. It can create significant stress on a person if he or she becomes overloaded and it can lead to less efficiency and productivity (Brillhart, 2004). Cognitively distancing oneself from the stress created by multi-tasking and information overload is known as absent presence, “the idea that we may be physically on a street corner, but our distracted minds are not” (Berman, 2003). The absent presence is a form of psychological distance. Some have found that frequent interruptions affect decision-making (Speier, Valacich et al., 1999; Thompson, 2005). During meetings in the new millennium many listen to presentations while also using hand-held PDAs to communicate with others simultaneously. Some experts believe that multi-tasking in this way is detrimental to productivity (Richtel, 2003). While it has been shown that telecommuting can improve satisfaction and work/ life balance (Hill, Miller et al., 1998), family and other home-based considerations may represent a form of multi-tasking that creates stresses that are difficult to overcome (Richtel, 2003). The
extent to which workers engage in multi-tasking depends, in part, on the organization’s desire to increase productivity (Cascio, 1993; Snizek, 1995); another key reason why virtual work is proliferating at “hyperspeed.”
Technical Skill Studies have shown that a member’s comfort level with technology plays a role in their interactions with distant team members (Staples, Hulland et al., 1999). Less technically competent team members may be less inclined or able to communicate and form the kinds of relationship that would decrease social distance. The theory of cognitive fit describes the need for matching problem-solving task to problem-solving tools in order to obtain higher levels of performance (Agarwal, Sinha et al., 1996). Major corporations have also found that technical and interpersonal skills are important to the selection of VT members who are most likely to be committed to the project and to each other (Kirkman, Rosen et al., 2002).
RESEARCH RESULTS The virtual distance model has been applied in two related research studies which offer empirical support for the importance of virtual distance in e-collaboration. A study of 72 collaborative teams showed that a virtual distance index (VDI), based on the eleven factors described above, was directly related to trust and clarity of project vision and goals and indirectly related to organizational citizenship behavior and project success (Reilly, Sobel Lojeski, & Dominick, 2005). A second study (Sobel Lojeski, Reilly, & Dominick, 2006) replicated these findings with 115 collaborative teams drawn from the financial, pharmaceutical and other industries and also showed that VDI had similar indirect influence on the level of innovation. Figure 2 shows the results of a structural equation model analysis of the relation-
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Understanding Effective E-Collaboration Through Virtual Distance
Figure 2.
ships between virtual distance, trust, vision/goal clarity, organizational citizenship behavior and innovation and project outcome.
FUTURE TRENDS Many of the implications of virtual distance have yet to be studied. Some areas that are potentially interesting and important include affective variables, selecting and organizing VTs and managing and leading VTs. For example, how does distance influence the emotional and affective side of work? Do distant employees have more or less satisfaction; are they more or less committed? Recent research has confirmed the increased difficulty of meeting socio-emotional needs of VT members (Chidambaram, 1996; Lurey & Raisinghani, 2001; Maznevski & Chudoba, 2001). In a recent paper, Kock (2004) suggests that human evolution has designed both our brains and bodies for FtF communication. It may be that alternatives to the social interactions of the workplace will have to be found for many virtual workers to meet some of the social and emotional needs required for job and life satisfaction. Notions of virtual distance may also be applied to selecting and organizing VTs. For example, a critical global project may require understanding
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and perhaps minimizing the distances between team members by selecting individuals with closely aligned work-related values and organizing the tasks to provide clear opportunities for interdependence and frequent communication. Selecting team members with a history of working together may also be a way to decrease the virtual distance within a team. Lynn and Reilly (2002) found that very high performing teams generally knew one another and had worked on similar projects before. In addition to selecting members with past common experiences, organizations can also plan for the future by providing opportunities for dispersed co-workers to build relationships. Practitioners may want to start to address CD from a values point of view as well as demographics-based education. Training on cultural demographics helps organizational members who visit different countries on a regular basis. It is also useful for leaders who manage multi-cultural team members. However, this type of training does not necessarily improve alignment between cultural value divides—one of the most salient factors contributing to CD and virtual distance. The findings suggest that if cultural values were the focus of more training, team selection processes and mentoring programs, then perhaps higher levels of trust and clarity may emerge, potentially resulting in higher levels of success.
Understanding Effective E-Collaboration Through Virtual Distance
Practitioners also should develop better methods for creating an environment where informal status can be elevated. These practices might include higher levels of recognition for contribution of team members through more frequent and targeted leader messages to all team members. VT reward and recognition programs can also be developed to help bolster team member perceptions of informal status based on rewards for contributions. Practitioners can help to minimize virtual distance by illuminating social networks within the organizational web. Once visible, they can focus on seeding project teams with a few members that may have worked together in the past or who know some of the same people. This will help to reduce virtual distance and increase trust. Another area of application of virtual distance notions is in team leadership. Understanding how distant team members are from one another and how they differ on key facets of virtual distance can help project managers to better lead and manage. As virtual work proliferates effective leadership of projects in virtual space will become an essential competitive weapon.
REFERENCES Akerlof, G. A. (1997). Social distance and social decisions. Econometrica, 65(5), 1005. Ahuja, M. K., & Carley, K. M. (1999). Network structure in virtual organizations. Organization Science, 10(6), 741. Alavi, M. (1994). Computer-mediated collaborative learning: An empirical evaluation. MIS Quarterly, 18(2), 159. Alge, B. J., Wiethoff, C., & Klein, H. J. (2003). When does the medium matter? Knowledgebuilding experiences and opportunities in decision-making teams. Organizational Behavior and Human Decision Processes, 91(1), 26.
Barczak, G., & McDonough, E. F. (2003). Leading global product development teams. Research Technology Management, 46(6), 14. Bradner, E., & Mark, G. (2002). Why distance matters: Effects on cooperation, persuasion and deception. Paper presented at the CSCW 2002, New Orleans, LA. Brillhart, P. E. (2004). Technostress in the workplace managing stress in the electronic workplace. Journal of American Academy of Business, Cambridge, 5(1/2), 302. Coppola, N. W., Hiltz, S. R., & Rotter, N. G. (2002). Becoming a virtual professor: Pedagogical roles and asynchronous learning networks. Journal of Management Information Systems, 18(4), 169. Igbaria, M. (1999). The driving forces in the virtual society. Association for Computing Machinery. Communications of the ACM, 42(12), 64. Jarvenpaa, S. L., Knoll, K., & Leidner, D. E. (1998). Is anybody out there? Antecedents of trust in global virtual teams. Journal of Management Information Systems, 14(4), 29. Latane, B., & Bourgeois, M. J. (1996). Experimental evidence for dynamic social impact: The emergence of subcultures in electronic groups. Journal of Communication, 46(4), 35. Latane, B., & Herrou, T. (1996). Spatial clustering in the conformity game: Dynamic social impact in electronic groups. Journal of Personality and Social Psychology, 70(6), 1218. Majchrzak, A., Malhotra, A., Stamps, J., & Lipnack, J. (2004). Can absence make a team grow stronger? Harvard Business Review, 82(5), 131. Roach, S. (2005). The new macro of globalization. Global Economic Daily Comment. Thompson, J. D. (1967). Organizations in action. New York.
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Townsend, A. M., DeMarie, S. M., & Hendrickson, A. R. (1998). Virtual teams: Technology and the workplace of the future. The Academy of Management Executive, 12(3), 17. Venkatesh, V., & Johnson, P. (2002). Telecommuting technology implementations: A within-and between-subjects longitudial field study. Personnel Psychology, 55(3), 661.
KEY TERMS Cultural Distance: Cultural distance is a function of differences in values and communication styles that are rooted in culture (demographic OR organizational). Distance is created when individuals or groups perceive that their values and communication styles differ from others. Interdependence Distance: Interdependence is the degree to which one individual or group perceives that their success is tied to another individual or group member. Interdependence distance is created when individuals or groups do not perceive their goals or tasks as interconnected. Relational Distance: Relational distance is based on the difference between team members’
organizational affiliations. Distance is created when individuals are in different companies. Relationship History Distance: Relationship history includes both the extent to which members have had prior relationships with one another (strong ties), or relationships with some of the same people (weak ties). Distance is created if the strong and weak ties between individuals are absent. Social Distance: Social distance is based on perceptions of class or status differences that produce feelings of social closeness or distance based on social interactions. Social distance is created when individuals perceive themselves to be in a different class or status than others. This can be formal status or informal status differences. Virtual Distance Index: The virtual distance index is an operational measure (quantitative score) of virtual distance. It is a standardized, equally weighted average of all of the virtual distance factors in the model. Virtual Distance Model: The virtual distance model incorporates a set of eleven physical, social and work-related factors that create a sense of perceived distance in individuals, teams and organizations collaborating in virtual space. Virtual distance is created as distance within each of the eleven factors in the model becomes greater.
This work was previously published in Encyclopedia of E-Collaboration, edited by N. Kock, pp. 660-666, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.17
The Role of Rhetoric in Localization and Offshoring Kirk St.Amant East Carolina University, USA
INTRODUCTION Globalization is increasingly integrating the world’s economies and societies. Now, products created in one nation are often marketed to a range of international consumers. Similarly, the rapid diffusion of online media has facilitated cross-border interactions on social and professional levels. Differing cultural expectations, however, can cause miscommunications within this discourse paradigm. Localization – customizing a communiqué to meet cultural expectations – has thus become an important aspect of today’s global economy. This essay examines localization in offshoring practices that could affect database creation and maintenance.
BACKGROUND To understand localization, one must understand how rhetoric, or the way in which information is
presented, can vary along cultural lines. Each culture has a set of rhetorical expectations, or conditions, for how to convey ideas effectively (Kaplan, 2001; Woolever, 2001). The more closely a message meets the rhetorical expectations of a cultural group, the more likely members of that group will consider that message credible or usable (Bliss, 2001). If one does not meet a culture’s rhetorical expectations, then the related group is likely to view a message as non-credible and will be less inclined to consider it. Moreover, if noncredible messages are associated with a particular product, audiences might consider that item as not worth purchasing (Ulijn & Strother, 1995).
Rhetoric and Verbal Communication Differing rhetorical expectations means information considered credible by one cultural group might be deemed suspect or unusable by another (Woolever, 2001; Ulijn & St.Amant, 2000). Language is perhaps the most obvious factor related
The Role of Rhetoric in Localization and Offshoring
to credibility in cross-cultural exchanges. That is, if one wishes to develop informative materials for another culture, then concepts must be presented in the language used by that group. (If one wishes to target information for an audience in France, one should use the French language when presenting ideas.) Using the correct language, however, is often not enough, for cultural groups can have different norms for how ideas should be expressed within a language (Ulijn, 1996; Kaplan, 2001; Driskill, 1996). These expectations often reflect deepseated values or societal rules (Neuliep, 2000; Ferraro, 2002). It is thus often difficult for the members of one culture to anticipate the rhetorical expectations another cultural group associates with credible presentations. These cultural-rhetorical differences, moreover, can assume a variety of forms. Some cultures tend to prefer more linear/focused presentations in which connections between ideas and conclusions are explicitly stated (Campbell, 1998; Ulijn & St.Amant, 2000). Other cultures, however, might prefer more indirect presentations in which individuals seem to go off on tangents or avoid directly stating facts or conclusions (Woolever, 2001; Ulijn & St.Amant, 2000; Campbell, 1998). These variations can cause misperceptions or confusion when different cultural groups interact. As Ulijn and St.Amant (2000) note, many Western cultures prefer a more direct presentation of information. In contrast, many Eastern cultures use a more indirect approach when sharing ideas. As a result, the indirect style used by Eastern cultures is often viewed as evasive or dishonest by Westerners who expect presenters to “get to the point.” Conversely, many Easterners tend to view the direct presentation style of Western cultures as rude, for by directly stating information (stating the obvious), an individual is patronizing the audience. In such cases, failing to address the rhetorical expectations of the “other” culture can undermine the credibility of persons interacting in cross-cultural exchanges.
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Rhetoric and Visual Communication Interestingly, cultural rhetorical expectations are not restricted to verbal presentations. Rather, they also affect how different groups perceive and respond to visual displays. In some instances, the cultural expectations of what features an item – or visual representations of an item – should possess can differ from country to country. Such differences can affect how audiences perceive the credibility and the acceptability of visual displays (Kamath, 2000; Neuliep, 2000). For example, the perception of a mailbox being a box that sits atop a post and that has a “red flag” on the side of it is, essentially, a U.S. one (Gillette, 1999). In other cultures, a mailbox might be a small door in a wall or even a cylindrical metal container. These design discrepancies could cause confusion when individuals use images to share information across cultures. Consider the following situation: Persons from different nations come to a web portal and expect to find a “mail” function on that portal. To address this expectation, the portal’s designers have included an “access mail” icon into the portal’s design. The image used for this icon, however, is a U.S.-style mailbox. Unfortunately, this choice of image renders that depiction unrecognizable to persons from different cultures – cultures in which mailboxes have very different characteristics. Those individuals might then consider the associated web portal non-credible, for they perceive it as lacking the key design feature of a mail option. In this way, cultural differences can affect sites that use the “wrong” kind of image. The presence or absence of a design feature, moreover, can affect the credibility of an image or of an overall website. Cultures, for example, can associate different meanings with the same color (Conway & Morrison, 1999; Ferraro, 2002). These associations could affect how individuals from different cultures perceive the meaning of a particular image. In the United States, for example, a blue ribbon usually indicates first place, while
The Role of Rhetoric in Localization and Offshoring
the same color ribbon in the United Kingdom often indicates second place. (In the U.K., a red ribbon often signifies “first place/winner.”) The different associations related to the color blue could affect how persons from the U.S. vs. the U.K. view a “blue ribbon product” (first rate vs. second rate). In terms of web design, one might consider how the blue ribbon image associate with the Electronic Frontier Foundation’s (EFF) Blue Ribbon Campaign for Free Speech Online – an icon proudly displayed by many U.S. websites – could affect how persons from the U.K. perceive the quality of information found on such sites (i.e., second rate information). The expectations cultures can have for verbal and visual communication can affect the success of cross-cultural exchanges. For these reasons, individuals can benefit from practices that address cultural differences on both a verbal and a visual level. Localization offers a solution to such situations.
MAIN FOCUS OF THE CHAPTER Localization is a process in which professionals design or revise materials to meet the rhetorical expectations of a particular cultural group (Esselink, 2000; Yunker, 2003). Often abbreviated as L10n (for the 10 letters between the “L” and the “n” in “localization”), localization generally involves one of two scenarios.
Post-Production Localization In this scenario, an organization creates a product for a specific cultural audience (Esselink, 2000; Yunker, 2003). Both the product and its related documentation are then designed to meet the rhetorical expectations that particular culture associates with credibility. Over time, however, the company decides to market the product in other nations. Yet the design of the original item and its related materials might conflict with the
rhetorical expectations of other cultural audiences. At this point, the organization has localizers re-design the product to make it appear credible to users from other cultures (Esselink, 2000; Yunker, 2003). Such a process involves converting information from the rhetorical styles used in source (original) materials to those of a different cultural audience (known as the target audience). Such after-the-fact localization involves factors of translation (language) and visual design – both in terms of layout and image use. The text is often translated into the language of the desired target audience, and visual and design factors are revised or replaced to match the expectations that same audience (Esselink, 2000; Yunker, 2003). Ideally, this process is a relatively simple “find and replace” activity in which items in source materials are replaced with culture-specific ones designed for other audiences. Unfortunately, certain factors can affect the ease with which localizers accomplish such a process. One of the more interesting problems in this context is text expansion. The idea is information that can be conveyed with a single word in one language might require multiple words to convey the same meaning in another language (Esselink, 2000; Yunker, 2003). The English-language expression “overtime pay” (2 words), for example, is often translated as “remuneration des herues supplementaires” (4 words) in French. Even in cases where a single word is used to convey the same concept in different languages, the length of the related word could vary considerably. The English word “Help” (4 letters), for example, can be translated into “Assistance” (10 letters) in French. Text expansion is important, for it can affect the design of a product. Software, for example, might use drop down menus to access certain functions. The width of a menu, however, is often configured to be as wide or narrow as the longest line of text in that menu. The formatting of a drop down menu might therefore require redesign to
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The Role of Rhetoric in Localization and Offshoring
accommodate the text expansion related to insert corresponding information presented in another language. Changes resulting from text expansion could also require individuals to re-configure an overall interface to accommodate all of the textual features associated with a particular program (Esselink, 2000; Yunker, 2003). Similarly, website features such as menu buttons or menu options might require redesign to accommodate text expansion (St.Amant, 2003). In such cases, the size and structure of menu bars or a web page might also need to be re-configured to accommodate such changes. Other instances might require the localizer to remove or replace certain design features, such as pictures or icons, to address the sensibilities of different target cultures (Esselink, 2000; Yunker, 2003). The removal or replacement of such items, however, could create gaps in the overall interface or change the layout of or the flow of text within an interface depending on the size of the images that are removed or replaced (St.Amant, 2003). Additionally, the expectations of a target culture might be so different that creating a localized item involves an entire redesign of an overall product. These factors are further complicated by the fact that localization is often done on relatively tight schedules and with limited budgets. In such cases, localizers often find themselves balancing issues of quality with those of cost and time.
Simultaneous Localization In a more ideal situation, localization occurs at the start of a product’s development (Esselink, 2000; Yunker, 2003). In these cases, localizers do more than “revise” source texts created for one specific culture. Rather, localizers simultaneously generate original source materials for different cultural audiences. Such a process allows for the coordinated release of a product into different overseas markets. While such processes seem time and cost intensive, the quality of the resulting materials would generally be better than items localized after the fact. 1612
Another benefit of simultaneous localization is localizers might notice design factors (e.g., the construction of an interface) that would render a product less usable by a certain cultural audience (Esselink, 2000; Yunker, 2003). The localizer could then present this problem to the actual designer, programmer, or engineer creating the product. Such consultations allow developers to revise a product during vs. after the initial design process and alleviates many problems related to re-engineering completed products. In both scenarios (i.e., post-production and simultaneous localization), localization facilitates the flow of information from one cultural group to another by revising materials to meet different rhetorical expectations. While localization practices often focus on products or product-related services, localization can be adapted to address processes. Perhaps the most influential reason for such an adaptation is the spread of a production approach known as offshoring.
FUTURE TRENDS Growth in Global Online Access At present, there are some 1.3 billion persons around the world who have access to the online environment (Internet Usage Statistics, 2008). While this number is only 1/6 of the world’s population, international online access continues to increase with amazing speed. The number of Internet users in Australia, for example, grew by almost 350,000 between June and August of 2004 (Active Internet users July, 2004). In Canada, spending on IT infrastructure is expected to grow by $4 billion (US) between 2004 and 2008 (Canada Gets with IT, 2004) while in South Korea, roughly 75% of the population has access to broadband (Forsberg, 2005; Borland & Kanellos, 2004). This easy and cheap access to broadband has led to a rapid growth in the number of online gamers in South Korea and to the
The Role of Rhetoric in Localization and Offshoring
development of the nation’s online educational institutions (Lessons from Afar, 2003; Borland & Kanellos, 2004). The most astounding growth, however, is taking place in developing nations. The number of Internet connections in India, for example, was projected to grow by 28 percent between 2006 and 2007 (Burns, 2007), while online access in China grew from 2.1 million users in 1999 to 210 million in 2007 (The Flies Swarm In, 2000; Internet Usage in Asia, 2008). In Africa, some 44 million persons have regular Internet access, and Africa’s number of internet users has grown by almost 880% between 2000 and 2007 (Internet Usage Statistics for Africa, 2008). Additionally, the number of individuals going online in Eastern Europe has grown exponentially in recent years, and Lithuania, Latvia, Poland, and Russia have all experience 300+ % growth in online access since 2000 (Burns, 2005).
Offshoring Examined The increase in global access has prompted many companies to explore database creation and management processes involving online communication technologies. One of the most interesting approaches is offshoring – a process in which organizations use online media to exchange information and electronic products (e.g., software) with employees in other countries. Generally, companies in industrialized nations export work to employees in developing nations. These employees can often perform skilled IT work for a fraction of what it would cost in industrialized countries, and online media allow these workers to interact directly and quickly with one another and with the company sponsoring a project. These factors also mean •
Parts of a database creation or maintenance process can be performed simultaneously in different locations
•
Materials related to database creation or management can be forwarded from one time zone to another and allow work to continue without pause
Ideally, offshoring creates quality database products that can be completed more quickly and cheaply than if the item had been produced domestically. These benefits have inspired private companies and municipal governments to use offshoring for a variety of database-related activities (The New Geography, 2003; Relocating the Back Office, 2003; Engardio, 2006). Trends in information technology and in demographics furthermore indicate offshoring practices will increase in coming years as more developing nations seek to enter this highly profitable area (St.Amant, 2007). Successful offshoring involving database creation and management, however, depends upon effective communication. In offshoring projects, ignored or misinterpreted information could result in employees performing a process incorrectly. Moreover, the speed with which such processes take place, when combined with the physical and cultural distance separating participants, means mistakes might go unnoticed until it is too late. Information therefore needs to be conveyed in a rhetorically effective manner that encourages participants to make use of it. Localization, in turn, becomes an important process, for it increases the chances workers from different cultures will use essential materials.
Localization and Offshoring Practices Localization can take place at two levels within offshoring. The first level is interface design and involves the medium through which individuals interact. In many cases, participants collaborating on offshoring projects come to a central online location (e.g., a company portal or web page) to collect, present, or exchange information related
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to a particular product or production process. These interfaces, however, must be designed to encourage use if all involved parties perform their tasks correctly. Localization can facilitate such information exchanges by creating interfaces that meet the credibility expectations of different cultures and thus encourages effective use of such interfaces. The second level of localization involves the use of online media (e.g., email, chats, and bulletin boards) to share information. In these exchanges, participants need to know two important pieces of rhetorical information: 1.
2.
How to draft online messages that recipients from other cultural groups will consider credible and worth responding to How to interpret verbal messages constructed according to different cultural rhetorical norms
In both cases, localizers can provide participants with communication “cheat sheets” that address these factors. The first cheat sheet would explain how to draft messages that addresses the rhetorical expectations of other cultural groups involved in an offshoring process. The second cheat sheet would tell users how to interpret the meaning individuals from other cultures convey via a particular rhetorical structure. By teaching others how to address and interpret such rhetorical factors, localization enhances communication activities within offshoring. Such approaches contribute to the success of projects involving offshoring.
CONCLUSION The global nature of modern business means individuals must now consider interactions in terms of international audiences. These audiences can have different expectations of how information should be presented. Fortunately, localization can
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facilitate cross-cultural interactions by converting materials from one cultural rhetorical style to another. While localization has traditionally dealt with products, the shift to offshoring allows localization to address processes as well. Thus, by understanding what localization is and how it works, organizations can increase their successes in a variety of cross-cultural communication situations related to database creation and maintenance.
REFERENCES Active Internet users by country, July 2004. (2004, August 25). ClickZ. Retrieved July 10, 2008, from http://www.clickz.com/stats/sectors/geographics/ article.php/3397231 Bliss, A. (2001). Rhetorical structures for multilingual and multicultural students. In C. G. Panetta (Ed.), Contrastive rhetoric revisited and redefined (pp. 15-30). Mahwah, NJ: Lawrence Erlbaum Associates. Borland, J. & Kanellos, M. (2004, July 28). South Korea leads the way. News.Com. Retrieved November 2, 2005, from http://news.com.com/So uth+Korea+leads+the+way/2009-1034_3-52613 93.html Burns, E. (2007, July 5). Urban Indian web users. ClickZ. Retrieved April 3, 2008, from http://www. clickz.com/showPage.html?page=3626341 Campbell, Charles P. (1998). Rhetorical ethos: A bridge between high-context and low-context cultures? In S. Niemeier, C. P. Campbell, & R. Dirven (Eds.), The Cultural Context in Business Communication (pp. 31-47). Philadelphia, PA: John Benjamin. Canada gets with IT. (2004, September 29). Insurance-Canada.ca. Retrieved February 5, 2005, from http://www.insurance-canada.ca/ebusiness/ canada/eMarketer-Canada-IT-409.php
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Conway, W. A. & Morrison, T. (1999). The color of money. Global business basics, Retrieved December 10, 1999 from, http://www.getcustom. com/omnibus/iw0897.html Driskill, L. (1996). Collaborating across national and cultural borders. In D. C. Andrews (Ed.), International dimensions of technical communication (pp. 21-44). Arlington, VA: Society for Technical Communication. Drucker, P. (2001, Nov. 1). The next society: A survey of the near future. The Economist, pp. 3-5. Engardio, P. (2006). Let’s offshore the lawyers. BusinessWeek, Retrieved April 3, 2008 from http://www.businessweek.com/magazine/content/06_38/b4001061.htm?chan=search Esselink, B. (2000). A practical guide to localization. Philadelphia, PA: John Benjamins. Ferraro, G. (2002). Global brains: Knowledge and competencies for the 21st century. Charlotte, NC: Intercultural Associates. Forsberg, B. (2005, March 13). The future is South Korea: Technology firms try out latest in world’s most wired society. San Francisco Chronicle. Retrieved November 3, 2005, from http://www. sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/03/13/ BROADBAND.TMP Gillette, D. (1999, December). Web design for international audiences. Intercom, pp. 15-17. Internet usage in Asia. (2008). Internet World Stats. Retrieved April 3, 2008, from http://www. internetworldstats.com/stats3.htm Internet usage statistics. (2008). Internet World Stats. Retrieved April 3, 2008, from http://www. internetworldstats.com/stats.htm Internet usage statistics for Africa. (2008). Internet World Stats. Retrieved April 3, 2008, from http:// www.internetworldstats.com/stats1.htm
Kamath, G. R. (2000, May). The India paradox. Intercom, pp. 10-11. Kaplan, R. B. (2001). Foreword: What in the world is contrastive rhetoric? In C. G. Panetta (Ed.), Contrastive rhetoric revisited and redefined (pp. vii-xx). Mahwah, NJ: Lawrence Erlbaum Associates. Lessons from afar. (2003, May 8). The Economist. Retrieved September 12, 2005, from http://www. economist.com/business/globalexecutive/displaystory.cfm?story_id=1762562&tranMode=none Lui, K. M. & Chan, K. C. C. (2003). Inexperienced software team and global software team. In A. Gunasekaran, O. Khalil, and S. M. Rahman (Eds.), Knowledge and Information Technology Management: Human and Social Perspectives (pp. 305-323). Hershey, PA: Idea Group Publishing. Neuliep, J. W. (2000). Intercultural communication: A contextual approach. Boston: Houghton Mifflin. Relocating the Back Office. (2003, 11 Dec.). The Economist, Retrieved December 20, 2003 from, http://www.economist.com/displaystory. cfm?story_id=2282381 St.Amant, K. (2007). Outsourcing: Perspectives, practices, and projections, IEEE Transactions on Professional Communication, 50, 81-84. St. Amant, K. (2003). Designing web sites for international audiences, Intercom, 15-18. The flies swarm in. (2000). The Economists. Retrieved April 3, 2008, from http://www.economist.com/world/ displaystory.cfm?story_id=E1_GPPG The new geography of the IT industry. (2003, 17 July). The Economist, Retrieved December 20, 2003, from http://www.economist.com/displaystory.cfm?story_id=S%27%29HH%2EQA%5B %21%23%40%21D%0A Ulijn, J. M. (1996). Translating the culture of technical documents: Some experimental evidence.
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In D. C. Andrews (Ed.), International dimensions of technical communication (pp. 69-86).Arlington, VA: Society for Technical Communication. Ulijn, J. M. & St.Amant K. (2000). Mutual intercultural perception: How does it affect technical communication–some data from China, the Netherlands, Germany, France, and Italy. Technical Communication, 47(2), 220-37. Ulijn, J. M., & Strother, J. B. (1995). Communicating in business and technology: From psycholinguistic theory to international practice. Frankfurt, Germany: Peter Lang. Wired China (2000, July 22). The Economist, pp. 24-28. Woolever, K. R. (2001). Doing global business in the information age: Rhetorical contrasts in the business and technical professions. In C. G. Paneta (Ed.), Contrastive Rhetoric Revisited and Redefined (pp. 47-64). Mahwah, NJ: Lawrence Erlbaum Associates. Yunker, J. (2003). Beyond borders: Web globalization strategies. Boston: New Riders.
KEY TERMS Localization: The process of revising materials designed for one culture to meet the communication expectations of a different culture. Offshoring: Production process in which individuals in other nations perform work for an organization. Online Media: Communication technologies that use the Internet or the World Wide Web to present or exchange information. Rhetoric: The manner in which information is presented. Source/Source Text/Source Materials: Original materials designed for a specific cultural group. Target Culture: The culture for which one revises source materials in the localization process. Text Expansion: When one language requires more words to express the same meaning than does another language.
This work was previously published in Handbook of Research on Innovations in Database Technologies and Applications: Current and Future Trends, edited by V. E. Ferraggine; J. H. Doorn; L. C. Rivero, pp. 844-851, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.18
Intercultural Collaboration in the ICT Sector Martina Maletzky Technische Universität Berlin, Germany
ABSTRACT In the context of global sourcing in, and internationalization of, the ICT sector, intercultural collaboration is for many ICT workers a daily affair. Especially in the field of software development, where the needs for communication are high, intercultural collaboration poses a particular challenge. Misunderstandings and an unproductive work atmosphere may result in hidden costs for the companies. This chapter highlights the different types of intercultural collaboration in the ICT sector, identifying the special challenges that occur and suggesting ways in which companies may minimize such challenges of intercultural collaboration.
INTRODUCTION Intercultural collaboration is a necessity for many ICT workers since the ICT sector has become
highly globalized. In the context of international market entries, mergers, network production, as well as near- and offshoring, three modes of intercultural collaboration take place: collaboration in multicultural teams, in dispersed teams and in the context of foreign assignment. If persons with different cultural backgrounds work together, challenges occur due to different value systems, work and communication styles. They join the general difficulties of internationalization and industrialization in the ICT sector and, thus, are often overlooked but may hold risks and provoke hidden costs. This chapter describes the challenges of intercultural collaboration and methods to control the risk of intercultural friction focusing on the particular modes of collaboration. Companies should include results of intercultural research into their selection of personnel strategies. Additionally a systematic intercultural personnel development by cross-cultural trainings and coaching helps the collaborators to handle culture differences and to establish a productive collaboration.
Due to advanced globalization, intercultural collaboration is becoming a necessity for employees of many sectors and, thus, of the ICT sector as well, because “information technology is largely now a global field, business, and industry” (Aspray, Mayadas, & Vardi, Moshe Y., 2006, p. 9). While the classical industries already had a boom of internationalization with regard of their production locations in the 1970s and 1980s, the ICT producing sector has become increasingly globalized in the last two decades (OECD, 2004). But, particular big companies, such as IBM, already built factories of production in the 1950s outside of the United States. In the 1980s and 1990s, the internationally distributed capacities of production have been integrated in a new model of organization: the network production or “wintelism,” for which the IT Industry has become a paradigm (Ferguson & Morris, 1993). In the year 2004, the OECD states the ICT sector as a leader in the globalization of industry. Motives for expansion of the ICT firms are gaining market access, economies of scales, growth, and access to skills and technology. “Cross-border M&As are the most common form of ICT expansion, enabling faster build-up than greenfield investment” (OECD, 2004, p. 6). A recent development is international sourcing of ITand ICT-enabled business services, or offshoring and nearshoring.1 Off- and nearshoring refer to a total or partial transfer of functions to external enterprises or to dependent enterprises in lower-wage countries as, for example, subsidiary companies and joint ventures in lower-wage countries. The trend is reinforced by competition. Drives are the dynamics of digital delivery, the need to fill skill shortages, to cut costs, and to increase efficiency (OECD, 2004). Offshoring and outsourcing require a minimum degree of industrialization, what means a standardisation and decomposability of the production process in order to reach a reduction of the vertical integration. This means a challenge for implementation in the software industry and its employees, because their work often is associated
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with creativity, which is limited by this process (Boes & Trinks, 2006). Thus, having to handle technical challenges of internationalization and industrialization, soft factors, as for example, those related to cross-cultural collaboration, play a subordinated role regarding personnel development and organizational strategies in the ICT sector. But, they often influence the success of international projects and they may provoke hidden costs2 (DB Research, 2006). In the context of the internationalisation of the ICT industry, different modes of intercultural collaboration proceed: (a) multicultural teams, (b) virtual teams, and (c) foreign assignments. a. Multicultural teams: In times of workforce shortages, which according to the economic theory seems to be a periodic phenomenon (López-Bassols, 2002), one often-practised solution is the inflow of foreign ICT workers, as it has occurred in Europe in a massive way from 1995 until the crisis of the new economy at the beginning of the new millennium in 2002, and especially 2003.3 At the latest, since then, many countries developed special policies in order to ease the workflow (McLaughlan & Salt, 2002). The immigration of ICT workers provokes an international composition of working teams in the ICT sector. While in many European countries, as for example Germany, Ireland, and so forth, cultural diversity in highly skilled jobs in the ICT branch has not been common, in the USA and its melting pot, especially in the Silicon Valley where cultural diversity already has a long tradition. Thus, attention to diversity has grown exponentially in U.S. organizations in the 1980s (Ferdman & Brody, 1998), while in the European debate it does not show such a high presence. The same happens to personnel development strategies in the context of diversity at work. b. Dispersed teams: In the context of saving costs, international network production and
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off- or nearshoring virtual teams are increasing (Martins, Gilson, & Maynard 2004; Davidson & Tay, 2002). Especially if a partial transfer of functions to low-wage countries takes place, the projects often are conducted in geographically dispersed cross-cultural teams. In the context of nearshoring, many companies hope that because of less culture differences dispersed collaboration will be eased (DB Research, 2006), which has not been evidenced yet. c. Sojourns: In the context of M&As and founding of subsidiaries, intercultural collaboration normally takes place in the form of sojourns. Executives are sent abroad in order to coordinate offshore or nearshore centres, the process of merging and founding, or in terms of knowledge transfer. All types of collaboration have particular challenges to overcome, but all have one thing in common: They have to deal with culture differences of the collaborators. According to the UNESCO, culture is defined as a “… set of distinctive spiritual, material, intellectual and emotional features of society or a social group, and that it encompasses, in addition to art and literature, lifestyles, ways of living together, value systems, traditions and beliefs” (UNESCO, 2002). Culture differences can be interpreted as differences in Figure 1. Determinants of intercultural interaction
structures of social systems. They appear where individuals of one social system or culture show accumulations of behavior patterns, which are not observable in the same frequency in another cultural context. That means that the peculiarities of each culture exist in the form of a Gaussian distribution, but with a displacement of the average. The range of the overlap varies, known as the dimensions “difference” or “similarity” of both cultures (see Schroll-Machl, 1999, p. 343). Intercultural interaction is influenced by three dimensions (Thomas, Hagemann, & Stumpf, 2003): culture differences, individual differences, and intercultural knowledge and experience (see Figure 1). Culture differences influence the intensity, quality, and duration of problems related to cultural adjustment. Individual differences are shown in the ability to cope with cultural differences, while former intercultural experiences may have led to a development of a higher degree of intercultural competence, depending on the quality of former contact with other cultures. Intercultural competence may be defined as the ability of perception, appreciation, respect, and productive utilisation of cultural conditions and their influences on perception, thinking, judging, feeling, and interaction. This should be given either by observing the own behavior or the behavior of other persons with different cultural backgrounds (see Thomas, 2003, p. 99). In the following chapter, I describe general challenges of intercultural collaboration. In this context, I will focus then on the particular challenges of the three modes of intercultural collaboration. In the second part of the chapter, I point out possible methods reducing intercultural friction. This can be reached by selection of personnel, including intercultural research results and crosscultural personnel development strategies, as there are cross-cultural trainings and coaching.
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BACKGROUND: CHALLENGES OF INTERCULTURAL COLLABORATION According to Moore and Brown (2004), 51% of CIOs perceive the greatest offshore outsourcing challenges overcoming cultural differences. Comparative, cultural studies have pointed out the high importance of culture influencing perception, cognition, motivation, emotion, and interpersonal behavior (Thomas, 2003; Hall, 1990; Hofstede, 1980, 1991, 1993, 1997, 2000). In the context of internationalization strategies, soft factors are essential, since the interaction has to take place, bridging culture differences, as they occur (e.g., in communication styles, work-related values, and working styles, etc.) (Stumpf, 2003, p. 309). Unfortunately they are often neglected (Bolten, 2002, p. 4). Even if a common language is spoken and historical ties are strong, as it is for example in the case between India and the UK, the culture distance may be high. DB research reports that 56% of British ICT companies mention culture differences as an obstacle for offshoring in India (p. 7). If there is no common mother tongue, communication for all, or at least some collaborators, takes place in a foreign language. That even may be a challenge if the lingua franca is dominated in an excellent way, because the way of coding and decoding a message and communication rules are culture-specific (Hall, 1990; Hofstede, 19804; Demorgon, 1989). Even having the same mother tongue, linguistic mismatches may occur, as it happens frequently between Indian and American collaborators (Matloff, 2005). Additionally, the nonverbal communication is an important factor of interaction, but its interpretation varies over cultures, too. In Albania, accordance is expressed, for example, by sidewise-shaking of the head (DB Research, 2006). Work and leadership styles may have a big range. In some cultures, strict super ordinates and high degree of control are desired. Leadership styles that work in one culture may cause problems in another culture. The disregard of stricter
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hierarchies may cause problems (Winter, 2006; Matloff, 2005; Hofstede, 1980) and unintentionally one may appear as rebellious. On the other hand, it also is possible that egalitarian leadership styles ask too much of the subordinates, which they are not used to handling with participative leadership styles. Thus, problems may occur, for example, faults may not be reported at the time and, therefore, provoke further problems that are difficult to be resolved (Maletzky, 2006). Some investigations have been carried out in order to classify cultures by dimensions, to be able to understand and predict the behavior of persons with a differing cultural backgrounds and to ease the interactions. The highest impact was caused by the dimensions of Hofstede (19805), Trompenaars (1993), Demorgon (1989) and Hall (1990). Nevertheless, it is not possible to predict all facets of culture, taking into account that cultures also vary insight and that, in times of globalization, fast changes occur (Giddens, 2001). Thus, it is more important to develop a general ability for culture learning (Furnham & Bochner, 1982, 1986). The condition for culture learning is intercultural competence, that enables to decipher underlying structures of the others behavior and, thus, to adapt more easily to a foreign culture. Especially in the context of partial transfer of functions to low-wage countries as it is characteristic for ICT off- and nearshoring projects (Wieandt 2007), a lack of intercultural sensibility and competence may cause unpredictable problems, because correct match-fixing has to be done in order to assure that the final product made by foreign workers overseas really exhibits those characteristics that have been required and a frictionless implementation can take place. If this is not the case, additional costs could be the result because it will be necessary to change part of the products, so forth, and, therefore, cause a belated delivery of the final product to the clients. M&A processes require an especially high degree of sensibility and intercultural competence because of an often unbalanced distribution
Intercultural Collaboration in the ICT Sector
of power, which leads to mistrust and avoids a integrative corporate identity. According to studies of Booz-Allen and Hamilton, Mc Kinsey, KPMG and A.T. Kearney, between 34% and 58% of takeovers are failures. Reasons are misunderstandings and coordination problems, as well as strict aspiration to reach a consensus (see Bolten, 2002). Besides general challenges occurring when persons of different cultures collaborate, the above-described three modes of intercultural collaboration show special challenges, which I will highlight in the following.
Multicultural Teams A team is multicultural if at least one team member has a different cultural background than the others. By employing multicultural teams, companies often make significant benefits in productivity (Townsend et al., 1998). Those teams predict a high potential of innovation and effectiveness in problem solving, including the variety of perspectives, skills, and personal attributes that multicultural team members contribute to an organization (Maznevski, 1997). They may generate more ideas of higher quality in brainstorming tasks (McLeod & Lobel, 1992), and outperform cultural homogeneous teams at identifying problems and generating solutions (Watson et al., 1993). But, a well-planned combination of workforce is of high importance, since cultural differences among team members can cause conflict, misunderstanding, and poor performance (Shenkar & Zeira, 1992). Differences in social categories as nationality and ethnicity also may have an important impact on the group process as well as on its achievement (McGrath, Berdahl, & Arrow, 1995). Achievement of multicultural teams depends, in general, on the degree of diversity, the right composition of the team, and the way the team members handle the culture differences. That is influenced by culturespecific processes of socialization and the activation of national stereotypes (Stumpf, 2003, p. 341).
Frictions can take place since the understanding of role-taking inside the team and working styles may vary. Since cohesion depends on perceived similarities, it is more difficult to reach, because of occurring differences in values and norms. At least a high identification with a common goal should be assured, which sub serves cohesion as well (Rosenstiel, 2004). Thus, according to Kopper (2003), we have to state: “The first commandment of effective multicultural teamwork is ‘assume differences until similarities are proven.’ Collaboration can be improved by merely understanding that differences exist and then trying to discover content of those differences” (p. 381). In order to increase the productivity of cultural diverse teams, diversity trainings could take place, which focus on raising the awareness of culture differences and lowering discrimination between the collaborators in order to reach a high cohesion and identification with work.
Virtual Teams Teams are defined as virtual teams if they predominately communicate via media and their workplaces are located in different places. The geographical distance between team members may exponentiate challenges that take part in intercultural collaboration in general. Carmel (2005) points out five major challenges that global software development teams have to face, working together over distance: (1) adjusting to geographical dispersion of IT personnel and users, (2) loss of communication richness with less face-to-face contact, (3) coordination breakdown in project management, (4) loss of teamness, and (5) dealing with culture differences. Additionally, virtual teams have to face difficulties in communication and coordination arising from time zones, geographical locations, and culture (Edwards & Sridhar, 2002). The special problems in communication occur because of the usage of less rich channels as phone, fax, e-mail, electronic databases (see Davidson & Tay, 2002;
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Sharpe, 2001). Solutions of problems may take a longer time because of time dispersion of the other team members. Besides, camaraderie is difficult to reach because of seldom face-to-face contact, but at the same time it is an important fact for the productivity of a team (Rosenstiel, 2004). Team cohesion also is difficult to reach, because team members often belong to multiple teams. Social integration and cohesion in virtual teams are only produced by the constant use of technological-communication tools, also in order to support informal communication, maintenance of social relations, and discussion on working issues (see Edwards & Sridhar, 2002; Hynsell, 2000; Joisten, 2005). Intercultural problems are the following ones: On the one hand the communication is handicapped by the lingua franca because the coding and decoding of a message is culturally influenced and, thus, may provoke misunderstandings. On the other hand the message is filtered by the communication media, which may undermine important context information that helps to understand a message, for example, the nonverbal language. Without the nonverbal language signs, an important framework of orientation lacks, which also provides the information whether the own behavior is appropriate or not. The communication may be difficult, especially between persons of a high-context culture and those of a low-context culture (Hall, 1990). High-context cultures tend to give indirect information that is only understandable if the context is known, while those of low-context cultures express all the necessary information in the verbal message. Thus, during the interaction between persons from these cultural backgrounds, the one of the low-context culture may annoy the one of a high-context culture because of verbalizing taboos. This may lead to an unfruitful work atmosphere. On the other hand, the person from a low-context culture possibly is not able to decipher the message in a correct way. One example would be the indirect expression of a negation in Latin American or
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many Asiatic countries. There “no” is seldom expressed explicitly. “Yes” may have the meaning of a “no” if there is a delay in pronouncing it or depending on the additional information given, as for example, the exact date of delivery, a “yes” may be understood as a “yes.” In this case, nonverbal communication may give a further orientation. This possibility is missed by the usage of most communication media. With few face-to-face contacts, trust is another element that is difficult to reach, but which, at the same time, is constitutive for the identification with a common goal (Davidson & Tay, 2002) and productive collaboration. Thus, it is necessary that the group members know each other at least in the context of a kick-off meeting (Hynsell, 2002) and stay in a continuous contact by temporary collocating them through site visits, and so forth (Davidson & Tay, 2002). The fluidity of communication must be assured, because even informal “coffee kitchen” communication is a very important part of collaboration. “Despite the multiple promises of dispersed, cross-functional teamwork, evidence suggests that accessing, combining, and applying knowledge in these teams may be inherently problematic” (Sole & Edmonson, 2002). In order to bridge the geographical distance, the choice of the right communication medium is of a high importance. The preference of the usage of particular media is culture specific. Knowledge about the cultural background of the collaborators is an important factor of success. In cultures where personal aspects dominate the business-like aspects, media that favours a direct interaction, for example telephone and video conferences, seem to be favoured. The necessity of the transmission of the message context should be taken into account by doing the right choice. According to Edward Hall’s finding of the existence of low-context vs. high-context cultures we may suppose that persons of low-context cultures have fewer problems by communicating by e-mail than those of high-context cultures (see Figure
Intercultural Collaboration in the ICT Sector
2). In high-context cultures, the intonation of an expression or the mimics may help to understand its meaning, in this context the use of high-context media is not very helpful to transmit the holistic dimension of a message. Even if emoticons are used in order to enrich the communication, it is not possible to transmit all notions since the interpretation and writing of them also vary (Aoki, 1995 cited by Opdenakker, 2006). Thus, in order to assure a successful collaboration over distance, special communicative skills are necessary. Abstract processes, which before could be discussed face-to-face, with the possibility to show on the monitor about what one is talking, must be verbalized now. New challenges occur by virtual teamwork. It is not investigated yet if cultural differences tend to increase or to be less important in the case of virtual collaboration. Investigations taking into account these special premises lack, as well as the evaluation of the adequacy of tools, in the cross-cultural context. According to this, cross-cultural trainings especially designed for the challenges of intercultural, virtual collaboration with a scientific basis still do not exist.
Foreign Assignments Foreign assignments are defined as the long term relocation of an employee to another country. Many companies send employees abroad in order to assure a frictionless working process, to introduce special techniques of production, organization of a new company, co-ordination and control, transferring know-how, or for the development of global management abilities (Götz & Bleher, 2000). As such, the expatriates, sent to a company’s subsidiary overseas, have to adapt to the host culture. This process is called acculturation, which “refers to changes that occur as a result of continuous firsthand contact between individuals of differing cultural origins” (Redfield, Linton, & Herskovits, 1936 in Ward, 1996, p. 124). According to the host culture’s requirements of adaptation, the acculturation proc-
ess may vary (Berry, 1990). With Ward (1996), acculturation to a host culture is characterized by stress, disorientation, and learning deficits, which provoke changes in behavior and thinking. In all cultures, particular values and norms exist, which determine the interaction routines of members of a certain culture. They help to predict the interaction of the other members of the same social system (Thomas, 2003). Thus, the interaction routines of members with different cultural backgrounds differ. If someone interacts in an unexpected way and against the established norms, his behavior is sanctioned. Being a stranger, it is more likely to behave inappropriately and to perceive the other’s behavior as unexpected and unpredictable, which may lead to a culture shock (Oberg, 1960). Culture shock is defined as an unpleasant feeling that may violate expectations of a new culture. Oberg mentions different aspects of culture shock: strain, a sense of loss, feelings of deprivation, rejection, role confusion, surprise, anxiety, disgust, indignation, feelings of impotence.6 It is not surprising that the success of sojourns abroad is estimated by less than 30% (Trimpop & Meynhardt, 2000, p. 183). Unsuccessful sojourns provoke very high costs. Miller (1989) estimates them as 3 to 4 times as high as the normal expatriate’s annual salary staying in the home company. But, “Whereas most measures of success and/or failure in expatriate assignments are based on the expatriate’s early return to the home country, several other indications of failure exist” (Littrell et al., 2006, p. 357). The reasons for failure are mainly social and psychological ones: problems of adjustment by the expatriate or the spouse; personality and coping styles with the work overseas (Tung, 1987). Additionally the motivation to work overseas plays an important role for success, too. Reasons for problems overseas may be, according to Hamill (1989), inadequate selection or recruitment criteria (technical skills rather than cultural empathy), inadequate pre-departuretraining, poorly designed compensation packages,
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Figure 2. Which technology for which kind of task?
Low context
Internet
Intranet e-mail
Video Telefon / (web) web cam Konferenz
Face to face
High context
Source: Zaninelli 2003
lack of advanced planning for repatriation, and loss of status or remoteness through working at periphery also cause discontentedness (Hamill, 1989). As Stahl (1998) pointed out, problems of expatriates additionally are caused by the company structure, for example, reintegration in the company after the sojourn, the relations to the parent company, adequate treatment of personnel and leadership, amount of work and its contents, as well as role conflicts. Other problems have been identified in relation to the host culture. There we can list communicative problems, few contacts to persons of the host culture, quality of life, and different economic practices. In all cases of intercultural collaboration, knowledge about culture peculiarities and a sensibility of the workers’ cultural bias is important for avoiding misunderstandings. Companies should support their workers in applicating intercultural development of personnel and starting with an adequate selection of personnel and project staffing.
HOW TO PREVENT CHALLENGES OF INTERCULTURAL COLLABORATION? Companies may reduce the potential of friction in intercultural collaboration by incorporating results of intercultural studies in their strategies of selection of personnel as a first step. Since a perfect applicant does not exist, a second step should be
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the training and coaching of the staff, working in an intercultural environment (see Table 1). In the following, strategies and contents of intercultural selection of personnel will be highlighted. This contains different phases of international selection of personnel as well as personal skills, predicting effective collaboration across cultures, and should be measured in the process of intercultural personnel selection and needs assessment for cross-cultural trainings. Also, I describe two main methods of intercultural personnel development: cross-cultural trainings and coaching. Cross-cultural trainings are focused on two aspects: on overseas assignment and on developing domestic employees, working in multicultural teams or working contexts. Trainings differ in timing, theoretical framework, and methods depending on the employee’s and company’s needs.
Intercultural Selection Strategies of Personnel In order to assure a productive intercultural collaboration, companies should begin with an adequate way of selection of personnel. In the context of sojourns, normally, a well-engineered selection process takes place primarily because of the high costs joining its failure and the high responsibility of the expatriates, and also the selection of a project leader and international team members should be well-structured. Most of the current literature focuses on the finality of a foreign assignment, but it has a
Intercultural Collaboration in the ICT Sector
Table 1. Methods to reduce intercultural risks Method Personnel selection
Sustainable intercultural personnel selection
Focus • • •
Sojourns Multicultural teams cross-cultural virtual teams
Performance •
Before, while and after recruitment
Goal • • • •
Personnel development
Cross-cultural training (predeparture, postarrival and re-entry training)
Develop a profile of skills and knowledge Define training needs Develop an information pool including intercultural experiences Redefine future soft skills required
•
•
similar validity for the other types of intercultural collaboration. Particular skills predict effective collaboration across cultures. In the context of multicultural and virtual teams, especially the cross-cultural and partnership skills play an important role (for details, see below). With Kealey (1996), there are seven situations that make the task of doing effective cross-cultural personnel selection difficult: (a) a lack of reliable tools, (b) poor analysis of the host environment, (c) an unintegrated selection process, (d) ignoring the role of the spouse and family, (e) no monitoring of field performance, (f) the multidimensional nature of intercultural effectiveness, and (g) the limitations of all individuals. But: Effective selecting tools themselves cannot guarantee that international personnel will adapt and perform effectively on the overseas assignment. For this reason, the development of the profile of skills and knowledge for each international position and linking of selection and training are important activities to undertake. (Kealey, 1996, p. 100)
Ease cross-cultural adjustment of sojourner Increase (intercultural) performance
Regarding this, Kealey has developed a threephase model of international selection of personnel (see Table 2) based on three goals: (1) establishing the profile of skills and knowledge, (2) planning and implementing the selection procedures, (3) training and monitoring the overseas performance. Kealey’s model is focused on sojourns, but also may be useful for intercultural collaboration in cultural diverse and virtual teams, only the training necessities vary. It gives an overview of a holistic personnel selection, which also integrates other than technical aspects. Unfortunately the daily selection practice is focused to a high degree on technical skills. Therefore, besides the analysis of job requirements, according to Kealey, cultural constraints and the host organization environment make up the general profile of the cross-cultural collaborator. Cultural toughness7 and particularities should be taken into account, not all persons are suitable for all host cultures. The analysis of personnel needs should not be a one-sided process, the counterpart should be included into the development of the job profile and into the decision-making process.
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Table 2. International selection of personnel: A three phase model Goal
establishing the profile of skills and knowledge
planning and implementing the selection procedures
training and monitoring the overseas performance
Job analysis
Pre-screening program (self assessment)
Design training based on needs analysis
Identify selection committee
Establish training contract with the individual
Socio-cultural analysis Tasks
Institutional analysis Administer selection instrument Counterpart screening
Conduct training conduct selection interviews Monitor performance overseas
Job objectives identified Scope of work, including job requirements and constraints Outputs
Personnel selected with best potential to succeed
Trained personnel equipped with the knowledge and skills needed to succeed overseas.
Training needs of international personnel identified
Selection criteria from international personnel established
Source: Kealey 1996, p. 101
The first goal is the basis for the other goals and should be modified by means of the experiences made with it and those experiences the expatriates make overseas. Social skills play a crucial rule for successful cross-cultural collaboration. A higher emphasis on nontechnical requirements, such as adaptation skills, cross-cultural skills and partnership skills in the personnel selection process should take place. According to Kealey (1996, p. 86), they may be worked out in detail as shown in Table 3. Adaptation skills are such characteristics that enable a person to adjust to a foreign environment. They are strongly related to cross-cultural skills, which help to understand the host cultural context and to honor its particularities. Partnership skills endorse these processes, because they ease the contact to strangers and thus to understand underlying structures of unfamiliar behavior by clarifying communication. In the second phase of planning and implementing the selection procedures, the pre-screening program should give the candidates the chance to inform themselves about the job and to acquire
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more information about the country of posting in order to make the right decision in going abroad. Often the motivations and expectations are not adequately thought out and may cause problems ex post. The more differing and multiple the sources of information one has on a particular candidate, the more reliable the resulting selection procedure. In this regard, “assessment center methodologies perhaps offer the most potential for effective international screening because they elicit a variety of responses, both verbal and behavioral, to the different situations presented to all candidates. (Kealey, 1996, 101) Assessment centres normally are not common in the international selection process, because of the time needed and the high costs, never-the-less if it is not possible to applicate an assessment centre selection, Kealey (1996) recommends a combination of structured and open-ended interviews, paper and pencil tests, reference checks and behavioral assessment.
The third phase links the results of the first two phases with the pre-departure or pre-project training, and monitoring of the selected personnel. The performance overseas should be monitored and the results should be a basis for former profiles. After the process of selection of personnel and recruitment, a continuous intercultural personnel development is of high importance in order to embitter the intercultural competence of the employees. In the following, we will highlight different methods, goals, and the different theoretical frameworks of intercultural personnel development and their pros and cons.
Intercultural Personnel Development Intercultural personnel development is an important factor in order to diminish friction in intercultural collaboration. Finality of the intercultural personnel development is the amplification of intercultural competence. It takes place as cross-cultural training or coaching. Different types of cross-cultural trainings (CCT) exist, depending on their focus. “Whereas traditional CCT focuses on preparing individuals for overseas assignments, multicultural training is directed at improving the cultural awareness of domestic employees in the hopes of improving their ability
to interact with individuals from diverse cultural backgrounds” (Littrell et al., 2006, p. 356). Cross-cultural training may be divided in pre-departure training before the foreign assignment as well as post-departure training and re-entry training before the return of the sojourner. In multicultural teams or organizations diversity training is an instrument of personnel development in order to minimize racism and to create a more productive working atmosphere. In the last decades, diversity training has received growing attention in the United States, and, according to Lippman (1999), 36% of firms of all sizes are offering some diversity training (Ferdman & Brody, 1998; Robertson et al., 2003), in other countries it is still neglected. Intercultural coaching normally takes place on the job overseas and is also a recent trend, being an answer to the criticism of cross-cultural trainings that they cannot address to all problems that may occur overseas.
Personnel Development off the Job Fruitful personnel development should be sustainable. In the case of sojourns, sustainability means that the support of the expatriate should not stop at the pre-departure or pre-project
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phase. According to this, Thomas, Kinast and Schroll-Machl (2000) developed a helix model of personnel development, which means that there is no end: former experiences should be included in further development strategies. The intercultural personnel development should start with the personnel selection according to experiences made with sojourns or intercultural collaboration. Then a pre-departure training should take place, which should include both, cultural-general and/ or cultural-specific preparation depending on the type of intercultural collaboration. During the residence overseas, the expatriate should be accompanied and before the end of the sojourn re-entry training is necessary. After the return, the experiences made by the expatriates should be used in order to create a database with information about the subsidiaries overseas, culturespecific experiences, population data, political conditions, geographical particularities, and the social system. In case of multicultural and cross-border virtual teams, coaching may help to decipher conflictive potential and to clarify misunderstandings during the collaboration process. After the project, a documentation phase also should be included in order to file the specific intercultural experiences and problems that have occurred. This data should be integrated in future trainings and mechanisms of personnel selection. In the following, different training types and coaching will be described in detail. Cross-cultural trainings.8 Goals of trainings differ from goals of education. According to Nadler (1970), trainings are designed to improve human performance on the job, while education is not linked to a special job. With Landis and Baghat (1996), cross-cultural “training in an increasingly shrinking, highly interdependent world is no longer a luxury, but a necessity that most organizations have to confront in a meaningful fashion” (p. 7). Thus, the market of cross-cultural trainings is booming but “the field of cross-cultural trainings has not yet achieved the
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status of a profession” (Paige & Martin, 1996), main critics are a gap of theoretical foundation of cross-cultural trainings (Gudykunst, Guzley, & Hammer, 1996). Consequently, discussions have been raised about the contents and ethics in cross-cultural trainings.
Ethical Principles of Cross-Cultural Trainings In sum, the following ethical principles have been developed for training practice (see Paige & Martin, 1996, p. 39, according to Kagan, 1972; Nieto, 1992): •
• •
•
•
Trainers should help learners to understand the dynamics of cultural intervention and change agentry. Trainers should promote learner awareness of culture-bound and unconscious behavior. Trainers should promote changes in the existing patterns of learner’s behavior if they will be maladaptive in the new culture. Trainers should provide opportunities for learners to gain skills in identifying and helping others change their maladaptive behaviors. Trainers should provide opportunities for learners to become responsible for their own choices and to help others become responsible for theirs.
Another common point of criticism, according to a lack of professionalism of trainers, is that, in practice, many cross-cultural training programs show a lack of theoretical frameworks. Nevertheless, there many training programs that base on a theory, but they are not immune against criticism.
Theoretical Frameworks of Cross-Cultural Training According to Littrell et al. (2006), cross-cultural trainings base mainly on four theoretical
Intercultural Collaboration in the ICT Sector
frameworks: the social learning theory, the U curve of adjustment theory, culture shock theory, and the sequential model of adjustment. Depending on the theoretical background, the assumptions for cross-cultural trainings differ. Table 4 provides an overview of the theoretical frameworks, their contents, and assumptions for cross-cultural trainings. According to Bandura (1977), the social learning theory assumes that social learning is a process influenced by observation and experience. Applying this theory to cross-cultural trainings it is supposed that the expatriate may learn by observing appropriate and inappropriate host country behavior. By doing so, he will develop the necessary skills to interact appropriately in the host cultural context and develop a sensibility for inappropriate interactions. Critics may argue that one-sided cognitive learning is not appropriate for all persons and does not necessarily lead to competent interactions (Ferdman & Brody, 1998). Training contents would base on information about the host country, and using videos or texts showing appropriate and inappropriate behavior, with an explanation about what makes the behavior appropriate. The U-curve of adjustment has been developed by Calvero Oberg. In 1960, he described different stages of adjustment to a host cultural context. It is a function of time and has the form of a U-curve. That means that at a beginning stage the expatriate feels euphoria and only perceives positive aspects of the foreign assignment and the host culture. Then follows a phase of friction, where misunderstandings occur and collision with the different norms and values takes place. In the next step, differences will be accepted and tried to be understood until a broad understanding of the host cultural context takes place and the expatriates adapt to it. Assumptions for crosscultural trainings are that understanding the process of cultural adjustment can reduce the anxiety associated with it. An awareness of these phases should be created as well as coping styles
in order to stay the course. The U-curve theory has been criticized because of the fact that the order can vary and some steps may be skipped, as well as a lack of differentiation between distinct subgroups of sojourners and adaptation to quite different phenomena (Furnham, 1987). Training contents will be information retrieved from cultural studies to raise the awareness of the adjustment process and in order to show the expatriate that the different stages of adjustment are something normal. Another theoretical approach is the culture shock theory. With Littrell et al. (2006), “Culture shock is defined as a normal process of transition, adaptation, and adjustment in which an individual who enters a foreign environment for an extended time period experiences cultural stress involving some degree of anxiety, confusion, disruption, helplessness, and irritability” (Befus, 1998; Church, 1982) (p. 366). Therefore, in order to lower the level of psychological distress, crosscultural trainings should provide coping styles. As with the other theories, the culture shock theory also has been criticized. Furnham (1987, p.45) claims: “Nearly all users have suggested that the experience is negative—though this may not necessarily be the case.” The theory of met expectations assumes that an individual has expectations regarding the characteristics of a job before entering in an organization. According to Caligiuri et al. (2001) and Wanous et al. (1992), these former expectations are compared to the actual experiences. If they coincide with the reality of the job, the individual is more likely to be satisfied, committed, and adjusted. The assumption for cross-cultural trainings are the following: Having a more realistic idea about the conditions of the work overseas, there will be less illusion and, therefore, less dissatisfaction, and, as such, information about the host countries’ living and working conditions become the most important aspects of trainings. A counter-argument could be that in a case of negative expectations, selffulfilling prophecies may take place.
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The sequential model is based on the viewpoint that training is a process and should not be a one-time event. Selmer et al. (2001) developed a training program according to that assumption, corresponding to the cycle of adjustment that an individual progresses through the adaptation process to a foreign environment. The rationale behind the dynamics of adjustment suggests that the impact of training differs at the various phases of the foreign assignment, depending on the individual’s psychological receptivity to the culture at the given stages. (Selmer et al., 2001; Littrell, 2006, p. 366) According to Selmer and colleagues (2001), four phases of adjustment exist: the ethnocentric phase, the culture-shocked phase, the conformist phase, and the adjusted phase. The program of the cross-cultural training should correspond to each phase of adjustment. Pre-departure and post-arrival training should take place. The predeparture training should address information about the host country and the adjustment phases. Post-arrival training, first, should stress cultural awareness in order to lower ethnocentrism. The next stage of cross-cultural training has to be structured so that the individual is instructed on how to learn about his or her environment, and the expatriates should be taught how to sort out the experiences they had gained. During the conformist phase “Training exercises should be designed so that the expatriate interacts with host nationals in structured or unstructured situations, and then the expatriate should be provided with immediate feedback on the appropriateness of the behavior exhibited during the interaction” (Littrell et al., 2006, p. 367). These assumptions overlap with those, which are made for coaching as well. Many theoretical frameworks have been proposed for designing programs of cross-cultural training or explaining their effectivity. Nevertheless, not all are empirically tested and, therefore,
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should be used cautiously. Which theoretical framework seems to be adequate depends on the objective a cross-cultural training has.
Objectives of Cross-Cultural Trainings According to Gudykunst, Guzley and Hammer 1996, the broad objectives of cross-cultural trainings have a wide range, they can be directed to help to adjust to new cultural environments, to interact effectively with members of other cultural groups in cultural diverse environments, or counsel members of other cultural groups. Crosscultural trainings normally involve some changes in three areas: cognition, affect, and behavior. In the cognitive area, cross-cultural trainings help to stimulate a general reflection about how culture, as well as attitudes and stereotypes influence interaction with members of other cultures. In the affective area, cross-cultural trainings try to develop the ability to self-control when interacting with persons with another cultural background. In the behavioural area, cross-cultural trainings focus on abilities and methods in order to adapt own behavior patterns to the particular host culture.
Classifications of Cross-Cultural Trainings The three areas may be trained by the following techniques, which can be categorized in two dimensions: the approaches (didactic, experiential) used in the trainings and their content (culturegeneral and culture-specific), which base on different assumptions.9 The combination of these issues leads to four types of classifications of training types: didactic culture-general, didactic culture-specific, experiential culture-general, and experiential culture-specific, which have different contents (see Table 5). According to Bolten (2000), all types of trainings have advantages and disadvantages.
Intercultural Collaboration in the ICT Sector
Table 4. Theoretical frameworks as basis of cross-cultural training programs Theoretical framework
Content
Assumption for the trainings •
Social learning theory (Bandura 1977)
Social learning is a process influenced by observation and experience.
•
Intercultural learning by observing approbiate and inappropriate host country behaviour. (Bhagat & Prien, 1996; Black & Mendenhall, 1990) Sensibilizing for model behavior in the host country and thus more likely to reproduce that type of behavior (Bhagat & Prien, 1996).
Adjustment process is characterized by ups and downs. A first phase of euphoria is replaced by frustration and in the last phase of adaptation the individual begins to recover.
•
Expatriate has to be tailored to the different phases of adjustment and to get aware of all these stages in order to overcome the challenges which occur in the phase of frustration.
Individual who enters a foreign environment for an extended time period experiences cultural stress involving some degree of anxiety, confusion, disruption, helplessness, and irritability
•
By addressing the problems associated with culture shock, lower levels of psychological distress, and the expatriate will be provided with coping skills for dealing with physiological, behavioral, emotional, and intellectual effects of culture shock (Befus, 1998).
Theory of met expectations (Caligiuri et al., 2001; Wanous et al., 1992)
Met expectations lead to greater levels of job satisfaction, commitment, adjustment, and performance
•
By transmitting realistic expectations satisfaction, commitment, adjustment and performance should be increased.
•
Sequential model (Selmer et al., 1998).
Four phases of adjustment exist: the ethnocentric phase, the culture-shocked phase, the conformist phase, and the adjusted phase
Training should take place in the four phases with different contents corresponding to the particular needs. (Bennet et al., 2000; Forster, 2000; Kealey & Protheroe, 1996; Bennet et al., 2000; Rahim, 1983; Selmer, 2001,)
U-curve of adjustment (Church 1982)
Culture shock theory (Oberg, 1960; Church, 1982; Befus, 1998).
Source: Modified version of Littrell et al. (2006)
The didactic culture-general types have a high effect on cognitive learning in order to understand processes of intercultural communication. Disadvantages are that they normally take place in an academic way, which has been criticized by many executives as being very abstract. The didactical culture-specific trainings may lead to a deeper understanding of a specific cultural system. But, if they are only descriptive, referring to “do’s and taboos,” they may lead to a reinforcement of stereotypes. The experiential culture general trainings may help to experience interculturality in cultural diverse groups. Negative effects are that the situations are normally fictitious and many participants do not take them seriously. The
experiential culture-specific trainings normally train behaviors of the economic context and do not focus enough on culture-specific knowledge in general. Unfortunately, many companies do not invest in cross-cultural trainings or do it only in a very short-term way in a one-day briefing (Littrell et al., 2006). Reasons are, for example: the short length of time between selection and expatriate departure; the belief that technical competence is the main factor in determining success; the opinion that managers who operate well will be effective regardless of location; and the costs associated with training have all been
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Table 5. Classifications of cross-cultural trainings and their contents* Didactic
Culture- general
Culture- specific
Experiential
Transmission of general knowledge about culture, by videos, presentations, discussions and culture assimilators, case studies, presentations of theories of intercultural communication, cultural anthropology and culture-comparing-psychology, discourse analysis.
Active experiencing of in which way the own and foreign cultural background influence behaviour patterns and values, by workshops, simulations, exercises in order to reach self-assessment Role taking games, self assessment questionaires.
Transmition of knowledge about the particular cultural background and country specific themes as e.g. cultural standards by cultural specific assimilators, language teaching, culture specific presentations about history, execute case studies .
Culture-specific exercises based on own experiences made by bicultural communication trainings, country specific simulations and interactional role playing games, sensitivity trainings.
*Own design, based on different sources (Bolten 2000, p.72; Götz/Bleher, 2000, p. 32ff)
supplied as reasons for neglecting preparatory training on international assignments (Litrell et al., 2006, p. 359 citing Baumgarten, 1995; Black & Mendenhall, 1990; Deshpande & Viswesvaran, 1992; Kealey & Protheroe, 1996). An important factor of success is additionally the commitment of the management supporting the strategies of the human resource development. While cross-cultural trainings try to minimize the problems of adjustment and to sensibilize for the cultural otherness before the assignment, intercultural coaching, taking place on the job overseas and thus may address to concrete problems, is an alternative, which in the last years has reached more and more impact in the literature but still is not very common in the companies. It has the advantage that particular problems may be reflected with the coach who should have a profound knowledge of both cultures. He or she may stimulate clarifying communication about the origin of the problems and possible solutions. Aims of coaching are, according to Peuker, Schmal, and Götz (2002), to favour the integration
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of the expatriate in the host culture and his/her enhancement in case of problematic situations. In order to reach this, a trustful relationship between the coach and the expatriate is a premise, because sensible areas may be touched as, for example, the expatriate’s leadership competence, and so forth. It should take place in terms of stimulating an independency after a certain time (see Peuker, Schmal, and Götz, 2002). The expatriate should learn techniques of coping with stress and of deciphering unfamiliar behavior of host nationals. In many companies, intercultural coaching takes place in an informal way. Expatriates who already have been overseas for a long time would introduce those who are new in the host cultural and company context. This is perceived as a big help by the newcomers, but may provoke a reinforcement of stereotypes, which will be passed in an unreflected way and may contain ethnocentric viewpoints (Maletzky, 2006). Thus, coaching by specially qualified coaches should be assured in order to amplify the perspective and avoid misunderstandings. Disadvantages are the high costs and the fact that a coach may get insights in areas that often are confidential.
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Intercultural re-entry trainings. In the context of foreign assignment, expatriates additionally should participate in re-entry training, because the phase of reintegration into the host company and culture shows similarities to the adaptation to foreign culture (see e.g., Gullahorn & Gullahorn, 1963). One’s own culture could become strange over time. Some theories even emphasize that the return of a sojourn may also cause culture shock. In this context, it may be estimated that the difficulties of reintegration rise in proportion to the duration of the foreign assignment. But the process of intercultural re-entry is often neglected, which may provoke underestimated problems for the company, too. According to Gomez-Meija and Balkin (1987), “a large number of expatriates who are successful for the duration of their assignment decide to leave the organization within one year of returning to the home country” (see Littrell et al., 2006, p. 358). Intercultural re-entry means, according to Adler (1981), the process of reintegration into primary home contexts after a sojourn. We can name six general areas of re-entry problems that should be taken into account by those trainings (see Martin & Harrel, 1996, p. 314: • • • • • •
Cultural adjustment: For example, problems in order to adjust to the home cultural context and to the daily routines, social adjustment Social adjustment: For example, feeling of social alienation, superiority, and so forth. Linguistic adjustment: For example, problems to readopt to the home cultural way of speaking. National or political adjustment: For example, problems with changes in political conditions, and so forth. Educational adjustment: For example, absence of educational programs, and so forth. Professional adjustments: For example, resistance to changes by colleagues, too high expectations, and so forth.
They can vary according to the expatriate’s personality, host- and home cultural background. A detailed evaluation of the necessities should take place, preparation. The re-entry training should begin during the sojourn. The contact to the mother company should be maintained in order to be notified about changes and to assure a less problematic reintegration and to stay informed about professional requirements. In the pre-re-entry phase, professional briefings should take place, as well as information about possible changes in the political system, and so forth. During the re-entry phase, readjustment issues are of high importance as there are, for example, employment issues such as job searches, and so forth.
Cross-Cultural Personnel Development on the job Intercultural coaching. Analysing the intercultural problems that occur during the sojourn or international projects of expatriates, many of them do not decrease by the time. That shows, according to Bolten (2000, p. 65), that cross-cultural trainings before the sojourns are not enough in order to overcome intercultural problems. In the context of virtual and cultural diverse teams, we can make the same assumption. Thus, a high necessity of support during the sojourn and the projects may be stated. Many times a fruitful utilization of the potential inherited in the situation of cultural overlap (Bolten, 2000) does not take place. This may be additionally stimulated by intercultural coaching on the job. Companies often have to handle with multicultural workforce especially in times of workforce shortages, which predicts a high productivity if the team composition is well done and the team members are aware of the high potential of cultural diversity and are sensibilized for culture differences, if not friction may take place. A well done diversity training may help to establish a positive working atmosphere. Thus some aspects have to be considered, which will be highlighted below. 1633
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Diversity Training Diversity training is a method to develop heterogeneous teams or workforces. Diversity may be defined in a wide-range, for example, as race, gender, age, and so forth. In this context, cultural diversity is of interest, and the overcoming of stereotypes and the creation of a fruitful team atmosphere are the objectives. Diversity training can overlap greatly with intercultural communication training, in that it often incorporates the same goal. Moreover, many methods and tools included as components of diversity training are derived or adapted from cross-cultural training approaches. (Ferdman & Brody, 1998, p. 284) According to Robertson et al. (2003), it may be distinguished between two main types of diversity training: awareness training and the developing of skills. “Awareness training primarily targets trainee’s attitudes toward diversity (and) skill-based training targets behaviors rather than attitudes, focusing on communication skills and conflict management, or resolution strategies (Kerka, 1998) across diverse group identities” (Robertson et al., 2003, p. 152) (emphasis added). According to Ferdman and Brody (1998), different levels are targeted by diversity trainings: the individual, interpersonal, group, intergroup, organizational or societal level. Depending on the different levels, the training focus and methods vary (see Table 6). All these targets and objectives want to decrease racism and raise efficiency of labor. They are related to different motivations introducing diversity trainings. Reasons for the implementation of diversity trainings may be legal or social pressure, a moral imperative, or business success. The more intrinsic the motivations are, the more success of training is predictable, because then a high commitment within the top management may be supposed, which is constitutive for its suc-
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cess. According to Ferdman and Brody (1998), the lower the commitment of the (top) management, the less is the success of the trainings in general, because less resources are available and the duration of the trainings are shorter. Furthermore, participants’ motivation is more observable if the management encourages the trainings and points out its necessity. In order to reach organizational goals, as for example, to create an egalitarian atmosphere between workforce with different ethnic backgrounds, it is necessary to implement long-term trainings. Just as cross-cultural trainings, in general, diversity trainings may take part by experiential or didactic learning. “The basic premise of the didactic approach is that interaction among people from different cultures will be more effective when there is a reciprocal understanding of the other’s culture” (Ferdman & Brody, 1998, p. 295) (emphasis in original). The didactic approach involves frontal presentations and group discussions. It targets, primarily, knowledge objectives and awareness. “The experimental approach presumes that the best learning occurs through active engagement and participation” (Ferdman & Brody, 1998, p. 295) (emphasis in original). In this context, many diversity training programs include simulation and role-play activities. But also group discussions of individuals and collective experiences are usual in order to make aware of stereotypes and ways of thinking. It is not easy to decide which training design is more effective. All have their advocates and antagonists. Awareness programs are, for example, accused of perpetuating stereotypes (Flynn, 1998). Employees who lack the critical behavioural skills needed to avoid unlawful discrimination may learn little from a training program with an awareness focus. Those unhappy with the current organizational climate for diversity are likely to view awareness training as window dressing, for
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appearance’s sake only, leading to resentment. (Robertson et al., 2004, p. 153) Developing skills by role-playing games, and so forth, runs the risk of creating a scapegoat. Some trainers use confrontational methods, which may be problematic, especially if there is not enough time to create an atmosphere of trust, which is constitutional for the success of this method. According to Robertson et al. (2004, p. 153), first, it should be assessed: “What are employee attitudes toward diversity and how strongly are those attitudes held?” The commitment of the ideas influences the changing. Ideas with low commitment may be changed by the input of new information, while high commitment of the ideas makes them difficult to change and the best way is by an experiential design (Petty & Cacioppo, 1986). Some investigations argue that diversity trainings are more effective if they are closely linked to business strategy or organizational culture and sufficient leadership support (Sims & Sims, 1993; Wheeler, 1994; GilDeaneGroup, 1993 cited by Ferdman & Brody, 1998).
FUTURE TRENDS Intercultural collaboration will increase in the future in many industrial sectors, including the ICT sector. But, unlike theories predicting a convergence of cultures, which state that the world will develop a uniform culture, probably dominated by western values (Ritzer & Stillmann 2003; Ritzer, 1996), it is more likely that new combinations of values create new cultural or regional differences, such as the theory of a “global melange” (Nederveen Pieterse, 2004).10 That means, that challenges due to cultural differences will not decrease in the future and intercultural competence will still be a condition of successful internationalization processes. In order to stay competitive, not only to increase internationalization, but doing it effectively will be of high importance. Newer approaches accentuate that competitive advantage may be established by utilizing cultural differences appropriately (Welge & Holtbrügge, 2003). At the same time, intercultural personnel selection and development will be indispensable for successful internationalization
Table 6. Level, focus and peculiarities of accordant diversity trainings Targeted levels Individual
Focus of training program •
changing attitudes and / or behavior
• Interpersonal
•
Development of more effective communication patterns Learning how to deal with problematic relationships
Group
• •
Team building Development of efficacy
Intergroup
•
Changes of patterns of relationships
•
Make the organization as a whole more inclusive and effective
•
Diminish oppression
Organizational
Societal
Peculiarities • • • •
• • • • •
Specific Temporary Do not require top management involvement Housed in Human Resources or Training Department
Part of a broader organizational process Infused throughout all levels More resources Long term orientated Require top management involvement
Source: Ferdman and Brody (1998)
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processes. Thus, delays and change of locations may be minimized, especially SMEs, which have not established extended networks over the world, yet need knowledge about cultural particularities in order to negotiate successfully. Dispersed teams are the most cost-saving form of collaboration over distance, and their presence will increase (Martins, Gilson, & Maynard, 2004). This may be predicted especially in the context of the software branch, where the product may be transported electronically and off- and nearshoring increase. Challenges for intercultural collaboration may rise because of a lack of faceto-face contact. Intercultural coaching is a recent trend and will have an increasing impact because of the possibility to solve problems, when they occur. Computer-based coaching could be a cost-saving alternative to the common face-to-face coaching. It also has the advantage of anonymity, which would reduce the anxiety of losing face-to-face contact. Continuous evaluation of the working atmosphere of multicultural teams onshore and offshore, or overseas will be important in order to assure a fruitful working atmosphere. In cultures that have a high tendency to lose face-to-face contact, this will be hardly reached by conventional evaluation techniques. Also, the anonymity, which may be reached in computer-based methods, should be used to create appropriate tools. Only few computer-based cross-cultural trainings exist, but a future trend will be an increase of such training tools, because they have the advantage to be location-independent and cost-saving. Normally, they focus on culture-specific training methods, and it should be carefully evaluated that they do not reinforce stereotypic perception of the users, since there is no possibility of a clarifying exchange with a trainer.
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CONCLUSION Fruitful intercultural collaboration is of high importance in the context of internationalization. Being involved in general challenges of industrialization and internationalisation, that, especially for the software branch, does not have such a long tradition yet, soft factors tend to be neglected. Intercultural competence is part of the soft factors, which predicts less friction during the intercultural collaboration. Three frameworks for intercultural collaboration in the ICT sector have been pointed out: sojourns, multicultural teams, and dispersed teams. All provoke particular challenges. While during sojourns the expatriate’s adequate adaptation to the host cultural context is of high importance for performance, multicultural teams depend on the right composition, mutual awareness, and a high degree of acceptance of the otherness. Virtual multicultural teams suffer a lack of trust and have to handle with a high risk of misunderstandings and a negative working atmosphere, because the face-to-face contact, which in many cultures gives a first orientation about appropriate behavior, drops out. Knowledge transfer issues are another challenge to overcome. Problems that may occur in the context of intercultural collaborations are difficult to anticipate and may cause hidden costs. Nevertheless, investigations have found that there are some personal skills that predict successful interactions across cultures. They can be subsumed in three categories: adaptation, cross-cultural, and partnership skills. They are typical for a high intercultural competence, which is required for successful intercultural interaction, independent of the type of intercultural collaboration in the ICT sector. Sustainable personnel selection, which integrates conclusions of cross-cultural studies can help to identify appropriate applicants. That means
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that the profile of skills is worked out by a needs assessment, which, in case of overseas assignment, incorporates the needs of both company locations and focuses on technical as well as intercultural skills, and the experiences made by expatriates or collaborators in multicultural (dispersed) teams for further recruitment processes. Training needs also should be screened during the personnel selection, since the perfect applicant does not exist. Crosscultural or diversity trainings should be designed according to the individual needs and the form of intercultural collaboration. While the preparation of future expatriates requires culture-general and culture-specific contents, virtual and multicultural teams, depending on their composition, should get general training raising cultural awareness and promoting tolerance. Coaching for all groups is an important measure in order to decipher misunderstandings and potential conflicts, even if it is mainly promoted in the context of cross-cultural trainings. An often-neglected factor is the influence of the spouse or family in the context of foreign assignments. Sojourns are often terminated prematurely because of their family’s inability to adjust. Thus, cross-cultural training and coaching programs designed for expatriates should also comprise the expatriate’s family. Unfortunately many companies neglect trainings or invest only few resources. Often only short-term briefing sessions are held before the departure of an expatriate (Littrell et al., 2006) or the start of multicultural teamwork. Additionally, diversity trainings often lack the commitment of management and, correspondingly, are not very successful because then the participants become more resistant. Failure of sojourns are mainly seen as failure of the expatriates’ competences on a personal level, the group level often is not taken into account, but is also of high importance (Maletzky, 2006). Personnel development should include both parts, because, even if the expatriate is well-adapted, misinterpretations of his or her behavior by the collaborators overseas are influenced by stereotypic
perceptions. This is a neglected aspect that may lead to an unfruitful collaboration (Maletzky, 2006). This is a surprising fact because we cannot assume that most of the collaborators overseas, especially those on a bottom level have been living in a foreign country or had close contact to foreigners before. We can only suppose that perceptions are strongly influenced by unreflected stereotypes and, therefore, may cause struggle. Accordingly, intercultural team development is a necessity in cultural diverse working teams in situ and overseas.
FUTURE RESEARCH DIRECTIONS Intercultural collaboration in the ICT sector has, until now, been rarely addressed. This is especially relevant in the context of high-end sourcing, since, for example, the outsourcing of software architecture, product design, and so forth, require a high degree of communication, coordination, and control throughout the working process. In the context of global sourcing and internationalisation, this implies additional challenges, since different cultural backgrounds must be taken into account. Quality management systems and standardisations are limited in not being culturally neutral. Different ways of understanding and exertion provoke problems. More research should be done in this field, including an examination of to what extent cultural differences and worldwide competition between ICT workers affect the collaboration, cohesion, and productivity of intercultural teams. Collaboration in dispersed teams is especially problematic due to difficulties in assuring knowledge transfer and the use of poorer communication channels. International virtual teamwork is a special case of intercultural teamwork, due to the lack of face-to-face contact. These aspects have not yet been systematically researched, but will be of high interest for many practitioners as this form of collaboration increases. This aspect is not taken into account enough in cross-cultural training, which normally addresses conventional forms of
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intercultural collaboration. There is no literature focusing on the intercultural development of virtual teams. At the same time, in the context of a growing tendency to near- and offshoring and reducing costs, as well as embetterment of technical tools, geographically dispersed intercultural teams will increase in the future. Technical tools and media should be evaluated and developed focusing the usefulness for intercultural collaboration. It may be supposed that in the context of the use of messengers there may occur misunderstandings in decoding the messages. The interpretation schemes of symbols, which should transmit feelings, cannot be seen as universal. On the other hand, it also may be possible that using a media such as the Internet there occurs something like a culture-neutral space and cultural differences decrease because the otherness is not perceived as strong as it does face-to-face. Many channels of perception are limited and the language is in the foreground, thus the whole bandwidth of differences may not be perceived. There is a large market of cross-cultural trainings, but only a few investigations analysing their effect exist (see Thomas, Kinast, & Schroll-Machl, 2000). Effective evaluation tools are still lacking. Professionalisation of the trainers should be a future aim in order to guarantee a better performance. Contents of diversity trainings are often derived from those of cross-cultural trainings preparing a sojourn. More investigation should take place on this special issue, because according to Littrell et al. (2006), “multicultural teams face their own unique set of challenges” (p. 363). Additionally, investigations about foreign assignment and trainings mainly are focused one-sided on the expatriate’s situation overseas. In this context, studies that take into account both, the expatriate’s perspective as well as the perspective of the host cultural collaborators, are rare, but may bring an important input to the practice because a one-sided perspective biases the results (Maletzky, 2006). Cross-cultural trainings should, in addition, be developed according to sector-specific needs. There is still a lack of
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research into which specific training contents would be needed, especially for the ICT sector.
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ENDNOTES 1
Starke-Meyerring, D., & Andrews, D. (2006). Building a virtual learning culture. An international classroom partnership. Business Communication Quarterly, 69(1), 25-4. Steinwachs, K. (2001). Information and culture: The impact of national culture on information processes. Journal of Information Science, 25(3), 193-204. Thomas, D. C. (2006). Domain and development of cultural intelligence. The importance of mindfulness. Group & Organization Management, 31(1), 78-99.
2
3
4 5
Triandis, H. C. (2006). Cultural intelligence in organizations. Group Organization Management, 31, 20-26. Triandis, H. C. (2001). The study of cross cultural management and organization: The future. International Journal of Cross Cultural Management, 1, 17-20. 1646
6
Offshoring means outsourcing or founding of spin offs in a geographical far located low-wage country, while nearshoring refers to the same process in a geographical nearer low-wage country. The distance is not specific, but often the distance of 1000 kms (ca.621 miles) is taken as demarcation. (Scherf, Schütt & Partner, 2005). For a detailed description of off- and nearshoring see the chapter “Offshoring in the ICT Sector in Europe” in this book. See chapter “Offshoring in Europe” in this book. For detailed description, see Kolb et al. (2004). See also Hofstede (1991, 1993, 2000). He first found the four dimensions: power distance, masculinity vs. femininity, uncertainty avoidance, and individualism vs. collectivism. The same dimensions are described also in Hofstede (1991, 1993, 2000) but a fifth dimension has been included: long-term orientation For a critical ref lexion, see Furnham (1998).
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7
8
Cultural toughness pertains to the notion that it is more difficult to adjust to certain countries than to other countries. For detailed description of training methods and inventories, see Fowler (1999).
9
10
For more detailed infor mation see, Gudykunst/Guzley, Hammer (1996, p. 65f). For a critical reflection of convergence and hybridization, see also Nederveen Pieterse (1997, 2002, 2003).
This work was previously published in Handbook of Research on Global Information Technology Management in the Digital Economy, edited by M. Raisinghani , pp. 167-194, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.19
Managing E-Collaboration Risks in Business Process Outsourcing Anne C. Rouse Deakin University, Australia
INTRODUCTION A marked development in the last decade has been the growth of “virtual organizations” (or “extended enterprises”), where a network of service supplier and vendor firms cooperates to create customer value. One form of cooperation is described as business process outsourcing (BPO). A business process involves several interrelated activities performed with the goal of generating customer value. Because of the growth in e-collaboration tools, it is now possible for firms to outsource even core business processes to external vendors. Examples of processes typically outsourced include logistics, customer support, human resources, and back-office accounting functions. BPO and the value networks created by vendors and purchasers hold the promise of substantial business benefits associated with specialization and scale. These include reduced costs, greater business flexibility, and higher
service quality. According to the Gartner Group, the world market for BPO services is likely to increase from $100 billion in 2002 to $173 billion by 2007 (Gartner, 2004). E-collaboration is a core aspect of BPO, as vendor and purchaser are physically separated, and without this collaboration, the level of integration needed between vendor and client would be impossible. Maturing IT capabilities, and in particular e-collaboration tools, were important drivers of the large growth in outsourcing witnessed since 1989. Yet the e-collaboration that enables BPO also introduces new corporate risks, particularly those associated with sharing of data, and with the change from face-to-face interactions based on propinquity to computer-mediated interactions. Drawing on a series of focus groups, this paper summarizes the promises e-collaboration holds for BPO, but also highlights risks that need to be managed. These risks have increased with recent legislative demands like the US Sarbanes-Oxley and EU privacy legislation.
Managing E-Collaboration Risks in Business Process Outsourcing
The findings reported here are based on ten focus groups and individual interviews with practitioners involved in outsourcing IT/IS or BPO services. These were conducted between 1999 and 2004. In all, 46 informants were interviewed in the focus groups, and a further five informants were interviewed individually. While most informants were from purchaser organizations, one focus group involved informants from outsourcing vendors. Services supplied within these outsourcing arrangements included back-end bank processing, scientific data collection, call centre operations, delivery of ongoing mainframe services, software development, help desk operations, and desktop support. Details are reported in Rouse (2002) and Rouse and Corbitt (2004).
BACKGROUND There are three major classes of outsourcing: (1) outsourcing of IT/IS services, or “ITO” (where the services to be supplied involve the development and delivery of technology and information systems), (2) BPO, where relatively complex, ITsupported businesses services are involved, and (3) simple outsourcing (such as cleaning) where no IT support is involved. This paper is concerned with the first two forms, BPO and IT/IS outsourcing, which can be considered a particular form of BPO. Both involve complex business processes supported by IT, and the handing over of sensitive data resources to a third party. It is the complexity, business impact, and the integral role of IT that distinguishes these from other, simpler forms of outsourcing. In practice, BPO involves the delivery of a service, rather than a physical product (manufacturing). Consequently, the service delivery (or production) process has several characteristics: these include intangibility, variability, and the fact that the output is perishable—if not delivered at the right time it has no value (Langford & Cosenza, 1998). Another important characteristic
of services is labeled “inseparability”—in other words, the service is created by the coordinated (and so inseparable) activities of the deliverer and receiver. Because outsourcing involves industrial services, a large number of vendor and purchaser employees can perform part of the delivery process, and for the process to work well their actions have to be articulated, communicated, and coordinated (Bitner, Faranda, Hubbert, & Zeithaml, 1997). Complex outsourcing (like ITO and BPO) cannot exist without some form of e-collaboration to effect coordination and communication. Such outsourcing also requires fast data communications capabilities and mechanisms for easily moving data between client and vendor databases. These technologies overcome geographical distance, so BPO now often involves supply of services across national boundaries, allowing western firms to use lower cost labor from India, China, or other developing countries—described as offshore outsourcing, or “offshoring.” E-collaboration technologies are electronic technologies that enable collaboration among individuals engaged in a common task (Kock, Davison, Ocker, & Wazlawick, 2001). A range of these are used to coordinate the actions of participants in the outsourcing-based service production process. Examples include e-mail, tele-, video-, and data-conferencing, groupware, electronic meeting systems, Web-based chat and asynchronous conferencing tools, collaborative document preparation, document management technologies, and shared databases. The nature of BPO is illustrated in Figure 1. Outsourced business processes involve transforming purchaser data, often using specialized software packages, and automated routines. With outsourcing, whenever e-collaboration tools are used this data is transmitted in digital form. “… Final products supplied to the client are available digitally via network connections, e.g. a processed payroll list, or a new inventory list…”(Gewald & Dibbern, 2005, p 2). The flows of e-collaboration
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Figure 1. E-collaboration between vendor and purchaser creates additional points of vulnerability e-collaboration tools and databases (areas of vulnerability)
outsourced Vendor A
Purchaser
organisational division
organisational division
Intra-organizational – under purchaser control
data, particularly when distributed/accessed over the Internet, represent a point of vulnerability, as do the databases controlled by the vendor/ subcontractor. Once data leaves the purchaser organization, strategies for protecting it (such as passwords, encryption, virtual private networks, etc.) become the responsibility of the vendor, and the value of these protections is only as good as the integrity of vendor staff and processes. The mechanisms for the purchaser to ensure protection of key data become problematic—the purchaser must rely on a contract with the vendor to guarantee security—a very different management approach.
BPO RISKS BPO potentially results in a number of benefits to purchasers, including cost savings, flexibility, improved quality, and allowing the purchaser to concentrate on core business (Lacity & Hirschheim, 1995). However, outsourcing has also been described as “risky business” (Aubert, Patry, & Rivard, 2002) because empirical research to date has revealed that purchasers who outsource frequently fail to obtain the theoretical benefits (Rouse & Corbitt, 2003) and often encounter unexpected downsides. In practice, in deciding
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sub-contracted Vendor B
on whether or not to outsource decision makers must weigh up the potential benefits against the risks of negative outcomes. Not all BPO risks are related to e-collaboration tools. For example a major and commonly encountered risk is that the costs projected for the outsourced arrangement are poorly thought through, leading to a flawed business case (Lacity & Hirschheim, 1995). However, several risks are associated with the replacement of social, face to face coordination and control mechanisms with computer-mediated e-collaboration. Other risks are associated with sharing data across organizational boundaries. The e-collaboration risks commonly raised by informants fall into two categories: those (1 and 2 below) associated with the handing over data to the vendor, and (3 and 4) those associated with replacing in-house, largely cultural control processes, with formal, contractual controls supported by computer-mediated coordination and communication.
Interception Risks Because data needs to be moved between vendor and purchaser, it is subject to the typical risks of data interception and theft. These may occur through accessing data in transit, or through
Managing E-Collaboration Risks in Business Process Outsourcing
contamination of workstations with “malware” code that, for example, captures data being keyed. This is probably the least difficult risk to manage, as there are a range of technical solutions. These include encryption, virus protection, and software that tests for and removes malicious software. These risks are present for many inhouse business processes too, when data has to be moved between sites, and are not inherently due to outsourcing. The main issue for purchasers to be aware of is that outsourcing does not devolve responsibility for managing this risk. The purchaser remains responsible, in the eyes of customers, and increasingly, legislators, for ensuring that operations are properly performed and controlled, regardless of whether this is done in-house or by an external vendor. This responsibility needs to be actioned by specifying security requirements in the outsourcing contract, and by establishing appropriate consequences for breaches. Several focus group informants were caught out in their initial outsourcing experiences, because they had not specified detailed requirements related to security in their contract, expecting that (as in their own organization) security measures were automatically applied by the vendor. However, just having specific terms in the contract will not ensure that the vendor acts in the specified way—purchasers need to verify the vendor’s security measures, and to ensure that consequences are sufficiently negative to ensure the vendor is deterred by their possibility.
Privacy, Confidentiality, “Identify Theft,” and “Loss of Intellectual Property” Risks In a recent survey of German banks’ outsourcing, Gewald & Dibbern (2005) found that respondents were less concerned with privacy risks than with financial or operational risks. Yet recent European, US, and Australasian legislation now heavily penalize organizations for failing to safeguard
customer and corporate records. Issues of privacy and particularly “data theft” are important outsourcing risks because digital data exchanged with the vendor is relatively easily accessed (and copied) by the vendor’s front-line operators. BPO has significantly higher risks than does the delegation of factory-based manufacturing, where the risks of losing key data and intellectual property (IP) are mitigated by the fact that shop-floor staff rarely has easy access to them. The recent security breach at CardSystems Solutions—when 40 million MasterCard, Visa, and American Express cardholders woke up to find that their account details had been stolen—is an example of how important this outsourcing risk is in terms of customer trust (Rouse & Watson, 2005). Because outsourced business processes usually require that vendor staff access non-encrypted data in order to process it (Gewald & Gellrich, 2005), encryption alone will not address this risk. The vendor needs to institute a range of behavioral controls to avoid relatively easy, but potentially large-scale, data theft through use of technologies like flash drives and external hard disks. Many of these controls are social, and are dependent on a range of cultural values (backed up by the likelihood of institutional repercussions, such as threats of jail). One explanation for the low concern of the German bankers about privacy risks might be that decision makers knew that vendor staff would work within the same national culture as the purchaser companies, and that purchaser staff would know that, in Germany, security breaches would likely result in prosecution. However, where BPO involves cross-national outsourcing, differences in cultural values and legal infrastructure may not be appreciated. This issue is discussed further, below. Managing the risks of data theft and loss of IP relies largely on a process of recognition, planning, and verification. Purchasers should consider the marketing and reputation risks associated with such losses as well as the increasing risks of penalties associated with privacy and governance-
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related legislation. Purchasers should work with the vendor to determine management strategies to avoid data theft. As for interception risks, the contract needs to explicitly outline requirements, and should include appropriate penalties. An important third step is for the purchaser to continue to verify the procedures and safeguards used by the vendor through spot checks.
Failing to Understand and Codify the Behaviors Required of the Various Collaborators As articulated above, the quality of the service supplied to the purchaser depends on the coordinated actions of a range of staff working for both vendor and client. Yet outsourcing involves replacing the face-to-face supervision of staff, selected and vetted by a client firm, with arms-length supervision of an external vendor through an outcomes-based contract. Day-to-day coordination is achieved largely through computer-mediated interactions between staff working for vendor and purchaser. For the service-delivery process to work, all players need to know what behaviors are required, and when to act. This is an area where many misunderstandings and problems occur with outsourcing (Rouse, 2002). Replacing controls based largely on tacit understandings and social mores with explicitly codified requirements, converted into documents and transmitted via e-collaboration tools, involves a process of attenuation. Many focus group informants were surprised to find how many of the controls exercised prior to outsourcing were tacit, relying largely on cultural understandings and expectations. Thus “cultural compatibility” between vendor and purchaser has come to be viewed as an important, but elusive success factor for outsourcing (Hancox & Hackney, 2000). Managing this risk involves recognizing the richness and complexity of the control processes that occur within organizations, and the extent to which these rely on cultural expectations. Vendor
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and client must also devote the required attention, skill, and resources to surfacing and articulating what needs to be done by each player in the service delivery process. Another management strategy is to recognize and alert staff that communication and coordination will be more attenuated, and so open to misunderstanding, when relying on computer-mediated tools. Choosing culturally compatible partners is desirable, as is frequent face-to-face dealings (Kern & Willcocks, 2001), though the latter is not always possible, particularly where the vendor and purchaser are operating in different countries. It is not yet clear whether e-collaboration tools like videoconferencing will adequately substitute for such encounters. An important aspect of managing this risk is to recognize the difficulties imposed by this replacement, even with recent developments in e-collaboration tools (particularly shared documents, teleconferencing, and e-mail, which have become critical to supporting this process). Many of our informants told us how unrealistic it is to expect that staff will consult, or even be aware of, complex procedure manuals even if they are available online. It is here that evolving tools, such as listservs, FAQs, and hypertext are proving helpful. However, the process of abstracting, codifying, and converting usually un-articulated behavioral requirements into carefully-simplified, computer-mediated forms is a highly skilled task, as is training participants in the required behaviors and sensitizing them to potential differences in worldviews that can lead to misunderstandings. Informant reports indicate that the costs associated with this consequence of outsourcing are substantially underestimated (Rouse, 2002).
Cultural Misunderstandings Associated with Different Social and Legal Settings Cultural differences (and consequent misunderstandings) between vendor and purchaser are magnified where offshore outsourcing is involved.
Managing E-Collaboration Risks in Business Process Outsourcing
An additional risk dimension is added because contracts entered into may not be practically enforceable in foreign jurisdictions. The focus groups revealed that many outsourcing clients did not think seriously about cross-national issues because they were so embedded in their own national culture, where legal protections are taken for granted. They assumed that contracts would be enforced, and that staff would be deterred from large-scale theft because of legal sanctions. However, the behavior of vendor staff depends on cultural values and a robustly enforced legal system. Managers from countries with well established legal systems and corruption-free societies (like Australasia, Singapore, the UK, and US) do not necessarily recognize that a contract entered into in countries where corruption is prevalent ( Transparency International, 2004) may have little practical effect on the behavior of staff. Another area where cross-national differences can be magnified, particularly when computermediated communication occurs, is the use of English as a “common” language. Vendors in India, in particular, are cognizant of this and are instituting training programs for staff to “Americanize” conversational styles, but this is an issue that can still cause problems and misunderstandings. Unwitting use of writing conventions that have different meanings in the other culture (e.g., related to formality, or forms of politeness) can hamper relationships between players and contribute to misunderstandings. The extent to which e-collaborators are unpredictable (because they do not use expected conventions) decreases trust and cooperation (Kasper-Fuehrer & Ashkenasy, 2001). As with risks described above, risk management requires recognizing and acknowledging these risks, and preparing for them. Issues associated with legal systems and cultural values related to corruption need to be considered as part of the outsourcing strategic decision. Issues associated with the potential for miscommunications can in part be addressed by alerting staff to
the potential problems, and by training. However, as with previous risks, the costs associating with managing the risk can be substantial and need to be identified and factored into the “business case” for whether to outsource or not.
FUTURE TRENDS Research into outsourcing to date has largely been exploratory (despite being a topic for almost 15 years) and at this stage much is still theoretical or anecdotal. The study of e-collaboration between vendor and purchaser, particularly given the shortcomings of existing outsourcing research, is an important potential research topic, and one that is ripe for investigation. New communication and organizational forms can lead to new risks that need to be understood and managed. In future, more studies into the practical mechanisms for increasing relationship quality and trust should be conducted.
CONCLUSION Outsourcing requires people from different organizations to collaborate synchronously or asynchronously to achieve common tasks, and to ensure the effectiveness of the service delivery process. Most of this collaboration is done through a range of electronic tools. The digitized nature of the data exchanged introduces substantial risks that must be managed. The change from largely tacit, cultural controls to codified, explicit controls demands substantial effort from the purchaser in recognizing and addressing potentially false assumptions and misunderstandings. Issues of trust, cooperation, and relationship quality are of paramount importance to outsourcing researchers yet there is a paucity of empirical investigations, and the important role of e-collaboration technologies in supporting vendor-purchaser relationships has been considered only peripherally. There are
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significant opportunities for future e-collaboration research in the BPO domain.
REFERENCES Aubert, B. A., Patry, M., & Rivard, S. (2002). Managing IT outsourcing risk: Lessons learned. In R. Hirschheim, A. Heinzel, & J. Dibbern (Eds.), Information systems outsourcing: Enduring themes, emergent patterns and future directions (pp. 155-176). Berlin: Springer. Bitner, M. J., Faranda, W., Hubbert, A. R., & Zeithaml, V. A. (1997). Customer contributions and roles in service delivery. International Journal of Service Industry Management. 8(3), 193-205. Gartner Group. (2004). Outsourcing market view: What the future holds. Press Release 09.06.2004. Retrieved November 12, 2004, from www.gartner.com Gewald, H., & Dibbern, J. (2005). The influential role of perceived risks versus perceived benefits in the acceptance of business process outsourcing. E-Finance Labs Working Paper 2005-9, University of Frankfurt. Retrieved February 22, 2006 from www.efinancelab.de/results/pubs/ pubscluster1.php. Gewald, H., & Gellrich, T. (2005, July 7-10). Impact of perceived risk on the capital market’s reaction on outsourcing announcements. In Proceedings of the 9th Pacific Asia Conference on Information Systems (PACIS 2005), Bangkok, Thailand. Hancox, M., & Hackney, R. (2000). IT Outsourcing: Frameworks for conceptualizing practice and perception. Information Systems Journal, 10, 217-237. Kasper-Fuehrer, E., & Ashkenasy, N. (2001). Communicating trustworthiness and building trust in interorganizational virtual organizations. Journal of Management, 27, 235-254.
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Kern, T., & Willcocks, L. P. (2001). The relationship advantage: Information technologies, sourcing and management. Oxford: Oxford University Press. Kock, N., & McQueen, R. J. (1996). Asynchronous groupware support effects on process improvement groups: An action research study. In J. I. DeGross, S. Jarvenpaa, & A. Srinivasan (Eds.), 17th International Conference on Information Systems (pp. 339-355). New York: Association for Computing Machinery. Kock, N., Davison, R., Ocker, R., & Wazlawick, R. (2001). E-collaboration: A look at past research and future challenges. Journal of Systems and Information Technology, 5(1), 1-9. Lacity, M. C., & Hirschheim, R. (1995). Beyond the information systems outsourcing bandwagon: The insourcing response. New York: Wiley. Langford, B. E., & Cosenza, R. (1998). What is service-good analysis? Journal of Marketing Theory and Practice, 6(1), 16-26. Rouse, A. C. (2002). Information technology outsourcing revisited: Success factors and risks. Unpublished doctoral thesis, University of Melbourne, Australia. Rouse, A. C., & Corbitt, B.J. (2004, July 8-11). IT supported business processes(BPO): The good, the bad, and the ugly. In Proceedings of the 8th Pacific Asia Conference on Information Systems (PACIS 2004), Shanghai, China. Rouse, A. C., & Corbitt, B. (2003) Revisiting IT outsourcing risks: Analysis of a survey of Australia’s Top 1000 organizations. 14th Australasian Conference on Information Systems, Perth, Australia. Rouse, A. C., & Watson, D. J. (2005). Cyberfraud and identity theft: The hidden costs of business process outsourcing. Monash Business Review, 1(2), 30-33.
Managing E-Collaboration Risks in Business Process Outsourcing
Transparency International (2004). Corruption perception index. Retrieved June 13, 2005, from www.transparency.org/cpi/2004
KEY TERMS BPO: Business process outsourcing. Outsourcing of relatively complex business processes or activities that are supported by information technologies. Business Process: A set of interrelated organizational activities performed by a number of individuals with the goal of generating customer value. This process can be intra-organizational or interorganizational. Offshoring: Offshore outsourcing or crossnational outsourcing, where the vendor and client operate in different countries.
Outsourcing: Assigning, to required results, responsibility for all or a portion of the activity and tasks involved in a business process to an external provider. The provider is responsible for management of organizational assets, resources, and/or activities. Risk: The likelihood or probability of some consequence seen as undesirable, although the term is often used synonymously with “downside.” Risk exposure is calculated as the probability of an undesirable consequence multiplied by its (negative) magnitude. Risk Management: The process of evaluating and selecting alternative responses to risk. Service Delivery Process: The set of activities that take place to perform a service. Performance involves the coordinated actions of both the provider and user (customer) of the service. In industrial settings, there may be many types of users, and the number of performers increases.
This work was previously published in the Encyclopedia of E-Collaboration, edited by N. Kock, pp. 424-429, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Knowledge Transfer and Sharing in Globally Distributed Teams Ilan Oshri Erasmus University, The Netherlands Julia Kotlarsky University of Warwick, UK Paul C. van Fenema Netherlands Defense Academy, The Netherlands
INTRODUCTION Recent years have witnessed the globalisation of many industries. Consequently, globally distributed and virtual teams have become increasingly common in many areas, for example, in new product development and information systems (IS) development. Achieving successful collaborations has become a key challenge for globally distributed organizations, and it is largely dependent on teams’ ability to transfer and share knowledge. Knowledge transfer is the process through which one organization (or unit) identifies and learns specific knowledge that resides in another organization (or unit), and re-applies this knowledge in other contexts (Hansen et al., 1999). On the individual level, Cutler (1989) has previously observed that knowledge transfer is indeed a process by which the knowledge of one actor is
acquired and is reapplied by another. There have been numerous studies on knowledge transfer in various contexts (e.g., co-located teams, virtual teams), exploring the factors involved, and their impact on individual and team performance. It is commonly recognized that knowledge transfer is important for both team and product success. In this article, the concept of knowledge transfer in globally distributed teams will be explored. First, some definitions of the key concepts discussed here will be provided and a review of the relevant literature will be presented. Following this, a discussion of the processes, contexts, mechanisms and challenges involved in knowledge transfer in globally distributed teams will be developed. Lastly, the potential for future research in this area will be explored and conclusions will be offered.
Knowledge Transfer and Sharing in Globally Distributed Teams
BACKGROUND Knowledge transfer is the process through which one organization unit identifies, learns and (re) applies routines in a specific area from another organization or organizational unit. The transfer of knowledge between teams and individuals is important in both co-located and distributed contexts (Hendriks, 1999). The ability to share knowledge through knowledge transfer processes, for example, is important to building trust and improving the effectiveness of group work (Storck, 2000). Others have claimed that without an effective sharing of information, projects might suffer from coordination problems, leading to unsuccessful collaborations (Herbsleb & Moitra, 2001). Nonetheless, achieving an effective knowledge transfer process may encounter certain challenges, in particular when teams are faced with cultural, geographical and time zone differences such as in globally distributed teams. In comparison to co-located teams, globally distributed teams are faced with additional challenges when attempting to transfer and share knowledge between remote sites. Globally distributed teams are broadly defined as two or more teams working together to accomplish project goals from different geographical locations. One key area that has attracted attention from both academics and practitioners when considering knowledge transfer between globally distributed teams is the organizational mechanisms through which knowledge can be best shared between remote sites. In particular, the literature has emphasized the use of certain collaborative technologies such as e-mail, chat (instant messaging), phone/teleconferencing, videoconferencing, intranet, group calendar, discussion lists and electronic meeting systems (Herbsleb & Mockus, 2003) as critical for knowledge transfer. Others have highlighted the importance of face-toface meetings for knowledge transfer in globally distributed teams (Kotlarsky & Oshri, 2005). In this regard, it has been suggested that some col-
laborative technologies, such as GroupWare, do not provide the richness needed to capture and share knowledge that is tacit and contextual in nature. Indeed, the transfer of knowledge may encounter challenges because of the different images of knowledge involved in this process. By this, we mean that knowledge transfer may be seen as a process that involves generic, accessible and codifiable knowledge in which the role of collaborative technologies is central in the transfer process, as well as knowledge transfer that concerns embedded, non-codifiable and contextual knowledge, which may require face-to-face meetings to support the sharing of knowledge. These two views of knowledge transfer will be discussed in detail in the following sections.
MAIN FOCUS OF THE ARTICLE Globally Distributed Teams Globally distributed teams—both within and between organizational boundaries—represent a new organizational form that has emerged in conjunction with the globalization of socioeconomic processes. Such teams have replaced the traditional single-site hierarchy and the functional department structure, for various reasons. For example, companies in developed nations have outsourced parts of their IT services and business processes to developing nations (Carmel & Agarwal, 2002). In addition, short-cycle development and the launch of new products and software for global markets has required expertise from a range of geographical areas (Desouza & Evaristo, 2004). Following this trend, the transfer of knowledge has become a key challenge for global teams attempting to deliver products and services adjusted to local markets and yet aiming to standardize expertise and business and technological operations on an international scale (Sole & Edmondson, 2002). Indeed, the growing trend of outsourcing, for example, has increased the
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exchange of information and knowledge between knowledge workers located offshore and onsite during different stages of product development. In this regard, the transfer of knowledge has become a significant factor in supporting successful collaboration between remote teams.
Knowledge Transfer and Sharing in Globally Distributed Teams: The Challenges While the literature has so far provided various explanations as to how knowledge is shared between individuals, for example, through knowledge codification and socialization processes (Nonaka, 1994), several studies have expressed concern with regard to the transferability of knowledge between remote counterparts and dispersed teams, prompted by a number of factors. First, the diversity of local contexts may exacerbate the stickiness of information (von Hippel, 1994), hampering the transfer of contextual knowledge between remote sites (Cramton, 2001). Second, remote counterparts often adopt unique local routines for working, training and learning (Desouza & Evaristo, 2004). These unique routines may obstruct the development of shared understanding of practices and knowledge across remote sites. Third, differences in skills, expertise, technical infrastructure and development tools and also methodologies further raise the barriers to knowledge transfer between remote sites. And finally, time-zone differences reduce the window for real time interactions (Boland & Citurs, 2001), thus limiting opportunities for remote team members to discuss, debate and explain conflicting opinions and perspectives. Indeed, while co-located teams may develop various memory systems that support the transfer of both codified and contextual knowledge, globally distributed teams often face challenges in developing such memory systems that may provide support for the transfer of contextual and embedded knowledge. The following sections discuss the collaborative tools and social
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aspects involved in supporting knowledge transfer between globally distributed teams.
Collaborative Technologies for Knowledge Transfer Several tools and technologies have been suggested to overcome knowledge transfer challenges in globally distributed teams. It has been argued that a powerful ICT infrastructure may allow the transfer of data at high speed. Indeed, a reliable and high bandwidth ICT infrastructure is required to ensure connectivity between remote sites (Carmel, 1999; van Fenema, 2002). The most commonly suggested collaborative technologies are shown in Table 1. Typically, (the) collaborative technologies recommended for globally distributed teams are classified according to the time/space dimension: the two-by-two same/different place and same/different time matrix. This matrix contains four categories and corresponding technologies: same place/same time (co-located group decision support), same place/different time (workflow systems), same time/different place (telephone, chatting), different place/different time (bulletin board). A more advanced classification of collaborative technologies was suggested by Huis et al. (2002): the authors distinguished between several types of collaborative technology that overcome certain knowledge transfer challenges in globally distributed teams in different time/place settings, as illustrated in Table 2.
Table 1. Collaborative technologies for globally distributed teams E-mail Chat (instant messaging) Phone/audio conference Videoconference Internet/intranet Group calendar Discussion list Electronic meeting system
Knowledge Transfer and Sharing in Globally Distributed Teams
Table 2. Types of collaboration technologies (Adapted from Huis et al., 2002) Different place/different time (off-line), i.e., support between encounters
Different place/ same time (online), i.e., support for electronic encounters
Communication Systems: aim to make communications between remote people easy, economical and fast
Fax e-mail voicemail video-mail
telephone mobile phone desktop-video video/audio-conferencing systems (multi-point) chat system
Information-sharing systems: aim to make the storage and retrieval of large amounts of information quick, easy, reliable and inexpensive
Document-sharing systems, computer conferencing
tele-consultation systems application for searching remote information sources
presentation systems
Collaboration systems: aim to improve teamwork by providing document sharing and co-authoring facilities
co-editing systems
shared white-board, CAD, wordprocess or spread-sheet
Group Decision Support Systems
Social encounter systems: aim to facilitate unplanned, interactions
By using these collaborative technologies, remote counterparts could overcome the challenges associated with different time zones and geographical distances. However, research has demonstrated that some social aspects involved in knowledge transfer, such as trust and rapport between remote counterparts, may require richer means of communication than those offered by collaborative technologies. For this reason, the following section explores the social aspects involved in knowledge transfer, and also the activities that can be carried out by globally distributed teams in building interpersonal ties between remote members.
Social Aspects Involved in Knowledge Sharing Indeed, to cope with geographical distances, different time-zones and cultural diversity, and to ensure an efficient knowledge transfer processes between remote counterparts, numerous technical and operational mechanisms have been proposed
Same place/ same time, i.e., support for face-toface meetings
media spaces virtual spaces
to, and applied by, managers. However, in addition to solutions that are technical in nature, the literature has also considered the social aspects involved in the transfer of knowledge between remote sites. In particular, the literature has discussed aspects relating to building social and interpersonal ties between remote counterparts in order to improve trust and knowledge sharing. Face-to-face meetings, for example, have been considered imperative to improving collaborative work between remote counterparts. Indeed, face-to-face meetings could advance social ties in globally distributed teams and may also improve the formation of a globally distributed team as members get to know each other during these meetings, learn about cultural differences between members of the team, discuss and agree on ways to resolve tensions, set up procedures for coordinating work activities and start working together towards the successful completion of a project. This, in return, could improve the sharing and transfer of knowledge between remote counterparts.
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While the motivation to transfer and share knowledge may be improved following the development of social ties, other challenges may still persist. For example, a major challenge for globally distributed teams is to identify who knows what and with whom a particular knowledge transfer should take place. Herbsleb et al. (2000) described how one globally distributed team was facing major challenges in identifying who knows what: The difficulties of knowing who to contact about what, of initiating contact, and of communicating effectively across sites, led to a number of serious coordination problems (p. 3). To overcome such a challenge, globally distributed teams should develop a “transactive memory,” a concept that describes the combination of individual memory systems and communications (also referred to as ‘transactions’) between individuals. In other words, remote counterparts might face fewer problems in their knowledge transfer process if they were aware of who knows what in the remote sites. Among the various activities that may support the development of a transactive memory in globally distributed teams are: joint training programs, short- and long-term relocations of team members, team-building exercises and social events during face-to-face meetings, and a division of work that creates links between sites (as opposed to a division of work in which one site is responsible for a particular task). Another imperative aspect involved in knowledge transfer is the existence of collective knowledge within the globally dispersed team. Grant (1996) claims that collective knowledge comprises elements of knowledge that are common to all members of an organisation. In the case of globally distributed teams, the ‘organization’ involves all people participating in the project in remote locations. Collective knowledge is the “knowledge of the unspoken, of the invisible structure of a situation, a certain wisdom” (Baumard, 1999,
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p. 66). The lack of collective knowledge may result in difficulties in transferring knowledge between remote sites. To overcome such a challenge, globally distributed teams need to develop some knowledge of the environment, and of the established rules, laws and regulations of their remote counterparts. This can be developed by investing in language lessons (English for nonEnglish speakers), discussing and agreeing on forms of symbolic communication and shared meaning between the remote sites and on protocols of communication. Through such activities, globally distributed teams will start creating a common ground upon which knowledge can be transferred between remote counterparts.
FUTURE TRENDS Despite the broad discussion in this article of the contemporary challenges and solutions involved in transferring knowledge between remote counterparts, it is commonly accepted that the near future will pose two key challenges to globally distributed teams. The first is the deployment of the most appropriate collaborative tools and organizational mechanisms that best support and optimize knowledge transfer processes between remote counterparts. This challenge calls for the development of a framework that links project management practices with product development processes and knowledge management strategies. In this regard, companies should consider approaches that already offer ties between the remote sites. For example, in our research we have discovered that knowledge transfer is more successful in globally distributed teams in which the members have previously worked with each other in the past. Indeed, staffing project teams based on their shared histories could significantly reduce the barriers to transferring knowledge between remote counterparts. Furthermore, firms may also wish to assess the barriers which their teams face prior to investing in ICT and other col-
Knowledge Transfer and Sharing in Globally Distributed Teams
laborative tools. We have identified three stages in the lifecycle of globally distributed teams: (1) introduction, (2) build-up of the connections between remote counterparts, and (3) renewal of interpersonal ties. Each stage requires different sets of collaborative tools and organizational mechanisms that support the transfer of knowledge between remote counterparts. For example, we argue that in the early stages of a globally distributed project it is imperative that videoconferencing facilities are used for project meetings. During videoconferencing, newcomers can be introduced to the entire team and their areas of expertise and responsibilities can be described. Through such activities, a distributed project team can start developing a transactive memory, thus improving the knowledge transfer processes. The second challenge is to maintain a high degree of motivation within the team actually to share and transfer knowledge. Motivating remote counterparts to participate in, and contribute to, knowledge sharing and transfer activities often requires two approaches. One is a knowledge transfer methodology that ensures that remote counterparts are aware of the processes, procedures, areas of expertise and the organizational form within the team. TATA Consulting Services, we have observed, have developed a methodology to transfer application knowledge from onsite to offshore locations. Their methodology included a careful documentation of the knowledge captured onsite, the roles involved in capturing the knowledge onsite, and the assessment exercises through which the diffusion of this knowledge at the offshore location is evaluated. Such methodologies, which are becoming more common in globally distributed teams, are the driving force behind a firm’s ability to standardize knowledge processes while still being responsive to local market demand. The second approach should strengthen the links between performance and rewards for leading knowledge management activities. In this regard, firms still face major challenges in assessing the contribution of knowl-
edge management activities to innovation and product success. Developing scoreboards that link product and team performance to involvement in knowledge transfer, based on criteria that assess the reapplication of this knowledge, may further motivate individuals and teams to contribute to the transfer of knowledge across time zones and geographical distance.
CONCLUSION This article has explored the concept of knowledge transfer in globally distributed teams. Aspects associated with knowledge transfer were reviewed and the challenges associated with the transfer of knowledge across distributed teams were discussed. In particular, we focused on two aspects that are central to this literature: collaborative tools and social aspects. We have discussed the role that collaborative tools play in transferring knowledge between remote counterparts, and highlighted the complementary role that social aspects play in the sharing of knowledge. While research and practice has made significant progress in understanding knowledge transfer processes, far more investment in methodologies, tools and processes is still needed in order to perfect the transfer of knowledge across different time zones and geographical distances.
REFERENCES Baumard, P. (1999). Tacit knowledge in organizations. London: SAGE Publications. Boland, R., & Citurs, A. (2001). Work as the making of time and space. SPROUTS: Working Papers on Information Environments, Systems and Organizations, 2, 1-15. Carmel, E. (1999). Global software teams: Collaborating across borders and time zones. Upper Saddle River, NJ: Prentice-Hall P T R.
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Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 1(2), 65-77. Child, J. (2001). Trust—The fundamental bond in global collaboration. Organizational Dynamics, 29(4), 274-288. Cramton, C. (2001). The mutual knowledge problem and its concequences for dispersed collaboration. Organization Science, 12(3), 346-371. Cutler, R. (1989). A comparison of Japanese and U.S. high-technology transfer practices. IEEE Transactions on Engineering Management, 36(1), 17-24. Desouza, K., & Evaristo, J. (2004). Managing knowledge in distributed projects. Communications of the ACM, 47(4), 87-91. Drucker, P. (1969). The age of discontinuity. NJ: Transaction Publisher. Grant, R. (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal, 17, 109-122. Hansen, M., Nohria, N., & Tierney, T. (1999). What’s your strategy for managing knowledge? Harvard Business Review, 77(2), 106-116. Hendriks, P. (1999). Why share knowledge? The influence of ICT on the motivation for knowledge sharing. Knowledge and Process Management, 6(2), 91-100. Herbsleb, J., & Mockus, A. (2003). An empirical study of speed and communication in globallydistributed software development. IEEE Transactions on Software Engineering, 29(6), 1-14. Herbsleb, J., Mockus, A., Finholt, T. &Grinter, R. (2000). Distance, dependencies, and delay in global collaboration. Conference on Computer Supported Cooperative Work. Philadelphia. Herbsleb, J., & Moitra, D. (2001). Global software development. IEEE Software, 16-20.
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Huis, M., Andriessen, J., & Soekijad, M. (2002). ICT facilitation of distributed groups and communities. Building Blocks for Effective Telematics Application Development and Evaluation, 39-46. Delft University of Technology. Kotlarsky, J., & Oshri, I. (2005). Social ties, knowledge sharing and successful collaboration in globally distributed system development projects. European Journal of Information Systems, 14(1), 37-48. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5(1), 14-37. Sole, D., & Edmondson, A. (2002). Situated knowledge and learning in dispersed teams. British Journal of Management, 13, S17-S34. Storck, J. (2000). Knowledge diffusion through “strategic communities.” Sloan Management Review, 41(2), 63-74. van Fenema, P. (2002). Coordination and control of globally distributed software projects (p. 72). Erasmus University, Rotterdam School of Management. von Hippel, E. (1994). “Sticky information” and the locus of problem solving: Implications for innovation. Management Science, 40(4), 429-439.
KEY TERMS Collaborative tools: Tools such as groupware that enable both structured and free-flow sharing of knowledge and best practices. An example is Lotus Notes. Collective Memory: The collection of memories shared by a common culture. Knowledge Sharing: The process through which information or knowledge held by an
Knowledge Transfer and Sharing in Globally Distributed Teams
individual is disseminated throughout the organization.
clude, but are not limited to, researchers, product developers, engineers, and resource planners.
Knowledge Transfer: The process through which one organization unit identifies, learns and (re)applies routines in a specific area from another organization unit.
Transactive Memory: The combination of individual memory systems and communications (also referred to as ‘transactions’) between individuals.
Knowledge Worker: Participants in an economy where information and its manipulation are the commodity and the main activity (Drucker, 1969). Some examples of knowledge workers in-
Trust: The willingness of one person or group to relate to another in the belief that the other’s action will be beneficial rather than detrimental, even though this cannot be guaranteed (Child, 2001).
This work was previously published in the Encyclopedia of Networked and Virtual Organizations, edited by J. Wang, pp. 789794, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 5.21
Challenges in Developing a Knowledge Management Strategy: A Case Study of the Air Force Materiel Command Summer E. Bartczak University of Central Arkansas, USA Jason M. Turner Air Force Institute of Technology, USA Ellen C. England ISN Software Corporation and Kaplan University, USA
ABSTRACT
INTRODUCTION
It is widely acknowledged that knowledge management (KM) strategy is a desired precursor to developing specific KM initiatives. Strategy development is often difficult due a variety of influences and constraints. Using KM influences as a foundation, this case study describes issues involved in developing a KM strategy for the Air Force Material Command, including issues to be considered for future strategy development such as leadership support and understanding, conflicts with IT organizations, funding, technology usage and configuration, and outsourcing.
Enablers, barriers, and influences of KM have been grouped into three broad categories: internal managerial influences, internal resource influences, and external environmental influences (Holsapple & Joshi, 2000, 2002). Managerial influences “emanate from the organizational participants responsible for administering the management of knowledge” (Holsapple & Joshi, 2000, p. 239); resource influences include human, financial, knowledge, and material resources that make KM a reality (p. 241); and environmental influences affect what “knowledge resources
Challenges in Developing a Knowledge Management Strategy
should or can be acquired in the course of KM, as well as what knowledge manipulation skills (e.g., human or technical) are available” (p. 242). KM strategy is also generally regarded as essential to implementation and should be guided by organizational strategy (Zack, 1999). Earl (2001) provides a taxonomy of strategic starting points, seven “schools of knowledge management” and key attributes of each. Yet despite such insight, little is known about KM strategy within the military (Bower, 2001; Plant, 2000). Difficulties stem from the unique context in which KM must be implemented including culture, organization, and operating environment. Because of these unique attributes, an investigation of military KM may prove telling theoretically and practically.
CASE BACKGROUND Headquartered in Dayton, Ohio, Air Force Material Command (AFMC) employs 85,000 military and civilian employees worldwide. AFMC has “cradle-to-grave” oversight for all aircraft, missiles, and munitions. The Directorate of Requirements (DR) is home to AFMC’s Knowledge Management program. In the early 1990s, AFMC/DR developed a repository of acquisitions regulations, process descriptions, and other miscellaneous information. The repository soon expanded into the Defense Acquisition Deskbook program and was managed by an interservice Joint Program Office. AFMC/DR continued updating Air Force (AF) documents within Deskbook; however, this did not require DR’s entire budget. As a result, it was decided the excess funding was to be used for the development of an additional KM application that helped to document and disseminate overarching AF lessons learned. AFMC/DR was also developing Web-based training for acquisitions personnel due to impending talent drains as more civilian personnel retired. To improve AFMC’s preparedness, Deputy Di-
rector Robert Mulcahy became a KM champion. He consolidated deskbook, lessons learned, and web-based training into one KM system in order to provide better capture and dissemination of critical workforce knowledge. Mulcahy assigned Randy Adkins to lead the consolidated AF knowledge management (AFKM) program. Initially, the AFKM program centered on the use of commercial KM processes and technologies for solving specific customer problems. Soon, however, the now-consolidated KM system grew beyond its original three components; by 2000, two new modules were added: the AFMC Help Center and Community of Practice (CoP) workspaces.” The Help Center provided search capabilities for information across AFMC web sites; the CoP workspaces fostered information exchange, collaboration, and problem solving. The AFKM Hub/home page was a portal-like entrance into the entire system.
RESEARCH METHOD AFMC was one of the first AF organizations to embrace KM; the AFKM team also faced significant challenges determining future directions for their efforts. It was therefore likely key issues impacting KM strategy development might be identified in this context. Additional case research was also needed to bridge the gap between KM theory and practical advice (Jennix, 2005, p. vii). Given these factors, an exploratory case study methodology was used. Holsapple and Joshi’s (2000, 2002) KM influences framework provided three foundational constructs for “analytic generalization” (Yin, 1994, p. 31); these factors—managerial, resource, and environmental—could be examined as potential barriers to KM strategy development. Considerations for design quality were made in accordance with Kidder and Judd (1986) and Yin (1994); however, internal validity was not addressed due to the study’s exploratory nature.
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Data included interviews, field notes, and physical traces. Open-ended interviews were taped and transcribed, then reviewed and approved by respondents. Twelve individuals were interviewed providing a cross-section of organizational leadership, the AFKM team, and AFKM customers. Transcripts were first searched and categorized according to a priori KM influence (and emergent) categories and themes. Resultant data was combined with field notes (capturing impressions about the interviews and observations of individual/organization dynamics) and physical traces (e.g., documents, Web sites, organizational charts, budget records, advertising media, etc.) to form a robust understanding of the case.
FINDINGS The AFKM effort exhibited many of Holsapple and Joshi’s (2000, 2002) influence factors; however, the military environment provided some unique constraints that further exacerbated the negative influences. On the whole, this study revealed a variety of latent and emergent issues that should be considered for any KM strategy development; key issues are discussed below.
Leadership Support and Understanding Mulcahy had been a staunch supporter for KM efforts. David Franke replaced Mulcahy in 2000, and a new Director of Requirements was also appointed. Both were open to KM concepts and the AFKM program, but neither was as educated or enthused about KM as Mulcahy. Adkins indicated that Franke didn’t see KM as needing emphasis above other AFMC programs, thereby increasing the difficulty of securing exposure and backing necessary to compete for scarce resources. Furthermore, few other individuals had much of an idea of what KM was about. Although it was easy to communicate the importance of individual
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applications (e.g., lessons learned, document repositories, corporate yellow pages), it was more difficult to explain comprehensive KM concepts. Adkins realized “learning about KM” took time, but the ignorance of those upon whom he relied for support threatened the program’s survival before it had a chance to prove itself on a large scale.
Conflict with the IT Organization Dealing with AFMC’s information technology (IT) organization was a continual challenge because it perceived its role as providing technology solutions for the customer, as did AFMC/ DR. Additionally, a conflict arose when the IT organization mandated LiveLink® as AFMC’s only authorized collaboration tool. LiveLink® directly conflicted with CoP development and was generally more sophisticated than was needed by the average customer. While Adkins’ team had a wealth of KM knowledge and system development expertise, the IT organization was the authorized policy maker, and continued conflicts risked AFKM being changed, dismantled, or absorbed.
Funding A $600,00 budget cut loomed that would eliminate six personnel impacting AFKM systems development workload distribution. Furthermore, many AFKM customer-specific applications had been developed without charge. Without such assistance, some customers would never get their KM efforts off the ground and AFKM’s support practices would have to be re-evaluated
System Usage Concerns Despite rave customer reviews about AFKM systems, Adkins was disturbed by low usage rates. Access metrics showed usage generally rising, and yet it was a small portion of what it could be. Publicity capmpaigns did little overall; it was clear
Challenges in Developing a Knowledge Management Strategy
the AFKM system tools were still in their infancy and the low usage statistics didn’t help the team adequately justify the benefits or budget.
Technological Challenges The AFKM team became so efficient at developing technology solutions that they could develop a “CoP in a box” with a few minor customizations in only a few days. Instead of providing content (i.e., deskbook, lessons learned), the team now provided software frameworks, in which customers added information and knowledge. However, a new AF portal was decreed the de-facto access point for all AF information and knowledge. This raised the question of how to design future applications. Adkins’ team was heavily involved in the technology of CoPs, but the communitybased capabilities of the AF portal might change everything.
methodology for fully explaining or depicting strategic KM needs. After seeing the initial draft of the IDEF model, it was clear the process was “over-engineered.” After a year of waiting, the promised roadmap was too unfamiliar and complicated for Adkins and others to practically implement. Faced with an impending budget cut, AeroCorp would likely not have an opportunity to make necessary changes. At this point, Adkins had no good answers.
LESSONS LEARNED Adkins understood he needed a strategic vision to guide AFKM’s direction and decision-making. When outsourcing KM strategy met with limited success, he rescoped and refocused the team on a few key areas under their immediate control. From 2002 forward, the AFKM team:
Outsourcing KM
1.
With so many issues impacting AFKM; Adkins needed a strategic vision and implementation roadmap to guide future development. Adkins’ foremost concern was the development of a strategic vision and plan. He needed documents that would provide starting points for decision-making and describe how to proceed to the envisioned business environment. Unfortunately, AeroCorp’s recommendations captured the complexities of AFMC’s environment, and yet were so broad and involved it was difficult to determine a starting point. AeroCorp also had difficulty developing concise methodologies or “blueprints” that addressed the enormity of what AFMC needed to do to evolve into a true knowledge-sharing organization. In particular, AeroCorp applied integrated definition (IDEF) modeling to KM. IDEF modeling was developed for systems engineering and often depicts “as-is” enterprise processes and information requirements; it did not serve as a user-friendly
2. 3.
promoted CoPs as a key technique for KM across the AF, provided enterprise Web search capabilities across AFMC and selected AF sites, used a process approach for delivering CoP capability.
The team’s strategy became one of building momentum by providing rapid KM services (“CoPs in a box”) and following up with training and implementation support; leadership could observe successes at the grassroots level. Since the change in strategy, AFKM has enjoyed remarkable success. The AFKM Web site, now called AF Knowledge Now, continues to expand its capabilities and customer base. In 2004, Adkins secured key support from the AF Chief Information Officer; Adkins’ team was dubbed the AF Center of Excellence for Knowledge Management, and AF Knowledge Now was integrated into the AF portal.
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Challenges in Developing a Knowledge Management Strategy
IMPLICATIONS AND CONCLUSION This study highlighted some real-world examples of such barriers and several issues to be considered for strategy development: many of the same factors that act as barriers to implementation may also impede KM strategy development. This study highlighted some real-world examples, such as barriers and several issues to be considered for strategy development: • •
•
• •
KM is hard to define and communicate to others. KM initiatives must be championed and supported at the highest levels of any organization. KM strategy development is not easy, yet it is critical to the success of any KM initiative. Outsourcing KM can be very risky. Focusing on specific KM efforts is important for countering negative KM influences.
Despite rising awareness of KM and its benefits, we are reminded that such issues may well play out in any organization, military or otherwise, and should be accounted for preemptively during KM strategy development to improve the chances of improving long-term organizational performance.
Earl, M. (2001). Knowledge management strategies: Toward a taxonomy. Journal of Management Information Systems,18(1), 215-233. Holsapple, C., & Joshi, K. D. (2000). An investigation of factors that influence the management of knowledge in organizations. Journal of Strategic Information Systems,9, 235-261. Holsapple, C., & Joshi, K. D. (2002). Knowledge management: A three-fold framework. The Information Society, 18, 47-64. Jennix, E. (2005). Case studies in knowledge management. Hershey, PA: Idea Group Publishing. Kidder, L., & Judd, C. M. (1986). Research methods in social relations (5th ed.). New York: Holt, Rhinehardt, and Winston. Plant, T. (2000). Introducing knowledge management into complex organizations (unpublished manuscript). Australian Defense Force Academy, School of Computer Science, University College, University of New South Wales. Yin, R. K. (1994). Case study research: Design and methods (2nd ed., Vol. 5). Thousand Oaks, CA: Sage Publications. Zack, M. H. (1999). Knowledge and strategy. Boston: Butterworth-Heinemann.
ENDNOTE REFERENCES Bower, W. (2001). Development of a decision framework for knowledge management projects. Unpublished doctoral dissertation, Air Force Institute of Technology, Wright-Patterson AFB, Dayton, OH.
1
The views expressed in this case study are those of the authors and do not necessarily reflect the official policy or position of the Air Force, the Department of Defense, or the US Government.
This work was previously published in Knowledge Management and Business Strategies: Theoretical Frameworks and Empirical Research, edited by E. Abou-Zeid, pp. 314-340, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Section VI
Managerial Impact
This section presents contemporary coverage of the managerial implications of outsourcing. Particular contributions address risks, benefits, and challenges of outsourcing, vendor perspectives of outsourced projects, and business strategies for outsourcing. The managerial research provided in this section allows executives, practitioners, and researchers to gain a better sense of how outsourcing practices, projects, and research are continually informed by the changing global landscape.
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Chapter 6.1
Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices Subhankar Dhar San Jose State University, USA Bindu Balakrishnan San Jose State University, USA
ABSTRACT
INTRODUCTION
Many large organizations are increasingly outsourcing their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, and ability to focus on core areas are some of the benefits of outsourcing. However, there are many challenges and risks associated with IT outsourcing. In this article, we identify the main risk factors and best practices in global IT outsourcing. In addition, we delve into some important issues on IT outsourcing, particularly the challenges along with benefits. Finally, we present case studies of two Global 200 organizations and validate some of the claims made by previous researchers on IT outsourcing. This study will help the management to identify the risk factors and take the necessary remedial steps. Hence, this study is timely and relevant from both an academic and a practitioner’s perspective.
In today’s global economy, outsourcing has become a very common phenomenon. Many large organizations have outsourced some or all of their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, time to market, and ability to focus on core areas are some of the benefits of outsourcing. However, there are many challenges and risks associated with IT outsourcing (Adeleye, Annansingh, & Nunes, 2004; Alvares et al., 1995; Bahli & Rivard, 2003; Beamish, Marcolin, & Mclellan, 1995; Cross, 1995; Dibbern & Goles, 2004; Feeny, Lacity, & Willcocks, 1995; Lacity & Willcocks; 1995, Lee, Huynh, Kwok, & Pi, 2003; Nam, Rajagopalan., Rao, & Chaudhury, 1996; Rothman, 2003; Sabherwal, 2003). IT Outsourcing is as an act of delegating or transferring some or all of the IT related deci-
Risks, Benefits, and Challenges in Global IT Outsourcing
sion making rights, business processes, internal activities, and services to external providers, who develop, manage, and administer these activities in accordance with agreed upon deliverables, performance standards and outputs, as set forth in the contractual agreement (Dhar, Gangurde, & Sridar, 2004). Whenever, there is an outsourcing decision, there is an inherent risk associated with it. In addition, in any outsourcing deal, there are some hidden costs, unexpected outcomes, diminishing service levels, to name a few (Antonucci, Lordi, & Tucker, 1998; Aubert, Patry, Rivard, & Smith, 2001; Clark, McCray, & Zmud, 1995; Earl, 1996; King & Malhotra, 2000; Lacity & Hirschheim, 1993). There are four major aspects of the proposed research that are summarized by the following questions: 1. 2.
3. 4.
What are the objectives for outsourcing? What are the major factors that contribute to risk in global offshore IT outsourcing? How do we minimize the risk in IT outsourcing projects? What are best practices for outsourcing? How do we validate some of the assumptions made by prior research?
Although there are quite a number of studies that address the risk factors and hidden costs in outsourcing, we found out that there is no single study that takes a comprehensive approach in analyzing the issues like risks, benefits, challenges, and best practices in the context of global outsourcing. In addition, many of the important risk factors are not properly analyzed that are quite important to global outsourcing. Of particular interest to us are the effects of risk assessment factors like geographical location, political, cultural, quality standards, legal contracts, and intellectual property as many of these are not well studied and well documented before. These are some of the motivating factors behind this study where
we address not only the risks and benefits but also the challenges and best practices along with two case studies and validate some of the claims made by previous researchers on IT outsourcing. Hence, this research fills the gap in the current literature with regards to risk assessment factors in offshore outsourcing in a global context. This article presents case studies of two Global 200 organizations and validates some of the claims made by previous research on IT outsourcing. Our main contribution in this article is to identify sixteen different risk assessment factors that are quite sensitive to global IT outsourcing. In addition, we also analyzed two large organizations (FIRM-1 and FIRM-2) that are currently outsourcing their IT functions and identify the objectives, key benefits, important risk factors, challenges, and best practices. We also found how Transaction Cost Theory has played an important factor in the decision making process for outsourcing. This research is unique in the sense that it analyzes two multinational organizations FIRM -1 and FIRM-2 that are involved in outsourcing for quite sometime and the outsourcing work is done on remote offshore locations in India, China and some other countries in Asia. So this study is truly global in nature as both the organizations conduct business in various parts of the world including the Americas, Europe, Asia, and Australia and in some parts of Africa. In addition, FIRM-1 is one of the suppliers of FIRM-2. Thus both organizations have common goals of making their global supply chain successful, and maximizing the overall profitability. Finally, we do a comparison of each of these factors for both the organizations. Hence, this study is timely and relevant from both an academic and a practitioner’s perspective.
THEORETICAL CONCEPTS BEHIND OUTSOURCING There are various theoretical justifications for outsourcing. The most popular ones are Trans-
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Risks, Benefits, and Challenges in Global IT Outsourcing
action Cost Theory (TCT) (Ang & Straub, 1998; Williamson, 1985), Agency theory (Bahli & Rivert, 2003) and Coordination theory (Sabherwal, 2003) to name a few. We have chosen TCT over other theories in this research because a careful analysis of the two cases revealed that TCT was the basis for their outsourcing decision.
2.
Transactional Cost Theory 3. A goal of the organizations is to reduce cost and to achieve cost efficiency (Aubert et al., 2001; Diromualdo & Gurbaxani, 1998). Keeping that in mind, Williamson developed the Transaction Cost Theory (TCT). Transaction costs are related to the effort, time, and costs associated with searching, creating, negotiating, monitoring, and enforcing a service contract between buyers and suppliers. As per Williamson, there are two types of costs involved for any service–production costs, and coordination cost. Production cost is the cost incurred to make the product or to provide the service. It includes the cost of labor, material, and capital. Coordination costs include monitoring, controlling and managing the work internally. If the job is handed over to external vendor, the coordination costs are called transaction costs. As per Williamson (1985) transaction cost theory depends on the following parameters: 1.
Costs: There are two types of costs associated with any service or product: a. Production cost b. Transaction cost
Williamson argues externally outsourcing of work results in lower production costs than doing it internally due to economies of scale. But in such a case the transaction cost is high because vendors need to be managed and monitored. In an in-house arrangement, production cost is high because it is difficult to achieve economies of scale. But at the same time, the transaction cost is low because of low coordination costs.
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4.
Asset specificity: It is defined as the degree of customization of the transaction. It could be site specificity, physical asset specificity, or human asset specificity. High asset specificity results in high transaction. Also the production cost goes up with high asset specificity because specific assets have limited utility in other markets (Hirschheim & Lacity, 1993). Opportunism threat: When the work is given to an external vendor, coordination costs increase because quite possibly the vendor may be opportunistic. Hence, managing and monitoring the vendor becomes more difficult. But when the work is done internally coordination costs are low because the workers may be less opportunistic. Vendors also become opportunistic when there is competition in the market, and when there are a less number of vendors (Hirschheim & Lacity, 1993). When there are only few vendors in the market, organizations looking for such vendors cannot bargain much. Organization may not save much by outsourcing because the vendor may charge excess or may not perform as promised. All these lead to high transaction cost. Uncertainty: Williamson outlines that uncertainty increases the transaction cost. Transaction cost goes up especially for asset-specific investments, under uncertain conditions (Hirschheim & Lacity, 1993).
Thus, all these parameters should be weighed well to make a decision. A detailed analysis and trade-off study should be carried out before making an outsourcing decision.
RISK DEFINED Risk and risk management have been widely studied in various contexts, such as Finance, Economics, Insurance, Healthcare, Operations
Risks, Benefits, and Challenges in Global IT Outsourcing
Table 1. IT outsourcing risk exposure Undesirable outcomes Unexpected transition and management costs (Cross, 1995; Earl, 1996; Nelson et al, 1996) Switching costs (including lock-in, and repatriation and transfer to another supplier) (O’Leary, 1990) Costly contractual amendments (Earl, 1996) Disputes and litigation (Aubert et al, 1997; Lacity and Hirschheim, 1993)
Service debasement (Lacity and Hirschheim, 1993)
Cost escalation (Lacity and Hirschheim, 1993; Lacity et al, 1995)
Loss of organizational competencies (Earl, 1996; Lacity et al, 1995) Hidden service costs (Lacity and Hirschheim, 1993) Cost of delayed delivery / non-delivery Poor quality and reliability Damages due to security breach Loss due to disasters and recovery costs Loss due to vendor’s opportunism, including loss in future revenue Vendor lock-in Lack of trust Business uncertainties
Factors leading to outcome
• • • • • • • • • • • •
Lack of experience and expertise to the client with the activity (Earl, 1996; Lacity et al, 1995) Lack of experience of the client with outsourcing (Earl, 1996) Uncertainty about the legal environment Asset specificity (Williamson, 1985) Small number of suppliers (Nam et al 1996) Scope Interdependence of activities Uncertainty (Alchian and Demsetz, 1972; Barzel, 1982) Technological Discontinuity (Lacity et al, 1995) Task complexity
• •
Measurement problems (Alchian and Demsetz, 1972; Barzel, 1982) Lack of experience and expertise of the client and/or of the supplier with outsourcing contracts (Earl, 1996; Lacity et al 1995) Uncertainty about the legal environment Poor cultural fit
• • • • • •
Interdependence of activities (Aubert et al. 1997; Langonis and Robertson, 1992) Lack of experience and expertise of the supplier with activity (Earl , 1996) Supplier size (Earl, 1996) Supplier financial stability (Earl, 1996) Measurement problems (Alchian and Demsetz, 1972; Barzel, 1982) Task Complexity
• • • • • • • • • • • • • • • • • • • • • • • •
Lack of experience and expertise of the client with contract management (Earl, 1996; Lacity et al, 1995) Measurement problems (Alchian and Demsetz, 1972; Barzel, 1982) Lack of experience and expertise of the supplier with activity (Earl , 1996) Scope Proximity of the core competencies (Hamel and Prahalad, 1990) Interdependence of activities Complexity of the activities Measurement problems (Alchian and Demsetz, 1972) Uncertainty (Barzel, 1982) Vendor fails to deliver as per contract (Bahli and Rivard, 2003) Delayed delivery due to unexpected change in the requirements Inability to control vendor’s technical quality (Sabherwal, 2003) Loss of control over vendor’s technical quality Security requirements practices (Adeleye et al., 2004) Intellectual property protection Privacy concerns Loss of control over disaster recovery (Dibbern and Goles, 2004) Loss of data and information Vendor becomes competitor Vendor takes advantages of contractual gap and charges additional amount for services (Wang, 2002) Long term contractual agreement (Dibbern and Goles, 2004) Few vendors leads to limited options (Bahli and Rivard, 2003) Uncertainty (Barzel, 1982; Wang, 2002; Adeleye et al., 2004) Uncertainty (Barzel, 1982, Dibbern and Goles, 2004))
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Research, and Engineering. Each discipline has its own way of analyzing and interpreting risks. This section elaborates the main issues of risks and presents our perspectives on issues related to risks. Risk as an undesirable event. According to Levine and Schneider (1997, p. 38), risk is “… events that, if they occur, represent a material threat to an entity’s fortune.” Using this approach, risk can be interpreted as occurrence of undesirable events. a.
b.
c.
Risk as a probability function: In some disciplines, risk is defined as the probability of an event. It is the chance of serious adverse outcome (Bahli & Rivard, 2003). Risk as a variance: In finance, risk is calculated as the variance of the distribution of outcomes. Risk as expected loss: In some disciplines such as casualty insurance, risk is interpreted as expected loss, which is the product of a loss function and a probability function (Bowers, Gerber, Hickman, Jones, & Nesbit, 1986).
RISK FACTORS Many researchers have studied the risk factors that are common in IT outsourcing (Dhar et al., 2004; Earl, 1996; Jurison, 1995; Overby, 2003). We summarize their work on risk factors. We found some studies have addressed many risks factors associated with IT outsourcing. We decided to focus specifically on risk factors that are quite common, important and sensitive to global IT outsourcing, and later validate those using case studies. Of particular interest to us are the effects of risk factors like geographical location, political, cultural, quality standards, legal contracts and intellectual property, etc. The
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important risk factors for our study are summarized as shown in Table 2.
RESEARCH METHOD In order to investigate our research problems, we did a thorough analysis of two large organizations who are involved in outsourcing. We have chosen these two organizations for various reasons. Both organizations are doing IT outsourcing globally for several years. In fact, outsourcing has become a part of their business strategy. Their experience in dealing with offshore vendors coupled with efficient project management expertise helped them coordinate business processes over globally distributed teams. In addition, they had already dealt with multi-cultural teams, diverse geographic and political environment, varying quality, and intellectual property standards in different countries to name a few. Hence we came to the conclusion that these two organizations are good candidates for our research studies. We conducted in-depth interviews with key personnel who were carefully chosen based on their roles, responsibilities, and experience in dealing with outsourcing projects. Although we interviewed a handful of people, they actually represent a large division within their organizations and are actively involved in the outsourcing strategy for their respective organizations. Hence, the data we collected is reliable and truly represent the outsourcing process of their organizations. Our approach is based on positivist case research as proposed in the case research literature (Dube & Pare, 2003) where we focus on qualitative analysis of the results rather than rigorous quantitative and analytical methods. The data have been collected during the year 2003. In order to gain insightful information and perspectives on offshore outsourcing, respondents were given a detailed questionnaire to collect data and outsourcing related information. The participants were assured confidentiality of their personal and organizational information.
Risks, Benefits, and Challenges in Global IT Outsourcing
The people risk emerges from the experience level, training, and human resource deployment policies of the vendor. In addition, redeployment of existing IT staff of the customer is also a risk assessment factor (Gilbert, 2001).
Globally distributed teams with different skills and experience contribute to risk
Knowledge (Functional, Technological, Managerial)
Functional knowledge is the expertise, understanding, and experiences in the given functional area of the activity. Technological knowledge is associated with the expertise in the areas technology selection, analysis, architecture, design, development, integration, and maintenance support. Managerial knowledge is associated with the project management, risk management, resource management, developing and administrating management processes to carry out the activities.
The level of functional, technological, and managerial knowledge contributes to risk in offshore outsourcing. Managerial knowledge is extremely important in a global context.
Cultural
Cultural risks arise from the dominant culture prevalent with the vendor. The attitudes, communication skills, language, selection policies, performance motivation, team spirit, level of cohesiveness, autonomy, participatory decision making, work ethics, management style, customerorientation, and related organizational behavioral factors that shape the culture.
Country specific cultures can add risk in global outsourcing. Language and work ethics vary from country to country and that may contribute to risk.
Political
Political risks arise out of trading restrictions imposed by the sovereign, permissible ownership rights, nationalistic aspirations, type of government, and political and economical stability.
Political instability is a major concern for global outsourcing as the government rules and regulations may have adverse effect on outsourcing.
Financial
Financial risks arise out of project accounting standards, cash flow, asset base, and currency stability.
Accounting standards and variation in currency exchange rate contribute to risk.
Quality Standards
Software Capability Maturity Model (CMM) and ISO 9000 compliance are hallmarks of the quality standards. The ability to prepare test plans, and performance standards are seen favorably while assessing the risks due to quality standards.
Quality standards vary from one country to another and contribute to risk.
Measurement
Performance measurement standards, benchmarking, and assurance of the performance are key elements in evaluating measurement risks.
Performance measurement standards vary from country to country which contributes to risk.
Scope, Cost, and Time Estimates
Ability to formulate the scope of the project, accurate cost and time estimation poses the risk.
It is quite difficult to accurately determine scope, cost, and time estimates in global outsourcing. This contributes to risk.
Company Specific Risks
Company specific risks are largely due to outsourcer’s financial strength, area of core competence, management, relationships and alliances with other major organizations, and (potential) acquisitions and mergers activities.
Different companies in foreign countries have different management and core competencies. Those contribute to risk.
Legal Contracts and Intellectual Property
Intellectual property rights and their legal status in the country, brand protection, contractual bindings, and arbitration policies of the outsourcer constitute the risk.
IP standards and law vary from one country to another and contribute to risk.
Security
Access control, authentication, usage of secure protocols, encryption, and security policies adopted by the outsourcer constitute the risk.
Security is also a major concern in global outsourcing as protection and control of data pose a problem.
Disaster Recovery
Ability to protect software code, and related data, level of replication, redundancy, and back-up and recovery policies are the main factors in deciding the risks due to disasters.
Loss of control over disaster recovery contribute to risk.
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Table 2. (continued) Contract Management
Contract management involves formulating contracts, schedule planning, activity planning, sending and accepting deliveries, dispute resolution, and signing off. Inability to properly formulate or execute the contracts constitutes the risk.
Contract management in global outsourcing is a risky business as monitoring the project activities become a challenge.
Relationships & Alliances
Ability to formulate customer-vendor interface at executive and working levels, customer relationship management, and developing long term alliances offers synergy at organizational level.
Inability to manage relationships and alliances constitutes the risk in global outsourcing.
Geographic Location
The country, province, and city may be in different time zones, which require working at odd hours for the customer or outsourcer. The communication infrastructure, distance, industrial peace and stability in the region, availability of supporting infrastructure, social-economicalpolitical stability constitutes the risk.
Vendor’s geographic location poses some risks. Communication infrastructure failure in offshore projects incurs significant loss.
Multi-vendor Arrangements
Synchronization of development efforts, data format exchange standardizations, complexities due to multi-layer architecture dependencies or non-contagious independent parts constitute the risk with ability to work with multi-vendor arrangements.
In global outsourcing with multi-vendor arrangements, coordination has to be efficient. Otherwise execution becomes a problem and contributes to risk.
We analyzed the data by summarizing the interviews and questionnaire filled by each participant from each case. After analyzing the responses from each participant, we again contacted them if necessary for further clarification and explanation. This process of analysis clarified lots of complex issues that they had to deal with and helped us gain further insights in outsourcing. These case studies also reflect the global nature of outsourcing as some of the projects were done offshore. Hence, we tried to capture the global perspective and practices of outsourcing when we developed the cases. In addition, we tried to understand the theoretical perspectives and arguments that each participant put forward in the decision making process. In order to provide deeper insight into our qualitative analysis, we also included some comments from participants. We also did a comparison of the objectives, key benefits, major risk factors, challenges, and best practices for the two cases and explained their implications from Transaction Cost Theory.
ing, case studies were done for two Global 200 organizations. All the participants joining discussions were involved in outsourcing projects and helped developing the case studies. We conducted a focus group survey of information technology executives and managers from both organizations who were involved in outsourcing information technology projects. Survey participants answered a detailed questionnaire, followed by an interview. The participants were offered choice to mention any other objectives, benefits, best practices, risk assessment factors not listed in the questionnaire. The participants were assured confidentiality of their personal, organizational, and professional role information. The participant also shared their own experience in dealing with outsourcing projects and gave us valuable information about some of the best practices and challenges. Each case has the following four sections: 1.
2.
CASE STUDY FORMAT In order to understand the objectives, benefits, risks, challenges and best practices of outsourc1676
Background: The background section provides a brief description of the organization studied. Introduction: The purpose of the introduction section is to introduce the individuals, from each organization, who participated in the study. These individuals were actively
Risks, Benefits, and Challenges in Global IT Outsourcing
3.
4.
involved in outsourcing decisions of the firms. Outsourcing decision: This section outlines the motivations, challenges, risks, and benefits associated with outsourcing decisions that each of these organizations faced. Case conclusion: The purpose of case study conclusion is to summarize the interview results. It also highlights some deviations in the ratings by the participants of both the firms.
Anonymity: Anonymity was deemed necessary to protect the identities of all the participants as well as the name of the organization. Both the organizations are referred to as “FIRM-1” and “FIRM-2.” As per the requests of the participants, the names of the outsourcing partners are also kept confidential.
CASE STUDY: FIRM-1 Background FIRM-1 is a large multi-national organization with more than 20,000 employees and 100 offices worldwide. It wants to be the leading provider of semiconductor-based solutions for consumer and communications applications and medical systems. It has annual revenue of approximately US$5-10 billion. It is one of the world’s top semiconductor suppliers, with manufacturing facilities and partners in diverse geographic areas. It has 14 manufacturing and assembly sites, 20 design centers, four system labs, and more than 100 offices. The manufacturing facilities are located in the USA, the Far East, and Europe serving customers worldwide. It also participates in its customers’ business-to-business supply chain extranet. This enables FIRM-1 to get a visibility of demand for the customer’s products, which in turn drives FIRM-1’s production plan. FIRM-1 believes that delivering these services
and applications depends on the right business model, the right partners, and the right technologies. FIRM-1 is dedicated to semiconductor and related technologies and is customer focused. FIRM-1 provides its partners with scalable, versatile technologies and a world-wide manufacturing base.
Introduction Three individuals from FIRM-1 were interviewed. Due to anonymity reasons, their names are not disclosed; they are referred to as “Person 1,” “Person 2,” and “Person 3.” The names of the outsourcing partners are also kept confidential.
Outsourcing Decision FIRM-1’s management believes that if a business function is not its core competency, and better value is found externally, it is an ideal candidate for outsourcing. The core competency of FIRM-1 is semiconductor technology, and related R&D activities, which are kept in-house. Also, it believes that the knowledge of knowing the customers’ needs and providing those solutions faster to the customers is another key to their success. Many ERP and supply chain functions like manufacturing, fabrication, packaging, warehousing, and shipping and handling are outsourced. For more than 10 years, FIRM-1 has outsourced some of its IT functions, which have changed over time. FIRM-1 is in the process of changing its strategy on IT outsourcing. It is a global organization and has looked at its IT outsourcing globally. It used to have a more distributed outsourcing strategy, but now it is more centralized and from a division standpoint. The top management outlined the IT outsourcing strategy first. It then evaluated the approach not just from the overall organization’s standpoint but also from a division standpoint. They picked
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potential suppliers by type of service, or technology that was required and divided those suppliers by divisions. Divisions then ran pilot projects with these outsourcing vendors for years. The results from these pilot projects were collected, which helped FIRM-1 to decide major outsourcing partners commonly for all divisions. So it took FIRM-1 almost twelve months of activity to get organized for IT outsourcing. But the strategy was always to keep a part of all these functions, especially controlling them, in-house. When asked about how IT outsourcing decision has helped to reduce the supply chain costs (namely, core costs, non-coordination costs and transactional costs), one manager replied: We are able to treat each application and its development as a variable cost and make very quick decisions based on ROI if we should even build it. Because the development costs are external, we incur no cost unless the initial business case justification (BCJ) process dictates that positive ROI will result. We always build contingency over-run costs into each project as a part of the BCJ process. FIRM-1 has primarily two IT outsourcing vendors and also some niche players. It has divided up the work between the two vendors in order to leverage their strengths. It describes the relationship with the vendors as strategic partners. When asked about their relationship with outsourcing partner, one of the managers told us:
It is very positive. Our outsourcing partner has program management personnel in the U.S. and act as members of our team. They understand how our company works and as such, this helps with the software applications that they build for us. The outsourcing partners have their program management personnel on-site (i.e., personnel from the outsourcing partner are located within FIRM-1’s campus) who understand the business processes of FIRM-1. And as such, this helps with the software applications and other services they provide to FIRM-1. It has a dedicated staff to manage the vendor relationship. In the past, FIRM-1 had some failures in terms of managing vendor relationships because of inadequate staffing and poor contractual agreement. After they realized their mistakes, well-defined contracts are framed and signed by both the parties. Also weekly status meetings and monthly progress meetings are held to monitor the performance of the vendors. Based on the responses of the participants, an effort is made to analyze and understand the focus areas like objectives, benefits, risks, and challenges involved in the IT outsourcing decisions in FIRM-1. IT Outsourcing Practices: FIRM-1 keeps the project management functions in-house. It does not outsource project management responsibilities and complete project management control to its vendors. That was mainly a reaction of a bad experience from one of its earlier outsourced projects. However, there are multiple projects in which the roles and responsibilities are generally
Table 3. FIRM-1 participants PARTICIPANTS
JOB TITLE
RESPONSIBILITY
Person 1
Senior Manager, IT
Responsible for identification of outsourcing opportunities
Person 2
E-Business Director
Responsible for vendor selection, budget management, and monitoring of delivery of applications to requirements
Person 3
Project Manager
Vendor management, execution and delivery of the projects
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shared but control of responsibilities of projects itself is never delegated. User acceptance and timeline are always controlled in-house, and never outsourced. There has been a participative association with vendors in formulating design specifications. FIRM-1 partners with some key vendors to develop design specifications. These vendors are more of key suppliers of software solutions and not pure “IT outsourcing partners.” It also evaluates their vendors from time-to-time and if there are any value-added services or products that the IT outsourcing vendors have to offer, and if that product or service is beneficial, FIRM-1 definitely takes a close look at it. Another strong driver for FIRM-1 to outsource some portions of its IT is to focus on its core competency. In order to rapidly deploy their breakthrough projects, it takes its best and brightest resources to put on these projects. Therefore, these resources cannot do more repetitive and stable jobs. FIRM-1 tries to free up these core competent people to focus on its core processes, and to improve its competitive advantage. FIRM-1 tries to outsource its “non-critical” jobs to vendors. With the help of pilot projects, FIRM-1 has identified couple of IT competencies, which it has in-house. The demand for these competencies is quite variable. So instead of maintaining it in-house, FIRM-1 decided to acquire those competencies through outsourcing partners. Moreover, these jobs are non-critical and are not related to FIRM-1’s core business, its business creation initiatives or its ERP and supply chain management initiatives. Objectives: For FIRM-1, cost reduction, focus on core activities, and professional services are the main objectives for outsourcing its IT to external vendor. Building competitive advantage, quality and reliability, access to state-of-the-art technology, and customer satisfaction are also some important objectives for IT outsourcing in FIRM-1. Knowledge about consumers’ needs
and providing solutions for those needs are very important to FIRM-1. So participants said that increased flexibility to meet the changing demands and market environment, and reduced time to market are other key objectives for outsourcing IT activities to their vendors. Based on the participants’ responses a histogram is plotted, which is shown in Figure 1. While two respondents think that new technology can be an advantage, one respondent thinks that unproven/untested new technology can pose a risk to outsourcing and hence disagrees with others. Benefits: Participants from FIRM-1 emphasized that the main benefits achieved by outsourcing IT are reduction in costs, and optimal allocation and utilization of internal resources. FIRM-1 outsourced its IT function to low-cost and competent vendors in different countries, thus saving money. By outsourcing some functions of its IT, the management could identify and allocate its key resources, and utilize them efficiently to build a competitive advantage. Reduced time to market/reduced delays, improved flexibility to respond to the changing demand and business environment, predictable outcome, and higher degree of success are some other benefits that FIRM-1 realized by IT outsourcing projects. Quality and reliability was also one of the benefits achieved by FIRM-1. Each of the benefits was rated on a scale of 0-10. Based on the participants’ responses a histogram is plotted, which is shown in Figure 2. Risk Factors: Knowledge being the core competency for FIRM-1, is the main risk factor for the firm. A careful planning of what knowledge to keep in-house and what to outsource is required. FIRM-1 wants to protect the core knowledge because it is afraid that outsourcing of core knowledge will make them very much dependant on the vendors. This will make the vendors in an advantageous position in the outsourcing deal. Formulating scope and deciding the budget and
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Figure 1. Histogram for objectives for IT outsourcing (FIRM-1) 10 Ratings (0-10)
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schedule estimates is another critical risk factor. In the past FIRM-1 missed some schedule and the cost exceeded the budget. Also the vendor did not provide the optimal service, because the scope was not clear. FIRM-1 learnt from its failures. And because ultimately it is FIRM-1 who is answerable to the consumers, a clear understanding of the requirements, finalizing the scope, and agreement of both the parties are very important to FIRM-1 along with budget and schedule. Apart from these, quality standards, financial stability of the vendor, its disaster recovery plans, and security are some of the important risk factors to FIRM-1. When asked what risks their customers and suppliers may have faced from their decision of outsourcing, one of the managers told us: We have had very difficult and costly outsourcing. We outsourced not only applications development and management of applications but also outsourced most of the staff. We outsourced too much of our core knowledge. And also under estimated what it takes to manage vendor relationship at that price, and we didn’t manage it well. As a result it became very advantageous to suppliers
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and disadvantages to our customers. Very high cost and high stakes are involved here. People, contract management, and performance measurement are some other important risk factors for FIRM-1. Legal contract and intellectual property protection is another risk factor for FIRM-1. Though FIRM-1 has a very efficient legal department to take care of the penalties and other legal issues of the contract, it believes that brand protection and intellectual property rights protection are key risk factors. Figure 3 shows a histogram based on the responses of FIRM-1 participants. Challenges: The main challenges for FIRM-1 in outsourcing IT projects are: (a) deciding what jobs to keep in-house and what to outsource, (b) ongoing vendor relationship management, and (c) setting up a governance model. Selecting the right vendor is very challenging for FIRM-1. But since it has a cross divisional strategy, it has the option of partnering with al-
Risks, Benefits, and Challenges in Global IT Outsourcing
Figure 2. Histogram for benefits of IT outsourcing (FIRM-1) 12
Ratings (0-10)
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ternative vendors. And that makes the ongoing management of vendor relationship as one of the biggest challenges. Another challenge for FIRM1 is the continuous commitment to the spirit of partnership. Cultural barriers and designing a contract do not pose a challenge for FIRM-1. Since FIRM1 has a global presence, and has operations in many countries world wide, one of its strategies is to provide training, from time-to-time, to all its employees to deal with various cultures. Also designing a contract, especially the legal issues are well taken care by its legal department. Figure 4 shows a histogram based on the responses of FIRM-1 participants. Best Practices: One of top best practices for FIRM-1 is stakeholders’ buy-in. This has helped FIRM-1 to deal with internal resistance and to carry out change management effectively. It also holds frequent informal meetings to review the progress of the projects. FIRM-1 has the policy of “First Things First.” It prioritizes the action items as per their priority. Other practices like empowerment and formation of steering committees and joint review
boards are also important in FIRM-1’s opinion and it practices them on a regular basis. Based on the responses of FIRM-1 participants, a histogram, as shown in Figure 5, was plotted.
Case Conclusion By outsourcing some portion of IT, FIRM-1 is able to efficiently manage its information systems. Some other measures that FIRM-1 has taken to tightly integrate its supply chain management with information systems are partnering with multiple vendors, penalties for non-performance, and well defined and dedicated management roles. The management has explained the firm’s strategy to all its employees, and it has tied this strategy to the current business environment. The employees are trained in newer technology, and from time-to-time they are also sent to such educational seminars and training programs. From an organizational standpoint, most of the organizations go in search of low-cost and competent services. And that’s what FIRM-1 has been doing. FIRM-1 believes that there will be 50% cost reduction if all but management and control are
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12 10 8 6 4 2 0
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Pe Kn op ow le le dg C e ul tu ra Po l lit ic Q ua Fin al an lit y Sc c S op ta ial n e, M ea dar co su ds s C re om t , a m pa nd en s t ny c sp hed Le ul ec e ga i l a fic r nd is IP ks is su D is Se es a C cu on ste tra r R rity R ec c el o at t M an ver io ns ag y em G hip M eo & en ul gr Al tia lia t ve p nd hic nce or L s ar oca ra ng tion em en ts
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Figure 3. Histogram for risk factors of IT outsourcing IT (FIRM-1)
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Figure 4. Histogram for challenges of IT outsourcing (FIRM-1) 4 3 2 1 0
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outsourced; 25% if only part of the activity is outsourced. From the analysis, it is observed that cost reduction along with competent services is the main driving factor behind IT outsourcing decision. Costs are mainly related to development of a service or an IT application. By lowering costs, FIRM-1 was able to save money in a stringent budget situation, which is a driving factor for outsourcing. Focus on core activities; professional services, and reduced time to market are some other motivations and benefits. Cost and loss of critical skills are the most important risks associated with IT outsourcing
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decision for FIRM-1. Deciding what jobs to outsource, ongoing vendor relationship management, and continuous commitment to the spirit of partnership pose challenges for FIRM-1 in making IT outsourcing decisions. Apart from these, some other observations are noted in each of the focus areas. The participants said that it is a good strategy to outsource legacy systems, and that has been the trend for most of the organizations. FIRM-1 did outsource legacy systems in the past but are not doing it currently as it experienced some unsatisfactory outcomes in the past. So currently it is in the process of removing a bunch of legacy systems and do not
Risks, Benefits, and Challenges in Global IT Outsourcing
Ratings (0 - 3)
Figure 5. Histogram for best practices in IT outsourcing (FIRM-1) 4 3
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Best Practices (High Importance = 3, Medium importance = 2, Low importance = 1, Not important = 0)
want to outsource them at the end of their life cycle. FIRM-1 believes that letting an external vendor to replace the internal staff or anything in-house is definitely very complex. In the past, it had some failures. It had to continuously coordinate and monitor the outsourcing partner, which was not simple. So for FIRM-1 reduced complexity is not a benefit at all. In the risk category, Geographical location is not a big risk factor for FIRM-1 to outsource their projects. Currently the trend is to move to Asia-Pacific region, especially India, for outsourcing jobs. This is mainly because low cost and competent service. But participants were of the opinion that in another five-seven years China may also become one of the choices; it may also offer similar services. So the trend would again change. Hence, FIRM-1 does not have any preference for any geographical location. It is also worth mentioning that FIRM-1 does not worry about contractual amendments costs as it is well taken care of by its very efficient legal department. It has never experienced loss due to outsourcer’s opportunism because of the type of business it is in. It believes such risks are mostly applicable to smaller organizations, start-ups, and software organizations. Since FIRM-1 does not market its software, so does not have this risk. They did face the risk of lack of trust but as soon as they realized
that they got rid of that outsourcing vendor. The participants stated if the partnering relationship is not “win-win” or satisfactory to both the parties, FIRM-1 does not plan to continue with the relationship. Hence, FIRM-1 evaluates its vendors quite meticulously because primarily if there is no trust between them, FIRM-1 does not do business with those vendors. To summarize, high competency and low cost, non-core business functions are the key drivers of the outsourcing deals. Applying Transaction Cost Theory in our analysis, it is apparent that reducing transaction costs played an important role in the decision making process. Also, threat from opportunism and uncertainty is a risk for outsourcing.
CASE STUDY: FIRM-2 Background FIRM-2 is a major, multi-national networking organization with annual revenues over US$20 billion. It provides the broadest line of networking solutions to most of the corporate, education, and government centers. Their hardware, software, and service offerings are used to create Internet solutions that allow individuals and enterprises
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to increase productivity, improve customer satisfaction, and strengthen competitive advantage. It conducts most of its business over the Internet, and is recognized as the leader in this area. FIRM-2 outsource much of its production. Customers visit the Web site to configure, price, route and place orders directly to FIRM-2. More than half of the orders are directly transmitted to the suppliers. Once the product is manufactured, it is shipped directly to the customer. As a result the order-to delivery cycle time is reduced from approximately eight weeks to less than three weeks. Moreover, this helped FIRM-2 and its suppliers to manufacture based on actual orders and not on projection, lowering inventory costs for both FIRM-2 and its suppliers, while making customers happy with the speed of fulfillment of the orders. Additionally, 85% of customer queries are handled through FIRM-2’s Web site. It has established a business-to-business supply chain extranet for its manufacturers and suppliers. This online exchange is used to purchase supplies, make reports, and submit forecast and inventory information. With the help of this common platform, it has been possible for both FIRM-2 and its suppliers to reduce inventories by 45%. FIRM-2 uses Internet extensively in every department of the organization. It also makes extensive use of intranet for its employees. Its employees use it to enroll in organizational benefits, and file expenses. More than 50% of technical training is provided online, saving the organization employee time and travel money while enabling employees to receive more training. Even peer reviews, collection of market information, and monitoring sales are all done online. It has also established a business-to-business supply chain extranet for its manufacturing partners and suppliers. With their Internet-based financial applications, they are able to continuously monitor their sales data and are able to close their books within a short period of time.
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Introduction Five individuals, from various divisions at FIRM2, were interviewed. Table 4 shows their role and responsibilities. FIRM-2 has outsourced its IT functions for the last five years. It has outsourced only portions of IT such as design, development, bug fixes, enhancements, and customer support. FIRM-2 first identified those activities, which could be sent outside to finish faster. The core activities were kept in-house and the context activities were given out. Overall for the FIRM-2, there is a central program office, which manages the relationship with the vendors and all the rates are negotiated centrally. FIRM-2 outsource its IT activities with five outsourcing vendors. It describes its relation with the vendors as very collaborative, focused on the success of business client. During the outsourcing operations, the IT managers met with Offshore Development Center (ODC) managers on regular basis. On site account managers ensure that critical issues are handled appropriately and provide oversight of entire operation.
Outsourcing Decision FIRM-2 is recognized as an innovator in conducting business over the Internet. It says that partnership is one of the pillars for the growth of the organization and such strategic partnerships have helped and contributed significantly to the customer’s, partner’s and FIRM-2’s bottom line. These strategic partnerships help FIRM-2 to focus on its core activities, and have helped FIRM-2 to reduce time to market. With these strategic alliances, it is possible for FIRM-2 to render quality services, and solutions to its customers. FIRM-2 tries to strike a partnership with such organizations that are leaders in their respective markets. FIRM-2 outsources many supply chain activities like manufacturing, product design, product development, engineering, and shipping and handling activities to various partners. Since
Risks, Benefits, and Challenges in Global IT Outsourcing
Table 4. FIRM-2 participants PARTICIPANTS
JOB TITLE / ROLE
RESPONSIBILITY
Person 4
Lower Management
Manage day-to-day IT activities with the regression facility at the outsourcing partner’s facility in India; ensure that process is followed and reset / redesign process, if needed.
Person 5
IT Manager (Middle management)
Responsible for managing team of IT professionals
Person 6
Manager
Part of the group responsible for setting up the relationship with offshore outsourcing organizations
Person 7
Senior Manager
Responsible for outsourcing Order-to-cash processes and systems, and for making outsourcing decisions.
Person 8
Senior Manager
Responsible for defining business requirements, and prioritizing the outsourced tasks.
Internet plays a significant role in optimizing the supply chain of FIRM-2, information technology plays a very important role in the supply chain of FIRM-2. With the growth in information technology, enabled by the Internet, it is possible for all the partners in the chain to work together more closely and effectively than before, making the whole supply chain more effective. Based on the responses of the participants, an effort is made to analyze and understand the focus areas of IT outsourcing decisions in FIRM-2.
b.
IT Outsourcing Practices: FIRM-2 keeps complete project management control within, when the vendor supplies project expertise, technical knowledge, and manpower. FIRM-2 also encourages participative association of vendor in formulating design specifications. But FIRM-2 does not enjoy any access to attractive financing options from the vendor. Some other IT outsourcing practices that are followed by FIRM-2 are as follows:
IT managers meet with Offshore Development Center (ODC) managers on a regular basis. On site account managers ensure that critical issues are handled appropriately and provide oversight of entire operation.
a.
Management of outsourcing vendors has become a core competency. So a centrally managed ODC Project Management Office (PMO) is established that ensures common standards, governance policies, and operating procedures across all vendors.
Quarterly reviews are conducted to evaluate performance and to optimize business processes. By optimizing the business processes, FIRM-2 is able to optimize its overall supply chain. It also reviews areas of improvements, changes, and defects periodically.
When asked about how they manage the relationship with their vendors, one manager told us:
Objectives: For FIRM-2, cost reduction, and focus on core activities are the main objectives for outsourcing its IT to external vendors. Building competitive advantage, organization’s strategic goals, quality and reliability, professional services, and customer satisfaction are also some important objectives for IT outsourcing in FIRM-2. Apart from the options mentioned in the questionnaire, maximum coverage for support related activities (context activities), decreased IT costs for non-critical projects, tap into wider talent pool,
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and reduced time to market are some other primary objectives for FIRM-2 to outsource its IT. Based on the responses from the participants of FIRM-2, a histogram is plotted, which is shown in Figure 6. Benefits: The major benefits for FIRM-2, in outsourcing its IT, are lower costs, optimal allocation and utilization of internal resources, and flexibility to respond quickly to changing demands and business environments. Predictable outcome, higher degree of success, and higher quality and reliability are some other benefits that FIRM-2 realized by IT outsourcing projects. Based on the FIRM-2 participants’ responses, a histogram is plotted, which is shown in Figure 7. Risk Factors: Most important risk factors for FIRM-2 are: a. b. c. d.
Knowledge/expertise Quality standards Scope, cost and time estimates Measurement of performance
Participants from FIRM-2 believe that scope/ requirements of the outsourced projects must be finalized, properly documented and stick to the specifications. Otherwise, if the requirements change continuously it would be difficult for both FIRM-2 and its vendors to do the job. This would then result in budget over run, and schedule slip, along with performance. A multi-vendor arrangement is another risk factor as it involves more coordination efforts and demands a closelyknit governance model. People are another risk factor faced by FIRM-2. Cultural factors added to this risk. We also noticed that FIRM-2 takes a qualitative approach to measure the risks. When asked about how risk is measured, one manager told us: We assess the loss of business or lack of customer satisfaction with late delivery of projects. We assess this quarterly via surveys and business-balanced scorecards. We also assess risks associated with projects coming in over budget due to lack of clarity in requirements and scope creep. When asked what risks their customers and suppliers may have faced from their decision of outsourcing, one of the managers commented:
Ratings (0 - 10)
Figure 6. Histogram for objectives for IT outsourcing (FIRM-2) 12 10 8 6 4 2 0 y e e e s s gy als os ts v iti es c tio n ntag a bil it nc ce nta g tem ida go ol o i a rvi C a ti re l se a dva y sy s av o ec hn ac ti sf adv g ic wer l a & e e t a t r S e c e a Lo ga Co mer e titi v uali ty s si on s an tur e -art Str Le endi a e Q s to omp f-th p rof l ogy x o P Cu e C o e l hn ta t i ta c p S e Ca wt Ne
Objectives (A lways = 10, Very Of t en = 8, Of t en = 6, So met imes = 4, Rarely = 2, Never = 0)
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Person 1 Person 2 Person 3 Person 4 Person 5
Risks, Benefits, and Challenges in Global IT Outsourcing
Figure 7. Histogram for benefits of IT outsourcing (FIRM-2) Ratings (0 - 10)
12 10 8 6 4 2 0 l ys ss tro xi ty tion i es me gy i li ty ts il ity es es ol o lex ib r c os utc o del a ucc e fai lur e lia b profi l t con pl e l loc a rtun it n m o h F we le a po ed f s er e n co d r sk ec Lo i ctab educ ree o Low ty an er ri gem c ed u rc e s op rt t li ow ana edu eso nes R eg e -a d a h e t r r u i L d P R r Q o fal us rm he tet te tim y b Hig Be Sta O p ent if d I
Person 1 Person 2 Person 3 Person 4 Person 5
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Figure 8. Histogram for risk assessment factors in IT outsourcing (FIRM-2) 12 10 8 6 4 2 0
Person 1 Person 2
l t l le ge nt le es on ial es ry ra ca ds ity ks nts en op d ltu oliti anc dar eme edu c ris issu cur ove em lianc cati me e h Pe owle Cu c r l g i P Fin tan f c e u P i S a A c Lo nge I s s c n R n S a & e d a d r K hi arra ty Me t, an y sp al an ste ct M ship rap r ali n a s sa n g og ndo Qu Di ontr atio co mpa Le e e , G i-v e Co C Rel p lt o Sc Mu
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Heavily outsourced operations where vendors have significant knowledge of business process have significant risk to customers. If customers are directly dealing with outsourced vendors without having local IT counterparts in the loop, this will result into IT losing its core competence. Based on the responses from the participants of FIRM-2, a histogram is plotted, which is shown in Figure 8. Challenges: All the challenges asked in the questionnaire are important for FIRM-2. But
cultural barriers and selecting the right vendor are the most critical challenges for FIRM-2 in outsourcing IT projects. Deciding what jobs to keep in-house and what to outsource, setting up a governance model, ongoing vendor relationship management, and continuous commitment to the spirit of partnership are also some important challenges for FIRM-2. Designing a contract was well taken care by the PMO of FIRM-2. Based on the responses from the participants of FIRM-2, a histogram is plotted, which is shown in Figure 9.
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Figure 9. Histogram for challenges of IT outsourcing (FIRM-2) 4 Ratings (0 - 3)
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Figure 10. Histogram for best practices in IT outsourcing (FIRM-2)
4 3 2 1 0
Person 1
on hi ps tions nt ity gers tems ie w ttees y -i n tion s i v u lati s I E a a a sc a l atio n un ic ec ia l M an c tion es Re omm l der B u nic E nt / e r Re Comm a Sp ti onal tiz e A Iss u ri ng C keho Comm e i c i m Pe rmal bl is h Add rio r teg i Ste e Sta orp. er P a a C pow Str Info Es t Em
Person 2 Person 3 Person 4 Person 5
Best Practices (High importance = 3, Medium importance = 2, Low importance = 1, Not important = 0)
Best Practices: 1. 2. 3.
Empowerment and escalation Frequent informal communications Key strategic issues review meetings are the most important best practices in FIRM-2
Peer relationships and stakeholder buy-in are also important practices that FIRM-2 follows. Prioritizing the action items is also another best practice followed there. Another practice that is followed in FIRM-2 is the creation of PMO. A central program management office is created to manage the outsourcing
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relationships. However, establishing a special entity, like joint review board, corporate media communications are not very popular practices in FIRM-2. Figure 10 shows the histogram for the best practices followed in FIRM-2.
Case Conclusion By outsourcing, FIRM-2 is able to better manage the available resources to focus on core activities. Some other measures that FIRM-2 has taken to ensure its supply chain success are the following:
Risks, Benefits, and Challenges in Global IT Outsourcing
• • •
Establish standards, governance, and guidelines for working with offshore outsource vendors. Manage projects locally, but distribute the work globally. Measure the performance and optimize the process.
The management is making all efforts to educate the employees in the concept of core and support activities. Building the “one team” atmosphere is very helpful in this area. Both the onsite and offshore teams work collaboratively as a single team to help achieve the overall success. Also providing training, job rotation, and new career opportunities are some important steps towards dealing with the backlash against outsourcing. FIRM-2 did not disclose its actual costs savings. However, an approximate estimate projected by the participants of FIRM-2 is slightly more than 50% cost savings on a per person basis. From the analysis, it is observed that cost reduction is one of the main motivation behind IT outsourcing decision in FIRM-2. Focus on core activities, and professional services are some other motivations and benefits. Cost and loss of critical skills are the most important risks associated with IT outsourcing decision for FIRM-2. Cultural barriers and selecting the right vendors are most challenging for FIRM-2 in making the IT outsourcing decisions. Apart from these, some observations are noted in each of the focus areas, which are described here. Some participants rated major capital expenditure avoidance and access to state-of-the-art technology as very low. They reasoned that IT outsourcing had actually caused their divisions a major capital expenditure, mostly in capital equipments, to set up their offshore development centers. Moreover, they were of the opinion that they certainly do not go offshore to access state-of-the-art technology. The outsourcing partners are providing FIRM-2 skilled resources, or state-of-the-art programmers, and not state-of-the-art technology. One of the
persons had the opinion that IT outsourcing did not have much impact on organization’s strategic goals, and competitive advantage, and his team did not have anything to do with reducing the burden of legacy systems. As far as benefits are concerned, access to state-of-the-art technology is rated very low. This is because by outsourcing IT, FIRM-2 gets access to state-of-the-art programmers/resources and that its partners are not providing technology. ‘Better ability to identify possible business opportunities and threats so as to evaluate and manage them in the strategic perspective’ is not an important factor for FIRM-2. It believes that going offshore does not decrease management’s attention to the outsourced tasks. It still takes a lot of management overhead to run those outsourced tasks right. Though financial, political factors and geographical locations are some other risk factors, FIRM-2 deals with five vendors, which are well established, competent and financially stable. Also these vendors are located in countries where the political situation is quite stable. So those risk factors are not very much alarming. FIRM-2 has rarely faced risks like contractual amendment costs, disputes and litigation costs, vendor subcontracting the job, and loss due to outsourcer’s opportunism. All these are well taken care of and explicitly mentioned in the contract. Penalties for such unhealthy situations and non-performance are also clearly spelt out in the contract. This saves FIRM-2 from these risks but makes the job of designing a contract very challenging. Applying Transaction Cost Theory in our analysis, it is apparent that reducing transaction costs played an important role in the decision making process. Also, threat from opportunism and uncertainty is a risk for outsourcing.
ANALYSIS OF THE CASES After conducting the case analyses, it was clear that transactional cost theory was the theoretical
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Risks, Benefits, and Challenges in Global IT Outsourcing
foundation behind IT outsourcing decisions for both the firms. As proposed by Williamson in the Transaction Cost Theory that outsourcing of work results in lower production or service costs than doing it internally due to economies of scale. The same argument is also true in the two cases that we analyzed. Another interesting point noticed from the analysis is that FIRM-1 is one of the suppliers for FIRM-2. Thus they both have common goals of making their supply chain successful, and maximizing the overall profitability. From the focused group interviews of participants from both the firms, the following results and conclusions for each key area were drawn: Objectives: It is observed that the top three important reasons for IT outsourcing, in both the firms, are lower costs, focus on core activities, and professional services. Almost 75% respondents were of the opinion that lower costs, professional services, quality, and reliability are most often the motivations for IT outsourcing projects. Sixty-three percent of the respondents said that focus on core activities is another motivation for IT outsourcing. Benefits: It is clear that for both the firms, the main benefit of IT outsourcing is reduction in costs. Also management is able to allocate and utilize the resources optimally. Flexibility to respond to changing demands is the third ranked benefits, which both the firms achieved by IT outsourcing. Almost 63% respondents said that reduction in costs is always the benefit of IT outsourcing. Seventy-five percent of participants said that predictable outcome is another key benefit of IT outsourcing. Sixty-three percent respondents said that higher degree of success and optimal allocation and utilization of resources are most often achieved benefits of IT outsourcing. Fifty percent participants said that increased flexibility is also a key benefit of IT outsourcing.
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Risk Factors: The main risk factor observed for both the firms is knowledge. Both the organizations felt that knowledge transfer needs to be carried out meticulously. The organizations as well as their outsourcing partners should follow proper methodology for knowledge transfer and information sharing. Secondly, both the firms felt that there should be project scope, cost, and time estimates for such outsourcing projects. It is observed that 75% respondents said that knowledge is the most critical and always a risk factor in IT outsourcing. Fifty percent of the participants said that scope, cost and time estimates is another critical risk factor. Sixty-three percent of participants said that monitoring and measurement of performance is a most often risk factor. More than 50% of the participants were of the opinion that quality standards are another risk factor in IT outsourcing. Challenges: The biggest challenge for both the firms are selecting the right vendor and deciding what to outsource and what to keep in-house. Since both the firms have a good legal department and a program management office, they have not faced the challenge of designing a contract very often. Setting up a governance model, ongoing management of the vendor relationship, and continuous commitment to the spirit of partnership are some very important challenges for both the firms. It is clear that 50% of the participants said that selecting the right vendor, and deciding what to outsource and what to keep in-house are the most critical challenges while 63% said that continuous commitment to the spirit of partnership is a moderate challenge faced in IT outsourcing projects. Fifty percent of the participants said that setting up a governance model, ongoing management of the vendor, and designing a contract were some of the challenges. Other factors contributing to risk: Apart from the risk factors described earlier, there are other factors that also directly or indirectly
Risks, Benefits, and Challenges in Global IT Outsourcing
Table 5. Summary of the case studies Category
FIRM-1
FIRM-2
Objectives
Cost reduction; focus on core activities, professional services, Building competitive advantage, quality and reliability, access to state-of-the-art technology, and higher customer satisfaction.
Cost reduction, focus on core activities building competitive advantage to enable organization’s strategic goals, quality and reliability, professional services, and higher customer satisfaction, maximum coverage for support related activities (context activities), decreased IT costs for non-critical projects, tap into wider talent pool, and reduced time to market
Reduce overall transaction cost
Key Benefits
Cost reduction, optimal allocation and utilization of internal resources. Reduced time to market, improved flexibility to respond to the changing demand and business environment, predictable outcome, and higher degree of success, Higher quality and reliability.
Lower costs, optimal allocation and utilization of internal resources, and flexibility to respond quickly to changing demands and business environments. Predictable outcome, higher degree of success, and higher quality and reliability.
Reduce overall transaction cost
Important Risk Factors
Knowledge, People, contract management, and performance measurement, Formulating scope and deciding the budget and schedule estimates.
Knowledge/expertise, quality standards, scope, cost and time estimates, measurement of performance, multi-vendor arrangements, cross culture.
Threat from opportunism and uncertainty
Challenges
Deciding what jobs to keep in-house and what to outsource, ongoing vendor relation management, setting up a governance model, selecting the right outsourcing partner.
Cultural barriers, selecting the right vendor, deciding what jobs to keep in-house and what to outsource, setting up a governance model, ongoing vendor management, and continuous commitment to the spirit of partnership.
Threat from opportunism
Best Practices
Stakeholders’ buy-in, frequent informal meetings, prioritizes the action items as per their importance.
Empowerment and escalation, frequent informal communications, key strategic issues review meetings, peer relationships and stakeholder buy-in, prioritizing the action items, creation of PMO.
Reduce overall transaction cost
contribute to risks in outsourcing. Transition and management cost is one of the top priority risk, followed by cost escalation risk. There are also some hidden costs involved in outsourcing like cost of retention/lay-offs, and cost of ramping up. In addition, loss of critical skills, switching costs, and poor quality and reliability are the other very important risks involved in outsourcing. From the interviews, we found out that 63% of the respondents said that most critical risks are unexpected transition and management costs, and other hidden costs. Almost 50% said that cost escalation, and
Implications from Transaction Cost Theory
poor quality and reliability are another critical or moderate risk. 75% said that switching costs is another moderate risks. Best Practices: Empowerment and escalation was the top priority for the two firms. Also both the organizations hold informal communication sessions frequently to update the management and the employees about the outsourced projects. Stakeholder buy-in was the next important practice that both the firms followed. It is observed that more that 87% of respondents said that Empow-
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Risks, Benefits, and Challenges in Global IT Outsourcing
erment and escalation, and frequent informal communications are the most important practices followed in their firms. Seventy-five percent said that stakeholder buy-in is another best practice followed in their organization. Apart from the results observed in each key area, the following observations are noticed for both the firms. Both the firms felt that there are other risks involved in outsourcing. Transition and management cost is the top priority risk, followed by cost escalation risk. Hidden cost, like cost of retention/ lay-offs, and cost of ramping up, is the third import risk. Loss of critical skills, switching costs, and poor quality and reliability are the other very important risks involved in outsourcing. It is seen that 63% of the respondents said that most critical risks are unexpected transition and management costs, and other hidden costs. Almost 50% said that cost escalation, and poor quality and reliability are another critical or moderate risk. Seventy-five percent said that switching costs is another moderate risks. For risk reduction, there are several methods that both the organizations do follow. We combined all the responses from all the persons interviewed from both the organizations and they are listed in Table 6. Let us also mention here that the first three responses (Person 1, Person 2, and Person 3) are from FIRM-1 and that rest of the responses (Person 4 through Person 8) are from FIRM-2.
CONCLUSION In many large organizations, IT outsourcing is being considered as a viable cost reduction alternative. Cost reduction is the main driving factor for outsourcing their IT activities. Other than cost reduction, short-term requirement of highly skilled resources is another objective for the firms to outsource IT. The top management of both the firms is convinced of the benefits of outsourcing
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and supports the outsourcing decisions. More than anything, support of the top management is the key towards the success of IT outsourcing for both firms. There are a lot of things to be learned from these two cases. First, risks in outsourcing can be managed through proper contractual agreement and quality standards. This has been also described in the work of McFarlan and others (McFarlan & Nolan, 1995). In addition, continuous monitoring of projects can also reduce risks. Both the organizations have risk contingency plans. Broadly, risk is measured on performance metrics over time. Risk factors are weighed to reflect financial implications as well. The metrics to measure the effectiveness of an outsourcing arrangement are checked frequently, and are brought up during the quarterly review meetings. If a risk is time bound, risk mitigation plan is created and executed. If there are repeated and multiple failures to meet the Service Level Agreements (SLA) goals, then alternative vendors may be identified for a part or rest of the work. If the business processes and the QA methodology are very robust and well thought of, risks will be reduced in global outsourcing Other than effective project management, and participative association of vendors in formulating design specifications, it is very important to have planned and periodic reviews to improve the communication with the team members. The concept of “one-team” should be strengthened. Also quality management programs and metrics should be followed. It is again a good practice to have an out-clause and penalty for not meeting the SLAs. Both the organizations described their relation with the IT outsourcing partners as very collaborative and healthy. The outsourcing relationship is managed using a combination of performance metrics, periodic discussions regarding timely delivery, budget and schedule. Other than this, selecting the right outsourcing partner is an important factor in a successful outsourcing project. Another interesting observation
Risks, Benefits, and Challenges in Global IT Outsourcing
Table 6. Summary of risk reduction practices Risk Reduction Practices in IT Outsourcing
Person 1 Person 2 Person 3 Person 4 Person 5 Person 6 Person 7 Person 8
Round the clock project management over globally distributed teams
N/A
Complete project management control with the vendor, over project initiation, planning, and execution for the outsourced project
Complete project management control with the organization, where the vendor supplies project expert technical knowledge, manpower, and other intellectual resources
Participative association of vendor in formulating design specifications
Complete outsourcing of projects, except design specifications, to vendor located at some offshore locations, within the country and out side
Access to value added products from the vendor
Access to attractive financing options for the outsourcing deal from the vendor
N/A
is that the organization and the outsourcing vendor are forming partnerships, which is based on mutual trust and long term commitment. This trend has also been observed in the work of Lee and other researchers (Lee et al., 2003). In addition, there are many risks involved in global IT outsourcing. We identified the key risk factors that commonly arise in global IT outsourcing. This study will help the management to identify the risk factors and take necessary steps to reduce them.
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Aubert , B. A., Patry, M., & Rivard, S. (1997). A tale of two outsourcing contracts. Cahier du GreSI(97-05). Bahli, B., & Rivard S. (2003). The information technology outsourcing risk: A transaction cost and agency theory-based perspective. Journal of Information Technology, 18(3), 211-221. Barzel, Y. (1982, April). Measurement cost and the organization of markets. Journal of Law and Economics, (25), 27-48. Beamish, P., Marcolin, B., & Mclellan, K. (1995). Financial and strategic motivations behind IS outsourcing. Journal of Information Technology, 10(4), 299-321. Bowers, L. N., Gerber, U. H., Hickman, C. J., Jones, A. D., & Nesbit, J. V. C. (1986). Actuarial mathematics: The society of actuaries. Schaumburg, IL: The Society of Actuaries.
Dube, L., & Pare, G. (2003) Rigor in information systems positivist case research: Current practices, trends, and recommendations. MIS Quarterly, 27(4), 597-635. Earl, M. J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26-32. Feeny, D. F., Lacity, M. C., & Willcocks, L. P. (1995). IT outsourcing: Maximize flexibility and control. Harvard Business Review, 73(3), 84-93. Gilbert, A. (2001, September 24). Outsourcing poses staff challenges. InformationWeek. Hamel, G., & Prahalad, C. K. (1990, May-June). The core competence of the corporation. Harvard Business Review, 79-91. Hirschheim, R., & Lacity, M. C. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86.
Clark, T. D., Jr., McCray, G. E., & Zmud, R. W. (1995). The outsourcing of information services: Transforming the nature of business in the information industry. Journal of Information Technology, 10(4), 221-237.
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Lee, J., Huynh, M. Q., Kwok, R. C., & Pi, S. (2003). IT outsourcing evolution — Past, present, and future. Communications of the ACM, 46(5), 84-89. Levine, M., & Schneider, M. (1997, August). Making the distinction: Risk management, risk exposure. Risk Management, 36-42.
Risks, Benefits, and Challenges in Global IT Outsourcing
King, W. R., & Malhotra, Y. (2000). Developing a framework for analyzing IS sourcing. Information & Management, 37, 323-334. McFarlan, F. W., & Nolan, R. L. (1995). How to manage an IT outsourcing alliance. Sloan Management Review, 36(2), 9-23. Nam, K., Rajagopalan, S., Rao, H. R., & Chaudhury, A. (1996). A two-level investigation of information systems outsourcing. Communications of the ACM, 39(7), 37-44.
Overby, S. (2003, September 1). The hidden costs of offshore outsourcing. CIO, 60-66. Rothman, J. (2003, September 15). 11 steps to successful outsourcing: A contrarian’s view. Computerworld. Sabherwal, R. (2003). The evolution of coordination in outsourced software development projects: A comparison of client and vendor perspectives. Information and Organization, 13, 153-202.
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APPENDIX Questionnaire on IT Outsourcing Projects Purpose: The purpose of this survey is to determine the objectives, practices, benefits, risk assessment factors, risk measurement, and risk mitigation methods of outsourced information technology projects. Your feedback of this survey is extremely important to us and will be very much appreciated. 1.
Please give a brief description about your role in outsourced IT projects.
4.
Who is your IT outsourcing partner?
5.
Do you wish to keep the above information confidential? Yes / No: ____ (please specify)
6.
How do you describe your relationship with your outsourcing partner?
7.
How do you manage the relationship?
8.
Does your organization achieve the following objectives by outsourcing IT? Please score each of the objectives, on a scale of 0-10 (Always = 10, Very often = 8, Often =6, Sometimes = 4, Rarely = 2, Never = 0)
Sl.No.
Objective
1.
Company’s strategic goals
2.
Lower costs
3.
Focus on core activities
4.
Customer satisfaction
5.
Competitive advantage
6.
Quality and reliability
7.
Professional services
8.
Making new technology work to the advantage of the company
9.
Reducing the burden of legacy systems
10.
Allows major capital expenditure avoidance
11.
Access to state-of-the-art technology
9.
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Score (0-10)
Please list any other objectives you consider for outsourced IT projects? Also please score them on a scale of 0-10.
Risks, Benefits, and Challenges in Global IT Outsourcing
10. Which of the common practices / risk reduction practices utilized in your outsourced IT projects? Sl.No.
IT Outsourcing practices / Risk reduction practices
1.
Round the clock project management over globally distributed teams
2.
Complete project management control with the vendor, over project initiation, planning, and execution for the outsourced project
3.
Complete project management control with the organization, where the vendor supplies project expert technical knowledge, manpower, and other intellectual resources
4.
Participative association of vendor in formulating design specifications
5.
Complete outsourcing of projects, except design specifications, to vendor located at some offshore locations, within the country and out side
6.
Access to value added products from the vendor
7.
Access to attractive financing options for the outsourcing deal from the vendor
11.
Yes / No (please specify)
Please list any other practices you consider in your outsourced IT projects? Describe briefly.
12. Does your organization achieve the following benefits by outsourcing IT? Please score each of the benefits, on a scale of 0-10 (Always = 10, Very often = 8, Often =6, Sometimes = 4, Rarely = 2, Never = 0). Benefits
Sl.No. 1.
Access to state-of-the-art technology
2.
Flexibility to respond quickly to changing demands and business environment
3.
Lower costs
4.
Predictable outcome
5.
Reduced delays
6.
Higher degree of success
7.
Lower failures in service or products
8.
Higher quality and reliability
9.
Lower risk profiles
10.
Better management control
11.
Reduced complexity
12.
Optimal allocation and utilization of resources
13.
Better ability to identify possible business opportunities and threats so as to evaluate and manage them in the strategic perspective
Score (0-10)
13. Please list and score any other benefits that you consider for outsourced IT projects?
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Risks, Benefits, and Challenges in Global IT Outsourcing
14. Please list any major benefits that your customers and suppliers have realized out of the outsourced IT projects.
15. Do you consider the following risk assessment factors to determine the risks associated with the outsourced IT projects? Please refer to Appendix for explanations of these risk factors. Please score each of the risk assessment factor, on a scale of 0-10 (Always = 10, Very often = 8, Often =6, Sometimes = 4, Rarely = 2, Never = 0) Sl.No.
Risk Assessment Factor
1.
People
2.
Knowledge
3.
Cultural
4.
Political
5.
Financial
6.
Quality Standards
7.
Measurement
8.
Scope, cost, and time estimates
9.
Company specific risks
10.
Legal contracts and intellectual property protection
11.
Security
12.
Disaster Recovery
13.
Contract Management
14.
Relationship & Alliances
15.
Geographic Location
16.
Multi-vendor arrangements
Score (0-10)
16. Please list and score any other risk assessment factors you consider in your outsourced IT projects.
17.
Following are some of the unfavorable outcomes in determining the risks associated with the outsourced IT projects? How critical are each one of them. Please rate each one of them, on a scale of 0-3 (Critical = 3, Moderate = 2, Low = 1, Not critical = 0).
Sl.No.
Unfavorable Outcome
1.
Hidden Costs
2.
Unexpected transition and management costs
3.
Switching costs
4.
Contractual amendments costs
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Score (0-3)
Risks, Benefits, and Challenges in Global IT Outsourcing
Sl.No.
Unfavorable Outcome
5.
Cost escalation
6.
Disputes and litigation costs
7.
Service debasement
8.
Cost of delayed delivery / non-delivery
9.
Loss of organizational competencies / critical skills
10.
Loss of autonomy and company’s control over IT decisions
11.
Loss of control over disaster recovery
12.
Poor quality and reliability
13.
Damages due to security breach
14.
Loss due to disasters and recovery costs
15.
Loss due to outsourcer’s opportunism, including loss in future revenue, if outsourcer becomes competitor.
16
Loss of innovative capacity
17.
Vendor lock-in
18.
Lack of trust
19.
Vendor sub-contracting the job
20.
Business uncertainties
21.
Endemic uncertainties
22.
Technological indivisibility
Score (0-3)
Irreversibility of the outsourcing decisions
18. Please list and score any unfavorable outcomes you consider in your outsourced IT projects.
19.
Do you prepare risk contingency plans? Yes / No: ______
20. How do you measure risk? Describe briefly. 21.
Describe briefly your contingency plan, if outsourcing IT does not work as estimated?
22. Please list any risks that your customers and suppliers may have faced from your decision of outsourcing IT?
23. Information is the key driver for the success of a supply chain? By outsourcing IT, how have you achieved this success?
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24. What were the measures taken to ensure this success?
25. How has IT outsourcing helped to reduce the supply chain costs (namely, core costs, non-coordination costs and transactional costs) in your organization?
26. Did your organization face the following challenges, while outsourcing IT? Please rate each one of them on a scale of 0-3 (Critical = 3, Moderate = 2, Can deal with = 1, Not important = 0) Sl.No.
Challenges
1.
Deciding what jobs to keep in-house and what to outsource
2.
Selecting the right vendor / partner
3.
Cultural barriers
4.
Designing a contract
5.
Setting up a governance model to monitor the vendor and its services
6.
Ongoing management of the vendor relationship
7.
Continuous commitment to the spirit of partnership
27.
Yes / No; Score (0-3)
Please list and rate any other challenges that you faced in your outsourced IT projects?
28. Do you follow the best practices, listed below, in managing the outsourcing relationships? Please rate each one of them, on a scale of 0-3 (3 = High importance, 2 = Medium importance, 1 = Low importance, 0 = Not important) Sl.No.
Best Practice
1.
Empowerment and Escalation
2.
Peer Relationships
3.
Frequent Informal Communications
4.
Establish a Special Entity, like Joint Review Board, User involvement committee, Technology Review Board, Regional Governance Board
5.
Appoint Additional Managers when implementing New Objectives
6.
Prioritize Action Items
7.
Key Strategic Issues Review Meeting
8.
Steering Committees
9.
Stakeholder Buy-in
10.
Corporate Media Communications, as a means of mass communication for all employees
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Yes / No; Score (0-3)
Risks, Benefits, and Challenges in Global IT Outsourcing
29. Please list and rate any other best practices that you consider in your outsourced IT projects?
30. How are you dealing with the backlash on moving jobs out of this country, due to outsourcing projects?
THANK YOU FOR YOUR PARTICIPATION
This work was previously published in the Journal of Global Information Management, Vol. 14, Issue 3, edited by F. Tan, pp. 59-89, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.2
Managing Risks of IT Outsourcing Leonardo Legorreta California State University, USA Rajneesh Goyal California State University, USA
ABSTRACT
INTRODUCTION
Outsourcing is one of the most talked about and widely debated topics. Over the past few years, firms have been outsourcing their IT operations at increasing rates. The fact that firms are turning to outside vendors in increasing numbers in order to meet their needs does not mean that outsourcing is without problems. Firms often enter outsourcing deals without considering risks or assuming that all risks lay with the external service provider. In this chapter, we provide an overview of IT outsourcing, its risks, and a model for managing those risks. We identify different firm-vendor configurations for sustaining long-term relationships aimed at diversifying risk over time and discuss the need for psychological contracts to manage such outsourcing relationships.
Outsourcing is one of the most talked about and widely debated topics. Firms are outsourcing their IT operations at an increasing rate over the past years. Research by Gartner projects the worldwide IT outsourcing market to grow from $180.5 billion in revenue in 2003 to $253.1 billion in 2008 at a compound annual growth rate (CAGR) of 7.2% (Caldwell, Young, Goodness, & Souza, 2004). Some of the top reasons for outsourcing are cost reductions, the ability to focus on core competencies, access to specialized expertise, relief from resource constraints, and to eliminate problem areas. The fact that firms in increasing numbers are turning to outside vendors in order to meet their needs does not mean that outsourcing is
without problems. While outsourcing has helped organizations achieve major benefits such as cost savings, increased flexibility, higher quality services, and access to new technology, unsuccessful outsourcing experiences have also been reported in which suppliers have failed to meet expected service levels and deliver expected cost savings. IT outsourcing has thus become one of the most talked about and widely debated topics. Please see Figure 1. In spite of outsourcing failures, IT outsourcing continues to grow and outsourcing options continue to expand. As the MPEA case study, above shows, it has become more important than ever to understand the risks associated with these different options. Enterprises often enter outsourcing deals without considering risks, assuming that all risks lay with the external service provider. A large number of studies show that the risks associated with various options need to be managed on IT outsourcing. In this chapter, we provide an overview of outsourcing risks, and a model for managing them. We identify different firm-
vendor configurations for sustaining a long term relationship aimed at diversifying risk overtime and discuss the need for psychological contracts to manage outsourcing relationships.
THE MONITORING DASHBOARD IS outsourcing has been defined in many different ways by different researchers. Williamson (1985) defines it as a market vs. hierarchy decision, Rands (1992) defines it as a make or buy decision, while Gurbaxani and Whang (1991) and Porter (1980) define it as “vertical integration.” In this chapter, IT outsourcing is broadly defined as a decision taken by an organization to contract-out or sell the organization’s IT assets, people and/or activities to a third party supplier, who in exchange provides and manages assets and services for monetary returns over an agreed time period (Loh & Venkatraman, 1992). The definition is very broad and includes all types of outsourcing. The IT resources can either be transferred in part or
Figure 1. Metro-Pier case study Case Study: Metropolitan Pier and Exposition Authority Metropolitan Pier and Exposition Authority (MPEA) owns and manages the McCormick Convention center, a business gathering facility, and the Navy Pier, a popular tourist attraction. In early 1998, MPEA with limited capabilities did not consider itself to be a technical service provider. However, on occasions clients requested local area network and Internet services for their conventions. At that time, MPEA opted to outsource the Internet and network services to a third party. In January 1998, MPEA signed a three year revenue-sharing deal with RedSky Technologies for all the show-floor network services. Soon thereafter, MPEA’s business requirements started changing. Increasingly customers were now requesting IT services - private virtual local area networks, firewall implementations, and high-speed bandwidth, MPEA sensed that offering such value-added services would add to their core competencies. RedSky chose not to expand to meet the demands of MPEA. They would only design and build a new network for each convention, leaving MPEA to tear it down after the show. At this point, MPEA decided to insource the IT services and did not renew the three year contract. MPEA spent $1.5 million initially to build the infrastructure and since then they have been successfully delivering all Internet and network services requested by their convention clients.
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Managing Risks of IT Outsourcing
in total. An external supplier can either own its own hardware or may provide the service on the organization’s equipment. This creates different types of outsourcing and the need for rational decision making based on the risk for each option. We introduce The Monitoring Dashboard (Figure 3) to manage the risks associated with the different types of outsourcing. The Monitoring Dashboard will help the organization selected and monitor the optional outsourcing strategy. First we need to carry out an overview of IT outsourcing practices. This overview exposes the dimensions or variables of outsourcing that need to be monitored and managed. The Monitoring Dashboard is the natural result of this analysis.
OVERVIEW OF OUTSOURCING IT outsourcing began to evolve in the early 1960s, largely in response to cost saving opportunities. In 1963, Electronic Data System (EDS) signed an agreement with Blue Cross of Pennsylvania for handling its data processing services. This was the first time a large business had turned over its entire data processing department to a third party (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). EDS continued to grow, increasing its customer base by signing contracts with Frito-Lay and General Motors in the 1970s and with Continental
Airlines, First City Bank, and Enron in the 1980s (Dibbern et al., 2004). Please see Figure 2. In 1989, Kodak followed the footsteps of General Motors and outsourced its mainframes, telecommunications, and personal computer maintenance and service to IBM. Never before had such a big company, in which information systems were considered to be a strategic asset, turned its assets over to a third party (Applegate, Austin, & McFarlan, 2003). IBM aimed to cut operating costs of Kodak’s data center by 40% by consolidating the four existing data centers (Runnoe, 1989). Success of this deal fueled the growth of information systems outsourcing. More companies started outsourcing and many new players joined the business. In 1991, driven by growing customer demand and constrained by a 1956 U.S. Department of Justice Consent Decree (1991), IBM launched a new division called Integrated Systems Solution Corporation (ISSC) to provide a broader range of services. This new division later became IBM Global Services. Outsourcing went on a global scale in 1994. Xerox turned over all its data operations, telecommunications, and network services in 19 countries to EDS. This global, $3.2 billion, 10-year contract was the largest outsourcing deal to date (Rifkin, 1994). Most of the deals formed in the early 1990s were single-vendor total outsourcing contracts. Since then other types of outsourcing arrangements have emerged.
Figure 2. IT outsourcing timeline EDS wins contract from Blue cross of Pennsylvania
EDS signed deals with Frito-Lay and GM
Kodak-IBM deal signed
ISSC was formed
Cosourcing evolved
EDS in financial outsourcing deals
1960
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1970
1980
First global deal b/w Xerox and EDS ($3.2 billion deal)
1990
2000
BPO and ASP
Managing Risks of IT Outsourcing
Outsourcing arrangements evolved from simple transfer of control of information technology processes and infrastructure to complex cosourcing consortiums. Cosourcing is a collaborative and performance driven approach with complex arrangements involving multiple vendors and multiple clients. It shifted the emphasis from minimizing costs to maximizing benefits while sharing the risks and rewards. Teranet Land Information Services is an example of cosourcing. This was a company formed out of a partnership between the Government of Ontario and the private sector which included EDS, KPMG Peat Marwick Stevenson & Kellogg, Intergraph Canada, and SHL Systemhouse (1994). In the last few years, many different forms of outsourcing have emerged such as business process outsourcing (BPO), application service provider (ASP), multisourcing, and net-sourcing. BPO involved the outsourcing of noncore busi-
ness functions along with its IT to a third party. It enabled clients to focus on their primary business operations and to achieve a combination of lower costs, improved productivity, and flexible staffing options (1997). ASPs run enterprise applications on their own computers and provide access to those applications to their clients based on a service charge revenue model. Clients keep complete control of their data. The growth of the ASP option is due to the increasing cost of the software and evolution of the Internet (Taylor, 1999). A slight variation of the ASP model is net-sourcing. Net-sourcing provides a variety of service offerings, in addition to those offered by traditional ASPs. ASP suppliers realized that many other services can be bundled along with the stand-alone software (Kern, Lacity, & Willcocks, 2002). Multisourcing involves multiple suppliers so as to eliminate monopoly power and achieve advantages of “best of breed” (Lacity &
Table 1. IT outsourcing timeline Year
Event
Source
1963
EDS wins Blue Cross of Pennsylvania
(Dibbern et al., 2004)
1970s
EDS signs deals with Frito-Lay and General Motors
(Dibbern et al., 2004)
Mid-1980s to late
EDS involved in financial outsourcing deals • Continental Airlines • First City Bank • Enron
(Dibbern et al., 2004)
1989
Kodak – IBM, Digital Equipment, and BusinessLand (“Kodak Effect”)
(Caldwell, 1995)
1991
IBM enters IS service business. ISSC is formed
(1991)
1994
$3.2 billion outsourcing deal between Xerox and EDS. One of the first mega deals on a global scale
(Overby, 2003)
Mid-1990s
Cosourcing evolves. A complex arrangement between multiple vendors and multiple clients
(1994)
Late 1990s
New outsourcing model BPO and ASP evolves
(Taylor, 1999)
Early 2000s
Net-sourcing, Multisourcing
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Managing Risks of IT Outsourcing
Willcocks, 2001). There has also been growth in the areas of Web and e-business outsourcing (Dibbern et al., 2004). These are e-commerce instances of net-sourcing. Table 1 summarizes the IT outsourcing overview. Having done an overview of IT outsourcing we are now able to distinguish the dimensions of outsourcing. These are independent variables or parameters within management’s control that need to be monitored and assessed so as to manage risk and maximize benefits in the complex web of outsourcing options.
DIMENSIONS OF OUTSOURCING There are different dimensions to IT outsourcing. First consider the “degree” of outsourcing. Lacity and Willcocks (1996) group the outsourcing decision into four categories: total outsourcing, total insourcing, selective sourcing, and de facto insourcing. Total outsourcing is the transfer of the IT assets, leases, staff, and management responsibility for delivery of IT services from internal IT functions to third-party vendors which represent at least 80% of the total outsourcing budget. Total insourcing retains the management and provision of at least 80% of the IT budget internally after evaluating the IT services market. The temporary buying-in of resources to meet temporary needs is included in this as long as the customer retains the responsibility of delivery of IT services. Selective sources transfers selected IT functions with external providers while still providing between 20 and 80% of the IT budget. The vendor is responsible for delivering the results of the selectively outsourced activities, and the customer is responsible for delivering the results of the retained IS activities. De facto insourcing uses internal IT departments that act like third parties to provide products and services that arise from historical precedent, rather than from a reasoned evaluation of the IT services market. Hence, Lacity and Willcocks (2001) provide a model of
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outsourcing options based on degree of control. Other authors classify outsourcing arrangements along a variety of dimensions or parameters. Ang (1994) describes outsourcing using three conceptualized organization boundaries: geographical (an activity is performed or located at or away from the premises of the business unit), legal (property rights of physical assets and employment of personnel are maintained or relinquished by the client), and control (behavioral control is maintained or relinquished by the client). Looff (1995) extends the framework by distinguishing between dedicated and shared resources. Looff variables are as follows: location, ownership and employment, dedicated or shared use, and control. A dedicated and shared resource variable distinguishes if the resources are shared by suppliers among multiple clients or not to achieve economies of scale. The dedicated use is chosen for security reasons, to keep intellectual rights or to maintain competitive use of software (Looff, 1995). Dibbern et al. (2004) defines four dimensions that determine the outsourcing arrangement a firm may enter into: degree (total, selective, and none), mode (single vendor/client or multiple vendors/clients), ownership (totally owned by the company or partially owned by the company), and timeframe (short term or long term). Based on these research studies, we find that analyzing the risk of outsourcing involves five dimensions describing the different outsourcing arrangements: ownership of IT assets, degree, mode, timeframe, and location, as shown in Figure 3, The Monitoring Dashboard. Ownership is the percentage of IT assets owned by the client. Risk increases as more and more IT asset ownership is transferred to the suppliers. Ownership is classified into three categories: internal, partial, and external. Internal is when the client owns all IT assets, partial is when client and supplier both have investment in IT assets, and external is when supplier owns all the IT assets. Degree is classified based on the percentage of IT assets outsourced. The three options of degree are (1) total, when
Managing Risks of IT Outsourcing
Risks
Figure 3. The Monitoring Dashboard
External
Total
Partial
Selective
Single-Single
Long-term
Off-shore
Midterm
Nearshore
Shortterm
Same shore
Multiple-Single
Single-Multiple
Internal Ownership
None Degree
more than 80% of the assets will be transferred to the supplier, (2) selective, where 20% to 80% of the assets are transferred to the supplier, and (3) none, where less than 20% of the assets are transferred to the supplier. Risk increases with the increase in percentage of asset outsourced. Mode is the different client and supplier configurations. Possible options are single client — single vendor, multiple clients — single vendor, single client — multiple vendors, and multiple clients — multiple vendors. Each of these configurations have different associated levels of risks. Risk of lock-in due to single-vendor configurations can be diversified by increasing the number of vendors, but at the same time transaction costs may increase. The fourth dimension is timeframe. IS outsourcing projects can be either short-term (1 year or 2 years), midterm (3 to 5 years), or longterm (10 years or longer). Clients are locked-in for the period of the contract. These contracts cannot be terminated without penalty. Risk increases with inflexible contracts which lock-in the client for longer periods of time. The final dimension is location. Location is the place where resources will be located. Resources include hardware, software, and people. The assets can be located at the client’s location or the supplier’s location.
Multiple – Multiple
Mode
Timeframe
Location
The recognized levels of location are off-shore, near-shore, and same shore. The Monitoring Dashboard synthesizes the five dimensions. The risks associated with a given IT outsourcing configuration can be readily assessed and viewed with The Monitoring Dashboard. Moreover, the dashboard helps management stay alert to the sources of risk. Next we review how the monitoring dashboard can be used to manage the risk of a given outsourcing configuration.
RISK MANAGEMENT IS outsourcing, as a management strategy, entails both risks and benefits. It is impossible to run a business without taking risks. In order to obtain certain benefits you have to expose yourself to risk. We seek, therefore, not to avoid all risks, but to manage those we willingly assume. Please see Figure 4. Outsourcing offers the benefits of lower cost, increased quality, and flexibility, but it also exposes an organization to significant vulnerabilities. These vulnerabilities, if not managed properly, can eliminate the benefits partially or totally.
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Managing Risks of IT Outsourcing
Figure 4. Boehm-Bawerk’s Law “One of the most rigorous theorems of economics (Boehm-Bawerk’s Law) proves that existing means of production will yield greater economic performance only through greater uncertainty, that is through greater risk.” Peter Drucker
Figure 5. Peter Drucker wisdom
“We must be able to choose rationally among risk-taking courses of action rather than p lunge into uncertainty o n the basis of h unch, hearsay, o r experience, no matter how meticulously quantified.” Peter Drucker
In the early 1990s, companies signing outsourcing contracts relied on total outsourcing with a single vendor. These early deals were fixed-price, exchange-based, long term contracts for a baseline set of services (Lacity et al., 2001). Very few of these deals were completely successful. Deals which made sense at the beginning of the contract did not make sense three years later. Many customers had to renegotiate and even terminate their contracts midstream (Lacity et al., 2001). The reasons for the failure of these deals were loss of power due to a monopoly supplier condition (lock-in), fixed prices that exceeded market value over the long term, hidden costs such as software license transfer fees, inability to adapt the market contract to even minor changes in business and technology, and excessive fees for service beyond the contract or excessive fees for services customers assumed were in the contract (Lacity et al., 2001). Companies then pursued selective outsourcing with multiple vendors to mitigate the risk of total outsourcing. Success rate for this strategy was higher than that of total outsourcing as some of the risk of total outsourcing was mitigated or diversified across a portfolio of outsourcing
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arrangements. Selective outsourcing created an environment of competition and provided more flexibility for the customer. But the transaction cost associated with multiple evaluations, multiple vendors, multiple contract negotiations, and multiple suppliers needed to manage and coordinate activities also increased (Lacity et al., 2001). There are always risks. Hence, it becomes important to manage the risks no matter what kind of outsourcing configuration is used. Risk management is therefore an integral component of IT outsourcing. Please see Figure 5. Risk management is a discipline in its own right. Here we focus on the application of risk management to outsourcing configurations. Boehm defines risk management to consist of identifying risks and controlling risks. Hence, we begin by identifying the top risks of outsourcing. Having identified the top risks of outsourcing, we break these into risk factors. This will be the basis for risk control. For example, having a small number of suppliers or insisting on asset specificity are risk factors for lock-in. Controlling risks involves steering clear from such identified risk factors and from the dangers they foretell. Lastly, as part of our suggestions for controlling risk,
Managing Risks of IT Outsourcing
we identify different firm-vendor configurations for sustaining long-term relationships aimed at diversifying risk over time and discuss the need for psychological contracts to manage such outsourcing relationships.
Identifying Risks The top risks need to be identified before we can develop meaningful risk control strategies. The relative importance of the risk will also be established along with some understanding as to why certain risks are perceived to be more important than others. This is necessary so that management attention can be focused on the areas that constitute the greatest threats. Finally, identified risks must be classified in a way that will help select the best sourcing option for the case in consideration and suggest meaningful risk control strategies (see Table 2). Lock-in is one of the top risks of IT outsourcing. It refers to the situation where the client wants but cannot get out of a relationship except by incurring a loss or sacrificing part or all of its assets to the supplier (Aubert, Patry & Rivard, 1998). Some of the factors creating the lock-in situation are asset specificity (Williamson, 1985), small number of suppliers (Nam, Rajagopalan, Rao, & Chaudhury, 1996), and interdependence of activities (Aubert et al., 1998), among others. To perform a service, some assets used are common and some are dedicated to the particular use and are said to be specific. The specificity of an asset creates a lock-in situation where a party could
extract a quasi-rent from the contracting party by threatening to withdraw from the transaction at a time when the specific asset is needed (Aubert et al., 1998). Having a small number of suppliers may result in excessive fees for services and a lack of innovation. Excessive fees, in particular, is one of the top risks associated with outsourcing. In a survey of 50 companies, about 14% of outsourcing operations were deemed failures (Barthelemy, 2001). The major cause of these failures was hidden costs. They are also referred to as unexpected transaction and management costs (Bahli & Rivard, 2003). These costs are associated with vendor search and contracting, transitioning to the vendor, managing the effort, transitioning after outsourcing, and software license transfer fees (Barthelemy, 2001; Lacity et al., 2001). Most companies are outsourcing IT for the first time. They are not aware of these costs and fail to account for them, resulting in lower savings than expected. In addition, vendors may also charge excessive fees for services assumed to be included in the scope of the contract or excess fees for the additional services not included in the contract (Lacity et al., 2001). Costly contractual amendments are also one of the threats to IT outsourcing. They are related to uncertainty. Contracting parties are rationally bounded and cannot foresee all eventualities, so writing a complete contract is impossible (Bahli & Rivard, 2003). Uncertainty can be linked to quantity, the exact nature of deliverables or evaluation of product and services being exchanged (Aubert,
Table 2. Top risks of IT outsourcing Top risks of IT outsourcing 1. 2. 3. 4. 5. 6.
Lock-in Hidden cost/excess cost Costly contractual agreements Disputes and litigations Vendor’s inability to deliver/service debasement Culture difference
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Managing Risks of IT Outsourcing
Rivard, & Patry, 2003). This problem increases with the increase in the number of teams or team members. Some of these changes have to be made in the normal course of business. Contracts have to be reopened and modified, resulting in premiums (Aubert et al., 1998). Disputes and litigation are other major risks associated with IT outsourcing. They refer to any controversy concerning contracting parties (Bahli & Rivard, 2003). The disputes and litigation typically arise due to lack of experience of the client and supplier with outsourcing contract and measurement problems (Aubert et al., 1998). Earl (1996) points out that weak management is not an excuse for outsourcing but a recipe for conflicts and dissatisfaction. Outsourcing is not an option to fix the problem of weak management. The clients need strong internal management to manage contracts and relationships with suppliers. On the other hand, if suppliers have weak management, they may not be able to respond to a rapid change in business conditions, thereby causing disputes between the parties (Lacity et al., 2001). Improper or insufficient measurement techniques will result in accusations of declining services. Both parties need strong management and sound management techniques (Earl, 1996). Service debasement and lack of innovations involve both the deterioration of service and the inability to evolve these services to meet the demands of the changing business and technology environment. As the MPEA case study shows, what was once not considered a core competency can readily become a strategic differentiator. Kliem (2004), in another study, examined the potential risk facing off-shore development projects. Most of the risks are associated with cultural differences. The risk factors identified because of culture differences are as follows: unclear responsibilities, no interaction among cross culture team members, conflicting development standards, widely divergent working styles, mistrust and miscommunication, poorly articulated requirements, inability to resolve time zone differences,
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poor communication of decisions, high turnover, and unwillingness to provide feedback. The risks associated with the sociopolitical and economic events are trade barriers, border tensions between two countries, political instability, and historical animosity between cultures.
Risk Factors • • • •
• •
• • • • • •
Lock-in Asset specificity Small number of suppliers Client’s degree of expertise in outsourcing contracts Inability to adapt the contract to changing business and technology (Lacity et al., 2001) Inflexible contracting (Lacity et al., 2001) Treating IT as an undifferentiated commodity (Lacity & Willcocks, 2001) Hidden/excess cost Uncertainty (Aubert et al., 2003) Opportunism (Aubert et al., 1998) Client’s degree of expertise in IT operations Client’s degree of expertise in outsourcing contracts Relatedness Fixed process that exceed market prices two to three years into the contract (Lacity et al., 2001)
Costly contractual amendments • Uncertainty (Aubert et al., 2003) • Technological discontinuity (Aubert et al., 1998) Disputes and litigations Measurement problems Client’s lack of experience in managing outsourcing project • Supplier’s degree of expertise in IT operations • •
Managing Risks of IT Outsourcing
•
Supplier’s degree of expertise in IT contracting
Service debasement Failure to retain requisite capabilities and skills • Lack of innovation from supplier (Lacity et al., 2001) • Deteriorating service in the face of patchy supplier staffing of the contract (Lacity et al., 2001) •
• • • • • • • • • •
Cultural differences Unclear responsibilities No interaction among cross-cultural team members Conflicting development standards Widely divergent working styles Mistrust and miscommunications Poorly articulated requirements Inability to resolve time zone differences Poor communication of decisions High turnover Unwillingness to provide feedback
Note that these are only the major risks and that there are many other outsourcing risks. Risk also varies based on the specific project. We will now develop a framework to assist managers in selecting the best option to meet their outsourcing requirements and manage their risks. We begin with an analysis of the top 10 risk mitigation strategies aimed at steering clear from known risk factors. Lastly, we identify different firm– vendor configurations for sustaining long-term relationships aimed at diversifying risk over time and discuss the need for psychological contracts to manage such outsourcing relationships.
CONTROLLING RISKS
instance. Each outsourcing instance requires a mental predisposition to think things through and evaluate competing risk management strategies. General recommendations may not be ideally suited for all situations. In this section we identify the top practices to mitigate known risk factors and long-term strategies for diversifying risk over time.
Ten Best Practices to Mitigate Known Risk Factors In the previous section we identified the top risks. Each of these risks has risk factors associated with them. Some risk factors are associated with more than one risk. But all risk factors do not lead to all undesirable outcomes. In Table 3, we identified the link between risks and risk factors. The risk factors, from our review of the literature, that appear to be most closely related to a given risk are only indicated in the table. Risk mitigation strategies are associated with each risk factor. Just as a single risk factor may be associated with many risks, similarly one risk mitigation strategy can mitigate one or more than one risk factor. Figure 6 shows how risk, risk factors, and risk mitigation are linked with each other. It can be seen that the framework is a complex web structure where many risks are associated with risk factors and many risk factors are associated with different risk mitigation strategies. Table 4, at the end of this section, shows the link between risk mitigation strategies and risk factors. It is not enough to single-handedly execute the strategies. The best way to manage all risks is through firm-vendor partnerships and through so-called “psychological contracts.” We identify seven structural models for such firm-vendor partnerships and we conclude our analysis of risk management with a discussion of psychological contracts. A summary of the literature yields the following list of best practices:
There is no silver bullet, no step by step procedure for controlling risks over every outsourcing
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Managing Risks of IT Outsourcing
Table 3. Risk factors associated with current and emerging practices Traditional Outsourcing
Selective Outsourcing
• • • • • •
• Management overhead cost *Not enough outsourcing experience. Risk yet to be fully identified.
Treating IT as undifferentiated commodity Vendor l ock-in Inflexible contracting Excess fees for services beyond the contract Hidden costs Fixed prices that exceeded market prices two to three years into the contract
ASP/Net Sourcing (Kern, Lacity et al., 2002)
Spin-Offs
• • • • • • • •
* Not enough outsourcing experience. Risk yet to be fully identified
Reliability and security of Internet Application unavailability or slow response time Unstable dot.com start-ups Oversold supplier capability Incomplete contracting Customer’s lack of experience with IT outsourcing Unrealistic customer expectation Idiosyncratic requirements which cannot be handles by generic systems • Risk of subcontracting Joint Venture * Not enough outsourcing experience. Risk yet to be fully identified
Business Process Outsourcing (BPO) * Not enough outsourcing experience. Risk yet to be fully identified
Figure 6. Links between risks, risk factors, and risk mitigation strategies
Risks
1. 2. 3.
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Risk factors
Negotiate short term contracts or renew contracts periodically to improve flexibility Include a provision to terminate the contract with smooth transition Use pilot project (start with pilot project to test supplier’s capabilities)
4. 5. 6.
Risk Mitigation
Build experience by incremental outsourcing Retain key capabilities in-house while outsourcing technology task Establish a pricing strategy which encourages innovation (fixed price plus)
Managing Risks of IT Outsourcing
Table 4. Links between risk mitigation strategy and risk factors Risk Factors • Asset specificity • Small number of suppliers
Risk Mitigation Strategies • Short term contracts or renew contracts periodically to improve flexibility • Retain key capabilities in-house while outsourcing technology task
Source (Aubert, Patry et al.,1998; Bahli & Rivard,2003)
•
•
Short term contracts or renew contracts periodically to improve flexibility Provision to terminate the contract and smooth transition Hire an intermediary consulting firm to serve as broker and guide
(Willcocks, Lacity et al.,1999)
Short term contracts or renew contracts periodically to improve flexibility Build experience by incremental outsourcing Retain key capabilities in-house while outsourcing technology task Use Pilot project to mitigate business risk Create a centralized program management office to consolidate management Hire an intermediary consulting firm to serve as broker and guide Hire a legal expert to mitigate legal risks
(Willcocks, Lacity et al.,1995; Rottman,2004)
Inflexible contracting
• • • •
Client’s degree of expertise in IT operations Client’s degree of expertise in outsourcing contracts
• • • • • • •
Risk Factors • Inability to adapt the contract to changing business and technology
Risk Mitigation Strategies • Pricing strategy which encourages innovation. Such as fixed price plus • Regular reviews of price/service/requirement against market
Source (Willcocks, Lacity et al.,1995; Rottman,2004)
•
Vendor’s failure to retain requisite capabilities and skills Treating IT as an undifferentiated commodity
•
Retain key capabilities in-house while outsourcing technology task
(Willcocks, Lacity et al.,1999)
•
Retain key capabilities in-house while outsourcing technology task
Unrealistic expectations of outsourcing Uncertainty
•
Careful delineation in contract of limited expectations from both client and supplier
(Aubert, Patry et al.,1998; Willcocks, Lacity et al.,1999; Applegate, Austin et al.,2003) (Lacity & Willcocks,2001)
• •
Share the risk and rewards with vendors Increase vendor oversight through project management Manage performance through well constructed metrics
(Jurison,1995)
Share the risk and rewards with vendors Manage performance through well constructed metrics Hire an intermediary consulting firm to serve as broker and guide
(Jurison,1995)
•
• •
• •
Opportunism
• • •
•
Relatedness
•
Share the risk and rewards with vendors
(Jurison,1995)
•
Measurement Problems
•
Manage performance through well constructed metrics
(Rottman,2004)
•
Technology discontinuity
•
Short term contracts or renew contracts periodically to improve flexibility Retain key capabilities in-house while outsourcing technology task
(Aubert, Patry et al.,1998)
Start with pilot projects to test supplier’s capabilities Customer feedback
(Lacity & Willcocks,2001)
Well constructed and managed performance through SLAs Supplier performance/reward mechanism
Supplier’s degree of expertise in IT operations and outsourcing contracts Deteriorating service in the face of patchy supplier staffing of the
• • • •
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Managing Risks of IT Outsourcing
Table 4. continued Risk Factors • Supplier’s degree of expertise in IT operations and outsourcing contracts • Deteriorating service in the face of patchy supplier staffing of the contract • Lack of innovation from supplier
Risk Mitigation Strategies • Start with pilot projects to test supplier’s capabilities • Customer feedback
Source (Lacity & Willcocks,2001)
•
Well constructed and managed performance through SLAs Supplier performance/reward mechanism
Pricing strategy which encourages innovation. Such as fixed price plus
(Earl,1996)
•
•
Hire a legal expert to mitigate risk
(Rottman,2004)
•
Retain key capabilities in-house while outsourcing technology task
(Lacity, Willcocks et al.,2004)
•
Legal risks for offshore outsourcing Company’s ability to innovate may be impaired
•
7. 8.
Hire an intermediary consulting firm Manage performance through well constructed metrics (create balance scorecard metrics, frequent vendor reporting, and increase vendor oversight through project management) 9. Hire a legal expert to mitigate legal risks 10. Create a centralized program management office to consolidate management We will now describe each of these best practices. 1.
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Negotiate short term contracts or renew contracts periodically to improve flexibility: Outsourcing contracts structured for very long periods of time have high risks, as discussed above. Contracts which make sense at the beginning of the period may make less economic sense three years later and require adjustments. Suppliers would like to have longer contracts. Their investments in the first year are high because of heavy capital made to purchase equipment and transitioning costs. This investment is made in expectation of a larger revenue stream in the later years (Applegate et al.,
2.
2003). So the longer the contract, the more beneficial it is for them. On the other hand, customers receive large benefits in the first couple of years. These benefits decline year after year because of changes in market pricing, technology, and business practices. Short term contracts or renewable contracts improve flexibility and reduce the risk associated with such environmental changes. It is highly recommended that customers don’t lock themselves in a long term contract. They should sign either short term or renewable contracts. Include a provision to terminate the contract with smooth transition: A well drafted contract should enable its termination in a fair and reasonable manner prior to its end date. This reduces the risk of lock-in with a single vendor. In the event that the vendor’s performance is not as expected, the contract can be transferred to another vendor or insourced, provided a smooth transition clause is in place. Hence, customers should ensure that the contract has a continuity clause requiring vendors to smoothly transition to any other preferred arrangement in
Managing Risks of IT Outsourcing
3.
4.
5.
case of termination of contract (Lacity et al., 2001). Use pilot project (start with pilot project to test supplier’s capabilities): Pilot projects should be used to gain experience with outsourcing. They are a very useful tool in selecting suppliers. The supplier’s capabilities can be tested on technology implementation and different sized projects (Rottman, 2004). The same project can be given to two different suppliers to compare their performance. Customers should use pilot projects for vendor selection to mitigate risks in the initial stages of the outsourcing project and to learn how best to configure the later stages of the outsourcing project. Build experience by incremental outsourcing: Companies can choose IT functions to be transferred to a vendor. The options of outsourcing are not limited to all-ornothing. The transfer done incrementally rather than entirely does not have unnecessarily high economic stakes. The potential consequences of mismanagement will not be that far-reaching and can be controlled easily. Austin describes the levels of services offered by hosting providers for outsourcing data center as real estate services (suitable floor space and physical facilities), network services (connectivity within the facility and externally), platform services (support for hardware, operating system, and reboot services), application support services (support of software above the operating system level), and business operating services (administering and operating an application level). It is apparent from this example of an outsourcing data center that there are a variety of alternatives from which customers can chose. It is not an all-or-nothing choice. Outsourcing services incrementally is a lower risk option. Retain key capabilities in-house while outsourcing technology task: A low risk
6.
7.
option is to retain the critical IT differentiators. Critical IT differentiators are the services which are unique to a company and provide it with significant advantages over competitors or are critical to achieving strategic advantages. These activities are so core to a company’s business that an internal capability to manage and extend them must be maintained. They need to be monitored and controlled continuously for fast changes in the competitive environment. Customers will be well off by outsourcing commoditylike services, which have little to do with the key success factors of the company. Pricing strategy which encourages innovation (fixed price plus): Customers often opt for fixed pricing. One of the problems with this option is the lack of incentives to the supplier for innovation. Suppliers maximize their economic returns by investing the minimum required to meet the service level agreements signed with the customer. Performance-based pricing would encourage suppliers to innovate and exceed customer expectations. In performance-based pricing structure the incentives are given to the supplier when performance exceeds an established criteria and a penalty is imposed when they fall short. Hire an intermediary consulting firm: As Derek Bok said, “If you think education is expensive, try ignorance.” It is always recommended to get advice from experts. More often than not the vendor has a lot more experience than the customer firm. The vendor has dealt with many situations and has worked through various difficulties, while the typical firm will be engaging in outsourcing for the first time. In order to balance the disparity in experience it behooves the customer firm to have an intermediary consulting firm. The probability of them winning without the third party support is very high. There are intermediary consult-
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8.
9.
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ing firms such as NeoIT which specialize in information technology outsourcing and BPO. Intermediary consulting firms are advisory and management firms with a wide range of specialties and experience and offer independent point of view. Manage performance through well constructed metrics (create balance scorecard metrics, frequent vendor reporting, increase vendor oversight through project management): The objectives of the outsourcing should be quantifiable. These criteria must be established at the beginning of the project and must be shared with the supplier. The current performance can then be compared with the preestablished objectives to know if the benefits are being achieved or not. Detailed measurement and benchmarking are vital elements in the regulation of performance and relationships (Rottman, 2004). To monitor day-to-day performance, companies create a balance scorecard or dashboard. It measures costs, quality, timeliness, and risks. The data is analyzed monthly by management to monitor the real development cost and trends (Rottman, 2004). Hire a legal expert to mitigate legal risks: Many companies have their own legal departments or are taking advice from a consulting firm to sign contracts. The need for legal expertise with off-shore or nearshore outsourcing is even more pronounced because customers abide by different legal systems and more regulatory requirements (Rottman, 2004). In-house legal staff may routinely draft domestic contracts but may lack the required knowledge to draft offshore contracts. Existing legal advice must not be experienced in tax implications, protection of intellectual property, business continuity, regulatory compliance, visa formalities, governing law, and dispute resolution processes of other countries.
10. Create a centralized program management office (PMO) to consolidate vendor management: Customer firms should create an integrated PMO if they want business requirements to drive the supplier selection and if they want the suppliers to compete. PMO are ideal tools for assessing vendor suitability for a given project. Each of these 10 risk mitigation strategies can be applied to control a series of risk factors. The next section links these strategies with the risk factors.
Risk Factors and Associated Risk Mitigation Strategies •
•
•
Asset Specificity/small number of suppliers (Aubert et al., 1998; Bahli & Rivard, 2003) Negotiate short term contracts or renew contracts periodically to improve flexibility Retain key capabilities in-house while outsourcing technology tasks Inflexible contracting (Willcocks, Lacity, & Kern, 1999) Negotiate short term contracts or renew contracts periodically to improve flexibility Include provision to terminate the contract with smooth transition Hire an intermediary consulting firm to serve as broker and guide Client’s degree of expertise in IT operations/ client’s degree of expertise in outsourcing contracts (Rottman, 2004; Willcocks, Lacity, & Fitzgerald, 1995) Negotiate short term contracts or renew contracts periodically to improve flexibility Build experience by incremental outsourcing
Managing Risks of IT Outsourcing
•
•
•
•
•
•
Retain key capabilities in-house while outsourcing technology task Use a pilot project to mitigate business risk Create a centralized program management office to consolidate management Hire an intermediary consulting firm to serve as broker and guide Hire a legal expert to mitigate legal risks Inability to adapt the contract to changing business and technology (Rottman, 2004; Willcocks et al., 1995) Establish pricing strategy which encourages innovation, such as fixed price plus Provide for regular reviews of price/ service/requirement against market Vendor’s failure to retain requisite capabilities and skills (Willcocks et al., 1999) Retain key capabilities in-house while outsourcing technology task Treating IT as an undifferentiated commodity (Applegate et al., 2003; Aubert et al., 1998; Willcocks et al., 1999) Retain key capabilities in-house while outsourcing technology task Unrealistic expectations of outsourcing (Lacity et al., 2001) Careful delineation in contract of limited expectations from both client and supplier Uncertainty (Jurison, 1995) Share the risk and rewards with vendors Increase vendor oversight through project management Manage performance through well constructed metrics Opportunism (Jurison, 1995) Share the risk and rewards with vendors
•
•
•
•
•
•
•
•
Manage performance through well constructed metrics Hire an intermediary consulting firm to serve as broker and guide Relatedness (Jurison, 1995) Share the risk and rewards with vendors Measurement problems (Rottman, 2004) Manage performance through well constructed metrics Technology discontinuity (Aubert et al., 1998) Short term contracts or renew contracts periodically to improve flexibility Retain key capabilities in-house while outsourcing technology task Uncertainty about supplier’s degree of expertise in IT operations and outsourcing contracts (Lacity et al., 2001) Start with pilot projects to test supplier’s capabilities Customer feedback Deteriorating service in the face of patchy supplier staffing of the contract (Earl, 1996; Lacity et al., 2001; Rottman, 2004) Well constructed and managed performance through SLAs Supplier performance/reward mechanism Lack of innovation from supplier (Earl, 1996) Pricing strategy which encourages innovation such as fixed price plus Legal risks for off-shore outsourcing (Rottman, 2004) Hire a legal expert to mitigate risk Loss of ability to innovate (Lacity, Willcocks, Hindle, & Feeny, 2004) Retain key capabilities in-house while outsourcing technology task
It is not enough to single-handedly execute these strategies. Next we propose establishing long-term firm-vendor relationships and identify
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seven structural models aimed at diversifying risk over time.
Long-Term Strategies for Diversifying Risk Over Time Perhaps the best approach to controlling outsourcing risk is to build long-term firm-vendor relationships. The prospect of being able to continue to do business has a psychological impact the benefits risk control. Researchers have found that so-called psychological contracts may be the best way to control for known and unknown risk factors. We review the psychological contract literature and provide seven models for long-term firm-vendor relationships. Koh, Ang, and Straub (2004) introduced a psychological contract perspective to help understand the ongoing IT outsourcing relationship. Psychological contract refers to an individual’s beliefs about his or her mutual obligations in a contractual relationship (Rousseau, 1995). It exists only if both parties believe that an agreement exists, that promises have been made. The three distinctive principles of psychological contract theory leading to the success of an outsourcing relationship are mutual obligations, psychological obligations, and individual level of analysis. A mutual obligation is a belief that one is obliged to provide services based on the perceived promises of a reciprocal exchange. IT outsourcing involves a contract with a set of mutual obligations between customer and supplier. These mutual obligations should not be violated if the outsourcing project is to succeed. Moreover, there are implicit psychological obligations. Psychological obligations are a kind of implied contract subject to interpretations. Legal contracts for IT outsourcing can never be complete and must be supplemented by unwritten promises and “understood” expectations. Successful IT outsourcing relies heavily on a psychological contract between the customer and supplier. These psychological contracts may be expressed partially in terms of
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a legal contract, or based simply on oral promises and other expression of commitment made by the parties. Failure to meet these obligations leads to mistrust between firms. One will view the “trespass” as a violation of the “spirit” of the contract. It is at this level where many of the risks can be mitigated. An individual level of analysis means that a psychological contract applies at an individual level rather than the firm. In IT outsourcing relationships, project managers are typically viewed as representing their organizations. The contractual party views his or her actions as being those of the organization. They play a critical role in facilitating long term relationships and in assessing the outsourcing relationship. Hence, the psychological contract is derived from formal role relationship and interpersonal relationship among individuals. Some of the customer’s major obligations in an outsourcing project are clear specifications, prompt payment, close project monitoring, dedicated project staffing, knowledge sharing, and project ownership. Some of the major supplier’s obligations are accurate project scoping, clear authority structures, taking charge, effective human capital management, effective knowledge transfer, and building effective organizational teams. In addition, outsourcing success requires that customers and suppliers understand and fulfill the impact psychological contract. Violation of the psychological contract would lead to significant negative effects for the parties involved. Hence parties are more likely than not to abide by such covenants. Successful outsourcing requires a careful management of relationships. In this last section, we are going to describe a new perspective on managing outsourcing relationships by focusing on the best practices followed by university campuses and communities. Campuses and communities have successfully used seven structural models for managing their partnerships. These seven successful structural models can also be used for
Managing Risks of IT Outsourcing
managing vendor-customer partnerships. This section will describe each of these models. Communities and campuses establish partnerships to enhance experiential learning activities while addressing community needs. They have been successful in forming and managing partnerships between community organizations and their local institutions of higher education and have increased substantially during the 1990s. The community partners define the characteristics of good partnerships as effective in meeting shortterm goals, contributing to long-term goals, and developing relationships with higher education institutions with the promise of benefits beyond the results of a given engagement activity. The seven structural models are centralized, cross-company collaborative, organizational-enhancement, vendor-enhancement, decentralized, issue focused, and vendor alliance.
Centralized Model Centralized model focuses on building a centralized, enterprise-wide infrastructure for managing the outsourcing relationship as a means to transform the existing organizational culture. It brings together a variety of departmental initiatives to establish an enterprise-wide initiative. The projects are outsourced from a central place. Any department which wants to participate in outsourcing goes through this office. The central office offers different opportunities to fit the needs of all departments. It deals with multiple vendors and outsources the project to the vendor specializing in the area outsourced. The relationships are managed by experts, who are aware of the market changes because they are constantly involved in the marketplace. Money can be saved through careful negotiations and economies of scale.
Decentralized Model Decentralized model focuses on letting all individual units manage their own outsourcing rela-
tionship. There is no central office to oversee the operations or to assist in forming vendor relations. The departments can form outsourcing arrangements in a way they prefer and approach vendors in ways that are most interesting and appealing to them. There are no controlling managers who approve or disapprove relationships to conform to specific policies. This model has little coordination and articulation among different departments in the organization that engage in an outsourcing relationship but is high flexible. In this model, there is a propensity for territorial issues and competition among departments to manifest.
Cross-Company Collaborative Model Cross company collaborative model identifies and builds on the existing programs by bringing together a variety of existing organizational outsourcing programs through the application of enterprise-wide initiatives. It convenes departments that engage in outsourcing activities to collaborate with each other and interface with suppliers. Though the departments remains separate, the model places heavy emphasis on developing enterprise-wide policies and ensures that they are being followed across the company. It is a hybrid model of the centralized and decentralized models.
Organizational-Enhancement Model Organizational enhancement model focuses on improving organizations practices by implementing the best practices recommended by vendors. It builds on existing partnerships that have developed over the years, placing heavy focus on developing best management practices. Vendors improve operation efficiencies by improving the existing processes. These processes can be implemented in the organization, too, by collaboration. It reduces the risk of process mismatch between vendor and client. This model uses vendor exper-
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tise to enhance the organization’s business and outsourcing practices.
Vendor-Enhancement Model Vendor-enhancement model focuses on improving the vendor’s processes by implementing the best practices followed by the client. The vendor can effectively identify the culture and practices that need to be accommodated and implement them by successful collaboration. This will again reduce the risk of process mismatch. This model uses client expertise to enhance the organization’s business and outsourcing practices.
Issue Focused Model Issue focuses company partnership model focus on a particular issue, opportunity, or challenge they are facing. There are issues in the organization that can be addressed through a new partnership. The activities are focused on resolving the issue. Many such relationships, for example, have been formed to address the Sarbanes-Oxley issue. Vendors can provide the best solution, building a mutually beneficial partnership which focuses specifically on the issue.
To conclude our analysis of risk mitigation strategies, we must discuss psychological contracts as an emerging device for establishing outsourcing relationships.
CONCLUSION Outsourcing will continue to grow despite the protests surrounding the loss of U.S. jobs. The types of outsourcing will evolve creating more options to meet the ever growing requirements of each organization. With the increase in outsourcing activities, the number of outsourcing failures unless more attention is placed on risk management. In this chapter, we highlighted the various types of IT outsourcing options existing today and the risks involved with these options. The risks were synthesized from our review of literature. We covered a new perspective on managing outsourcing relationships by focusing on the best practices followed by communities and campuses. Seven structural partnership models taken from the service literature were explained in detail and shown how they can be used for managing firm-vendor relationships. The importance of fulfilling psychological contracts for a successful outsourcing relationship was also discussed.
Vendor Alliance Model This model focuses on building a vendor coalition that works to improve the conditions of outsourcing. The coalition is composed of multiple vendor agencies to share experiences, create a learning environment, and share best practices and standards. Sourcing professionals collaborate with each other to continue improving management practices. One such example is Sourcing Interests Group (SIG), www.sourcinginterests.org. SIG has over 160 members, which includes 25 of the Fortune 100 companies. Members have all levels of sourcing experience and share noncompetitive information with each other to share best practices and their experiences.
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REFERENCES Ang, S. (1994). Business process re-engineering. IFIP Transactions, A-54, 113-126. Applegate, L. M., Austin, R. D., & McFarlan, F. W. (2003). Corporate information strategy and management (6t h ed.). New York: McGraw-Hill Higher Education. Aubert, B. A., Patry, M., & Rivard, S. (1998). Assessing the risk of IT outsourcing. In Proceedings of the 31s t Hawaii International Conference on System Sciences.
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Aubert, B. A., Rivard, S., & Patry, M. (2003). A transaction cost model of IT outsourcing. Information and Management, 41, 921-932. Bahli, B., & Rivard, S. (2003, September). The information technology outsourcing risk: A transaction cost and agency theory-based perspective. Journal of Information Technology, 18, 211-221. Barthelemy, J. (2001). The hidden costs of IT outsourcing. Sloan Management Review, 42(3), 60-69. Caldwell, B. (1995). Outsourcing megadeals: More than 60 huge contracts signed since 1989 prove they work. InformationWeek, 34(552). Caldwell, B. M., Young, A., Goodness, E., & Souza, R. D. (2004). Continued growth forecast for IT outsourcing segments: 3. Gartner Research. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. Database for Advances in Information Systems, 35(4), 6. Earl, M. J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26-32. Gurbaxani, V., & Whang, S. (1991). The impact of information systems on organisations and markets. Communications of the ACM, 34, 59-73. Jurison, J. (1995). The role of risk and return in information technology outsourcing decision. Journal of Information Technology, 10(4), 239247. Kern, T., Lacity, D. M. C., & Willcocks, D. L. P. (2002). Application service provision: Risk assessment and mitigation. MIS Quarterly Executive, 1(2), 113-126. Lacity, D. M. C., & Willcocks, D. L. P. (2001). Global information technology outsourcing. New York: John Wiley & Sons. Lacity, D. M. C., Willcocks, D. L. P., Hindle, J., & Feeny, D. (2004). IT and business process out-
sourcing: The knowledge potential. Information Systems Management, 21(3), 7-15. Loh, L., & Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the Kodak effect. Information Systems Research, 4(3), 334-358. Looff, L. A. D. (1995). Information systems outsourcing decision making: A framework, organizational theories and case studies. Journal of Information Technology, 10, 281-297. Nam, K., Rajagopalan, S., Rao, H. R., & Chaudhury, A. (1996). A two-level investigation of information systems outsourcing. Communications of the ACM, 39(7), 36. Overby, S. (2003, March 1). Bringing I.T. back home. CIO. Porter, M. E. (1980). Competitive strategy: Techniques for analysing industries and competitors. New York: Free Press. Rands, T. (1992). The key role of applications software make-or-buy decisions. Journal of Strategic Information Systems, 1, 215-223. Rifkin, G. (1994). $3.2 billion Xerox-E.D.S. deal is set. The New York Times, Late Edition, 3. Rottman, J. W. (2004). Twenty practices for offshore sourcing. MIS Quarterly Executive, 3(3), 117-130. Rousseau, D. M. (1995). Psychological contracts in organizations: Understanding written and unwritten agreements. Thousand Oaks, CA: Sage Publications. Runnoe, G. (1989, July 31). Kodak chooses IBM to run, upgrade its DP operations. Network World, 46. Taylor, P. (1999). Internet provides a new market impetus: Web application hosting: Many companies find it too expensive to run their own IT systems, so farming them out to experts is an
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attractive option. Financial Times, 2n d ed., 2. London, England. Willcocks, L., Lacity, M., & Fitzgerald, G. (1995). Information technology outsourcing in Europe and the USA: Assessment issues. International Journal of Information Management, 15(5), 333351.
Willcocks, L. P., Lacity, M. C., & Kern, T. (1999). Risk mitigation in IT outsourcing strategy revisited: Longitudinal case research at LISA. The Journal of Strategic Information Systems, 8(3), 285-314. Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.
This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans, D. Schniederjans, and M. Schniederjans, pp. 240-267, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.3
Risk Management in Distributed IT Projects:
Integrating Strategic, Tactical, and Operational Levels Rafael Prikladnicki Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Roberto Evaristo University of Illinois at Chicago, USA Jorge Luis Nicolas Audy Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Marcelo Hideki Yamaguti Pontifícia Universidade Católica do Rio Grande do Sul, Brazil
ABSTRACT Distributed IT projects exhibit certain features that make them fundamentally different from traditional co-located projects, not only involving additional steps and decisions, but also impacting the risk management process. The goal of this paper is to discuss these impacts and to suggest the development of an integrated risk management process taking into account site dispersion, time zone difference, and cultural boundaries not only at the operational, but also at the tactical and strategic level. We also report results of an
exploratory case study conducted in a software development center (a Brazilian subsidiary of a U.S. corporation) in support of such a model, and conclude with a discussion of theoretical and practical implications of our work.
INTRODUCTION Project failure, particularly in information systems development, is unfortunately a very common occurrence (Schmidt, Lyytinen, Keil, & Cule, 2001). Many of these failures are well
documented. Key reasons include the lack of top-management commitment to the project, lack of client responsibility, unstable corporate environment, failure to manage end-user expectations, failure to identify all stakeholders, lack of change management, poor risk management and control, unclear or misunderstood scope, staffing volatility, poor team relationships, and artificial deadlines. Sophisticated risk management techniques have been developed to address these problems (Kumar, 2002). However, a new level of difficulty looms: such risks are magnified when IS projects are distributed (Erickson & Evaristo, 2005). IS projects tend to be performed in a distributed fashion in offshore outsourcing arrangements, for instance. That is becoming increasingly more common for several reasons: the search for lower costs, higher quality, and better access to skilled resources (Herbsleb & Moitra, 2001). In fact, economic forces are relentlessly turning national markets into global markets; software development is becoming a multi-site, multicultural, and globally-distributed undertaking (Morstead & Blount, 2003). This phenomenon is impacting not only marketing and distribution, but also the way IS products are conceived, designed, constructed, tested, and delivered to customers (Karolak, 1998). For these reasons, Distributed Software Development (DSD) has attracted a large amount of research over the last few years (i.e., Herbsleb & Moitra, 2001; Carmel, 1999; Prikladnicki, Audy, & Evaristo, 2003; Kiel, 2003; Lanubile, Damian, & Oppenheimer, 2003; Evaristo, Scudder, & Desouza, 2004; Robinson & Kalakota, 2004). In this context, risk management is critical. According to Karolak (1998), risk management in distributed IT projects should happen at the operational as well as at the strategic and tactical levels. In the strategic and tactical levels, the role of risk management is to help in the decision whether to distribute the development of an IT project across several locations and, once the decision is made, to help in identifying the risks in projects that will
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be developed by a particular subsidiary. In the operational level, the risk management process relates to the software development process and is performed by the project manager. This study examines risk management problems that organizations face when going global in software development. In particular, there is a strong lack of alignment between the risk management approaches or decisions made at the top and how that is shared and implemented across tactical and operational levels. We therefore focus on the following research question: How can we integrate the risk management processes across strategic, tactical, and operational levels in distributed IT projects? In order to analyze this problem, we first develop a model of integration of risk management approaches across different organizational levels based on the theoretical state of the art in this area; then we proceed to present an exploratory — but model-inspired — case study in a software development center: a Brazilian subsidiary of an U.S. corporation. Based on the results of our case study and how it fits with the model developed, we develop and present strong practical implications for how organizations may better integrate their risk management approaches across different levels. In the next section of this manuscript, we present the theoretical base; in the following section, the process integration proposal; the section afterwards, the research method and the case study description, with practical implications of the integration proposed; and finally, in the last section, further considerations, suggestions for future studies, and research limitations.
THEORETICAL BASE In this section, we first discuss risk management, followed by a brief description of the most important characteristics in distributed software development that are likely to affect risk management approaches. The analysis of both literatures
Risk Management in Distributed IT Projects
shows that there is a strong need for an integrated approach to manage risk in distributed projects across different organizational levels; in a later section we develop a proposal to such integration.
Risk Management The word “risk” comes from the old Italian word “risicare”, which means, “to dare” (Bernstein, 1997). Boehm examined risk through the spiral model: risk analysis in each iteration of software development (Boehm, 1991). DeMarco and Lister (2003), on the other hand, define risk as a problem that has yet to occur, while a problem is a risk that has already materialized. Before it happens, a risk is just an abstraction. It is something that may affect a project, but it also may not. Successfully managing risk requires more than good processes and the ability to think intuitively, it also requires discipline and method. DeMarco and Lister (2003) define risk management as the process of thinking out corrective actions before a problem occurs, while it is still an abstraction. The opposite of risk management is crisis management, trying to address a problem after it happens. Risk management in software engineering should pervade the whole software lifecycle. The risks cannot be thought of as add-on to the project, but as the core of the business (Kerzner, 2000). In conclusion, risk management is proactive on preventing problems, and it is a continuous and concurrent process (many risks are managed at the same time).
Distributed Software Development (DSD) The software development process is a set of activities, methods, practices, and technologies used to develop and keep related software and products (Pressman, 2004). Commonly accepted premises are that the software quality is strongly dependent on the process quality used in its preparation and
that the software process can be defined, managed, measured, and improved. However, even using a well-defined development process, software development is not a simple task. As part of globalization, software project teams have become geographically distributed on a worldwide scale for several reasons: one, to explore market proximity advantages, including knowledge of customers and local conditions; two, to improve time-to-market using time-zone differences in “round-the-clock” development; and three, to satisfy the need to have a global resource pool to successfully and cost-competitively have resources, wherever located. Organizations search for competitive advantages in terms of cost, quality, and flexibility in the area of software development (Karolak, 1998), looking for productivity increases as well as risk dilution (Prikladnicki, Yamaguti, & Antunes, 2004). Many times the search for these competitive advantages forces organizations to search for external solutions in other countries (offshore sourcing). DSD profoundly impacts the way products are conceived, designed, constructed, tested, and delivered to customers (Herbsleb & Moitra, 2001). Thus, the structure needed to support this kind of development is different from the one used in collocated environments. DSD has diverse effects on many levels, including strategic, cultural, knowledge management, and technical issues. Tools and technological environments have been developed over the last few years to help in the control and coordination of the development teams working in distributed environments. Many of these tools are focused in supporting procedures of formal communication such as automated document elaboration, processes, and other noninteractive communication channels.
Risk Management in Distributed IT Projects Risk management in DSD is an important and necessary activity. Prikladnicki, Audy, and Evaristo 1725
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(2003) suggested that effective risk management was an alternative to solve existent problems in distributed projects, because it is hard to deploy, execute, and control projects in DSD environments due not only to technical factors like specification, code, peer review, analysis, and so on, but also to non-technical factors such as social, cultural, behavioral, and political (Kiel, 2003). Other studies (i.e., Herbsleb & Grinter, 1999) present the same difficulties but also suggest additional technical factors such as the software development process, project management, project size, and complexity. Therefore, risk management becomes important in projects developed by distributed teams (from the same or different organizations). Whether a project is developed globally or in the same city, having geographically dispersed teams using collaboration technologies and developing specific solutions to distributed projects adds risk factors to the projects. The three categories of risks in DSD projects are organizational, technical and communication (Karolak, 1998). Risks can belong to more than one category, and such shared risks are the most critical. Karolak also found that the risk management in DSD projects should occur not only at the project level, but also at the organizational level. First, the decision to whether globally dispersed teams can develop a particular project is difficult (strategic level). Moreover, the decision of where the project will be better developed can also be a problem (tactical level). A number of models are possible and appropriate under different circumstances to examine the cost-benefit ratio of such decision. Morstead and Blount (2003) developed a roadmap and a risk management framework for reinventing the IT function into a low-cost, high-service organization leveraging remote resources. Additionally, it is suggested that all the risks identified in the strategic and tactical levels should be reflected at the project development, or operational, level. The identified risks must then
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be passed to the project manager. Therefore, the project manager can plan response actions to these risks and add them to those of the whole project. In short, there are a set of inherent problems and challenges to software development. DSD, by adding factors like geographic and temporal dispersion as well as cultural differences, has accentuated such challenges and added new ones to the development process. As a result, the work in DSD environments is more problematic than in centralized ones, and the importance of effective risk management becomes even more critical.
PROCESS INTEGRATION PROPOSAL Based on the literature review discussed in a previous section, we have developed a process integration proposal for risk management at the strategic, tactical, and operational levels. The need for this integration has been discussed in the literature (Karolak, 1998; Prikladnicki, Yamaguti, & Antunes, 2004; Sahay, Nicholson, & Krishna, 2003), but there has been no actual proposal on how to implement it. In our proposal, we develop activities with the purpose of enabling better and more effective risk management in distributed projects. The guiding principle is to document all decisions made at the higher decision levels, and to provide means to reflect such information at the operational level where the project will be executed and the risk management process based on the software development process will begin. As a result, a project manager at the operational level will also become aware of identified risks at the higher levels and he/she could plan response actions for these risks. The integration proposed is based on the reference model for distributed software development proposed by Prikladnicki, Audy, and Evaristo (2004), and presented in Figure 1. Two planning cycles can be identified for the management of DSD projects. The first is strategic
Risk Management in Distributed IT Projects
Figure 1. The reference model for DSD (Prikladnicki, Audy & Evaristo, 2004) Tactical / Operational Planning Project Development Projects 1, 2, n / Unit 1
Strategic Planning
New Projects
Project Allocation
Headquarters
Units 1, 2, N
Desenvolvimento Project dos Development Projetos Projects 1, 2, n / Unit 2
Project Development Projects 1, 2, n / Unit N
Evaluation Feedback Learning
planning, conducted by the organization headquarters to identify and prioritize new projects to be developed. The decision involves both projects from the organization as well as those requested by external clients. Moreover, the participants in this planning level are responsible for the strategic alignment between the perspectives and goals of each subsidiary and the headquarters. The second cycle involves the tactical-operational planning level in each subsidiary. The overlapping of the two planning cycles occurs at the critical juncture of project allocation time, because those activities involve the planning and selection of projects that will be developed in each center and appropriate resource allocation. Project allocation involves the selection of projects that will be better developed in each subsidiary, according to an allocation policy defined by the organization. The allocation must have as entry criteria the list of projects to be developed and the output of this step is the center or centers selected for each project. Global directors, vice-presidents or CIO’s are responsible for the strategic planning stage. The coordinators (directors and/or senior managers) in each subsidiary approve the tactical
planning stage. The project managers are directly involved in the operational planning, which involves the software development project administration centered in the general coordination of the work between the collaborators, interfaces among teams, communication, contacts with clients, and conflict solving. At this time the project risk management process is put in place. Finally, the last cycle proposed is the learning cycle, related to the activities evaluation and strategies adopted. This learning activity is reflected in future projects and allocation decisions.
The Integration Proposal In order to integrate the risk management in the strategic, tactical, and operational levels, our integration proposal follows the same sequence as those in the reference model presented in Figure 1. First, the identification and prioritization of new projects to be developed is focused on the organizational roadmap for distributed development. Second, the project allocation involves the planning and selection of projects to be developed in each center and the resources allocated for each
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project. Finally, project development (project dimension and the risk management process itself) is the project execution activity, where the risk management process will run from the operational level point of view. The evaluation and feedback process (learning cycle) is the continuous learning process that needs to be included in all activities to reflect the decisions and experiences in future selection of projects, project investigation, project and resource allocation, and project execution activities. The last integration effort proposed it the creation of an artifact to document all risk analysis and risk assessment conducted at the strategic and tactical level. The purpose of this artifact is to give the project manager all information necessary from discussions with senior managers. The artifact is composed of two main sections: the first section describes details of the project investigation and decision of which development center to use; the second session is related to the risk description, including strategies to reduce the risk, the exposure from the organizational point of view, and general comments. This document should be completed after the project selection decisions, and is sent to the project manager to be used as another input for the risk management process. Finally, when the project is finished, all lessons learned should be stored in the risk repository and used for new distributed IT projects to be developed.
CASE STUDY: EVALUATING THE INTEGRATION PROPOSED This exploratory study was developed to initiate the evaluation of the risk management integration proposed. This study was performed in an offshore software development organization that is located in Brazil and is a subsidiary of a U.S. corporation. Our main goal was to understand how the decision to develop a project using globally dispersed teams was made and how it was reflected in the
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project development itself. The risk management process was analyzed, as well as decisions at the strategic and tactical levels that impacted project development at the operational level.
Research Method Qualitative methods are appropriate when studying state of the art situations where practice precedes theory (Yin, 2001), which is the case here. The data collected was constituted of primary (individual interviews) and secondary sources (document reviews, business processes, meeting minutes, and software development process description). We interviewed two people from the U.S. headquarters (the director for global IT development and the global project management office (PMO) manager) and eight people from the Brazilian subsidiary: the director of the Brazilian software development center, three senior software development managers, three project managers, and the PMO manager. In the interviews, we asked about the risk management process in the context of a software development project, and the process to allocate a project to be developed in a subsidiary. A content analysis was developed for data analysis (Krippendorff, 2003). We developed two questionnaires (Appendix 1), each considering a specific dimension to be explored. The first questionnaire explored the Strategic and Tactical decision levels, where the projects are analyzed and allocated (or not) to be developed in a subsidiary. The main respondents were the director for global IT development (Global Development Software Operations), the global project management office (PMO) manager, one of the Account Managers responsible for some competence centers, the director of the Brazilian software development center, and three senior software development managers. The second questionnaire explored the Operational decision level, were the project is executed (project development). The main respondents were the PMO manager for the Brazilian center, three senior
Risk Management in Distributed IT Projects
software development managers, and three project managers. It is important to notice that all senior software development managers were interviewed in both dimensions, because their role in participating in some decisions in the tactical level and as a supervisor in the operational level.
The Organization The organization studied is an offshore software development center located in Brazil and owned by a multinational organization. In January of 2001, the company decided to transfer to Brazil part of its software development and created its first offshore software development center worldwide, with the goal of developing and improving the software applications that support the trade areas of the company around the world. The subsidiary has over 180 professionals working on many projects worldwide. Almost all projects are globally geographically distributed since customers and users are located in the company’s offices around the world. Figure 2 shows the global organizational structure, whereas. Figure
Figure 2. Global organizational structure
3 shows the Brazilian organizational structure, highlighting their development areas (each managed by one senior manager, organized similarly to the organization departments in the U.S.), the shared services group, and the SEPG (Software Engineering Process Group) — each managed by a senior manager). Important strategic changes took place since the Brazilian center was created. In January 2002, the role of director for global IT development (Global Development Software Operations) was created in the company’s head office in the U.S., to manage all orders of software projects of all trade areas in the company around the world. From then on, both the center in Brazil and the newly inaugurated center in India became directly subordinated to that director. Also, a global PMO team was created, with a PMO manager in each center to better control the projects during the development. The software development process is based on the MSF1, and on known methodologies such as RUP2, and PMI3. Finally, the center studied is a SW-CMM4 level 2 organization since 2003. As a result of the interviews conducted,
Figure 4. Project allocation to software development centers
we identified the main processes employed by the organization in order to manage risk in a distributed environment at all decision levels.
Project Allocation In order to have better control of the distributed project allocation and planning, the organization created a set of activities to be implemented in all projects being developed in the several development centers of the organization (see Figure 4). These activities include the selection of projects for offshore development through resource allocation. Interestingly, the director for global IT development mentioned that many times the decision to develop a project in an offshore subsidiary was made based on his own intuition combined with the intuition of other directors and managers. Once the project is planned and sent to the development centers, execution starts, following the defined software development process. These activities are part of a process called the Software Development Distribution Model (see Figure 5),
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where all strategic and tactical decisions are made following a systematic process with well-defined steps (generally performed by senior managers, account managers, and development center directors, with the approval of the director for global IT development). The risk analysis is represented in step two where, after the distributed development roadmap definition (step one), a risk and benefit analysis helps to decide whether the project can be allocated to a remote development center (step two). The criteria guiding this process were based on a survey developed by the Account Manager interviewed. Account managers, senior managers, directors, and other people involved in this process identified what should be considered when deciding on an offshore development activity and location. They found that decisions are made considering the following criteria: •
Export compliance issues (if the project falls under export compliance restriction);
Risk Management in Distributed IT Projects
Figure 5. Software development distribution model - IT Roadmap - Acceptance criteria
- Approved roadmap by center - Resource needs by center skills
- Project requirements - Allocated resources - Risk management process
Resource Allocation
Project Execution
1
2
3
4
5
Strategic Level
Tactical Level
Tactical Level
Tactical Level
Operational Level
Data privacy (if data needs to move with the application [e.g., support] but onsite government regulation prohibits it); Intellectual property (if the application contains high value and the offshore centers are not stringent enough to protect its intellectual property); Physical environment availability (if the project requires environment that is not the direction given by the organization — e.g., replicating a database outside the headquarters); Security constraints (if there is a concern that the security to the application will be compromised by moving offshore); The project size and cost of moving offshore; The level of documentation available for the offshore project team; Requirements clarity (if it is clearly defined and understood by the onsite team), and integration requirements (how many integration point the application[s] would have); Technology risk (if the project is working with new or obsolete/legacy technology); Onsite experience in offshore project (how many projects the key members have participated with offshore teams);
• •
•
Span of control (how many concurrent projects are managed by the onsite manager); Complexity of engagement (how many non-IT partners and sponsors will be engaged); Timeframe of engagement (the lead time to ramp-up the project).
Once the decision is made, a risk assessment is conducted in step three to verify which center among all the organization’s development centers, can better develop each project. At this time, decisions are made considering the following criteria: •
•
•
•
Center capability (experience against each project activity in the context of current project requirements [coding, testing, modeling, etc.]); Risks regarding knowledge (center’s knowledge in application and technology domain required by the project); Risk concentration (based on the total combined risks of all projects an the country where the center is located); Resource availability (current level of bench strength of the center);
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Risk Management in Distributed IT Projects
•
•
• • •
•
Onboarding time for new resources (current lead time to hire and train — both employee and contractor in a range); Physical space (availability of office space, desktops, phones, etc. to make a new resource productive; Turnover factor (current attrition rate); Language barrier (level of difficulty communicating with other teams); Time zone implications (any hurdles the team might face to effectively collaborate due to difference in time zones); Transaction cost (captures any additional cost the center may have to consider due to moving people cross portfolio/project, recruiting new people, and due to management overhead over usual and customer overhead).
Once the center is selected, resource allocation activity occurs in step four and finally, in step five, project execution occurs following the organization’s defined software development process.
Risk Management in the Software Development Process Project execution involves all work concerning project development by the project team. This process includes risk management activities (performed by project managers). The risk management process in the operational level (project execution) was defined based on the CMMI model and has 10 activities (see Figure 6). The organization uses the PMBOK Guide (2004), with inputs from the risk management defined in the MSF. The risk management process was developed in order to be simple to implement and to improve the communication with all stakeholders involved. The first activity involves the planning and definition of steps that will be used in the project risk management and identifying stakeholders. The project manager must define strategies to be used based on the strategies available in the organization software development process, which risks will be managed, when the risk status will be communicated, etc.
Figure 6. Risk management process, based on the CMMI model
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Risk Management in Distributed IT Projects
Afterwards, all risks are identified. Risk identification includes searching for common risks and past risks in the risk repository, using the techniques planned in the first activity, and may involve all the project team, including globally dispersed customers and/or users. Risk identification must consider as input project requirements, assumptions, and constraints. As an example, we can consider risks related to the resource skill, late requirements, trust, cultural differences, the development environment, and so on. The technical leader and the onsite project manager review the risks identified in order to agree on the risk list (10th activity). Additionally, the risk identification can be based on a standard risk list that was created based on the most common risks from old projects. This list is maintained and updated periodically. Once the risks are identified, they have to be analyzed (third activity). Risk analysis involves determining the probability and impact of each risk and its exposure, which can be determined using a standard scale from 1 to 5 where 1 is the least probable to occur and the lowest impact, while 5 is the most probable and the highest impact in the project. The fourth activity is one of the most important in the risk management process, since it involves the planning of response actions for each risk. All actions must define the type of response (mitigation, avoid, transfer, etc.), who is responsible for the action and the timeline. All planned response actions must be tracked, as defined in the fifth activity. To track all response actions means to monitor if each response action is being implemented on time, and to track periodically the probability and impact of each risk. If a risk occurs, a contingency action (planned in the fourth activity) must take place, and the risk must be controlled. The risk control is defined in the sixth activity. All risks being managed in a project will have a status that must be communicated (seventh activity) to specific stakeholders as defined in the first activity. The senior manager usually reviews this status (ninth activity). Finally, when a project is
finished, lessons learned should be registered in the risk repository for use in the future projects (eighth activity).
Critical Analysis Both the software development distribution model and the risk management in the software development process have activities related to risk management. The software development distribution model implements a risk analysis and a risk assessment at the strategic and tactical levels in order to help in the decision to distribute development and the selection of the best center for a specific project. On the other hand, risk management in the software development process involves risk management concerning the project itself at the operational level. But a key point in the whole process is the integration of the risk analysis and assessment in the strategic and tactical levels (generally performed by senior managers, account managers, and development center directors with the approval of the director for global IT development) with the risk management process in the operational level (performed by project managers). According to the Global PMO manager, “after we established the process to make allocation decisions in offshore development, we realized that we also needed to integrate such decision with execution”, because “integration would improve risk management, giving the whole picture of the project concerning all risks involved, the selection of projects to be developed in an offshore center, center and resource allocation and the project execution”. For this reason, despite the process to select appropriate centers to develop each project, and a process to manage risks when a project is being executed, the processes are not typically integrated, according to the interviews conducted in the organization studied. All interviews showed the need for a more integrated and improved risk management process.
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According to the Brazilian software development center director, “based on my experience with the Brazilian team, I start to see some projects with many difficulties, and some of them with the same or similar difficulty. From this point, I decided to discover where the main problem was. I was part of the project allocation decision process and at the same time I was managing the Brazilian team. Then when I started observing the project execution and talking to the project teams, I found that the risk management integration could be a good approach to minimize project issues, managed by the project manager, in the future”. From the point of view of the senior software development managers interviewed, “most of the projects being developed in the offshore subsidiary were having problems considering risks that were identified in the project investigation and allocation. Since each one of us coordinates one or more project managers and their project teams, we had experiences where some risks were not considered in the project execution. The reason is that those risks were identified by the Brazilian center director, the global PMO manager or other people in a higher decision level, without a process or documented procedure to reflect in the project development. Risks such as requirements
clarity, level of documentation, data privacy, and security constraints were the most common risks, in our opinion”. Finally, according to all project managers interviewed, they had many difficulties managing risks in a distributed environment without having a better knowledge of what had been done during the decision of allocate the project to their center, under their responsibility. Ultimately, the case study supports a need for a shared understanding of all risks in the strategic and tactical levels to be reflected in the operational level through a systematic and documented procedure. Analyzing the case study results, the Software Development Distributed Model created by the organization and the risk management process defined in the operational level can be easily integrated, following the model proposed. Figure 7 identifies the processes. In some of the projects analyzed there was an integration effort, but without a formally documented procedure. The integration was dependent on who was working on a specific project and not on a rule or standard procedure to be followed in each decision level. For this reason, all suggestions collected in the interviews can be implemented using the model
Figure 7. The integration proposed analyzed with the case study results
- Approved roadmap by center - Resource needs by center skills
- Project requirements - Allocated resources - Risk management process
Resource Allocation
Project Execution
1
2
3
4
5
Strategic Level
Tactical Level
Tactical Level
Tactical Level
Operational Level
Risk Management in Distributed IT Projects
proposed for the risk management integration across decision levels. The last thing we think the organization can implement aiming an improvement in the whole process is the learning cycle, that is, an evaluation of all decisions made to be reflected in future project and decisions.
FINAL CONSIDERATIONS Software projects are dynamic and unique, leading to the existence of many risks that must be managed. But one of the main reasons that risk management is inefficient or is not implemented in many organizations is the lack of documentation of both success and failures in projects. Knowledge about risk management alone is not sufficient. The practice of learning from past experiences is mandatory to help senior managers and project managers to plan for and control risks (Kwak & Stoddard, 2004). DSD provides a good opportunity to exploit the benefits of knowledge management since the DSD model involves additional steps not found in traditional risk management models. And sometimes, risk management in this kind of project can take longer than in traditional projects, because of the geographic dispersion and time zone differences. Additionally, the DSD environment itself can be a risk for the projects, and need to be managed to avoid the common problems and challenged that Herbsleb and Moitra (2001) identified in one of their studies. This paper discussed the role of risk management in distributed IT projects, considering the strategic, tactical, and operational level of an organization that has implemented DSD. From the point of view of the strategic and tactical levels, organizations can create a Software Development Distribution Model, where a risk analysis and a risk assessment can be performed in order to help in the offshore development decision. This can lead to the selection of the best development center for a specific project. Additionally, from the operational level point of view, the key point
in the whole process is the integration of the risk analysis and assessment performed in the strategic and tactical levels with the risk management process executed in the operational level. Despite the process to select appropriate centers to develop each project, and a process to manage risks when a project is running, the processes must be integrated to achieve an efficient risk management process for DSD projects. One of the limitations of our study is that the case study was conducted on a particular type of distributed software development environment that admittedly is not the more common: the remote software development center was a wholly owned subsidiary of a U.S. headquartered organization (Carmel & Agarwal, 2002; Subramanyam, 2004). However, we strongly believe that the issues surfaced would be there regardless of the type of ownership structure between the parties. The integration followed activities proposed in a reference model for DSD (see Figure 1), which helps in the identification of the main integration points. The integration itself is composed by simple activities in order to make clear the necessity of having procedures and artifacts to document the decisions taken in all levels and also the risks identified. The main contribution of this integration proposal is to help organizations to improve their risk management in all DSD projects since it includes standard procedures to document all decisions made in the software development distribution model and is directly reflected in project execution in all levels. The risk management importance must be emphasized and its participation must be more decisive in this kind of projects. Planned follow-up studies on this topic will analyze other organizations in the same situation (wholly owned subsidiaries), in order to improve this process integration.
ACKNOWLEDGMENT The study was developed by the Research Group on Globally Distributed Software Development of 1735
Risk Management in Distributed IT Projects
the PDTI program, financed by Dell Computers of Brazil Ltd. with resources of Law 8.248/91.
REFERENCES Bernstein, P. (1997). Challenge to God: The risk history (in Portuguese). Rio de Janeiro, Brazil: Campus. Boehm, B. (1991). Software risk management: Principles and practices. IEEE Software, 8(1), 32-41. Carmel, E. (1999). Global software teams — Collaborating across borders and time-zones. US: Prentice Hall. Carmel, E., & Agarwal, R. (2002). The maturation of offshore outsourcing of information technology work. MIS Quarterly Executive, 1(2), 65-77. DeMarco, T. & Lister. T. (2003). Waltzing with bears: Managing risks on software projectc. Dorset House Publishing. Erickson, J., & Evaristo, J. R. (2005). Risk factors in distributed projects (Research Report). University of Illinois, College of Business Administration, Chicago. Evaristo, R., Scudder, R., & Desouza, K. (2004). A dimensional analysis of geographically distributed project teams: A case study. Journal of Engineering and Technology Management, 21(3), 175-189. Herbsleb, J. D., & Moitra, D. (2001). Guest editors’ introduction: Global software development. IEEE Software, 18(2), 16-20. Herbsleb, J. D., & Grinter, R. (1999). Splitting the organization and integrating the code: Conway’s Law revisited. In Proceedings of the International Conference on Software Engineering. Los Angeles, California (pp. 85-96).
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Karolak, D. W. (1998). Global software development — Managing virtual teams and environments. Los Alamitos, CA: IEEE Computer Society Press. Kerzner, H. (2000). Project management: A systems approach to planning, scheduling, and controlling. John Wiley & Sons. Kiel, L. (2003). Experiences in distributed development: A case study. In Proceedings of the International Workshop on Global Software Development at ICSE, Portland, Oregon (pp. 44-47). Krippendorff, K. (2003). Content analysis: An introduction to its methodology. Thousdand Oaks, CA: Sage Publications. Kumar, R. L. (2002). Managing risks in IT projects: An option perspective. Information & Management, 40, 63-74. Kwak, Y. H., & Stoddard, J. (2004). Project risk management: Lessons learned from software development. Technovation, 24(2004), 915-920. Lanubile, F., Damian, D., & Oppenheimer, H. L. (2003). Global software development: Technical, organizational, and social challenges. ACM SIGSOFT Software Engineering Notes, 28(6). Morstead, S., & Blount, G. (2003). Offshore ready: Strategies to plan & profit from offshore IT enabled services. ISANI Press. PMBOK Guide. (2004). A guide to the project management body of knowledge (3rd ed.). Pittsburgh: Project Management Institute. Pressman, R. S. (2004). Software engineering: A practitioner’s approach (6th ed.). McGraw Hill. Prikladnicki, R., Audy, J. L. N., & Evaristo, J. R. (2003). Global software development in practice: Lessons learned. Journal of Software Process: Improvement and Practice, 8(4), 267-281.
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Prikladnicki, R., Audy, J. L. N., & Evaristo. R. (2004). A reference model for global software development. In Proceedings of the 5th IFIP Working Conference on Virtual Enterprises, Toulosse, France (pp. 369-378). Prikladnicki, R. , Yamaguti, M. H., & Antunes, D. (2004). Risk management in distributed software development: A process integration proposal. In Proceedings of the 5th IFIP Working Conference on Virtual Enterprises, Toulosse, France (pp. 517-526). Robinson, M., & Kalakota, R. (2004). Offshore outsourcing: Business models, ROI and best practices. Mivar Press.
Subramanyam, M. (2004). The impact of global IT outsourcing on IT providers. Comunications of the Association for Information Systems, 14(25), 543-557. Yin, R. K. (2001). Case study research: Design and methods (3rd ed.). Thousdand Oaks, CA: Sage Publications.
ENDNOTES 1
2
3
Sahay, S., Nicholson, B., & Krishna, S. (2003). Global IT outsourcing: Software development across borders. Cambridge, UK: Cambridge University Press. Schmidt, R., Lyytinen, K., Keil, M., & Cule, P. (2001). Identifying software project risks: An international delphi study. Journal of Management Information Systems, 17(4), 5-36.
4
Microsoft Solutions Framework (http:// www.microsoft.com/msf) Rational Unified Process (http://www-306. ibm.com/software/awdtools/rup/) Project Management Institute (http://www. pmi.org/) The SW-CMM describes the principles and practices underlying software process maturity and is intended to help software organizations improve the maturity of their software processes (http://www.sei.cmu. edu/cmm/cmms/cmms.html).
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APPENDIX A. QUESTIONNAIRES Questionnaire 1. Strategic and Tactical Decision Levels 1. How is the organization organized in terms of roles and responsibilities for offshore development? 2. What is the process to allocate a project to an offshore subsidiary? 3. Who is involved in the project allocation decision? 4. What are the main risks involved in the project allocation decision? 5. How are the risks identified in the project allocation phase reflected to the project manager in the subsidiary that was selected to develop the project? 6. What are the main difficulties around the decision of developing a project in an offshore subsidiary? 7. What are the solutions you have adopted to solve the difficulties?
Questionnaire 2. Operational Decision Level 1. How do you receive the notification that a project will be developed by your team? 2. What are the main risks involved in the development of a project in a subsidiary? 3. What is your role in the project allocation decision? 4. When the project ends, how are the lessons learned reflected in other projects, specifically those lessons about the offshore development environment? 5. Where do you document the risks of your project? 6. What is the organization risk management process for the projects you manage? 7. What are the main difficulties around the development of a project in an offshore subsidiary? 8. What are the solutions you have been adopted to solve the difficulties?
This work was previously published in the International Journal of e-Collaboration, Vol. 2, Issue 4, edited by N. Kock, pp. 1-18, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.4
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS) Paul Trott University of Portsmouth, UK Andreas Hoecht University of Portsmouth, UK
ABSTRACT The United States and European economies have witnessed an enormous increase in the amount of specialized business services, which now provide critical inputs to firms in all sectors. It is this area of the economy which has witnessed huge expansion and development. KIBS include traditional professional business services such as accountancy and law, but also a new generation of KIBS such as IT expertise and internet development. Coupled to this growth has been an increase in the level of outsourcing. Outsourcing was originally confined to peripheral business functions and mainly motivated by a cost saving logic, but has now developed into a routine strategic management move that affects not only peripheral functions but the heart of the competitive core of organisa-
tions. This chapter analyses previous research and adopts a conceptual perspective in investigating the innovation-related risks to the organisation that can arise from strategic outsourcing. It uses the example of KIBS outsourcing to highlight the increased risks that arise from a move from traditional to strategic outsourcing and discusses some measures that managers can take to attempt to control these risks.
INTRODUCTION Occasionally one would be forgiven for thinking that in these advanced developed economies servic es had replaced all manufacturing activities, and there had simply been a huge growth in coffee bars, smoothie bars and hair salons. In the most
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
advanced service economies in the world such as the USA and UK, services now account for up to three-quarters of the wealth and 85% of employment (Tidd and Hull, 2003). Within the EU services now account for 60% of GDP (Eurostat, 2006). The term knowledge based economy has been coined to characterize some of the main changes in the development of economies over the past twenty years. Similarly, the influence of technology in general and information communication technologies in particular cannot be overstated. In virtually all industries there has been a huge growth in specialist knowledge and skills being made available to firms. For example in civil engineering and architecture, where previously much of the input came from the architect now the architect employs a range of specialists from: fire engineering; acoustic engineers; lighting designers, etc. A new range of disciplines have emerged offering specialist knowledge and skills. This has been replicated in virtually all industries (Gann and Salter, 2003). The development of these economies has led to a massive increase in the amount of specialized business services which now provide critical inputs to firms in all sectors. It is this area of the economy (US and Europe) which has witnessed huge expansion and development. It is not simply that people are spending more time and money in hair salons (though that may also be true). It is these knowledge intensive business services (KIBS) which are the key behind the development of the service side of the economies. KIBS include traditional professional business services such as accountancy and law, as well as services that have a scientific and technical knowledge base such as IT/IS (Miles, 2003; Alvesson, 2004). Other examples include a new generation of KIBS. For example the provision of specialist services to the Oil industry has led to huge growth for Halliburton and Schlumberger, the world market leader for oil services. Indeed, while the share prices of Exon and Shell have doubled over the past four years
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the share price of Halliburton and Schlumberger has tripled (Financial Times, 2007). The growth in information communication technologies during the 1980s and the development of the internet in the 1990s and into the 21st century has led to enormous sums of money being spent by firms in order to ensure that they are equipped to compete. In addition, the introduction of some of these business systems such as Enterprise Resource Planning systems (ERP) have led to significant reductions in costs and improvements in efficiency. If one then adds to the KIBS the huge growth in entertainment industries including the gaming industry (Xbox, Nintendo, Playstation, PC games, etc), the new on-line gambling industry (Party-Gaming, Gaming Corporation) and the more recent social networking industry (which includes Myspace, Bebo and Mypages) one begins to recognize just how much change and growth there has been to economies over the past ten years. The service sector is vast and it varies considerably from public services, in the form of state funded education for 97% of children in the UK, to specialist business services in the form of Internet web site design and maintenance. Each sector of the service economy (such as leisure, charities, public services, financial services) has its own set of specific challenges. Yet at the same time the distinctions between some of these sectors is blurring. Some charities and not-for profit organisations are offering their services to compete with the private sector. Health care provision is a prime example. Similarly some public funded organizations such as the BBC offer its services in the commercial world and generate large revenue streams. Table 1 offers a classification of services and includes professional business services, such as accountancy and public services such as libraries. This overview helps demystify the service notion. It clarifies the different sectors within services and illustrates the different challenges facing each sector.
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
Table 1. Typology of services Business to business services (traditional)
Business to business services (KIBS)
Consumer services
Internal firm services
Public services
Not for profit services
Description
Services provided for businesses
Specialist services provided to businesses
Services provided to individuals
Services provided by internal functions
Services provided by local and national government
Services provided by charities
Examples
Accountancy Legal advice Training
Management consultancy IT consultancy
Shops Hotels Banking Health & beauty
Finance Personnel IT
Health Education Leisure Prisons
Hospices Counselling Aid agencies
Customers
Frequently purchased by professionals, who may not be end users
Frequently purchased by professionals, who may not be end users
Purchased by consumer of the service
Consumers of the service have no choice of provider
Funded through taxation and little choice for consumer
Funded through charities maybe government grants consumers chosen or choose.
Challenges
Providing high quality tailored and personal service
Providing high quality services to businesses who have high purchasing power
Providing a consistent service to a wide variety of customers
Delivering customised, personal service. And demonstrating value for money.
Delivering acceptable public services against a backcloth of political pressures.
Balancing needs of volunteers, donors and overwhelming needs of customers.
Adapted from Johnston & Clark (2005)
OUTSOURCING AND SERVICE GROWTH Outsourcing has become very widespread in the last decade and has moved on from limited applications where peripheral business functions are “outsourced” to much more vital business functions being outsourced today, such as I.T. support (Jennings, 1997, Quelin and Duhamel, 2003). Despite the rather mixed record of largescale long-term total outsourcing deals with single suppliers in particular in the IT/IS industry (Lacity & Willcocks, 1998), such contracts are still entered into in significant numbers. The academic literature has identified a number of expected gains that companies can derive from outsourcing. These include: •
the reduction of operational costs (Lacity & Hirschheim, 1993);
• • •
the ability to transform fixed costs into variable costs (Alexander & Young, 1996); the ability to focus on core competencies (Quinn & Hilmer, 1994); access to the industry-leading external competencies and expertise (Kakabadse & Kakabadse, 2002).
There seems little doubt that the growth in services is linked to this enormous growth in outsourcing. With many firms now buying in “services” that were previously undertaken inhouse. So whether its catering facilities within schools now being bought from local providers by the County Education Authority or whether it’s a firm buying in information technology (IT) support rather than providing the service themselves, the evidence is overwhelming that this growth in outsourcing has contributed to the growth in services Davies, 2003). Coupled to this debate,
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
however is the suggestion that manufacturers are now moving into highly profitable knowledge intensive services. This is certainly the case at IBM which has moved successfully from manufacturer to service solution provider with its profits now being dominated by IT services (FT.com, 2007). For some firms lower production costs in India and China are forcing them downstream into the provision of services. For other firms, like IBM and Ericsson, it is recognition that they can offer added value market offerings to their customers by providing additional services. Within sectors of complex products and systems (CoPS) buyers are outsourcing non-core activities and focusing on the provision of services to the final customer. In the pharmaceutical industry for example, clinical trials that were previously undertaken by the firm are now outsourced to clinical trial specialist firms. There is, however, also an emerging literature that highlights the weaknesses and risks associated with large-scale outsourcing arrangements, in particular where non-peripheral business functions are concerned. This highlights the risk of becoming dependent on a supplier (Alexander and Young, 1996); Barthelemy (2001) draws our attention to the hidden costs of outsourcing and authors such as Doig et al (2001) and Quinn and Hilmer (1994) identify the possibility of a loss of vital know-how in particular with respect to core
competencies as a major risk factor in outsourcing. There is also the problem of selecting the most suited supplier/service provider and their longerterm ability to offer the capabilities that are needed in particular in business environments with rapid technology change (Earl, 1996). Another risk that is often overlooked is linked to the broader area of information leakage that arises when business organisations collaborate in order to gain access to knowledge and expertise that they cannot develop on their own. Research by Hoecht & Trott (2006) has demonstrated that there is trade-off between access to cutting-edge knowledge via collaborative research and technology development in knowledge-intensive industries and the risk of losing commercially sensitive knowledge to competitors. This risk, they argue, cannot be controlled by traditional management approaches and legal contracting alone, but requires the operation of social control and in particular the development of trust to be contained. Table 2 offers an overview of the main risks identified in the literature.
OUTSOURCING CORE CAPABILITIES There is an additional specific risk associated with outsourcing that has yet to be fully explored.
Table 2. Main outsourcing risks identified in the literature Main negative outcomes of outsourcing
Research evidence
1
Dependence on the supplier
Alexander and Young (1996); Aubert et al. (1998)
2
Hidden costs
Earl (1996); Alexander and Young (1996); Aubert et al. (1998); Lacity and Hirschheim (1993); Barthelemy (2001)
3
Loss of competencies
Bettis et al. (1992); Martisons (1993); Quinn and Hilmer (1994); Khosrowpour et al (1995); Alexander and Young (1996); Aubert et al. (1998); Doig et al. (2001)
4
Service provider’s lack of necessary capabilities
Earl (1996); Aubert et al. (1998); Kaplan (2002)
5
Social risk
Lacity and Hirschheim (1993); Barthelemy and Geyer (2000)
6
Inefficient management
Wang and Regan (2003); Lynch (2002)
Adapted from Quélin and Duhamel (2003)
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
This may be classified under the general term of loss of competencies (Table 2), but precisely is innovative capability. From a strategic management perspective, when considering a firm’s innovation and longterm competitiveness, the traditional cost concerns are far less important than the question of how to identify and to retain a company’s competitive core and not to lose its future ability to compete in fast-moving and unpredictable markets. The strategic management literature is divided on this issue. There are tools like Hamel and Prahalad’s (1994) three tests for critical business processes, namely “customer value”, “competitor differentiation” and “extendibility” that are claimed to be useful and reliable for identifying core competencies and authors like Quinnn (1999) are optimistic that these competencies can be identified but warn companies never to outsource their core (defined as “best in world”) competencies. A number of researchers also believe that not only the core competences but also most special skills related to competitive advantage need to be kept in-house (Reve, 1990; Quinn, 1999). Nevertheless, there appears to be a general consensus in the strategic management literature that at least the complementary skills or organisational competences can be handled and developed by alliances and opened up to collaboration and that goods and services of little strategic value can be purchased on the open market (Brandes et al, 1997). The key strategic management controversy however, remains about the issue whether these core competencies and specialised skills can be reliable identified. McIvor (2000: 48), for example, is much less confident that other writers that these competencies can be accurately predicted: “A current competency may cease to be a source of competitive advantage if there is a change in customer requirements or competitors develop innovative technologies”.
There is also the important question of the potential for losing one’s core skills and competitive advantage to competitors in the process of collaboration. Hamel (1991) maintains that core skills can be learnt form the other party and absorbed into one’s own company just as much as one’s own skills can be absorbed by a partner and one’s unique competitive advantage lost in the process. Bower et al (1997) observed the behaviour of technology leaders in the close-knit North Sea upstream offshore oil and gas industry and found that participating in networks sharing leading edge technology was exposing firms to the risk of their competitive edge being lost to competitors. Interestingly, this risk was found to be much smaller for resourceful and influential companies benefiting form a network centrality position than for smaller and less well positioned companies. The next section develops the above discussion further by exploring why outsourcing a firm’s core capabilities may hinder its innovative capability.
THE MANAGEMENT OF INNOVATION WITHIN FIRMS: WHY OUTSOURCING MAY HINDER INNOVATION The management of innovation is a large and diverse body of literature. It recognises that while there is much complexity and uncertainty in managing innovation and new product development much is known. There is considerable agreement on many of the factors that contribute to success and the activities and processes that need to be undertaken if innovation is to occur. Over the past fifty years there have been numerous studies of innovation attempting to understand not only the factors necessary for it to occur, but how they influence the process and when and where they are required and in what order. Table 3 captures
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
Table 3. Key studies studies of innovation management Study
Date
Focus
1
Carter & Williams
1957
Industry & technical progress
2
Project Hindsight- TRACES, (Isensen)
1968
Historical reviews of US government funded defence industry
3
Wealth from knowledge (Langrish et al.)
1972
Queen’s Awards for technical innovation
4
Project Sappho (Rothwell, 1974)
1974
Success & failure factors in chemical industry
5
Stanford study (Madidique & Zirger)
1984
Success factors in US electronics industry
6
Minnesota Studies (Van de Ven)
1989
14 case studies of innovations
7
Rothwell
1992
25 yr review of studies
8
Sources of innovation (Wheelwright & Clark)
1992
Different levels of user involvement
9
MIT studies (Utterback)
1994
5 major industry-level cases
10
Project NEWPROD (Cooper)
1999
Longitudinal survey of success & failure in new products
11
Radical innovation (Leifer)
2000
Review of mature businesses
12
T.U.Delft study (Van der Panne et al.)
2003
A major literature review of success and failure factors.
13
Chesbrough
2003
Open innovation systems along the supply chain
Sources: van der panne et al., (2003) & Trott (2005)
some of the key studies that have influenced our understanding. At the corporate level, a number of research paradigms have attempted to explain the international difference in technological development and innovation. Neo-classical economic theorists believe market structure, competition pressure, local supply of skills together with openness of communication are the most important factors (Stoneman, 1983; Geroski, 1993; Ansoff, 1965; Porter, 1980; 1985; 1990). However, this approach has not been able to fully explain the dynamics of innovation processes and the role played by firms and other institutions (Patel and Pavitt, 1984; Lundvall, 1988). In terms of firm specific characteristics that are required for firms to become more innovative much has been written about this (Quinn, 1991; Kanter, 1998; Wolfe, 1994). There is also significant amount of literature on the strategic dimension of competition (Porter, 1980; Pavitt, 1984; de Woot, 1990). Many writers on innovation consider it mainly as a process that needs careful management (Souder, 1987; Trott,
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2004; Twiss, 1992), while others view innovation more as a cognitive and behavioural phenomenon (Van de Ven, 1988; Madique, 1988). Despite their differences, most of these writers seem to accept that innovation is a phenomenon that can be subjected to human control and is considerably affected by human interaction. We also know that individuals create knowledge through collaborating with others in groups/teams in an organisational context; helping individuals to achieve their full potential and contribute new knowledge is a critical management issue which has also received considerable attention in the literature (Tidd, 2000; Nonaka, 1991; Nonaka, & Takeuchi, 1995; Polyani, 1966). The studies in Table 1 have contributed to the accepted view that a firm’s ability to successfully develop innovative new products is not only the result of public and private investments in tangibles and intangibles by individual elements in the economy, but that it is also strongly influenced by the character and intensity of the interactions between the elements of the system. This position
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
is strongly advocated in the literature on “National Innovation Systems” (Freeman, 1982; Lundvall, 1992; Nelson, 1993). In this view, innovation and technological development in particular depend increasingly on the ability to utilise new knowledge produced elsewhere and to combine this with knowledge already available in the economy and its actors. The capacity to absorb new knowledge, to transfer and diffuse knowledge and the ability to learn through interaction are crucial success factors in innovation (e.g. Cohen & Levinthal, 1989; Chesborough, 2003). New and commercially useful knowledge is not only the result of the conscious action of creative individuals. It is also the outcome of the interaction and learning processes among various actors in innovation systems, i.e. producers, users, suppliers, public authorities, and scientific institutions, which David & Foray (1995) have coined the “knowledge distribution power” of the innovation system. Indeed, Rothwell (1992) put forward the idea of a fifth-generation model of innovation management, based on inter-company networking facilitated by IT systems. More recently, the term network has become widely used. The need for connectivity and the complexity of the interactions it entails therefore emerges as a major factor influencing the management of innovation. While knowledge sharing across organisational boundaries is not an entirely new phenomenon the increasing emphasis on network forms of innovation in the innovation literature reflects the growth of KIBS for technology intensive sectors in the advanced economies. Given the significance of the beneficial effect of effect of inter-firm collaboration and the role of networks for innovation and organisational learning (Hamel, 1991), it is necessary to explore this concept in more detail. March (1991) distinguishes between exploration and exploitation in organisational learning. He argues that there are major differences between experimentation with new alternatives (exploration) and the refinement of existing technologies and organisational compe-
tencies (exploitation). The latter can be conceived as a close relative of the keep in house-or outsource decision, where collaboration arises from an unwillingness to go-alone and a strong preference for risk-limitation will always be prevalent. On the other hand, explorative knowledge creation relies on much more “openness” and a dedicated participation in research communities, firms, universities, research laboratories, suppliers and customers (Powell, 1990). What is required here is a much more intimate form of collaboration where both parties are contributing, rather than the handing over of responsibility of an activity, which is often associated with the outsourcing decision. Furthermore, Powell at al (1996) argue that the locus of explorative innovations is to be found in networks of inter-organisational relationships and that a firm’s success crucially depends on its “centrality-position” in such networks and the experience gained in managing its networks. They argue that internal capability and external collaboration rather than being substitutes are complementary: “Internal capability is indispensable in evaluating research done outside, while external collaboration provides access to news and resources that cannot be generated internally... A network serves as a locus of innovation because it provides timely access to knowledge and resources that are otherwise unavailable, while also testing internal expertise and learning capabilities.” In their empirical study of the network behaviour of biotechnology firms operating in the human therapeutics and diagnostics field (1960-94) they found strong support for their hypothesis that a firm’s centrality in network relationships and its incrementally acquired experience in managing network ties is a strong predictor for its growth and economic success. Network experience, it appears, should be considered as an incremental learning process both in terms of the management of collaborative ties and in terms of the actual technical learning of biotechnology innovations (Powell at al., 1996). The decision to outsource
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
an activity includes the inherent risk of forgoing a firm’s centrality of participation in valuable networks. The development of network models of innovation have helped to illustrate further the prominence now given to internal and external interactions (networks) within the innovation process. All these knowledge flows contribute to the wealth of knowledge held by the organisation (Woolgar et al., 1998; Rothwell, 1992; Major and Cordey-Hayes, 2002). Recognising this, capturing and utilising it to develop successful new products is the difficult management process of innovation. Here then lies the potential problem for firms if key activities are outsourced: whether at the very least the firm risks disrupting the knowledge flows to the organisation and more worryingly for senior managers is whether it will isolate a firm from valuable networks. Furthermore, the inability to retain a company’s competitive core will not only endanger its future competitiveness, but can also create a serious risk of dependency on outside providers. A crucial question is whether the desired access to “best in industry” capabilities are sufficient to sustain its competitive advantage in particular where the provider serves “many masters” and the particular expertise ceases to be unique and becomes best- practice industry standard. While there is no shortage of advice in the literature on how to manage the risk of dependency from outside providers and suppliers in general (see for instance Currie & Willcocks, 1998 who suggest multi vendor approaches and shorter term contracts for handling large-scale long-term total outsourcing contracts with IT/ IS providers), the specific problem that access to world-leading expertise via outsourcing may well be compromised by the “levelling-out” of unique advantages when leading service providers spread their world-leading expertise to several clients has not received much attention. As a consequence of the problem of “levelling out” of leading edge expertise, the innovation
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impact of outsourcing is not limited to the issue of core competencies and the need of companies to retain at least the absorptive capacity to exploit innovations that have been developed by outside service providers. There is also the problematic assumption that service providers are always able to infuse best practice into the company. In a traditional outsourcing relationship, a longterm commitment is entered into that “locks” a company to a service provider for the length of the service contract. The ability to infuse best industry practice may not only depend on the relative competence of the provider, but the service providers may also be restricted in their ability to pass on best practices by confidentiality agreement with previous and other current clients. A significant dilemma emerges: Individual firms have a reasoned case against competitors gaining the fruits of their investment and innovation efforts, while at the same time the majority of companies choose outsourcing not least in the hope of gaining such advantages from other firms. This dilemma is mainly left to the service providers and the individual consultants they employ to resolve. It is, however, a very important issue from an organisational innovation perspective. We will see below that this issue becomes even more pressing when companies and industries move away from traditional long-term outsourcing relationships with single service providers to strategic outsourcing, i.e. to much more open, short-term relationships with multiple suppliers involving all business processes.
THE IMPORTANT ROLE OF TRUST IN THE MANAGEMENT OF OUTSOURCING RELATIONSHIPS: THE EXAMPLE OF INFORMATION SYSTEMS OUTSOURCING Outsourcing has a long tradition in relation to the IT industry. Because of the high costs of IT infrastructure and the rapid change in technol-
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
ogy, many organisations have been looking at external providers for the IT function since the early 1980s. The reasons for this move are rational. If information services play a supporting role for the key business functions and this service can be bought in at higher quality of service delivery without having to commit substantial assets and resources, it makes good sense to look at the external market for providers. In most cases, the outsourcing relationship goes further than just substituting for an internal IT service and a contractual relationship is sought where the service provider assumes responsibility for one or more of the organisation’s IT or even business functions (Willcocks & Lacity, 1999). In this case, the relationship includes the transfer of resources of the outsourcing organisation to the external service provider and involves a longterm commitment with a detailed legally binding contract. Significant organisational changes are needed as the role of the internal IT department changes form being a supplier of its own services to assuming the function of a controller and broker of IT and/or business services. Because of the level of mutual commitment, lengthy contract negotiations (9-12 months) and detailed rules are the norm which later can become problematic as technology base and business requirement tend to change, at times even before the contract is finally signed (Gartner, Research Report, December 2001). As the original focus is traditionally on cost saving on the basis of existing solutions, both parties can be locked in inflexible arrangements that lead to a lack of satisfaction with the services received by the outsourcer and frustration with the constraints imposed by the service provider (Gartner, Research note, June 2001). Due to the long-term timeframe, the level of resources committed and the emphasis on cost efficiency, a bureaucracybased approach to relationship management and management control is often pursued which as it is not well suited for coping with changing requirements and therefore leads to disappointment on
both sides and further enforces the desire to impose a high level of management control. Ironically, despite a high level of dissatisfaction with current service providers, a high number of organisations stick with their existing provider when it comes to contract renewal because of the high level of sunk costs (Barthelemy and Geyer, 2000). Outsourcing relationships need to be managed during the lifespan of the projects concerned. The costs involved and the complex nature of the projects that frequently involve the transfer of assets from the outsourcer to the provider call for detailed contractual arrangements. Theses are also in the interest of the service provider who does not wish to face spiralling costs due to ambiguities. In principle, detailed contractual arrangements are often considered good professional practice – the one who has good intentions can sign a detailed contract – and need not be considered as a substitute for or undermining trust in relationships. Detailed contracts and legal means are of course more of a background safeguard, providing contract parties with the confidence that although the law is slow and costly and seeking legal redress is not the best avenue to solve conflicts, they do have a safeguard against gross malfeasance (Sitkin & Roth,1993, Deakin & Wilkinson,1996). Beyond contract, however, a fair amount of trust a is required to make outsourcing relationships work. The outsourcing organisation must at least have trust in the service provider’s competence and willingness to keep to contractual obligations. This will normally be based on the service provider’s record of achievement and reputation. Most of the larger outsourcing contracts are awarded to the reputed and established players in the industry who can point towards a record of previous achievements or who have been directly recommended although the contract tendering process will be principally open to all contender who can meet the project requirements. As outsourcing involves close cooperation between internal and external staff, interpersonal trust relationships become very important for the success of the project.
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
The long-term time frame of the contracts allow for interpersonal trust relationships to be built, but this trust-building can be undermined if the contractual terms do not sufficiently allow for a dynamic adjustment of the services to be delivered to changing circumstances of the outsourcing organisations (such as growth through acquisitions or moving into new markets) or to changes to the technology and products/services available at the cutting edge of the market. In such cases, rather than having governance procedures in place that allow for quick response and dynamic adjustment of terms, outsourcing contracts often are inflexible, require substantial renegotiation and lead to dissatisfaction on both sides. Once however, disagreements and tensions have set in, it becomes more difficult to renegotiate and find mutually beneficial solutions on the basis of trust (Sitkin & Stickel, 1996). Even worse, signals that relationships with service providers have become difficult seem to reinforce preferences for a bureaucracy-based approach to management control (van der Meer Koistra, 2000)b with closer supervision and monitoring and more direct intervention of the outsourcing company. Given that at least one of the causes of this adverse dynamic, the rate of technology change is bound to increase, the nature of IT outsourcing contracts is in need of flexibilisation. Rather than chasing “moving targets” with closer nets, a more developmental, trust-enabling approach to contact and relationship management is needed. A move towards a trust-enabling governance structure and management control approach would need to incorporate changes such as shared flexible decision-making and goal setting by a joint alliance board with backing from senior management level, open book accounting, outcome-based rewards with a clear recognition of a priority to meet dynamic goals rather than static contractual obligations (Dekker, 2001). Such an approach to management control, however, must be implemented before trust has been lost. It also requires a move away from a mainly tactical orientation towards cost
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efficiency to a more strategic consideration of overall business objectives and the role IT and IS can play to that end.
INFORMATION LEAKAGE, TRUST, REPUTATION AND THE INNOVATION DILEMMA We have argued above that from an innovation perspective, the reliance on outside providers can be problematic, not only because key areas of expertise may be gradually lost to the outsourcing organisation but also because outside providers may not have the desired leading edge expertise over the long-term (Earl, 1996) or may spread their expertise among many clients so that it degrades from “best in world” to mere industry standard. The problem of information leakage lies at the heart of this dilemma. Companies want exclusivity in their relationship with their service providers, but consultants who work with many clients are unlikely to be able not be influenced and not to spread the best practice that they acquire when working with many client firms. Detailed legal contracts may offer short-term solutions as they can protect tangible outcomes from specific projects undertaken, but not every innovation related project outcome is tangible and can be clearly defined in legal contracts. And consultants are clearly expected to work at the cutting edge of their professional expertise for all of their clients. The problem of information leakage in collaborative research and technology development has been investigated by Hoecht & Trott (1999). They contend that companies need to be outward-looking to gain access to new knowledge and that this openness comes at the risk of commercially sensitive information being leaked to competitors. Furthermore, the more dependent technology intensive industries are on “openness” in innovation related activities the higher the rate of information leakage is likely to be in these industries. The increasing role of KIBS for
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
R&D in sectors such as the IT industry can be expected to increase this risk. The more outwardlooking the R&D strategy of these companies, the less suitable are traditional approaches such as legal instruments for controlling this risk and the more these companies have to rely on mechanisms of social control, in particular trust and reputation concerns. When companies pursue an extrovert, the most outward-looking technology development strategy, they rely on the expertise of distinguished individual researchers, either as temporarily hired subject field experts or as prominent members of research community networks working within an organisation and acting as boundary spanners between the organisation and the scientific community. Because of their superior subject knowledge and their privileged position in the research community, which is after all the prime reasons for employing them, they have, at least in theory, ample opportunities to leak information to competitors and to betray the organisations hiring their services if they wish to do so. Direct, bureaucratic control is largely ineffective and non-implementable in situations where the controllers lack detailed understanding of the nature of the controlled person’s workc, legal contracts such as detailed secrecy clauses and intellectual property agreements are accepted as a matter of professional good practice, but detection of contravention would be very difficult and the contravention difficult to prove and any legal redress would not compensate for the commercial damage incurred. In such cases when legal instruments and direct, bureaucratic control are of limited effectiveness, companies need to rely on trust and social control in order to be able to work with the individuals in question. And although trust is always “ultimately a leap into the dark” (Luhmann, 1979), research organisations have good reasons to trust these individuals as their personal and professional integrity is based on their need to protect their professional reputation as the “social capital” (Coleman, 1990) which makes them so desirable
to their employers. As a consequence of their self-awareness of the need to protect their reputation as their social capital, external hired experts and organisational boundary spanners more than any other group of scientists “internalise” proper professional conduct in themselves. The problem of information leakage and how to control it also applies in the case of outsourcing of knowledge-sensitive business processes with high innovation potential. We have encountered this issue as a pressing ethical and professional problem for a number of IS consultants that we interviewed for another innovation-related research project (Trott & Hoecht, 2004). With the move from traditional long-term single provider to strategic outsourcing, it will become much more of an issue as will be discussed in the next section.
STRATEGIC OUTSOURCING AND THE INNOVATION DILEMMA Strategic outsourcing goes beyond traditional outsourcing in the sense that competitive advantages are being sought through opening up all business functions, including the core competencies which should provide competitive advantage to whoever can provide the perceived best solution, internal or external (Quelin and Duhamel, 2003). In contrast to traditional outsourcing, there are no protective boundaries around core activities in the hope that the organisations can maximise their innovative capacity by being an active part of a networked economy. This means that rather than having exclusive arrangements with one or very few service providers of long periods of time which will be expected to offer tailor-made solutions, strategic sourcing arrangements will be with multiple partners over short periods of time and with very little protection of internal core competency functions against outsiders (Gartner, Strategic Analysis Report, May 2001)d.
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
There is a certain paradox inherent in this approach: a very high level of trust is required for such relationships as the risks involved are substantial while at the same time the conditions for building trust are undermined by a shorterterm orientation with less commitment compared to traditional outsourcing relationships. If we are experiencing a move towards a global networked economy (Castells, 1996) with rapid technology change and an increasing need for sharing information and cooperative R&D, then long-term exclusive relationships between buyers and service providers may have too unsustainably high opportunity costs because of the inherent lock-in that can seriously hinder innovation. From a risk-control perspective exclusive relationships with clearly defined organisational boundaries may be preferable, but the cost of restricting information exchange among service providers in networks and limiting oneself to the expertise of just one firm can be significant. Furthermore, as discussed above, such exclusive relationships, when managed with a bureaucracy rather than trust-based approach to management control can be unproductive. The challenge then is to find ways in which more core business functions (but not all!) can be opened to the shared knowledge of the external service providers as a networked industry without losing core competitive capabilities, be it as a consequence of extensive reliance on outsiders, or through imitation by competitors as a consequence of information leakage. The problem of information leakage is inherent in all outsourcing relationships, but the magnitude of this problem is greatly increased when dyadic relationships are replaced by multiple partner and network arrangements. There is some tentative evidence that “powerful” firms may be more able to protect their sensitive information than weaker ones, but this is far from certain and may well be influenced by managerial competence of the participating firms. It is also not always easy to determine the exact boundaries between the required up-to-date professional knowledge of in-
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dividual consultants derived from current industry experience and cutting edge innovative practices exclusively developed for a particular client that have to be kept confidential. This boundary will become even more blurred the faster technology development progresses.
DISCUSSION AND MANAGERIAL IMPLICATIONS: INNOVATION, NETWORKS AND TRUST Innovative capability of the firm is largely dependent on cumulative knowledge built up over many years of experience. Contrary to the model used by economists, innovative ability cannot be simply bought and sold. Hence, the need to remind senior managers of the unwitting harm that may be inflicted on the ability of the organisation to survive in the long term if its core competencies are slowly eroded through outsourcing. This chapter has put forward a different conceptual approach for how companies can view the role of outsourcing and its impact on innovative capability. We need to look again at what delivers long-term success as opposed to short-term gains. This chapter has highlighted two particular strategic risks associated with outsourcing. Firstly, that not only does outsourcing involve the inherent risk of forgoing the development of the knowledge base of the firm but also that the firm’s existing skills and core competencies may be unwittingly being leaked via the third party provider. The concept of trust is introduced as a possible mechanism for managers not only to understand the dynamics of knowledge leakage, but also as a means of managing the dilemma. From the point of view of the individual firm, the question is how it can maintain a commitment to secrecy and confidentiality from multiple partners. One solution would be their interest in repeat dealings. If the buyer firm is a significant player in its industry, the service providers may fear to loose it as a future customer and may therefore
Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
control their own behaviour. This would require a certain likelihood that potential betrayals would be noticed, which in terms depends on the nature of the relations between service providers. If there is sufficient competitive rivalry (despite the network cooperation) between service providers, some of their members may be prepared to “shop” the betraying service provider to the buyer in the hope of securing a future contract. Another way of securing commitment would be for the buyer to acquire a stake in one or more of the service providers. Partial ownership may make the service provider as a consultant/provider less attractive to other buyers, but it would offer a degree of control in the sense that the buyer firm could exercise direct influence in managerial decisions and the employees of the service provider would be less likely to harm “part of their own” organisation. This is, however, a very costly way to buy loyalty and the associated costs could well be far higher than the benefits derived from strategic sourcing itself. Tightening legal contracts would also be an option, at least in theory. In practice, the knowledge base of core competencies is often of a tacit nature and difficult to codify, and it is next to impossible to prove that betrayal has occurred. Furthermore, the essence of strategic sourcing is to move to shorter relationships including more flexible, less closely defined contracts. To some extent, developments in IT may provide a solution. Those services which are mainly focused on IT (cost) efficiency (such as product support, network maintenance and help desk services) may well cease to require buyerowned assets and to be firm specific altogether. Instead of longer-term service contracts, buyers may opt for a just in time/pay as you go “access” model where they tap into standardised solutions (Gartner, Strategic Analysis Report, May 2001). As this will normally not affect their core skills and competitive edge, the risks will be acceptable. If networking and shared technology development is the future for the IT industry, another
option would be for large buyers to retain the capacity to participate themselves directly in these networks. This could be achieved by either retaining or recruiting individuals into the buyer firms who have the ability to judge industry developments and to actively participate in industry networks. The task of these individuals, who have to be highly regarded experts in their field, would be to act as boundary spanners between scientific research, the service providing consultancy firms and their respective buyer firm. Their job would entail the definition and demarcation of high- risk areas within their home organisations and the selection and supervision of those “externals” who would be granted access to the business functions and processes identified as high risk. As external service providers can easily be made to specify the individuals assigned to specific tasks as part of the tendering process specification and as part of the final contract, the boundary spanner’s judgement on the competence as well as trustworthiness of the specified individuals could be used as a device to control the risk of secrecy betrayal. As a consequence, it would be very much in the career interest of the staff of external service providers to keep and earn the trust of the boundary spanners of their main client firms as this would become a key selection criterion for the award of future contracts to their firms. As a consequence, the problem of trust would be transferred onto a higher level, from trust in service providers to trust in the controllers/boundary spanners. Although this resounds of Shapiro’s (1987) observation that “one of the ironies of trust is that we frequently protect it and respond to its failure by bestowing even more trust”- onto regulators and guardians in this case, the experience of other industries such as biotechnology with boundary spanners as guardians of company secrets is positive (Liebeskind and Oliver, 1996; Hoecht& Trott, 1999). Boundary spanners have an overwhelming interest in guarding their reputation as being both trustworthy and competent as this reputation amounts to their “social capital” (Coleman, 1990).
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
Naturally, the monitoring and supervision which can be exercised by boundary spanners themselves is limited to “working hours” and the “trusted externals” could still pass on information after hours and during future assignments with competing firms, in particular as there are no sufficiently effective legal sanctions to prevent this from happening. Therefore, in order to control this risk, some minimum level of exchange of information among boundary spanners of large buyers would be required. It is, after all, in the collective interest of buyers to limit the risk of betrayal and therefore to expel unreliable individuals from the circle of consultants with access to high risk areas in their clients’ organisations. Whether this collective interest would prevail or the short-term benefits derivable from acts of betrayal would prove to be too tempting is very much a question of the character of the network of boundary spanners in question. Given that the collective sanctioning interest of networks cannot necessarily be relied upon particularly if detection is unlikely, other safeguards would be needed. Such as safeguard could be the external consultants own interest in protecting their reputation as their social capital. It may not be likely that a boundary spanner can be proven to have failed to inform his network colleagues of a betrayal, but the self-interest of the external consultants themselves is likely to stop them from committing acts of betrayal in the first place.
Ansoff, H. I. (1965). The firm of the future. Harvard Business Review, 43(5), (Sept-Oct), 162-178.
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Barras, R. (1986). Towards a theory of innovation in services. Research Policy, 15(4), 161-173. Barras, R. (1990). Interactive innovation in financial and business services: The vanguard of the service revolution. Research Policy, 19(3), 215-237. Barthelemy, J., & Geyer, D. (2000). It outsourcing: findings from an empirical survey in France and Germany. European Management Journal, 19(2), 195-202. Barthelemy, J. (2001). The hidden costs of IT outsourcing. Sloan Management Review, 42(3), 60-69. Beveridge, W. I. B. (1957). The art of scientific investigation (3rd ed.). New York: Vintage. Bower, D. J., & Keogh, W. (1997). Conflict and cooperation in technology-based alliances. International Journal of Innovation Management, l1(4), 387-409. Brandes, H., Lilliecreutz, J., & Brege, S. (1997). Outsourcing- success or failure? Findings from five case studies. European Journal of Purchasing & Supply Management, 3(2),63-75. Burns, T., & Stalker, G. M. (1961). Managing innovation. London: Tavistock.
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Distinct capabilities are those things that the organisation is better at doing than its competitors.
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Information Leakage: Information leakage refers to the unintended loss of information from an organization. This usually occurs as a result of employees passing information to others sometimes unwittingly sometimes wittingly.
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KEY TERMS Core Capabilities: The knowledge and skill that resides in an organisation. Core capabilities include technical know-how, technical skills, business process know-how and business skills.
Innovation: The process of developing and commercialising something new, usually a product, service or manufacturing process. The process is related to >invention but they are not identical twins. The management of innovation is a growing and significant subject in its own right. While there is continued debate in the literature about the range of activities covered by the term, there is broad agreement that successful innovation management involves research, technology development, marketing and manufacturing. Knowledge Intensive Business Services: Knowledge intensive business services (KIBS) include traditional professional business services such as accountancy and law, as well as services that have a scientific and technical knowledge base such as IT/IS. Other examples include a new generation of KIBS. The growth in information communication technologies during the 1980s and the development of the internet in the 1990s and into the 21st century has led to enormous sums of money being spent by firms in order to ensure that they are equipped to compete. Outsourcing: A term used to describe the process of using external organisations to provide the firm with the necessary services it requires, and that it previously supplied from within. Such as maintenance, cleaning, catering, computer support, telecommunications services. The benefits of outsourcing include reduced costs and increased services.
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Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)
ENDNOTES a
b
There are literally hundreds of definitions of trust. A useful pragmatic definition of trust is that “an agent exhibits trust when he/she exposes herself/himself to the risk of opportunistic behaviour by others and when he/she has no reason to believe that the trusted other will exploit this opportunity” (Humphrey & Schmitz, 1996:4). A key point is that trust makes the trustor vulnerable to the behaviour of the trustee, but the trustor ignores this possibility. Moellering (2006: 111) defines trust as “an ongoing process of building on reason, routine, and reflexivity, suspending irreducible social vulnerability and uncertainty as if they were favourably resolved, and maintaining thereby a state of favourable expectation toward the actions and intentions of more or less specific others.” Sako (1992) distinguishes between competence trust (confidence in the other parties ability to perform properly), contractual trust (honouring the accepting rules of exchange) and goodwill trust (mutual expectations of open commitment to each other beyond contractual obligations). Langfield-Smith and Smith (2003), following on from van der Meer-Kooistra and Vossleman (2000) distinguish between marketbased, bureaucracy-based and trust-based
c
d
control patterns of inter-firm transactional relationships. Trust plays no role in the first and only a limited role in the second control pattern (emphasis on outcome and behavioural control), but becomes central in the trust-based control pattern (emphasis on outcome and social control as well as trust). The relationship between trust and control is a complex one that can be either supplementary and or complementary depending on circumstances. The relationship between trust, risk and control in inter-firm relationships has been explored systematically and in considerable depth by Das and Teng (1998, 2001). Quinn (1999) acknowledges this as a major problem in controlling the risks involved in “intellectual outsourcing”. While there is no accepted consensus in the literature regarding the exact nature of strategic outsourcing; Quélin and Duhamel (2003), for example, maintain that it involves a long-term commitment between the client and the service provider. Empirical research undertaken by Gartner suggests that strategic outsourcing can also involve short-term contracts with multiple partners in order to get access to the highest level of expertise from different specialist companies in their fields where such expertise is not available in any one particular company.
This work was previously published in the Handbook of Research on Knowledge-Intensive Organizations, edited by D. Jemielniak and J. Kociatkiewicz, pp. 47-66, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.5
Outsourced IT Projects from the Vendor Perspective: Different Goals, Different Risks Hazel Taylor University of Washington, USA
ABSTRACT
INTRODUCTION
As outsourced and multinational IT projects become more common, managing risks for these projects is increasingly important. The research reported here examines key risks identified by Hong Kong vendor project managers working on both local and international package implementation projects. In addition to the typical risks that threaten project outcome success, respondents noted location-specific risks on their multinational projects. They also distinguished threats to the satisfactory process of the project, and threats to their own firms from competitors and from potential damage to their reputation arising from customer dissatisfaction with either the outcomes or the process of the project. Using an agency theory perspective, this broader focus is examined in the light of differing definitions of project success for clients and outsource providers.
For over 30 years, reports about problems with IT projects have appeared regularly in popular and academic literature, including several wellpublicized major failures (Drummond, 1996; Lyytinen, Mathiassen, & Ropponen, 1998). During this period, there has also been a steady flow of advice in both academic and practitioner literature for IT project managers on IT project management, development methodologies, and risk management techniques. Risk management practice has been identified as one critical factor of the success of IT development projects (Barki, Rivard, & Talbot, 2001; Boehm, 1991; Charette, 1996; Fairley, 1994; Heemstra & Kusters, 1996; Schmidt, Lyytinen, Keil, & Cule, 2001). A significant stream of research has focused on identifying risk factors for IT projects in order to aid managers in making decisions about risk mitigation in their software development projects (see, for example: Alter, 1996; Baccarini, Salm, &
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Love, 2004; Barki, Rivard, & Talbot, 1993, 2001; Boehm, 1991; Cooke-Davies, 2002; Keil, Cule, Lyytinen, & Schmidt, 1998; Moynihan, 1996; Schmidt, Lyytinen, Keil, & Cule, 2001). These studies have included surveys of managers from a variety of cultures, including Australia (Baccarini, Salm, & Love, 2004), Canada (Barki, Rivard, & Talbot, 1993), Europe (Cooke-Davies, 2002), Ireland (Moynihan, 1996), and the U.S., Finland, and Hong Kong (Schmidt, Lyytinen, Keil, & Cule, 2001), and show substantial commonality of risk perspective across cultures. The body of work on risks in IT projects is extensive but the success rate for these projects continues to be poor (Standish Group, 2003). One increasingly popular risk mitigation option for organizations is the outsourcing of development and implementation of IT projects (Lacity & Willcocks, 1998; Levina & Ross, 2003; Willcocks, Lacity, & Kern, 1999), either by contracting specialist software development firms to build custom information systems, or by purchasing off-the-shelf packages, typically with some customization to fit the client’s needs (Lacity & Willcocks, 1998; McFarlan & Nolan, 1995; Natovich, 2003; Rao, 2004; Russo, 2000). Such outsourcing, which can be within country or offshore (Rao, 2004), offers the benefits of risk transference, cost reduction and improved performance (Lassila & Brancheau, 1999; Martin & McClure, 1983; Natovich, 2003). Recent research has focused on how client organizations can best manage the outsourcing relationship in order to maximize these benefits (Choudhury & Sabherwal, 2003; Foxman, 1994; Willcocks, Hindle, Feeny, & Lacity, 2004). While certain cross-cultural issues have been highlighted for off-shore sourcing arrangements (Kliem, 2004; Krishna, Sahay, & Walsham, 2004; Rao, 2004), there is a broad level of consensus in recommendations for both within country and crosscountry outsourcing (Choudhury & Sabherwal, 2003). Software package projects are especially interesting in the context of IT risk management
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practice, in that their use is claimed to ameliorate or avoid many of the risks to client organizations associated with custom developments (Lassila & Brancheau, 1999; Martin & McClure, 1983). Interest in the client perspective on risks related to software package implementation projects is increasing (Parr, Shanks, & Darke, 1999; Scott & Vessey, 2002; Sumner, 2000), but the vendor perspective on these projects has received less attention ( Davis, 1998; Gable, 1998; Goles, 2001; Levina & Ross, 2003). While many risk factors for IT projects in general have been identified in the literature (Alter & Sherer, 2004; Barki, Rivard, & Talbot, 1993; Schmidt, Lyytinen, Keil, & Cule, 2001), little is known about which of these risks are of high concern for managers of vendor-driven projects. To explore the issues associated with vendor risk management of outsourced IT projects, the research reported in this article examines the key risks identified by experienced vendor managers of software package implementation projects on client sites. An agency theory perspective was used to provide a framework to examine and explain the findings. In the next section, I review the literature related to outsourcing IT projects, and discuss the underlying agency theory assumptions supporting much of the prior research. The following sections describe the research methodology, results, and discussion of findings. The article closes with a discussion of implications for practice and research and a brief conclusion.
LITERATURE REVIEW There is an extensive body of work on the typical risk factors faced by in-house software development project managers, which has focused on developing comprehensive checklists of risk factors to be considered when planning and managing an IT project (Alter & Ginzberg, 1978; Barki, Rivard, & Talbot, 1993; Boehm, 1991; Heemstra & Kusters, 1996; Schmidt, Lyytinen, Keil, &
Outsourced IT Projects from the Vendor Perspective
Cule, 2001; Sumner, 2000). The most recent and arguably the most comprehensive list of risk factors was reported by Schmidt et al., (2001), from a Delphi survey of Finnish, Hong Kong and U.S. respondents primarily involved with in-house development projects. Schmidt et al., found a high level of agreement across countries on the key risks for IT development projects. Many, if not all, of the factors identified as threats to a satisfactory in-house project outcome will also apply to outsourced projects. However, the outsourcing situation may give rise to additional or different risks both from the client and the vendor perspective. Moynihan’s study of Irish managers of bespoke custom development projects (1996) identified some additional risks from the vendor viewpoint, while Sumner’s study of ERP implementation projects in U.S. companies (2000) highlighted extra client concerns. Table 1 contains the combined factors identified in the Schmidt et al., Moynihan and Sumner studies. Recent research into management and control of outsourced IT development projects has emphasized the need for clients to protect their firms against risks arising from the vendor involvement in these projects (Choudhury & Sabherwal, 2003; Loh & Venkatraman, 1995; Natovich, 2003; Phelps, 1996). These studies view the relationship between client firm and outsourcing vendor as essentially an agency relationship (Basu & Lederer, 2004; Eisenhardt, 1989; Koh, Ang, & Straub, 2004; Loh & Venkatraman, 1995), with the two parties involved in a cooperative venture, but having differing goals and differing attitudes towards risk (Eisenhardt, 1989). According to agency theory, the principal in the relationship, in this case the client, typically does not have full control over what the agent—the vendor—is doing or how the work is done, and some authority is delegated to the agent to get the work done. The agent and the principal may have differing goals relating to what they hope to achieve from the completion of the work, and hence differing perceptions of the risks that might threaten the successful achievement
of these goals. For example, a vendor’s goals in an outsourcing project are likely to include making a profit, while the client may have a goal of reducing overall IT costs. The concern and risk for the principal is that differences in goals may lead to the agent taking actions more favorable to the agent’s self-interest than to the principal’s interests. Consistent with an agency theoretical perspective of the client-principal’s viewpoint, researchers have recommended mitigating this risk with outcome-based contracts combined with monitoring of the vendor-agent’s behavior, in order to ensure that the vendor will behave in the interests of the client rather than in the vendor’s own self interest (Choudhury & Sabherwal, 2003; Eisenhardt, 1989; Loh & Venkatraman, 1995). The challenge for the vendor is to meet the client’s goals for the project, while ensuring that the vendor’s own, possibly differing, goals are also met, and this vendor perspective has received little attention (Goles, 2001; Levina & Ross, 2003). Yet, clearly, if the outsourcing arrangement is to be successful for both parties, while the vendor must accept the transferred risks in the project and agree to the controls imposed by the client to manage the relationship, the vendor must also stand to gain from the relationship, and vendor interests must also be met. In a key study of application management outsourcing from the vendor perspective, Levina and Ross (2003) have explored the vendor’s value proposition in outsourced maintenance and support contracts. They argue that vendors can offer cost benefits to clients by focusing on their core business of outsourced IT work and hence developing specialized skills, complementary to skills in the client firm, across many projects. However, Levina and Ross’ study did not explore the possibly different goals, and hence differing risk perspectives, of vendors involved in outsourcing projects. The aim of the exploratory research reported here is to examine risks that threaten outsourced IT projects from the vendor’s perspective and to identify key differences between risks attended
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Outsourced IT Projects from the Vendor Perspective
to by vendor project managers and those identified by clients in prior research. Given the limited research into the vendor side of the outsourcing relationship, the theoretical framework used to guide the study was drawn from the agency perspective that has underpinned recent research into the client view of outsourced IT projects. In order to focus particularly on the vendor perspective on risk, a key aim was to distinguish those risks actually identified by vendor project managers in the context of their specific projects. Investigating these particular key risk factors enables an understanding of vendor project managers’ current practice and highlights any areas that are specific to the vendor perspective. The research questions that guided the study were: 1.
2.
What key risks do vendor project managers attend to in outsourced software package implementation projects and how do these differ from those identified by in-house project managers for in-house software development projects? What are the underlying concerns of vendor project managers that drive any such differences?
In the context of this research, the term project manager is used to describe the manager who is assigned overall responsibility for a specific project. In vendor-driven projects i.e., projects outsourced by a client organization to a vendor of a suitable (possibly customized) software package, typically there will be a vendor project manager with responsibility for the project from the vendor perspective, and a client project manager with responsibility for the project from the client perspective. Vendor project managers were the focus of the present research. Vendor project managers manage the daily activities of the project, co-ordinate tasks, manage the project team, meet with their counterparts in the client firm, and are
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responsible for ensuring the project schedule, budget, and requisite quality are achieved. The terms risk and risk factor refer to potential problems or issues that may arise and adversely impact on the progress or outcome of a project. Note that while typical definitions of risk with respect to project management relate to potential problems that could impact on the project itself, the vendor respondents in this study also consider a risk to be any potential problem or situation arising from involvement in the project that could adversely impact on their own firm.
RESEARCH METHODOLOGY Given the limited prior research on the vendor perspective on risk in IT projects, and the need to distinguish possibly subtle and contextual differences in vendor project managers’ practice, the study uses an interpretive approach (Walsham, 1995). A semi-structured interview method—the critical decision method—was chosen, since this method has been demonstrated to be particularly effective in capturing respondents’ interpretations of their experiences, rather than the researcher’s preconceived ideas (DuBois, 2002; Klein, Calderwood, & MacGregor, 1989). Using the critical decision method, respondents were asked to describe recently completed projects that involved challenging situations from a risk perspective. No prompts or cues were given about which risks were of interest. Rather, the respondents were encouraged to be the judge of what issues were important to them in the contexts they were working in. Probe questions were used to follow up on detail of specific situations described by the respondents, in order to tease out details of the risks identified. The sample was selected in a two-step process, using a purposive, maximum variation strategy in order to ensure good coverage of risk management approaches and facilitate the identification
Outsourced IT Projects from the Vendor Perspective
of common patterns (Miles & Huberman, 1994; Patton, 2002). In the first step, a range of packaged software implementation firms in Hong Kong were identified, with the aim being to identify organizations significantly involved in software package implementation, with variation in terms of the range and size of clients served by the firm, and the size and type of package the firm worked
with. Small and medium software package implementation firms were identified from the Hong Kong directory (Dun & Bradstreet (HK), 2002), while large software package firms operating in Hong Kong were identified on a reputational basis. Firms were invited to participate in the research, and a summary of research findings was offered as an incentive for their involvement. In the second
Table 1. Risk factors and number of respondents (out of 22) identifying risk factor No. of PMs mentioning risk
Risk factor from previous studies Risk factor in present study
Vendor staffing: All problems with vendor staffing – not enough, wrong skills, staff turnover
Lack of effective project management skills (part) [SLKC] Lack of required knowledge/skills (part) [SLKC] Lack of “people skills” in project manager [SLKC] Poor team relationships [SLKC] Insufficient/ inappropriate staffing [SLKC] Staffing volatility [SLKC] Lack of available skilled personnel [SLKC] Lack of business analysts with business and technology knowledge [S] Lack of ability to recruit and retain qualified ERP systems developers [S]
5
Client staffing: All problems with client staffing – not enough, wrong skills, staff turnover
Lack of appropriate user experience (part) [SLKC] Insufficient internal expertise [S]
3
third party staffing: All problems with third party staffing – not enough, wrong skills, staff turnover
Excessive use of outside consultants [SLKC] Failure to mix internal and external expertise effectively [S]
19
sChedule and budget management: Risks associated with keeping to preset schedule and budget, including failure to develop work breakdown structure; failure to adequately monitor progress on tasks; and blow-outs caused by unexpected problems, beyond the pre-set contingencies
Lack of effective project management methodology (part) [SLKC] Poor or nonexistent control (part) [SLKC] Under-funding of development [SLKC] Bad estimation [SLKC] Artificial deadlines [SLKC] Poor risk management [SLKC] Lack of effective development process [SLKC]
7
Client projeCt management: Risks associated with client’s internal project management structure, including failure to appoint client project manager, failure to give client project manager adequate authority over client staff, incompetence of client project manager
Lack of proper (client) project management [S] Lack of full-time commitment to project management and project activities [S]
15
Change management: Risks for vendor associated with managing client change requests, both managing too tightly (hence alienating clients) and managing too loosely (hence losing control)
Not managing change properly [SLKC] Lack of effective project management methodology (part) [SLKC] Changing scope/objectives [SLKC] Lack of frozen requirements [SLKC]
continued on the following page
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Outsourced IT Projects from the Vendor Perspective
Table 1. continued No. of PMs mentioning risk
Risk factor from previous studies Risk factor in present study
doCumentation management: Risks associated with vendor failure to adequately document project meetings, sign-offs, agreed changes and ‘trade-offs’ (add a new item in exchange for deleting unrequired item). Includes risks from overaggressively using documentation to control project
Lack of effective project management skills (part) [SLKC] Lack of effective project management methodology (part) [SLKC] Poor or nonexistent control (part) [SLKC]
6
sign-off Control: Risks associated with reluctance or failure of client to adequately test and sign-off on deliverables i.e. client fails to meet its deadlines in terms of testing when required and then signing off on satisfactory test completion. Can be a deliberate ploy on part of client to delay payment, or as a result of fear of accepting in case something turns up later on
Lack of cooperation from users (part) [SLKC] Poor or non-existent control (part) [SLKC]
5
third party deliVerables Control: Risks associated with failure of third parties to meet deliverables deadlines, or to meet quality requirements. Includes risks such as failure to ensure third parties develop adequate work breakdown structure and failure to monitor third party progress
Poor or non-existent control (part) [SLKC] Lack of control over consultants, vendors and subcontractors (part) [SLKC]
5
Client readiness: Risks associated with client’s readiness to implement. Includes site preparation, user training, client’s ability to meet their deadlines on e.g. data conversion etc
Client willingness/capability to handle implementation [M] Insufficient training of end-users [S]
solution risks
3
14
deVelopment ChoiCe: Presales commits to wrong development strategy e.g. package instead of custom, or over-sells modules not really required, or fails to identify modules that are required, or fails to identify the degree of customization required
Choosing the wrong development strategy [SLKC] Lack of effective development methodology [SLKC] Trying new development methodology [SLKC] Ease of validation of solution (e.g. prototyping) [M]
Vendor understanding of requirements: Vendor has inadequate grasp of requirements, e.g. specification is at too high a level, or unclear, or has omissions or is based on unfounded assumptions
Scope creep (due to not understanding true work effort required) [SLKC] Misunderstanding the requirements [SLKC] New and/or unfamiliar subject matter for vendor [SLKC] Lack of required knowledge/skills of business [SLKC] Knowledge of client’s business sector [M]
continued on the following page
step, once a firm had agreed to participate, the senior executive was asked to nominate project managers who would be recognised as ‘expert’ in their domain. While I did not offer a precise definition of ‘expert,’ I assumed that the title of ‘senior project manager,’ or similar, was a good indicator of the type of expertise and responsibilities I was looking for, and I also suggested guidelines of a minimum of five years’ experience,
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managing at least five projects. In all, 10 vendor organizations participated in the research, and 22 experienced project managers from these firms were interviewed. While the respondents were based in Hong Kong, they had all trained or worked abroad for part of their careers, and all had experience working with team members from a wide variety of cultures. The respondents themselves
Outsourced IT Projects from the Vendor Perspective
Table 1. continued No. of PMs mentioning risk
Risk factor from previous studies [SLKC]: Schmidt et al. (2001); [M]: Moynihan (1996); [S]: Sumner (2000)
Risk factor in present study
14
Client understanding of requirements: Clients are unclear as to what their requirements are or have significant internal differences about requirements
Unclear/misunderstood scope/objectives (due to client ‘fuzziness’) [SLKC] New and/or unfamiliar subject matter for client [SLKC] Client’s knowledge of requirements [M] Failure to emphasize reporting [S]
7
required funCtionality: Risks associated with the match between product and client’s requirements and degree of change required from client to utilize the provided functionality
Mismatch between company culture and required business process changes [SLKC] Level of change to be experienced by user [M] Failure to redesign business processes [S]
8
third party solution: Risks associated with the third party’s ability to deliver what it has contracted to deliver
External dependencies not met [SLKC]
technology risks
9
Customization of produCt: Risks associated with degree of required customization (from none to complete development). Includes risks associated with issues of package integrity across other clients if major changes are required, and issues of on-going support
Failure to adhere to standardized specifications which the software supports [S]
12
newness of produCt: Risks associated with newness of package, and associated bugs
Introduction of new technology [SLKC] Previous experience of application [M] Maturity of technology [M]
9
Complexity of produCt: Risks associated with the number of different modules or functionalities to be implemented - the greater the complexity the greater the risk
Logical complexity of application [M]
3
third party integration and Compatibility: Risks associated with integration and compatibility of third party products both with vendor product, client technology, and other third party products
Need to integrate/interface with other systems (part) [M]
8
data Conversion: Risks associated with data conversion from client legacy systems
Need to integrate/interface with other systems (part) [M] Failure to follow an enterprise-wide design which supports data integration [S]
7
Client teChniCal enVironment: Risks associated with client technical environment, including particular combinations of h/w and o/s; availability of testing environment and specific technical requirements set by client IT department
Stability of technical architecture [SLKC] Familiarity with platform/environment/methods [M] Freedom of choice of platform/development environment [M] Attempting to build bridges to legacy applications [S]
relationshiP risks
continued on the following page
also came from a broad cross-section of cultural backgrounds: 14 were Hong Kong Chinese, seven were ‘Western’ (including HK born European, African-American, Australian, British, Scottish
and South African) and one was Canadian Chinese. The project management experience of the respondents ranged from five to 30+ years, and five to 150+ projects.
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Outsourced IT Projects from the Vendor Perspective
Table 1. continued No. of PMs mentioning risk
Risk factor from previous studies Risk factor in present study
Vendor internal negotiations: Risks associated with internal competition for staff; and with need to influence other internal teams and other sections of the vendor firm e.g. for customization of package requirements
12
Vendor teaM Morale: Risk of deteriorating team morale affecting project performance
5
Vendor top management support: Risks associated with getting necessary support from vendor top management for increased schedule/budget; for getting support to influence clients and third parties
Lack of top management commitment (partial match but doesn’t distinguish vendor aspect) [SLKC]
7
Client top management support: Risks associated with lack of, or unwillingness of, client top management to support and drive through change, and manage internal conflict, within the client organization
Lack of top management commitment [SLKC] Lack of client responsibility, ownership and buy-in [SLKC] Existence of project sponsor [M] Level of client enthusiasm (part) [M] Lack of senior management support [S] Lack of a champion [S]
15
Client expeCtations: Risks associated with addressing expectations of clients, including expectations set during pre-sales; expectations about client contributions to project work; expectations about deliverables
Failure to manage end-user expectations [SLKC] Ineffective communications [S]
13
client trust: Risks associated with deterioration in or lack of trust between client and vendor. Sometimes related to difficult customers
8
‘Bad news’: Risks associated with unwillingness of client users and IT department to pass bad news upwards. Includes reluctance to keep client senior management informed, especially where problems could relate to client staff’s own poor performance
7
Client it department: Risks associated with client IT department skills - too much or too little; Client IT department’s willingness to participate
Working through users vs. working through IT department (part) [M] Insufficient training and re-skilling (of IT department staff) [S]
users: Risks associated with user skills - too much or too little; users’ willingness to participate
Failure to gain user commitment [SLKC] Lack of adequate user involvement [SLKC] Lack of cooperation from users (part) [SLKC] Growing sophistication of users [SLKC] Lack of appropriate user experience (part) [SLKC] IT competence of users [M] Working through users vs. working through IT department (part) [M] Level of client enthusiasm (part) [M] Lack of sensitivity to user resistance [S]
7
continued on the following page
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Outsourced IT Projects from the Vendor Perspective
Table 1. continued No. of PMs mentioning risk
Risk factor from previous studies [SLKC]: Schmidt et al. (2001); [M]: Moynihan (1996); [S]: Sumner (2000)
Risk factor in present study
5
third party Cooperation: Risks associated with getting required level of cooperation from third parties
8
client organization culture: Risks associated with differing organizational cultures, reflecting ‘the way we do things’. Includes issues related to e.g. dealing with government versus commercial projects, and with differences in country culture
Improper definition of roles and responsibilities [SLKC] Lack of control over consultants, vendors and subcontractors (part) [SLKC]
location risks
4
Vendor oVerseas head office: For large multi-national vendor companies, risks associated with differences between non-local HQ and local branch in terms of what should be done, or how it should be done
8
non-local third Party: Risks associated with dealing with a non-local third party; or with the local branch of an overseas based third party Managing multiple relationships with stakeholders [SLKC] Multi-vendor projects [SLKC] Co-ordination complexity of the project [M] Main source of control of project (developer vs. client vs. third parties) [M]
5
multiple third parties: Risks associated with the need to coordinate and integrate several different third parties
Knowledge of country/culture/ language (partial match) [M]
13
multiple Client sites; sites in multiple Countries: Risks associated with delivering projects across multiple sites. Risk is compounded if sites are spread across several countries. Includes risks associated with country variations
5
multiple departments: Risks associated with delivering projects across multiple departments within one site, including interdepartmental conflict, and issues relating to unwillingness of any one department to accept responsibility
Conflict between user departments [SLKC] Failure to identify all stakeholders [SLKC] Number of organizational units involved [SLKC] Need to satisfy multiple groups of users [M]
8
Vendor’s rePutation: Risks associated with possible damage to vendor reputation as a result of project outcomes such as bad client relationships; bad (over time, over budget, poor quality) project performance; or ‘walking away’ from difficult projects
coMMercial enVironMent risks
continued on the following page
Coding and Analysis The existence of a substantial body of research on risk factors in the closely related area of in-house
IT development projects provided support for a prior-research-driven thematic analysis (Boyatzis, 1998; Miles & Huberman, 1994; Ritchie & Spencer, 1994). An initial framework of 53 risk
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Outsourced IT Projects from the Vendor Perspective
Table 1. continued No. of PMs mentioning risk
Risk factor from previous studies
14
Vendor’s coMPetition: Risks associated with external competition and its consequences, particularly the impacts on the pre-sales team such as over-selling and under-bidding to get projects
12
legal and credit risk: Risks associated with possible financial damage to vendor as a result of ‘walking away’ from difficult projects, or as a result of client financial instability, or refusal to make progress payments
10
contract terMs and conditions: Pre-sales has agreed to a contract with harsh terms and conditions, in the client’s favor. There is little room for negotiation. Often typical of government contracts
5
Client business Changes: Risks associated with financial viability of client, and with possible major business changes such as takeover
Climate of change in the business creates instability [SLKC] Unstable corporate environment [SLKC] Change in ownership of senior management [SLKC] Stability of client’s business environment [M]
faCtors not identified in the present study
Projects intended to fail [SLKC] Failure to get project plan approval [SLKC] Project not based on sound business case [SLKC] Under-funding of maintenance [SLKC] “All or nothing” budget, leading to under-funding in later years [SLKC] “Preemption” of project by higher priority project [SLKC] No planning or inadequate planning [SLKC] Criticality/reversibility of the roll-out [M]
factors in 14 different themes was prepared, based primarily on the list of risk factors developed by Schmidt et al., (2001), and augmented with risk factors specific to outsourced projects identified by Moynihan (1996) and Sumner (2000) (see Table 1). The framework was used to code the interview transcripts, using NVivo software to manage the process. As coding continued, some risk factors emerged that were not well-catered for in the initial framework and other codes from the framework were difficult to apply consistently. Thus, following Boyatzis (1998) and Miles and Huberman (1994), once a first pass of all transcripts had been completed, the risk factor framework, which at this stage included 98 factors, was re-
viewed and reorganized into a new framework that better reflected the themes emerging from the particular set of project managers that had been interviewed. This new coding framework still drew on the codes that had previously been identified from the literature, but now some factors were condensed and amalgamated and categories in other areas were expanded in order to better match the respondents’ perspectives. The new framework contained a total of 42 risk factors, differentiated by source—vendor risks, client risks, and third party risks—and type—project management, solution, technology, relationship, location and commercial environment—to reflect distinctions made by the respondents. The full
Outsourced IT Projects from the Vendor Perspective
table of factors used in the new coding framework is shown in Table 1. Every transcript was then recoded using the new framework, without reference to the original coding framework. This detailed coding of all transcripts under two different frameworks provided the opportunity to assess the consistency of coding through an examination of the extent to which coding references occurred at the intersections expected from a mapping of the original framework onto the new framework. The majority (81%) of coding intersections were as expected. Two thirds of the anomalies (12%) were spurious, due to overlapping caused by selection of slightly larger “chunks” of text during the second coding process. The remaining anomalies (7%) were all related to the coding problems with the original framework discussed earlier, and each of these was reviewed to ensure that the second framework had been consistently applied and better captured the intent of the respondents. While the final framework remains my own interpretation of the risks identified by respondents, the detailed coding and cross-referencing process described above minimized any biases introduced by my own perspective.
RESULTS Research Question 1 To address the first research question, the risk factor framework developed during coding was compared factor by factor with factors identified in three previous studies (Moynihan, 1996; Schmidt, Lyytinen, Keil, & Cule, 2001; Sumner, 2000), as shown in Table 1, which also shows the number of project managers in the present study mentioning each factor. Schmidt et al., study is the most recent and the most comprehensive, and hence was used as the primary benchmark for the present study. However, Schmidt at al., respondents were drawn primarily from in-house respondents
reporting risks on software development projects, and so the Moynihan and Sumner studies were also included, since they provide perspectives on risks in outsourced projects that may not have been identified by in-house managers. There are many small variations between studies in definitions of factors, so I have reported factors that seem, based on a close reading of the descriptions presented in each study, to be the closest match to the definitions I have developed in the present study. Factors in the present study that appear to have no match with any previous factor are shown in bold. Factors shown in italics are those that can only be matched with a factor from Moynihan’s or Sumner’s studies and hence may also reflect a difference in perspective of managers of outsourced projects. The factor-by-factor comparison reveals a very close match between many of the risk factors identified by the vendor IT project managers in this study and those identified in previous surveys of primarily in-house IT project managers. Indeed, as shown in Table 1, only seven of the factors from Schmidt et al., (Schmidt, Lyytinen, Keil, & Cule, 2001) were not mentioned at all by the present set of respondents. None of these seven factors were ranked highly by Schmidt et al., respondents. However, Table 1 also shows 12 factors that seemed to have no counterpart in any of the prior studies, and a further eight factors that could only be matched with factors identified in Moynihan’s or Sumner’s studies of outsourced projects. The unmatched and partially matched factors in Table 1 are particularly interesting in view of the comprehensive nature of Schmidt et al., and reveal a possibly different focus and emphasis placed on risk by vendor project managers. It is important to note that one of the strengths of the critical decision interview method used in this research is that it was specifically designed to tease out those risks that respondents thought important enough to attend to, rather than seeking every possible risk that they might consider.
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Outsourced IT Projects from the Vendor Perspective
Thus respondents tended to focus their attention on those issues they saw as critical to the success of their projects, suggesting that these factors are of broad concern to vendor project managers. While some of the unmatched factors, such as client trust or vendor team morale, have received considerable attention in other contexts in the literature, it is important to note that they have not been considered to be of sufficient importance to be mentioned by respondents in previous risk factor studies. These 20 vendor-perspective factors, discussed below, fall into four groups: (a) Risks arising from the client side of the project; (b) risks arising from the vendor side of the project; (c) risks related to the location of the project and involved parties; and (d) risks related to the vendor’s commercial environment. Three of these groups are primarily related to the vendor focus of the respondents, while the location risks draw from the respondents’ experiences with projects spanning country boundaries.
Risks Arising from the Client Side of the Project The separation between the vendor firm and its clients means that vendor project managers are likely to understand less than in-house project managers about the capabilities and general readiness of the client organization for the implementation of a new system. Thus, eight vendor-perspective risks arise from the client side in an outsourced project situation, namely client project management, client readiness, client IT department, data conversion, integration of third party products, client organizational culture, client trust, and ‘bad news.’ The first three of these factors, client project management, client readiness, and client IT department, also identified in the Moynihan or Sumner studies, concern issues about the ability and willingness of the clients to manage their side of the project, and reflect concerns from a vendor
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perspective over issues that may fall outside their locus of control. While in-house risk factor lists have certainly identified risks related to lack of knowledge and skills in project personnel, respondents in the present study, similar to Moynihan’s and Sumner’s respondents, clearly separated risks arising from lack of skills on their own vendor team, and problems arising from inadequacies in client staff. The latter were often seen as being more problematic and more difficult to address. In particular, respondents were concerned about risks arising from the skill levels of the client project manager and the client IT department and their willingness to cooperate with the vendor on an outsourced project, recognizing that, in some cases, a client’s decision to outsource may not have had the support of the client IT department. In addition, some client firms were considered to be just ‘not ready’ to take on an IT implementation project. This lack of client readiness was seen to be an easy risk to overlook in view of the vendor project manager’s lack of detailed knowledge about the client’s general capabilities, particularly when the client’s senior managers were giving strong assurance of their support. The two factors related to client technology, data conversion, and integration of third party products, could also be matched with factors in Moynihan’s or Sumner’s studies, but not specifically with any factor from Schmidt et al. Again, vendor respondents were aware that they were less likely to know critical details about the design and operation of the clients’ existing systems. This lack of knowledge increased risk in areas related to fitting the new system into the clients’ existing operations, both in terms of understanding issues such as data conversion from legacy systems, and in addressing integration issues, particularly if a third party product was also involved. The final three risks arising from the client side of the project, client organizational culture (mentioned by nine respondents), client trust (noted by 14 respondents) and ‘bad news’ (mentioned by 10 respondents) had no corresponding factor in
Outsourced IT Projects from the Vendor Perspective
previous lists, even though all three factors have received extensive coverage in other contexts in the literature (see, for example, Gefen, 2002; Lander, Purvis, McCray, & Leigh, 2004; and Sabherwal, 1999 for discussions of the role of trust in IT projects; and Smith & Keil, 2003 for discussion of the ‘bad news’ concept). These three client relationship risks were seen to be closely related. Respondents placed high emphasis on the need to build strong and trusting relationships with the client management and users, and a corresponding high risk if that trust was not well established at an early stage of the project. In addition, failure to recognize organizational culture differences in ‘the way we do things round here’ (Schein, 1992) could adversely impact on the development of a trusting relationship. This organizational culture risk was compounded if the client was located in another country. The ability of the project managers to build a trusting relationship was seen as crucial in mitigating the ‘bad news’ factor. Respondents described this factor as risk associated with the unwillingness of client staff to keep their senior management informed of possible problems in the project, particularly where these problems could be construed as indicative of poor performance or poor decision making on the part of the client staff. These problems were seen as difficult to address because the obvious solution, the vendor project manager delivering the bad news themselves, was seen as likely to destroy any trust that had previously been established with the client staff.
Risks Arising from the Vendor Side of the Project In addition to the client side risks, respondents identified five risks arising from their own organization, namely customization, complexity, vendor top management support, internal negotiations, and team morale. In common with Moynihan and Sumner, I found that vendor project managers placed a higher emphasis on specific technology
issues than has been noted in previous in-house surveys. However, technology risks may be more critical for vendors working with package implementations for clients. In particular, implementers of software package systems have two additional risks specific to the nature of their product, namely customization and complexity. While the general ‘wisdom’ with package implementation is that client firms should change their business processes to match the package and to take advantage of the claimed ‘best practice’ embedded in the package (Parr & Shanks, 2000), the present study respondents’ experience suggests that some degree of customization is almost inevitable in any package implementation. This need for customization is associated with risks both in terms of understanding the extent of the required changes, and in terms of managing the impact on the integrity of the package. Two aspects of this latter risk arose. Firstly, the project managers in the present study reported risks associated with their own internal management, already noted above, in terms of negotiating the required support to make requested customization changes. Secondly, a further risk arose with the complexity of system requested by some clients. Many of the large package systems now available have so many different possible combinations and configurations that it is unlikely that all possible variations have been fully tested. Thus, a project involving a complex and unusual mix of package modules is likely to present additional risk. The remaining three risks arising from the vendor side of the project, vendor top management support, internal negotiations, and team morale, had no match with previous studies. While lack of top management commitment has been identified by previous researchers, managers in the present study made a distinction between the need for a client top management sponsor, and the need for top management support within their own vendor organization. In particular, they noted the importance of getting the necessary approval for increased budget expenditure from their own
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Outsourced IT Projects from the Vendor Perspective
project executives when they were asked to take on a project that had been under bid by the pre-sales team, and in getting assistance when necessary to influence clients, third parties and other sections of the vendor firm itself. The second vendor relationship factor, internal negotiations, is closely related to the top management support factor, in that project managers reported risks associated with internal competition for a limited pool of staff, and also difficulties in influencing other sections of the firm, for example, for customization of package requirements. These internal competition risks were aggravated if the manager did not have strong backing in the internal negotiations from his or her project executive. The final risk from the vendor side was the issue of team morale, which was noted as a risk by 13 respondents and was particularly mentioned by managers who took over ‘troubled’ projects. The managers in this study considered a strongly motivated team to be one of the keys to success, and they rated any threat to their team’s well-being as a key risk to the project.
Risks Related to the Location of the Project and Involved Parties Over half of the respondents in the present study had experience working on multiple country implementations, and as a result, identified three location-related risks, multiple sites/countries, overseas head office and overseas third parties. The multiple sites/countries factor reflects difficulties working with geographically distant parties. Clearly, a project that spans several countries is likely to encounter increased logistical problems and adds the extra issues of language and culture. But even when working within the manager’s home country, multiple site implementations, for example implementing systems in different branches of the same firm, were seen as higher risk. Previous studies have worked with respondents
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from in-house IT departments in large organizations, and these respondents are most likely to have been focused on internal projects, rather than involved with multi-country implementations. It is a little surprising, however, that the multiple sites aspect of this factor was not mentioned by respondents in Schmidt et al., (2001), because it might be expected that managers from the large organizations contacted for this study would have had experiences in project implementations across several branches of their firms. The sites in multiple countries aspect of this factor is simply a compounding of the multiple sites problem. Implementing at many sites is difficult enough, but working with sites in many countries increases the logistical problems and adds the extra issues of language and culture. Moynihan’s (1996) construct knowledge of country/culture/language, mentioned by two of his respondents, covers the language and culture part of this factor, and thus provides a partial match, but does not appear to include the logistical problems that also arise with a multi-site, multi-country implementation. A second aspect of the location for respondents from the large multinational firms was the greater incidence of projects involving overseas third parties or an overseas vendor head office. While previous researchers have identified risks associated with third parties and multi-vendor projects, they do not distinguish the compounding effect of working with an overseas subcontractor, or reporting to a senior manager in an overseas head office, who might not fully understand local conditions. A number of the projects described by respondents involved working with overseas third parties, or required significant interaction between the local project team and an overseas vendor head office. Each of these aspects of projects, if present, was identified by respondents as adding an extra layer of potential logistical and communication risks to the project, as well as introducing complications related to time zone and local cultural differences.
Outsourced IT Projects from the Vendor Perspective
Risks Related to the Vendor’s Commercial Environment Four risk factors that have no match with prior studies, risks from the vendor’s competitors, risks to the vendor firm’s reputation, legal and credit risk, and risks from contract terms and conditions, are clearly specific to vendor organizations operating for profit in a commercial environment. These particular factors indicate that the vendor project managers in the present study had a wider focus when considering risk than simply the risks that could impact on the successful outcome of the project. These vendor managers also had to consider the possible risks for their own firms from involvement in the project. They reported the need to maintain an awareness of the commercial environment their firms were operating in, with 14 respondents commenting in terms of possible threats from their competitors, and eight referring to their firm’s reputation in the marketplace. The contractual nature of the relationship between the vendor firm and its client and potential legal and credit issues were also considered to be sources of risks for the manager trying to implement the project. The project managers in the present study were particularly aware of the need to develop and maintain good working relationships with their clients in order to achieve a successful conclusion of their projects, maintain their firm’s reputation, and to pave the way for future business between their firm and the client.
Research Question 2 In order to understand why certain risk factors appeared to be of much higher concern to respondents in the present study than to respondents in earlier studies, the subset of risk factors that were specific to the vendor/outsourced perspective were carefully re-examined and grouped into higherlevel categories to facilitate understanding. In particular, patterns were sought that reflected the
particular perspective of vendor project managers and had plausibility in providing possible explanations for aspects of the differences found (Miles & Huberman, 1994). Traditionally, risks have been considered to be potential problems that could impact adversely on the goal of a successful project outcome. However, vendor project managers in this study discussed not only these more traditional aspects of risk, but also considered risks to the long-term goals of their own firms’ future business successes. This broader perspective may have arisen because respondents in the present study were encouraged to make their own determination about what they wished to discuss in the context of risk, rather than having the researcher impose pre-determined definitions or lists of risk. As shown in Table 2, the vendorperspective risks discussed in the previous section reflect respondents’ concern about threats to three different goals. First, respondents were concerned about the traditional risks that threaten the goal of a successful outcome of the project, in terms of meeting schedule, budget, and requirements targets. Second, they were alert to threats to the successful process of the project, partly because such problems could have a detrimental effect on project outcomes, but more importantly because problems with project process could result in dissatisfied clients and in damage to the vendor firm’s reputation, even if the final outcomes were satisfactory. The third area of concern for respondents was risk to their own firm’s future business success arising from the competitive environment their firms were working in. Clearly, at the highest level, all risks to project outcome success are also risks to the vendor’s future business, in that failure to provide expected project outcomes in terms of delivering a usable system within the agreed time and budget will result in considerable damage to the vendor’s profitability and reputation. However, the distinction made here between the three categories of project outcome success, project process success, and future business success, reflects the distinction
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Outsourced IT Projects from the Vendor Perspective
Relationship with client IT department [M] [S] Data conversion [M] [S] Integration of third party products [M]
Risks to project outcome success
From vendor side From location From package (rather than custom) nature of software product
Vendor top management support Vendor internal negotiations Multiple sites/countries [M] Overseas third parties and/or head offices Customization [S] Complexity [M] Client organizational culture
Risks to project process success
From client side
Client trust ‘Bad news’
From vendor side
Vendor team morale Vendor’s competition
Risks to vendor’s future business success
From commercial environment
Vendor’s reputation Legal and credit risk Contract terms and conditions
the respondents themselves made between their short-term goals of delivering a successful project to a satisfied customer, and their longer-term goals of ensuring their own firm has continued viability.
DISCUSSION It is surprising that the risks identified in Table 2 have not been included in the checklists derived from in-house project manager responses in previous risk factor studies, since a number of these risks—trust, organizational culture, ‘bad news’ and team morale, for example—have been the subject of considerable research in other contexts, and even in studies relating directly to problems with
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IT projects (Gefen, 2002; Lander, Purvis, McCray, & Leigh, 2004; Sabherwal, 1999; Smith & Keil, 2003). Moreover, half of these risks were identified by at least 10 of the 22 respondents, with the remaining nine risks being identified by between five and nine respondents, suggesting that they are not simply one-off concerns for these vendor project managers. Thus, vendor project managers who rely on the previous risk factor checklists for guidance on risk assessment of their projects may find that risks of key importance to vendor firms are overlooked. The framework that is developed in Table 2 to categorize risk factors of particular importance for outsourced package implementation projects can assist vendor project managers in their risk identification processes. In particular, Table 2
Outsourced IT Projects from the Vendor Perspective
highlights the risks not typically found in in-house risk factor lists, and emphasizes both the source of the risk and the particular aspect of success that is being threatened by the risk, so that appropriate mitigation strategies can be adopted. In particular, vendor project managers must be aware of the potentially negative effects that can arise for the vendor firm if a client’s initial expectations about both project outcome and project process are not met. They must also be vigilant for threats to their own firms from competitors and from potential damage to their firm’s reputation if the customer is dissatisfied with either the outcomes or the process of the project. In order to understand why these additional risks in Table 2 may have been omitted by respondents in previous studies, it is useful to review the purpose of risk identification in IT projects, and the role of IT projects both within the client organizations and for the outsource providers. The goal of risk management is to ensure that the project has a final successful outcome. In both generic project management texts (Gray & Larson, 2003; Kerzner, 2001; McLeod & Smith, 1996; Project Management Institute, 2000; Schwalbe, 2004) and the information systems project management literature (Aladwani, 2002; Barki, Rivard, & Talbot, 2001; Deephouse, Mukhopadhyay, Goldenson, & Kellner, 1995; Jiang, Klein, & Discenza, 2002; Linberg, 1999; Nidumolu, 1995; Smith & Keil, 2003; Yetton, Martin, Sharma, & Johnston, 2000), a project is considered successful if it meets schedule and budget constraints and delivers satisfactory outcomes i.e., meets the specified requirements or satisfies the client with respect to the final product. Most typically, IS project management studies have investigated in-house projects, where the implementation team and the project manager belong to the organization implementing the project. In these situations, the overall goal of completing the project successfully is to deliver an information system that will support and enhance the organization’s core
business. Hence, a narrow focus on project success as completion of the specified requirements within time and budget is an appropriate aim for an in-house project manager, since if these criteria are achieved, and assuming that the requirements have been well-defined, then the project will have met the overall goal of supporting the core business of the firm. In contrast, in studies of 127 product development and construction projects and 110 defense projects carried out in Israel by contract organizations for customers (Dvir, Raz, & Shenhar, 2003; Shenhar, Dvir, Levy, & Maltz, 2001; Shenhar, Levy, & Dvir, 1997), Shenhar and his colleagues argued for a broader multidimensional definition of project success, with three criteria: (1) Meeting planning goals i.e., meeting schedules and budgets; (2) providing benefits to the customer i.e., meeting the requirements and delivering a usable and improved product; and (3) providing benefits to the contractor or vendor organization i.e., building the potential for future revenues for the vendor. In these situations, the overall goal for the customer is still to have a completed project that will support and enhance the organization’s core business. However, the core business of the contracting organization or vendor is the delivery of projects to customers, and hence vendor firms have the additional goal of completing their projects so successfully that their reputation is enhanced and prospects for future business and on-going revenue are improved. Figure 1 encapsulates these differences. The dashed box labeled ‘In-house Risk Management Focus,’ showing traditional threats to project outcome success, illustrates the typical focus of in-house IT project managers on key risks that must be managed to ensure a successful outcome for their projects. When a project is outsourced, the client managers must consider both these typical project risks and additional risks to project outcome success relating to the vendor involvement. In particular, from an agency theory view
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Figure 1. Perspectives on outsourced project risk and success Aspect of Success
Client Perspective
Threats to Success Outsourcing Risks (Vendor opportunistic behavior, Interpretation of requirements, Contract monitoring)
of the vendor-agent involvement, these additional risks include possible opportunistic behavior on the part of the vendor, the potential for disagreements relating to interpretation of requirements, and difficulties in contract monitoring (Choudhury & Sabherwal, 2003; Loh & Venkatraman, 1995; Natovich, 2003; Phelps, 1996). Vendor project managers of outsourced projects have similar concerns regarding the typical risks to project outcome success but must also meet their own firms’ goals and deliver benefits for their own organization. Hence, project outcome success is only one part of their broader focus, which includes project process success and success in the wider commercial environment and the implications for the longer-term future business and viability of their firms.
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Commercial Environment Success
IMPLICATIONS FOR PRACTICE Agency theory has been used in prior research to provide a rationale for the client’s perspective on risks in outsourced projects. In particular, researchers have argued that possible goal incongruence between client-principal and vendor-agent necessitates the use of strong contracts clearly specifying required outcomes and careful monitoring of the vendor’s behavior to mitigate the risk from vendor opportunism (Basu & Lederer, 2004; Choudhury & Sabherwal, 2003; Loh & Venkatraman, 1995). However, other researchers have warned that too heavy a reliance on contract-driven controls can be counter-productive, suggesting that both client and vendor should also focus on the partnership aspects of the outsourcing relationship (Gefen, 2004; Goles, 2001; Koh, Ang, & Straub, 2004; Natovich, 2003; Sabherwal, 1999).
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The findings from the present research shed light on these apparently contradictory recommendations, since an agent’s opportunistic behavior is only likely to happen if there is goal incongruence between principal and agent (Davis, Schoorman, & Donaldson, 1997; Eisenhardt, 1989). As Figure 1 illustrates, while vendors do have additional goals related to their firms’ future businesses, these additional goals are higher level and will be adversely impacted if the vendor fails to deliver on the lower level project outcome goals. For example, suppose a vendor were to engage in opportunistic behavior in the delivery of project outcomes by insisting on interpretation of poorly specified requirements in the vendor’s favour. Such action would be likely to rebound on the vendor by causing serious client dissatisfaction both with project outcome and project process, and hence result in long-term damage to the vendor’s reputation and future business. Indeed, the respondents in the present study showed a strong concern for meeting the traditional outcome measures and ensuring that their client was satisfied with the project outcomes, in order to protect against adverse impact on their firm’s future business. Clients should still ensure that they take care when selecting a vendor and that they do clearly set out contractual expectations at the pre-sales stage. However, once the contract has been agreed, both client and vendor are likely to benefit from a more collaborative partnership approach to the management of the implementation stage of outsourced projects. A final implication for practice is the identification of location-specific risks, which have not been included in previous studies. It seems obvious that multi-location projects, especially those involving overseas third parties or overseas head offices, will have increased logistical and communication risks. However, the omission of such risks in previous checklists raises the possibility that they will be overlooked, with a resulting failure to take appropriate risk mitigation actions.
IMPLICATIONS FOR FUTURE RESEARCH A central proposition resulting from the present study is that, in contrast with in-house project managers, vendor project managers must manage not only the risks that impact directly on the project outcome success, but also longer-term risks that arise from the project performance and can threaten higher-level goals such as the vendor firm’s future business and viability. The findings reported here suggest that these higher-level concerns on the vendor side for their future business and reputation in the marketplace mitigate the risk to the client of opportunistic behaviour by the vendor. Researchers examining the client-vendor relationship in outsourced software implementation projects should exercise caution in using the agency theory lens to interpret their findings, as the real situation is likely to be more complex. Future studies drawing on agency theory perspectives would benefit by examining the client-vendor relationship from both sides, and by separating the pre-contractual stage of the project from the implementation stage.
CONCLUSION The study reported here has identified additional risk areas, not previously discussed in the IT project risk factor literature, that are particularly important for vendor project managers implementing outsourced software package projects for clients. Previous studies on risk factors in IT projects have focused primarily on in-house development projects, and have been based on traditional concepts of IT project success, focusing on time, budget and requirements goals. The model of different perspectives on project risks and success developed in Figure 1 extends our understanding of the project success concept in the IT outsourcing environment, highlighting
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the key difference for vendor firms, namely that each IT project they deliver is an integral part of their core business. Thus, risk assessments carried out by vendor firms for these projects should consider not only the operational threats to successful delivery of project requirements on time and within budget, but also potential strategic threats to the future business and reputation of the vendor firm itself. While the Hong Kong location of the respondents in this study raises the possibility that the findings are country/culture specific, the sample included respondents from a broad range of backgrounds and nationalities. All of the respondents had trained or worked abroad at some stage in their careers, and all had experience working in a wide variety of different cultures. Over half of the respondents had worked on large multinational projects, and most had experience with software packages that are marketed globally. Hence, the respondents may be considered to be a cosmopolitan cross-section of project managers, and the results are unlikely to show any mono-cultural bias. Indeed, the location-specific risks, such as multi-location projects and overseas third parties, have implications for any managers working with multinational outsourced projects that cross traditional country/culture boundaries.
Alter, S., & Sherer, S. (2004). A general, but readily adaptable model of information system risk. Communications of the Association for Information Systems, 14, 1-28.
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This work was previously published in the Journal of Global Information Management, Vol. 15, Issue 2, edited by F. Tan, pp. 1-27, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.6
Business Strategies for Outsourcing Information Technology Work Subrata Chakrabarty Texas A&M University, USA
INTRODUCTION Firms pursue various strategies to exploit resources and capabilities and gain a competitive advantage (Porter, 1996). Interfirm relationships are collaborative agreements between organizations (Chakrabarty, 2006a; Whetten, 1981), and firms need to be careful in adopting suitable strategies to deal with interfirm relationships (Chakrabarty, 2007b). Interfirm relationships represent a sort of trade-off that organizations must make, whereby, in order to gain resources of other organizations, an organization must relinquish some its independence because the relationship also brings certain obligations with it (Whetten, 1981). Top management strategists might find their commitments to other firms as a sort of liability, and therefore, a serious evaluation of whether the benefits from the interfirm relationship outweigh the inevitable costs is needed before entering into interfirm relationships (Whetten, 1981).
Outsourcing is an Interfirm Relationship Between a Customer Firm and Supplier Firm Work is outsourced to suppliers by a customer firm. A customer firm is therefore a firm that is in need of services, and a supplier firm is a firm that provides those services. The common synonyms for “customer” firm are either “client” firm or “buyer” firm. The common synonyms for “supplier” firm are either “vendor” firm, “consultant” firm, “third-party”, or external service provider. This chapter will provide a useful summary of some strategies that customer firms can use for outsourcing information technology work to a supplier firm (Chakrabarty, 2006b, 2006c). For further information, readers are encouraged to refer to Chakrabarty (2006c) for real life case studies, and refer to Chakrabarty (2006b, 2007a, 2007b) for a deeper understanding of the advantages and disadvantages of various outsourcing strategies.
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BACKGROUND This section will provide some basic background information on outsourcing. Lacity and Hirschheim (1995) categorized the primary strategies of sourcing work into a continuum that ranges from total outsourcing at one extreme to total insourcing at the other extreme, and had selective sourcing as an intermediate strategy. Total outsourcing strategy is the strategy of a customer firm to outsource at least 80% of its information technology (IT) budget to suppliers. Total insourcing strategy (the opposite of outsourcing) is the strategy where a customer firm formally evaluates outsourcing but selects its own internal IT departments’ bid over external supplier bids, and thereby allocates over 80% the IT budget to its internal IT department. Selective outsourcing strategy is the strategy whereby the customer firm opts to use suppliers for certain IT functions (representing around 20 to 60% of the overall IT budget, typically around 40%), and retains the remaining work for its internal IT department (Lacity & Hirschheim, 1995). Further, Gallivan and Oh (1999), categorized the strategies for outsourcing on the basis of number of customers and suppliers into dyadic, multisupplier, cosourcing and complex outsourcing as follows. In a dyadic outsourcing strategy, there is just one customer and one supplier, that
is, a customer firm uses only one supplier for a given activity, and the supplier in turn performs the given activity only for that customer firm. In a multisupplier outsourcing strategy, there is only one customer but many suppliers, that is, a customer firm uses many suppliers for a given activity. In a cosourcing strategy, there are many customers and only one supplier, that is, many customer firms jointly sign an outsourcing contract with a single supplier firm. In a complex outsourcing strategy, there are many customers and many suppliers; that is, it involves combining multiple customer firms and multiple supplier firms into a single contract (Gallivan & Oh, 1999). Chakrabarty (2006b, 2006c) described how the location of the supplier to which work is outsourced can vary (see Figure 1). When a domestic-outsourcing strategy is adopted, both the customer and the supplier are located in the same country (this is also termed as onshoreoutsourcing). In contrast, a customer and supplier can be located in different countries, and this known as a global outsourcing strategy. Though the term global outsourcing is widely referred to as offshore outsourcing, it can also be further classified into nearshore-outsourcing versus offshoreoutsourcing. When a nearshore-outsourcing strategy is adopted, the chosen supplier located in a country that is geographically close to (but not the same as) the customer’s country. When
Figure 1. Location of supplier in outsourcing
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an offshore-outsourcing strategy is adopted, the chosen supplier is located in a country that is geographically far away from the customer’s country. Time zones may also need to be factored during the formulation of strategy, because with improvements in communication technology and the need for 24x7 coordination of work, the time zones may be a bigger concern than geographical distance. We will now move on to more refined business strategies that can be used for outsourcing information technology work.
BUSINESS STRATEGIES FOR OUTSOURCING INFORMATION TECHNOLOGY WORK Strategy of outsourcing selectively in a modular or flexible manner. A strategy often recommended to customer firms is that a selective set of information technology (IT) tasks need to be retained in-house based on the firm’s own strengths and capabilities, and any remaining IT work that can be better performed by suppliers should be outsourced to the suppliers. Selective outsourcing is the strategy of outsourcing select IT tasks to suppliers, while retaining other IT tasks in-house (Lacity, Willcocks & Feeny, 1996). In selective sourcing, customer firms outsource between 20 to 60% of the IT budget to suppliers while still retaining a substantial amount of work for the internal IT department (Lacity & Hirschheim, 1995; see also Dibbern, Goles, Hirschheim & Jayatilaka, 2004, p. 10), and accordingly capitalizes on the strengths of both the internal IT department and the external suppliers. This is a flexible and modular form of outsourcing where work is broken down into multiple modules, of which, some are outsourced and some are retained in-house. This strategy of selective outsourcing has been given various other names such as smartsourcing, right-sourcing, flexible outsourcing, and modular outsourcing.
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Strategy of hiring multiple suppliers for an activity. Klotz and Chatterjee (1995) suggested that when a customer sources from two suppliers, it prevents the customer firm from being held by hostage by a monopolistic supplier, and it helps the customer firm to derive cost advantages due to competition among the suppliers. Currie and Willocks (1998) suggested the following three advantages of a multiple-supplier outsourcing strategy: (a) the customer firm is protected from being dependent on a single supplier, (b) the customer firm can use short-term contracts that may not be renewed with the same supplier (or combination of suppliers) and this encourages competition among the suppliers, and (c) the customer firm can focus on its core business while the suppliers manage and provide IT services. Such a strategy of multi-supplier outsourcing involves one-to-many relationships, indicating that one customer uses multiple suppliers with whom the division of labor is negotiated (Gallivan & Oh, 1999; see also Dibbern et al., 2004). Based upon the agreed division of labor, the various IT tasks are then jointly performed by the multiple suppliers, and this requires a cooperative environment among the suppliers, even though the suppliers are actually competing with each other for future business from the same customer (for case studies, see Chakrabarty, 2006c). Strategy of contractually linking payments to realization of benefits - customer’s performance determines supplier’s revenue. A strategy where both the customer and supplier make upfront investments into a relationship and thereafter share both the risks and benefits is termed as a strategy of forming benefit-based relationships (Sparrow, 2003). Here, the customer firm makes its payments to the supplier depending on the specific benefits received. For example, if a customer can obtain potential business benefits by using the information technology services provides by a supplier, then the customer can establish a payment methodology that links the payments to the supplier with the extent to which the customer
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benefits from the services. Hence, the supplier’s earnings from the customer firm to which it is providing services is linked to the performance of the customer (Willcocks & Lacity, 1998). This strategy is also termed as business benefit contracting, because it involves contracts that define the payments the customer will make whenever the customer earns excess revenues by using the supplier’s services, and this arrangement essentially allows the sharing of both risks and rewards (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). The supplier provides services to the customer firm in manner that would ideally improve the customer firm’s performance (Chakrabarty, Whitten & Green, 2007), and the customer evaluates the extent to which any improvement in its own performance is due to the supplier’s contribution, and pays the supplier proportionately. Though such business benefit contracting has its advantages, it is often hard to adopt due to the challenges associated with negotiating and measuring the contractual criteria for sharing risks/costs and rewards/revenues (Lacity & Hirschheim, 1995). Strategies of sharing risk and rewards using ownership and control structures. Novel ownership and control structures can be used to institutionalize the sharing of risk and rewards in two ways: (a) creating a new joint venture company where both the customer and supplier firms have ownership stakes, or (b) the customer firm can purchase share/equity for partial ownership of a supplier firm, and the supplier can similarly purchase share/equity for partial ownership of the customer firm (Currie & Willcocks, 1998; Sparrow, 2003; Willcocks & Lacity, 1998). These options are also known as strategic alliances. The first strategy involves the customer and supplier firms creating and sharing ownership in a new joint-venture firm that has its own management team and IT employees, and the customer firm can outsource technology work to the joint venture company. Such joint venture companies enable the customer to gain access to new techni-
cal skills and resources, reorganize IT functions and processes and investigate new sources of revenue (Sparrow, 2003). Since the ownership of the new joint venture company is shared, the risks and rewards are also shared by the customer and supplier firms. The second strategy involves equity holding deals, where the customer purchases enough shares of a supplier firm to partially own the supplier firm, and the supplier may also purchase enough shares of the customer firm to partially own the customer firm (Willcocks & Lacity, 1998). This automatically aligns the interests of both the customer and supplier firms, because each will benefit when the other performs well, and this arrangement motivates both the firms to share the risks and rewards. Strategies for short-term requirements. A strategy for filling short-term labor demands is body shop outsourcing, whereby the customer goes shopping for “bodies” or human resources from suppliers. In other words, contract staff (such as programmers) are provided by a supplier, and these contract staff work at the customer firm’s office and report directly to the customer firm’s management executives (Lacity & Hirschheim, 1993). The contracted staff are therefore the supplier’s paid employees who work under the supervision of the customer at the customer site. Another strategy for getting temporary access to human resources for a short period of time is called tactical outsourcing (also known as contracting-out or out-tasking) (Sparrow, 2003). This strategy involves signing short-term outsourcing contracts with competent supplier firms who have the necessary technical skills to provide rapid solutions whenever the customer firm finds itself short of in-house employees to complete tasks in quick time. Strategy of hiring a supplier for maintenance of technology assets. Most firms own a large amount of technology assets and infrastructure within their own facility (for example, hardware that needs maintenance or software that needs
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regular upgrades). A suitable strategy might be to hire a supplier who can offer the expertise and personnel to maintain the customer’s technology assets and also lower the costs of maintaining these technology assets. That is, the customer owns the technology assets in the given facility, but hires a supplier to take over the operational control of these assets. This strategy is often termed as facilities-management outsourcing (Dibbern et al., 2004; Sparrow, 2003). Strategy of outsourcing the process of setting up new offices/facilities abroad. Firms often need to expand their presence to new locations abroad, and this a challenge because the firm may not be knowledgeable about the processes of setting up an office/facility in the new location (Chakrabarty, 2007a). A suitable strategy to deal with this challenge is known as managed offshore facilities’ strategy, whereby the customer firm outsources the process of creating its foreign subsidiary office to a supplier. Once the facility is up and running at the new location, the customer can take over the full ownership and control of the facility. At times, the customer firm retains the supplier for the long-term maintenance of the facility. A variant of the managed-offshore-facilities strategy is the build-operate-transfer strategy, whereby the supplier manages the process of creating the facility in the foreign location, and the customer firm has the option of taking full ownership by a specified date (i-Vantage, n.d.; Kobyashi-Hillary, M., 2004, p. 153). Hence, this outsourcing strategy has the potential to reduce many hassles for a firm that decides to set up its own subsidiary at a foreign location (for more details on the process of setting up a subsidiary abroad, see Chakrabarty, 2007a). Strategies to strengthen the internal IT department. Though growth in the outsourcing of technology work is often assumed to be at the expense of the customer firm’s internal IT department, a contrasting fact is that outsourcing can also be used to strengthen the internal IT department (Green, Chakrabarty & Whitten, 2007). Firms
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sometimes undergo major transitions or technology overhauls in order to make use of newer technologies and bring in more efficiency. Suppliers can be used during this growth or maturation process of the customer’s own IT department. For example, during a major changeover or transition, such as migration from a old technological platform to a modern technology platform, the customer firm can handover the management of the older systems to a supplier while the customer’s IT department focuses on the transition to new technology. This is known as transitional outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995). A similar scenario whereby a certain work is outsourced to a supplier while the internal IT department transitions itself to a new set of skills is called a transition-assistance strategy (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004).
FUTURE TRENDS Two distinct strategies that have gained prominence in recent times and are likely to be future trends are as follows. The use of a supplier that can provide teams at multiple locations, that is, a supplier team is at the customer site for coordination, while other skilled teams from the same supplier work at locations across the world at a lower cost. The renting of information technology services on a subscription basis. Strategy of using suppliers with global capabilities. Distributed consulting implies that a supplier chosen by a customer has the ability to provide teams both at the customer’s location and at the supplier’s own location (Chakrabarty, 2006c). A global delivery model implies that the supplier can take advantage of the global talent pool and provide maximum value to the customer in terms of both quality and cost, by dividing the outsourced work into modules and distributing the modules to appropriate global locations (Infosys, n.d.).
Business Strategies for Outsourcing Information Technology Work
Customer firms are increasingly adopting the strategy of offshore-outsourcing, that is, the chosen supplier is located in a country that is geographically far away from the customer’s country (Chakrabarty, 2006c). This can be carried out more effectively by adopting a strategy of choosing a supplier that can provide supplier teams both at the customer’s on-site location and at the supplier’s offshore location. The supplier team at the customer site coordinates face-to-face with customer (Chakrabarty, 2006a), and the bulk of the outsourced work is carried out by the offshore supplier team (for case studies, see Chakrabarty, 2006c). Large IT service providers from India, such as TCS (http://www.tcs.com), Infosys (http:// www.infosys.com), and Wipro (http://www.wipro. com), have incorporated such distributed consulting practices into their global delivery model (for case studies, see Chakrabarty, 2006c). Strategy of accessing remotely hosted IT applications. One strategy that a customer firm can adopt for outsourcing information technology work is to rent the required service on a subscription basis (Chakrabarty, 2006b). Similar to the manner in which employees of a customer firm can access software applications installed on a LAN or data center within the customer firm, the customer firm’s employees can also access a software application that is installed on a remote server under the control of the supplier. That is, the remote server resides at the supplier’s data center and is accessed by the customer firm through a dedicated line, Internet, or extranet (Dewire, 2000). Hence, the suppliers develop, customize, install, and manage the software applications at the remote locations and host them for their customers over a suitable network or the Internet. Such suppliers are called application service providers (ASP) (Bennett & Timbrell, 2000; Susarla, Barua & Whinston, 2003), and this type of outsourcing strategy has been given various names such as net-sourcing (Kern, Lacity & Willcocks, 2002), on-demand service, application utilities, realtime delivery and software-as-a-service (Pring
& Ambrose, 2004), all of which allow access to externally managed software applications.
CONCLUSION Outsourcing is an interfirm relationship between a customer firm and supplier firm, where the customer firm is in need of services and the supplier firm provides those services. Since such interfirm relationships are essential for most businesses, and this chapter suggested that firms need to be careful in adopting suitable strategies. An array of strategies that can be used for both domestic and global outsourcing of information technology work were described, so that business managers can choose an appropriate strategy in order to get the best deal for their information technology needs.
REFERENCES Bennett, C. & Timbrell, G. (2000). Application service providers: Will they succeed?. Information Systems Frontiers, 2(2), 195-211. Chakrabarty, S. (2006a). A conceptual model for bidirectional service, information and product quality in an IS outsourcing collaboration Environment. In Proceedings of the 39th Annual Hawaii International Conference on System Sciences (HICSS’06). Retrieved June 17, 2008, from http://doi.ieeecomputersociety.org/10.1109/ HICSS.2006.7 Chakrabarty, S. (2006b). Making sense of the sourcing and shoring maze—The various outsourcing & offshoring alternatives. In H. S. Kehal & V. P. Singh (Eds.), Outsourcing & offshoring in the 21st century – A socioeconomic perspective (1st ed., pp. 18-53). Hershey, PA: IGI Publishing. Chakrabarty, S. (2006c). Real Life Case Studies of Offshore Outsourced IS Projects: Analysis of
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Issues and Socio-Economic Paradigms. In H. S. Kehal & V. P. Singh (Eds.), Outsourcing & Offshoring in the 21st Century – A socio economic perspective (1 ed., pp. 248-301). Hershey, PA: IGI Publishing.
Green, K. W., Chakrabarty, S., & Whitten, D. (2007). Organisational culture of customer care: Market orientation and service quality. International Journal of Services and Standards, 3(2), 137-153.
Chakrabarty, S. (2007a). The journey to new lands: Utilizing the global IT workforce through offshore-insourcing. In P. Young & S. Huff (Eds.), Managing IT professionals in the internet age (1st ed., pp. 277-318). Hershey, PA: IGI Publishing.
Infosys (n.d.). Global delivery model. Retrieved June 17, 2008, from http://www.infosys.com/ gdm/default.asp
Chakrabarty, S. (2007b). Strategies for business process outsourcing: An analysis of alternatives, opportunities and Risks. In J. Sounderpandian & T. Sinha (Eds.), E-business process management: Technologies and solutions (1st ed., pp. 204-229). Hershey, PA: IGI Publishing. Chakrabarty, S., Whitten, D., & Green, K. W. (2007). Understanding service quality and relationship quality in IS outsourcing: Client orientation & promotion, project management effectiveness, and the task-technology-structure Fit. Journal of Computer Information Systems, 48(2), 1-15. Currie, W. L. & Willcocks, L. P. (1998). Analyzing four types of IT sourcing decisions in the context of scale, customer/supplier interdependency and risk mitigation. Information Systems Journal, 8(2), 119-143. Dewire, D. T. (2000). Application service providers. Information Systems Management, 17(4), 14-19. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Gallivan, M. J. & Oh, W. (1999). Analyzing IT outsourcing relationships as alliances among multiple clients and vendors. In Proceedings of the 32nd Annual International Conference on System Sciences, Hawaii.
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i-Vantage. (n.d.). Global insourcing services. Retrieved June 17, 2008, from http://www.i-vantage. com/GlobalInsourcingServices.html Kern, T., Lacity, M. C., & Willcocks, L. P. (2002). Netsourcing: Renting business applications and services over a network. New York: Prentice Hall. Klotz, D. E. & Chatterjee, K. (1995). Dual sourcing in repeated procurement competitions. Management Science, 41(8), 1317-1327. Kobyashi-Hillary, M. (2004). Outsourcing to India: The offshore advantage. Berlin, Germany: Springer-Verlag. Lacity, M. C. & Hirschheim, R. A. (1993). Implementing information systems outsourcing: Key issues and experiences of an early adopter. Journal of General Management, 19(1), 17-31. Lacity, M. C. & Hirschheim, R. A. (1995). Beyond the information systems outsourcing bandwagon: The insourcing response. Chichester: Wiley. Lacity, M. C., Willcocks, L. P., & Feeny, D. F. (1996). The value of selective IT sourcing. Sloan Management Review, 37(3), 13-25. Porter, M. E. (1996). What is strategy? Harvard Business Review, 61-78. Pring, B. & Ambrose, C. (2004). Vendors vie for competitive position in ASP market. Gartner research Sparrow, E. (2003). Successful IT outsourcing. London: Springer-Verlag.
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Susarla, A., Barua, A., & Whinston, A. B. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-123. Whetten, D. A. (1981). Interorganizational relations: A review of the field. Journal of Higher Education, 52, 1-28. Willcocks, L. & Lacity, M. (1998). Strategic sourcing of information systems. Chichester: Wiley.
KEY TERMS Application Service Providing / Net-Sourcing / On-Demand: Accessing remotely hosted information technology (IT) applications Benefit Based Relationships / Business Benefit Contracting: Linking payments to realization of benefits; customer’s performance determines supplier’s revenue. Body Shop Outsourcing: Using contract personnel. Cosourcing: Many customers and only one supplier: Many customer firms jointly sign an outsourcing contract with a single supplier firm. Distributed Consulting: Supplier has teams both at onshore and offshore. Global Delivery: Large supplier delivering services from various global locations to customers at various global locations.
Managed Offshore Facilities: Outsourcing the process of setting up a subsidiary abroad. Multisupplier Outsourcing / Dual Sourcing: A customer firm uses many suppliers for a given activity. Nearshore-Outsourcing: Chosen supplier is located in a country that is geographically close to (but not the same as) the customer’s country. Offshore-Outsourcing (A Form of Global Outsourcing): Chosen supplier is located in a country that is geographically far away from the customer’s country. Onshore-Outsourcing / Domestic Outsourcing: Both customer and the supplier are located in the same country. Outsourcing: Interfirm relationship between a customer firm and supplier firm, where the customer firm is in need of services and the supplier firm provides those services. Selective / Smart / Right / Flexible / Modular Sourcing: Outsourcing and insourcing optimally and selectively; A customer firm uses suppliers for certain IT functions which represents between 20 and 60% of the IT budget (typically around 40%) and therefore retains substantial work for its internal IT department. Tactical Outsourcing / Contracting-Out / Out-Tasking: Outsourcing for short term access to skilled professionals. Transitional Outsourcing: Outsourcing during a major changeover; Helping the customer’s IT department mature.
This work was previously published in the Encyclopedia of Information Science and Technology, 2nd Edition, edited by M. Khosrow-Pour, pp. 483-488, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.7
Outsourcing Non-Core Business Processes: An Exploratory Study Adriana Romaniello Universidad Rey Juan Carlos, Spain B. Dawn Medlin Appalachian State University, USA
ABSTRACT
INTRODUCTION
This study examines corporate performance effects when banks outsource noncore business processes. Additionally, the article proposes that knowledge management process plays a significant role in determining the outcomes of outsourcing. Drawing from resource theory and knowledge management literature, the authors develop the concept of managerial outsourcing competence and then propose a conceptual model. Also presented is an exploratory study of members of the North Carolina Bankers Association to assist in identifying the business processes they are currently outsourcing and their principal reasons for outsourcing.
Outsourcing has been defined as a results-oriented relationship in which a business organization transfers ownership of a business process to an external service provider rather than perform the activity in house (Halvey & Melby, 2000). For some, the hint of outsourcing may be found as early as 1776, when, in The Wealth of Nations, Adam Smith wrote the following: “If a foreign country can supply us with a commodity cheaper than we can ourselves make it…” (Adam Smith Institute, 2007). This may have been one of the hints of the forthcoming principles related to outsourcing and later building on Adam Smith’s ideas was British economist David Ricardo and his principle of comparative advantage, where he hypothesized that each nation should specialize
in what it does best and trade with others in order to best meet their needs (Ricardo, 2004). Certainly, the issues of competitive pressures, customer demands, cost efficiency, and the ability to gain access to world-class capabilities are considerations that have all manifested themselves in the increased use of outsourced functions. When the choice is made to outsource, and the move involves a vendor located in a different nation, outsourcing then becomes offshoring. Business process outsourcing is another type of outsoucing that also relates to the investment of physical resources while still attempting to maintain internal effectiveness. In fact, one of the most commonly cited reasons for outsourcing is that management expects that they can gain cost advantages by hiring outsiders to perform certain services and produce certain products (Loh & Venkatraman, 1992). Banking activities that are not inherently or typically part of a bank’s core functions are therefore logical processes thought generally suitable by management for outsourcing. Additionally, the implementations of such activities in-house can be prohibitively costly to smaller institutions. For years, the financial industry has relied on the outsourcing of services where banks could seek advanced technologies and greater economies of scale while still lowering costs. It should be expected that the use of outsourcing will only increase as banks expand their product lines (e.g., Check 21 processing). Check 21 was specifically designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. More specifically, the Check 21 law that was created in 2004 introduced the notion of a substitute check, which permitted banks to process check information electronically. Other methods of electronic processing have also been introduced to handle electronic check transfers. As an example, Amar Gupta and a team of MIT researchers have developed a fully electronic check transfer that can read handwritten
infomation in order to increase check processing efficiency and accuracy, which may be of interest to countries outside of the U.S., where powerful banks are in a position to better control their overall check processes (“Gupta Eyes,” 2007). Within the current process, check processing is an expensive prospect for banks due to the high cost of the technology required, and thus makes Check 21 processing a logical process to be outsourced by community banks. In his March 17th, 2004, satellite address before the Independent Community Bankers of America Convention, Alan Greenspan stated, “Over the past 5 years, for every four bank mergers that have been approved, three de novo bank charters have been granted” (“Technology Outsourcing,” 2005). Additionally, he added that 90% of all start-up banks will choose to outsource and that, overall, it is expected that all banks will use some type of outsourced services. Financial institutions have been outsourcing technology projects for more than 30 years in their desire to reduce costs, focus on their core business, obtain knowledge, and increase efficiency and productivity. In particular, and within the past 10 years, the competition for customers and the consolidation of banks has brought these aforementioned issues to the forefront, as well as the need to outsource, both on and offshore, these activities in order to achieve the desired results. Starting in the 1970s, the outsourcing trend began mainly with banks outsourcing software development and maintenance (http://www.financetech.com/showArticle.jhtml?articleID=17500105). Projects ranged from straightforward tasks such as application maintenance to complex longterm projects. Today, outsourcing large, complex technology projects is making a comeback, as evinced by J. P. Morgan Chase’s recent decision to outsource their technology infrastructure to IBM. In the 1990s, banks began to outsource business processes as well as technology projects. In the banking industry, the first forays into business
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processing outsourcing traditionally involved offshore call centers and credit card transaction processing. As an example, offshore call center outsourcing agencies in the Philippines have been quickly increasing their share of the global call center market resulting in more than 100 centers in different locations in the Philippines (http:// www.piton-global.com/resource13.html). In March 2007, Deloitte Research reported that financial institutions worldwide were increasingly interested in sending their IT work to lower cost countries such as India and China. The research group surveyed 27 global financial institutions around the world and indicated that 33% of the respondents had already sent IT work offshore; 75% said they will have work going to offshore companies within the next 2 years (“Deloite,” 2006). By 2015, it is estimated that there will be more than 472,632 jobs in the information technology field that are expected to move offshore to countries like Russia, China, India, and the Philippines, according to a November 2002 report by the Forrester Research Group Inc. Banking firms such as Bank of America (BofA) will send about one third of their systems programming jobs to India, where work costs approximately $100.00 U.S. vs. $20.00 U.S. an hour. In additon, Bank of America cut 3,700 of its 25,000 technical and back-office jobs in 2002 with an estimated 1,100 jobs being lost in 2003 (“Banking & Securities,” 2003). A majority of these positions will be sent to IT companies in India, where new technology parks are being built by companies partnering with U.S. firms such as Infosys Technologies Ltd. (“Banking & Securities,” 2003). In Europe, global cost competition forces financial companies such as ABN, AMRO Bank, and Deutsche Bank to bring their cost base in line with that of competitors from the U.S., such as American Express and Citigroup, which have already made aggressive use of cheaper offshore operations and services. Forrester’s 2004 research
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into offshore services spending by European firms’ shows what they call “two speed Europe” because of the differences between the United Kindom and other continental countries. Europe, along with the 16 countries they considered in their sample, will lose a cumulative 1.2 million jobs to offshore locations by 2015 (65% from UK), with financial firms being the largest and most aggressive of the offshoring participants. During the same period in the U.S. (2004-2015), they found a cumulative figure of 3.3 million jobs moving offshore, which has a smaller population overall than the 16 European countries studied (Parker, 2004). While India is still the first choice of many companies’ favorite outsourcing destinations, especially the UK, other countries within Central and Eastern European (CEE) are the favorite sites for Western European countries to develop near-shoring activities. Near-shoring outsourcing is generally defined as the outsourcing of work to companies with the economic benefits of an offshore location, but a closer cultural, linguistic, and geographic fit with the employing organisation. Also, from the total European jobs moving offshore forecasted by 2015, 13% are IT jobs, 34% are clerical jobs, 29% are business and management jobs, 20% are science and engineering jobs, and 4% are others type of jobs (Parker, 2004). Thus, despite the differences in the outsourcing process, both U. S. and European companies must essentially become involved within this type of process because of two reasons: (1) they are in a global marketplace with global competition, and (2) they must bring their cost base in line with their competitors. The process of offshoring, as stated earlier, is a must, and the development of managerial outsourcing competence is part of the process companies must participante in to remain competitive. Nevertheless, this is not enough to be competitive, because there are a large number of vendors offering excellent managerial outsourcing services. Because of this, we believe that the outsourcing process will impact on a company’s profit margin if they seize this opportunity to
Outsourcing Non-Core Business Processes
focalize on their core competences through a knowledge management process.
OBjECTIVES Although recent studies have examined the relationship between outsourcing and firm performance, this research stream continues to be hampered by the lack of a widely accepted conceptualization of managerial outsourcing competence (MOC). The resulting body of research still continues to be contradictory and rely on differing conceptualizations, levels of analysis, and OC-related measures. During the outsourcing process, organizations improve their knowledge about themselves and are learning and acquiring skills and new competences. Ex-ante outsourcing decision making includes two basic components of outsourcing capabilities: leadership in order to motivate the members of the organization and to resolve political and economic conflicts intra- and interorganizational, and an adequate organizational structure that can respond with flexibility to the requirement of strategic changes. Ex-post outsource decision making involves the managing of relationships with the vendors that necessitates the signing of good contracts, monitoring them, and building long-term and trusting relationships, because of the impracticality that all possible contingencies could be included within the contracts. During this process the organization has been developing a deeper knowledge about itself, and a new strategic vision about the resources and capabilities which allows for the possibility of still maintaining a competitive advantage in the market. Therefore, we suggest that the organization develops new competencies as a result of the outsourcing decision-making process and that these competencies will spill over throughout the knowledge management process (KMP). Accordingly, the first objective of this article is to develop a conceptualization of managerial
outsourcing competence in a form that will address these issues. As discussed in the next section, we propose the notion of outsourcing competences consisting of a construct of three components: (a) modular organizational design, (b) strategic outsourcing leadership, and (c) outsourcing relationship management. The second objective of this article is to develop a better understanding of how outsourcing competences impact a firm’s performance. It is not clear how outsourcing competences affects the specific organizational processes that contribute to improve firm performance. The basic contention of this article is that the outsourcing decision may not necessarily improve firm productivity or profitability; it is the generation of additional competencies that is more important to achieve this aim. By developing managerial outsourcing competence and using it to leverage knowledge management processes, firms are in a better position to enhance their performance. In the sections that follow, we begin with a conceptual background, and then we provide an overview of the resource-based approach that forms the theoretical basis for our work. We then discuss the concepts of managerial outsourcing competence and knowledge management process. Following this, we develop a conceptual model with three propositions representing the relationships between managerial outsourcing competencies, knowledge management process, and performance. We propose to test our hypothesis with the structural modeling technique in future work and we present in this article a statistical exploratory test supported by a survey administrated to bankers who are members of the North Carolina Bankers Association.
CONCEPTUAL BACKGROUND Embedded in the general stream of research that seeks to understand how firm resources and ca-
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pabilities are combined to produce some form of competitive advantage, the study of how outsourcing capabilities affects the strategic management of organizations continues to demand considerable attention. Prior to 1990, most of the literature focused on the importance of outsourcing and its potential to alter a whole range of strategic and industry structure variables, including cost positions. More recently, the focus of the literature has shifted to the relationship between outsourcing and specific components of the firm strategy, such as competitive advantage (Aranha & Wheelwright, 2007; Goo et al., 2000; Krebsbach, 2004), and organizational performance (Gilley & Rasheed, 2000). A review of this literature reveals that most of the earlier conceptual work tends to favor the notion that outsourcing can be used favorably to create a competitive advantage and sustain firm performance. However, emerging empirical evidence has shown that outsourcing does not necessarily create a competitive advantage and that there is no significant direct connection between outsourcing and performance (Barthélemy & Quélin, 2006; Gilley & Rasheed, 2000). To provide a possible explanation for this discussion, we draw on the resource-based view (RBV).
Resource-Based View Grounded in evolutionary economics and the work of Penrose (1959), the RBV has gained considerable attention during the last decade (Barney et al., 2001). In RBV, the firm is seen as a bundle of tangible and intangible resources and tacit know-how that must be identified, selected, developed, and deployed to generate superior success (Penrose 1959, Wernerfelt 1984). Competitive advantage originates from firm heterogeneity in resources and capabilities through barriers to imitation by investing in inimitable idiosyncratic capabilities (Lippman & Rumelt, 1982) and leveraging these firm-corespecific assets for competitive advantage. Firms
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can achieve sustained competitive advantage by accumulating resources which produce economic value, are relatively scarce, and can sustain attempts at imitation, acquisition, or substitution (Barney, 1991). According to the RBV, managerial outsourcing competence (MOC) per se may not generate a sustainable advantage, because it can be replicated. We see the most important vendors in the world are offering their expertise in financial services consulting, technology, and outsourcing. For example, Accenture Ltd has a 10-year contract with Caixa de Catalunya, Spain’s third largest savings bank. Accenture is providing outsourcing for Caixa´s technology infrastructure, as well as system integration, application maintenance and technical help service. The work is completed through ITC, a company jointly owned by Caixa and Accenture that also provides services to other Spanish firms (SharedExpertiseForums, 2005). However, the advantages of outsourcing capabilities can be protected by embedding it in an organization through complementarities and cospecialization. Complementarities is said to exist when the value of one resource is enhanced by the presence of another. For example, the complementary use of information technology and human resources leads to superior firm performance (Powell & Dent-Micallef, 1997). Resources rarely act alone in creating or sustaining competitive advantage (Wade & Hulland, 2004). They play an interdependent role with other firm resources (Keen, 1993). This is particularly true in managerial outsourcing capabilities that act with other firm resources to provide strategic benefits. Thus, in banking environments, while managerial outsourcing competence may be essential to compete, it in itself conveys no particular sustainable advantage of one bank over another. The value of managerial outsourcing competence is enhanced when banks use it to develop the concentrating resources process, focusing on its core competences. Consequently, in this article, we focus on the role that knowledge manage-
Outsourcing Non-Core Business Processes
ment plays in enhancing the value of managerial outsourcing competence. Cospecialization is said to exist if one resource has little or no value without another (Clemons & Row, 1991). We suggest that managerial outsourcing competence should not be examined as a stand-alone resource. In our article, we examine how managerial outsourcing competence as a resource can be embedded in an organization and protected through cospecialization. For example, a firm possessing a modular organizational design will realize very little advantage if it does not have the necessary outsourcing leadership to drive it successfully. In the next section, we describe the concept of managerial outsourcing competence and suggest that it consists of three cospecialized resources: modular organizational design, strategic outsourcing leadership, and outsourcing relationship management. We then follow with a discussion of the components of knowledge management processes and examine the link between managerial-outsourcing competence and knowledge-management processes in order to determine how they might interact to enhance firm performance.
Managerial Outsourcing Competence Modular Organizational Design Modular organization design refers to the need of structuring the organization in business processesECT (electronic communication technologies) enabled. Banks operate in dynamic environments and must be continuously innovative in order to create and sustain a competitive advantage. This need brings into focus the importance of the flexibility of the organization through modular business processes in order to enable organizational adaptation. Business processes are activities structured and organized according to a predefined flow that allow an organization
to carry out its business. Many of the business processes require process interdependencies and system dependencies that are established through integration of the business processes (Moitra & Ganesh, 2005). Because communication is integral to organizational form, advances in communication capabilities through electronic technologies are implicated in a wide variety of changes in forms. ECTs are enablers of changed forms by offering capabilities to overcome constraints on time and distance, key barriers around which organizational forms have traditionally been designed. Electronic communication systems are also configurations that may be shaped as organizations evolve and change (Fulk & DeSantis, 1995). Following Orlikowski, Yates, Okamura and Fujimoto (1995), electronic technologies can be viewed as an opportunity for structuring. In this view, communication technologies offer users opportunities to manipulate both the communication technologies themselves as well the organizational contexts in which they are embedded. When a hierarchical organization such as a bank elects to outsource with other firms, their value chain becomes fundamentally altered. New forms of coupling may be developed through communication technology, in what has been termed the electronic integration effect (Zaheer & Venkatraman, 1994). Defining and implementing flexible business processes supported by flexible ECT systems is of significance to organizations because this allows them to collaborate with partners in new ways which can result in inimitability of the processes, and in turn allow them to adapt to the changing environment. The modular design of organizations through business processes allows them to be prepared to outsource some of their functions, as seen in Table 1. We can see in this table the business processes which are most frequently being offshored. In their sample, Ricart and Agnese (2006) are considering firms from different sectors such as manufacturing, financial services, telecom, media
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Table 1. Most frequently outsourced business processes Spain
Germany
Holland
USA
Finance/Acc.
22%
29%
12%
29%
HR
15%
9%
5%
12%
IT
54%
65%
44%
54%
Contact centers
44%
36%
9%
34%
Freight & logistics
15%
25%
14%
14%
R+D
17%
29%
19%
22%
Product design
20%
20%
14%
11%
Others
17%
n/a
2%
8%
Note. From “El offshoring en España: Causas y consecuencias de la deslocalización de servicios,” by J. E. Ricart & P.Agnese, 2006, Centro Anselmo Rubiralta de Globalización y Estrategia.
and technology. As is also seen in their information, most countries are involved in some offshore outsourcing that may include the low-added-value activities such as IT and contact centers. These results are supported by a 2006 survey conducted by the Gartner Research Group. According with that, IT outsourcing in Western Europe will continue to increase over the next 2 years. The survey of 300 firms found that the proportion of companies with moderate or high levels of outsourcing will grow from 67% to 81% by 2008 (SharedExpertiseForums, 2005).
Outsourcing Leadership Outsourcing decisions can be both rational and political in nature. Although most of the literature gives the illusion that the process is essentially rational, including legitimate goals such as cost efficiency and effectiveness (senior management evaluating the alternatives, apply a low cost criterion, and then select the most efficient option; Allison, 1971), we need to consider the political aspects of this subject, which are present not only during the outsourcing decision but during the
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entire life of the relationship. In this situation, we are referring to the politics, conflicts, and compromises involved during the development of this relationship. During the outsourcing process managers improve their skills and acquire key competencies. One of those key competencies is the ability to coordinate the web of transactions that have to be undertaken effectively within the network that the outsourcing company establishes with its contractors. In addition, this situation requires establishing precise, measurable objectives for the outsourcing. Dun & Bradstreet suggest establishing a scorecard that quantifies each objective the outsourcing is supposed to accomplish and setting up periodic reviews with relevant internal staff and the outsourcing partner to assess how things are going and whether objectives are being met. In this moment, in which the offshoring of production activities has given way to moving higher-added-valued services to emerging countries in order to be more competitive, Spanish companies are a good example of a gap in outsourcing leadership. As we see in Table 2, cultural differences with the host country (49%) and corporate resistance (44%) are the two main risks that Spanish business leaders have pinpointed when offshoring (Ricart & Agnese, 2006).
Relationship Outsourcing Management The costs of outsourcing can be substantial if the vendor behaves opportunistically. Opportunism extends the notion that people act in their own self-interest with guile (Williamson, 1975). Williamson also suggests that opportunism is only a threat when there are a small number of vendors available to provide service. Williamson found that markets with a large number of suppliers minimize opportunism because “rivalry among larger numbers of bidders will render opportunistic inclinations ineffectual” (Williamson, 1975, p. 27). Companies may still wish to buy transactions from a market with few
Outsourcing Non-Core Business Processes
Table 2. Risks taken into account when offshoring an activity (percentage of companies surveyed) Spain
Germany
Holland
USA
Customer acceptance
43%
21%
24%
46%
Loss of control
42%
33%
44%
48%
Corporate resistance
44%
n.d.
32%
36%
Cultural differences *
49%
33%
36%
28%
Security of data
29%
14%
24%
55%
Quality of service
40%
28%
52%
68%
Recovery from disasters
28%
18%
n.d.
n.d.
Operational efficiency
32%
39%
46%
55%
Staff rotation
33%
26%
25%
40%
Loss of intellectual property
19%
20%
38%
40%
Political consequences
18%
22%
4%
22%
Staff lack of motivation
16%
31%
n.d.
n.d.
Political instability *
24%
14%
21%
22%
Instability *
26%
13%
n.d.
n.d.
Note. From “El offshoring en España: Causas y consecuencias de la deslocalización de servicios,” by J. E. Ricart & P.Agnese, 2006, Centro Anselmo Rubiralta de Globalización y Estrategia. * host country
suppliers, but they are admonished to reduce the threat of opportunism by signing appropriate contracts. Williamson recognizes that conditions change during contract execution. Thus, when banks first enter a market to outsource a business process, there may be a large number of suppliers to choose from. No one supplier may have a substantial advantage over the others, since each is assumed to have minimal knowledge about the idiosyncrasies of the bank’s business. The outsourcing bank may select a supplier based on who provides the required service for the lowest cost. During this initial selection stage, opportunism is not a serious threat. However, once a supplier is selected, it gains valuable knowledge about the customer’s organization during the contract period. At the end of the first contractual period, the supplier has an advantage over the
other vendors in the marketplace. Renegotiation with the original supplier will be the most attractive alternative, but results in a situation called “small numbers bargaining”, where the supplier may have opportunistically (Pisano, 1990; Williamson, 1975). In spite of the contract, the outsourcing organization must continuously monitor the process during its execution because the vendor may impose excess charges or may not perform the duties as agreed upon. The contract monitoring capability involves holding suppliers accountable for both existing service contracts and the development of performance standards. When companies are choosing outsourcing destination countries, the relationship of outsourcing management is a very important factor. Companies are more attractive not only for location cost
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advantages and abundant resources, but also for their cultural affinity. Aspects such as language skills, physical proximity, and cultural similarities are relevant when companies are choosing destination countriess to outsource because of their abilities to facilitate the management of the outsourcing relationships (Kearney, 2007).
effective organizational knowledge management. Organizational memory covers aspects which go beyond the individual memory to include other components such as organizational culture, transformation (production processes and work procedures), structure, ecology and information archives (Walsh & Ungson, 1991).
Knowledge Management Process
Knowledge Transfer
This framework is grounded in the sociology of knowledge (Berger & Luckman, 1967) and is based on the view that organizations are social collectives and “knowledge systems”. According to this framework, organizations as knowledge systems consist of four sets of socially-enacted “knowledge processes”: 1) creation, 2) storage/ retrieval, 3) transfer, and 4) application (Hozner & Marx, 1979). This view of an organization as knowledge systems represents both the cognitive and social nature of organizational knowledge and its embodiment is the individual’s cognition and practices as well as the organization’s collective practice and culture (Alavi & Leidner, 2001).
Transfer occurs at various levels: transfer of knowledge between individuals, from individuals to explicit sources, from individuals to groups, between groups, across groups, and from the group to the organization. Gupta and Govindarajan (2000) have conceptualized knowledge flows in terms of five elements: (1) perceived value of the source unit’s knowledge; (2) motivational disposition of the source; (3) existence and richness of transmission channels; (4) motivational disposition of the receiving unit; and (5) the absorptive capacity of the receiving unit, defined as the ability not only to acquire and assimilate but also to use knowledge (Cohen & Levinthal, 1990).
Knowledge Creation
Knowledge Application
Organizational knowledge creation involves developing new content or replacing existing content within the organization’s tacit and explicit knowledge (Pentland, 1995). Through social and collaborative processes as well as an individual’s cognitive processes (e.g., reflection), knowledge is created, shared, amplified, enlarged, and justified in organizational settings (Nonaka, 1994).
An important aspect of the knowledge-based theory of the firm is that the source of competitive advantage resides in the application of the knowledge rather than in the knowledge itself. Following Grant (1996), we can identify three primary mechanisms for the integration of knowledge to create organizational capability: directives, organizational routines, and self-contained task teams.
Knowledge Storage/Retrieval Empirical studies have shown that while organizations create knowledge and learn, they also forget (Argote, Beckman, & Epple, 1990). Thus, the storage and retrieval of organizational knowledge, also referred to as organizational memory (Stein & Zwass, 1995) is a very important component of
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PROPOSITIONS Below we present our three propositions. In addition, Figure 1 includes our conceptual model.
Outsourcing Non-Core Business Processes
Figure 1. Conceptual model Modular O. Design
Outsourcing Leadership
Managerial Outsourcing Competence
Relationship Outsourcing Managementt
Prop.1
Firm Performance
Prop.2 Knowledge Management Process
Knowledge Creation
Knowledge Storage
Prop.3
Knowledge Transfer
Knowledge Application
Managerial Outsourcing Competence and Firm Performance
Therefore, the following proposition is set forth:
Historically, banks outsourced repetitive tasks such as facilities management or logistics but currently have begun to outsourcing more visible and sensitive functions such as customer service and R&D. Moreover, this trend is expected to continue and grow in the foreseeable future. As previously mentioned, up until now banks have been outsourcing fairly repetitive tasks, but outsourcing capabilities by themselves are ineffective at providing a basis for sustainable competitive advantage because they are easy to imitate. Thus, we expect that the impact of managerial outsourcing competence on a firm’s performance cannot be measured directly, but can only be quantified by examining the indirect effect on some intervening capability (e.g. knowledge management process).
Proposition 1: The relationship between managerial outsourcing competence and firm performance is mediated by organizational knowledge management processes.
Managerial Outsourcing Competence and Knowledge Management Process During the outsourcing relationship firms develop new managerial capabilities and improve upon those that already exist. We argue that outsourcing noncore activities is an interactive way to learn not just the objective and observable aspects of the other firm but also the more tacit aspects as well. This relationship represents a good opportunity of learning and improving the managerial knowledge
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of the firm. Important sources of managerial capabilities are development from the relationship between the firm and the contractor. The firms spend substantial time and effort in identifying alliance partners, determining goals of outsourcing, negotiations terms, making agreements, choosing appropriate governance structures, building social and relational capital, and managing the alliances (Ireland, Hitt, & Vaidyanath, 2002). Other sources of managerial capabilities streams from analyzing its current organizational structure, its processes, and its activities. The outsourcing firm knows more about its needs, routines, procedures, directives, and about its self-contained task teams because the process also implies asking itself about its current organizational structure, processes and activities. Then, the managerial outsourcing needs trigger an organizational reflection process which enables knowledge creation. We can find here the four modes of knowledge creation: socialization, externalization, internalization, and combination (Nonaka, 1994). Each mode relies on, contributes to, and benefits from other modes. For example, the socialization mode can result in creation when the outsourcing firm obtains a new insight (internalization) which is triggered by an interaction with the other firm. On the other hand, the socialization mode may involve transferring existing tacit knowledge from one member to the other through a discussion of ideas (Alavi & Leidner, 2001). We are suggesting that knowledge creation can be enhanced through the outsourcing process. In addition, the outsourcing process enlarges the organizational memory, in both semantic and episodic memory. For example, as semantic memory refers to general, explicit and articulate knowledge, we can refer to all documentation, reports, and charts generated by the outsourcing process. As episodic memory refers to contextspecific and situated knowledge, outsourcing process generates a flow of organizational decisions and their outcomes.
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During the outsourcing process, individuals and groups transfer knowledge through formal and informal channels. One important aspect of transferring knowledge is the absorptive capacity of the outsourcing firm, defined as the ability not only to acquire and assimilate but also to use knowledge (Cohen & Levinthal, 1990). Thus, given the potential impact that managerial outsourcing competence has on knowledge process, the following proposition is set forth: Proposition 2: Managerial outsourcing competence is positively related to knowledge management process.
Knowledge Management Process and Firm Performance Competition is increasingly knowledge-based as firms strive to learn and to develop capabilities earlier than their rivals (D’Aveni, 1994; Teece & Pisano, 1994). In turbulent markets, the strategic value to a firm will naturally erode over time as substitutes appear and new competitive problems emerge. When firm’s capabilities build on tacit knowledge and are rare, imperfectly tradable, and costly to imitate, these are the basis of superior performance (Barney, 1991, 1995; Spender, 1996). The fact of outsourcing noncore activities enables the firm to think strategically and critically on its core business processes of knowledge creation and transfer. Further, this process enables firms to focalize on what they do best, the converging of resources on a few clearly defined and consistent goals; focusing the effort of each group, department, and business unit in a sequential fashion; and targeting those activities that have the biggest impact on customers’ perceived value (Yang & Peterson, 2004). Creating and sustaining competitive advantage is the core of strategic management (Barney, 1991). The following proposition is set forth:
Outsourcing Non-Core Business Processes
Proposition 3: There is a positive relationship between knowledge management process and firm performance.
EXPLORATORY RESEARCH METHODOLOGY As a first approach to the outsourcing problem within the community banking industry, we prepared an electronic survey with data gathered from participating executives of the North Carolina Bankers Association for the purpose of identifying the business processes that they are currently outsourcing, believe they will outsource in the future or that they will never outsource. We explain the composition of the sample and data collection, and then we analyze the results of the test.
purposes, but individual responses remained confidential. Various statistical methodologies such as the stepwise and t-test procedures were applied using SPSS (2005). Delivery of the survey was administered online. Electronic surveys provide a faster reaction time than traditional mail surveys, with many studies reporting that most e-mail responses arrive within 2 to 3 days following the initial e-mail contact (Bachmann & Elfrink, 1996). In addition, bankers received two e-mails, with the first asking for their assistance in the online survey. Two weeks after the initial e-mail, a second reminder e-mail was sent to those individuals who had not yet participated. Participants were given appropriate instructions in each of the e-mails on how to complete the online survey instrument. The internal validity of the survey was conducted using Cronbach’s alpha and was found to be .886.
Sample and Data Collection ANALYSIS AND RESULTS The data set consisted of 132 possible respondents from the North Carolina Bankers Association, with 31 responses, thus providing a response rate of approximately 24%. Completing the research instrument was either the chief executive officer or the chief information officer of the organization. Other data collected included demographic information (location of the bank and its assets). The instrument was pilot tested using banking officials comparable to those used in the study to eliminate any ambiguity as well as to ensure a complete understanding of the questions and the survey instrument. These individuals were not included as sampling units in the actual survey. A 5-point Likert-type scale was used to measure respondents’ propensity to use onshore outsourcing methods (1 = Currently Outsourcing and 5 = Never Outsource). Additionally, the reason for outsourcing was measured on a scale of 1 to 5, with 1 being Extremely Important and 5 being Unimportant. The survey instrument did require that the bankers reveal their identity for tracking
In Table 3, the stepwise regression procedure identified three onshore variables at a significance level of 0.10, which influenced the respondent’s views related to cost. The stepwise procedure identified the following significant variables: payroll services, which would include third-party preparation of payroll reports to promotes confidentiality of payroll information and complying with relevant regulations; ALM (Asset/Liability Management) modeling, or the measurement and management of asset and liability maturities or repayments in order to reduce interest rate risk; and, Check 21 imaging, or the federal requirement that banks accept images rather than hard-copy cancelled checks. Relationships are revealed in terms of cost. As indicated by the results in Table 3, the higher the importance of cost, the more payroll services will be outsourced onshore. This is also the case with ALM modeling. Additionally, the more important cost, the more likely banks were to outsource Check 21 imaging onshore.
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Table 3. Results of stepwise procedure and cost Dependent Variable
Cost
Independent Variables
Beta Coefficient
t statistic
p value
Payroll Services
0.763
8.97
0.000
ALM Modeling
0.290
5.92
0.000
Check 21 Imaging
–0.117
–2.35
0.033
Table 4. Results of stepwise procedure and focus on core functions Dependent Variable
Independent Variables
Beta Coefficient
t statistic
p value
Fixed Assets
0.443
3.95
0.001
Human Resources
1.206
2.54
0.019
Focus on Core Functions
Table 5. Results of stepwise procedure world-class capabilities Dependent Variable Gain Access to WorldClass Capabilities
Independent Variables
Beta Coefficient
t statistic
p value
Fixed Assets
0.913
23.073
0.000
ALM Modeling
0.097
4.631
0.001
Check 21 Imaging
0.100
2.056
0.070
In Table 4, the stepwise procedure identified the significant independent variable of fixed assets in relationship to the dependent variable of focusing on the banks’ core function. Fixed Assets are nonearning assets such as buildings, fixtures and equipment. Software may also be included in fixed assets, as it has a depreciable life of five years. The more important this independent variable, the more likely the banks would outsource in the near future. The independent variable of human resources was found that the more important this variable the more likely offshore outsourcing would occur. Human resources would include those functions that allow the management of people, such as benefits, employee assessment and regulatory compliance. Addressing the variable of gaining access to world-class capabilities in Table 5, it was found that the more important banking executives thought the dependent variable of gaining access to worldclass capabilities, the more the banks outsourced
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the management of their fixed assets. This was also the case with the independent variables of ALM Modeling and Check 21 imaging.
CONCLUSION Firms are increasingly relying on knowledge acquired from other firms to facilitate the development of their own capabilities. This study examines the role that outsourcing noncore business process plays in the success of a firm mediated by a knowledge management process. We present managerial outsourcing competence (MOC) as a construct that is jointly determined by three resources of the outsourcing firm and we argue the impact of MOC over the performance is mediated by a knowledge management process. The MOC, which has been developed during the outsourcing process, is not enough to generate sustainable competitive advan-
Outsourcing Non-Core Business Processes
tage because is easy to replicate. The firm could obtain a desirable competitive position within an industry if it could utilize MOC to leverage other firm-specific capabilities. Outsourcing noncore business processes has no direct effect on a firm’s performance. In this article we are enhancing the complementarities and cospecialization between MOC and a knowledge management process. From one side, through a knowledge management process the outsourcer banks achieve a stronger awareness of its outsourcing “know how,” which is embedded in routines, procedures, directives and in self-contained tasks. We argue that the more firms outsource noncore activities the more efficient they will become at using their outsourcing know-how. As we see in our exploratory, test banks always outsource more than one business process, and this suggests that banks could be achieving scope economies through the application of outsourcing know-how in the many different noncore business processes. Another side, of the knowledge management process enables firms to focalize on what they do best, concentrating resources through the processes of converging resources on a few clearly defined and consistent goals, building core competences and understanding strategic know-how. We reinforce this theoretical aspect after analyzing the results of the test because in our survey banks reasons for outsourcing are majority strategic ones such as cost, focus on core functions and gain access to world-class knowledge A knowledgebased approach to strategy formulation effectively matches the opportunities and corporate capabilities of the banks and may generate economically feasible strategic alternatives.
statistical tests we are showing in this article have been a very useful empirical tool that addresses the approach to the outsourcing problem within the banking industry. Anyway, we are aware that the following step of our work is to test our model with structural equations methodologies. Data collected in the survey reflects information exclusively collected from North Carolina banks and, more specifically, only those banks that held memberships within the North Carolina Banking Association at the time the survey was distributed. By limiting this survey only to those members of the North Carolina Banking Association, we cannot generalize our findings to all community banking institutions and their outsourcing decisions.
Further Research Several kinds of follow-up research studies could be done. In the case of outsourcing business process functions, banks can neither transfer risk nor share risk with the outside vendor. Therefore, the informal network appears as a very interesting alternative for community banks which need to manage their risks in a very efficient way. We think it could be particularly interesting in this industry to see the outsourcing decision as an agency problem and study problems that may result as lack of current information and knowledge for the institution. Another interesting research area and related questions could address exactly what the banks have gained (economically and quality of service improvements) by outsourcing the various (Payroll Services...Fixed Asset) processes. Is the gain more evident in some of the processes over others?
Limitations The model presented in this article is primarily conceptual in nature, and thus needs to be validated with other specific empirical studies which are adequate to the conceptual model we are proposing. In spite of this, the survey and the
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This work was previously published in the Journal of Information Technology Research, Vol. 1, Issue 2, edited by M. KhosrowPour, pp. 21-37, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.8
Establishing Performance Metrics for Managing the Outsourced MIS Project Jeanette Nasem Morgan Duquesne University, USA
ABSTRACT This chapter presents the tactics and metrics an organization applies after having made a decision to use outsource providers. Tactics are used to define the nature and specifics of the outsourcing arrangement, as well as to select the contractual basis of the agreement. Organizations that elect to use providers geographically distant from the client site are cautioned to carefully evaluate capabilities, as well as legal and security issues related to external outsourcers. For these purposes, it is critical to align measures of performance compliance in the form of metrics on each MIS outsourcing relationship. When negotiating and establishing the terms of the outsourcing arrangement, management should ensure that appropriate performance metrics are identified and included, as well as flexibility for change is built in to the contract. This chapter addresses some of the methods, as well as some of the metrics
that might be used in such contract agreements. The use of contracts and service level agreements are discussed, as well as in depth techniques for conducting validation and background checks on outsource suppliers. Sample outlines for service level agreement preparation and performance specifications are included for the practitioner.
EXECUTING THE TACTICS OF OUTSOURCING MIS This section presents the tactics that an organization should draw upon after having made certain decisions related to the use of outsource partners. Topics include establishing agreements for service or support, managing geographically dispersed teams of providers, and appropriate metrics to be used to manage these types of global projects — across international datelines and multiple time zones. Issues related to quality, contract
Establishing Performance Metrics for Managing the Outsourced MIS Project
investigation and issuance, as well as preparing to monitor the outsourced project are identified. The importance of service level agreements to monitor and manage performance under outsourcing contracts is addressed. Problems that arise out of poor or inferior communications and reporting are illustrated by example.
Role of the Service Level Agreement Even before the vendor has been selected, an exploratory process must take place within the organization that is considering outsourcing work. A process for defining the scope of the work was described in Chapter IV, “Strategic and Tactical Planning of Outsourcing in MIS.” Figure 1 shows the steps for refining the scope of work, which is then used to craft the agreement as to service levels defined for the outsourcing relationship in the agreement. The purpose for a service level agreement (SLA) is to describe the scope and terms of the outsourcing arrangement. The scope constitutes a high level understanding of the nature of the agreement. By defining the type of services or products to be delivered, there is a general understanding of agreement as to the concept of the deal. The terms of the outsourcing arrangement should cover the scope of specific performance expectations, such as volumes of transactions, Figure 1. Preparing the request for outsource work • • •
• • • •
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Research your needs Benchmark processes and areas of automation to develop metrics Develop Requirements (RFP) ○ Statement of Work: contains the specifics of what the outsourcer is to accomplish or provide. ○ List specific “Schedule C” numbered requirements ○ Provide models of current infrastructure (Zachman, 1987): networks, nodes, configurations Evaluate respondents Perform site visits, background checks: ask for demonstrations Best and finals (BAFO) Finalize contract terms
turnaround times for the work, response times for infrastructure support, security, backup and recovery services for MIS outsourcing, or may include scenario based behaviors or scripts for business process outsourcing arrangements. For each specific service being contracted, there will be levels of performance criteria and metrics associated with the services or products. A pricing model is negotiated for the contracted services, and that model will allow for escalation of price as more services are requested, or as the work expands or increases in volume, and so forth. The SLA should also include provisions for oversight by the customer organization as well as reporting expectations to help in monitoring the contract.
Steps in Creating the Outsourcing Arrangement and SLA First, we learned in the previous chapter that the client organization must preliminarily take steps to ensure the outsourcer is financially sound and experienced by reputation. This is often accomplished by working with local, independent auditors and consultants who verify the outsourcer’s financial and human resource assets, as well as those subjects of the contract obligations for equipment, infrastructure, and facilities. A local consultant will be familiar with the reputation and quality history of the outsourcer. The local contact may also later negotiate on the organization’s behalf when flexibility is required, or minor changes need to be dealt with. If local regulations or local governmental authorities need to be involved, the local contact can be an invaluable asset to have in the pocket. Companies who plan to expand globally need to think strategically about partnering with local distributors as well as suppliers in order to take advantage of local expertise and access to materials. Partnering locally gives the advantage of minimizing initial investment risk, and is a means for gaining early penetration, as well as cost savings.
Establishing Performance Metrics for Managing the Outsourced MIS Project
Second, SLA contract provisions should be considered to ensure the outsourcer’s timely notification of any developments, whether internal or externally caused, that could conceivably impact the ability of the outsourcer to perform or complete the contract provisions. Because most outsourcing arrangements are for ongoing support services, it is likely over time that service terms must change to accommodate changing conditions or levels of service required. Contract agreements may be described in terms of the size of the system being managed, the number of incoming customer calls that must be dealt with, or even the nature of the support services. Organizations that keep track of the metrics of call hang-ups, unresolved customer problems, and the nature of customer problem calls go a long way in establishing a knowledge base that can be used for continuous improvement in call handling. These requests need to be handled as part of the SLA negotiations. Use of tools such as Peregrine or Remedy for customer call tracking, problem classification and reporting are helpful for the firm who wishes to track any drop in customer service or even who wishes to leverage product or service knowledge across the outsourcer’s staff for improved customer service handling. Metrics drawn from customer calls abandoned by callers, number of minutes to resolve problems, number of problem reoccurrences are good metrics associated with customer service business process outsourcing. The objective is to include reporting of appro-
priate metrics — tied to the type of service the outsourcer is providing. A sample table of contents outline for what should go into a typical SLA is included in Figure 2. Third, operating agreements should be addressed between the parties to ensure verbal communications will be open and regular, in addition to formalized reporting mechanisms established. SLA arrangements should include a means for conducting regular formal reviews, in addition to periodic informal reviews, and an allowance for “spot checks”. Figure 3 lists several types of formal and informal reviews for MIS that should be considered important to keeping a constant finger on the pulse and condition of the outsourcer level of service. Comprehensive reporting should include contract, deliverables, and cost/budget reviews as well. Fourth, the ability of both parties of the contract to discuss and agree upon ad hoc modifications for changed circumstances or revised requirements should exist in the relationship. SLA terms should be flexible enough to allow for changes in processes, as well as in what is being managed as the client organization continues to evolve and new products or services are introduced. Many of us know of instances where we purchased the latest computer or cellular phone, yet when calling customer support to inquire for assistance, the nonnative English speaking representative seems to know less about the equipment than we do, having just bought and having read the instructions ourselves. New technologies or outsourcer
Scope/specific services to be performed Technical specifications for performance Where the work will be performed Node and components architecture diagrams Performance tracking and reporting mechanisms Capacity forecasts (see text box on “Benchmarking”) Transaction specifications and volumes Problem management Fees and rates (facilities, equipment, labor, levels of service) Customer duties and responsibilities
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Figure 3. SLA reporting 1. 2. 3. 4.
5.
6. 7. 8.
Services or products to be provided. Timely notification of changes needed by either party. Established process for modifying contract requirements. Formal reviews conducted monthly, quarterly, annually: a. Requirements baseline b. Critical design reviews c. Prototype reviews d. Implementation readiness reviews e. User acceptance reviews f. Operation readiness reviews Informal reviews conducted as scheduled: a. Preliminary requirements reviews b. Preliminary design reviews c. Structured walkthroughs d. Test readiness reviews e. Unit test, and systems integration test reviews f. Pre-implementation reviews Ad hoc reviews as needed for spot check of documentation, in-process progress checks, and so forth Financial arrangement, fees, and service levels Service level metrics (e.g., response time, frequency of backups, call handling, etc.)
capabilities will evolve and the client organization should have enough contrast flexibility to take advantage of these advances without penalty or infringement.
What Happens without Formal SLA Management In one case, an outsourcer learned not having agreements as to the nature and formality of communications can backfire on the client, and wind up burning the outsourcer as well. Halper and Hudson (1993) report a case where inland revenue (IR), the UK government tax authority, outsourced its IT services to electronic data systems (EDS) for 10 years starting in April 1994. EDS purchased the existing IT equipment from Inland Revenue and hired 2,000 of the 2,500 IR IT employees thus taking over, in place, the entire IT operations of the tax authority. Inland Revenue planned to retain 300 employees but reduce costs and gain improved technology by this arrangement. The arrangements appeared to operate effectively for several years into the 10-year contract. In 1999, Collins (2003) describes, the UK government
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announced new tax credits to be introduced in April 2003. EDS, as the main IT supplier, was to develop and implement the software to handle the new tax credits. The plan was to create two releases, a Release One version to commence development in October 2000 for deployment January 2003, the Release Two version to start 6 months later in April 2001, with development in parallel and deployment by April 2003. Shortly after this new outsourcing arrangement, it became clear that IR failed to provide firm requirements as scheduled. By April 2001, 6 months behind schedule, EDS began work on Release One even though uncertainty about the design and business processes remained. EDS resorted to heroics to put over 500 labor-years of work into Release One so it could go live on schedule, though EDS apparently did not formally communicate with the release risks. The consequence was Release Two work started April 2002, 12 months late. During the delayed start for Release Two, the scope for requirements increased by about half for new complexity introduced by the client IR. Even as November 2002 testing was due to start, IR had 60 new MIS change requests
Establishing Performance Metrics for Managing the Outsourced MIS Project
open. In spite of these issues and the failure of the last MIS test safety mechanism which was in review by the Office of Government Commerce, IR gave approval to go live with Release One on schedule. The accumulated project management failures began the final rush to critical mass implosion. In January 2003, IR discovered 100,000 tax returns entered in Release One MIS had incorrect national insurance numbers entered. IR stopped sending award notices. This soon resulted in so many phone inquiries, the IR phone system jammed. To resolve the critical national insurance number errors, IR and EDS compounded Release Two’s schedule problem by freezing testing at Release One so it could be corrected before proceeding with Release Two. The corrections were completed and Release One resumed operation the following month. IR shortened the Release Two test schedule to four weeks instead of the planned twelve weeks. The outsource partner, EDS, warned the reduced testing increased the risk of problems in Release Two. EDS did not officially request a delay of deployment and IR did not delay the deadline. EDS heroics again completed Release Two on schedule, but this time over one million claims were incomplete or had errors, an order of magnitude greater problem than in the Release One in January. The resulting extra workload also exposed system capacity limitations that had not been found in the severely shortened testing phase. Both MIS systems crashed several times per day until stability was restored in June 2003. The major fault is directly traceable to lack of clear contract terms for communication, a change control process, and means for granting extensions or altering critical schedules when necessary changes were needed. These are all components of a service level agreement between a client and an outsource partner. Collins (2003) suggests IR failed to establish its own requirements on schedule and failed to comprehend the impact of milestones and schedules missed. EDS, as a part-
ner, failed to establish a functional change control process that would have rejected the continued stream of late changes or demanded schedule extensions to accommodate delayed testing. Both IR and EDS shared in the final fatal flaw of slashing the Release Two test cycle to correct errors in Release One data and then proceeding with both systems even though EDS knew, and made IR aware, of the increased risk of in-service failures. Although IR faced political and bureaucratic ramifications if they publicly announced a delay and although EDS was well aware they were approaching contract negotiations at the end of the ten-year contract, both parties ignored the basic outsourcing rule to have in place project management and control procedures to address each problem as it was identified along with clear requirements, deliverables, and baseline schedules.
METRICS FOR MANAGING THE OUTSOURCED PROjECT This section discusses various metrics programs for quality and for organizational process maturity. Metrics are used both in selection of outsource partners, as well as for managing their performance. The section presents suggestions for how to measure and track productivity of the outsourcer and how to manage difficulties, as well as ongoing communications. Suggestions for appropriate metrics and the underlying management processes to support continued awareness of these are given. Use of a Balanced Scorecard is presented as well as actions appropriate to managing critical success factors.
Using Internationally Recognized Quality Metrics Programs: TQM, ISO 9000x, SEI CMM Many firms and government agencies have learned that selecting a provider with internationally
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recognized credentials can prove to be one safe harbor for assuring that the outsourcing work will be done according to customer requirements. As depicted in Figure 4, quality is defined in many different ways by different organizations. Some definitions of what constitutes quality in the arena of MIS are illustrated in the textbox. However, questions arise as to how to maintain the quality benchmark of outsourced projects, while still making them cost-effective. Several quality models and certifications exist that provide guidance. The U.S. Congress signed the Malcolm Baldrige National Quality Award into law on August 20, 1987; it is an established standard of the National Institute of Standards in Technology (NIST). The Award is named for Malcolm Baldrige, whose managerial excellence contributed to improvement in government efficiency and effectiveness reports Morgan (2005). The award may contain self serving aspects that make certain its use in arbitrarily selecting an outsourcer on this basis alone. To apply for the award, an organization completes self assessment questions, which is then followed by a study of the candidate organization. The candidate organization selects which key factors will be evaluated, irrespective of whether these are the “right” set of practices for that industry in which they claim to demonstrate recognition-worthy quality. The Malcolm Baldrige Award is not charged to validate the efficacy of specific practices such as software engineering in the candidate organiza-
tion. It rather looks for artifacts to evaluate competency. Leadership, planning, customer awareness, culture, and other characteristics which may not be relevant to the client’s outsourcing requirements are evaluated. So, while shedding light on an outsourcer’s quality culture, it may not truly demonstrate their ability to fulfill an outsourcing agreement’s terms and requirements. On the other hand, where a strong customer-focused culture is important to service levels, such characteristics may be very relevant and appropriate. The International Organization for Standardization publishes updates to the ISO 9000 quality models originally developed for manufacturing production processes in 1987. Many believe the ISO 9000 models can be applied to measure quality processes for MIS. However, clients must regard ISO 9000 certification as an incoming qualification but should actually consider the specific highmark processes that are part of the outsourcing arrangement before determining the applicability of the quality processes that earned the outsourcer an ISO 9000 certification qualification. Finally, the Software Engineering Institute (SEI) Capability Maturity Model (CMM) for software and more specifically, the newer Integration Capability Maturity Model (CMMi) may be more applicable to outsourcing. These models enumerate key process areas containing qualifying practices to measure an organization’s competency level. The model is not a standard, but has been adopted by the U.S. Government and is broadly
Figure 4. What constitutes quality in MIS projects • • • • • • • • •
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Quality in MIS Complying with requirements Zero defects Project on-budget delivery On-time delivery Meeting user’s expectations Achieving performance objectives Getting it right the first time Degree to which project is integrated and supported by the organization and its culture Quick resolution of issues which arise during the project
Establishing Performance Metrics for Managing the Outsourced MIS Project
used in international business related to MIS transactions. Several agencies require offerors to demonstrate their organizational competency in software engineering with qualification at CMM level three or higher. Specifically, the newer CMMi contains four integrated models to select among depending on the type of MIS service or product: systems engineering, software engineering, integrated product and process development, and supplier sourcing. The last model can actually be used by the client organization as a model for selecting outsourcers. The supplier sourcing model can be used when outsourcing complex work efforts, such as when projects use suppliers to perform different functions or to add modifications to products. The CMMi is used when the outsourcing supplier activities are critical, where enhanced supplier source selection processes are used, or when acquiring products from suppliers. It also includes critical processes for monitoring outsource supplier activities before product delivery. The SEI uses a rigorous assessment methodology with independent appraisers that identify strengths and weaknesses in all key process areas.
Metrics in the Service Level Agreement As a company considers outsourcing, there are the legal and contractual aspects that must be considered as well. As previously described in this chapter, the client firm should ensure that the outsourcer is financially sound, by independent audit and verification of financial assets, as well as contract obligations of the outsourcer for equipment, infrastructure, and space location. Include contract provisions to ensure timely notification of any developments, whether internal or externally generated, that could conceivably impact the ability of the outsource supplier to perform or complete the contract provisions. Ensure expectations for written and verbal communications are fully described. The ability of both parties
to the contract to make easy modifications for changed circumstances or revised requirements should be addressed in the contract. Statistics of what services will be provided and benchmark estimates of size of the MIS and the volume and description of transactions expected are relevant. The ability to modify service statistics from time to time, based on actual events, should be included in the SLA. For standard services covered by a vendor’s normal outsource service offerings, usually the boilerplate outsourcer offered metrics associated there under would be sufficient. If there are any special circumstances concerning the nature of the outsource services requested, appropriate metrics for monitoring performance and controlling outcomes should be described in detail, with examples in the SLA. The elements of a network SLA, for example, should cover the characteristics of the network itself, connection characteristics, and network security. The network SLA should identify the IP performance levels that a service provider guarantees in the course of delivering services to the customer. It should also define the type of network infrastructure that the service provider will deliver. Understanding the nature of a network’s physical components helps providers set customer expectations on the performance levels they will receive. The network SLA also spells out network availability, measured in percent of uptime, and throughput, measured in bits per second. A key element of a network SLA is specifying penalties for downtime during critical business hours vs. overall downtime: For instance, downtime at 2:00 a.m. may not disrupt business, but it could be unsatisfactory in an e-commerce environment. “Most service providers probably will guarantee 99.5 percent uptime; few promise 100 percent” (Lee, 2000). Another key part of guaranteeing network service is the connection, which spells out acceptable data losses and delays, plus bandwidth provisioning. A security section should address
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the level of encryption, where data is encrypted, and the penalties for security breaches. An application SLA should require the institution of application specific metrics that define performance levels that relate to application utilization. For example, Menasce (2002) states an application SLA should define the percent of user interactions, such as downloads or data requests, to be executed without failure. It should also define the acceptable time lapse between a user’s request for data and the moment the updated data screen appears, as well as an acceptable rate for data transfer in a transaction session. A time-lapse guideline should work in conjunction with the execution guideline, ensuring that while a download is deemed successful even if it takes several hours, it would still violate the SLA for taking so long. Hosting SLAs ensure the availability of serverbased resources, rather than guarantee server performance levels. Hosting SLAs should cover server availability, administration of servers, and data backup and the handling of storage media. A server availability SLA, measured in percentage of uptime, usually guarantees a minimum of 99% uptime. The server-administration part of a hosting SLA should detail the management responsibilities of a hosting service, specifically, the acceptable response times for restoring failed servers, as well as performing data backups. For example, a hosting SLA should mandate that a host provider respond to a restoration request for a failed server within a set period of time (such as 1 or 2 hours); it should also guarantee that the server would be returned to service within another specified period (such as 12 to 24 hours). The percentage of scheduled data backups that will actually be conducted should also be defined. A data backup might also require the hosting service to create a disaster-recovery plan. This could include contingencies that would give a customer access to temporary computing facilities when
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the customer’s own site is unavailable (Ferengul, 2002). Service level agreement provisions should include periodic formal reviews, in addition to informal reviews, and an allowance for “spot checks” against the appropriate metrics.
Controlling, Pricing, and Managing Changes in the Outsourced Project There is a saying in the information technology fields that the only thing inevitable is change. Because change is often unpredictable, it is vital to plan for it in crafting the outsourcing agreement. Addressing the procedures for making and pricing amendments is a vital part of the negotiation. The process for documenting significant changes and for accepting minor changes should be discussed and agreed upon early on. Some changes should be acceptable, such as when product offerings on an onsite store change — this is part of the business of an online retail operation, and is an expected part of the application service provider (ASP) hosting services. Understanding what recourse there may be when changes are undesirable, such as a change in ownership of the outsourcer or loss of key personnel should be considered. Legal aspects of contract change and undesirable events are covered later in this chapter. The possibility of amendments should be provided for in the outsourcing contract language, so that the terms can be flexible enough for changes, but not flexible as to how they may be interpreted. Wherever possible, benchmark expectations of performance to metrics should be required to ensure statistical collection on processes or contract performance items to avoid misunderstandings. Use of selected benchmarks to clarify expectations on size and capacity are a key ingredient to ensuring agreement as to the level of support expected. Figure 5 illustrates a benchmarking process for determining the size and performance expectations for MIS service.
Establishing Performance Metrics for Managing the Outsourced MIS Project
Figure 5. Benchmarking MIS systems • • • • • • •
Capture specifications on workload Average size of each transaction (consider both inputs and outputs) Largest historical size of a transaction, and largest forecast future size of a transaction Largest historical number of transactions at peak times, and largest forecast number of transactions at peak times Total current storage capacity requirements for data Total forecast storage capacity requirements for future data Peak utilization of the central processing unit at particular times during the 24-hour day
Finding the Right Outsourcers where they Live Some of the concern regarding outsourcing is loss of competitiveness. As we consider outsourcing MIS functions the terms “software factory” and “assembly line” come to mind. Experience with outsourcing software development has yielded many success stories, while others that are “service” related have not. Other concerns have centered around the potential for security breach of customer or other key corporate data, and associated loss of competitiveness. However, where firms have retained the creative, or innovationdriven design functions, it seems that success in cost reduction or increased efficiencies can be compartmentalized. For 20-odd years we have witnessed industry/manufacturers “horizontally stratify” work: outsourcing parts manufacturing and generalassembly tasks to low-wage countries, while keeping the high-wage, high-level design work close to home. The danger occurred for some firms when they allowed the design jobs to follow the manufacturing jobs overseas too. In many cases, it just made more sense to have the design proximate to the manufacturing floor. Technology advances in third world countries, fueled by globalization and domestic support for advanced telecommunications capabilities, satellite communications supporting videoconferencing, e-mail, and fiber
optics have made them all viable contenders for outsourcing work. Chapter IV reported on the top nine countries where the bulk of the outsourcing has gone. The list of countries will continue to expand as opportunity for globalization in MIS as well as business process support becomes increasingly lucrative to poorer nations, as a way to build gross domestic product and revenues for trade. Careful consideration of the scope of the outsourcing arrangement needs to be given. There are proprietary risks to horizontally stratify highvalue-added activities (whether manufacturing or building software), parcel out the work, and attempt to retain control over intellectual design property, research and development, and the organization’s long-term competitive advantage. In a lesson gone “bad,” Logitech took an initiative to outsource 80% of the production of its “mouse” hardware and design. However, in the first year, Logitech found that market design changes were evolving so rapidly that the outsourcer was unable, either contractually or knowledge-wise, to help Logitech maintain its innovative edge. Competitors were able to test and implement changes to design, function, or price more rapidly because they controlled production lines (Johnson, 2004). Yes, the organization can horizontally stratify, and they can farm out product design and get a temporary, short-term cost advantage, but very possibly at the cost of losing control of critical new product development (Applegate, 2003). Likewise for MIS, it may be a risk to outsource all the work from requirements specification through software/ system design to coding. It may be more prudent to farm out the coding, but retain the competitive edge in design. Eventually design gets farmed out too, and all that is left are the marketing and distribution. When the local outsourcer becomes the competition and figures out that since they now control the entire life cycle of the product, they do not need the client organization’s name for marketing either, the game is up for the client.
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The Request for Proposal Process In evaluating an outsourcer, we have addressed the need for local consultants or experts in arranging outsourcing deals. Even before the SLA is negotiated and signed, preparation must begin. Figure 6 illustrates some of the steps in preparing for the bidding process. Finally, once all candidate responses have been collected, it is vital to evaluate each vendor’s adequacy to the tasks to be outsourced. Much of this was covered in Chapter IV on Strategic and Tactical Planning of Outsourcing in MIS. Yet it is also worth repeating that due diligence means looking beyond stated capabilities, to reputation and stability of the firm. A good vendor evaluation includes looking at both hard facts about the firm, as well as their potential ability to perform
the required activities. Figure 7 gives additional distinction between the various aspects. In the final analysis, there will be considerable work that can largely be reduced by advance research and planning. Aspects of due diligence also include the contractual side of the outsource relationship. Some of the actions that have proven useful are to actually travel to the outsourcer location and meet with technical staff as well as management. In some cases, it may be that the vendor will also use subcontractors. It is advisable to take the time and effort to also meet the staff and management of the subcontractors as well as verify past experiences and project results of all service providers who will be involved in the MIS arrangement. Whenever feasible, it is advisable to personally talk to past clients, or to verify with the local experts. Ask questions about the
Figure 6. Steps to prepare for evaluating outsourcers •
• • • • •
Review outsourcer’s descriptive information & evaluate if technical approach is reasonable; they have experience before; approach and management style fits our strategy and culture. Financial information (stability, banking relationships) Schedule and plan (compare deliverables; milestones; reviews; communications) Risk mitigation plans Service level guarantees (past history, pricing, SLA components, metrics used) Pricing (labor rates, capacity or utility computing pricing, flexibility to upsize or downsize, etc.)
Figure 7. • • • • •
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Hard Metrics Net worth of the business Accounts receivable/payable status Production capability Accounting systems Depth of past performance experience in similar contracts
• • • • • •
Soft Metrics Technical capability Management experience Cash flow and banking relationships Quality assurance program Inventory control measures Packing, marking and shipping capabilities
Establishing Performance Metrics for Managing the Outsourced MIS Project
operating principles of the outsourcer with regard to end-to-end quality. A key component of the contract will be time and materials’ costs. It is important to confirm labor rates for different types of work under the outsourcing contract. Lastly, part of the SLA itself should include an agreement concerning the oversight role of the outsourcer for their subcontractors, as well as the role of the client organization in direct oversight of the arrangement (Strassman, 2004).
The Balanced Scorecard for Monitoring Progress One of the successful ways that has evolved in upper management circles is the use of the Balanced Scorecard. Like an automobile dashboard, a quick review of the key indicators on a project can quickly highlight a potential problem or series of related problems that are developing, before they become large and unmanageable. A scorecard can be established with methods for reviewing the health of the myriad components of an SLA. One of the first aspects to developing an outsourcing scorecard is to identify the critical success factors (CSF) for each MIS project. The scorecard translates corporate strategy into operational terms. Critical success factors are those pertinent components of project management that must be done right, consistently, for the overall project to be a “Success.” These CSFs are applicable to the metrics included in the SLA, as previously discussed. CSFs become the variables by which we measure compliance, progress and ultimately, the achievement and closeout of the project. To be successfully implemented in an outsourcing arrangement, the scorecard must be adopted by all levels of the organization, as well as throughout the operations of the outsourcer. The Balanced Scorecard Institute reports that the balanced scorecard:
… approach to strategic management was developed in the early 1990’s by Drs. Robert Kaplan and David Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to “balance” the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. (Arveson, 1998) For outsourcing projects and other MIS projects that are distinctly defined and managed out of the mainstream of core business processes, certain key factors should be considered in development of an understanding of the project’s CSFs. These factors are Stakeholders, Team and Resources, Work and Schedule, Risk Management, Financial and Business Benefits, Cost Management, Scope, and Delivery of Products or Services. Defining the CSFs for an insourced vs. an outsourced project simply requires that management look more carefully at the communications mechanisms that will be used to convey and receive progress reports on the relevant CSFs for an externally managed MIS project. Figure 8 provides relevant questions to be asked in data mining the rigth CSFs for the candidate project. Invoking the aforementioned regular reporting along the lines of these eight key CSFs, the organization can quickly assess where there may be impending problems arising. Individually asking sample questions for each CSF area like those included in the Using Critical Success Factors (CSFs) to Monitor Projects text box, management is assured that CSFs are addressed in specific elements of the outsourcing scorecard. A logical connection exists between use of the Balanced Scorecard which illustrates the Green-Yellow-
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Figure 8. Selecting and defining appropriate critical success factors for the outsourced MIS project Using Critical Success Factors (CSFs) to Monitor Projects Stakeholders • Are project “owners” committed and involved? • Are decision-makers and funding authorities supportive? • Do users or subject matter experts (SMEs) make time for this project? • Do we have management support for project needs and goals?
Financial or Business Benefits • Is the project achieving planned benefits to the corporation/constituency? • Are requirements aligned to achieve good return on investment (ROI)? • Does this project help the company achieve a corporate goal? • Are the goals reasonable and achievable by this project?
Team & Resources • Is project staffing appropriate, do we have the right skills that are needed? • Do we have the correct equipment and facilities to do the job? • Is the infrastructure sufficient and stable to support the work?
Cost Management • Do we have sufficient finances to complete the project; are we expending costs as planned? • Are reporting processes in place for cost control? • Are costs in line with competitor organizations with similar levels of quality and experience?
Work & Schedule • Is the project schedule and work realistic? • Is the project schedule complete and up-to-date with progress reported? • Will we be able to deliver the requirements as planned? • Are forecasting and productivity targets being realized; are schedule adjustments accommodated? • Are staff able to perform the work within planned timelines?
Scope • Have new requirements been presented that stretch the available resources? • Are we adding additional “features” while not finishing those already agreed to? • Are additional requests “priced” to ensure adequate scope coverage? • Are we expending resources doing activities that don’t add value?
Risk Management • Are we managing all our risks and addressing issues as they arise? • Are we tracking issues management on a regularly reporting basis? • Do risks occur without being resolved or without contingency plans?
Delivery of Products or Services • Is the project acknowledged as “successful” at Enterprise levels? • Is the project delivering upon stated expectations? • Are interim deliverables delivered on time with good quality? • Are we given ample time to review products before acceptance?
Figure 9. “Dashboard” type of balanced sources
Red status of each CSF and the early detection of problems with the individual projects making up the MIS (see Figure 9). Furthermore, a rather simple approach of requiring the outsourcing organization to report weekly as to the condition of each CSF and how it is progressing according to plan can be implemented. Using a Web-based virtual project management reporting system, comments can be provided weekly by the teams performing the outsourcing work. Items that may become problematic can be
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explained and any variances drilled down into by the simple click of a radio button. Buttons would indicate by color the condition in that week, of that specific CSF reporting area. Buttons are highlighted as one of three colors: Green, indicating there is no known problem or aberration from plan, Yellow, indicating that deviations from expected plan or results are anticipated or have been encountered, or Red, which means management action must be taken immediately to avoid or minimize further loss or exacerba-
Establishing Performance Metrics for Managing the Outsourced MIS Project
tion of the severity. This dashboard management technique is equally applicable to our outsource partners when they are included in the same reporting structure, as described under subsection on SLA reporting in this chapter.
How to Construct a Virtual Teaming Organization Tactics for constructing and managing virtual teams are presented in a step by step manner to guide the manager in establishing such teams. A discussion of considerations and information related to technology for managing information security are provided. Finally, technological issues such as trends towards open architectures, global “time-independent” services and Web service-enabled MIS applications are discussed in the context of their applicability for executing and supporting the outsourced project. This subsection deals with the mechanics of how to facilitate good, regular, and formalized reporting between the outsource provider and the client organization. The challenges include technology, time and distance, as well as cultural practices and norms that may be different between the outsourcer and the client. One way of addressing the disparity that can occur to damage the outsourcing of MIS is to adopt the concept of Virtual Teams.
Figure 10 lists some of the defining characteristics and requirements for successful implementation of virtual teams. Virtual teams are distinct groups of human resources that cooperate for the purpose of completing a service or aspect of a project, but are geographically separate. This definition works quite well for the outsourcing arena, as the outsourcing arrangement frequently means that the provider or vendor is not in a proximate location to the client, although this is certainly possible. When physical distance is not an issue, such as with rural outsourcing or even simple outsourcing to a local provider, the need for communications and reporting structures as well as for managing the terms of the arrangement is still necessary. Effective virtual team relationships help improve both productivity and increase the likelihood of outsourcing success. In the virtual team arrangement, productivity is measured by adherence to schedule and fulfillment of requirements, within a prescribed cost structure. Part of the cost of facilitating the virtual team relationship is, of course, the establishment of and support of the technology to make this work. A firm cannot simply put up a LotusNotes database and expect teams to populate it correctly and frequently. Training needs to be provided, as well as operating procedures for frequency of reporting and to help define the type of documentation that will be included in the
Figure 10. Characteristics and special requirements for virtual teams •
Virtual Teams Managing people at a distance using technology to provide
• up to 50% with huge gains in team prod • •
to process discipline. Requires an investment in technology as well as in team training
•
Means
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virtual database. There are several technologies in the marketplace that provide global accessibility to information resources, such as LotusNotes, Microsoft Project Central, and various others using .NET or J2EE technologies for converting internal employee intranet Web sites into globally accessible Web-based extranet Web sites. Once a tool has been selected, systems administrator support for managing the virtual team room environment will also be needed.
Managing Resources and Ongoing Productivity: The Globe-Trotting Project Managers This subsection deals with some examples of the unique challenges of outsourced projects in different time zones. In most cases, organizations have discovered that there is a right balance of organic resources for oversight and project management and outsourced resources to get the job done in MIS projects. The following examples describe some of the techniques used to manage the outsourcer half a globe away. In studying lessons learned from companies that have outsourced projects, certain universal considerations emerge. Some of these relate to the importance of good communication channels, others relate to the mix of outsourced labor to project management personnel and where they should be located, and finally to legal considerations when executing an outsourcing contract. The following points address some of these lessons. •
•
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Consideration for outsourcing should be to reduce operating costs, but do not outsource the control functions for the project. Capitalize on the outsourcing provider’s newer hardware and software technologies. Provide mechanisms for geographically disbursed teams to maintain the focus on corporate objectives and goals, clear direction, and frequent checkpoints.
•
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Use a centralized project management information system (PMIS) to centrally control configuration of the MIS and all reporting documentation; helps provide a visual “big picture” view of the context of the outsourced project within the overall client organization. A Web-based PMIS supports online status reporting and project by project accountability. Balanced Scorecards tied to measures of success support the project manager’s “finger on the pulse” of all vital signs. It is critical to establish a “culture” and set of “norms” that are synchronized across the client organization and their outsourcing partner. Use Project Management techniques and documentation to monitor control, and execute appropriate corrections as needed.
In one “good” case, Patni, Inc. uses a threetiered project approach to execute outsourced projects for net cost savings. Johnson (2004) cites their outsourcing projects as being characterized by 7,000 employees in India, another 1,500 project managers who shuttle between India and U.S., and the 150 U.S. industry experts based in U.S. This approach ensures that the outsourced projects are managed with domestic, business knowledgeable staff, and continually supported by subject experts who maintain the open lines of communications by being housed where the core business functions are initiated. Patni recognized that the in-depth business knowledge of the U.S. staff was vital to continued good service. While travel is frequent for the 150 U.S.-based project managers, this model works and is highly cost-effective. In another case, State Street Financial recognized that investment clients across the globe required 24 hour service, seven days a week (24/7). This could not be accomplished with a domestic work-force without incurring huge overtime expense and shift work. State Street found by placing outsourced teams, supported by IT staff
Establishing Performance Metrics for Managing the Outsourced MIS Project
in various time zones, they could comfortably provide 24/7 service to their customers through the use of selected outsourcing partnerships. In a third but unsuccessful case, Nielsen Media Research which collects, collates, and analyzes television viewer data found the coordination efforts of data collection and analysis using off-shore assets too cumbersome and ineffective. In order to effectively manage the critical path activities of their projects, Nielsen needed to bring the work back to domestic shores to be able to adequately control analysis and reporting for clients. Clearly the cost of collaboration and the role of monitoring and coordination are key functions in outsourcing projects. Outsourcing teams and client organizations require an added infrastructure to facilitate reporting and coordination among virtual teams. Today’s technology provides Web-based tools that include ready made templates for virtual teams to coordinate project(s) across time zones and sovereign borders. In some cases, the online virtual team tool can also be used as an electronic meeting venue, complete with video conferencing, as well as electronic white-board capabilities. Centralizing documentation and providing a balanced scorecard for weekly status reporting and monitoring goes a long way to alleviate the necessity of a full-time project manager on-site at the outsourcer. Companies considering the use of such online collaboration tools need to study the costs and benefits of a particular suite of tools. Ease of setup and low technology maintenance is vital. It is important for the outsourcing team to be an active player, and training to ensure broad entrenchment and understanding of the virtual team collaboration site is critical to success. The key to success in these cases was that establishing cultural “operating norms” across the company and including their outsourcers in those norms was vital to the virtual teams’ crossborder coordination.
Off-Shore Projects Require Leveraged Technology and Higher Education The success of off-shore projects require enhanced understanding of the technologies that enable projects to come in on budget, on time, while meeting the organization’s performance and business requirements. An adroit project manager has the skills of American corporate politics and communication in their bag of qualifications. Statistics involving IT projects in the 1990s gave many IT projects a bad report. A 1995 Standish group study found that only 16% of IT projects were successful. Nearly a third were cancelled before completion. Yet, in 1998, corporate America initiated 200,000 new IT projects; in 2000, 300,000 new IT projects were initiated; and by 2001, over 500,000 new IT projects were started. This growth in the demand for IT projects and the corresponding expansion of available, cheaper technology makes outsourcing reasonable today. International developments in infrastructure and technology posture developing nations for involvement and competitive position in the global services marketplace: •
•
•
Telecommunications costs from the late 1980s to 1990s dropped by a factor of 30 and continue to drop at even greater rates. Lesser developed countries invested in technology education for labor forces while U.S. graduates in the engineering sciences have significantly dropped. Computing power doubles every 18 months, affording even more opportunity to leverage lower cost technology in lesser developed nations.
Through the use of collaborative and virtual team software, and through secured use of the Internet for cross-border communications, the U.S. project manager brings a set of skills unmatched in parts of the world where outsourcers are prolif-
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erating. Jeanette Morgan reported in March 2004 at the IEEE and Pittsburgh Technology Council Summit on Outsourcing that this is the skill area where public focus and politicians need to look for retraining MIS-educated citizens. Retraining unemployed, educated professional workers with special project management skills and tools is one way to keep MIS outsourcing managed from home base. Skills required to manage off-shore projects and to integrate the use of technologies for virtual teaming relationships is vital to globalization of these relationships. Institutions with industry and public sector experience in Web-based collaborative work environments share their experiences and lessons for how to effectively manage geographically dispersed development efforts across the world. Incoming college students must understand the new roles professional careers will require in both the skills and knowledge of intercultural teamwork. Education and exposure in the academic environment to global “gaming,” team play and communications, and the use and application of Web-based project management tools for sharing team based products is critical (Morgan, 2003).
Current and Evolving Enabling Technologies for Globalizing Project Management We have discussed how virtual teams can leverage available technology for managing performance under outsourcing contracts, as well as for coordinating activities and documentation. Another area for outsourcing organizations to consider is the use of enabling technologies such as collaborative software. With collaborative software technologies, in addition to the PMIS for reporting and documentation, as well as project schedule management, additional features may be deployed to further enhance the teamwork to make the outsourcing relationship seamless to organic projects:
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Conduct teleconferences directly from personal workstation PCS or even mobile personal digital assistants (PDAs). Hold online (video) meetings with numerous participants across several global connections. Share software applications and data access. Present prototypes of outsourced MIS under development for instantaneous feedback. Team members can ask questions and see responses in real-time for group decision support. Tally responses for immediate quantitative results. Conduct MIS testing and create problem reports for developers to access on the PMIS.
However, collaboration on outsourcing MIS does not always involve Internet technologies. Another innovative approach to near-sourcing work involves artificially creating local proximity of outsourced staff. Romero (2005) reports one new company, Sea-Code, Inc. will deploy a cruise ship with living quarters and offices, three miles off the coast of Silicon Valley, Los Angeles, CA staffed with 600 software engineers. Workers will initially be onboard ship for 4 month assignments. The company anticipates that the lower cost salaries for staff who originate in India, will make the venture attractive. (Romero, 2005) The operational feasibility of being in the same time zone as many software development client organizations will likely offer a new alternative to off-shore outsourcing with companies across the other side of the globe. This will bring jobs closer to the United States while still maintaining the imprimatur of near-shore outsourcing.
A Final Word on Negotiating Outsourcing Contracts and Terms Before leaving this section, it is worth noting that outsourcing arrangements that cross national
Establishing Performance Metrics for Managing the Outsourced MIS Project
borders do so with some degree of risk that is not experienced when outsourcing rurally or locally. International law governs these transactions. In some cases, domestic political unrest or sovereign actions such as nationalizing foreign assets, have thrown outsourcing arrangements into disarray. With the proliferation of the Internet and electronic commerce, the courts have had to address many of these concerns. The preponderance of evidence suggests that arrangements that go awry where there is a difference of opinion on the outcome of the arrangement, courts may tie up final legal verdicts for years, rendering the outsourced MIS hostage to the arrangement. In such cases, it is advisable to retain legal advice and handling by experienced firms which have strong local representation. Services for negotiating resolution may include arbitration, litigation, mediation, negotiation, or other alternative dispute resolutions such as resumption of work by the outsourcer through an extension of time or transference of the contract to a third party for completion and satisfaction. The aim in using legal resources to resolve disputes is to attempt to not have to force litigation action in courts. Since successful dispute resolution is about achieving attainable results in the most cost effective and timely manner, and international courts can be capricious, it is best to avert the necessity of legal action by close monitoring throughout the outsourcing process. CIOs negotiating the outsourcing contract should be aware of the Unfair Contract Terms Act 1977 (UCTA) and the Court’s interpretations of the law as pertain to outsourcing agreements. With respect to MIS contracts, it has long been standard practice for the supplier to include provisions to limit their potential liability for losses or damages due to MIS functions or bugs that become evident after the contract is executed. Outsourcers typically include self-protection against liability or litigation through Limitation and Exclusion clauses. The traditional obstacle to the outsourcer’s attempt to limit and exclude
liability has been recently litigated with interesting results under the Unfair Contract Terms Act 1977 (UCTA) and the Court’s interpretation of reasonableness (Shoosmiths, n.d.). Recent international judgments under this law have presumed the parties negotiating a contract were fully cognizant of the ramifications of all aspects of the outsourcing agreement. The client organization can no longer simply state “failure to perform” allegations under the UCTA. It is incumbent on the client organization to adequately address the risk factors involved in an outsourcing contract and at least attempt to negotiate on the outsourcer’s Standard Terms and Conditions before accepting these clauses. The most obvious advice is to read and understand the terms and conditions related to limitations and exclusions. Should subsequent litigation be required, the client organization will have at least illustrated to the Court the imbalance in negotiating power, if limitations have been artificially imposed by the outsourcer. Failure to object to limitation clauses in an outsourcer’s standard service contract are interpreted as silence and considered tacit acceptance. Another aspect of governance in negotiating an outsourcing agreement is the concern for protection of the organization’s intellectual property rights. This was commonly referred to in international agreements as the technology transfer block exemption (TTBE). Shoosmiths (n.d.) describes the European Union and United Kingdom competition law which addresses issues of technology transfer with an aim to promote innovation, but still protect patents and copyright laws across national borders. In some cases, TTBE may require the client organization to conduct an economic analysis of the impact of an agreement on the market. The former 1996 block exemption for technology transfer was widely criticized as being: • Too narrow in that it addressed patent and know-how licensing, but not most other
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•
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forms of intellectual property, such as software design and new product functions Too prescriptive, for example, prohibiting noncompete clauses which are often benign and difficult, if not impossible, to enforce and prove violation under Too formulaic and restrictive leaving many circumstances out of step with modern competition law, particularly in the area of information technology developments
Shoosmiths (n.d.) feels the new TTBE is an improvement in some areas, but may be difficult to apply without detailed analysis, which could lead to an unsatisfactory interpretation of the law in some cases. Organizations that are involved in software or MIS licensing need to be careful to structure agreements to fall within the protection of the new TTBE. They also need to review existing agreements – those which fall within the current TTBE will be protected for a transitional period of 18 months, but after that date, they must comply with the new arrangements or risk being unenforceable. (Shoosmiths, n.d.). Bear in mind that international litigation is extremely slow and painstaking. The Internet is prolific, as are technology vulnerabilities, and attackers are hard to track down. Even when there is a clear dispute and violation, both enforcement and proof are hard to come by. Governments are often slow or reluctant to take action. Let the buyer beware!
SECURING THE STRATEGIC NATURE OF THE RELATIONSHIP This section addresses some of the procedural as well as technical issues that are considered as part of the outsourcing relationship. Examples of security vulnerabilities as well as threat identification techniques are presented. Finally, considerations that can be included in contract terms, as well as due diligence of oversight before entering into the contractual relationship are discussed. Sugges-
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tions for appropriate steps that the organization can take to address security of data as well as assets entrusted to the outsourcer are discussed.
Issues Related to Information and Process Security The proliferation of hacker attacks resulting in denial of service to company customers, or logjams in processing transactions via Web-based servers has caused organizations to reevaluate the dangers as well as the advantages of outsourcing. One danger of outsourcing is that control over corporate assets is no longer under the ownership and purview of the organization. Instead, this control is turned over to the outsourcer to whom it has been entrusted. On the other hand, when the outsourcer has more robust hardware and software assets and that is its main business concern, then greater security measures with deeper experience in managing information assets can be brought to bear on behalf of the client organization. Recently, it was reported that in the U.S. Department of Defense, there were over 38,000 attacks identified, of which over 27,000 resulted in unauthorized access to data. Of these, only 988 were actually detected by users, and only 267 were reported to authorities. These statistics are relevant in that they highlight the glaring reality that the vast majority of security breaches are, in fact, never even detected. Therefore the organization that outsources MIS work must be proactive in ensuring that the outsourcer has a tactical plan for addressing information security. Technology can actually help in assuring secure management of MIS and data. However, it can also be a danger as the trend towards more open architecture may actually provide an easier opportunity for violations of secure systems and transfer of sensitive data. Mechanisms such as firewalls as well as complex security monitoring procedures and an architecture of tools can help minimize the threat of technological vulnerabilities in outsourced MIS.
Establishing Performance Metrics for Managing the Outsourced MIS Project
Best Practices Related to Off-Shore Outsourcing Security Risk Risk management in any project is a matter of process enforcement and oversight functions. It is also a matter of responsibility. Leishman and Van Buren (2003) define risk as “A possible future event that, if it occurs, will lead to an undesirable outcome.” Risks can come from either internal sources, such as infrastructure weaknesses or incompetent or disgruntled staff, or external events, such as supplier material outages, weather or cyber-security violations. Organizations need to ensure that their outsourcer practices safe security and data protection. Koch (2005) highlights five best practices, in Figure 11, that should be considered part of an outsourcing relationship. First, organizations that turn over services to an outsourcer may elect to still specify and even retain responsibility for implementing the infrastructure. In this manner, the hardware and networks will be dedicated to that organization’s workload and there is no risk of sharing databases on common platforms. The drawback of this approach is that it is more costly, but companies that insist on ownership or at least on specifying the configuration of their hardware assets retain more control over the operating environment of the outsourcer, inasmuch as that is critical. In addition, some organizations also monitor network traffic to ensure that they can detect security lapses at the outsourcer site before it gets out of control. Second, due diligence to investigate the
Figure 11. Five best security practices for outsourcing 1. 2. 3. 4. 5.
Control the assets: consider providing your own MIS equipment to the outsourcer. Use security consultants to background check outsourcers and their employees. Manage outsourcer’s access to data. Verify security processes and facilities. Control where the work is done.
vendor is necessary to ensure that the reputation and capabilities of the outsourcer are as stated. Some firms even hire security consultants on the ground, in the host countries to report on the outsourcers. Local consultants can also assist the organization in structuring the contract to best leverage regulations and local laws, as part of the outsourcing agreement. Third, organizations that also take responsibility for the hardening of the assets at the outsourcer may have better control over security infrastructure. Some companies use software tools that permit remote control and virtual management of the local assets including outsourcer login and validation. Access control management by the outsourcer that is retained by the client organization is another way security can be managed at the data access level. Fourth, Koch suggests regular verification activities by the client organization. Standards such as the International Standards Organization (ISO) 17799 (see Figure 12) as well as other standards for auditing procedures should be considered for use in verifying the practices and in-situ processes at the facilities of the outsourcer. Considerations of facility security should also be addressed to ensure proximity does not permit accidental, unauthorized access to client data or MISs. Lastly, taking careful stock of the political environment and regulatory environment of the outsourcer is another avenue that should be addressed by the client organization. Local civil strife or conflicts, as well as sweeping government actions such as Mexico’s nationalization in the 1970s can have disastrous affects on the client organization’s business, and are often not reversible. However, international tribunals and international commerce law is are strengthening protections for global commerce, partly just so that lesser developed nations can in fact participate in the global labor marketplace for services.
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Figure 12. International standards for information security • • • • •
Security policies and management procedures in place Maintain accurate inventory of IT assets Workers and business partners are qualified to fulfill duties and responsibilities Data centers are physically protected against access by unauthorized parties Comprehensive business continuity plans have been developed and tested
Vendor Hardening and Other Security Measures with Technology Due diligence on the part of the organization who will outsource some aspect of an MIS includes consideration of several security approaches. The fundamental components of an outsourcing relationship require an investigation of the vendor infrastructure. Core technologies include: •
•
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Networks: Fiber, hardware (routers, switches, etc.), network operating systems, identity management, network monitors, and so forth Processing: Enterprise applications, servers, clients (PCs), peripherals (printers, etc.) Facilities: Data centers, managed services, buildings, power supply
The mathematical probability of a catastrophic failure or loss of systems decreases with added redundancy of those systems, but increases with
the number of interconnected components existing in the infrastructure (Applegate, 2003). Therefore, it is prudent to evaluate what protective measures are taken at each juncture point of multiple components. Security measures can be Systemic or Procedural, or some combination of both, as applicable to the nature of the outsourcing scope and services. Systemic measures are built-in, and designed to operate automatically. They include software for firewalls, monitoring software with business rules defining normal transaction patterns, as well as digital certificates. “Normal” transaction patterns are defined based on benchmarking that captures typical transaction contents and patterns. Procedural measures must be created and customized to the actual business processes. These include development of security policies such as user profiles and valid data access definitions, the use and maintenance of passwords, host and network authentication, and even encryption which can include key encryption or digital-signatures. Some encryption mechanisms can be automated to be systemic.
COOP Objectives Ensure continuous performance of essential functions/ operations; Protect essential facilities, equipment, records, and other assets; Reduce or mitigate disruptions to business; Reduce loss of life, minimize damage and losses; Achieve a timely and orderly recovery from an emergency and resumption of full service to customers.
Establishing Performance Metrics for Managing the Outsourced MIS Project
A security framework should be deliberate: it may be acquired through the use of commercial tools such as virus protection software, as well as development of policies and procedures that are policed and proactively enforced. Security procedures should also be reviewed with constant vigilance to changes in cyber-criminal activity. The outsourcer’s security framework must be evidently disciplined with change management practices and deployment of available patches as soon as they are available. The framework should be evidently pervasive across the company — staff and users are educated; enforcement of things like password changes and data access are automated, and so forth. The outsourcer should be cognizant of and be able to demonstrate a multilevel security architecture, depending on the sensitivity of the client data. Lastly, in the event of the unforeseen or unavoidable occurrence, the outsourcing agreement should stipulate a common understanding of how the outsourcer will provide for continuity of operations (COOP). COOP planning is done to ensure operations can continue despite a wide range of potential events or risks. The objectives of a COOP plan are illustrated in Figure 13. The COOP assists the organization to continue some or all operations under varying ability levels until return to full normal operations. Degrees of partial operation may include cessation of all ability to function, a limited set of capabilities, or simply degraded performance with all capabilities working in some fashion. Finally, the COOP must address the procedures for returning to normal operating mode, as well as procedures for recovering lost or damaged data.
REFERENCES Applegate, L. M., Austin, R. D., & McFarlan, F. W. (2003). Corporate information strategy and management: Text and cases. New York: McGraw-Hill.
Arveson, P. (1998). What is the balanced scorecard? Retrieved March 15, 2006, from http://www. balancedscorecard.org/basics/bsc1.html Collins, T. (2003, December 16). Inland revenue should not put all blame for tax credit failure on sacked supplier. Computer Weekly, 14. Ferengul, C. (2002, January 31). Best practices in Web hosting service-level agreements. Retrieved March 15, 2006, from http://techupdate.zdnet. com/techupdate/stories/main/0,14179,2843179,00. html Halper, M. (1993, November 29). UK tax agency will outsource to EDS. Computerworld, 27(48), 47. Hudson, R. L. (1993, November 24). EDS wins $1.48 billion contract to run computers for Britain’s tax agency. Wall Street Journal (Eastern Edition). Johnson, M. (2004, January 26). Unspeakable candor. Computerworld, 18(4), 56. Koch, C. (2005, May 15). Don’t maroon security. CIO Magazine, 18, 46-51. Lee, M.-Y. (2000, November 10). Check that network service level agreement. Savvy Business Shoppe. Retrieved March 15, 2006, from http:// www.bizjour nals.com/austin/stories/2000/11/13/ smallb4.html Leishman, T., & Van Buren, J. (2003). The risk of not being risk conscious: Software management basics (STSC Seminar Series). Hill AFB, UT. Menasce, D. (2002, September-October). Mapping service-level agreements in distributed applications. IEEE Internet Computing, 8(5), 23-31. Morgan, J. N. (2004, March). 2004 Outsourcing Summit. Retrieved June 5, 2005 from http://www. pghtech.org/Events/speakers.org Morgan, J. N. (2004, July 16). The rise of international project management as a national and
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corporate strategic advantage: The impact of outsourcing technology and business process projects in the new millennium. Paper presented at Academy of Business and Administrative Sciences (ABAS), Tallinn, Estonia. Morgan, J. N. (2005, January-February). A roadmap of financial measures for IT project ROI. IT Professional, IEEE Computer Society, 7(1), 34-47. Romero, P. (2005, May 3). Un Barco-Factoria de “Software” en Alta Mar, el Colmo de la “Deslocalizacion”[A ship’s factory of software in
the Atlantic Ocean, the culmination of offshore outsourcing]. El Mundo, 15. Shoosmiths. (2005, May 25). Preparing the way to outsource — What should I consider? Retrieved March 15, 2006, from http://www.shoosmiths solicitors.co.uk Strassman, P. A. (2004, April 5). Pick your perspective on IT outsourcing. Computerworld, 30(21), 31. Zachman, J. A. (1987). A framework for information systems architecture. IBM Systems Journal, 26(3).
This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans, D. Schniederjans, and M. Schniederjans, pp. 93-122, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.9
The Power of Incentives in Decision Making Geraldine Ryan University College Cork, Ireland Edward Shinnick University College Cork, Ireland
Most of economics can be summarised in four words: “People respond to incentives.” The rest is commentary. Rauh and Seccia (2005, p.1) quoting Landsburg (1993, p.3)
INTRODUCTION The organisation of the workplace is evolving. In many industries, mass production by large, vertically integrated, hierarchically organised firms is being replaced with more flexible forms of both internal organisation and industrial structure (Brynjolfsson & Mendelson, 1993). Work is increasingly accomplished through networks of smaller, more focused enterprises. Added value is generated by ever-changing coalitions, where each member of a coalition specialises in its area
of core competence and controls it through the use of strategic partnerships. The information systems (IS) revolution has had an enormous influence on how organisations are managed. Electronic access, communication, and decision support influence several managerial processes and systems including the nature and scope of managerial roles, organisational structure, strategic planning systems, budgeting, performance measurement and review, incentive compensation systems, and knowledge management. In today’s world of business, investors must ask how they can motivate independent, self-interested, self-organising, somewhat-coordinated managers so they focus their skills on the common goal of maximising the value of the company. Meanwhile, managers must also inspire their employees to work hard, their suppliers to pro-
vide a good service at the right price, and their customers to purchase their products. Within companies, team structures are replacing the traditional hierarchical form and incentives are being used to encourage performance (Baker, 1992; Holmstrom, 1979). What are incentives? Incentives are mechanisms offered to you to help in the decision-making process. In economics, an incentive is any factor that provides a motive for a particular course of action. Some incentives make people better off and reward them for their actions. Other incentives leave people worse off and penalize them for their actions. Economics is to a large extent a study of incentives: incentives to work hard, to produce high quality goods, to study, to invest, to save, and so forth (Laffont & Martimort, 2002). The aim of this article is to examine how incentives assist in the managerial decision-making process at individual, group, and firm level. We argue that incentives are an integral component of a successful business. Suitably designed incentives provide a tool to elicit correct and timely information, to encourage and reward performance, and to promote coordination and cooperation between firm owners, managers, and employees. We begin by examining the source of the incentive problem and the associated principal-agent literature. We highlight the importance of incentives in solving hidden action and hidden knowledge problems in information security. We look at the concept of contract design and examine how contracts can be used to alleviate one of the problems associated with outsourcing the development of IS. We also look at how incentives can be designed to minimise information problems in auctions. Finally, we discuss the limitations of incentives and we conclude by outlining some avenues for future research.
BACKGROUND Traditional economic theory concerned itself with understanding how prices are formed in competi1830
tive markets and failed to ask such questions as how owners of firms can motivate their employees to strive for the same goal—profit maximisation. In modern organisations, particularly those owned by a large number of shareholders, firm owners must relinquish some control of their firm and delegate tasks to their employees. As soon as one acknowledges that owners and employees have different objectives, delegation becomes problematic (see for example, Baker, 1992; Davenport & Prusak, 1998; Eisenhardt, 1989; Fama, 1980; Holmstrom, 1979, 1982; Gibbons, 1998; Milgrom & Roberts, 1992; Mirrlees, 1997; Pratt & Zeckhauser, 1985). If the interests of the owners and employees are fully aligned, there is no incentive problem. The problem arises when there is conflict between the incentives of both parties and when there is less than perfect information (see for example Holmstrom, 1979, 1982; Mirrlees, 1997, Vickrey, 19611). The following three examples demonstrate how differences in the incentives between the principal (the employer) and the agent (the employee) can arise: (1) An insurance company wants its salespeople to be looking for customers, but the salespeople might prefer to be shopping. (2) A new author, seeking fame, wants his/her book to be reasonably priced so as to achieve high sales and a larger readership, the publisher, seeking high profits prefers a higher price. (3) An IT subcontractor wants to pass any production-cost increases to the price contactor2 while the prime contractor wants the subcontractor to be responsible (as least in part) for any cost increases (McMillan, 1992). All of these examples have the same underlying structure. The person designing the terms of the contract, the principal, has one aim whereas the person performing the task, the agent, has a different aim (Pratt & Zeckhauser, 1985). In economics, this is known as the principal-agent problem. The principal-agent problem refers to the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent (Eisenhardt, 1989). The hiring
The Power of Incentives in Decision Making
person gets dependent on the other’s action. If the principal and the agent are perfectly in agreement then there is no need for one to create incentives for the other. Therefore the best solution is for the principal to hire a person whose interests are directly aligned with his/her own. For example, if he/she wants to move furniture then he/she should hire a fitness fanatic rather than a couch potato; the fitness fanatic is more likely to see the task as an opportunity for a workout and therefore more amenable to carrying out the task (McMillan, 1992). In the world of business it is very difficult to find principals and agents with identical interests. Since it is not possible to constantly monitor the work of every employee within a firm, the principal must either change the agents’ preferences or offer the agent some form of reward to induce the agent to do what he or she really does not want to do (Mirrlees, 1997). In today’s society this is achieved by fostering a corporate culture, by encouraging pride in teamwork, and by developing corporate goals (McMillan, 1992). Motivating devices including money (stock options and periodic bonuses), peer pressure, pride in craftsmanship, work ethic help to align the interests of the principal and the agent while the treat of being fired or not having a contract renewed also incentives agents. The upshot is that in order to get people to do something they would prefer not to do you must offer some sort of reward, or you must punish their actions in some way (Laffont & Martimort, 2002; Mirrlees, 1997; Rauh & Seccia, 2005). Principle-agent theory makes two basic assumptions: firstly, both the principal and the agent are self-interested, utility-maximisers and secondly, the agent is risk-averse, while the principal is risk-neutral or at least less risk-averse than the agent (Gibbons, 1998). Since a utilitymaximising agent does not necessarily act entirely in the principal’s interest, agency-theory proposes that contracts should be designed to provide the agent with incentives that make him act in the best interest of the principal (Mirrlees, 1997).
Holmstrom (1979) examines the use of performance measures in incentive contracts. In particular he shows how the owner of a company can reach his/her targets by including additional performance measures. Looking at the managerial labour market, Fama (1980) shows how the present performance of a manager (the agent) acts as a signal about his/her talents and thus about his/her future performance. He concludes that because managers are concerned about their reputation, incentives can be used to induce them to work harder. Latham and Lee (1986) show that workers who are given specific goals, outperform workers who are not given any goal. Baker (1992) extends this analysis to non-profit firms and government agencies and finds similar results.
INCENTIVES IN THE WORKPLACE Brynjolfsson and Mendelson (1993) argue that the best way for the principal to induce the optimal level of effort from the agent is to base his/her salary directly on his/her effort. However, paying according to effort requires that the principal can monitor the agent perfectly and cheaply, if such monitoring is possible the principal-agent relationship is unproblematic. Unfortunately, in most cases, it is not possible for the principal to monitor every move of the agent. Due to hidden information and/ or hidden knowledge, there are information asymmetries between the principal and the agent after signing the contract. These problems make it very difficult for the principal to design appropriate incentives and contracts.
Hidden Actions and Hidden Knowledge in Information Technology Security The economics of security is a rapidly growing field of research. More and more people are coming to realise that security failures are often due to perverse incentives rather than to the lack of suitable technical protection mechanisms (“The 1831
The Power of Incentives in Decision Making
Weakest Link,” 2002). Wash and MacKie-Mason (2006) argue that incentives are crucial to the smooth running of security in the information sector. They identify a number of incentive problems in security including: knowledge workers and the labelling of vulnerabilities. “Knowledge workers” is a hidden action problem, while “labelling vulnerabilities” is a hidden information problem. Labelling vulnerabilities refers to how security providers (the agent) sometimes label security updates so as to indicate to the users and system administrators the urgency of the update. However, the security provider knows more about the security issue than the user does and they may be afraid to announce a major vulnerability with their software, as this would cause bad public relations and loss of reputation for their product. Therefore there is no incentive for the security provider to provide correct information. Knowledge workers, on the other hand, refers to the fact that within any company employees make numerous decisions on a day-to-day basis which impact on the security of that company. For example, is your password on a sticky label under your keyboard? This is a hidden action problem; the firm cannot see what each individual employee is doing. In this scenario careful attention must be paid to incentives for these workers. Since appropriate security behaviour is difficult to verify, Wash and MacKie-Mason (2006) argue that incentives should be applied to other observable security behaviour. Davenport and Prusak (1998) discuss a similar idea. They argue that in a “knowledge market,” users of a knowledge management system have to be provided with incentives for the system to be a success.
Designing the Right Incentives Given asymmetric information the principal cannot base his/her payments on the agent’s effort. The best thing the principal can do, under these circumstances, is use output as an estimator for
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the agent’s effort (Holmstrom, 1979). Various mechanisms are used to do this, such as piece rates, commissions, profit sharing, efficiency wages, the agent posting a bond, or the threat or being fired/ not-promoted. Musicians, writers, and salespeople all receive commission based on their performance. Executives’ pay is often linked to their firms’ performance with annual bonuses and stock options.3 For example, in U.S. manufacturing, more than a quarter of workers receive at least part of their income in the form of piece rates, bonuses, or commissions (McMillan, 1992). Lazear (2000) shows that productivity increased by about 44% when the Glass Corporation, Safelite, switched from hourly wages to piece rates. If there is a constant, predictable relationship between inputs and outputs, it does not matter that inputs are unobservable as by seeing the output the principal can deduce the size of the inputs and reward appropriately. In the world of business, this is not always possible. A disadvantage of any performance-based payment systems is that they subject the agent to risk. For example, a machine malfunction may impact on the output of a manufacturing worker or a salesperson may be working in a region where there is very little interest in the product and an executive may be faced with harsh economic forces such as rising interest rates. Bouwens and Van Lent (2003) argue that one way to reduce the risk faced by agents is to design the payment so that the agents’ total wage is not variable. For example, the average salesperson only receives a percentage of his/her income from the sales he/she makes. This depends on the number of sales he/she makes and the amount of effort he/she is willing to make. This effort involves some direct costs on the salesperson (e.g. fatigue, wear and tear on the car, etc.) and some indirect costs (e.g., opportunity costs of spending time on sales). What determines the salespersons effort? The percentage of his/her salary he/she takes in commission, that is, his/her marginal
The Power of Incentives in Decision Making
rate of payment. The higher the marginal rate of payment the harder the salesperson works.4 To elicit information about the sales region and the salesperson sales ability, companies often allow the salesperson to choose the commission rate. The salesperson will always choose the commission rate where the cost of extra effort equals the gain from extra effort (McMillan, 1992). The highest marginal rate of payment is 100%. At this level the salesperson is fully rewarded for the effort they make, however, the firm does not make any profits. At this marginal rate the salesperson is fully exposed to risk, for example, if he/she gets sick for a day he/she will receive no income, if he/she works very hard to sell a product in an area which has no interest then he/she will receive little or no reward for his/her effort. Therefore, there is an incentive for firms and employees to share the risk by designing incentive schemes that reward both (Milgrom & Roberts, 1992). To do this the principal designs a contract so that the payment depends on both a fixed element and on a variable element (such as commission rate).5 The variable element elicits information (about the agent, the product, the sales territory, etc.) and the effort the agent wishes to put in.
Designing an IS Outsourcing Contract Currently IS outsourcing is viewed as an attractive option by many senior managers because of the belief that IS outsourcing developers can achieve economies of scale and specialisation because their only business is information processing (Bryson & Sullivan, 2002). Critical to the management of the outsourcing relationship is the outsourcing contract, which if improperly or incompletely written can have significant negative implications for the outsourcing firm and for the IS developer. Firms, typically, use one of three contract types: (1) a fixed-price contract, where the payment is fixed regardless of the costs of the project; (2) a cost-plus contract, which fully covers the
realised costs of the project; or (3) an incentive contract, which allows cost over/under-runs to be shared between the parties involved. Each contract gives the IS developer different effort incentives. For example, if the firm offers a fixed contract then the developer bears the consequences of its effort. This gives the developer a huge incentive to keep costs down, as all unforeseen costs are imposed on the contractor. It does not offer the developer any incentive to invest in research and development. A cost-plus contract offers the developer no incentive to keep costs down. The IS developer can spend as much as they like on a large workforce, high-tech equipment and so on, without any repercussions for themselves. The incentive contract, on the other hand, offers the developer an incentive to work with the firm in order to produce the best, yet cost-efficient product. Bryson and Sullivan (2002) argue that the incentive contract should specify performance levels for given periods of time, and the corresponding penalty and incentive components. It is important that any outsourcing contract strike a delicate balance between penalties and rewards to ensure that the vendor behaves in a manner that is consistent with the outsourcer’s best interest when making decisions about allocating scare resources to the outsourcer’s application. The value-based incentive system at 3M Corporation provides a positive example of how incentives can be structured to reward innovation. There, business unit heads are rewarded for the proportion of revenues derived from new products (less than 5 years old) (Chen, Conover, & Kensinger, 2005). Clearly this encourages innovation. McConnell and Muscarella (1985) show that on average, shareholder wealth increases each time a firm announces increased investment in R&D or in new equipment.
Other Uses for Incentives Incentives form a very useful tool in the marketplace. For example, auctions can be designed in
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The Power of Incentives in Decision Making
a way that offers incentives for people to tell the truth about how they value an item (e.g., property, a car, a painting, a concert ticket, a mobile phone licence). There are many different auction formats. You can have a first-price, sealed-bid auction or a second-price, sealed bid auction. You can have an ascending-price auction or a descending-price auction. There are different ways to run an auction with different properties to achieve different goals. The key to auction design is incentives. By setting up the rules of an auction, or the rules of how people buy and sell things, you provide different types of incentives for the trading partners. Consider, for example, an auction, where you want the bidders, who are bidding for a particular good, to bid truthfully. You want them to provide information about what they are really willing to pay. The best way to do this is to use a second price auction (Vickrey, 1961). Here each bidder submits a sealed bid, the highest bidder gets the item, and the price that the winner pays is the second-highest bid. With this auction rule, no bidder can gain by lying. If the bidder understates their true value they decrease their probability of winning the auction and if they exaggerate their true value they increase their probability of winning the auction. Therefore, their bid only influences their probability of winning/ losing and not the actual amount they pay. Admittedly, the truth comes at a price; the firm now only receives the second highest valuation. This sum of money can be thought of as what the firm is willing to loose as a result of their informational disadvantage.
A Word of Caution The behavioural literature on compensation systems (Hamner, 1975; Lawler, 1971, 1990) argues that using incentives often leads to unintentional and dysfunctional consequences. Asymmetric information and unintended consequences can often make incentives much more complex than the people offering them originally expected,
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and can lead either to unexpected windfalls or to disasters produced by unintentionally perverse incentives. While competition among firms has often beneficial results (e.g., lowering prices and encouraging innovation), competition within firms has almost uniformly negative results. The performance measure will not always give the agent accurate incentives and the agent will engage in actions that the principal, if he/she had the agent’s information, would consider non-optimal. The problem with incentive contracts is not that they do not work but that they work too well. Agents do exactly as the incentive desires. For example contracts that promote quantity often results in poor quality products or if bonuses are more dependent on timely project completion than on discovered failures, the employee may over invest in expedience at the experience of quality (Wash & MacKie-Mason, 2006). This is a major problem with experience goods, where it can take days, months, or years after purchasing the good to discover its quality, for example, with a computer chip. This can be resolved by giving delayed rewards, like promotions or end of year bonuses (Murphy & Oyer, 2003).
CONCLUSION AND FUTURE RESEARCH Incentive problems are essentially information problems. With perfect information the principal could easily design a contract to elicit the desired actions from the agent. Inefficiencies resulting from incentive problems can be reduced by improvements in information. Attention to individual incentives can lead to vast improvements in the design of information, communication, and collaboration systems. Designing a contract that incentives the provision of correct and timely information and accurately rewards for performance can add value to any company or public body. The terms of a contract must be set as a compromise between providing performance
The Power of Incentives in Decision Making
incentives and eliciting information and sharing risk. For example, bonus and commission-based payment systems will dominate when the agent possesses valuable information and good performance measures are available. Straight salary payment systems will dominate either when the agent is not asymmetrically informed about the job being performed or when no good performance measures exist. In these situations, expending resources to monitor effort or to mitigate the information asymmetry will be efficient. Incentive contracts based on the total value of the organisation, such as partnerships and stock ownership, will dominate when information asymmetries are great and no good performance measure exist. Economic incentives are used in many situations to motivate improvements in the use of scarce resources; for example, Rekhter, Resnick, and Bellovin (1996) and Afergan and Wroclawski (2004) among many others, are examining the case of Internet routing. Currently, any source can send a packet to any destination; in general, such a packet will travel across many different autonomous systems. However, this is likely to change in the future and therefore there is a need for the autonomous systems to be properly incentivised to supply truthful information about how much it actually costs them to carry traffic. Similarly, others such as Fehr and Schmidt (2004) are examining how an agent reacts if he/ she is rewarded for one task but not another, while Wichelns (2006) is examining how incentives can be used to encourage farmers to improve water management. Properly designed, economic incentives reward sustainable practices. Disciplined frameworks, that assist business in applying innovation and forward thinking improvements provide improved cost structures and margins. This positions a business to deal more effectively with internal and external markets.
REFERENCES Afergan, M., & Wroclawski, J. (2004). On the benefits and feasibility of incentive based routing infrastructure. In Proceedings of the ACM SIGCOMM Workshop on Practice and Theory of Incentives in Networked Systems (pp. 197-204). Baker, G. (1992). Incentive measures and performance measurement. Journal of Political Economy, 100, 598-614. Bouwens, J., & Van Lent, L. (2003). Effort and selection effects of incentive contracts. Discussion Paper 130. The Netherlands, Tilburg University, Center for Economic Research. Brynjolfsson, E., & Mendelson, H. (1993). Information systems and the organisation of modern enterprise. Journal of Organisational Computing, 3(3), 245-255. Bryson, K. M., & Sullivan, W. E. (2002). Designing effective incentive-oriented outsourcing contracts for ERP systems. In Proceedings of the 35th Hawaii International Conference on System Sciences. Chen, A. H., Conover, J. A., & Kensinger, J. W. (2005). Voluntary disclosure of real options: When and how. Mimeo College of Business Administration, University of North Texas. Davenport, T. H., & Prusak, L. (1998). Working knowledge: How organisations manage what they know. Boston: Harvard Business School Press. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74. Fama, E. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288-307.
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Fehr, E., & Schmidt, K. M. (2004). Fairness and incentives in multi-task principal-agent model. Scandinavian Journal of Economics, 106(3), 453-474. Gibbons, R. (1998). Incentives in organisation. Journal of Economic Perspectives, 12(4), 115132. Hamner, W. C. (1975). How to ruin motivation with pay. Compensation Review, 7(3), 17-27. Holmstrom, B. (1979). Moral hazard and observability. Bell Journal of Economics, 10, 73-91. Holmstrom, B. (1982). Moral hazard in teams. Bell Journal of Economics, 13, 324-340. Laffont, J. J., & Martimort, D. (2002). The theory of incentives. Princeton University Press. Landsburg, S. E. (1993). The armchair economist: Economics and everyday life. New York: Simon and Schuster. Latham, G., & Lee, T. (1986). Goal setting. In E. Locke (Ed.), Generalizing from laboratory to field settings (pp. 101-118). Lexington, MA: Lexington Books. Lawler, E. W. (1971). Pay and organisational effectiveness: A psychological view. New York: McGraw-Hill. Lawler, E. W. (1990). Strategic pay: Aligning organisational strategies and pay systems. San Francisco: Jossey-Bass. Lazear, E. P. (2000). Performance, pay and productivity. American Economic Review, 90(5), 1346-1361. McConnell, J., & Muscarella, C. (1985). Corporate capital expenditure decisions and the market value of the firm. Journal of Financial Economics, 14, 399-422. McMillan, J. (1992). Games, strategies and managers: How managers can use game theory
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to make better business decisions. Oxford University Press. Milgrom, P., & Roberts, J. (1992). The economics of modern manufacturing: Technology, strategy and organisation. American Economic Review, 80(3), 511-528. Mirrlees, J. A. (1997). Information and incentives: The economics of carrots and sticks. The Economic Journal, 107(444), 1311-1329. Murphy, K. J., & Oyer, P. (2003). Discretion in executive incentive contracts. Working Paper. Stanford Business School. Pratt, J., & Zeckhauser, R. (1985). Principals and agents: The structure of business. Boston: Harvard Business School Press. Rauh, M. T., & Seccia, G. (2005). Incentives, monitoring and motivation. Working paper No. 0506008, EconWPA: Game Theory and Information. Rekhter, Y., Resnick, P., & Bellovin, S. (1996). Financial incentives for route aggregation and efficient address utilization in the Internet. In Proceedings of Telecommunications Policy Research Conference, Solomons, MD. The weakest link. (2002, October 26). The Economist [newspaper], 11-14. Vickrey, W. (1961). Counterspeculation, auctions and competitive seal tenders. Journal of Finance, 16(1), 8-37. Wash, R., & MacKie-Mason, J. K. (2006). Incentive-centered design for information security. In Proceedings of the First Workshop on Hot Topics in Security (pp. 1-6). Wichelns, D. (2006). Economic incentives encourage farmers to improve water management in California. Water Policy, 8, 269-285. Woolridge, J. R. (1995). Do stock prices reflect fundamental values? Journal of Applied Corporate Finance, 8(1), 64-69.
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KEY TERMS Added Value: Added value refers to the increase in worth of a product or service as a result of a particular activity. Asymmetric Information: Information asymmetry occurs when one party to a transaction has more or better information than the other party. Contract: A contract is an agreement between two or more persons which creates an obligation to do or not to do a particular thing. A legally enforceable agreement between two or more competent parties made either orally or in writing.
accurately called the principal-agent problem. Outsourcing: Outsourcing is the practice of a firm contracting a non-core activity to a third party. Strategic Partnership: A strategic partnership is a type of cooperative strategy in which corporate alliances are made between organizations—including between former rivals—as part of a global business strategy.
ENDNOTES 1
Core Competence: A firm’s core competency is the one thing that it can do better than its competitors. A core competency can be anything from product development to employee dedication. 2
Economies of Scale: Economies of scale is a situation where unit costs drop as volume increases. Hidden Action: Hidden action refers to when the principal is not able to observe exactly how much effort the agent really puts forth because monitoring is costly and precise measures of the agent’s behaviour are not available. Hidden Information: Hidden information refers to the situation where the agent has better knowledge about the decisions he/she is taking on behalf of the principal. Incentive: Incentives are financial compensation, public recognition, or other benefits used to reward higher levels of performance and/or new ideas or contributions. Incentive Theory: Incentive theory is an element of human resources or management theory. It states that firm owners should structure employee compensation in such a way that the employees’ goals are aligned with owners’ goals. It is more
3
J. A. Mirrlees and W. Vickrey were joint recipients of the 1996 Nobel prize in Economics “for their fundamental contributions to the economic theory of incentives under asymmetric information.” As this will allow him/her to invest in the best of equipment, have a large workforce, spend little time looking for cost-effective production methods, and so forth. The annual bonus incentivises the executive to maximise the profits of the company, whereas, the stock option incentivises the executive to improve the performance of the company in the future. This can be as much of a hindrance as help. By giving executives stock options you are encouraging them to increase stock prices. They can do this in two ways, either by making sound decisions and reaping the rewards of a long-term price increase or by falsifying accounting information to give the illusion of economic success and reaping profits from the shortterm price increase by selling before the truth comes out and prices fall. Woolridge (1995) presents evidence that more than half the value of a stock is typically based upon something else besides the next five years’ expected earnings. The present value of growth opportunities, or other things such
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The Power of Incentives in Decision Making
4
as the hope of receiving a premium price in an acquisition, typically account for the majority of share value. For example, if the marginal rate of payment (or the commission rate) is changed from 0% to 30% then there is an incentive for the salesperson to sell more of the product as it will directly impact on their take-home pay. At 0% there is no incentive for the
5
salesperson to make any sale. Any amount greater than 0% encourages the salesperson to sell. In some cases this can work by the agent paying the principal a fixed initial amount, in order to buy the right to become an agent, and then retaining 100% of the marginal rate of payment after this point.
This work was previously published in Encyclopedia of Decision Making and Decision Support Technologies, edited by F. Adam and P. Humphreys, pp. 724-731, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.10
Project Management Issues in IT Offshore Outsourcing Kathy Stewart Schwaig Kennesaw State University, USA Elke Leeds Kennesaw State University, USA Stephen H. Gillam Accenture, USA
ABSTRACT
INTRODUCTION
Global partnerships are forming to take advantage of the cost savings associated with offshoring as well as other strategic benefits. Not all information technology offshoring projects, however, are successful. Cost overruns, increased complexity and defective code cause organizations to rethink their offshoring strategy and their methods for managing these projects. In this paper, project management issues associated with offshore information technology outsourcing projects are identified and specific recommendations for addressing these issues are presented.
Globalization, increased competition, shorter cycle times and an uncertain economic climate are the primary motivators for firms to reexamine traditional methods of delivering information technology (IT) based services and systems. Offshore IT outsourcing is an increasingly popular option for many firms as they transfer a wide array of software development and customer service applications to countries overseas (Misra, 2004). The rate of growth in the global IT outsourcing market is projected to grow at a compound annual rate of 26%, increasing from $10 billion in 2003 to an estimated $31 billion in 2008. During the same period, savings in offshore projects are
Project Management Issues in IT Offshore Outsourcing
expected to increase from $6.7 billion to $20.9 billion (Behravesh & Klein, 2004). McKinsey & Company, for example, purports that every dollar offshored from the U.S. or the U.K. creates $1.45 to $1.47 of value, with an estimated $1.12 reinvested back into the U.K. or U.S. and the rest going to the vendor country (Financial Times Limited, April 2005). The dominant firms sending software development offshore are U.S. and European, and the typical offshore destinations are India, China, and the Philippines. Both sides of the list are expected to grow, however, as firms from more nations become involved (Kedia, Lahiri, & Lovvorn, 2005). Currently, India is projected to receive about 70% of the world’s software and business process offshoring business while China, Ireland, Singapore, Mexico, and the Philippines comprise the rest (Bharadwaj, 2004). Firms that offshore their IT processes expect to benefit from cost savings, access to highly skilled labor, increased quality and reduced development times (Bharadway, 2004). Based on the touted benefits and the expected growth in the offshoring market, it is clear that offshore IT outsourcing will increasingly become a part of an effective strategy for gaining and sustaining competitive advantage (Nair & Prasad, 2004; Kedia, Lahiri, & Lovvorn, 2005). Unfortunately, many offshore IT outsourcing projects to date have not delivered the projected costs savings and the expected strategic benefit (Saran, 2004). Traditional, “onshore” IT projects are replete with both management and technical complexities that challenge even the best project managers (McDonald, 2001). Geographic distance and cultural differences, among other factors, make managing offshore IT projects even more complex (Kliem, 2004; Laplante, Costello, Pawan, Sudi, & Landon, 2004). Sound project management practices and techniques are crucial to delivering a successful offshore project. In fact, poor project management is one of the major causes of problems in IT offshore outsourcing efforts (Ante, 2004). A
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recent study of 101 CIOs involved in offshore IT projects found that their greatest challenges dealt with project management issues such as managing team communication, addressing cultural differences, specifying internal work processes, and developing internal management skills (Ware, 2003). Each challenge can impact the functionality and quality of offshore projects and ultimately eliminate any expected financial or competitive benefits. In this paper, project management issues encountered in an IT offshoring context are discussed and suggestions for addressing these issues are presented. The paper is organized as follows: the next section provides an overview of outsourcing, IT outsourcing, and offshore IT outsourcing. In the following section, a discussion of IT project management is presented along with the framework used to evaluate project management issues in an offshore context. The section afterwards, discusses offshore IT outsourcing challenges related to each project management area and provides insights for addressing each issue. The last section concludes the paper with a discussion of the paper’s contributions as well as recommendations for future research.
OVERVIEW OF OUTSOURCING, IT OUTSOURCING AND IT OFFSHORE OUTSOURCING Outsourcing The term outsourcing refers to the relationship between a vendor and a client in which the vendor is responsible for one or more of the client’s processes or functions (Rajkumar & Mani, 2001). Theoretically, the outsourcing firm achieves economies of scale by spreading the fixed costs of performing the service or producing the product over their entire customer base (Ang & Straub, 1998). The client firm benefits from the vendor’s expertise and saves the production costs associated with
Project Management Issues in IT Offshore Outsourcing
developing the product or service. Added costs emerge, however, in that the client has to manage and coordinate the negotiation process as well as the relationship with the vendor during the life of the project. A tradeoff typically emerges in terms of production and coordination costs (Lacity & Hirschheim, 1993). As long as the coordination costs do not exceed the savings in production costs, the firm’s cost saving goals are achieved. If the coordination costs exceed the production costs savings however, the client’s overall costs of producing the product or providing the service are actually increased. Additional forces beyond cost savings motivate firms to outsource certain parts of their business (Lacity & Hirschheim, 1993; Williams, 1997; Insinga & Werle, 2000). One major force has been the need for firms to focus on their core competencies; those key activities that the firm must do better than their competitors in order to effectively compete in the marketplace (Prahalad & Hamel, 1990; Lacity & Hirschheim, 1995). Firms using a core competency mindset assess whether or not a function or process is essential to their business. If the answer is “no”, the activity is a candidate for outsourcing (Lokachari & Mohanarangan, 2001). Other forces driving firms toward outsourcing include access to scarce expertise or new technology and the need to have a scalable workforce (Lacity, Willcocks, & Feeny, 1996).
IT Outsourcing Firms have outsourced select information technology functions since the early 1960’s when clients allowed vendors to process accounting applications such as payroll and accounts payable. Wide scale IT outsourcing, however, had its beginning in late 1988 when Kodak engaged in a major outsourcing project (Lacity & Hirschheim, 1995). Using a core competency model, Kodak outsourced three components of its information technology division to three competing vendors, IBM, Businessland, and DEC. This event led to
a bandwagon effect where hundreds of CEOs, dissatisfied with their IT department’s failure to deliver quality systems on time and within budget, made similar decisions to outsource their IT functions (Fitzgerald & Willcocks, 1993). Since that time, much research has been conducted on the factors associated with successful IT outsourcing (Schary & Coakley, 1991; Fitzgerald & Willcocks, 1993; Hurley & Rundell, 1997; Lacity, Willcocks, & Feeny, 1996; Lacity & Willcocks, 1998; DiRomualdo & Gurbaxani, 1998; Grover, Teng, & Cheon, 1998; Willcocks & Lacity, 1998; Kern & Willcocks, 2002). Even though the current trend in IT outsourcing began with Kodak in the late 1980’s, two key transformations have occurred since that time (Qu & Brocklehurst, 2003). The first was a movement beyond outsourcing IT towards business process outsourcing such as customer service centers. The second transformation was the expansion of IT outsourcing from onshore to offshore (Qu & Brocklehurst, 2003).
Offshore IT Outsourcing Khan and Fitzgerald (2004) define offshore outsourcing as “an activity where client firms outsource IT activities to external service providers in other countries…and excludes the global internal subsidiaries of client firms” (p. 37). IT offshoring began in the early ’90s when ERP implementations created a need for companies in developed countries to access talent in developing countries in order to shorten development time (Bharadwaj, 2004). In the late ’90s, Y2K and the booming ecommerce market greatly increased the need for IT professionals worldwide. The trend continued following the technology downturn in 2001. With the sluggish economy, firms continued to look for ways to cut cost while still delivering quality and timely IT projects (Bharadwaj, 2004). More recently, interest in offshore IT outsourcing has increased dramatically (Khan & Fitzgerald, 2004). Vendors such as IBM, EDS,
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Project Management Issues in IT Offshore Outsourcing
Computer Sciences Corporation (CSC), Accenture, and Affiliated Computer Services, Inc. offer offshore outsourcing options to their clients. As mentioned earlier, expected benefits include lower cost for IT application maintenance and software development, faster time to market, access to global expertise, better allocation of resources, increased throughput and fewer labor restrictions (Apte et al., 1997). Concerns regarding the risks of IT offshore outsourcing exist as well. A few of the challenges include effectively managing cultural differences across geographically dispersed teams, maintaining security of data and systems, compliance to regulatory mandates, saving morale of onshore staff, establishing and maintaining communications, selecting an offshore an vendor, and negotiating and enforcing contracts across multiple legal and ethical systems (Kliem, 2004). With the explosion in the IT outsourcing market in the past few years has come increased attention by the academic community. Some research focuses on the economic, social, and political impact of offshore outsourcing on specific countries such as the United States (Matloff, 2004), Indonesia (Setiadi & Kom, 2005) and India (Khan, Currie, Weerakkody, & Desai, 2002; Nair & Prasda, 2004; The Economist, 2005). One study analyzed the software development strategies for implementing short-cycle-time software development within Russia (Pries-Heje, Baskerville, & Hansen, 2005). Other work identifies the benefits, risks and challenges of offshoring (Apte et al., 1997; Rajkumar & Dawley, 1997; Khan et al., 2002; Kliem, 2004). Case-based research investigates the business models pursued by different firms and provides comparative results across multiple projects (Khan & Fitzgerald, 2004; Beulen, van Fenema, & Currie, 2005). Finally, Misra (2004) advocates the use of metrics to assure that the goals of all parties involved in an IT offshore outsourcing project are met. The following section discusses the discipline of project management and its importance in
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successful offshore IT outsourcing projects. In addition, the framework used in this paper for assessing current project management practices and issues in the offshore IT outsourcing context is presented.
PROjECT MANAGEMENT The history of project management crosses many disciplines and decades (Cleland, 2004). Project management is the application of expertise, skills, tools, and techniques to a set of interconnected activities in order to meet the requirements of the project (Grupe, Urwiler, Ramarapu, & Owrang, 1998). The goal of any project management effort is to manage the resources assimilated in such a way that the project is completed on time, within budget, and according to the functionality and quality expectations of the sponsor (McManus, 2004). Project management factors that lead to successful development and implementation of software have been identified (McConnell, 2001; Nidumolu & Subramani, 2003) as well as those factors that pose risk (Keil, 1995; Wiegers, 1998; Chang & Christensen, 1999; Abdel-Hamid, 1999; Conradi, Nguyen, Wang, & Liu, 2000). Numerous formal project management methodologies exist and many IT organizations formulate their own project management approaches for delivering successful systems (Cantor, 1998; Meredith & Mantel, 2000). Unfortunately, the failure rate of IT projects is somewhat legendary (Lyytinen & Hirschheim, 1987; Keil & Robey, 2001). In 2002 alone, over $140 billion was lost on failed information technology projects (Larkowski, 2003). Over the past decade, the Standish Group published studies indicating that anywhere from 75% to 90% of IT projects are unsuccessful (Larkowski, 2003). Interestingly, research also indicates that the cause of failure is typically not attributed to the technology but rather to poor management (Keil & Montealegre, 2000). As the statistics indicate,
Project Management Issues in IT Offshore Outsourcing
managing traditional onshore IT projects presents challenges ranging from eliciting end user involvement to selecting and motivating a project team. The complexity of an offshore IT outsourcing project delivers many of the same challenges as well as new ones (Misra, 2004). Some prior research exists examining project management issues in an IT offshore outsourcing context. Studies, for example, develop frameworks to help firms decide whether or not to outsource IT projects offshore and, if so, which locations are best (Smith, Mitra, & Narasimhan, 1996; Zatolyuk & Allgood, 2004; Nair & Prasad, 2004; Khan & Fitzgerald, 2004). Others examine the political reasons that offshore projects fail (Rost, 2004). A few studies have looked specifically at managing the risks of offshore IT development projects. Kliem (2004), for example, noted that the benefits of IT offshore outsourcing will not be realized unless the associated risks are identified and managed. He developed a framework of risks associated with offshored projects and a process for developing appropriate controls to address the risks. Similarly, Ramarapu and Parzinger (1997) discussed the complexity and risks associated with offshoring beyond traditional IT outsourcing and warned that benefits of reduce costs, improved quality, and economies of scale will not be realized without careful assessment of the issues associated with offshoring. The Project Management Institute (PMI) is a professional organization focused on the needs of project management professionals worldwide and across multiple disciplines and industries including information technology. As an international professional organization, PMI is recognized for its Project Management Body of Knowledge (PMBOK), which identifies and synthesizes important literature and research on project management into a coherent set of principles and standards for professional certification in project management (Zanoni & Audy, 2004). The PMBOK focuses on best practices in nine key areas of a project: scope, procurement, communication, time, hu-
man resource, quality, cost, risk, and integration (Zanoni & Audy, 2004; Schwalbe, 2004). Project managers deploy tools, techniques, and management processes specific to each of the nine areas with the intent of directing their projects to successful completion. No prior research, however, has used the PMBOK model as a tool for identifying areas of project exposure on IT offshore software development projects. This paper uses the nine areas of the PMBOK as a framework for assessing project management issues in an offshore IT outsourcing context. While the PMBOK is one of many project management frameworks, it is used in the current study due to its simplicity and applicability to practice. Table 1 presents and defines each PMBOK component. The following section identifies the offshore IT issues related to each PMBOK area and provides suggestions for addressing each issue.
PROjECT MANAGEMENT ISSUES IN AN OFFSHORE IT OUTSOURCING CONTEXT Scope Management Undertaking an offshore project involves considerable amounts of planning, coordination, and alignment with business strategy. Traditionally, a Work Breakdown Structure (WBS), identifying each unit of work required to complete a project, is constructed as one of the first steps in the project management process (Baar & Jacobson, 2004). In offshore outsourcing, with its added geographic and cultural complexity, a complete understanding of scope and impact is required prior to WBS creation. Simply locating some IT functions overseas does not ensure improved company performance and competitiveness in the long run. Managers must have a clear understanding of the objectives and goals of the offshore project and how they
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Project Management Issues in IT Offshore Outsourcing
Table 1. The nine knowledge areas of the project management body of knowledge (Schwalbe, 2004) Knowledge Area Scope Management Procurement Management Communications Management Time Management Human Resource Management Quality Management Cost Management Risk Management Integration Management
Definition All processes involved in defining and controlling what is or is not included in a project. All processes required to acquire goods and services from an outside organization. All processes required to ensure timely and appropriate generation, collection, dissemination, storage, and disposition of project information All processes required to ensure timely completion of a project. All processes required to make the most effective use of all the people involved in a project. All processes required to ensure that the project will satisfy the needs for which was undertaken. All processes required to ensure that the project is completed within the approved budget. All processes required to identify, analyze and respond to risk throughout the life of a project and in the best interests of achieving project objectives. Includes the processes involved in coordinating all of the other project management knowledge areas.
relate to the overall business strategy of the firm (Kedia, Lahiri, & Lovvorn, 2005). For the most part, firms engage in IT offshore outsourcing in order to meet strategic business objectives such as cost savings and faster time to market. In order for real value to emerge from the project, the IT planning process must be closely aligned with the strategic planning process of the firm. Offshore projects that are selected for implementation because they are closely aligned and linked to the objectives of the business are much more likely to succeed (Straub, Weil, & Schwaig, 2004). Critical in the scope planning and definition stage is the level of executive management support. Executive support is especially crucial in an offshore IT outsourcing project that has been identified as strategic for a firm and an enabler of competitive advantage. Most executives, unfortunately, have little or no exposure or experience with offshore IT outsourcing. Each offshore project needs an executive champion who will communicate the strategic and critical nature of the project throughout the organization and an executive sponsor who will assure adequate financial and human resources are available. These roles should be incorporated into the WBS to demonstrate firm commitment and executive
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management involvement. Strong executive support is essential to a successful, long-term offshore strategic initiative (Krell, 2004). Executives and other supporters, however, should be cautious not to overstate the benefits of offshoring. Users and executive management may be too ambitious or optimistic in their appraisal of what an outsourcing arrangement can accomplish. In fact, inaccurate cost savings estimates are the primary reason why outsourcing arrangements are perceived as failures (Krell, 2004). Identifying the scope of an offshore outsourcing project is key to answering the most important question regarding the decision to offshore or not: why do we want to offshore? Some firms choose to offshore processes that they see as non-core. Each business must evaluate its business model and judge whether or not offshoring all or part of their IT fits with their long-term strategy (Kedia, Lahiri, & Lovvorn, 2005).
Procurement Management The success of offshore IT outsourcing projects is largely dependent upon the relationship established with the vendor firm. Vendor selection, therefore, is extremely important (Ramarapu &
Project Management Issues in IT Offshore Outsourcing
Parzinger, 1997). Traditional IT vendor selection processes include the following steps: identify potential vendors, request solution and cost proposals from vendors, check client references, analyze vendor proposals including financials, and select a vendor. All of these steps are essential in selecting an offshore vendor as well, but a few additional issues are raised. Before selecting a vendor, it is extremely important to clearly articulate what business processes will be outsourced offshore and why an offshore solution is appropriate. Answering these two questions guides downstream decisionmaking and helps structure the offshoring project. Business and IT managers must be able to link the offshore initiative to their overall business goals before they can fully address how to best offshore a function. Several other issues must be addressed in the vendor selection process. First, the political and economic conditions of the offshore country must be assessed (Zatolyuk & Allgood, 2004; Nair & Prasad, 2004). Factors that should be understood include the judicial system, international trade laws, financial stability, labor laws, information privacy standards, software piracy laws, as well as the ability of law enforcement agencies to enforce regulations (Kliem, 2004). Second, the foreign destination must have a stable and appropriate national infrastructure. Issues associated with infrastructure include bandwidth scalability, real estate cost, power availability and reliability, cost of living, transportation, and degree of educated labor pool (Kliem, 2004). Third, the client should assure that the vendor’s goals, objectives, mission, and vision are consistent with its own. This is especially important if the client wants to sustain a long-term offshore relationship with the vendor. Switching vendors can be extremely costly especially in an offshore context. Assurance of the leadership and willingness of the vendor to adapt to the client’s standards and processes, therefore, is extremely important.
Fourth, a detailed investigation of specific vendor processes and capabilities should be conducted. Issues such as their software development capacity (employee retention, turnover, skills) and maturity levels, technology infrastructure, conflict management process, project management capabilities, and redundancy plans should be assessed. The goal here is to assure that the vendor has the technology and management processes in place to assure business continuity. Finally, special attention and detail should be given to the negotiation and contracting process. Contract terms should explicitly define financial commitments, payment methods, roles and responsibilities, schedules, quality, and functional expectations. Dispute management and early termination clauses should be clearly established. A firm must understand how different countries handle breaches of contract and criminal behavior. In the United States, for example, it is relatively easy to get an injunction. Canada and Ireland are similar to the U.S., while it is much harder in India and virtually impossible in China (Briggs, 2005). Ownership of information and software must be clearly stated in light of international intellectual property laws (Laplante et al., 2004). Increasingly important is the security and privacy of information exchanged. Security practices related to data exchange, access, use, and storage must be established.
Communications Management Communications management in a project includes two related tasks: instituting and managing the reporting cycle, and managing and coordinating meetings with team members as well as upper management. As team members work on project deliverables, their progress must be monitored and controlled. A sound reporting cycle assures that team members and managers are aware of quality expectations and deliverable deadlines and also assures that accountability is assigned and problems are systematically addressed. Formal
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and informal meetings are used to report on deliverable progress, discuss project issues, resolve problems, and communicate any major or minor changes in the project. A major component of communications management is handling project documentation for all stages of the project. Communication is made more complex in an offshore context due to dispersed team members, language, time zone, and cultural differences (Ramarapu & Parzinger, 1997, Kliem, 2004). Team members and management are typically located at both the client and vendor sites. Due to their remote geographic location, it is easy to exclude offshore team members from group meetings and communication. Special consideration must be made in order to prevent the organization from alienating the offshore IT members, which may result in poor decision-making and reduced productivity. It is equally important to prevent the offshore team from making decisions without the involvement of the onshore group. Management needs to be accessible to both the onshore and the offshore associates, ensuring that everyone is receiving the same message, communication, and direction (Gilliard & Joharisen, 2004). Cultural differences can also be seen in project communication. Generally, a U.S. worker is more likely to voice an opinion, ask questions, or offer suggestions. Some cultures, however, view a subordinate expressing their opinion as a sign of disrespect (Nicholls & Ellement, 1997). A project manager must understand this dynamic and manage it in a culturally appropriate manner (Kliem, 2004). While cultural differences and their impact on communication can be seen in an “onshore” project equally, the impact of cultural differences and lack of awareness may impact offshore projects more significantly. Client and vendor management both must be kept informed about project progress. Advances in communication technologies such as e-mail, internet/intranet access, instant messenger, discussions/chat rooms, online/offline work, video-conferencing, and so forth, help to facili-
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tate communication to team members as well as management (Chidambaram & Jones, 1993; Xue, Sankar, &Mbarika, 2005). While the technology is used to organize and send information, the message is actually communicated when it is interpreted by another person (Gillard & Joharisen, 2004). The effect of cultural interpretation and norms, therefore, plays an important part in technologically based communication (Xue, Sankar, & Mbarika, 2005). Finally, during the contracting process with the vendor, it is imperative that the client and the vendor agree on the quantity and frequency of communication as well as on a standardized reporting procedure.
Time Management The use of offshore IT resources for project development activities can impact the timing of deliverables and the ultimate schedule of the project. Defining activities, estimating durations, and identifying sequencing relationships among activities, as well as monitoring and controlling the schedule, are more complicated when managing geographically dispersed project activities. Finely developed communication, coordination, and integration skills are essential in avoiding project cost and schedule overruns. A major benefit of offshoring is the ability to perform project work on a 24x7 schedule. Some firms incorporate the “follow-the-sun” model in order to achieve round-the-clock development, management, and support (Edwards & Sridhar, 2005). The time difference can be a challenge in some cases and a real benefit in others. In a typical offshore situation, the IT resources may be located thousands of miles away and generally 9-12 hours apart. In this situation, a client development team can work all day and, while they are off work, another offshore team can continue the work from the point where the client team left off. This scenario allows for continuous development, reduces deployment time, increases throughput, and lowers cost in terms of faster time to market.
Project Management Issues in IT Offshore Outsourcing
Conversely, 24x7 development can add costs in terms of the increased need for coordination, communication, and control of the development environment (Dube & Pare, 2001). Projects involving web hosting, design, and other internet-related work, are candidates for shorter cycle times. When a shorter cycle time is required, project managers must use more adaptive project management methodologies and techniques (Pries-Heje, Baskerville, & Hansen, 2005). In other instances, such as the rollout of an enterprise resource planning system or a software migration, projects may take months or even years. Whether the cycle time is long or short, project managers on offshore projects must have a project management skill set flexible enough to adapt to the type of project they are leading.
Human Resource Management The offshore vendor team is the key to the overall success of the project and represents an extension of the client firm. As discussed earlier, communication and cultural challenges can make it difficult to achieve synergy between the domestic and remote teams. As a general guideline, one liaison from the onshore team should be present for every 20 members of the offshore team (Laplante et al., 2004). Other challenges include managing employee turnover, acquiring appropriate skills, sharing knowledge, and addressing cultural differences. Each is discussed below. Employee turnover is one of the primary considerations in managing offshoring projects. Due to the aggressive growth of the offshoring industry overseas, the job market is extremely competitive with job turnover rates climbing as high as 35% in some countries (Overby, 2003). To guard against potential schedule delays and cost overruns, the client firm should closely assess the hiring, retention, and training strategies of the vendor firm prior to signing the contract. In addition, the project manager should ensure that the vendor has incorporated appropriate reward
and incentives systems to reduce the risk of turnover. The initiating firm should communicate this directly to their internal human resources (HR) group and solicit involvement throughout the project. Assessing employees’ skills is challenging in the onshore realm. Transitioning the assessment to offshore vendor managed employees exponentially increases the difficulty. Because the outsourcing firm’s business practices and methods may differ from the foreign country’s practices, poorly developed and tested systems may result. The project manager must make sure, before the contract is signed, that the vendor can provide the technical and business talent necessary for a successful project. Depending on the function being outsourced, the firm may require that the vendor establish a “captive data center” or “pavilion” staffed with fulltime employees who are dedicated 100% to the firm’s outsourced function. This builds a knowledge base within the vendor’s staff regarding the client’s business and enables staff loyalty to the client. Sometimes it is necessary to transfer employees between two teams either to facilitate training, convey team values, or to encourage knowledge sharing. Face-to-face meetings among members can benefit the project by increasing team cohesiveness and providing a shared understanding of project goals and deliverables (Hollingshead & McGrath, 1993). The trips, however, typically involve great distances, are expensive, and take a great deal of project time. Depending upon the length of stay, obtaining travel and work visas in the client country may also be a challenge. The U.S. government, for example, capped the number of H1B visas from 195,000 per year in 2002 to 65,000 per year in 2003. Traveling between locations can be complicated to manage and should be planned and organized well in advance. Cultural differences can significantly influence the success or failure of an offshore IT project (Ramarapu & Parzinger, 1997). Project managers
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must be sensitive to differences in terms of vacation expectations, work ethic, holidays, religious observances, communication styles, and business methods. For example, during 2003, the Manilan president declared three additional holidays not originally on the calendar. Adjustments had to be made to work schedules and project timelines. In other cultures, it is typical for workers to take extended vacations at specific times of the year. The project manager who is unaware of these customs and who fails to incorporate them into the initial schedule will have to deal with project delays and cost overruns (Dube & Pare, 2001).
Quality Management Project quality management ensures that the project will meet functionality requirements and achieve the goals for which the project was originally undertaken. Quality management includes both quality assurance as well as quality control. Firms should have sound knowledge of their internal and external quality specifications prior to coordinating a quality guarantee with an offshore vendor. Firms that outsource software development or programming to cut expenses often find that those savings never materialize due to poorly written and poorly tested code (Matloff, 2004). In some cases, firms had their own engineers rewrite the code from scratch. A recent study found that the median Indian project had 10% more code errors than did comparable U.S. projects (Ante, 2004). To address this problem, it is crucial that clients select reliable and reputable vendors as well as implement a robust quality management plan on the client side. Details related to percentage error, applicability, and adherence to specifications will benefit firms in terms of project success, vendor assessment, and contract renegotiation. Large providers that have proven themselves with other clients are typically less risky and more likely to deliver quality products. Checking customer references and software-certification levels is essential. For example, many offshore sites have 1848
Capability Maturity Model (CMM) certification, which recognizes process improvement and quality in software development environments. Firms choosing to outsource offshore should consider the compatibility of the vendor’s CMM level to their own level of capability. A vendor operating at CMM level 5 may find it very difficult to service a client operating at level 1 or level 2. Conversely, client organizations should not rely solely on the vendor’s CMM level when assessing quality. CMM assesses the outsourcer’s management techniques, not the quality of their personnel or staff (Matloff, 2004). In India, for example, it is common to staff projects with young, inexperienced developers in order to control costs (Matloff, 2004). Clients must look at both the management processes in place to guide the project as well as the quality of their human resource processes. Stark differences may exist between the client and the vendor regarding their technical environments, their interpretation of quality, and development cultures causing additional project management challenges. Firms must carefully choose which tasks and functions they move overseas. Tasks that involve repetition and predictability can be done effectively. Any function that requires strong specific language skills, in depth knowledge of a specific country’s accounting rules or standards, or quick decision-making should be kept in the client’s country (Ante, 2004). Finally, an offshore vendor must have an extensive quality assurance process that effectively assesses the quality of all software products and applications. The vendor should demonstrate, through the software testing process, high standards of data integrity and security as well as functionality, performance, compatibility, and usability (Misra, 2004).
Cost Management Budget, or cost management, includes all the processes required to ensure that the project is completed within budget. During the planning
Project Management Issues in IT Offshore Outsourcing
phase, the costs of activities are estimated and the contract is structured (von Branconi & Loch, 2003). During project execution, actual costs are compared to budget, estimates are revised, and budgets updated. The total cost of an IT outsourcing project often exceeds expectations. Most companies find that their first-year savings from offshore outsourcing is 15%-20%, significantly below the 50%-60% often touted (Krell, 2004). While savings of 30% or more on labor costs do materialize, other hidden costs often emerge. When firms outsource to India, for example, they typically pay $8,000 to $12,000 per employee for facilities, telecommunications, and the technology infrastructure (Krell, 2004). In addition, the client firm may need to invest in upgrading their own technology infrastructure in order to interact with the offshore firm. Relationship management costs are typically not figured into expected costs savings projections on the front end of the project and can add an additional 8% to overall project costs. Finally, the costs of terminating domestic employees, leases, supporting expatriates, and legal and consulting expenses should also be included in the overall costs (Krell, 2004). It is imperative that these issues are addressed in the contract negotiation phase, and that top management of both the client and vendor firms are involved.
Risk Management Project risk management involves identifying, analyzing and mitigating factors that could lead to project failure. Risks are inherent in any strategic business initiative but especially in those that involve two companies located in different geographical and political environments with diverse work forces (Beulen, van Fenema, & Currie, 2005; Briggs, 2005). Firms must have a risk management process that identifies those factors most likely to significantly and negatively impact the project, and have a plan to mitigate those risks (Kliem, 2004).
An overarching issue in managing risk is the level and degree of control that the client retains over its strategic business processes and the security of the data that supports these processes (Cocheo, 2004). Client organizations must assure that foreign operations are meeting the standards set by regulators in their own countries. For example, a Canadian bank that is offshoring development to India may need to embed an auditor in the foreign operation to assure that all Canadian banking regulations are met. In some cases, a firm may use management interchanges where a manager from the client facility spends time in the foreign facility to assure compliance with company standards and government regulations (Cocheo, 2004). In many regulated industries, compliance officers will want to make sure that adequate controls (technical, contractual, and procedural) are in place to assure the integrity of the data and accuracy of the development process. Assuring that the vendor has appropriate security procedures including disaster recovery and backup plans in place is essential to assuring the security of the firm’s data. Failure to demonstrate data protection can result in excessive non-compliance fines (Cocheo, 2004). One of the major mechanisms for addressing risk is the contract between the client and the offshore firm. Contract negotiations can often become contentious as both sides flesh out all the terms and conditions of the deal. According to Krell (2004), the success of an IT outsourcing relationship depends on each party’s ability to address three areas: complexity, governance and flexibility. Each is discussed below. •
Complexity: Negotiating large offshore outsourcing deals is multi-faceted and often results in detailed contracts 500-1,500 pages long. Because so much is at stake, inexperienced clients often need to hire specialists in the following areas: technology transaction outsourcing, employment and labor law, tax law, and real estate law.
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•
•
Governance: Failure to establish an appropriate governance structure poses the largest risk to a successful project. Too often, clients focus too much on vendor selection and not enough on monitoring service levels once the deal is in place. Typically, governance of offshoring projects involves a steering committee tasked with designing and implementing a conflict resolution process. Also, firms need to retain 7-12% of their displaced IT staff to manage the relationship with the vendor and to assist the organization with assimilating business process changes that result from moving large portions of IT outside the organization (Krell, 2004). Flexibility: Organizations can undergo several rounds of strategic changes during the course of a multi-year offshoring agreement. Business and market forces cause firms to change their business strategies and objectives resulting in a need to reposition their existing offshoring arrangement. Clients need to build into their contract mechanisms for renegotiating or even terminating the relationship.
Managing these three primary risk factors is vital in assuring a successful IT offshore outsourcing project. Managers must continually balance the benefits of a project against its inherent risk (Kliem, 2004).
Integration The final project management area is integration, which deals with the manager’s ability to coordinate and synchronize the many phases and processes of an IT project. Integration ensures that all aspects of the project are mutually intertwined and working together to achieve the project goals and objectives. This is especially critical in an IT offshore outsourcing context, where physical and cultural separation occurs between project components and isolation becomes an increased risk. 1850
While integration is a separate area in the project management body of knowledge, properly managing integration on any IT project naturally encompasses the other eight areas. A change in scope, for example, should be accounted for and integrated into the project schedule, project budget, quality management plan, and risk management plan. Assuring that communication processes and control mechanisms are in place to fully synchronize all the activities and issues in a project is the domain of project integration. Successful project integration is the domain of an experienced project manager that understands the complexities and connectedness of the environment in which they manage. Specific challenges associated with each of the other eight domains relate to the notion of integration, and since they have already been discussed, they will not be reiterated here.
Summary Project management issues associated with offshore information technology outsourcing projects have been presented. Table 2 summarizes the previous discussion by highlighting the challenges and the project management implications associated with each PMBOK area. The following section discusses the limitations and contributions of the current paper as well as recommendations for future research.
LIMITATION, CONTRIBUTIONS AND IMPLICATIONS FOR FUTURE RESEARCH Limitations While this paper makes some initial observations regarding project management issues in an IT offshore outsourcing context, some limitations of the work are noted. First, the PMBOK framework, while grounded in the practice of project management, is not strongly used in academic
Project Management Issues in IT Offshore Outsourcing
Table 2. Project management implications of offshore IT outsourcing Knowledge Area
Challenge • •
Scope Management
What are the strategic and organizational benefits of engaging in a specific IT outsourcing project?
•
Articulate why an offshore solution is appropriate
•
Assure strong and effective executive management involvement
•
Adopt realistic expectations for offshore IT outsourcing success Understand the vendor’s socio-political climate, legal and criminal system, national infrastructure, and privacy and data protection standards
• • Procurement Management
• Communications Management
• Time Management
Given the political, social, and cultural complications associated with IT offshore outsourcing, how does the firm identify, select and contract with the best vendor for a specific project?
How are the cultural, language, and technology barriers addressed in order to insure effective and productive communications in a largely virtual environment? How is the time difference managed in a way that positively impacts the project schedule as well minimizes coordination costs?
•
Articulate a consistent mission, vision, and objective with vendor management
• •
Negotiate a flexible contract Establish specific communication processes that address cultural and language differences
•
Clearly state communication procedures and vehicles
•
Include both onshore and offshore team members in communications processes Recognize the benefits and risks associated with time zone differences
• • •
• Human Resource Management
How can a client assure that the best employees are assigned to their project and that vendor employee turnover is managed?
•
• Cost Management
How is quality management and control addressed in an offshore project given the geographic distance?
What mechanisms are used to assure that realistic costs savings are achieved and that coordination costs are minimized?
Prepare for the increased need and costs for coordination, communication, and control Employ appropriate client to vendor ratios
•
Assess the quality of the work environment, pay scale, etc to assure that vendor retention rates are being managed.
•
Monitor the skill sets of offshore employees assigned to your projects Assess the quality of the offshore vendor’s development processes and its fit with your environment.
•
Quality Management
PM Implications Link IT offshore outsourcing to strategic objectives of the firm
•
Establish realistic mechanisms for assessing quality
•
Offshore only those tasks that are appropriate for a given vendor Conduct financial feasibility studies that realistically estimate cost savings
• •
Anticipate additional costs associated with the project (i.e. upgrading communications infrastructure)
continued on following page
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Table 2. continued Knowledge Area
Challenge •
Risk Management
•
How are risks addressed in an IT offshoring project?
•
Establish governance mechanisms that control and monitor the offshoring relationship
•
Hire specialist to address risks specific to a certain technology, vendor, or country
•
Contract for renegotiation and termination clauses Coordinate and synchronize the various phases and components of the project
•
Integration Management
•
How do changes in one aspect of a project impact other aspects?
project management research. Second, the PMBOK framework is general and not exhaustive. All possible project management issues associated with IT offshore outsourcing are not identified with a cursory application of the framework. Finally, while the current study integrates both practioner and academic literature, the results are neither empirically derived nor examined. The paper, however, provides a great deal of foundational information and insights that can be used to formulate important research question that can guide future empirical investigations. These research opportunities and the contributions of the paper are presented next.
PM Implications Implement a risk management process that identifies, analyzes and mitigates risks associated with offshoring
•
Employ experienced project managers on more complex offshore projects
•
Respond to changes in the project environment by addressing multiple issues in a synergistic and consistent manner
project. In addition, the PMBOK framework is not country-specific. It can be applied across borders and across cultures. For academicians, the paper provides an impetus for future research into issues impacting the success of IT offshore projects. First, an empirical validation of the framework and its applicability in a variety of IT offshore outsourcing contexts is warranted. Second, research is needed to identify the “best practices” used by successful firms in terms of addressing issues in each of the nine PMBOK areas. Finally, research is needed to determine what organizational characteristics best influence successful project management of IT offshore projects.
Contributions and Future Research CONCLUSION The research is useful to both practioners and academicians alike. First, the PMBOK model has been shown to be an appropriate lens for examining IT offshore projects. A myriad of issues were identified and appropriate solutions were given. In the future, project managers can use the PMBOK framework to identify important issues in the context of their specific IT offshore
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This paper used an existing project management framework in an effort to gain a better understanding of the project management issues associated with an IT offshore outsourcing project. Most firms want the results of their offshore outsourcing effort to appear seamless and transparent to those ultimately impacted by the project, while
Project Management Issues in IT Offshore Outsourcing
simultaneously reaping potential cost savings and strategic benefits. Yet despite the potential benefits, IT offshoring projects face all of the same challenges and risks of onshore projects as well as some very unique challenges due to geographical, cultural and social differences. Project managers must recognize that offshore IT projects need to be managed with these special challenges in mind. Otherwise, the potential savings and strategic benefit of offshoring will not be realized and the chance of failure will increase.
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This work was previously published in International Journal of e-Collaboration, Vol. 2, Issue 4, edited by N. Kock, pp. 53-73, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.11
Outsourcing and Offshoring Finance Activities Siri Terjesen Queensland University of Technology, Australia
AbstrAct This chapter reviews the outsourcing and offshoring of finance activities and the socioeconomic implications for home and host countries. Part one provides an overview of the hierarchy of finance activities in the firm and the phenomenon of outsourcing and offshoring of these activities. The phenomenon is then examined from a firm perspective, highlighting the major drivers, trends and issues using theoretical frameworks and case examples from the author’s in-depth interviews with 37 managers at 25 multinational firms. Finally, the socioeconomic issues and implications of offshoring activities are discussed in the context of both home and host countries.
IntroductIon Globalisation, technology, regulation changes, stakeholder pressures, and firm re-organisations
present challenges and opportunities to firm finance functions to improve their contributions to the business. One of these opportunities is the outsourcing and offshoring of finance services. Finance services comprise 10% of the nearly $250 billion worldwide business process outsourcing (BPO) market (Gartner, 2003) and the total number of finance service outsourcing is expected to increase 71% over the next few years (Accenture & EIU, 2004). Firms also offshore these finance activities. A survey of 275 finance executives revealed that 21% send finance and accounting activities offshore (CFO Magazine, 2003). Finance services offshoring is more commonplace among firms based in the U.S. and Europe than those in Asia Pacific. The offshoring of finance activities has important socioeconomic implications for both the home and host countries. The chapter begins with an introduction to finance activities in the firm. The phenomenon of outsourcing and offshoring of these finance activities is reviewed, paying special attention
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to the drivers, costs and benefits of outsourcing and offshoring from the firm’s perspective. We then review a framework for evaluating location choice based on the author’s semi-structured, in-depth interviews with 37 managers at 25 U.S. and European headquartered multinational firms. This research was undertaken jointly by the author, Anne Evison, Julian Birkinshaw and Roy Barden in 2003 and 2004. The managers were identified through the researchers’ personal contacts. Respondents’ job titles were CEO (2), Finance Director (6), Head of Shared Services (12), Outsource Service Provider (2), Change Director (4) and Other (6). Five customers of shared service operations were also interviewed. The chapter then examines finance services offshoring from the perspective of both the home and host country, exploring the socioeconomic issues. Special attention is paid to two countries with deep involvement in sending and receiving activities abroad: the U.S. and India. The discussion of socioeconomic issues facing home and host countries is based on the expert interviews detailed above, as well as a review of recent government reports, academic research and case studies.
FInAnce ActIvItIes In the FIrm Finance activities can be seen in terms of a hierarchy of value-added inside the firm. At the top of the hierarchy are strategic finance decisions such as corporate risk management, budgeting and forecasting. The next level includes business partnering activities, group finance, tax and treasury. Next in the hierarchy are business analysis activities such as managerial accounting and budgeting. Finally, transaction activities include credit, control, payroll, general ledger, accounts payable, and accounts receivable. Figure 1 illustrates the hierarchy of finance activities in the firm.
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Strategy, business partnerships, tax and treasury activities at the top of the hierarchy are generally located in in-house at the firm’s corporate headquarters. However, new business models of shared services, outsourcing and offshoring are dramatically changing the organisation of finance activities in the rest of the firm. The first step in re-organisation is often the simplification, standardisation and centralisation of transactional and, to a lesser extent, analytical finance activities. Often, a shared service centre (SSC) is established and supporting IT systems are integrated on a single, unified platform. For example, in 1998, London-based supply chain management firm Exel replaced its 13 freight management accounting and administration centres around Europe with one SSC in Dublin. Exel then contracted outsourcer Accenture to provide the service and enable the delivery of future benefits (Accenture & EIU, 2004). This evolution of finance transaction processing from simplification to outsourcing is depicted in Figure 2.
outsourcing of Finance Activities The first finance service activities to be outsourced are generally transactional activities such as payroll, followed by increasingly value-added capabilities. Figure 3 illustrates the evolution of the outsourcing of finance activities. This evolution is reflected in current estimates of finance service outsourcing expenditure: employee payroll (27%), tax compliance and planning (21%), financial systems application support (16%), general and financial accounting (13%), travel and expense processing (12%), accounts receivables and collections (12%), accounts payable and vendor management (9%), financial reporting (7%), management report preparation and analysis (6%), treasury and cash management (4%), financial risk management (3%), budgeting and forecasting (1%) (Accenture & EIU, 2004).
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offshoring of Finance Activities
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Offshoring is the relocation of certain firm activities to foreign “host country” locations. For example, GE Financial Services relocated operations to India several years ago and now has over 12,000 employees in the country (GE Capital, 2005). In the last five years, offshoring has shifted from being a niche to a dominant strategy used by a number of firms, resulting in increased finance services capacity in offshore locations.
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drIvers oF FInAnce ActIvItIes outsourcIng And oFFshorIng The increasing use of offshoring is part of the never-ending search for efficiency and costreduction in large firms. The trend is particularly prevalent in back-office or support activities such as finance and accounting which, by definition, are not as customer-facing as other functions of the business, and are therefore open to being located in lower-cost, non customer-facing locations. Our research (Evison, Birkinshaw, Barden, & Terjesen, 2004) revealed five key drivers of finance activity offshoring. We review these drivers, and then a framework for activity location by activity scope, costs and benefits, and implementation issues. The five key drivers of outsourcing and offshoring are:
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Automation: Routine activities which can be performed without human intervention are automated. Disaggregation: Activities which were done formally by just one person can be separated into different tasks. For example, an accountant could perform a broad range of tasks, from providing advice to basic bookkeeping. Increasingly, accountants focus on higher-level advisory tasks, and the more routine job tasks are either automated or pushed into a shared service operation.
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Consolidation: Similar activities can be combined into a shared service operation. Rather than every operating unit doing its own payroll or accounts payable, these activities can be done far more efficiently in one central location. Commercialisation: Shared activities can be commercialised, either by making them into a profit centre within the firm, or by spinning them off through an outsourcing arrangement. For example, in 1999, Dairy Farm, a Hong Kong based retailer, established a 50/50 joint venture with Cap Gemini Ernst and Young. The joint venture, OneResource Group, provides accounting services to Dairy Farm and other companies from two SSCs, one in Hong Kong and the other in Guangzhou, China. Of the 200 employees- the same number of employed originally in Dairy Farm’s finance and accounting group- just 90 are required for Dairy Farm. The remaining 110 OneResource employees work for other firms in the SSC. Dairy Farm estimates that it has saved 50% of its costs and also minimised capital outlays (Accenture & EIU, 2004). Relocation: Shared activities can be moved to a carefully-chosen place, typically selected on the basis of cost or availability of employees, but sometimes for particular skills (e.g., language, data entry, analysis). The World Bank’s relocation of finance back-office activities from Washington, DC, to India resulted in 15% cost savings and eliminated a backlog of expense forms and accounts payable items. The director of the World Bank’s accounting department also describes how the Indian accountants help to improve process, [They] “say ‘Why are you are doing this, why don’t you think about how we can do the process better?’... You get to clean out the backlog and you also get to reengineer the business” (Knowledge & Wharton, 2002).
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We now focus on the aspect of the relocation of outsourced activities and the many options available. The drivers of relocation and commercialisation often go hand-in-hand. The decision to move an activity to its own facility cannot readily be made without also managing that activity in a more commercially-minded way.
evAluAtIng locAtIon optIons Our research also revealed two critical dimensions for selecting the location for a support activity. The first is the extent of “codifiability” or the degree to which an activity can be routinised. Highly codifiable activities such as payroll and expense claims lend themselves to automation, and they can also be undertaken by individuals with limited training or skills. Non-codifiable activities such as leasing, treasury, and compensation planning) involve a much higher degree of judgment and experience on the part of the individuals working in the activity. The second dimension is the nature of interdependence between the activity and the firm’s core strategic activities. A standard way of framing this location choice is to consider three forms of interdependence (Thompson, 1967): sequential (A is an input to B, which is an input to C), pooled (A and B are inputs to C), and reciprocal (A is an input to B and C, but B and C, in turn, are inputs to A). See Figure 4. Activities that have only pooled or sequential interdependence with the core can typically be managed on a remote basis, whereas activities involving reciprocal interdependence benefit from co-location. By considering these two dimensions together, it is possible to identify some of the critical differences between the different location options. Five primary options emerged from the research. Each dimension is considered in turn below, and a summary is provided in Figure 5.
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co-location Co-location is necessary for those activities involving a high degree of expertise and significant interaction with the senior executives in the firm. This is a default arrangement because such activities, including business analysis, treasury, and legal, have historically been located at the corporate headquarters. Within these functions there are sub-activities that which shift to other locations, or are automated. For example, Proctor and Gamble outsources accounts payable data entry to Hewlett Packard, but retain other accounts payable processes that interact with their internal customers.
virtual centre of excellence Some activities involve a high degree of expertise or professionalism, but there are few benefits from locating the individuals in question together at either the corporate headquarters or a business location. As such, these activities are best managed in what is sometimes called a “virtual centre of excellence”. All of the compensation and benefits experts would form part of such a centre, but they would continue to reside in their existing operations, and they would travel between sites and come together for meetings. The virtual centre of excellence requires active management, because the default is for the individuals in question to focus their energies on their local operation. The centre of excellence logic recognises that the expertise in question should be leveraged on a corporatewide basis, and it provides the resources and the technology to enable this resource sharing.
nearshoring Typically, “‘nearshoring” involves a centre or group of centres that perform codified, routine activities for a number of corporate customers. If more than one centre is to be deployed this can be assessed on the basis of quality/cost parameters to
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take advantage of differences in wages between countries/areas within the region, or alternatively separating activities into different centres, for example, accounts payable in one location, and Human Resources (HR) processing in another. For example, for a business considering a shared service organisation to serve Western and Eastern Europe, this would mean locating the centre(s) within this geographical boundary. Near shoring typically has a higher cost profile than offshoring, but it has several important benefits: lower risk, easier communication with the business, and typically a greater cultural affinity to the core customer groups, which can be particularly valuable in customer-facing entities such as call centres. An example of nearshoring is French chemical manufacturer, Rhodia’s relocation of finance and accounting activities to a centre in the lower-cost Czech Republic (Cooper, 2003).
automating the service. There may, however, be some activities which will have exceptions which require human intervention, such as check processing. At the moment, fully automated or “lights out processing” is a vision rather than a reality. Automation almost always occurs in tandem with one of the other options. For example, an investment bank has recently automated the majority of cash settlement activity to an outsource service provider. However those elements of the process that cannot be automated have been left co-located in the business. The rationale is that the cost to create complex, dynamic system rules would be greater than to retain human intervention. Table 6 summarises these approaches.
FInAnce ActIvItIes outsourcIng: costs And beneFIts perceIved by FIrms
offshoring Offshoring refers primarily to the relocation of activities to emerging economies, such as India, China and the Philippines. The distinction between nearshore and offshore is relevant for European and American firms. For example, European firms typically have medium-cost locations (e.g., Poland, Czech Republic, and Turkey) available that are closer than the big emerging economies of Asia. Offshoring is the preferred option for those activities that are easily routinised, and that offer substantial returns to scale. Enormous amounts of back-office banking work and call centres are done in such locations. Increasingly, firms are experimenting with higher value-added activities. For example, in August 2003, Citigroup and HSBC announced that they would be moving some of their investment bank analyst jobs to India.
Offshoring makes the business headlines, suggesting that relocation can lead to fantastic cost reductions as well as new skills and expertise. Business benefits, however, are not guaranteed. In the author’s interviews, several senior managers reported feeling that 15-20% costs savings of offshoring were not worth the risk. So, how should firms approach the outsourcing and offshoring of finance services? Earlier chapters have outlined costs and benefits of outsourcing. Here we focus briefly on the key insights specific to costs and benefits of outsourcing finance activities revealed in interviews with 37 executives in 25 multinational firms headquartered in the U.S. and Europe.
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Automation “lights out” processing Some activities can be entirely routinised, thereby altogether removing the human component and
Data disclosure to third parties: Some managers were reluctant to share finance data with third parties, for fear that this information might somehow reach competitors.
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Loss of talent: Managers worried about the loss of in-company finance talent if activities were moved outside the firm. Long time to implement: Managers noted that outsourcing activities took a long time, particularly if the processes needed to first be simplified, standardised and centralised. New regulation for accountability: In the U.S., the Sarbanes Oxley legislation requires senior managers to personally attest to the truthful reporting of company accounts. Managers with Sarbanes Oxley requirements said that they were less likely to consider outsourcing of these activities. Lack of flexibility: A firm’s business needs change and the outsourcers may not be prepared to deal with this change. Lack of performance measures: Performance measures are neither easily developed nor implemented. Many managers expressed a desire to develop service level agreements (SLAs) in the future. Poor performance: Some managers reported that the third parties did not meet their performance criteria and they considered “in-sourcing” the activities back into the firm. Extra taxes: Outsourcing can also lead to extra taxes from purchasing from outside the firm. For example, in the UK, most financial institutions exempt their income from the 17.5% value-added tax (VAT), so customers get services free of VAT but then find it difficult to reclaim VAT back on services.
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Cost savings: After an initial outlay to establish the centers and contracts, outsourcing arrangements, some managers reported lower labour and transaction charges. The average accountant in the U.S. makes about $41,000 per year. The Indian equivalent earns around $10,000 per year. A financial
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analyst in the U.S. costs $60 per hour; the Indian equivalent just $10 per hour. Core competency focus: Outsourcing of transaction activities freed employees and managers from routine tasks and enabled them to focus on core competences and more value-added activities. Leading edge knowledge and track record: Some managers describe outsource partners as having more detailed knowledge about regulatory and reporting requirements. Managers also reported feeling comfortable with the successful track record of outsourcing providers in automating high volume, low value activities. Increased transparency: Managers highlighted the potential for outsourcing to improve transparency and disclosure by distancing the managers who “create” performance from the accountants who measure it.
Costs and benefits are often linked to the implementation and delivery models. Our research also uncovered several implementation issues for firms (Evison et al., 2004).
ImplementAtIon Issues For FIrms Offshore delivery models are primarily constrained by a lack of confidence that the shared service organisation will be able to deliver to existing quality and service levels, although using an outsource service provider usually ameliorates this concern. This is because establishing shared services involves significant change — for both individuals within the back office functions and the businesses themselves. The elements of change are many:
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Disaggregated Jobs: Individual jobs often become disaggregated, into (1) tasks that are
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strategic to the business, (2) tasks that are advisory but can be undertaken remotely, and (3) tasks that are can be automated entirely. Each task typically has a different place in the new organisation. Loss of Control: Sharing of services means a de facto loss of influence and control over activities that were previously operated directly by the businesses. Not surprisingly, the process of giving up these activities is undertaken with great reluctance. Compromise: Implementing common systems and processes across the businesses often means that compromises have to be made on the functionality for each specific business. Business Interaction: Businesses interaction with back office functions has changed. The new approach typically offers a higher level of business discipline, including more self-service technology, higher levels of transparency of cost of service, and “extra services” being charged for separately.
In order to manage this change, most organisations select an implementation path that effectively manages their requirement to achieve cost reduction, whilst managing risk by choosing a location with which they are already familiar, containing scope to a manageable level and bringing the customers into the model in a phased way. Offshoring is usually considered as a second step. Consider the case of Oracle, the leading database and software company. In January 1998, in response to a need to create a single global brand while also reducing its cost base, Oracle decided to implement a standardised global finance processes and establish a shared services delivery model. It took eight months to agree standardised global processes across sixteen process areas. Through a process of “brown papering” with the best and the brightest resources from the company, these processes were then mapped to the standard Oracle
release at the time. Five months of integration testing followed and covered all scenarios, from all parts of the business. Three service centres were subsequently established. The EMEA centre was established in Dublin, and two other regional centres were established in California and Sydney. Forty-two countries were being serviced by the Dublin service centre within four years from programme inception, processing $3.5 billion in revenue, with a peak of almost 400 staff. Some of these activities are now being eliminated through technology or process optimisation and others are being moved to India. There will be 105 service jobs in India by the end of July 2004 and 230 jobs will remain in Dublin. But improvements will not stop there. In the interview, Nicky Sheridan, vice president and managing director of Ireland at Oracle, observed, “You have to keep changing and reinventing. We are always looking to bring in further work to the centre and automate or offshore the most routine work.” Regardless of the back-office strategy selected by the firm, two critical factors are (1) the level of commitment to the initiative from senior executives at country and functional levels, and (2) the overall appetite for change in the organisation. These factors are important in all change projects, but particularly so here, given the number of people who are directly impacted as well as the inherent uncertainty of moving activities overseas. As one interviewee observed, “If senior executives are not spending at least an hour a week on the project, then its not going to be successful. It’s tough selling to local country MDs [managing directors] that it’s going to be a worse system than before, because they previously had a customised system and process to suit their needs. It’s not easy to see the global benefit. If I had my time again, I’d concentrate even more effort and attention to managing the process of change, and getting the active involvement of the top executives.”
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Future trends While the outsourcing and offshoring of finance and other activities is here to stay, we see changes ahead for the size, scope and location of these activities. The number of firms outsourcing and offshoring finance activities will increase, including new industries and countries. Furthermore, the scope of finance activities offshored will change, expanding up the value chain to include asset management, investment banking, commercial and retail banking. The specific skills demanded in these areas include equity research, and statitical data research and compilation. Finally, the offshore locations will change. Through labour arbitrage and political pressures, BPO in India may move away from the traditional strongholds to more secondary and also tertiary cities. Abroad, other countries will continue to compete for the BPO market. Rising players include Malaysia, Costa Rica, the Phillipines, Russia and China. Our research suggests scope for more careful thinking about the costs and benefits of outsourcing and offshoring. The challenge is how best to use these alternatives in an integrated way and how to manage them dynamically, according to the evolving needs of the business. While this may not be an exhaustive list, three important trends were identified among some of the more sophisticated firms in the study:
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Disaggregate: Activities are divided into constituent parts, with each part done in a different location. Many business process outsourcers now operate on a “layered” model. In one case, the company in question was providing an outsourced Accounts Payable process to a Scandinavian customer. The transaction processing of the invoice and payment activity was carried out in India, and an operation in Poland was used for handling queries from internal customers and external suppliers. The additional costs this entailed were offset by a better quality
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of service than could currently be achieved in India. Shift: Activities are relocated between locations according to the shifting demands of the business. Some financial service activities are re-located with the changing demands of management and industry. For example, Guinness and Grand Metropolitan’s 1997 merger created Diageo. This new business had an opportunity to take advantage of greater economies of scale within their back office process. The merged service centres were initially located in the UK and Ireland. Subsequently, Diageo migrated its finance and customer service operations, for a number of European markets, from London to Budapest, and onto its global processes and systems, taking advantage of the new business requirements and environment. Monitor: Costs and benefits of different locations are carefully monitored, and firms remain open to change once the results are clear. This requirements the development and tracking of performance metrics. Thus, cost-benefit analyses prompt both the initial decision to outsource, and subsequent decisions to re-insource or “backsource” these services. This releases the organisation from the outsourcing agreement and enables the organisation retain control over the business. For example, Sears re-insourced finance activities from Andersen Consulting.
We now turn our attention away from the firm and toward the countries where firm activities have been relocated and to where they have been traditionally housed.
socIoeconomIc Issues For host And home countrIes To date, much of the research on outsourcing and offshoring has taken the perspective of the
Project Management Issues in IT Offshore Outsourcing
multinational firm. Indeed, we followed this approach in the first part of this chapter. We now turn to the socioeconomic issues faced by both the home and host offshore countries, with specific focus on the impact in two countries with deep involvement in the outsourcing of financial service activities: India and the U.S. We highlight the socioeconomic issues facing each country in terms of economics, education, government and social and cultural realms. We select India as it is expected that by 2008, India’s share of IT and back-office activities including finance services will employ four million people, account for 7% of India’s GDP and result in a $57B industry. We focus on the U.S. as more than 3 million whitecollar jobs worth $136B in wages are forecasted to move from the U.S. to overseas (Kripalani, Engardio, & Hamm, 2003).
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India: socioeconomic Issues Economy The tremendous growth of the BPO sector has stimulated India’s economy. This can be seen by evaluating individual, regional and national economic experiences.
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Job Growth: The offshoring of BPO in India has created more than 200,000 new jobs, mostly employing the nation’s young workforce of 20 to 30 year olds. Multiplier Effect: BPO employees’ spending has helped to grow the economy in what is described as the “multiplier effect of velocity”. For example, an employee may spend his or her wages on new clothes, and in turn the clothing retailer invests profits in the business, and so forth. The velocity of this multiplied consumption triggers the economy. Emerging Middle Class: Currently India’s middle class constitutes just 18% of the one billion population. This percentage is
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believed to increase to 50% over the next 20 years. This rising middle-class will have even more consumer purchasing power. Current Accounts Balance: Indian companies are paid in foreign currency, usually U.S. dollars, for BPO services but pay wages and other expenses in Indian rupees. This enables a current accounts balance which can facilitate the purchase of certain larger scale investments. Local Knowledge Enhancement: Through clusters of BPO activities, local Indian firms benefit from network effects. They are able to absorb and apply the financial and accounting expertise used in the offshored operations of multinational firms in their own operations. Concentrated Urban & Regional Growth: The offsourcing of BPO activities to India is actually limited to a few cities such as Bangalore, a city of 6 million in southern India. Most of the economic growth is experienced in the key cities which are home to the bulk of new BPO services. For example, there are more than 1 million high tech workers in the city of Bangalore. The economic impact is felt much more strongly in urban areas with high literacy and education rates. In tandem, there are more people moving from the countryside into the cities. There is also the growth of secondary cities such as Mangalore with clusters of outsourcing activities. Still there are many regions in India, such as Kerala, which do not benefit much from the outsourcing. To provide a broader picture, over all in India, there is 45% adult illiteracy and over 72% of the population live in rural communities (UNDP, 1998), though illiteracy is more prevalent in rural communities. Emergent Economic Activity: The increase in offshoring activities has also stimulated new industries and indigenous entrepreneurship. For example, in large cities with BPO
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to India has resulted in demand for certain qualifications. For example, GE Capital hopes to hire several hundred India-based qualified chartered accountants (GE Capital, 2004). People with accounting skills specialised to the U.S. system are also in demand to meet current and future needs. For example, in 2003, 25,000 U.S. tax returns were prepared in India, but this number was expected to increase over 10-fold to 300,000 in 2004.
operations, there is now a market for night catering and for keeping stores open during non-traditional hours, shared commuter flats, accent training and transportation to the city and the BPO centres. Catalyst for Change: The growth of BPO in India has also served as a catalyst for increasing the quality of education and management and attention the environment. Corruption has also been said to have decreased.
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Government Formal Education - University Degrees: Over the past 27 years, there has been a phenomenal 81% increase in the number of Indian students enrolling for commercerelated degrees (Ministry of Human Resource Development, India). Table 7 tracks this enrolment. These numbers are rising steadily, in part due to the establishment of a number of new universities as well as the development of links between Indian universities and those in the U.S. and elsewhere. In 1947, India had just 25 universities and 700 colleges; these numbers are now 216 universities and 8,613 colleges. Bridging Training: In order to land a job in the fast-growing BPO sector, some Indian students may need to take bridging training courses to satisfy job demands which were not part of university degree studies. This training could take the form of a primer in accountancy and finance for Arts graduates or a special course in advanced and applied finance for Commerce graduates. On the Job Training: Once they are on the job, Indian BPO employees are obtaining additional skills such as accounting and finance. These jobs are also teaching customer focus and improving workers’ skills in educating, coaching and managing others. Professional Qualifications Demand: The rise of financial service activity offshoring
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Initiatives to encourage industry: The Indian government is keen to continue to develop India’s market for offshoring finance and other activities. Government legislation has led to favorable taxes and other business start-up friendly policies for multinationals establishing their own centres in the country and for multinational and Indian third-party providers of outsourcing services. This occurs at both the national level and also the city and regional levels which often compete for new business. The Indian government has engaged in relationship building at company, country and regional levels. One of the major Indian business lobby groups is the Confederation for Indian Industry (CII). Capacity building: In order to meet new business needs, the Indian government has taken new educational focus in key skill areas for the future such as industry-specific knowledge and new languages. New industry focused curricula are aimed at developing deep skills and requisite environmental knowledge. There is also new training in French, German, Japanese and other languages in order to meet future demands from non Anglo-American countries. Legislation for workers: The nature of outsourcing work has led to legislative
Project Management Issues in IT Offshore Outsourcing
changes for working conditions (to monitor shift work), social security, and health issues (working with computers).
Social and Cultural Environment •
•
•
•
Westernisation at Work: At work, Indians may be rewarded for operating within a Western business culture. For example, employees for large multinationals headquartered in the U.S. and UK are encouraged to adapt American or British accents and also to anglicise their names. For example, a call centre worker named Priya may call herself “Polly” on the phone. Furthermore, finance employees must operate according to principles for the companies. Often this can mean developing expertise in American and GAAP guidelines. There are also more Westerners doing business with India although only about 30,000 are estimated to have relocated to India. Consumerism: In tandem, young Indian finance services employees are using their wages to enjoy greater access to a westernised lifestyle in the form of new clothes, cars, and cell phones. Family Changes: New jobs and wages enable young people to moving away from home earlier than in the past. India’s growing cadre of young BPO employees relocate into shared flats with friends and colleagues. Changing Career Models & Organisational Culture: Although today’s population of talented young workers can enjoy a greater selection of jobs, especially BPO, than their parents experienced, the career model is changing. Individuals no longer expect to work for one firm for the rest of their life. The BPO industry has a very high turnover as the average employee moves to a new company after two or three years. To deal with this hefty attrition rates, some companies have adapted a policy of not
•
•
hiring an indvidual if they have only been at their previous employer for less than one year or if they held more than three jobs in two years. Companies may also blacklist HR recruitment firms who have a record of poaching candidates. Increase of Women in Private Labour Force: Approximately half of the new BPO employees are women. Women constitute one of the fastest growing sectors of the private labour force in India. These women may someday reach senior and top management in the private sector, a traditionally male-dominated arena. Shift Work: Many BPO centres utilise shift work where as many as one-third of the employees regularly work in dark. To accomodate this population, some transportation, stores and clubs have also begun to operate for 24 hours each day.
united states: socioeconomic Issues When firms relocate certain activities offshore, the home country also experiences a set of socioeconomic issues which can be viewed in terms of impacts to the economy, education, social and cultural environment and government.
Economy •
Jobs Going Offshore: Only a small number of net job losses (approximately 2%) in the U.S. are actually attributable to offshoring. As highlighted earlier in the chapter, outsourcing and offshoring are not synonymous. A firm may choose to outsource to a third party which is based in the same country. In fact, this relocation outside of the firm but inside of the country is actually the most common in the U.S. Furthermore, some firms eliminate jobs through automation. Table 8 contains estimates of offshored net
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Project Management Issues in IT Offshore Outsourcing
•
•
•
job losses in the U.S. over time for management, business and office work in jobs which may contain some finance capabilities. Economic Returns: For every dollar spent on outsourcing abroad, the U.S. economy is expected to receive $1.12 to $1.14 in return (McKinsey, 2003). This figure is based on the estimated savings to U.S. consumers and investors, import of U.S. goods and services by Indian providers, transfer of profits to the parent company, and the value of the re-deployed U.S. labour. Unionisation: Some white collar workers have begun to entertain the idea of unionisation, although unions have traditionally been associated with blue colour workers. Possible Deflation: There is a long-term downward pressure on costs and prices in the U.S. which may lead to deflation.
These initiatives are partly based on fears that further job losses abroad will strap the already underfunded Social Security, Medicare, and workers compensation. At the national level, Representative Bernie Sanders (Vermont) has proposed the Defending American Jobs Act, which limits the amount of federal grants and loans available to companies that replace U.S. employees with foreign workers. At the state level, there are a number of initiatives such as the Keep Jobs in Colorado Act, Opportunity Indiana, and the American Jobs Act of Wisconsin. Several of these efforts have proved successful. For example, in November 2003, the Governor of Indiana was pressurised to withdraw from a $15M outsourcing contract with India-based Tata Consulting Services as it was deemed inappropriate to use state funds to pay for foreign workers.
Education •
•
Social and Cultural Environment Bridging and On-the-Job Training: The erosion of jobs has led some American academics decry the need for a knowledgeeconomy strategy (D’Aveni, 2004), which involves up-skilling the workforce around truly knowledge-intensive activities and industries. New skill training can be an individual initiative or offered through company or government programmes. Formal Degrees: In tandem, it has been suggested that many American university degrees, including the MBA, are too “generic” and further specialization is needed.
Government •
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Pending Legislative Initiatives: Just as India’s government has sought to increase the number of activities offshored, U.S. city, state and national government initiatives attempt to maintain firm activities at home and relocate offshored activities back home.
•
Changing Career Models: Traditionally, careers have followed an upward, linear progression through one or two firms or consist of stable employment in one profession (Sullivan, 1999). Macroeconomic forces such as globalisation and technology have changed the nature of careers and of the psychological employment contract which was originally seen as exchange of employee loyalty for job security. This contract has further eroded with the pressure of outsourcing and in particular when employees are asked to train individuals from overseas who will take their jobs. A recent study of technology workers found that 20% had trained an individual from overseas or known someone who did. In order to stay employable in this new career model, U.S. workers must focus on developing portable, individual-specific knowledge, skills and competencies.
Project Management Issues in IT Offshore Outsourcing
•
Backlash: The offshoring of American jobs has generated backlash in the U.S. for a variety of reasons such as consumers’ concerns about the security of data abroad and workers who are concerned about losing their jobs. Web sites such as http://www. nojobsforindia.com/ track the movement of U.S. firms’ activities abroad and are actively engaged in petitioning governments and companies to retain these activities and jobs in the home country. Consumers have also expressed concerns about the security of their data abroad and a dislike of dealing with foreign call centres.
A summary of socioeconomic issues for home and host countries can be found in Table 9.
conclusIons This chapter has examined the phenomenon of the outsourcing and offshoring of finance activities from both firm and country perspectives. We have reviewed our research on the major drivers, costs and benefits and put forward a way of thinking about the location choices facing a firm as it considers how best to manage its backoffice finance operations. Offshoring can provide important benefits, but it represents only one of several choices, and it carries with it substantial risks as well. This approach involves taking a disaggregated view of the finance activities in question, and thinking through the locational choice on a task-by-task basis. Once this analysis has been done, the attention can shift to issues of how best to coordinate the tasks across the various locations, and how to ensure an effective implementation process. It should also be noted here in that technology and innovation play a key role in firms’ future. Technology will continue to enable the automation and thus elimination of jobs. Technology can also enable communication between groups which are located at a distance in
the firm. Through technology, firms will be able to evolve and produce more with less. Outsourcing and offshoring has profoundly impacted the firm, as well as the country environments. We have illustrated how the increase in offshoring of finance and other activities has led to fundamental changes across in the economy, education, social, cultural and political environment in host and home countries.
reFerences Accenture and Economist Intelligence Unit. (2004). Outside upside: Finding focus through finance outsourcing. Report. Cooper, W. (2003). Case study: Rhodia makes its move. Outlook Journal. D’Aveni, R. A. (2004, June). What should be done about the export of jobs abroad? Academy of Management Online Discussion. Available at http:// www.aomonline.org/aom.asp?page_ID=213 Evison, A., Birkinshaw, J., Barden, R., & Terjesen, S. (2004, Autumn). Shifting strategic focus. European Business Forum, 19, 38-42. Forrester Research. (2004). Near-term growth of offshore accelerating. Report. Gartner Group. (2003). Outsourcing worldwide: Forecast database. GE Capital. (2004). Wanted: Indian chartered accountants for GE. Available at http://www. gecapitalindia.com/gecapital/apr2004.htm#2 GE Capital. (2005). Fact sheet: GE Capital India. Available at http://www.gecapitalindia.com/ gecapital/factsheet.pdf Knowledge at Wharton. (2002). The case for, and against, shifting back-office operations overseas. Available at http://knowledge.wharton.upenn. edu/100902_ss1.html
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McKinsey. (2003, August). Offshoring: Is it a win-win game? McKinsey Global Institute.
Thompson, J. D. (1967). Organizations in action. New York: McGraw-Hill.
Offshoring: Not everybody’s doing it. (2004, June 1). CFO Magazine.
United Nations Development Programme. (1999). Human development index: India.
Sullivan, S. E. (1999). The changing nature of careers: A review and research agenda. Journal of Management, 25, 457-484.
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 209-228, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.12
High Performance IT as Strategic Partner for HR Management Ferdinando Pennarola Bocconi University, Italy Leonardo Caporarello Bocconi University, Italy
IntroductIon The constant growth of the role that information technology (IT) is playing in business today has led to the development of new business models and new business processes (Cline & Guynes, 2001). In the modern business world, characterized by such things as internationalization and cooperation between organizations from different industries, companies are faced with a great many challenges, including: • •
•
The integration of data sources, applications, platforms, and businesses; The technological and organizational flexibility needed to respond efficiently to changes in the marketplace; The creation of systems that are reliable, robust, and flexible, and that are able to
•
keep pace with the changing needs of their users; Product and service quality.
As such, companies are increasingly recognizing the importance of effective IT management (Broadbent & Weill, 1997). As human resources management plays a critical role for an organization’s success (Jackson, Hitt, & DeNisi, 2003), all these mentioned challenges have implications for how human resources are managed. In particular, most of the human resources management has mainly focused on administrative aspects of HR (human resources) (Groe, Pyle, & Jamrog, 1996; Lawler & Mohrman, 2003). Moreover, although numerous studies have studied the potential for the human resource to be a strategic partner, human resources executives have not been strategic partners (Lawler, 1995; Lawler
High Performance IT as Strategic Partner for HR Management
& Mohrman, 2000).The information technology offers the opportunity to free up HR from much of these administrative activities. Then, the human resource function could significantly focus on participating to build the organization’s strategy (Lawler et al., 2003). In fact, human resources information system (HRIS) allows, from one side, a self-service HR administrative activities, and, from the other side, HR to gather strategic data and information in order to contribute to the business strategy formulation. The Lawler et al. study (2003) shows how HR is most likely to be a full strategic partner when an integrated HRIS exists. The globalization of business, the development of more flexible organization structures, the further development of information technology are some of the drivers of the necessity for HR information systems (Groe et al., 1996). In light of the previous, the goal of managing information technology resources is to be able to identify, select, and assess--and, when necessary, revise the initial decisions--a balanced, consistent set of IT products and services for both in-house users (employees and business owners) and external users (customers, suppliers, partners, and the community).
bAcKground Many organizations may be investing in IT to reduce transaction costs and reduce the size of HR function, instead of make it a strategic partner. However, as mentioned in the previous chapter, it is clear the potential contribution of HR function in the business strategy formulation. In order to increase the strategic value-add of HR function, the following considerations should be taken into account by both HR and Top management: human resource is an information-centered activity; IT supports to increase HR focus on and capacity of planning, organizational development and organizational designs; IT supports to turn data into strategically valuable information; IT supports to increase the business knowledge of HR profes1872
sionals (Groe et al., 1996; Lawler et al., 2003). In order to create and manage IT resources, one must make certain decisions in terms of understanding the needs of the business, investing in and coordinating the various IT components, and being able to alter the composition of IT resources, as well as to manage and control these resources and their relationship to the business as a whole. It follows, then, that IT governance does not limit itself to merely managing the current state of affairs, but also necessarily implies an ongoing analysis and revision of the needs, limitations, and opportunities provided by IT in relation to general business objectives (Cegielsky, Reithel, & Rebman, 2005). Therefore, it is important to have appropriate models for managing IT resources. A number of authors (Brynjolfsson & Yang, 1996; Hitt & Brynjolfsson, 1995) have shown how investments in IT resources can be beneficial to productivity, which does not necessarily mean an increase in productivity for the entire organization. Below, we shall put forth a six-part model1, based on the competitive forces model and applied to IT resources, which can be used as a general point of reference in managing IT resources in a manner that best supports a company’s business activities (Figure 1). The first part of the model requires that we identify the products and services currently provided to the organization’s various stakeholders (both internal and external) in order to analyze any gaps between these and the users’ actual needs. The second and third parts concern strategy: •
•
The strategy of the organization, the purpose of which includes determining which products and services are necessary in order to achieve general objectives; IT strategy, the purpose of which is to plan future needs in terms of IT products and services that are in line with the organization’s strategic goals.
High Performance IT as Strategic Partner for HR Management
Figure 1. Competitive forces model for IT resources 1. Market demand for services provided by the company to customers & vendors
2. The company’s strategy
3. The IT strategy
Company’s IT resources
5. IT services offered by competitors
4. IT assessment
The fourth part of the model highlights the importance of IT assessment in order to understand the level of the organization’s technology and the results of the use of IT resources. The two final parts then underscore the importance of the IT products and services provided by the competition and of the related levels of spending and investment. Finally, we want to focus on what we mean for “IT resource management”: it may be considered a critical success factor for any organization. It refers either to the infrastructural dimension of IT or to the strategical and tactical management of IT resources. IT managers have the responsibility to ensure that the appropriate IT infrastructures and applications are available for different projects committed by the other business functions.
It resource mAnAgement strAtegIes IT resource management is a complex activity that goes beyond the mere technical aspects to include the even more important strategic, orga-
6. IT investment by competitors
nizational, and financial aspects. For this reason, it is important to involve all of an organization’s various levels of decision making, from analysis and definition of specifications to design and implementation. Everyone involved must also be clear on the elements needed to define IT resource management and on the effects of the various alternatives over the short, medium, and long term. At the strategy level, based on the observations of Coase (1937) with regard to transaction governance2, there are two possible forms of governance for an IT resource: turning to the market or using in-house resources. Subsequently, the theory of transaction costs put forth by Williamson (1975, 1980), which integrates Coase’s observations, states that the choice between the market or in-house resources must be based on standards of organizational efficiency and on a comparative analysis of transaction costs and the following: • •
Costs of information and decision-making; Costs of negotiation and distribution (Perrone, 1990);
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High Performance IT as Strategic Partner for HR Management
• • • • • •
Costs of execution; Costs of control; Costs of change; Economies of scale; Economies of specialization; Economies of communication, information, and control.
In essence, make-or-buy decisions (i.e., the choice between insourcing and outsourcing) are management decisions characterized by a certain complexity and uncertainty and are made under conditions of bounded rationality (Loh & Venkatraman, 1992; Simon, 1985).3 In information technology, such decisions have changed as technology evolved and as new models of organization and IT resource management were developed (Currie & Willcocks, 1998; Shupe & Behling, 2006). We can identify certain variables that impact on the make-or-buy decision, including: the importance of the service; the uniqueness of the service; the ease with which the service’s characteristics and value can be defined; how often the transaction recurs; and the high performance of specialized
firms as compared to in-house performance. Figure 2 presents these variables in a matrix in order to demonstrate how they affect the makeor-buy decision. An organization may opt for a hybrid of the two options, which can be categorized based on two key aspects. The first is the level of competition in the marketplace, which can either be closed (in the case of a monopoly held by a single supplier) or open (i.e., multiple suppliers competing with each other for the services). The second is the make-or-buy decision itself. By combining these two aspects, we get the various strategic orientations (Currie et al., 1998) for IT resource management as shown in Figure 3: •
• •
I n-hou se ma nagement, i nsou rci ng (Hirschheim & Lacity, 2000) and cosourcing; Full or selective outsourcing (Subramanyam, 2004); Joint ventures and consortia.
Figure 2. Variables in the make-or-buy decision
• Service importance/uniqueness
in-house organization
high
• Transaction frequency • Unused production capacity • Specific in-house know-how
low
market
high
low
• Ease with which service characteristics are defined • Ease with which service value is defined • Number of potential counterparties • Context predictability • Performance of specialized firms vs. in-house • Investment required
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Figure 3. IT management strategies
Buy Full outsourcing
Insourcing
Selective outsourcing
In-house IT unit
Make
Open market
These strategies are described next.
Closed market
•
In-house management, Insourcing, and co-sourcing
Outsources the development and implementation of the application software using highly specialized service providers.
Full and selective outsourcing The strategy shown in Figure 1 as “In-house IT unit” represents the situation in which the realization and management of IT services are assigned to a department within a company, acquiring only the equipment and infrastructures from outside the company. We then move up to “insourcing” (in its more specific sense for our purposes herein), whereby the IT function is delegated to a service company which is separate from but owned by the company to which the IT services are provided. “Co-sourcing,” in turn, is selective application of insourcing and outsourcing (which will be discussed in greater detail below) for individual system components. Take, for example, a company which: •
Defines user requirements and analyzes the project on an insourcing basis;
The term “outsourcing,” which dates back to the 1970s, has established itself in the last decade and is used to indicate a situation in which a company delegates the management of one or more services (not just IT services, but any category of an organization’s services) to an external vendor (i.e., shifting to outside sources that which was previously done in-house). The various forms of this strategy can be categorized based on two key aspects: the type of activity outsourced and the number of activities outsourced. For the former, we can distinguish between: • •
The outsourcing of IT resources; Business process outsourcing (BPO), wherein IT resources are typically a key component in the provision of the services themselves.
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For the latter, we can distinguish between: •
•
Full outsourcing, whereby the company entrusts a single outsourcer with the entirety of an area or unit based on a specific service contract; Selective outsourcing, where the company assigns certain IT or other services to one or more outsourcers, while keeping or more or less significant portion of the services in house.
The table 1 summarizes a number of the services that may be provided by an outsourcer.
Joint ventures and consortia The joint venture strategy applies to situations in which it is necessary to there needs to be a strong connection between company and supplier. Such a strategy involves a long-term contractual relationship concerning specific projects that may be of critical importance to the company and for which the initial investment may be significant. In this case, the IT function is delegated to a service company established by the company to receive the services together with an outsourcer (legally speaking, it is also possible to establish consortia or temporary groupings of companies). The roles played by each of the parties vary: the company receiving the services, which may or may not hold a majority stake in the joint venture, is responsible for defining its own needs and guiding the implementation of new services by setting goals and priorities; the service provider, in turn, is responsible for managing operations related to design and delivery of the services themselves. The IT service firm provides the company with its services based on formal contracts just as any other outsourcer would. As opposed to insourcing, such a firm may also operate freely in the marketplace in order to
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promote the reuse of the solutions and infrastructures implemented and managed for the initial customer and to generate its own profits.
specIFIc strAtegIes oF ApplIcAtIon mAnAgement Strategies for managing application software are strictly correlated with and dependent upon the general strategies for managing all IT resources. In order to select the right strategy of application management, functional, technical, and financial analyses and comparison must be done right from the feasibility study phase and must take into account a great many factors, including: the total cost of ownership4 of the individual solutions; the potential reuse by other companies; the technical skills available within the company; the portability and interoperability of the solutions; independence from a specific vendor or technology; specific need in terms of security and privacy; the availability of the source code of commercially available solutions and of those that are purpose-built. The main strategies of application management are as follows: •
•
The development of custom-designed software, which is the most appropriate strategy for cases in which the procedures and activities to be computerized are specific to a given company and the software cannot, therefore, be reused by other companies, as well as when a great deal of personalization and integration with other functions and subsystems and extensive adaptation to the company’s specific organizational model are required; The reuse of custom-designed software that was previously developed for one or more other companies and which is able to handle similar processes. This type of
High Performance IT as Strategic Partner for HR Management
•
•
•
solution is advantageous in cases in which the existing software meets the company’s primary needs, so it is deemed unnecessary to conduct analyses, define requirements, and develop software from scratch; Acquiring a license to use proprietary software. This strategy may be justified in cases in which the processes and functions concerned are common to a broad number of companies, so vendors have created commercial software solutions (e.g., software for accounting, production, and sales). The better the commercial product meets the needs of the processes to be computerized, the greater the benefits of such a solution; The purchase of open-source software. This strategy involves the use of software based on public domain source code that is open to all users (i.e., it can be viewed, altered, personalized, and redesigned to meet specific needs). It should be noted, however, that open-source software is not necessarily an “alternative” to commercial software; A strategy based on a combination of the any and all of the previous strategies.
Application service providers Another strategy for IT resource management is the use of application service providers (ASPs), a form of IT management based on services provided over the Internet, rather than through possession of a full infrastructure or ownership of a software license. As such, it is a sort of hybrid of other IT management strategies. What sets this strategy apart from the others is the new way in which the services are both provided to and used by the company concerned. The main difference between ASPs and traditional outsourcing lies in their respective business models. In the case of ASPs, the applications (which are more or less standard) and services are provided to as many businesses as possible,
whereas a traditional outsourcer seeks to provide services that are personalized and specific to each company, such as managing applications that are owned by the customer.
It resource locK-In The decisions made with regard to IT resources can result in limitations, or “lock-in,” when it comes time for the company to adopt other IT solutions. The costs that a company will need to incur in order to switch from one solution to another are known as switching costs. Types of lock-in include the following: •
•
•
Database lock-in, where the cost of switching from one database architecture to another could be significant, in part due to the need to redesign and redefine data formats; Loyalty lock-in, where the switch to another vendor could lead to the loss of benefits gained with the previous one; Infrastructure lock-in, where the significant investment required for a certain infrastructure would make the cost of replacing it significant, as well.
Future trends Nowadays, information technology is commonplace in nearly all areas of business (from orders management to production through to customer relationship management, human resources management, and so on). For this reason, when speaking of IT resource management, we must also consider the aspects that characterize the given organization as a whole (industry, company size, products and services provided, corporate culture, organizational structure, etc.). As such, a contingency approach may be particularly useful. For an example of how things are changing, we could look to the recent rethinking of IT service
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High Performance IT as Strategic Partner for HR Management
outsourcing decisions, as we are now seeing a number of organizations that are switching to insourcing the management of services that were previously outsourced. This may be happening because the outsourced service has become a core activity for the organization or because the quality and the control of the outsourced service have been found to be unsatisfactory. This is just one example of how radically things continue to change in the world of information and communication technology.
conclusIon The globalization of business, the development of more flexible organization structures, the further development of information technology are some of the drivers of the necessity for HR information systems. HRIS has the potential to be an enterprise-wide support system that helps achieve both strategic and operational objectives (Groe et al., 1996). The IT resources management is a complex process that goes beyond the mere technical aspects to include the even more important strategic, organizational, and financial aspects, as well. For example, in terms of strategy, there are two forms of governance for IT resources: turning to the market (outsourcing) or using in-house resources (insourcing). The decision between the two options is influenced by a number of variables, including: the importance of the service; the uniqueness of the service; the ease with which the service’s characteristics and value can be defined; how often the transaction recurs; the number of potential counterparties involved; competitive uncertainty; and specific in-house know-how. Taking all of these variables into account may lead to an orientation towards one of the two forms of governance, but not necessarily to an outright decision. Indeed, in many cases, a company may decide to adopt a sort of hybrid of a number of strategies, which include internal management,
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insourcing, and co-sourcing; full and selective outsourcing; and joint ventures and consortia. Two additional aspects that are important to IT resource management are the lock-in effect (i.e., limitations or barriers that arise when it comes time for the company to adopt other IT solutions) and an analysis of the total cost of ownership (TCO) of IT resources.
reFerences Broadbent, M., & Weill, P. (1997). Management by maxim: How business and IT managers can create information infrastructures. Sloan Management Review, 38(2), 77-92. Brynjolfsson, E., & Yang, S. (1996). Information technology and productivity: A review of the literature. Advances in Computers, 43, 179-214. Cegielsky, C., Reithel, B., & Rebman, C. (2005). Developing a timely IT strategy. Communications of the Association for Computer Machinery, 48(8), 113-117. Cline, M. K., & Guynes, G. S. (2001). A study of the impact of information technology investment on firm performance. Journal of Computer Information Systems, 41(3), 15. Coase, R. H. (1937). The nature of firm. Economica, 4, 386-485. Currie, W. L., & Willcocks, L. P. (1998). Analyzing four types of IT sourcing decisions in the context of scale, client/supplier interdependency risk mitigation. Information Systems Journal, 8, 119-143. Groe, G. M., Pyle, W., & Jamrog, J. J. (1996). Information technology and HR. Human Resource Planning, 19(1), 56-60. Hitt, L., & Brynjolffson, E. (1995). Productivity, business profitability, and consumer surplus: Three different measures of information technology value. MIS Quarterly, 20(2), 121-142.
High Performance IT as Strategic Partner for HR Management
Hirschheim, R., & Lacity, M. (2000). The myths and realities of information technology insourcing. Communication of the Association for Computer Machinery, 43(2), 99-107. Jackson, S., Hitt, M., & DeNisi, A. (2003). Managing knowledge for sustained competitive advantage: Designing strategies for effective human resource management. San Francisco: Jossey-Bass. Laudon, K., & Laudon, J. (2005). Management information systems. Upper Saddle River, NJ: Prentice Hall. Lawler, E. E. (1995). Strategic human resources management: An idea whose time has come. In B. Downie & M. L. Coates (Eds.), Managing human resources in the 1990s and beyond: Is the workplace being transformed? (pp. 46-70). Kingston, Canada: IRC Press. Lawler, E. E., & Mohrman, S. A. (2000). Beyond the visions: What makes HR effective? Human Resource Planning, 23(4), 10-20 Lawler, E. E., & Mohrman, S. A. (2003). HR as a strategic partner: What does it take to make it happen? Human Resource Planning, 26(3), 15-29. Loh, L., & Venkatraman, N. (1992). Determinants of information technology outsourcing: A cross-sectional analysis. Journal of Management Information Systems, 9(1), 7-24. Perrone, V. (1990). Le strutture organizzative d’impresa. Milano: Egea. Shupe, C., & Behling, R. (2006). Developing and implementing a strategy for technology deployment. The Information Management Journal, 29(1), 52-57. Simon, H. A. (1985). Causalità, razionalità, organizzazione. Bologna: Il Mulino. Subramanyam, M. (2004). The impact of global IT outsourcing on IT providers. Communications
of the Association for Information Systems, 14, 543-557. Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: The Free Press. Williamson, O. E. (1980). The organization of work. Journal of Economic Behavior and Organization, 1, 5-38.
Key terms Application or “Application Program”: A program designed to be used for a specific purpose directly by a user or, in certain cases, by another application program. Examples include word processing programs, communication programs, and image editing programs. Application Service Provider (ASP): For example, a firm that provides access over the Internet to (typically standard) applications and services that would normally have been located within the company. Human Resources Information System (HRIS): A system that lets keep track of all employees and information about them. Insourcing: The opposite of outsourcing (i.e., referring to a situation in which IT resources are managed by a “standalone” service entity that is separate from the company receiving the services, but is wholly owned by this company). Lock-in (or the “Lock-in Effect”): Represents the costs that a company will need to incur in order to switch from one solution to another (also known as switching costs). Open Source: Generally speaking, any program made available in such a way that it can be used or altered by all users or by other software developers. Open-source software is typically developed through a publicly cooperative effort and is freely available.
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Outsourcing: The situation in which a company chooses to turn to an external provider for one or more (personalized and/or specific) services, rather than handling these services in-house.
3
TCO (Total Cost of Ownership): These costs can be classified in hardware, software, personnel, availability, productivity, restorability, application costs. 4
endnotes 1
2
This model is a re-elaboration of the competitive forces model for IT infrastructure proposed by Laudon and Laudon (2005). By transaction here, we mean the creation and acquisition of a good or service that is needed in the company’s business.
Information on future events is not always available when certain decisions need to be made. It follows, then, that decision makers are required to work with a certain level of uncertainty and do not always have all the information they need to select the “best” solutions. As such, they generally seek to select “satisfactory” solutions. These are, in short, the assumptions underlying the theory of bounded rationality. The third part of the model shown in Figure 1 refers to the significance of the IT management strategy that the organization should define and the related costs, which are known collectively as Total Cost of Ownership (TCO). These costs can be classified in hardware, software, personnel, availability, productivity, restorability, application costs.
This work was previously published in Encyclopedia of Human Resources Information Systems: Challenges in e-HRM, edited by T. Torres-Coronas and M. Arias-Oliva, pp. 420-427, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.13
High-Tech Workers, Management Strategy, and Globalization Jasmine Folz Seattle Central Community College, USA
AbstrAct
IntroductIon
Based on qualitative interviews with Seattle area high-tech workers, this chapter explores their positioning within and reaction to globalization processes. Looking especially as cost-cutting labor strategies of contingent employment, importation of foreign workers, and the outsourcing of professional high-tech work, it is argued that these are essentially restrictive employment strategies that benefit employers at the expense of employees. While some of the interviewees more or less approved of these practices as logical from the corporate perspective, and were confident that their jobs were too complex to be at risk, most are questioning these processes and some were actively trying to organize in an effort to halt or at least slow down such trends. How and why high-tech workers accommodate or resist management policies and practices they disagree with is analyzed with attention to the impact of ideology.
The rapidity and scale of technological innovations during the last century has contributed to a great transformation in the labor process that continues to change the nature of society in general and work in particular. Information can travel and be processed faster than ever before, and this allows for the reorganization of corporate entities with respect to both time and space. Many have interpreted these changes and shifts as the inevitable and indeed desirable result of “globalization” in which the breaking down of political and economic barriers is paired with the blurring of cultural identities. Attention to globalization has produced many valuable contributions to the anthropology of work in particular, ranging from ethnographies of how transnational production practices shape the lives of people working in the mines, factories, and “information sweatshops” of developing nations to studies of how blue collar workers in de-industrialized America have
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experienced these same processes (Doukas, 2003; Ferguson, 1999; Freeman, 2000; Nash, 1989, 2001). How, though, do the relatively elite workers who create the technologies that facilitate these practices experience globalization? Drawing from qualitative interviews with eleven high-tech workers conducted in Seattle, WA in 2004, I examine high-tech work and workers as embedded in the international political economy. In their day-to-day experiences, as well as in the moments and factors that define their careers, individual high-tech workers confront and negotiate a myriad of macro level issues, including changes in technology, market fluctuations, political regulations and policies, and off-shore production. Though these issues may appear much larger and thus separate from individual high-tech workers, these macro level changes do affect the high-tech workers I interviewed in very tangible ways. To better understand this macro-micro relationship, I analyze issues associated with globalization that were brought up in the interviews, looking particularly at high-tech production and labor processes and at how the workers I interviewed accommodate or resist globalization as it is manifested in management policies and practices.
globAlIZAtIon And hIgh-tech productIon cycles Much of what concerns contemporary ethnographers are the issues surrounding globalization, and, more specifically, the negative consequences globalization has had on many people in traditionally as well as newly marginalized spaces. Indeed, globalization is this moment’s answer to what Wolf calls the “central problem” inherent to each period of anthropology (1972, p. 252). Though from an anthropological perspective, globalization, as defined by the interconnectedness and exchange of world cultures and economies, is not new, what is new is the speed and scope at which
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technology is shrinking the relationships between time and space. From processing information in “data factories” to working in cyberspace, location of work and workers has shifted and new sites and categories of work have emerged. The implications of these transformations for hightech workers, their managers, and the global labor process are certainly significant, though they are also significantly contested. Within the American context, two issues exemplify the role of high-tech workers in the globalization process: flexibility and accommodation as management strategies and the high-tech production process. Advances in computing networks, transportation, and telecommunications have allowed corporations to become more flexible and take greater advantage of economies of scale. This flexible business model, which is facilitated by neoliberal policies, favors the decentralization of production framed within correlating shifts in time and space, or shifting spaces. Harvey’s analysis of the shift from the assembly line logic of industrial capitalism (Fordist) to the post-Fordist logic of flexibility and accommodation that now dominates global production is useful here for, as he explains: The primary significance… of all these changes is that the relatively privileged position of the working classes in the advanced capitalist countries has been much reduced relative to conditions of labor in the rest of the world… The secondary point is that conditions of life in advanced capitalism have felt the full brunt of the capitalist capacity for ‘creative destruction’ making for extreme volatility of local, regional, and national economic prospects… (2000, p. 69) Thus, the globalization process and, in particular, the management strategies of requiring flexibility and accommodation from employees, define the circumstances and constrictions of high-tech work/workers. While on the one hand high-tech workers can embrace unprecedented
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levels of personal autonomy in regards to where and when they work, they are also constrained by this same “freedom” to do work anywhere at any time. The implications being that they are seldom able to “turn off” their work selves and that their livelihood is dependent on the unstable global market. The role technology plays in enabling management to utilize such “rational” employment strategies is both obvious and debated. Hakken suggests that technological innovations, which allow more opportunities for communication, have put the labor process on the cusp of a new transformation he terms “resocialing,” or the development of a more social form of work whose sociality is both acknowledged and accepted by management (2000, p. 8). Still, the tendency for management to use technology as a means of control appears to be predominant. For most workers, new forms of technology provide management with new instruments of control through limited access to information and electronic surveillance of production and the workplace (Freeman, 2000, p. 198-9). Moreover, exploitative management strategies, such as those that favor international divisions of labor to the disadvantage of workers, are not only enabled by but premised on new technologies (ibid, p. 166-7). Hakken maintains that with advances in communication technology, work is no longer conducted in place but, rather, in space and that online workers simultaneously construct and are constructed by a new social formation of cyberspace (2000, p. 9). Certainly, information and communication technology (ICT) has opened up new possibilities for the organization of work; however, these possibilities are predicated on access to technology and there is a “digital divide” based on regional and class barriers to computer access and literacy. Michaelson goes as far to argue that the information economy “…has not caused the gap between the rich and poor, but it has exacerbated it” (2000, p. 13). Through examination of the high-tech production cycle, we will be able to connect these debates to the
high-tech industry and its workers and, in so doing, understand how these processes are perpetuated and experienced. The high-tech production cycle is rapid, global, and cyclical. The rapid, international aspects of the production process can be directly attributed to advances in manufacturing, travel, and communications technologies whereas its cyclical nature can be traced to the booms and busts inherent to capitalist economies. The production cycle, in general, consists of product research, design, and development, followed by production. At each phase of the cycle, there is usually intensive testing to verify that the product’s design, components, and function all meet in-house, industry, and government regulations. Because high-tech corporations are profit driven, they utilize the lower labor costs of contract employees and outside vendors (often in developing nations) and because they are also vying to beat their competition to the market, the cycle is continually sped up. What this means for high-tech workers is that their working lives (and often their outside lives) are dictated by what point they are in the cycle of any given product they are working on. For example, if they are preparing for the actual production of the product, there is a “crunch” time where it is common to work overtime for weeks on end, and there are also mini crunches at the end of each phase of the cycle to ramp up for the next phase. Further complicating matters, if production is taking place in another country and/or time zone it is often necessary to come in early or late to check in. In addition, it is not unheard of for individual workers to be assigned to two or more projects simultaneously. As straightforward as the previous description of the production cycle is, because of the fast pace and reliance on multisited production teams, problems are common. Trying to beat or at least keep up with the competition entails adhering to unrealistic schedules, which can be very stressful, as Barb,a a software programmer, explained:
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Sometimes the problems are just ongoing. You know if you’re doing builds you just have to turn them out every day and just make sure they work every day. And if there’s build breaks then you have to investigate those, fix them, or find a person to fix it… sometimes the developers are depending on the bits that you build for them to go on to the next step, so that’s kind of a turning point kind of a thing that just goes on endlessly. Add to this the logistics of working with team members in different time zones and, with so many variables in the production process, miscommunications and other problems are almost inevitable. In addition to negotiating the problems inherent to the logistic and temporal constraints of production cycles, some of the people I interviewed also have to contend with government regulations. This is because the technologies their companies produce have significant health and/or safety applications. John, an electrical engineer, told me that a large part of his job is to ensure their product, which uses potentially dangerous lasers, meets federal safety standards. Similarly, Kevin, a computer scientist who works on cancer treatment technology, must ensure that his work is stringently tested to meet Food and Drug Administration requirements. Because they force corporations to conduct and document rigorous tests on their products, in some cases, strict government regulations can slow down and thus mitigate the problems inherent to production cycles. In sum, while technology enables fast paced, multisited production cycles, even the technology must be understood in the context of the contemporary political economic environment, which favors profit driven, multinational corporations. To better understand how these changes affect those who design and work with the technologies that enable these processes we will look at how cost-cutting labor strategies such as contingency, importation of foreign labor, and outsourcing are executed and experienced in the high-tech industry.
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cost cuttIng lAbor strAtegIes: contIngency, ImportIng lAbor, And eXportIng WorK Contingent employment, which entails hiring workers on a temporary, contract basis, has been a widespread employment strategy in the high-tech industry for over twenty years (Barley & Kunda, 2004, p. 13). In fact, ten of the eleven workers I interviewed have worked on a contingent basis for part or most of their careers. While some of the interviewees prefer it because it allows for more freedom to pursue outside interests, others have never had a choice and would much prefer full time work. Whether for, against or ambivalent about contingency, everyone agreed that it is an increasingly prevalent fact of high-tech life. Contingency is attractive to employers because hiring employees on a contract basis allows corporations to save on the costs associated with full time employees and it allows for flexibility in hiring a specialized person for one specific project or task and then letting them go when their services are no longer needed or wanted. As such, it epitomizes the flexibility and accommodation inherent to post-Fordist capitalism. Contingency also gives employers some leverage with asking contract employees to put in long, stressful hours because it’s a short term, project specific request. But, as Barb explained when telling me about the demanding nature of her last job, this strategy is not always as effective as intended: That was a very unrealistic pace. But it was a contracting job so they knew this person was just going to suffer for a certain amount of time. They’re not doing the right thing with this job ‘cause they really should have a permanent position—the job was so difficult, if somebody could really learn it maybe it would have been easier but they laid me off. They spent a lot of time training me on this job—so now they’re gonna have to retrain somebody else—I don’t know what they’re gonna
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do, I just think they’re crazy. But they’re under budget constraints. That’s why they do it. So, while restrictive budgets can make contingency look good, the costs of filling a multifaceted, key position with someone who has no vested interest in the company may be very high. Be that as it may, high-tech corporations are motivated by profit and, in general, contingency is a successful and cost effective employment strategy. From the employee’s perspective, contingent work is attractive for similar reasons; it can be very lucrative and the flexibility of working on a contractual basis allows employees to sample and learn about various types of work and companies without making any commitments to stay if they don’t want to. Steve, a tech writer, is especially appreciative of this aspect of contingent work, as he explained when telling me about his early days as a Microsoft temp: “I took a break and traveled to South America for seven months—and that was another thing that [was] really attractive about the temp work because when my job was done I was done—I didn’t ask anyone, didn’t tell anyone I’m leaving, I’m just done.” That said there are some problems inherent to contingent employment. Full time employees do not always make as much money as some highly skilled contingent workers, but they generally have healthcare benefits, access to employee assistance programs to deal with job stress and/or personal problems, stock options, access to company sponsored events, and, perhaps most importantly, job security. According to Doussard and Mastracci (2003), 96% of contingent IT workers surveyed would prefer full time employment (p. 17). To that end, many contingent employees hope contingency will be an avenue to full time employment and while it sometimes is, according to my informants, more often than not the job ends with the contract. In fact, for some contingent workers, contracting has been their only employment. Sue, a hardware designer and drafter who has worked in the industry over twenty years, told me, “In
my life I think I’ve only had two full time jobs, the rest have all been contract.” Although they are not as obligated to their employers as full time employees, contingent employees have less rights and little control over the tenure of their contracts, especially in a bear market. While embracing the freedoms of contingent employment may say something about the individuals who choose to do so, what perennial contingency among workers who would prefer full time jobs says about the state of the industry and political economy is even more telling. Following from hiring native workers on a contractual basis is the increasingly common practice of using H-1B and L-1 work visas that enable foreign workers into the United States. These visas are premised on a lack of homegrown talent; however, some argue that this import of qualified but less expensive labor is in fact premised on the lower wages paid to and greater control over foreign employees (Doussard et al., 2003). Ben, a software developer and the only interviewee who is working on an H-1B visa, shed some light on the matter. He was brought to the United States from India several years ago by an agency that specializes in recruiting, sponsoring, and managing H-1B employees for a percentage of their wages, of course. Since that time, he has worked for several high-tech companies in California and the Seattle area, each one taking over his sponsorship for the duration of the contract. While Ben sees his experience working in the United States as an excellent opportunity to improve his skills, the context of this opportunity leaves much to be desired, as this interview excerpt illustrates: JF: Were you lonely when you came or did you miss India or your family? Ben: Yes, that was pretty hard but work kept me really on my toes seven days a week. So even getting some time off on Sunday was a big issue. I didn’t have much time to think about them. JF: And so everyone was working like this and do people ever get burnt out?
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Ben: Yes but we [had] no choice because we were brought in to fulfill a requirement and you cannot back out, it’s nothing like I’ve taken a job offer and anytime I can back out. I had no other option. You are sponsored by these organizations and you are pretty much tied down to them. Though the trafficking of highly skilled, well paid laborers who want to work in the United States doesn’t inspire the same level of concern as other transnational labor migrations, still, it does resemble past exploitations and raise questions about the state and nature of the high-tech industry. This level and scope of foreign importing of labor isn’t occurring in other professions, and while all contract workers are legally “tied” to their contracts, U.S. citizens are more likely to at least have knowledge of and fairly easy access to legal avenues of recourse from unfair or illegal work arrangements. From importing foreign workers to outsourcing the work does not take a great leap of the imagination and, indeed, the specter of outsourcing is looming over the high-tech industry and there is a real sense of, if not fear, unease about its impact. All the interviewees are aware of the trend in outsourcing professional high-tech work though only four are very worried, three of whom were unemployed at the time of the interviews. The rest feel that even if professional high-tech work goes overseas that they will probably be able to get work in the Seattle area because their skills are quite good and specialized and/or they have enough contacts in the area to secure employment. That said, the interviewees did express three main objections to outsourcing: (1) that it degrades the quality of the product, (2) that it threatens their own jobs, and (3) that the practice is immoral. While most everyone agreed to the first and several to the second objection, only a few brought up the third. Of all the interviewees, Ben was the most at ease with outsourcing as a production strategy, as he explained when I asked him if he has observed much concern about it: 1886
Yes, you can see the feeler of people’s faces the moment that a new personality comes to [the] company, especially an Indian. So the expression tells you off but it’s not only India, somebody’s going to do it cheaper than India... It’s not a question of Indians. Typically when you look for a car in the market you’re going to go to the guy who’s going to give you the best deal and that’s the guy who’s going to survive out there so that’s how the world market is going to be so it’s going to happen to India as well at some point of time. Some country that’s really qualified and you have people doing it much better, certainly the market is going to shift. So it’s the same thing in life. You’ll just have to take it philosophically, I’ll be old by then. While Ben, who plans on returning to India to continue his career, is in a good position to take the trend in outsourcing philosophically, it is only recently, with the outsourcing of some professional high-tech work, that many American high-tech professionals have begun to question the tacit approval for whatever lowers the bottom line. Most of the interviewees have firsthand experience dealing with outsourcing of software and electronic goods and everyone who had worked with outsourcing agreed that it compromises the quality of work. This judgment is not rooted in assessments of the ability of offshore workers but in the observed difference in assumptions and inevitable miscommunications that long-distance teams encounter. In fact, Mike and Kevin, both computer scientists, told me that they aren’t at all worried about outsourcing of professional software work because they have seen the compromised quality that results from miscommunications. Though not as unconcerned as Mike and Kevin, Peter, a project manager at Microsoft, gave examples of miscommunication and lack of quality he’s witnessed with the outsourcing model and then went on to explain why he doesn’t feel threatened by it:
High-Tech Workers, Management Strategy, and Globalization
In terms of it worrying me—and this is personal cause I know a lot of people that are very worried about it—but having seen the failures and the decreasing quality and things like that that happen, I’m not as worried. Eventually those kinks will get worked out and I think that a lot more of the low level jobs will probably go there but then that becomes a cascading effect that the low level jobs go but then you need some middle management over there and when before we [were] only using vendors and now there’s actually a whole bunch of full time Microsoft employees, they’re building campuses and everything in India and PRC, stuff like that. So, it’s a bit troublesome and I feel the same way that I do about The GAP. You know, like it’s ridiculous that they’re willing to go over there and compromise quality and like what they’re paid—they pay those people a quarter of what I get paid. So, I don’t know, it’s a little disconcerting ‘cause I think that they’re shortchanging their customers… Peter’s ambivalence is instructive. While, on the one hand, it is acknowledged that outsourcing tends to result in lower quality and has some unsavory implications about the industry in general, many high-tech workers do not perceive an imminent threat to their jobs and so they shrug it off as consumers do when they get a good deal on clothes they know were made in a third world sweatshop. And, in the same vein, just as Americans who have lost or expect to lose their manufacturing jobs to outsourcing may be more sensitive to the implications of buying clothes at The GAP than those who are secure in their job futures, for high-tech workers who have lost or fear losing their jobs the differences between offshore garment or manufacturing and offshore programming are negligible. For instance, Sue, whose job (mechanical design and drafting) has been outsourced, brought up the issue using the very tape recorder I was recording the interview with as an example:
Sue: The Sony tape recorder you are using, years ago would cost $250. Now, with rigorous competition… JF: It was $34. Sue: Yes, with rigorous competition from China it now cost $34, for this amazing piece of technology. But, if we turn this over I’m sure that we are going to see “Made in China.” JF: Just a sec, let’s see. Made in China! Sue: So I could tell you that this physical piece of equipment that cost you $34 in essence cost Sony company, physically, I’ll be generous, $4 to manufacture. That would be for all the components and the manufacturing of this. I would add another $2 for testing and shipping and then the rest would go towards the company. Notwithstanding debate about the differences and implications of outsourcing industrial vs. professional work, both types of outsourcing have the same motivation: the bottom line. Despite her skill and experience, because Sue’s job is a relatively lower level high-tech occupation, it has been one of the first to be outsourced. Time will tell whether or not Sue represents a canary in the mineshaft but, presently, many high-tech workers are very concerned for their future. Unsurprisingly, contingent employees are especially sensitive to outsourcing. When I asked Barb if she had witnessed much to do with outsourcing, she told me: I’ve heard a lot of stories of smaller companies that have just outsourced everything and people have been forced to train their replacements. Well the companies always say they’re not forced, but they’re not given the extra bonus after they’re kicked out. I mean I work with a lot of Indians and they’re great, but… How can you compete when those people are getting paid ten dollars an hour when we’re getting paid twenty to forty dollars an hour? People always say programmers get fifty to sixty, well maybe the company is paying fifty to sixty an hour, but the programmers
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around here, top wages are around forty an hour, if you’re contracting. Barb’s frustration and concern are palatable. And for good reason: the possibility of having to train your replacement is akin to building the machine that replaces you on the assembly line and, in fact, high-tech workers can fairly and ironically be held partially responsible for the technology that allows the outsourcing of highlevel work to occur. Several permanent, full-time employees were also very apprehensive about the future. When I asked John if he was worried his job could be outsourced he said, “Yeah, actually it could be, and it might be. Some of the stuff I do, yeah, very, very possibly.” When I asked if he thought the recent downturn in the industry was cyclical, as he had said earlier booms and busts were, he sighed and said no, and then told me about a friend of his who runs an internet business from Seattle but all his employees are in India, adding: Some people think that the whole outsourcing thing creates work here, which I find very hard to understand. A lot of other people just say oh no all of our jobs are going overseas and that’s it, we’re all going to be out of work. I think this friend of mine might be an example; he didn’t have enough money to do what he’s doing without the Indian programmers. So, I think it kind of goes both ways, but I don’t know. I think it’s probably a net [of] jobs going away than creating his business. … Maybe we’ll create a few jobs here because he’s able to get the start and get the work he needs done from India. As John’s friend illustrates, to stay competitive, it’s necessary to utilize “emerging markets.” And, if he is successful with this company, he may very well hire some people in Seattle but, there are a lot of contingencies in this scenario and, for the present, he cannot afford and is overlooking American workers.
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Even for seasoned high-tech workers the increased level competition brought on by the dot. com bust in late 2000 and outsourcing is daunting, as Sue told me: There are more people competing for the same job. I just recently went to a job fair for Boeing, and they just said that they received a contract that they will be hiring four thousand people. Two months prior they laid off maybe six thousand people and they recovered some of those people and then they had open interviews to fill positions. I have no idea how many people there were, but I know that when I got in for the interview process I was amongst maybe two thousand people. And I saw a line trailing out of the building around the corner, and all of those people were [told], after waiting for two or three hours in the sun, ‘We have too many people, please go home.’ They did not accept resumes, they just said go home. The image of thousands of workers waiting in line to apply for a few jobs is not unknown of in the United States, but the image is associated with relatively uneducated members of bluecollar occupations. When that line is comprised of educated workers waiting to apply for jobs that their education and experience led them to believe they could expect as the reward for completing the socially prescribed avenue to economic security, the very foundation of the American achievement ideology becomes suspect. For some high-tech workers, outsourcing has changed their perceptions of the socioeconomic framework they work in. Their criticism of outsourcing is based not only on the tendency for poorer quality products and its threat to their own livelihoods, but also on a moral judgment of the role their industry plays in the globalization process. For some, outsourcing represents a shift in society; when I asked Mary, a tech writer, how she felt about outsourcing she told me, “There was something in the paper just a couple days ago about community and the automatic checkers
High-Tech Workers, Management Strategy, and Globalization
at the grocery store and how, with the outsourcing, [we are] losing our sense of community. And that’s part of my objection to outsourcing.” Mary’s connection between outsourcing, automated checkouts at the grocery store and sense of community speaks to a fundamental criticism of how technology is utilized. The implication being that when jobs that were formally performed by people are done by machines or by people far away there is a loss of community because the daily interactions between the people that produce and consume goods and services are circumvented or eliminated altogether. For Sue as well, her objections to outsourcing are not merely based on the personal cost she has paid but also on her indignation at how it affects the Americans who are left without jobs and the foreigners who now perform them for less money: Well, my personal opinion is that there are people in my country and other countries who have money and I think the object is to maintain that money and to continue making money—never losing. They have found a resource—it was probably like the industrial revolution, how the industrial revolution changed the world—things could be mass-produced. And so now we have found the next phase, we have found a way to produce twenty-four hours a day and in the last ten years it’s extremely obvious to me how offshore manufacturing is affecting America. To the point that yes, some people are making money, they’re making good money, but now there is another issue—there are more and more people who are not making any money. So the rich are getting richer but now the middle classes are plummeting to the poor. I’ve noticed less and less opportunity here, but more and more in third world countries. And I guess I could say I’m happy for them, but I’m not because there is sacrifice. There are reasons things cost money. In America we have rules; there are stringent environmental and safety issues that companies have to comply to. And in, for example, China,
Malaysia, Viet Nam… people suffer because there are no regulations or constraints. From her comparison of contemporary outsourcing to the industrial revolution to her assertion that there are reasons things cost money, Sue is articulating a critique of the relationship between technology and the economy. That jobs are going away as a direct result of outsourcing and that high-tech workers are aware of the trend is clear, what is not clear is whether this will prompt an organized response from high-tech workers in an effort to mitigate or halt the process.
AccommodAtIon And resIstAnce Historically, engineers have had very little reason to resist management, with whom they assumed shared interests (Noble, 1979, p. 41). In fact, though Veblen (1964) had hopes engineers would organize the overthrow of business, he conceded this was improbable because, “Engineers and industrial experts are a harmless and domicile lot, well fed on whole, and somewhat placidly content with the ‘full dinner plate’ allowed by the vested interests” (p. 135). Nevertheless, as high-tech corporations ask for higher levels of commitment from their employees while simultaneously offering less job security, causes for resistance, if not revolution, abound. Freeman (2000) notes that due to the hegemonic nature of corporate power, resistance is not a clear-cut issue and many workers have conflicting and/or ambiguous feelings about the work they do. Kunda (1993) finds that in the contemporary high-tech corporation, management has consciously blurred the lines between work and play, organization and self, in an effort to control and extract commitment from employees. The result, from the high-tech workers’ perspective, is that more and more of the self is monopolized, and as Hochschild (1983) posits, in order to sal-
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vage personal autonomy and identity outside of work, personal feelings must be “managed” and the management of feelings in response to work constitutes a new form of labor: emotional work. The consequences of this monopolization of the self by the organization can be devastating and often leads to serious personal problems such as divorce or alcoholism and psychological breakdown, generally referred to as “burnout,” which all of the interviewees have witnessed and several have experienced. Whenever the workers I interviewed described a management policy or practice as inherently unsatisfying, I asked them how they and their coworkers dealt with it. While all the interviewees found at least some management tactics disagreeable, there was very little resistance beyond complaint: accommodation was the most common reaction. For instance, when I asked Tim, a game developer who frequently remarked that management only got in the way of technological work, if he or anyone he worked with who was unhappy with management ever did anything about it he replied, “Nah, you don’t wanna piss off management. It’s never a good move.” So, even though Tim was the most vocally anti-management worker I interviewed, he was no more likely to actively resist policies or practices he disagreed with than workers who were happy with or indifferent to management. When workers did provide stories of resistance to management, they discussed three basic tactics: humor, slowing down, and labor organizing. When I asked Peter about how workers at Microsoft were reacting to compensation cut backs, he gave an example of how humor is used as protest: There’s been jokes lately, a lot of joke memoranda showing up by elevator bays about bathroom usage and how Microsoft employees, blue badges, will get to use the bathrooms and they’ll have to use their cards whenever they go.b They can go in twice a day, and every time they go into a stall they’re allotted three sheets of paper per swipe
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and no more than a maximum of four swipes per day. And the non-native English speakers will sometimes grab me or come to my office and say ‘Have you seen this?!’ and I’m like, ‘I’m gonna tell you this is 100% positively a joke.’ Humor can be a very powerful form of critique, and because it is often used in hidden and public transcripts, there is room for different interpretations of its meaning(s). However, whether it, alone, can be considered a form of resistance as conceived in labor studies is not clear. While discussing how hard the recent trend in outsourcing has been for her and her coworkers, Sue told me about how some employees do resist such practices: If I think of some people, since their jobs are being taken away from them, since portions of their jobs are being done in other countries, they are making their functions last. So, let’s say there was somebody testing a piece of equipment. If it took two hours to test that piece of equipment, all of a sudden it’s going to take four hours. They’re trying to stretch their work out, trying to make themselves valuable. But actually it’s harmful to themselves and to the company. It does not help the company really—it doesn’t matter if it helps the company or not, they are going to change—but for you to slow yourself down, you have to think, is this going to be helpful, this skill set, is this going to be helpful to me in another company? Or, will I just be perceived as a slow worker? Sue’s assessment that slow downs aren’t good for the company is certainly valid. However, the fact that she even mentioned what is good for the company, as a worker who has been laid off from her own job due to outsourcing, is perhaps a telling clue as to why so few high-tech workers resist management in significant ways. According to my informants, high-tech workers are not likely to actively resist management policies and practices they find unsatisfying and
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if and when they do, they are likely to do so in non-confrontational ways. Though many workers disagree with many management decisions, they are usually able to find other sources of job satisfaction that balance the effects of management. Or, if they feel they are easily employable, they will simply quit. To understand why high-tech workers are unlikely to participate in organized resistance we must examine their occupational history. The professional identity attached to formal education generally and high-tech work specifically, in combination with the distinctive labor history of engineers, combines to produce a seemingly contradictory worker identity. Throughout the twentieth century, the occupation of engineering grew with industrialization and as it grew in scope and its ties with the military-industrial complex became ever stronger, it evolved from a craft formally associated with blue-collar work into a vaunted profession on par with medicine and law. This ascension to the rank of profession was accomplished as both industry and the need and niche for management grew. In fact, as Shenhav (1999) shows, it is the influence of engineering rationality in the management field that laid the foundations for subsequent and contemporary management theory as a “naturally” rational endeavour. Nevertheless, among high-tech workers there is an inherent distrust of management. Significantly, this distrust is not based on criticism of management per se but, rather, on an assumption that managers, by definition, are too far removed from the design and production process to provide accurate or efficient guidance to those who actually work with the technology. Management isn’t bad because it’s management so much as because it’s not engineering. Thus, while high-tech workers have not historically respected management, nor have they questioned its priorities. Though everyone interviewed was at least aware of if not worried about the trend in outsourcing high-tech work, only about half were aware of efforts by high-tech workers in Seattle
to unionize in an effort to mitigate, if not stop, the trend. Five of the eleven interviewees were aware of the attempt to organize high-tech workers; three of those five are pro unionization. For the interviewees who are pro union, they see unionization of high-tech work as a viable and necessary means to secure their financial ends. Opposition to high-tech unionization fell into two basic categories: (1) that unionization is undesirable for ideological reasons and (2) that the grievances of professional high-tech workers do not warrant unionization in the ways those of blue collar workers do. For the interviewees who were aware of but not supportive of high-tech unionization, Mike and Peter, their opposition to unionization is based on their experiences in and perceptions of the hightech industry. For Mike especially, unionization represents a part of the high-tech industry that he doesn’t want to feel connected to: I’ve never been a part of a union, and I’ve always kind of viewed them as an evil thing. I probably got it from my dad, from my family when I was a kid. At Boeing, half of the company is unionized and there was always an animosity between upper management and the unions; it just seemed really odd to me to be working in this environment where your boss is your enemy. And when the unions would go on strike, you know that was very much the feeling was it’s us against them to the point of vandalism and actual physical violence and who would want to work in an environment like that? So I guess my experience is that if you’re good at what you do you can make good money. And maybe that’s just because I’ve been lucky in my career or whatever, I’ve been at the right place at the right time and maybe that’s not true across the board and there’s people with valid grievances that a union could solve but it hasn’t been my experience. Mike’s discomfort with the confrontation inherent to union politics at Boeing, as well as
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his assertion that if you are good at what you do that you will be successful, are both rooted in his experience which, in turn, is rooted in his acceptance of rational management and the American achievement ideology. Both are also open to question, if not refutation, by his acknowledgment that his experience may not be representative. In fact, his experiences are representative of issues that prompt some high-tech workers to resist management. Earlier in the interview, he spoke of feeling like a second-class citizen when he worked on a contingent basis and of his prolonged, unplanned unemployment when the dot.com bubble burst. His resistance to organized resistance, then, can be understood as ideological in nature. When I asked Peter if he had heard of unionization efforts by local high-tech workers, he said he had and articulated a more nuanced but ultimately anti-union argument: The people that wanna unionize, I don’t think they understand the situation of the world economy anymore. I mean [if] you look at South Korea and how it’s economy completely fell apart it was because of the over unionization of industry in South Korea, they couldn’t compete with North Korea or China or any of these other places. So, when you look at Microsoft or you look at the technology industry and you look at unionization, I can understand from the perspective of temporary workers, why they would want to do that… I think [it] will do more harm than not, it’ll expedite outsourcing, and it’s actually frankly kind of ridiculous for technology people to do it. When you’re talking about meatpackers that sustain permanent injuries because they’re working in freezing conditions and using things that cause major vibrations in their bodies and they’re only making $8 an hour and have been working there for years, there is significant more push behind that. When you’re talking about someone who is making $85,000.00 a year… Ok, maybe if you wanna talk about in relation to how much money the company makes, you can talk about that. But
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you know what? It’s not a relational system and we’re not a socialist society. It’s hard though, because I do see a lot of people get f***ed, but it’s a relative f***ing compared to those people that work at McDonald’s. That Peter is also one of the few interviewees with significant experience in project and personnel management must be considered a significant factor when interpreting his perceptions of the situation. Peter’s opposition to unionizing the high-tech sector is based on his assessment that it renders industry uncompetitive and that while some high-tech workers are taken advantage of, relatively speaking, they are far better off than most workers. His analysis, then, is based on what he perceives as the irrationality of unionization. While no one else couched their opposition or ambivalence to unions in the competition argument, several other interviewees made this second observation. Among the interviewees who were not aware of the efforts to unionize high-tech workers the reaction to such efforts was one of general ambivalence. Like Peter, many see their situation as imperfect but do not think their grievances are significant enough to warrant union intervention. Ben’s reply to my question of what he thought of high-tech unionization implies that, by definition, high-tech workers do not need unions: “A union is very often [for] when people are neglected and people are not cared for. So I think IT is a highly paid job and typically seems to be going fine so no one has any complaints.” Kevin, too, while aware that there are some valid causes for complaint, does not see parallels between high-tech work and traditionally unionized labor: I guess it could make sense, like I’ve always had great contracts at my companies. The Microsoft type, I wouldn’t call it exploitation, but what ended up in the lawsuit was probably as close as you’d get to a need to have a union.c There’s ACM, there’s software programmers and software developers
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[who] band together on an intellectual level but also on like what their benefits are and usually if you’re getting screwed with a company and you’re a computer software engineer and you’re good at what you’re doing, then there’s so many other companies that will take you. You know, it’s like opposite of being a laborer being screwed over. But the outsourcing might actually cause some more union like activities, but we’ll see. Not right now, I never really thought about it, or I never felt any need for it, yet, but it’s interesting activity. Kevin’s acknowledgement of the instigating factors for high-tech unionization, combined with his assertion that, as Peter said, any exploitation experienced by high-tech workers is relatively benign, suggests, at best, an ambiguous classconsciousness. Also of note is Kevin’s reference to a professional organization (the Association for Computing Machinery) that provides intellectual and career support. Most professions, including doctors, lawyers and university professors, belong to professional associations, many of which perform several of the same functions as labor unions such as grievance representation and contract negotiations. That professional high-tech workers would belong to such organizations is not so interesting as is their simultaneous eschewing of unions. Of the six interviewees who were not aware of attempts to unionized high-tech workers, only one, Tim, was decidedly supportive: Well I guess it depends on how they unionize but unions in general I think are a good thing. I know a lot of temporary employees get forced to work ridiculous hours, like that was one of the problems with High-Tech-Corp-A was you had to work just amazing hours. I guess the Washington laws have been written such that they can require you to work up to twelve hours a day and they can fire you if you don’t want to or something like that. So there’s a lot of contract employees getting no benefits and that kind of stuff.
Tim’s support for unionization and derision of management can, at least in part, be attributed to his experience growing up working class. Conversely, Peter, who also grew up in a working class environment, is against efforts to unionize hightech workers and sees management as rational, if not ideal. Despite their similar class backgrounds, age, and years in the industry, Tim’s support for and Peter’s derision of high-tech unions provides an excellent example of how individual experience and agency can shape class-consciousness. When I asked Sue, who has lost her job and drawn connections between her industry and global disparity, if she thought other people were dealing with the same issues as her, she told me: I thought I was the only one against this, but I’m meeting more and more people who are recognizing that the WTO, without the right constraints or regulations, that it is a Pandora’s Box. That it provides opportunity, but does it provide equal amount of opportunity as much as it provides disparity? I think the disparity is greater, both here and abroad. Though the previous statement may indicate that Sue is ripe for joining an organized resistance to the processes she finds so ideologically reprehensible, when I asked her if she was aware of the efforts of high-tech workers to unionize she answered, “I was not aware of it. To unionize, I don’t think it would matter.” Sue’s ambivalence raises the question of how or even if it is possible for unions to effectively recruit and represent a group of workers who are not aware or supportive of unionization. Even Steve, who has a history of political activism, is overwhelmed by the present situation, telling me, “It looks like things might change radically you know? But if they do there’s nothing I can really do to stop it. If there’s really smart people in India that can do these jobs really well and if they can they’re gonna and it’s gonna go.”
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Yet for some high-tech workers, like Nancy, a tech writer, making a connection between their work in the high-tech industry and the global disparity in wealth and power has led to active resistance. Six months before she retired from Microsoft Nancy joined a union working to organize high-tech workers in the Seattle area, WashTech, which was started by contingent workers at Microsoft and is affiliated with the Communication Workers of America (CWA). d Before joining WashTech it hadn’t occurred to her that Microsoft was a part of the globalization process. And, in fact, initially WashTech wasn’t focused on globalization, but, rather, was concerned with the plight of contingent workers and occupational safety issues. But, as the interviewees have made clear, the contracting, importing, and outsourcing of labor is becoming an issue of great concern and its connection to the globalization of the production process has galvanized some high-tech workers to become at least interested, if not active, in unionization. Despite all of this, Nancy acknowledges that it is very hard to organize high-tech workers, noting, “Tech workers are passive in a way.” At the time of the interview, WashTech represented five bargaining units in the Seattle area; all in the public sector. On average, about thirty people attend the quarterly meetings but the membership has shot up from 250 to 450 since the union started placing off shoring ads in newspapers and there are 15,000 people on the mailing list. While Nancy is the most actively involved in labor organizing of the interviewees, she is also the only research participant who has been able to retire from the industry and thus has the time and resources to devote her energy to the cause. After Nancy, Barb is the most adamantly and actively supportive of high-tech unions. But, perhaps because she is working on a contingent basis, her assessment of the situation is bleak: I think it’s gonna take a lot of people being out of work or not being able to retire, having to work
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forever, for people to realize maybe a union might be a good thing. But, we’re not there yet. There’s people from all over the world doing this work and the jobs are becoming shorter and shorter, more contractual, you agree to only work for a certain amount of time and then you’re laid off, and that was the result of the lawsuit with Microsoft... And there’s no big retirement plans and you don’t get health care when you get laid off; it’s bad. But I don’t think people are desperate enough yet. Or, people get laid off and they don’t have any job— they lose their house they lose everything, but they’re not involved in the union because they’re just trying to survive… When I asked Barb if she ever tried to recruit and organize coworkers, she told me that she thinks she would be fired for being too vocal about unionization at work, adding: “…I’ve occasionally mentioned it to other workers but nobody’s ever that interested. So I don’t really make an issue of it, you know, yet.” Barb’s support for WashTech may be strong, but so is her concern that her politics could cost her jobs.
conclusIon Letting the workers speak for themselves, it is obvious that although their connections to the global economy are strong, they are also fraught with insecurity. While the daily stress of working to keep up with production cycles that are, by definition, too rapid and dependant on too many variable to avoid problems is offset by generous compensation, this too is offset by the insecurities associated with the increasingly global nature of the high-tech industry. Despite rhetoric about free agents and markets, contingency, importing labor, and outsourcing work must be seen as essentially constrictive employment strategies that, in general, favor employers at the expense of employees. This raises the question: If high-tech corporations continue to utilize contingency and
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reliance on foreign labor pools in an effort to stay competitive in the global economy, to what extent will American high-tech workers still identify with management’s interests? The interviewees’ assessments of their contribution to and positioning within globalization processes demonstrate that they are uniquely situated in terms of critiquing these processes. While most of the interviewees actively questioned management policies and practices that impact their job security, whether this will lead to active, organized resistance is not clear. While there are emerging labor organizations focused on the globalization processes that concern many high-tech workers, it remains to be seen if these efforts will affect how or to what extent high-tech workers who are willing to construct an identify against management are also willing to identify with organized labor. Finally, though the present findings are inconclusive in regards to if or how high-tech workers are likely to actively resist globalization processes, the power of technology and the workers who create it in enabling these and other changes cannot be underestimated. As such, as an occupational group, high-tech workers have a great potential to exert a meaningful and effective critique of the production and labor processes inherent to late capitalism.
reFerences Barley, S. R. & Kunda, G. (2004). Gurus, hired guns, and warm bodies: Itinerant experts in a knowledge economy. Princeton, NJ: Princeton University Press. Doukas, D. (2003). Worked over: The corporate sabotage of an American Community. Ithaca, NY: Cornell University Press. Doussard, M. & Mastracci, S. (2003). Uncertain futures: The real impact of the high-tech boom and bust on Seattle’s IT workers. Center for Urban
Economic Development: University of Illinois at Chicago. Ferguson, J. (1999). Expectations of modernity: Myths and meanings of urban life on the Zambian Copperbelt. Berkeley, CA: University of California Press. Freeman, C. (2000). High tech and high heels in the global economy: Women, work, and pink collar identities in the Caribbean. Durham, NC: Duke University Press. Hakken, D. (2000). Resocialing work: The future of the labor process. Anthropology of Work Review, XXI(1), 8-10. Harvey, D. (2000). Spaces of hope. Berkeley, CA: University of California Press. Hochschild, A. R. (1983). The managed heart: Commercialization of human feeling. Berkeley, CA: University of California Press. Kunda, G. (1993). Engineering culture: Control and commitment in a high-tech corporation. Philadelphia, PA: Temple University Press. Michaelson, K. L. (2000). Laboring in cyberspace: Internet realities and the future of work. Anthropology of Work Review, XXI(1), 11-14. Nash, J. C. (1989). From tank town to high tech: The clash of community and industrial cycles. Albany, NY: SUNY Press. Nash, J. C. (2001). Mayan visions: The quest for autonomy in an age of globalization. New York: Routledge. Noble, D. F. (1979). America by design: Science, technology, and the rise of corporate capitalism. Oxford, UK: Oxford University Press. Shenhav, Y. (1999). Manufacturing rationality: The engineering foundations of the managerial revolution. Oxford, UK: Oxford University Press.
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Veblen, T. ([1921] 1964). The engineers and the price system. New York: A.M. Kelley. Wolf, E. R. (1972). American anthropologists and American society. In H. Dell, & H. Hymes (Ed.), Reinventing anthropology (pp. 251-263). New York: Pantheon Books.
c
endnotes a
b
Pseudonyms have been employed to protect the anonymity of the research participants. As well, with the exception of references to Microsoft and Boeing, I have employed pseudonyms for all other high-tech companies discussed in an additional effort to protect the interviewees’ anonymity. Because Microsoft and Boeing each employ tens of thousands of workers it is highly unlikely that interviewees who discuss working at those companies will have their anonymity compromised. At Microsoft, there is a colour coded ID card system in which FTEs and contingent employees are differentiated by the color of their badges. FTE badges are blue, whereas
d
contingent badges are orange. Thus the fake memoranda are lampooning the company’s recent cutbacks and its stratification system. Kevin is referring to the precedent setting class action lawsuit, Vizcaino v. Microsoft, which was filed by perennially contingent (or “permatemp”) employees who felt they were being treated as “common law” employees and thus should be eligible for inclusion in company pension and stock options plans. The case was decided in favour of the plaintiffs and, since then, Microsoft and other high-tech companies have gone to great lengths to ensure contingent employs cannot legally be perceived as employed by the company. At Microsoft this has resulted in three month “breaks” between contracts for contingent employees so they cannot depend on or claim Microsoft as their sole employer, and the increased use of employees who have “vendor” status and who, in theory at least, can or do work for other companies in addition to Microsoft. Please see: http://www.washtech.org for more information on this organization.
This work was previously published in Management Practices in High-Tech Environments, edited by D. Jemielniak and J. Kociatkiewicz, pp. 42-57, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.14
Outsourcing in High-Tech Corporations: Voices of Dissent, Resistance, and Complicity in a Computer Programming Community Erik Piñeiro Royal Institute of Technology of Stockholm, Sweden Peter Case University of the West of England, UK
AbstrAct Management has historically sought to restrict the options for manual workers to rebel by simplifying and limiting their jobs according to Tayloristic principles. The need for their experience and knowledge has been consciously minimized, having been relocated instead to supervisors and middle managers, working routines and machines. In high-tech industries, by contrast, the workers’ fundamental contribution to the enterprise is their very knowledge, offering other possibilities for rebellious activities or, at least, for rebellious plans. This chapter focuses on one of the common denominators in the exchanges among programmers, namely the concept of knowledge: how to
get it, who has got it (and who hasn’t), what kinds are important and its role in their conflict with management.
IntroductIon Electrical, electronic, and computer engineers (IEEE-USA), a professional association with 235,000 members, starts its online introduction with the following remark: “Through years of record layoffs and bleak employment prospects for U.S. engineers…” (2006) and its 2006 President Elect, Ralph W. Wyndrum, Jr., writes in his first President’s Column that the first focus of the organization is to, “ensur[e] that U.S. technology
policy enhances America’s future and protects American workers” (Ralph W. Wyndrum 2006). In 2004, President Elect John Steadman, testified before Congress urging it to “take a close look at overseas outsourcing to see what can be done to create and keep high-value, high-tech jobs here in the U.S.” (Quan, 2003), basing his worries on the claim that “Some 160,000 U.S. IT jobs have disappeared in the past three years” (Steadman, 2004). That programmers would need this kind of help to stop the hemorrhaging of IT jobs was unthinkable only a few years earlier, when their central role in the “new economy” made them irreplaceable high-tech professionals. Castells, for one, went as far as to suggest they were to become the elite of the labor market (Castells, 1996). Much has happened since the “new economy” collapsed and the dotcom boom crashed. The labor market has seen its share of changes, but, as William Wulf, President of the U.S.-based National Academy of Engineering says, “the rate of change in the software field is more rapid than in traditional engineering” (Costlow, 2003). One of the phenomena that has had the largest impact on the programmers’ labor market is the managerial practice of outsourcing, which we introduce in the next section. Outsourcing, or the threat of it, has had several effects on the role of software engineers, the most important being probably their demotion from vital members of companies (indeed of the whole economy) to suppliers of functions; functions, moreover, that can be removed from the main body of corporate activity and which, usually on grounds of cost, placed “outside” the company, state, or continent. This move has implied a lowering of both their professional status and their salaries (Costlow, 2003). This chapter presents a study of the responses and identity work that takes place among programmers in the face of these changes. We shall analyze discussions among programmers that deal with the subject of outsourcing from different perspectives, and show the various strategies available to them
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in order to maintain their identity as important and powerful members of the organization. Various studies addressing different aspects of the programmers’ identities have been conducted (Barret, 2005). Their interest, and the interest of this one too, resides in the fact that programmers have convincingly been presented as archetypical “knowledge workers” (Angell, 2000, Scarbrough, 1999). At a time when Western policy makers and company representatives express their hope in the knowledge economy as the answer to competition from low-cost markets, it is seems highly pertinent to study the different organizational processes of the “knowledge firm.”
outsourcIng The term outsourcing became popular in the beginning of the 90s, representing the management fashion of focusing on core activities—a fashion that is today still very much in vogue. Companies, it was said, were to concentrate on what they did best, and improve their competitive advantages through judicious elimination of secondary activities (Brown, 2005, Corbett, 2004, Power, Desouza, & Bonifazi, 2006). The activities deemed to be “outsourcable” have since expanded and now include services provided by IT-professionals (Apte et al., 1997, Kakumanu & Portanova, 2006, Kehal & Singh, 2006, Sobol & Apte, 1995). Simultaneously, the process of globalization has implied a relocation of activities in low-cost countries, generating much discussion about two neighbour concepts: off-shoring and off-shore outsourcing (Gupta & Chaudhari, 2006). Whereas “outsourcing” relates to the slimming of activities in a firm in order to concentrate on the core of its competitive advantage, “off shore outsourcing” relates to a particular kind of slimming characterized by the replacement of domestic partners with others from low-cost countries. The related concept of “near-shore outsourcing” designates the relocation in low-cost countries that
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are geographically close (Mexico for the US and Eastern Europe for the EU). The fourth concept in use, “off-shoring” (and near-shoring) is applied for the relocation of activities within the company to low-cost countries. Even if outsourcing is often used as a general handle, it is important for our argument to distinguish between outsourcing, on the one hand, and off-shore (near-shore) outsourcing and off-shoring (near-shoring) on the other. Our argument is most clearly presented if we do not distinguish between the latter two because they both present programmers with the same threat: the relocation of their jobs abroad. It makes little difference to them whether these jobs stay within the company or not. Off-shore outsourcing is almost always championed as a cost-reducing measure (Gupta et al., 2006), even if its detractors maintain that the costs associated with it are often underestimated (Kakumanu et al., 2006). Be that as it may, the goal of this chapter is by no means to study the profitability of this strategy but to offer an insight into a fundamental change that, following this measure, takes place in the power relations within high-tech companies. Regardless of whether or not it leads to cost savings, it would seem that at least one of its effects is undisputable: the programmers’ loss of power and status. Moving IT-services outside the company (outsourcing), or away from the headquarters (off-shoring) is a clear manifestation of them not being considered part of the core competences. Instead of taking the long path of deskilling the IT-workforce (which is arguably what knowledge management practices seek to accomplish), management limits its power by moving it to the periphery, sending clear signals that IT-professionals are replaceable, expendable even, and thereby weakening their authority within the company. In this chapter, we shall explore how programers react to this emerging corporate agenda through the construction of alternative identities to those offered by management.
the slAshdot communIty oF progrAmmers Building on earlier work (Case & Pineiro 2006), the empirical foundation of this study lies on naturalistic data derived from an online computer programmer discussion forum (www.slashdot. org). The forum initiates about 12 discussions each day, with subsequent exchanges lasting anywhere between one and three days. The discussion threads we have chosen to study had already ended by the time we drew on them for analytical purposes. We intentionally made no effort to engage in them or to influence them in any manner. The participants, who are invariably programmers or other “techie” IT professionals, may enter the discussion as members of Slashdot, in which case their online identities are available, or they may access it anonymously, in which case they appear online under the shared name of “Anonymous Coward.” Furthermore, there is nothing that prevents a participant from having several online identities. However, Slashdot is not an “identity laboratory” forum (Bruckman, 1992). Unlike other more chat-focused online “hang-outs,” this is not a place to meet and get to know people. Its design does not allow for chat and picture exchange, its topics of discussion rarely touch upon personal subjects and there is a moderation system in place that has a sobering effect on the discussions. So even if there are cases of “flamebaits” and “trolls” (names given to entries whose goal is to provoke and/or mislead), the discussions can safely be assumed to present us with the participants’ earnest opinions, and thus with a rich picture of what programmers think on the subject of off-shore outsourcing. The language of Slashdot is English, and an important part of its participants are native English speakers—even if not always very careful with their mother tongue. A good deal of them, we estimate that about 85% (it is practically impossible to find out exactly how many) are
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either U.S. citizens or U.S. workers. So even if there are opinions from programers from other countries (particularly in those discussions that deal with, for instance, Australian issues), most of the entries originate in the U.S. It can therefore be said that the material is representative of U.S. programmers, which does not mean that it shows a homogeneous opinion on outsourcing. We have focused on negative opinions, because those are the ones which best exemplify strategies of resistance. Although they are in clear minority, however, there are also a good number of entries which side with management and express approbation and acceptance of off-shore outsourcing. The inclusion of a discussion entitled “Lowering the odds of being outsourced” is, in itself, a certain—albeit weak—manifestation of acceptance. We have studied five different discussions, all of which dealt with issues directly related to the practice of outsourcing. These discussions include all kinds of entries, from participants nearly insulting each other through to political manifestos in favour of or against communism, capitalism, socialism and many other forms of political regime. Dealing with the subject of offshore outsourcing, they also present outbursts of nationalism and xenophobia, and reactions against this. We touch upon these issues only tangentially, focusing instead on the question of organizational power, resistance, and identity. Our analysis is structured around one of the discussions, “Techies asked to train foreign replacements,” because due to its pungency, it offers some of the richest material. The background context to this thread is as follows: IT systems are a strategically fundamental part of the banking systems, but as early as 1998, banks are outsourcing their IT services (Ang & Straub, 1998). This is a subject certain to generate bitter comments among Slashdotters, but things get even more intense when Bank of America (BoA) presents some of its IT-workforce not only with the fact that their jobs are being outsourced but also with the threat of withholding their severance payments
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unless they agree to train their Indian replacements. Such a case of, according to Slashdotters, extreme lack of sensitivity from management generates a very intense debate in which participants exchange suggestions as to what those BoA programmers should do in the face of this managerial decision. These suggestions offer an insight into the programmers’ perspective of: (a) the role of knowledge in power relations, (b) their own position in these relationships as holders of a specific form of knowledge, and ultimately, (c) their own role in the organization. The chapter has been structured as follows: first we proceed to a classification of the alternative paths of action suggested by Slashdotters in reaction to BoA’s policy. We shall see that they vary from quiet acceptance of the facts of life to resentful sabotage. A second analysis, that includes also material from other discussions, reorganises those suggestions around the concept of knowledge. We shall see how programmers’ present knowledge as a fundamental part of their identities that differentiates them from “others,” such as managers, foreign programers, and lowtech workers. Lastly, we shall see how these exchanges shed light on the processes of construction of alternative identities set in motion by power conflicts in the high-tech industries. Apart from the BoA discussion, the following discussions have also been studied, although they do not play the same central role: •
•
Replaced by Outsourcing—What’s a geek to do? (2003) (http://ask.slashdot.org/article. pl?sid=03/12/19/0456221&tid=) Slashdot member SafariShane’s job as a network security analyst has been outsourced and asks the community for advice: “I’d like to hear comments from folks this has happened to, and what did you do as a result?” Australian workers concerned about migrants (2006) (http://it.slashdot.org/article. pl?sid=06/01/10/0327219)
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It would seem IT wages in Australia “not just the US” are decreasing due allegedly to immigration of IT-workers (Topsfield 2006): “Would programmers in the developed world be better off without immigration that favors IT or is there an overall benefit for the industry with skilled workers going to the developed world and thus making the industry larger?” Lowering the odds of being outsourced (2006) (http://it.slashdot.org/article. pl?sid=06/03/30/220219) The discussion starts with a statement that is controversial in an open-sourcefriendly forum like Slashdot: “[the] best thing young IT workers can do to avoid being outsourced is beef up their management skills.”
•
slAshdot AdvIce: strAtegIes oF dIssent And complIAnce As previously mentioned, the most interesting aspect of the discussion “Techies asked to train foreign replacements” is that it offers participants the possibility of suggesting actions in the face of what are perceived as rather harsh managerial decisions. Usually, there is little a programmer can do in the face of imminent outsourcing, but in this case, the programmers at the BoA are asked to train their replacements. This opens up a warmly welcomed opportunity for speaking about strategies in response to management decisions. These strategies vary from compliance to illegal acts of sabotage, offering a colourful panorama of differing views about what programmers think they are entitled to do in such a situation. Foucault (1977, 1980) contends that power embodied in and enacted through discourse is productive of particular objects, subjectivities and relations. Language is never neutral or merely descriptive, a condition that applies as much to the
discourse of “outsourcing” as it does to any other. In Foucault’s terms, discourses, “systematically form the object of which they speak” (1972, p. 49), and, “power produces; it produces reality; it produces domains of objects and rituals of truth” (1977, p. 194). The outsourcing discourse is productive of a new and particular set of power relations within and between organizations. Heretofore skilled IT professionals are repositioned as “redundant,” “expendable,” or “superfluous to needs” in the face of cheaper substitute labor now available in other parts of the world. The outsourcing discourse inevitably brings in its train a complex set of implied attitudes, purposes, dispositions and actions; in short, a set of power effects. The creation of new subjectivities and the rearrangement of power-knowledge relations is visible, we suggest, in the narratives of IT professionals within the Slashdot community. Within the online exchanges we see conflicts arising as a result of the perceived threat of outsourcing and the realization that organizations of the information age can treat programmers as expendable or substitutable in the just same way as unskilled blue workers have been under industrial capitalism. Nationalism and xenophobia get very close to the surface under such conditions. As a consequence, the exchanges we witness are often highly charged emotionally and full of invective. Respondents strike out at perceived sources of the threats involved: “foreign” workers, “unethical” capitalist corporations, “unsympathetic” and “ignorant” management, and so forth. Indeed, many of the IT professionals represented in our study seem to be acutely aware of the way in which their power positions are being redefined and demeaned. They give critical voice to what appears to be the “proletarianization” of their profession. There is evidence of what we might call growing consciousness of a nascent class conflict of the sort that typically exercises Braverman-inspired labor process theory (Braverman, 1974). IT professionals in the Slashdot community are aware that their livelihoods are under direct threat and
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that a managerial class, representing the interests of capital, are responsible for the predicament in which they find themselves. Of course, issues of deskilling and “deprofessionalization” are not new to the discussion of information technology (Beirne, Ramsay, & Panteli, 1998; Kraft, 1977, 1987; Kraft & Dubnoff, 1986; Orlikowski, 1988, 1989). But whereas in the past it has been the deskilling effects of high technology that have been at issue, what is new with outsourcing is the extension of deskilling to the very designers and writers of software code themselves. This is precisely the situation facing a significant number of members of the Slashdot community and what interests us, as social scientific analysts, are their responses to this predicament. For example, the scenario informing the following Slashdot exchange involves management of Bank of America (BoA) not only making a number of programmers redundant but also denying them severance pay unless they agree to train their foreign replacements. What we encounter in the ensuing discussion are a number of acts that programmers believe can be carried out by them in response to this “insult.” These acts do not represent what is possible in the actual case at BoA. Few, if any, of the participants seem to have a clear view of the concrete circumstances at BoA and it would probably be incorrect to think of the suggestions as being offered mainly for the benefit of the employees being laid off. The discussion taking place at Slashdot is more directed to other members of the community. It is but one manifestation of the common and empathetic reaction to a phenomenon (outsourcing) which threatens them all. In this context, followers of the thread are invited to entertain even the most illegal and unethical of suggestions. We surmise that they are not meant to be carried out. In fact, illegal suggestions are presented, for the most part, in a humorous tone, but even if they are not offered as “real” alternatives, this is nevertheless what programmers believe to be possible. And by telling us which of their wishes they think are realizable
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they are offering us a key into their perspective on the nexus of power-knowledge relationships within which they find themselves positioned. Let us start, however, close to the empirical material, with a classification of the alternatives suggested by Slashdotters. One could argue that management are paying programmers a favour when they ask them to train their replacements. It amounts to saying that they indeed have skills important to the company, which they want transferred. Programmers naturally accept this assumption, using it as the basis of many of the sabotage alternatives. The two most straightforward dissenting strategies are (1) train them badly, and (2) leave without training them—presented in the next section. There is a presumption, in many of the Slashdot discussion threads, that replacement (outsourced) programmers will be based in the Indian subcontinent. The Slashdot narratives about Indian counterparts are, occasionally, overtly racist in tone. While we wish to distance ourselves markedly from such racist views, we feel it is important to reproduce the language in the extracts verbatim in the interests of social scientific authenticity. We trust that readers will understand and accept this decision and that—recognizing that some of the material is intrinsically offensive—absolutely no offence is intended on our part.
train your replacements badly How do you train them badly? Participants suggest two main alternatives: (a) to lecture on technically useless subjects; and, (b) to teach trainees incorrectly. Useless lectures generally deal with material directly obtained from management (like ISO 9000 routines). Teaching those in detail will certainly make time pass without communicating to replacements anything Slashdotters consider of value. Management, however, cannot possibly oppose to the idea because, “[i]f it weren’t ok, the whole ISO, SOX and ITIL charade would collapse, which would be worse for management than one
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poorly trained replacement” (#15509302)a. Here is Confused’s advice: Re: Screw ‘em, Walk Out! (Score:5, Insightful) by Confused (34234) on Saturday June 10, @09:39AM (#15508798) (http://slashdot.org/) Walking out isn’t a good solution, because probably you’re just another cog in the big machine. If you refuse to train them, you’ll just save them your severance pay without much effect. To really spite them, you should make the effort an train your Indian replacement, in a creative way. Step 1 is to dig all those SOX and ISO-9000 procedures, you have been forced to fill out over the years. Per definition, they describe your work in a reproducible way. These should be the base of any training. Make your replacement memorize them an apply them in harmless cases, where they don’t generate too much mayhem. This alone should easily occupy about 3 months worth of training time and prove totally worthless while being the perfect employee by the book. Step 1a, if above mentioned documentation doesn’t have enough volume, take the time and have the trainee update it. This alone should cover another 6 months. Step 2 have your trainee sign of every thing you’ve told him, that he learned and understood the procedure. By the end of every day, you shoudl have at least 4 signed papers by your replacement how well you’ve trained him. Add copies of these signed statements to your daily work log.
again after you’ve left. The trainees and the managers should get the impression your job is just easy routine. If some manageroid comes with urgent requests, let him know that you don’t have time for it, as you have to train the replacement for your severance pay and the replacement isn’t ready to perform this yet. If they want it done anyway, get it in written and signed on paper, best with HR also approving that you don’t have to train the replacement while doing some other things. Give a reasonable time frame (e.g., Rebooting a desktop: 2 work days) […] A variant of this is to teach the replacements about the parts of the IT System that are either obsolete or will soon become so, leaving aside anything of importance. A more risky alternative is to teach them how a part of the program works only to modify it afterwards (without telling the replacement). BoA “IT folk” is also advised on the option of teaching their replacements wrongly: to lie to them about what parts of the software do what. Many entries with these kind of suggestions are meant as jokes, where the character of the Indian replacement is presented as rather ignorant on programming matters. The suggestion in the title of the entry below (to type in cd /, press “enter,” then type in “rm –rf *” – and press “enter” again –) is an elementary way of deleting everything in a given folder. One of the first things one learns when studying the Unix operating system (and other similar to it, such as Linux). It is highly unlikely that any programmer does not know this. Ok Remesh, now type in cd / enter rm -rf *....... (Score:1) by MoronBob (574671) on Saturday June 10, @07:58PM (#15510886) I bet it will be good training.
Step 3 stop doing any regular work - except for problems that are not easy to fix an will appear
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leave A very straightforward way of sabotaging the training of the future replacements is to refuse to do it and simply leave. The assumption behind the order of training the replacements is that the programmers’ knowledge is important, an assumption that programmers readily accept, and that the most straightforward way of damaging the company is to deprive them of this knowledge. There is, of course, the issue of the severance payment, which the BoA will only offer to those who train their replacements. Slashdot community “advice” on this matter appears to embrace three distinct strategies
Just Leave This first strategy does not even mention the severance payment. Training your replacements is so far beyond what you as a programmer with professional integrity can possibly accept that there are no mitigating considerations. Leave and never look back. Or, as some point out, expect a “callback” and get ready for retaliation: Reality of Outsourcing (Score:0) by Anonymous Coward on Saturday June 10, @04:34PM (#15510319) Having worked in IT for several investment banks, here are a few first hand observations on outsourcing. […] 5. Be prepared for a callback. If they outsource your role, and then discover the muppet from the services company they chose, or even the grad fresh from uni in India with zero experience does not have the same level or skills and experience, they may call you back offering to rehire you. If they do this, calmly report you will come back on a contract basis, and name an astronomical rate. You know they are over a barrel, they know they are over a barrel. Enjoy!
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6. Never, ever, train your replacement. Perhaps you would also like to go and park a big ol’ kiss on the backside of the greasy senior mismanager who authorised you losing your job in the first place. Most jobs take time not because of the technology, but because of the process. the local or company-wide processes, the red tape, the electronic paperwork. Let the new guy or girl struggle. Instead, use your time looking for the next role.
Leave Making Sure you Have Money in the Bank Everyone should save a little bit of their money every month to be able to do this. This suggestion triggered a series of responses around the subject of whether it is or is not possible to save this money. Some programmers complained that this is impossible if you have to support a “mortgage and a family,” implying that they were being exploited by companies, and more specifically, management.
Leave and Sue BoA for your Severance Pay One discussant alleged that what BoA are doing is illegal. There ensued a discussion on whether or not it is illegal to require employees to train replacements under these conditions; a discussion that appeared to have no clear end. Once again, the subject was raised of the pros and cons of a less “raw” capitalism, with a more restrictive law regarding contract-termination.
train the replacements Well, things Will take care of themselves This suggestion is founded in the seemingly common idea that the programmers’ knowledge about the system is not as easily transferable as management would like to believe. IT systems are too complex to be explained to novices (foreign
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programmers are treated like novices) so there is no point in getting excited about conscious acts of sabotage. Doing what management wants you to do, that is, training the new replacements, is a perfectly plausible alternative: the time allotted to this is too short, they simply will not learn what they need to know, regardless of how hard you try. So by all means, train them, give it your best shot. Re: Screw ‘em, Walk Out! (Score:1, Interesting) by Anonymous Coward on Saturday June 10, @11:58AM (#15509296) -To really spite them, you should make the effort an train your indian replacement, in a creative way.I don’t agree. I advise making your very best effort. Twenty years ago, something like his happened to me. I was the engineer in charge of manufacturing systems test for a packet switched network when the headquarters decided to move manufacturing to Southern California and shut us down. The test guys wanted to sabotage everything and asked me to help. I told them I had a better idea. Let’s do the very best we can knowing that they will foul it up anyway. You know what? I was right. They fouled it up despite all our efforts to help them. Frankly, I think it was more satisfying that way. Even when I found out years later it was an article of faith down there that I had sabotaged everything and that’s why they had so much trouble.
regardless of Anything else, take your money to Another bank “Vote with your dollars,” put your money in a Credit Union, or anywhere else. This suggestion appeared in quite a number of entries, and triggered discussions about where to put the money instead. There were also a number of commentaries along the lines of “Bank of America” changing its name to “Bank of India.”
unite! A few participants mentioned the idea of building a programmers’ union so as to be able to put pressure on companies such as Bank of America, and eliminating the worst of managerial practices, such as forcing programmers to train their own replacements. These contributions are interesting for the fact that they give voice to a clear sense of proletariat class consciousness and the need to form some kind of global labor movement (reminiscent of the nineteenth and early twentieth century Marxist International movement). However, suggestions regarding the need for collective action met in cases with a convinced opposition based on the idea of workers’ unions becoming, with time, centres of power that ignored their members’ needs and interests. Re: bunch of things (Score:3, Insightful) by smchris (464899) on Saturday June 10, @11:16AM (#15509127) […] IF programmers had been unionized like commercial pilots, I think we can see there would probably have been outsourcing eventually anyway. But you might have been able to strike, get union relief, and threaten BoA with a world of trouble. And perhaps have worked for a few more years. As it is, I see three options: […] 3) As others have suggested, you can do everything you can think of to monkey wrench the transition. I suggest small group meetings off-site, off-hours to coordinate. Document. At the appropriate time publish and teach others. Get BoA’s name everywhere they don’t want it. ‘BoA The Movie.” There are small voices to publicize this outsourcing like the AirAmerica and Jones Networks and plenty of web sites you can glean from portals like Buzzflash.com. And become honestly close to each other in the process. You’ll need the networking.
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world-wide worker union needed (Score:0) by polar red (215081) on Saturday June 10, @12:17PM (#15509354) There’s a world-wide workers union needed, with as most important objective : world-wide minimum wages. This is absolutely necessary, because employers already work globally, and by pitching different countries(the workers of those countries) against each other, they can exploit maximally leaing to 21th century feudalism! This is why nationalism is the new opiate for the masses, keep ‘em stupid !
Accept it A few participants were of the opinion that outsourcing is part of the game, and that there is nothing inherently bad about it and that it should be accepted. It may not be a good management practice but it does exist, it is not going to go away and, even if it hurts, it does not break against decency. However, this position is so extreme in the Slashdot context that whenever it appears, one suspects that the author might be trying to pull out a “troll”: an entry that argues for an opinion very much against the community’s with the hope of setting in motion a wave of outraged answers. This tactic has to be employed subtly, otherwise it risks being moderated out as flamebait.
sabotage the system Quite a number of participants recommended sabotage, based on their knowledge of the system, as a viable alternative: Re: In a capitalist economy, stuff like this happen (Score:2) by dgatwood (11270) on Saturday June 10, @02:13PM (#15509858) Three words: temporary root passwords. ‘Nuff said.
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Root passwords are passwords that allow you to access everything in a system (from the root). dgatwood is suggesting that BoA IT-workers should create a series of “backdoors” into the system so that, one would imagine, they can access it later on from outside the company for malicious purposes.
KnoWledge And poWer In hIgh-tech envIronments In this section we shall consider the role of knowledge in the programmers’ perspective on the relationships of power in the organization. We seek to address the question of what kind of power programmers think that their knowledge offers. Programmers seem to have different views: from “very little” to “a lot,” the latter end of the spectrum having a far larger representation in the discussion. However, what is interesting to us here is not so much the quantitative proportions of views as an analysis of the different ways in which knowledge and power are connected in the discussion narratives. Now, in the main, the overall message in the discussions is that programmers are not replaceable or expendable. This claim is simply a way of expressing their views about their role in the organization and about the power they actually hold, even if management does not perceive or recognize that power. It is also a strategy for constructing an alternative identity to that offered by outsourcing-happy managers, but more about this in a later section. Let us now see how this claim of being irreplaceable is argued for.
not Argued, Just stated This message is sometimes presented on its own, as if it were plain to everyone why programmers should not be replaced:
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From Australian IT Workers… Re: Oh geez.... (Score:1) by sgt_doom (655561) on Wednesday January 11, @02:17PM (#14447246) No, they didn’t take our jobs - our jobs were handed over to them by very shortsighted, unimaginative corps-heads who think everyone is an easily replaceable module - which has been the corporate America credo for the past thirty to forty years. […] It is undoubtedly telling that a number of participants would state that they are irreplaceable without even trying to explain why. Their identity is strongly based on the idea of being fundamental parts of the organization. It is however more interesting to study the arguments presented as the basis for this statement.
Irreplaceable on a large scale For instance, the “humanitarian” view that people should be valued as human beings and, hence, not laid off simply for reasons of economic expediency seems—perhaps surprisingly—not to be expressed by Slashdotters. On the other hand, there are frequent nationalistic comments regarding the native government’s responsibility of making sure jobs “stay in the country.” The reasons behind this argument as presented by Slashdotters are based on the idea that it is of national strategic importance that the skills associated with those jobs do not disappear from the country. Two underlying assumptions seem to lie at the heart of this: (a) that IT-skills are a fundamental strategic asset; and (b) that IT-skills are not easy to obtain. Participants do not spell these assumptions out, at least not in a structured manner, but they are implied in the ways they speak about outsourcing. These assumptions naturally reinforce their identity as vital members, not only to the firm, but even of society; so sure are they about this that it is not unusual to find comments that seem to revel in the “inevitable” effects of outsourcing:
Remember this . . . (Score:1) by Ph33r th3 g(O)at (592622) on Saturday June 10, @11:29AM (#15509166) . . . next time you’re reading about the “tech shortage” in the United States. More Fuel for the Fire (Score:3, Interesting) by blueZhift (652272) on Saturday June 10, @08:27AM (#15508570) (http://bluezhift.proliphus.com/ | Last Journal: Tuesday August 08, @10:52AM) This is just more fuel for the fire. Next there will be an article about some CEO complaining about how there aren’t enough skilled IT workers in the U.S. and how college students are not entering the field. I just don’t understand how U.S. companies can continue to build up so much ill-will (or bad karma if you will) with practices that BoA [Bank of America] at least acknowledges are offensive and yet continue said practices. A big price is going to be paid for these betrayals someday, a very big price.
Irreplaceable in the company By and large the most frequent argument for the claim of being irreplaceable—whenever it is explained by Slashdotters—is based on the assumed centrality of their knowledge and its role in the company. For instance, according to a number of entries, it is true that native programmers cost more but this is because they know more and hence can deliver better quality. This kind of argument is a central, if contested, dimension of the discussion, with narratives contrasting various positions. For example, some Slashdotters argue that native programmers cost more because they know more while others maintain they cost more for other reasons. Similarly, some contend that native programmers know more and deliver higher quality outputs while others espouse the countervailing view that not all foreigners are poor programmers. 1907
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Due to their personal experiences, or to prejudice, they seem to assume that services that cost less are of inferior quality. This, applied to the problem at hand, results in many voices suggesting that outsourced IT services will never offer the same quality as those obtained from the native workforce.
identities. The question of whether or not foreign programmers have that knowledge is contested but what is never questioned is the necessity for a programmer to possess that knowledge. This having/not having knowledge is articulated around three sets of opposition concerning: managers, foreign programmers, and low-tech workers.
From Techies asked… Re: Time to change banks... (Score:5, Informative) by Zemran (3101) on Saturday June 10, @08:32AM (#15508585) (http://www.geocities.com/zemran | Last Journal: Friday November 07, @07:07AM) Lots of British companies that outsourced to India 5-10 years ago found that it cost more overall because the quality suffered and so much time was spent with managers flying backwards and forwards. Many of those companies returned to the UK because it is cheaper to pay for something to be done properly in the first place that to get a cheap job done that needs twice as much spent on fixing it.
managers
Why exactly outsourcing does not offer the same quality is not always argued for in the entries (as above). But whenever it is, we can find two key ideas: one is based on knowledge (native programmers are more knowledgeable) and the other in general prejudices. The general prejudices have to do with the perceived degree of foreigners’ loyalty to the company and on their level of trustworthiness. There are a number of entries that are outright xenophobic, most of them are contested, both by foreign and native participants (or, more precisely, by participants who claim to be foreigners and native).
One of the basic reasons to dislike managers is that they are incapable of doing anything vaguely productive. Their decisions are based on ignorance of what an IT system actually is. Such alleged ignorance extends not to the programming side of things but also to more “managerial” aspects such as the roots of bugs and why low-quality software requires far more long term maintenance than well constructed programmes (and hence incurs further costs for the company). Moreover, managers are oblivious to the principles that result in highquality software, and, more generally, to what decisions are in the best interests of the company. For example, the general view (though it is not without its opponents) among participants is that the increasingly frequent appearance of “Another silly outsourcerer…” (#15508465) is a yet further confirmation of managers’ lack of understanding of the basics of their business:
KnoWledge As IdentIty opposItIon We see from our data set that knowledge plays an essential role in the construction of programmers’ 1908
Very little positive is said about managers in Slashdot discussions in general, and even less when the subject at hand is outsourcing. Basically, managers are placed on the opposite side of programmers in the Slashdot narratives: everything that managers are said to be can safely be interpreted as what programmers are not, and vice versa. Managers are definitively “other,” taking the role of the scapegoat in terms of Slashdot identity formation (Burke, 1969) and possessing two demeaning characteristics in the eyes of techies: managers are, above all else, incompetent and greedy.
Incompetent
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From Australian IT Workers… (Score:2) by BVis (267028) on Tuesday January 10, @08:20PM (#14441818) […] What I’m saying is that someone who you pay half of what you pay someone else is going to be perceived by the short-sighted useless douchebags in middle management to be the better value, no matter how craptacular their skillset is.[…] From Techies asked… Re: In a capitalist economy, stuff like this happen (Score:5, Insightful) by AB3A (192265) on Saturday June 10, @10:09AM (#15508894) (http://slashdot.org/~AB3A/journal | Last Journal: Wednesday August 02, @11:52AM) It may not be wrong. But I don’t think legality is the point. Over the longer term, what have these idiotic managers done? They’ve disconnected themselves from the very communities they serve. Sure, it’s cheaper to have a bunch of lower paid foreigners do this work. But do they really understand what they’re doing and why? Will they know when they’ve run in to a problem? Will they be able to reason their way through regulations and laws they had nothing to do with? […] Frankly, I see this as a huge disconnect between management and the techies who actually make things go. If anyone here owns this stock, I recommend they sell within the next year or so.[…]
I’m on call 24x7x365 while the CEO sleeps. The none technical types need to understand where info power resides. In contrast to alleged managerial ignorance, programmers construe themselves as the ones who comprehend the complexities of software development and, crucially, those who actually write software, in other words, the value adding members of the organization. They, the workers, know what must be done and, unlike managers, they undertake productive work. This is a fundamental dimension of their identity as programmers. The general view is that outsourcing is bad, for a number of reasons, but a number of participants actually defended this managerial practice, explaining that it made economic sense to move development to zones of the world with cheaper labor. Even if these entries showed more sympathy for the managers’ position, there was little in them about managers’ knowledge and skills. The decision to outsource was in all cases presented as an obvious one possessing a compelling logic, as follows: cheaper labor, hence reduced costs, hence move. The decision that requires thought and that would manifest both intelligence and courage, according to Slashdotters, is that of not outsourcing. The opposition between managers and “IT folk” is therefore upheld with respect to the knowledge/productivity axis even when outsourcing is not directly criticized.
Greedy Maybe it’s time for the technocratic war to begin. (Score:5, Interesting) by Anonymous Coward on Friday December 19, @12:14PM (#7764834) The managers and CEOs of this country have no idea about how to make router connection or how to correct a line of code in their payroll systems.
Slashdot was originally a forum for open source programmers and even if it now gathers programmers of all kinds, the concept of profit has retained some of its former “bad karma.” Whereas making money in itself is not negative, there are limits that should not be transgressed:
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Profit? (Score:2) by CaptDeuce (84529) on Saturday June 10, @09:06AM (#15508690) (Last Journal: Thursday June 08, @08:07PM) From TFA: BofA estimates that outsourcing has allowed the bank to save about $100 million over the past five years. From Fortune 500 [cnn.com]: * Profits in 2005: $16.465 billion * Growth: 16.4% over 2004 * 1995-2005 annual growth rate: 8.5% So... that profit figure was damaged considerably by the $10 million or so in IT expenses. Which means — using a very rough calculation — profits rose from $16.464 to $16.465, a whopping %.009 (a thousandth of one percent) by eliminating those jobs! It’s amazing BofA showed any growth over the past five years what with carrying the dead weight of 500 IT people! Arithmetic (Score:1) by blue.strider (737082) on Saturday June 10, @11:25AM (#15509153) Savings from f***ing up workers: 100 million over 5 years = 20 million / year. Income of (only one! of) the blood suckers: BoA CEO pay (in 2003) = 20 million. --Class war at its best.[…]
Foreign programmers There is much debate in the discussions about foreign programmers, and they are not always presented in a favourable light. However, in spite of certain participants’ racism and xenophobia it is interesting to observe how Slashdotters seem often to return to fundamental considerations of knowledge and skill in promoting or preserving their sense of identity. Those who are most insistent about the unsuitability of foreign programmers do so mainly by denouncing their lack of knowledge and skills around two areas: lack of understanding of the national culture (including language and laws) and lack of programming skills. Very occasionally they are also presented as untrustworthy. These accusations are contested, and a number of entries are devoted to expressing admiration or at least respect for the skills of specific foreign programmers “met […] over the years” (#15508616), but no participant questions the idea that advanced technical knowledge is necessary to be a good programmer. The issue is whether foreign programmers possess this knowledge. Some Slashdot participants claim that they do; others that they do not. No-one suggests, however, that the level of knowledge required to provide IT-services may have declined (due, for instance, to advances in technology). If anything, it would seem that it comprises not only technological skills but also social and language skills beyond the reach of foreigners.
Low-Tech Workers This aspect of the programmers’ identity, opposed to the “greed-is-good weasels” (#15509184) of management, is however not as prominent as the knowledge/productivity one. There are several entries that touch upon the subject of profit making but the culprit is more often ignorance about the importance of long-term sustainable strategies rather than greed.
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Low-tech workers do not appear at any length in the discussions we have studied. When they do, however, they constitute yet another kind of “other.” However, unlike the previous two categories of other—managers and foreign workers—this one is not perceived as a threat. Low-tech workers are not going to take their jobs, neither are they going to make the outsourcing decisions. Hence, we
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find them presented in, at worst, a rather neutral manner, and, indeed, often rather sympathetically. After all, they are facing similar problems. The main difference between blue and white collar workers, according to Slashdotters, lies in the level of knowledge necessary to do their job. Whereas technical know-how is a central element in the programmers’ view of themselves, participants do not seem to consider it an important attribute of the low-tech blue collar work: Well the thing is (Score:2) by Sycraft-fu (314770) on Saturday June 10, @01:47PM (#15509762) With manufacturing, it doesn’t matter where it happens or who does it. So long as the workers can do the job right, nothing else matters, just ship the goods to where they need to go. Not so with IT. There are distinct disadvantages to IT outsourcing.[…] Low-skill manufacturing is always going to be a lowest-bidder kind of situation, but that’s not the case with everything. Even higher skill manufacturing isn’t that way. Notice that Intel doesn’t fab all there chips in China, in fact they don’t fab any there. Their fabs are in places like Arizona, California, Israel, and Ireland. Same with AMD (Germany, Texas, Japan, etc). For various reasons, outsourcing to a lowest-bidder kind of country doesn’t work out for them, despite it being a manufacturing job in the end. In the face of outsourcing, it is difficult to maintain that IT workers have a special kind of knowledge that makes them irreplaceable. Some, as we have seen, blame outsourcing on the ignorance about the importance of US IT workers’ knowledge and predict dire consequences to the native companies; others, such as SlashSquatch, go to the other extreme, equating programmers, and blue-collar workers:
Software Engineers NEED a Professional Society (Score:1) by SlashSquatch (928150) on Saturday June 10, @10:39AM (#15508989) (http://cryptostenchies.com/) The professionalism is gone from software engineering. It grew from computer science with an influx of new systems and new employees in the 90’s. Professionalism went out the window, long hair was grown. For 100 crappy, expensive projects, one survived. A negative image was burnt on people’s minds. Next, the programmer started to become a blue collar worker. They do more for less pay, punch a clock and no one lets them make any business decisions. Now comes the next backlash, outsourcing. Very few company officers come from IT. Administration is in the dark about IT decisions. They rely on marketing information both coming and going to make decisions. IT gets pissed at installing yet another crap package and stupid patch. It’s an US v. THEM situation. Every software developer that runs around saying “I don’t care about the EVIL business side, I just want to program” this is your reward. Complete impotence. The solution: Software Engineer Professional society. One very effective Professional Society is the Society of Actuaries. They make GREAT money, business decisions and all they have to do is apply mathematics. dyslexics of America, Untie!
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It is interesting to note that the equation does not build on a lack of special knowledge on the part of the IT workers, the “problem” is rather that this knowledge is not valued any longer. SlashSquatch’s solution, thus, is to force the firms to value it through the establishment of a Software Engineer Professional Society: such an institution should be capable of securing jobs and salaries when even actuaries’ application of mathematics (allegedly trivial in comparison with the skills required of IT workers) can be made valuable. But not everyone likes the idea of unions, as we saw in the previous section, reasoning that if you are being outsourced that is due to your lack of programming skills, which means you are not a worthy programmer: Re:And then get arrested, convicted... (Score:0) by Anonymous Coward on Friday December 19, @06:07PM (#7769188) -that’s why you should organize before you need to... A union may have been able to stop this.Yeah - I want to sit on my butt all day long and get paid big bucks for doing mediocre work. Unions do have their place in the world. But just because _YOU_ have lousy skills and fear for your job doesn’t mean that the rest of us feel the same. Unions seek to make reward based not on skill, but on length of union membership on who you know and on who’s apple you’re polishing
conclusIon The discussions presented here, arguably, do not constitute cases of resistance per se but rather of dissent. The voices of dissent are not directed toward the managers, at least not directly, but to other peers. As Collinson (2003) argues, dissent in this case is not so much about sabotage as about the construction and performance of identities, expressing empathy and solidarity. In some cases
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this is very obvious, since what is suggested is that “complying with managers” is what should be done, things “will f@ck up anyhow.” For some of the participants, it is not so much doing something that counts but assuring one another that they form part of the community of the initiated; they “belong” to the community and know what will happen. They are the one’s with the knowledge to run BoA, the others are not only ‘greedy ignorant idiots’ but, above all, they are outsiders. As we have attempted to demonstrate above, the identities constructed and performed in the entries do not present a monolithic set. Instead, there are differences on at least two levels. Firstly, there are differing, and at times opposing, views on the subject of outsourcing. The kinds of dilemmas and questions debated in the narratives are numerous. Is outsourcing good, bad, or simply a neutral inevitability? Is it the result of greed or the unfolding of inexorable capitalist imperatives? Is it devastating for US programmers or is it the only way to maintain a healthy economy? Is it anti-nationalistic or a necessary step toward the improvement of living conditions in other countries? Secondly, as we have seen, there are differing and also at times opposing opinions as to how to deal with outsourcing, and as to what programmers can do about it. We opened the chapter by indicating that some social observers conclude that we are currently undergoing an epochal shift away from the socioeconomic dynamics of industrial capitalism and witnessing the emergence of an informational global social order. Castells (1996), for example, argues enthusiastically that recent ICT developments, constituting a new technological paradigm, have ushered in a new era of “informationalism” and “networking” that is distinct from capitalist or statist industrialism. By contrast, we suggest that a more even minded and measured consideration of the social and historical conditions in play is required. More compelling, we contend, are arguments that understand the distinctive social and material technologies of “post-industrial,” “late,”
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or “disorganized” capitalism as being genealogically related and continuous with an industrial (or statist) legacy (Harvey, 1989, Lash & Urry, 1987). Castells, we suggest, is inclined to overstate the case for paradigm shift with the resulting danger that historical continuities with respect to labor relations or the geographical redistribution of production under late capitalism are at risk of being overlooked. Reflecting on the employment relationships explicitly articulated in the Slashdot exchanges previously presented, for example, one might reasonably conclude that certain asymmetries characteristic of industrial capitalism persist within informational capitalism. As we have seen, Slashdotters respond vociferously to the threats that outsourcing poses to their livelihoods and professional status. Indeed, the narratives testify overtly to an antagonistic relationship between employers and employees which are reminiscent of, if not isomorphic with, the kinds of labor unrest that characterised industrial capitalism in the nineteenth and twentieth centuries. Many of the remarks made in Slashdot entries appear to be consistent with the forms of dialectical conflict present in Marxist critiques of industrial labor relations. The very language of Slashdotters concerning the formation of collective bodies to protect their professional interests, or, indeed, the speculative creation of an “international” IT resistance movement in the face of outsourcing are entirely consistent with the sentiments of The Communist Manifesto, for example (Marx & Engels, 1996/1848). This will be unsurprising to those familiar with certain stands of critical management studies that recognize the continuity between industrial and informational capitalism. Willmott (1995, p. 95-6), for example, argues that the employment relationship within contemporary capitalist organizations (informational or otherwise) is such that, all other things being equal: (1) investors will attempt at all times to ensure that managers direct and control organizations in ways that are deemed to serve investors’ interests (i.e., the generation
of profits that, in turn, translate into dividends); (2) employees will endeavor wherever possible to improve their pay, job security and conditions of employment, and; (3) Managers (as materially and symbolically privileged employees) will endeavor to protect their employment status. Many members of the Slashdot community, responding to the perceived threat of outsourcing, seem acutely aware of these dynamics of employment relations and give voice to what looks remarkably like a new iteration of industrial class consciousness. Whether dissent of this sort will eventually give rise to organized resistance on the part of IT professionals working under conditions of contemporary capitalism remains, of course, a moot point. The current political climate and labor law frameworks in western economies will make such orchestrated resistance very difficult, added to which divisions within the Slashdot community itself and scepticism, from some quarters, regarding the value of unionization cast serious doubt over the possibility of effective collective action. We hope, nonetheless, that reporting on the voices of dissent from within this community sheds fresh and interesting light, from the perspective of the workers affected, on how the management of outsourcing in high-tech environments is being perceived and responded to.
reFerences Ang, S., & Straub, D.W. (1998). Production and transaction economies and IS outsourcing: A study of the U.S. banking industry. MIS Quarterly, 22(2), 535-552. Apte, U. M., Sobol, M. G., Hanaoka, S., Shimada, T., Saarinen, T., Salmela, T., & Vepsalainen, A. P. J. (1997). IS outsourcing practices in the USA, Japan, and Finland: A comparative study. Journal of Information Technology, 12(4), 289-304. Angell, I. (2000). The new barbarian manifesto: How to survive in the information age. London: Kogan Page. 1913
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Barret, R. (2005). Management, labor process, and software development. London: Routledge. Beirne, M., Ramsay, H., & Panteli, A. (1998). Developments in computing work: Control and contradiction in the software labor process. In P. Thompson & C. Warhurst (Eds.), Workplaces of the future (pp. 142-62). London: Macmillan. Braverman, H. (1974). Labour and monopoly capital. London: Monthly Review Press. Brown, D. (2005). The black book of outsourcing. Chichester: Wiley. Bruckman, A. (1992). Identity workshop: Emergent social and psychological phenomena in text-based virtual reality. Retrieved November 27, 2006, from ftp://ftp.cc.gatech.edu/pub/people/ asb/papers/identity-workshop.rtf Burke, K. A. (1969). A rhetoric of motives. London: University of California Press.
Singh (Eds.), Outsourcing and offshoring in the 21st century: A socio-economic perspective (pp. 122-139). Hershey, PA: Idea Group Publishing. Harvey, D. (1989). The condition of postmodernity. An enquiry into the origins of cultural change. Oxford: Blackwell. Kakumanu, P., & Portanova, A. (2006). Outsourcing: Its benefits, drawbacks, and other related issues. Journal of American Academy of Business, 9(2), 1-7. Kehal, H. S., & Singh, V. P. (Eds.). (2006). Outsourcing and offshoring in the 21st Century: A socio-economic perspective. Hershey, PA: Idea Group Publishing. Kraft, P. (1987). Computers and the automation of work. In R. Kraut (Ed.), Technology and the transformation of white collar work (pp. 91-111). NJ: Lawrence Erlbaum.
Collinson, D. L. (2003). Selves at work. Organization, 10(3), 527-547.
Kraft, P. (1977). Programmers and managers: The routinisation of computer programming in the United States. New York: Springer Verlag.
Case, P., & Pineiro, E. (2006). Aesthetics, performativity, and resistance in the narratives of a computer programming community. Human Relations, 59(6), 753-782.
Kraft, P., & Dubnoff, S. (1986). Job content, fragmentation, and control in computer software work. Industrial Relations, 25(2), 184-196.
Castells, M. (1996). The rise of the network society. Oxford: Blackwell. Corbett, M. F. (2004). The outsourcing revolution: Why it makes sense and how to do it right. Chicago: Dearborn. Costlow, T. (2003). Globalization drives changes in software careers. IEEE Software, 20(6), 12-16. IEEE-USA. (2006). About us. Retrieved November 27, 2006 from http://www.ieeeusa.org/about/ default.asp Gupta, S., & Chaudhari, N. S. (2006). Information technology offshore outsourcing: A perspective of advanced countries. In H. S. Kehal & V. P.
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Lash, S., & Urry, J. (1987). The end of organised capitalism. Oxford: Polity Marx, K., & Engels, F. (1996/1848). The communist manifesto. London: Junius. Orlikowski, W. (1989). Software work. Industrial Relations, 25(2), 184-96. Orlikowski, W. (1988). The data processing occupation: Professionalisation or proletarianisation. Research in the Sociology of Work, 4, 95-124. Power, M., Desouza, K. C., & Bonifazi, C. (2006). The outsourcing handbook: How to implement a successful outsourcing process. London: Kogan Page.
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Quan, M. (2003). IEEE USA presses Congress on visa curbs. CommsDesign. Retrieved November 27, 2006, from http://www.commsdesign.com/ news/market_news/OEG20030326S0029 Ralph, W. & Wyndrum, J. (2006). Welcome to the new year. IEEE-USA, President’s Column. Retrieved November 26, 2006, from http://www. ieeeusa.org/communications/presidentscolumn/ Wyndrum/jan06.html Scarbrough, H. (1999). Knowledge as work: Conflicts in the management of knowledge workers. Technology Analysis and Strategic Management, 11(1), 5-16. Sobol, M., & Apte, U. (1995). Domestic and global outsourcing practices of America’s most effective IS Users. Journal of Information Technology, 10(4), 269-81.
Topsfield, J. (2006). Migrants blamed for IT jobs cut. The Age. Retrieved November 27, 2006, from http://www.theage.com. au /a r t icle s /20 0 6/01/0 9/113677150 0 496. html?from=top5 Willmott, H. (1995). The odd couple? Re-engineering business processes; managing human relations. Technology, Work, and Employment, 10(2), 89-98.
endnote a
All the data extracts from Slashdot are reproduced verbatim, complete with spelling, grammatical and typographical errors. The # numbers in parentheses are used to code Slashdot entries and may be used to locate them in the on-line archive.
Steadman, J. (2004). Career trends. IEEE-USA. Retrieved November 27, 2006, from http://www. ieeeusa.org/communications/Steadman/steadmannov04.html
This work was previously published in Management Practices in High-Tech Environments, edited by D. Jemielniak and J. Kociatkiewicz, pp. 209-227, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.15
Managing IT Outsourcing for Digital Government Yu-Che Chen Iowa State University, USA
IntroductIon IT outsourcing has become an increasingly important strategy in meeting the demand for digital government services in many developed countries. In the United States, government IT outsourcing is expected to become the fastest-growing segment of the overall federal IT market.1 In 2002, the federal government spent US$55 billion on IT service contracts (Harris, 2003). The European Union also witnessed mega government IT outsourcing deals. One of the most visible deals is the British government’s National Health Service modernization plan, which features a host of multi-year IT outsourcing contracts whose total exceeds £5 billion (Collins, 2004). Government interest in IT outsourcing will likely be sustained by growing interest in creating value for citizens (Accenture, 2002). The confluence of many factors has made IT outsourcing an appealing option for govern-
ments around the world. Governments around the world are facing the challenge of delivering more services with fewer resources to meet the demands of their citizens and businesses. Information technology is able to increase efficiency in service production and delivery. However, alone, governments find it difficult to provide the financial resources and competitive wages which attract needed IT talent to deploy e-government services (National Academy of Public Administration, 2001). Against this background, outsourcing becomes a value proposition for government. With outsourcing, government can gain access to IT expertise while gaining efficiency derived from private-sector economies of scale. Nevertheless, good management is needed to realize IT outsourcing’s potential for creating value. This article focuses on IT outsourcing in the public sector, analyzing management issues, and offering practical solutions. The background section defines IT outsourcing as well as its associ-
ated benefits and risks. The next section offers a process-oriented practical methodology as a tool for public managers to navigate the entire life cycle of IT outsourcing projects. More importantly, this process provides a structured way to maximize benefits and minimize costs associated with IT outsourcing. Then, a discussion of future trends examines IT outsourcing issues on the horizon. This article concludes with a general set of recommendations.
bAcKground IT outsourcing by government is the utilization of external organizations for the production and/ or provision of information technology services. This external organization is usually a company that provides IT services. The types of services include networks, applications, data centers, Web-hosting, and so forth. Britain’s outsourcing of desktop operating systems and applications for the National Health Service, using Sun Microsystems, is an example (Sun Microsystems, 2004). Another example is the U.S. Navy-Marine Corp’s multi-billion intranet outsourcing contract with Electronic Data Systems (EDS) (Wait, 2002). Maximizing the benefits of IT outsourcing begins with a background analysis of its associated benefits and risks. The ultimate value of IT outsourcing lies in using information technology to transform business processes to meet the objectives of the organization (Accenture, 2003). It goes beyond merely having access to networks or more computing power. The real value comes from using information technology to reengineer business processes. This transformation entails better, faster, and more affordable services. More specifically, the benefits associated with IT outsourcing include access to IT expertise, cost-savings, quick deployment, improvement in cash flow management, and flexibility in employment (Antonucci et al., 1998; Chen & Perry, 2003b). When a new major IT project is developed,
governments often find themselves lacking the necessary IT expertise. This is due mostly to the fast-changing nature of information technology and government’s competitive disadvantages in hiring and training skilled IT personnel. Cost savings are possible via leveraging economies of scale at the vendor side. For example, rather than building network capacity one government agency at a time, governments can outsource network services to network companies that can provide identical services at much lower unit costs. Quick deployment is a natural consequence of the increased technical and financial capacities obtained through a service provider. The benefit of cash flow management can be realized by arranging with private companies to pay only for on-going services (Gant, Gant, & Johnson, 2002). The service provider provides the initial capital investments and recovers costs through service fees over time. Flexibility in employment is another benefit of IT outsourcing. Service providers are more flexible than governments when responding to changes in demands for specific IT skill sets. However, IT outsourcing can also expose government to a number of risks. One is the loss of control over service level and service quality. Control is particularly difficult to exert when there is a large gap between what the government knows about service level and quality and what the service provider knows. With incomplete access to critical information, government may find it difficult to validate the claims of its IT service providers. Security is another risk factor, particularly when critical data is stored in facilities outside government perimeters. Government network-connected information systems supported by service providers may subsequently be subject to security threats. Moreover, training and background screening of IT personnel are important in addressing security threats. Complex procurement processes and employment issues pose two types of risks for IT outsourcing by a government (as opposed to outsourcing
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by a private company). Cumbersome procurement rules and procedures in the public sector tend to prolong the negotiation and implementation of IT outsourcing contracts. Employment issues are particularly salient in government. How personnel are treated in an IT outsourcing deal may significantly impact the overall success of the project. The importance of this issue has been reflected in several recent IT outsourcing projects. For example, in one outsourcing project, the state of Pennsylvania guaranteed no lay-offs to ensure the support of the existing IT staff for the project (Tungate & Michael, 2002).
mAnAgIng It outsourcIng: A process-bAsed ApproAch Public managers play a central role in realizing the full potential of IT outsourcing while minimizing its risks. The proposed process model is generic for governments of diverse needs and types. The discussions below focus on individual phases in the process also address the public sector. The model presents a “process” that governments must undertake as they plan and execute IT outsourcing projects. Following this process and attending to issues as they emerge at each phase, significantly increases the chance of capturing the benefits of IT outsourcing while minimizing entailed risks. This process-oriented approach requires that digital government managers adopt a different mindset. An IT outsourcing arrangement should be treated as an ongoing relationship that requires constant adjustments. This approach is best suited for complex public sector environments with changing political leadership and competing objectives. Moreover, an IT outsourcing arrangement, by its nature, progresses through a lifecycle (a process). The proposed process model consists of six phases and has been adopted and modified from Chen and Perry (2003a).
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determination of a sourcing strategy In the first phase, public managers need to define the sourcing strategy. This involves defining the government’s strategic business goals and ensuring that IT aligns with them (McIvor, 2000). At this phase, the focus is on the government’s strategic IT goals (i.e., affordable citizen-centric quality online services). The determination of sourcing scope and strategy requires an adequate level of internal IT management capacity. An experienced IT management team is more capable of assessing the associated benefits and risks. The proper level of IT management capability is critical for making informed selection of service providers, managing relationships, and making performance adjustments. The sourcing strategy for government has three general objectives: continuous service improvement, business continuity, and compliance with relevant laws and regulations. In formulating a sourcing strategy, the organization must consider how to continuously improve service. Business continuity is another issue in determining the sourcing strategy. The strategy must provide sufficient safeguards against IT service disruptions caused by major disasters. The safeguards should be placed in a risk-management framework to help prioritize service items for business continuity. Compliance with relevant laws and regulations is another objective of the sourcing strategy. Thus, privacy, security, and employment regulations are likely to comprise the main issues.
Analysis of sourcing needs and operational relationship Translating the strategic objectives into specific sourcing needs and operational relationships is the main task of the second phase. Prior to considering a specific vendor, government first must specify the information system’s functional
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requirements that enable the delivery of strategic IT services. For example, business continuity may be defined by performance measures such as time required for bringing service back online after a major disaster. When outlining possible operational relationships with service providers, government should take a partnership approach. This would involve identifying the strengths of a service vendor and specifying how those strengths may complement government operations. For example, Northern Ireland’s health service was looking for a centralized data center solution to address its fragmented and increasingly costly databases (McCue, 2003). It sought a service provider experienced in data migration, system integration, and centralized data centers. In determining the role that the service provider will play, government must examine each phase of the system development lifecycle as a systematic way of developing the functional requirements. These requirements will in turn give a clear indication of needed operational relationships. Armed with specifications for the functional requirements and operational relationships, public managers are ready to proceed to the next phase.
selection of service providers and contract negotiation The first step of this phase involves continuing to build an in-house IT management team for the purpose of engaging service providers and reviewing contracts. This team should possess technical knowledge capable of evaluating the merits of competing contract bids. It should also be equipped with contract negotiation and management skills. Though outsourcing arrangements vary significantly, government must find service providers that can provide complementary operational competency as well as adaptive and integrative services. System integrators are preferred because they can manage system in-
tegration as well as adapt to change. Integrators are relatively more adaptive because they are not locked into a particular platform or application. They can deal with rapid changes in technology and service needs by introducing new products and services. The IT outsourcing contract should be a service-level agreement that incorporates performance matrices, data stewardship, and penalty clauses. Performance matrices capture the measures used to monitor performance levels in critical areas such as uptime for business continuity, user satisfaction with overall performance, and ability to handle complex requests. Data stewardship addresses privacy and security concerns. The agreement must delineate the responsibility boundaries for securing data stored in an information system. Penalty and termination clauses—such as those featuring dispute resolution mechanisms, for example—should be established to address the possibility of unsatisfactory services or interruption of services (Lee, 1996). The signing of service contracts concludes this phase.
transition to the service provider For government IT outsourcing, the transition encompasses both the employment and information system dimensions. Government must formulate and execute a comprehensive plan to smooth the transitioning of in-house personnel affected by the project. This may involve training programs or employment opportunities with the service providers. Employment issues must be carefully addressed, as they may prove to be one of the most controversial items, particularly in light of political and regulatory situations surrounding any government agency. The information system dimension includes data/system migration and system integration. The magnitude of this task depends on the complexity of the existing system, the quality of data, and the extent of change involved. During the migration,
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a protocol for protecting privacy and securing systems is necessary for accountability. This protocol must map steps involved in migrating data and systems. Government should budget ample resources to manage the transition in both dimensions. This phase, compared to other phases, is probably the most resource-intensive. Much resource is required for cleaning the data, establishing common standards, and migrating to the service provider. Additional resources should be budgeted to cover unforeseen costs.
service performance management This phase involves managing the service performance of the ongoing outsourcing relationship. One important objective of this phase for government is to align performance measures to the strategic objectives outlined in the first phase. During this period, service needs are likely to change due to changing circumstances in market conditions or regulatory requirements. In response, government should review its sourcing strategy to determine the changes needed for performance requirements or service enhancements. Maintaining frequent and quality communication with service providers and key stakeholders allows government to better manage service performance. Communication has the purpose of addressing service problems and identifying tasks for continuous improvement. This effort can be enhanced with a performance management information system that can capture performance information (Rubin, 1997). Moreover, a dedicated IT manager or management team is critical for success in managing service performance. This team needs adequate resources if it is to stay focused on the strategic goals, conduct continuous improvement, and facilitate timely exchange of service information and expectations.
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contract termination, renewal, and transition management This last phase involves managing the expiration of an existing IT outsourcing contract. This phase is least understood and discussed but of prominent importance in maintaining business continuity and improving future IT services. If not properly managed, governments are likely to see their services disrupted. Another possible challenge is contract transition from one service provider to another. Due to long-term dependence on the service provider and high costs of transition, government may find itself locked in by its existing vendor. Lack of experience and planning on the part of government may further impair its ability to navigate the transition (Peled, 2001). During the selection of service providers and contract negotiation phase public managers have the opportunity to specify terms for contract termination, renewal, and transition. The clauses for termination and transition provide a structure and process for both the government and the service provider. These clauses should address both personnel and information technology assets. For example, San Diego County developed a specified depreciation schedule for each of its technology assets (Peterson, 2004). To avoid possible contract lock-ins, public IT managers should choose standard infrastructure and application solutions rather than developing customized ones. To further ensure success in contract transition, public IT managers can develop a process specifically focused on human resources and physical assets. This process would incorporate issuing a request for proposal at least one year before contract expiration. Moving IT services back into government should also be considered as an alternative. The request for proposal should be supported by information gathered in the service performance management phase and it should involve a re-evaluation of sourcing needs and operational arrangement. This proposal should
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feature data and solutions that directly address the transition of staff members and information technology assets.
which may otherwise be unavailable in traditional purchasing models.
conclusIon Future trends Public managers need to understand future trends in IT outsourcing to manage outsourcing effectively. The first important trend is the maturing of the IT outsourcing market, a maturity indicated by its expanding global scope. Global sourcing by European countries—as part of a worldwide sourcing phenomenon—will witness strong growth (Gartner, 2003, 2004). Outsourcing an entire array of IT services, such as outsourcing an entire business process, has also gained momentum. Also, security and privacy will become critical elements in government IT outsourcing. In the U.S.’s 2003 federal budget, over a quarter of IT spending was security-related (Porteus, 2002). Since government is the last line of defense in disaster situations, government requires that contractors ensure business continuity by implementing needed security measures. Any government IT outsourcing project also needs to safeguard citizen privacy. For example, the European Union’s 1995 Directive on the protection of personal data deals with confidentiality in the use and movement of data. It prescribes a privacy policy for EU governments to implement in IT outsourcing. Another development is the growing popularity of partnerships between government and the technology industry. In the partnership model, financial risks associated with digital government projects can be shared. For example, the partnership model makes possible a wide range of financial solutions for the Interagency Public Key Infrastructure in the United States (Cahan, 2002). Of further benefit, the partnership model can help governments cope with rapid changes in technology and service needs, a critical capacity
IT outsourcing has become an increasingly popular way of deploying digital government services. With the maturing of the IT outsourcing market and increases in government management capacity, there is significant potential for transforming government’s current use of information technology. IT outsourcing has the benefit of leveraging private-sector financial resources and technical expertise. Public managers can use IT outsourcing to deliver value to citizens while controlling risks. This article has offered a process-based methodology as a tool for public managers to realize the full potential of IT outsourcing. This process begins with identifying a sourcing strategy, culminates with on-going performance management of the outsourcing relationship, and ends with contract termination and transition. The process methodology calls for a relationship-based approach focused on the entire lifecycle of an IT outsourcing project. The relationshipbased approach moves beyond one-time procurement thinking and seeks to map out a long-term relationship. An on-going relationship requires frequent adjustments, depending on market conditions and changing service needs. Thus, a performance management team is needed to maintain quality and frequent communication. Several key recommendations can be drawn from the process model. First, public managers must constantly align every phase of the process to the strategic goals of IT outsourcing, focusing on quality and affordable service, security, and business continuity. Second, government must anticipate political and legal considerations surrounding an IT outsourcing project. Employment and privacy issues have legal implications for such projects. Finding a good strategic fit between government and its IT service provider may help
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sustain momentum in the event of changes in political leadership. Frequent and quality communication among key stakeholders is also critical; such communication helps early on in the selection of service providers. Also, it is a critical ingredient for success in service transitioning and performance managing. Lastly, the commitment of top management and assurance of ample resources are essential for realizing the potential of IT outsourcing. When an organization invests in each stage of the process—from defining sourcing needs, finding strategic partners, to managing transitioning and performance—it determines whether the IT outsourcing project will fail or succeed at delivering high-level digital government services.
reFerences Accenture. (2002, February). Outsourcing in government: The path to transformation. Accenture. Accenture. (2003, May). Outsourcing in government: Pathways to value. Accenture. Antonucci, Y. L., Lordi, F. C., et al. (1998). The pros and cons of IT outsourcing. Journal of Accountancy, 185(6), 26-32. Cahan, B. B. (2002, June 21). United States’ experience with public-private partnership: elements of effective public-purpose partnership. Report prepared for OECD E-Government Project Seminar. Chen, Y. C., & Perry, J. (2003a, March). IT outsourcing: A primer for public managers. Washington, DC: IBM Endowment for the Business of Government. Chen, Y. C., & Perry, J. (2003b). Outsourcing for e-government: Managing for success. Public Performance & Management Review, 26(4), 404-421.
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Collins, T. (2004, March 23). Is the national programm for NHS IT set to be “the biggest gamble in the world?” ComputerWeekly.com. Retrieved June 14, 2004, from http://www.computerweekly. com/Article129349.htm# Gant, D., Gant, J., & Johnson, G. (2002, January). State Web portals: Delivering and financing e-service. Washington, DC: The PricewaterhouseCoopers Endowment for the Business of Government. Gartner. (2003, April). Gartner says offshore outsourcing market in Europe will grow more than 40% in 2003. Gartner 2003 Press Release. Retrieved June 14, 2004, from http://www4.gartner. com/5_about/press_releases/pr11apr2003a.jsp Gartner. (2004, March 16). Outsourcing goes global in difficult market. Gartner 2004 Press Release. Retrieved June 14, 2004, from http:// www4.gartner.com/5_about/press_releases/asset_63079_11.jsp Harris, S. (2003, April). Tracking technology spending. Government Executive, 35(4), 13. Lee, M. (1996). IT outsourcing contracts: Practical issues for management. Industrial Management and Data System, 96(1), 15-20. McCue, A. (2003, August 14). IBM to give health service a face lift. Retrieved August 30, 2004, from http://news.com.com/IBM+to+give+health+ service+a+face-lift/2100-1011_3-5063842.html McIvor, R. (2000). Strategic outsourcing: Lessons from a systems integrator. Business Strategy Review, 11(3), 41-50. National Academy of Public Administration. (2001, August). The transforming power of information technology: Making the federal government an employer of choice for IT employees. Washington DC: National Academy of Public Administration.
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Peled, A. (2001). Outsourcing and political power: Bureaucrats, consultants, vendors, and public information technology. Public Personnel Review, 30(4), 495-514. Peterson, S. (2004, October 2). Outside in. Government Technology, October 2004. Porteus, L. (2002, April 24), Homeland security depends on new technology, Ridge says. Government Executive Magazine. Rubin, H. (1997). Using metrics for outsourcing oversight. Information Systems Management, 14(2), 7-15. Sun Microsystems. (2004, February). British health system aims to improve care and contain costs. Sun Microsystems. Retrieved September 15, 2004, from http://www.sun.com/br/0204_ezine/ hc_nhs.html Tungate, D. E., & Michael, G. (2002, March). Pennsylvania outsources to save millions. PA Times, 25(3). Wait, P. (2002, March 4). Government outsourcing grows fastest of all sectors. Washington Technology, 16(23).
Digital Government: The use of information and communication technology to deliver information and services to stakeholders including citizens, businesses, nonprofit organizations, government employees, and other units of government. Global Sourcing: Sourcing practices that involve buying services from other countries and around the world. It is an emerging practice, particularly in the area of information technology. Interagency Public Key Infrastructure: The U.S. federal government’s goal of providing hardware, systems, standards, and policies necessary to secure electronic transactions across federal agencies. IT Outsourcing: Utilization of external organizations for the production and/or provision of information technology services. Process-Based Approach: An approach to IT outsourcing based on six phases as articulated in the article. Service Level Agreements: Agreements that specify the performance metrics for specific services such as bandwidth availability and response times for queries.
Key terms Business Process Outsourcing (BPO): When organizations delegate back-office functions such as human resources to outside vendors.
endnote 1
This is based on the number by Input Inc., an information technology research and marketing firm.
This work was previously published in Encyclopedia of Digital Government, edited by A. Anttiroiko and M. Malkia, pp. 11901195, copyright 2007 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.16
Strategic Management of International Subcontracting: A Transaction Cost Perspective Yue Wang University of New South Wales, Australia
AbstrAct Research on international subcontracting has been policy-oriented and industry-focused. There is a lack of understanding of the phenomenon from strategic management and international business perspectives. This article conceptualizes international subcontracting as a type of relational contract formed by buyers and suppliers from different countries, aiming to facilitate the sourcing of products or components with buyer-specific requirements. It builds a transaction cost model for studying the strategic choice of international subcontracting as an intermediate governance structure, sitting between arm’s length outsourcing arrangement and vertically integrated multinational enterprises (MNEs). A set of propositions are developed to aid future empirical research and to provide managers with some guidelines for organizing supply chain across borders. The model also allows managers to examine the com-
plex nature of a range of subcontracting relationships and identify the specific mechanisms that can be used to preserve and manage the dyadic principal-subcontractor exchanges.
IntroductIon International subcontracting is an important phenomenon in international business (IB) studies (Casson, 1990) and has been an effective means of accelerating industrial development since 1960s, fostering the specialization among countries that reflects comparative advantages (Germidis, 1980). Through such measures as the establishment of free trade zones, developing countries encourage local firms to undertake subcontracting jobs for foreign firms to earn hard currency and to accumulate technological know-how (Hamada, 1974). Fir ms from developed countries are frequently attracted into
Strategic Management of International Subcontracting
subcontracting arrangements to exploit low labour and production costs in developing countries. The studies of international subcontracting are mainly policy-oriented (Cohen, 1975; Riedel, 1975; Sengenberger & Pyke, 1991) and geography or industry-focused (Kashyap, 1992; Lawson, 1992; Rogerson, 1995). Few have examined why firms from developed countries choose to use subcontracting arrangements in the first place. Moreover, despite some classifications of international subcontracting activities according to functional or market criteria (Gereffi, 1993; Holmes, 1986), the nature of subcontracting relationships remains unexplored due to the lack of theoretical underpinning of international subcontracting as a form of international business organization. Grounded on transaction cost theory (Buckley & Casson, 1976; Hennart, 1982; Rugman, 1981; Williamson, 1975, 1979, 1985), this article aims to provide a firm-level analytical framework for analysing the subcontracting choice and the nature of subcontracting relationships, complementing the existing literature’s emphasis on studying international subcontracting as a macro-economic phenomenon. The framework will also aid managers in choosing strategically between outsourcing, subcontracting, and vertical integration when organizing their supply chain. Although “transaction costs differ depending on both the nature of the transaction and on the way that it is organized” (Coase, 1937, p. 386), transaction cost economics (TCE) as formally developed by Williamson (1975, 1979) is not mainly concerned with the transaction itself, but with the contractual arrangements (the ways) through which transactions are organized (Cheung, 1983). Contractual or institutional arrangements, normally referred to as governance structures, are “the institutional matrix within which transactions are negotiated and executed” (Williamson, 1979, p. 239). Drawing upon the legal concept of generic contracting forms (Macneil, 1974, 1978) and relating them to the nature of transactions, Williamson (1979) matched the transactions to the contracts.
By so doing, he provided a framework ‘to assess the efficacy of alternative means of contracting’ (Williamson, 1990, p. 8) and illustrated which governance structure (including the firm, the mark and intermediate contracts) has the lowest cost under given circumstances. Despite the criticisms (some are highly theoretical and sometimes obscure or even mistaken on what they are criticising) (e.g., Conner & Prahalad, 1996; Ghoshal & Moran, 1996), empirical studies show Williamson-type of transaction cost-comparative contracting approach has more predictive power than other major IB theories such as resource-based view (RBV) in informing the choice between different forms of governance structures for organising firm interdependence (e.g., Hennart, 1991; Reddy, Osborn, & Hennart, 2002). Much of the RBV (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984) and its closely-related competence perspective (Foss, 1996; Knudsen, 1995) entail ex post rationalizations for success and has been remiss in predictive respects (Williamson, 1999). This article therefore employs TCE as an analytical framework for examining the choice of international subcontracting.
the concept oF InternAtIonAl subcontrActIng There is a great deal of ambiguity on the definition of subcontracting in the existing literature (Hovi, 1994). However, there are some essential features about the international subcontracting as a form of investment. First, international subcontracting involves two independent units located in different countries, reflecting a type of cross-border interfirm relationship. But the fact that a firm is legally independent does not necessarily mean that it will be economically independent. The relationship between subcontracting parties is defined as “quasi-integration,” in which subcontractors from less developed countries are often dependent on principals from developed countries, where the
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demand of subcontracting is derived (Germidis, 1980). Second, in a subcontracting arrangement, the subcontractor provides the principal with products or services on agreed terms and conditions set by the principal, where certain business activities such as marketing or product design may not be carried out by the subcontractor (Halbach, 1989). The goods produced are required to conform to specifications intended for a definite principal, making it impossible or very difficult to sell them to other customers (Germidis, 1980). Third, the principal usually provides specialised physical equipment and/or ongoing technical assistance to the subcontractor to assure product specifications and quality (Sharpston, 1977). The enforcement mechanisms are usually between principals and subcontractors themselves and no third party oversees the execution of the contract. The bond linking them together is thus out of market (Germidis, 1980). Consequently, a significant level of transaction-specific investment has to be undertaken both by subcontractors to meet the specifications set by principals and by principals to ensure the performance of subcontractors. These basic characteristics reveal that the nature of international subcontracting conforms to Williamson’s (1979, 1985) notion of a relational contract with a bilateral governance structure. Casson (1987) identified subcontracting as a distinctive type of intermediate contractual arrangement, an alternative to the vertically integrated multinational enterprises (MNEs). The lack of a clear definition of subcontracting in the existing literature is due to the lack of theoretical underpinning. Based on the essential features identified above and in line with Williamson-type of transaction costscomparative institutional framework, this paper defines international subcontracting as a type of long-term relational contract between buyers and suppliers in different countries that aims to facilitate the sourcing of products or components with buyer-specific requirements. This definition distinguishes international subcontracting from
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common arm’s length industrial outsourcing and in-house supply within an MNE’s network, providing the basis for conducting an analysis of the choice of international subcontracting over its alternatives and for developing some testable propositions regarding such a choice.
the choIce oF InternAtIonAl subcontrActIng The previous conceptualization allows us to examine the choice of international subcontracting as an intermediate relational contract, lying between arm’s length outsourcing arrangement and internalised MNEs, and to develop some testable propositions based on the comparison between international subcontracting and its market and hierarchy alternatives.
the choice of subcontracting over outsourcing In transaction cost framework, the choice of a relational contracting form is made when transactions between buyers and suppliers are characterised by mixed asset specificity, recurrent exchange and a low degree of uncertainty (Williamson, 1979, 1985). Central to the framework is the concept of asset specificity (Williamson, 1975). Also labelled transaction/ relationship-specific assets or dedicated assets (e.g., Dyer, 1997; Dyer & Singh, 1998; Dyer & Nobeoka, 2000), asset-specificity refers to durable human and physical investments undertaken to support particular transactions (Williamson, 1985) and cannot be redeployed to another transaction without some loss in the productivity of the asset or some increase in the costs in adapting the asset in the new transaction (Besanko, Dranove, & Shanley, 2004). In a buyer-supplier exchange relationship, relationship-specific investments are nonfungible signals of commitment that create economic losses if the relationship is
Strategic Management of International Subcontracting
prematurely terminated (Jap & Anderson, 2003). The requirement for transaction or relationshipspecific investments creates potential costs in the market execution of transactions. When the asset specificity feature involved in transactions is low, buyers and suppliers keep their relationship at arm’s length. A common industrial outsourcing activity refers to such market-based transaction of standard products or components which involve little transaction-specific investment. In outsourcing, both buyers and suppliers capitalise on their comparative advantages of trading and realising economies of specialization (Sharpston, 1977). While outsourcing may involve a long-term relationship between buyers and suppliers, it does not require the support of long-term contract. The products and components in common outsourcing activities are non-specific and there are many buyers and sellers. Some buyers and suppliers may be engaged in the trading of standard goods for a long time. But they are not bonded by contracts requirement and each side can switch to other trading parties easily due to the low asset specificity in their trading relationship. When products or components contain some degree of product specifications and are not “off the shelf,” they can no longer be bought on the spot market. Buyers look for long-term contractual arrangements to assure the supply of the specialised inputs and products. As previously defined, subcontracting is a kind of long-term contract that aims to facilitate the sourcing of products or components with buyer-specific requirements. This clarification is important because the term “subcontracting” is often misunderstood as an exclusive portrait of buyer-supplier relationship and therefore the distinction between common outsourcing and subcontracting is blurred (Wang, 2007). As such, asset specificity is an important reason for making long-term contracts (Kay, 1995), explaining the choice of subcontracting over outsourcing. To protect themselves from exposure to transaction costs arising from making
asset-specific investments, both parties involved in subcontracting relations have incentives to form a long-term relational contract. Thus, we suggest: Proposition 1: International subcontracting is chosen over outsourcing when there is a high level of asset-specificity in the purchasing/supplying transaction.
The Choice of Subcontracting over Vertical Integration The economic rationale of international subcontracting is to realise economies of specialization through externalising non-core production activities to achieve cost advantage (Sharpston, 1977). But firms can acquire existing low-cost suppliers in developing countries as their subsidiaries or set up plants in low-cost regions and relocate non-core activities to the new ventures. On the other hand, if the aim is to access technology expertise or other proprietary know-how held by suppliers, the buyer firm could still acquire them through equity integration with suppliers. Therefore, other than achieving production cost economies and acquiring complementary assets, there must be additional reasons for firms to choose subcontracting rather than vertical integration through acquisitions or greenfield. Engaging vertical integration through acquisition to exploit low production costs or to access complementary assets overseas would entail significant transaction and information costs, which justify the choice of subcontracting. First, the desired assets of the acquied firm are hard to disentangle from the non-desired ones, which impose a high cost on acquiring suppliers (Hennart, 1988). Under this circumstance, purchasing the target overseas firm would force the buyer to enter unrelated fields or to expand suddenly in size, with the attendant management problems (Hennart, 1991). This cost is particularly high for firms that rely mostly on cost rather than differentation to survive. Thus, we suggest:
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Proposition 2: International subcontracting is chosen over acquisition of overseas suppliers when the desired assets of the acquied firm are hard to disentangle from the non-desired ones.
Proposition 4: International subcontracting is chosen over acquisition of overseas suppliers when the pre-acquisition costs in assessing the value of the target firm are high.
Second, management costs after the acquistion make subcontracting preferrable. Acquisition of a foreign supplier means the buyer also takes over an existing labor force and a well-established administrative structure. Considerable difficulties might be expected by the buyer in managing the foreign supplier firm that has cultivated its own organizational routines and corporate culture, in addition to the nationial culture distance (Hennart & Park, 1993). Hence, a subcontracting arrangement may be desirable as it avoids the post-acquisition management costs by leaving the management of supplier firm to the overseas subcontractor itself. Thus:
Fourth, high exit barriers in an equity relationship may jepodize the flexibility valued by the firms. In contrast, a subcontracting arrangement allows the buyers to rescind the contractual relationship with suppliers at a relatively low exit cost. In addition, impediments to acquistions arising from governmental and institutional barriers are not uncommon. Many developing countries discourage and restrict the foreign equity control of local companies while the pervasive anti-trust legislation in developed countries also acts against acquisitions (Wang, 2007). We therefore suggest:
Proposition 3: International subcontracting is chosen over acquisition of overseas suppliers when the post-acquisition management costs are expected to be high. Third, information costs in assessing the value of the target firm inhibit the acquisition (Hennart & Park., 1993). Buyers may not acquire overseas suppliers for the purpose of establishing lowcost supply bases but for the potential gain from complementary assets held by suppliers. But it may be difficult to assess the true value of these complementary assets due to the intrinsic bounded rationality constraint and the expectation that overseas suppliers may opportunistically exaggerate the value of their assets. A subcontracting arrangement retains the possibility for principals to gather information on the value of overseas subcontractors’ complementary assets without financial exposure in an equity relationship, and may be used as a transitional arrangement for future acquisition of the overseas supplier. Hence, we propose:
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Proposition 5: International subcontracting is chosen over acquisition of overseas suppliers when there are institutional barriers to acquisition When making the choice between subcontracting and building new plants (greenfield) in low-cost countries, the following factors need to be considered. First, relocating low value-added operations to newly established greenfield plants may achieve a similar level of cost reduction in labor and other production factors. But relocation to another country through greenfields requires additional knowledge in managing labor and production in an unfamilar environment, and becoming acquainted with the specific local cultures and environment is a time-consuming process (Bell, 1996). Greenfield investments may be necessary for companies that aim to develop foreign markets for their products, but not for firms that simply seek a low cost supply base overseas. When the cost of learning cannot be recovered quickly, a subcontracting arrangement rather than a greenfied will be sufficient to achieve the objective of cost reduction. Second, even when the buyer firm plans to develop the foreign market in the future, subcontracting may still be a preferred entry mode as
Strategic Management of International Subcontracting
it allows the firm to acquire knowledge of local market before the subcontracting arrangement is replaced by a wholly-owned subsidiary (Kogut, 1988). In this case, the choice of subcontracting economises on the cost of acquiring local knowledge, allowing the prospective entrant to test the potential of the local market while exploiting the foreign country as a low cost supply base in the mean time. Hence: Proposition 6: International subcontracting is chosen over greenfield when there are sigificant costs involved in learning how to operate greenfield plants overseas
the rAnge oF subcontrActIng relAtIonshIp Transaction-specific investments bond principals and subcontractors in a relational long term supply arrangement, but it also leaves room for parties to bargain, shirk, or break the relationship for shortterm gains (Williamson, 1985). The so-called hold-up problem often arises when one party in an exchange relationship commits transactionspecific or relationship-specific investments (Wathne & Heide, 2000). The asymmetric investments in specific assets allow a firm to behave opportunistically to increase its short-term, unilateral gains in a dyadic channel relationship (Brown, Dev, & Lee, 2000). In a subcontracting relationship, whether and how to preserve the contractual arrangement is primarily a matter of the nature of the relationship between the principal and the subcontractor concerned. There is a whole range of international subcontracting relationships in terms of the degree of interdependence and bargaining power between principals and subcontractors. The perceived dependence and bargaining power are the function of the combination of many factors, including the degree of asset-specific investments, frequency of transactions and uncertainty (Williamson, 1979,
1985). Variations along those transactional dimensions determine the degree of interdependence and bargaining power between subcontracting parties, which in turn constitute a variety of subcontracting relationships. This section not only examines a range of subcontracting relationships but also their corresponding governance mechanisms. In studying how firms mitigate opportunism in marketing channels, Brown et al. (2000) identified three specific mechanisms: (1) ownership, (2) investment in transaction-specific assets, and (3) development of relational exchange norms such as role integrity, flexibility, and long-term orientation. As ownership does not apply to the governance of subcontracting relationship, which is essentially a commercial exchange, we focus on the efficacy of the other two mechanisms in preserving and managing subcontracting relationships. First, a loose subcontracting relationship denotes a low interdependence degree between principals and subcontractors, the switching cost for both parties is low as neither side makes significant asset-specific investments. The principal does not rely on a particular subcontractor or subcontractors for supply and the subcontractor also has a broad customer base. The principal only need to provide minimal technical assistance to the subcontractor and the subcontractor does not need sophisticated machinery and skills to perform subcontracting jobs. The frequency of orders has little impact on the relationship since both sides are loosely tied to each other and the exit costs are low for both sides when facing market demand fluctuations. Examples abound in commercial subcontracting (Gereffi, 1993). In this case, neither the principal nor the subcontractor has strong incentive to maintain a long-term association with each other. Consequently, neither investment in transaction-specific assets nor development of relational exchange norms will be necessary. Second, a subcontractor is more dependent when the principal has stronger bargaining power.
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This occurs when asset-specific investments made by the parties are asymmetric. The buyer commitments are usually confined to specific physical capital, including specific dies, moulds and tooling for the manufacture of a contracted product (Nishiguchi, 1994). The subcontractor, on the other hand, has to invest in special-purpose equipment, employ skilled workers and engineers who are devoted to customer-specific operation; expand production capacity to meet the principal’s requirement. The industry structure is such that many suppliers from developing countries are competing for relatively few buyers from developed countries. It is difficult for a subcontractor to diversify its customer-base and its sales revenue. To secure long-term orders from the principal, the subcontractor has to invest a greater degree of specific assets, which in turn leave them vulnerable to the potential hold-up by the principal. However, such an unbalanced subcontracting relationship may not be unstable. Although buyers from developed countries have much leverage among many suppliers in developing countries, stable long-term relationships with their suppliers can enhance performance certainty by reducing the costs in seeking suitable overseas suppliers, in drawing up multiple contracts, and in monitoring multiple suppliers in different countries. All of these benefits would be lost in a frequent shift of suppliers. Opportunism by one party can erode the long-term gains potentially accruing to both parties in a dyadic buyer-supplier relationship (Brown et al., 2000). These are also the reasons why arm’s length outsourcing may involve a long-term relationship. But the higher degree of asset specificity points to a more inter-locked pattern of relationship in subcontracting than in outsourcing. Both the principal and the subcontractor have incentives to maintain the long-term relationships. Consequently, both sides may invest in transaction-specific assets and develop relational exchange norms in order to consolidate the relationship.
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Third, situations where a principal is more dependent on a subcontractor are less common. They happen when the overseas subcontractor holds know-how crucial to the principal’s production cycle. Some once-off and occasional large purchasing orders that involve sophisticated work such as in aerospace (Esposito & Storto, 1994) and shipbuilding industries (Smitka, 1991) might qualify as examples, since they require highly specialized expertise and more importantly there are more buyers than suppliers in the global market. Subcontractors enjoy stronger bargaining power when they are not merely producing certain products or components, but serve as intermediates for transferring knowledge of the local market to foreign buyer firms. In this case, a local subcontractor’s bargaining power stem not from the transaction characteristics, but from the foreign buyer’s strategic purpose in developing the local market with the help of the local supplier (Wang, 2007). Nevertheless, the subcontractor may be unaware of the principal’s strategic motive and fail to materialise its power advantage in dealing with the foreign principal firm. Fourth, when the principal and the subcontractor are mutually and heavily dependent on each other, the demand for equal collaboration is high. Subcontracting of this type requires highly specialized investments from both sides and the relationship is balanced (Wang, 2007). In such a subcontracting relationship, the principal typically contracts out the assembly of a final product. The principal commitments contain a high degree of asset specificity since complete assembly requires the highest integration of contract-specific physical facilities, including dedicated assembly lines, tooling and testing equipment (Nishiguchi, 1994). Moreover, the principal will incur human assetspecific investments in the form of managerial training and technical assistance to the overseas subcontractor to attain the production specifications (Sharpston, 1977). For subcontractors, endproduct assembly for a particular overseas buyer will require specific investments both in human
Strategic Management of International Subcontracting
capital (e.g., employ highly skilled workers or provide special training) and in physical assets (e.g., purchase specialised machinery and equipment). Therefore, principals and subcontractors commit a similar level of asset-specific investments, which support an equal collaborative relationship characterised by common interest, mutual obligations, and trust (Morris & Imrie, 1992; Smitka, 1991). Under this circumstance, the principal and the subcontractor rely on both mechanisms to govern their ongoing exchanges and mitigate opportunism: investments in transaction-specific assets that create a mutual hold-up situation and development of shared relational exchange norms such as role integrity and harmonious conflict resolution (Brown et al., 2000).
conclusIon International subcontracting is often studied as an important instrument for industrial development at the policy level. Few studies have looked at
the phenomenon from international business and strategic management perspectives. In line with Williamson-type of transaction costcomparative contracting approach, the article defines international subcontracting as a type of long-term relational contract between buyers and suppliers in different countries, aiming to facilitate the sourcing of products or components with buyer-specific requirements. Building rigorously on the transaction cost theory, the paper develops an analytical framework to investigate the choice of international subcontracting over its market (arm’s length outsourcing) and hierarchy alternatives (vertical integrated MNEs). The comparison between subcontracting and its alternatives provides both prescriptive and pridictive value for international managers who face the strategic choice between outsourcing, subcontracting and vertical integration when organizing the supply chain across national borders. Table 1 summarizes the major transaction characteristics, advantages, and distantages of the different forms of supply chain organization.
Table 1. Outsourcing, subcontracting, and vertical integration Transaction
Advantages
Disadvantages
When to use it
Better for realizing
Unstable exchange
Most suitable for
economies of
relationship due to low
facilitating trading of
specialization and
switching costs
standard goods and
characteristics Outsourcing
Arm’s length contract
comparative advantages
Subcontracting
services
Relational contract with
Stable long-term
High switching costs
Most suitable for
bi-lateral governance
relationship between
to alternative trading
facilitating purchasing and
particular buyers
partners due to higher
supplying of goods and
(principals) and suppliers
degree of asset-specific
services containing some
(subcontractors)
investments
degree of asset-specific investments
Ve r t i c a l
Relational contract with
Complete hierarchical
High agency costs
Most suitable for
integration
unified governance
control over the supply of
in incentivising and
organizing purchasing
goods and services within
managing in-house
and supplying of highly
the boundary of the firm
suppliers
idiosyncratic goods and services
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Based on the framework, we developed a set of testable propositions that can be used not only for future empirical research but also to aid managers in making strategic choice between outsourcing, long term subcontracting, and vertical integration (Greenfield or acquisition) for organizing supply chain across borders. For example, we suggest that international subcontracting should be chosen over outsourcing when there is a higher level of asset-specificity in the purchasing/supplying transaction. It should be chosen over greenfield when there are sigificant costs involved in learning how to operate greenfield plants overseas. When choosing between international subcontracting and acquisition of overseas suppliers, managers should consider a range of factors, including how difficult it is to disentangle the desired assets of the acquied firm from the non-desired ones, how costly it is to assess the true market value of the acquisition targets ex ante and in managing the acquired firms ex post. The framework also allows us to examine the specific nature of a range of subcontracting relationships. We identify four types of subcontracting relationships in terms of the degree of interdependence and bargaining power between principals and subcontractors. We demonstrate how the variations along transactional dimensions, especially asset-specific investments by the principal and the subcontractor, shape the different dyadic exchange relationship. We also argue that the two major governance mechanisms, investments in transaction-specific assets and development of relational exchange norms, have different efficacy in preserving and managing a range of subcontracting relationships. The paper thus offers a conceptually coherent foundation for researchers and managers to analyse international subcontracting as a form of international business organization at the firm level, complementing the existing literature’s emphasis on studying the topic as a macro-economic phenomenon.
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Macneil, I. R. (1974). The many futures of contract. Southern California Law Review, 47, 691-738. Morris, J., & Imrie, R. (1992). Transforming buyer-supplier relations: Japanese-style industrial practices in western context. London: Macmillan. Nishiguchi, T. (1994). Strategic industrial sourcing: The Japanese advantage. New York: Oxford University Press. Peteraf, M. A. (1993). The cornerstone of competitive advantages: A resource-based view. Strategic Management Journal, 14, 179-191. Reddy, S. B., Osborn, R. N., & Hennart, J. F. (2002). The prevalence of equity and non-equity cross-border linkages: Japanese investments and alliances in the United States. Organization Studies, 23(5), 759-780.
Smitka, M. J. (1991). Competitive ties: Subcontracting in Japanese automotive industry. New York: Columbia University Press. Wang, Y. (2007). To internationally subcontract or not. Monash Business Review, 3(1), 48-49. Wathne, K. H., & Heide, J. B. (2000). Opportunism in interfirm relationships: Forms, outcomes, and solutions. Journal of Marketing, 64, 36-51. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171-180. Williamson, O. E. (1999). Strategy research: Governance and competence perspectives. Strategic Management Journal, 20(12), 10871108. Williamson, O. E. (1990). The firm as a nexus of treaties: An introduction. In M. Aoki, B. Gustafsson, & O. E. Williamson (Eds.), The firm as a nexus of treaties (pp. 1-25), London: Sage.
Riedel, J. (1975). The nature and determinants of export-oriented direct foreign investment in a developing country: A case study of Taiwan. Weltirtschaftliches Archiv, 3(3), 505-528.
Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.
Rogerson, C. M. (1995). Looking to the Pacific Rim: Production subcontracting and small-scale industry in South Africa. International Small Business Journal, 13(3), 65-79.
Williamson, O. E. (1979). Transaction cost economics: The governance of contractual relations. The Journal of Law and Economics, 12(2), 233-262.
Rugman, A. M. (1981). Inside the multinationals: The economics of internal markets. New York: Columbia University Press.
Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press.
This work was previously published in International Journal of Information Systems and Supply Chain Managementm Vol. 1, Issue 3, edited by J. Wang, pp. 21-32, copyright 2008 by IGI Publishing (an imprint of IGI Global).
1934
1935
Chapter 6.17
Rough-Cut Cost Estimation in a Capacitated Environment Mark Eklin, Technion Israel Institute of Technology, Israel Yohanan Arzi ORT Braude College, Israel Avraham Shtub Israel Institute of Technology, Israel
Introduction Nowadays, in the worldwide competitive market, a company’s prosperity is strongly dependent on its ability to accurately estimate product costs. This is especially vital for firms operating in a make-to-order environment. For such firms, a small error in a price quote, resulting from erroneous product cost estimation, may make the difference between the acceptance and loss of a contract. During the last decade, the relative weight of direct labor costs in manufacturing has dramatically diminished, while the relative weight of indirect costs has increased (Gunasekaran, Marri, & Yusuf, 1999). Therefore, allocating indirect costs to products, without taking into account the shop floor capacity, may lead to erroneous
estimations. Despite this, most of the existing cost-estimating models assume unlimited shop floor capacity. There are many such models in the literature. These models use information about the products, materials, and production processes. Common approaches are the following. •
Parametric cost estimation models that are based on the following Regression analysis (Cochran, 1976a, 1976b; Ross, 2002) Fuzzy logic (Jahan-Shahi, Shayan, & Masood, 2001; Mason & Kahn, 1997) Minimization Euclidean distance between the estimated cost and its actual value (Dean, 1989)
Rough-Cut Cost Estimation in a Capacitated Environment
Neural networks (Bode, 2000; Lin & Chang, 2002; Shtub & Versano, 1999; Smith & Mason, 1997) Bottom-up cost estimation models, in which the total cost is the sum of detailed components (Rad & Cioffi, 2004; Son, 1991; Stewart, 1982) Group-technology cost estimation models that use the similarity between products from the same family (Geiger & Dilts, 1996; Jung, 2002; Ten Brinke, Lutters, Streppel, & Kals, 2000) Hybrid cost estimation models that combine some of the models described above (BenArieh, 2000; Sonmez, 2004)
•
•
•
Parametric, bottom-up, group–technology, and hybrid cost estimation models use only information about the product, the materials it is made of, and the production processes required for its manufacture. None of the above cost estimation methods takes into account the available capacity on the shop floor. The assumption is that the available capacity is sufficient. However, in reality, one must deal with finite capacity and dynamic workloads, which may change over time. We assume that the product total cost is a function of the load on the shop floor (which is made up of the orders waiting to be manufactured or actually being manufactured in a certain time period). Specifically, we assume that the cost of producing an order when the load is high is different from the cost of the same order when the load is low and most of the resources are idle. Therefore, ignoring the load on the available capacity distorts the product cost estimation and may lead to wrong decision making. In recent years, several researchers suggested estimation models that consider limited capacity. However, in spite of the depth of this research, most of the models focus on pricing and fit specific environments, such as monopolistic firms. These models are not general enough as they do not explain the relationship between the product
1936
costs and the workload. Banker, Hwang, and Mishra (2002) analyzed the issue of optimal product costing and pricing of a monopolistic firm that must commit, on a long-term basis, for capacity resources. Falco, Nenni, and Schiraldi (2001) developed a cost accounting model based on the plant productive capacity analysis for line balancing. They tested their model in a chemical-pharmaceutical plant. R. Balakrishnan and Sivaramakrishnan (2001) tried to estimate the economic loss of planning capacity on the basis of limited information and of delaying pricing until more precise information about demand becomes available. Feldman and Shtub (2006) developed a detailed cost estimation model that performs capacity planning based on a detailed schedule of work orders assuming no outsourcing, no machine failures, and no product defects. Outsourcing cost is an important component of the total product cost. Firms use outsourcing as a potential way to reduce costs or as a solution for limited capacity. Product cost depends on a make-vs.-buy decision. Cost trade-off is the main approach to a make-vs.-buy decision (Balakrishnan, 1994; Bassett, 1991; Ellis, 1992, 1993; Levy & Sarnat, 1976; Meijboom, 1986; Padillo-Perez & Diaby, 1999; Poppo, 1998; Raunick & Fisher, 1972). In addition, strategic perspectives, like competitive advantage and risk of dependence on suppliers, are usually analyzed (Baines, Whitney, & Fine, 1999; McIvor, Humphreys, & McAleer, 1997; Venkatesan, 1992; Welch & Nayak, 1992). There are several other areas, in addition to manufacturing, that deal with make-vs.-buy problems. Berman and Ashrafi (1993) and Helander, Zhao, and Ohlsson (1998) presented the integer programming (IP) optimization models to facilitate make-vs.-buy decisions in component-based software development. Baker and Hubbard (2003) developed a model of asset ownership in trucking. Fowler (2004) discussed the issue of building components as opposed to buying in the development
Rough-Cut Cost Estimation in a Capacitated Environment
of new products and systems. Kurokawa (1997) examined key factors that affect make-or-buy decisions in research and development (R&D) settings: whether technology is developed in-house or acquired from external sources (e.g., through licensing or R&D contracts). This article presents a deterministic model for product unit cost estimation in a capacitated make-to-order firm, which may outsource its surplus work, and assumes machine failures and product defects. The product unit cost is estimated by taking into account shop rough-cut capacity planning and by determining which operations to outsource.
•
•
• •
• •
mAJor AssumptIons In this work, we develop a model that explains the relationship between product cost and workload. The model is based on the following assumptions: • • • •
• •
• •
The firm is operating in a make-to-order environment. The planning horizon is fixed and known. The shop floor consists of several workstations. Each workstation consists of several capacitated machines of one or more types and is operated by at least one worker. The reliability of each machine is known. Machines of a specific type are assigned to a single workstation only. Workers who are assigned to a regular hourly shift are paid for the entire shift, even if they are idle for part of the shift or the whole shift. Workers can be assigned to overtime only when machines are planned to be busy. Workers get paid for extra hours even when the machine is unavailable.
The shop produces several products. The total demand for each product for the planning horizon is known. The products are batched (e.g., by a planning system using lot-sizing rules). The number of units in each batch for the planning horizon is known. Any batch may be outsourced to subcontractors. Each product has a single production route. The production route consists of several operations. Each operation can be executed on a specific machine type. Setup time between two successive batches on a machine is sequence-independent. No late deliveries are allowed. Outsourcing is used to prevent late deliveries.
model FormulAtIon total cost calculations In our approach, the company’s total cost consists of two components: the shop and the outsourcing costs. The various shop costs are organized hierarchically at three levels: the machine level, workstation level, and shop level. The costs related to the machine level are the machine operational costs, machine maintenance costs, machine insurance costs, and tooling costs. The costs related to the workstation level are direct labor costs (regular and extra hours) and workstation overhead costs. The costs related to the shop level are material costs and the various indirect costs such as for the building, computer systems, transportation, indirect labor, and indirect materials. The total shop cost is calculated bottom-up, from the machine level to the shop level. The cost of each level is the summation of all costs in the lower levels and all the costs related to its own level. After having obtained the shop cost, the total cost is then calculated by adding the outsourcing cost to the total shop cost.
1937
Rough-Cut Cost Estimation in a Capacitated Environment
Let tik and sik denote the run time per unit and the setup time per batch when processing operation i, (i = 1,..., I) on machine type k, (k = 1,..., K), respectively; nbm be the number of units in batch b, (b = 1,..., B) of product m; and Y kmi be the total yield of product m on machine type k resulting from all losses of operation i and all its successive operations (percentages). Let also ximbk be an integer decision variable indicating that operation i of product m of batch b, processed on machine type k, is scheduled either for processing in the shop (ximbk =1) or for outsourcing (ximbk =0). Then the scheduled capacity, machine , on machine type k for processing product Okm m is obtained by summing setup times and total run times of all in-house operations required for processing the entire demand of product m on machine type k. B I n t machine = ∑∑ ximbk sik + bm ik Okm Ykmi b =1 i =1
(1)
In Equation 1, we obtained the run time of an operation by multiplying the run time per unit, tik, by the number of units, nbm, and dividing it by the yield of the operation, Y kmi. The total scheduled capacity on machine k, Okmachine, is then obtained by summing up all the scheduled capacity on machine type k over all products:
Let ckO and ckMT denote the operational and maintenance costs per working hour related to a machine of type k respectively, and cikT be the tooling costs per product unit related to operation i processed in machine type k. Also let ckI denote the insurance costs of a machine of type k per working day. Then, machine k’s total cost (not including workstation overheads), Ckmachine, is defined as the sum of total in-house operational, maintenance, tooling, and insurance costs for processing the total demand of all products on machine type k: Ckmachine = B
.
m =1
(2)
Let Rkmachine denote the available capacity of machine type k in regular hours (after subtracting stoppages, failures, and repair time). Then, Okmachine, R hours should be scheduled in regular hours,
(
)
Okmachine , R = min Okmachine , Rkmachine ,
and Okmachine, E hours in extra time, Okmachine, E = max(0, Okmachine − Okmachine, R).
1938
I
∑∑∑ ximbk b =1 m =1 i =1
((
)
nbm tik ckO + ckMT + cikT Ykmi
)+ c q T , I k k
(3)
where T denotes the planning horizon in days, nbm the number of units in batch b of product m, and qk the number of machines of type k. In Equation 3, the following parameters have been considered: •
•
M
machine Okmachine = ∑ Okm
M
•
The operational (or maintenance) cost of an operation is a product of operational (or maintenance) cost per working hour, ckO (or ckMT ); operation run time per unit, tik; and the number of units, nbm, divided by the yield of the operation, Y kmi. The tooling cost is a product of tooling cost per unit, cikT , and the number of units divided by the yield. The insurance cost for machines of type k is a product of the insurance costs of a machine of type k per day, ckI ; the length of the planning horizon, T; and the number of machines of type k, qk.
Following the assumption that in each workstation j all the Wj allocated workers are being paid for the entire H regular hours per day during the entire planning horizon of T days, the total regular-hour labor costs in workstation j is c Rj
Rough-Cut Cost Estimation in a Capacitated Environment
TWjH, where c Rj denotes the regular-hour direct labor cost per working hour. Since workers can be assigned to extra hours for busy machines only, the extra-hour direct labor cost in workstation j is
It is to be noticed that Equation 5 assumes that the materials of defective units are reworked. The total outsourcing cost is obtained from C out = ∑∑∑∑ (1 − ximbk ) nbm cikout K
B
M
I
k =1 b =1 m =1 i =1
c Ej W j ∑ Okjmachine , E Ak k
∑q
kj
k
where c Ej denotes the extra-hour direct labor cost per working hour, Okjmachine , E the extra hours that are scheduled, Akthe expected availability of machine type k (in percentages), and qkj the number of machines of type k in workstation j. Besides machine costs and direct labor costs (regular and extra hours), we assume, in the workstation level, additional constant overhead tan t per day. By summing up all four costs c cons j components, we can obtain the total cost of : workstation j, C station j C station = j
∑C k =1
machine kj
+ c Rj TW j H +
c Ej W j ∑ Okjmachine, E Ak k =1 tan t + c cons T j . K
∑q k =1
kj
M
(7)
In order to calculate the total cost C, we need to set the values to the decision variable ximbk that indicates which operations to perform in the shop (ximbk =1) and which to outsource (ximbk =0). It can be done by solving the following integer programming model, which minimizes the total costs:
m =1 b =1
(8)
Okmachine ≤ Lmachine k
(4)
B
C in = ∑ C station + ∑∑ nbm cmDM + c S T j j =1
C = Cin + Cout.
s.t. K
For calculating the total cost of the entire shop, we have to add to the workstation costs the direct material costs and other indirect costs such as the building, computer systems, transportation, indirect workers, and indirect materials. Let cmDM denote the direct material costs of a unit of product m, nbmbe the number of units of product m in batch b, and cS be the total indirect costs per day. Then, the total cost of the entire shop, cin, is calculated by J
where cikout denotes the cost of outsource operation i of product k. Finally, the total cost, C, is obtained by summing up the in-house and outsourcing costs:
MinC
K
(6)
.
(5)
∀k , k = 1,..., K
ximbk = (0, 1),
(9) (10)
where Lmachine denotes the total available capacity of k machine type k (i.e., includes expected machine unavailability) and Okmachine the total scheduled capacity on machine type k (formulated in Equation 2). Equation 9 assures the capacity limitation.
product unit cost calculations The total scheduled capacity, O station , required for jm processing product m on workstation j is obtained by summing up the total scheduled capacity of this product on machine type k over all machine types in the workstation. Hence, K
machine O station = ∑ Okjm jm k =1
,
(11)
1939
Rough-Cut Cost Estimation in a Capacitated Environment
machine where Okjm denotes the scheduled capacity on machine type k in workstation j for processing product m. Similarly, the scheduled capacity required for processing product m in the entire shop, Om, is obtained from
C =C
M
∑d m =1
m
.
(17)
model AnAlysIs
J
Om = ∑ O station jm
.
j =1
(12)
Following Equation 3, the cost of product m machine on machine type k, Ckm , is machine Ckm = B
I
∑∑ ximbk
(
nbm tik (ckO + ckMT )+ cikT
b =1 i =1
Ykmi
)+ c q T O I k
machine km machine k
k
O
.
In order to analyze the effect of workload (demand) on the product unit cost, Cm(dm), a specific product (m = 1) with demand dm ≥ 0 is considered, and a number of simplified assumptions are made (a more realistic situation, without these assumptions, was tested experimentally as described in the section titled “Experimentation”): •
(13) • Similarly, following Equations 4 and 5, the marginal cost of product m at workstation j is •
MC station = jm O station jm K
∑O k =1
machine kj
R K machine , E E Ak c j TW j H + c j W j ∑ Okj k =1
K
∑q k =1
kj
cons tan t T + cj
,
(14)
and the marginal cost of product m at the shop level is B
MCm = ∑ nbm cmDM + b =1
Om cST machine ∑ Ok k
• .
(15)
Finally, product m’s unit cost is obtained by dividing the sum of the machine, marginal station, marginal shop, and outsourcing costs by the demand dm for the product m. Hence, Cm = K
∑C k =1
+ ∑ MC station + MCm + ∑∑∑ (1 − ximbk )nbm Cikout jm J
machine km
K
j =1
B
I
k =1 b =1 i =1
dm
Let d1a and d1b > d1a be the maximal demand of product 1 that can be produced in regular hours (with no extra hours or outsourcing) and in both regular and extra hours (but with no outsourcing), respectively. Then the following apply: a.
1
,
(16)
and the average product unit cost over all products, C , is obtained by dividing the total cost, C (Equation 7), by the total demand:
1940
•
The demand of all other products m ≠ 1 is constant. Changes in the demand of product 1 do not cause any change in the cost allocation of all other products. The ratio between the processing time of product 1 and free regular-hour capacity is an integer number, which is equal for all types of machines. The ratio between the processing time of product 1 and free extra-hour capacity is an integer number, which is equal for all types of machines. It is cheaper to produce a product in-house (either in regular or extra time) than to outsource it.
C1(d1a) is the minimal product 1 unit cost for 0 < d1 ≤ d1a. For this range, as the demand increases, the constant costs and the direct labor costs (which in this situation are actually constant) are divided between more units and therefore product unit cost is reduced.
Rough-Cut Cost Estimation in a Capacitated Environment
b.
c.
C1(d1b) is the minimal product 1 unit cost for d1 ≥ d1b. When demand reaches the shop’s available capacity, outsourcing is started and the product unit cost increases with demand. It is, however, assumed that producing in extra hours is cheaper than outsourcing. Obviously, as the constant costs and outsourcing costs increase, the demand effect on product unit cost is greater. For d1a < d1 < d1b, the minimal unit cost depends on an expression F1 a − E1 d 1
so that b for C1 (d1 ) MinC1 (d1 ) = C1 (d1a ), C (d1b ) for for C1 (d1a )
F1 > E1 d1a F1 = E 1 d1a F1 < E1 d1a ,
where F1 is the product 1’s total cost when the demand is equal to d1a, and E1 is the cost for producing a unit in extra hours when demand is in the interval d1a < d1 < d1b. Proof: Let d1c be the demand of product 1, where d1a + g, g>0. Then, C1 (d1a )− C1 (d1c ) =
F1 F1 + gE1 − = d1a d1a + g gF1 gE − a 1 = a a d1 + g d1 (d1 + g ) g F1 a − E1 d + g d1 . a 1
(18)
From Equation 18, it is easy to see that for any a
d1c in the interval (d1 , d1b), the following apply:
•
F1
If d a < E1, C1(d1a) < C1(d1c) ⇒ C1(d1a) is the 1 minimum.
• •
F1
If d a = E1, C1(d1a) = C1(d1c) ⇒ all C1(d1c) values 1 in the interval d1a < d1c < d1b are equal. F1 If d a > E1, C1(d1a) > C1(d1c) and the difference 1 between C1(d1a) and C1(d1c) is increasing with g ⇒ C1(d1b) as the minimum.
usIng the model A shop manager would use the model on a “rolling horizon” basis. The model’s ability to calculate the unit cost of each product in the shop instantly makes it a tool for generating a new production plan (i.e., the number of units of each product assigned to be produced in the shop) whenever one or more new jobs are added in the planning horizon. In addition, a shop manager could use the model for pricing a job. In spite of the simplifying assumptions and the model’s simplicity, it can be used by a shop manager for evaluating important rules of thumb: “Once you decide, that for a specific product, using extra hours is more profitable than outsourcing— this decision will be correct for every overload—so do your best to increase potential of extra hours in case of an increase in demand of the product.”
experimentation In order to get some realistic insight on the effect of the workload, shop size, and product mix on the product unit cost, a simulation study was conducted. Nine different basic shop configurations were tested. The nine configurations are different in their number of workstations (three, six, or nine) and their number of products (four, six, or eight). For each one of the nine basic configurations, five different sets of parameters were randomly determined. So, a total of 45 different configurations were tested. The five sets were determined by sampling the parameters from random distributions as follows:
1941
Rough-Cut Cost Estimation in a Capacitated Environment
• • • • • • • •
• • • •
Number of machine types in each workstation: Uniform (1, 4) Number of machines of each type: Uniform (1, 3) Number of batches of each product: Uniform (1, 4) Number of operations for producing each product: Uniform (1, 9) Mean times between failures: Uniform (16, 60; hours) Mean times to repair: Uniform (1, 4; hours) Number of units in each batch: Uniform (10, 30) Processing times were first sampled randomly from a uniform (1, 5) distribution and then normalized to meet the desired workloads Operation setup times: Uniform (1, 3; hours) Yield of each operation: Uniform (0.8, 1) Ratio between extra- and regular-hour costs: Uniform (1.25, 1.4) Ratio between outsourcing and total shop cost for each operation: Uniform (1.1, 1.5)
All other parameters were set to be constant and identical to all the 45 configurations (values are available from the authors). To each one of the 45 configurations, 10 workload levels were fitted. First, processing times were adjusted to a workload of about 1 (100% of the available capacity including extra hours). Then, nine other workload levels, ranging from 0.5 to 5, were set by multiplying the number of units in each batch by factors of 0.5, 0.6, 0.7, 0.8, 0.9, 2, 3, 4, and 5. For each configuration, machines were loaded in accordance with the demand, processing routes, and capacities. Obviously, operations were outsourced for workloads that are greater than 1 only. For these workload levels, xmibk values were set optimally by solving the model in Equations 8 to 10. After loading, product unit costs were calculated as described in the third section.
model Implementation, experimental run time, and its reduction The model was implemented in ILOG OPL Studio TM (optimization software). All problem instances were run on a 900-MHz AMD Duron TM processor and 256 MB of RAM.
Rough-Cut Cost Estimation in a Capacitated Environment
Experimental run time for a sample replication of nine basic shop configurations was measured. Figure 1 presents the run time as a function of the number of the decision variables xmibk. We can see that the run time increases exponentially with the number of decision variables. So, it is very difficult to solve a real-size problem in a reasonable amount of time. The reason is that for the proposed model, we need to solve a nonlinear integer problem. In order to reduce run time, the problem can be modified without loss of optimality into a linear integer problem. Define Okmachine, E (the hours that are scheduled in extra hours) as a variable. Then the following model is linear: MinC
(19)
s.t. machine k
O
≤ THAk qk + O
machine , E k
Okmachine, E ≤ TEAk qk
∀k , k = 1,..., K
∀k , k = 1,..., K
ximbk = (0, 1) Okmachine, E ≥ 0
(20) (21) (22)
∀k , k = 1,..., K ,
(23)
where H and E denote regular and extra hours per day during the entire planning horizon of T days, respectively, and Okmachine the total scheduled capacity on machine type k (formulated in Equation 2). Equation 20 assures the capacity limitation, and Equation 21 defines the number of available overtime hours. To reduce the run time drastically, the following greedy heuristics is suggested. Step 1: Calculate, for each operation i of batch b that belongs to product m and produces on machine type k, the in-house worthiness measure (IHWM), IHWMimbk, as follows:
Inhouse Variable Cost Ignoring Extra Hours = Ousourcing Cost
=
(n (t (c bm
ik
O k
)
) )
+ ckMT + cikT Ykmi out ik
C
.
(24)
The smaller the IHWMimbk, the bigger the advantage of in-house production. Step 2: Sort all operations by ascending order of the in-house worthiness measure. Step 3: If the free capacity of machine type k is large enough, schedule the operation from the top of the sorted list to machine k; otherwise, outsource it. Step 4: Delete the operation from the list and go to Step 3. Table 1 presents a list of operations, sorted by IHWMimbk, for a typical example of a three-workstation/six-product configuration. The extra-hour to regular-hour costs ratio is 1.25 and the indirect to direct costs ratio is 1.08. The workload level is 2 (200%). The total available capacity of each machine type and the scheduled capacity of each operation are presented, too. According to the in-house worthiness measure heuristic, operations from the top of the list are generally produced in-house. The exception is the operation on machine Type 2. Total available capacity of machine Type 2 (96 hours) is smaller than the scheduled capacity of the operation at the top of the list (124.71 hours), so this operation is outsourced. We can see, in this example, that the heuristic and the optimization results are the same. For each one of the 45 configurations, the following ratio was calculated, assuming that the workload level is 2 (200%): Heuristic Total Cost − Optimal Total Cost Optimal Total Cost .
IHWM imbk =
1943
Rough-Cut Cost Estimation in a Capacitated Environment
Table 1. Data for heuristic illustration (workload is 200%) Station 1 Machine Type 1 Total Available Capacity (hours) Prod.
Batch
Oper.
180.92
IHWM
Station 2
Station 3
Machine Type 2
Machine Type 3
Machine Type 4
96
179.2
78.4 Heuristic
Optimal
Scheduled Capacity (hours)
6
9
10
0.18
-
124.71
-
-
0
0
3
4
6
0.25
-
-
-
21.20
1
1
3
5
6
0.25
-
-
-
21.20
1
1
1
1
1
0.26
44.01
-
-
-
1
1
3
4
5
0.26
-
31.13
-
-
1
1
3
5
5
0.26
-
31.13
-
-
1
1
5
7
8
0.33
87.03
-
-
-
1
1
5
8
8
0.33
44.52
-
-
-
1
1
2
2
3
0.34
-
-
-
73.25
0
0
2
3
3
0.35
-
-
-
37.12
0
0
4
6
7
0.39
-
-
81.81
-
1
1
5
7
9
0.43
117.51
-
-
-
0
0
5
8
9
0.43
59.76
-
-
-
0
0
2
2
2
0.44
-
-
87.02
-
1
1
2
3
2
0.44
-
-
44.51
-
0
0
3
4
4
0.57
-
-
68.98
-
0
0
3
5
4
0.57
-
-
68.98
-
0
0
This ratio indicates the advantage of the optimization model on the in-house worthiness measure heuristic. The average of the ratio, over all 45 configurations, is approximately 4%. Analysis of variance (ANOVA) was performed. For α=0.05, the influence of the number of workstations or the number of products on these ratios was not significant. The conclusion is that the difference between the optimization model and the in-house worthiness measure heuristic does not depend on the shop size.
results Figure 2 presents the results for the Table 1 example. We can see that the product unit cost is typically a concave function of the workload (which is approximately proportional to demand).
1944
ximbk
Results for workloads higher than 1 (when outsourcing is taking place) show that product unit cost does not necessarily increase with the increase in the workload. For example, in Figure 2, the minimal unit cost for Product 4 is obtained for a workload of 4 since Product 2 and 3 were outsourced enabling Product 4 to be processed in regular hours. Similarly, the minimal unit cost of Product 1 is obtained for a workload of 5 since Product 5 was outsourced. Hence, the product unit cost is affected by the current product mix in each planning horizon much more than by the product mix in the long term. Table 2 presents the ximbk values for the make-orbuy problem for the Table 1 example. It shows that jobs are outsourced (0 value) on workload levels 2, 3, 4, and 5 (greater than 100% workload).
Rough-Cut Cost Estimation in a Capacitated Environment
Product unit cost (normalized values)
Figure 2. Product unit costs against workload levels
1.00 0.90 0.80 product 1
0.70
product 2
0.60
product 3
0.50
product 4
0.40
product 6
product 5 average
0.30 0.20 0.10 0.5
0.6
0.7
0.8
0.9 1 2 Workload level
3
4
5
Table 2. Illustration of solution for the make-or-buy problem Workload Level Product
Batch
Operation 0.5
0.6
0.7
0.8
0.9
1
2
3
4
5
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
1
1
1
1
1
1
1
0
0
0
2
2
3
1
1
1
1
1
1
0
0
0
0
2
3
2
1
1
1
1
1
1
0
0
0
1
2
3
3
1
1
1
1
1
1
0
0
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0
3
4
4
1
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1
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1
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4
5
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6
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4
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5
5
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1
1
1
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1
1
1
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5
6
1
1
1
1
1
1
1
1
1
1
4
6
7
1
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1
1
1
1
1
1
1
0
5
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8
1
1
1
1
1
1
1
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5
7
9
1
1
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Rough-Cut Cost Estimation in a Capacitated Environment
Ratio between estimated product unit costs of 0 .5 and 1 workload)
Figure 3. Effect of workload on product unit cost in the 45 configurations
1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00 3-4 3-6
3-8 6-4
6-6 6-8 9-4
9-6 9-8
Basic configurations (no. of workstations - no. of products) For each one of the 45 configurations, the ratio between the average (over all products) product unit costs in workloads of 0.5 and 1 was calculated. This ratio is an indicator of the degree of the effect of the workload on the product unit cost. Figure 3 presents these ratios for all 45 configurations. ANOVA was performed. For α =0.05, the influence of the number of workstations or the number of products on these ratios was not significant. This concludes that for the rough-cut deterministic model, the influence of the workload on the product unit cost does not depend on the shop size.
comparison of the proposed model with traditional costing models In traditional costing, the product cost does not depend on the workload. It is based on the ratio between the total cost of the historical period (without direct material cost) and the scheduled capacity in hours known as the cost per labor hour. Product cost is calculated as the sum of direct material cost and the product of run time and cost per labor hour.
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Figure 4 presents a comparison of the proposed model with the traditional costing approach for the example of Table 1. The unit costs of Products 3 and 6 and the average cost over all six products, calculated by the two methods, are presented. For the calculation of cost per labor hour, we assume that the historical period is the last planning horizon; the workload in that period was 0.8 (80%) and the product mix was similar to the product mix of the current planning horizon. We can see that the traditional costing approach may underestimate (Product 3) or overestimate (Product 6) the unit cost. The average unit cost, calculated by the traditional costing approach, is closer to that of the proposed model than in the cases of Products 3 and 6. It can be explained by the shop (and not station) cost per labor hour assumption. In spite of this, there are still substantial differences between the two methods in low and high workloads.
Influence of Precedence between operations on cost estimation The assumption of the rough-cut deterministic model that there is no precedence between op-
Rough-Cut Cost Estimation in a Capacitated Environment
Product unit cost (normalized values)
Figure 4. Comparison of the proposed model with traditional costing approach 1.00 0.90 0.80 Rough-cut p3
0.70
Rough-cut p6
0.60
Rough-cut av
0.50
Traditional p3 Traditional p6
0.40
Traditional av
0.30 0.20 0.10 0.5
0.6
0.7
0.8
0.9 1 2 Workload level
erations may lead to poor cost estimates. In this section, we try to understand the influence of precedence between operations on cost estimation and we suggest a way to correct the cost estimation of the model. Table 3 presents data of the Table 1 example when the workload level is 1 (100%). Figure 5 displays the product Gantt chart. The Gantt chart consists of a set of four time lines, one for each machine type. The height of the time line indicates the number of machines for the current machine type. For example, because the number of machines of Type 1 is two and of Type 2 is one only, the height of the time line of machine Type 1 is twice the size of machine Type 2. In addition, the time line of machine Type 1 is separated into two sublines. We assume that the workload on machines of the same type is shared equally between the identical machines. Each time line indicates the status of the machines of a specific machine type over time. A ruled frame indicates a machine’s forced idle time while a blank frame with numbers in it indicates operations. The number indicates product (m), batch (b), and operation (i). When two operations have the same product and batch numbers, the
3
4
5
operation with the smaller number precedes. We assume that the dispatching rule is SPT. We can see from the Gantt chart that machine Type 4 operations 223, 346, 356, and 233 must be outsourced while the rough-cut model scheduled it in-house. In order to improve the rough-cut model, we suggest correcting the available capacity by subtracting the estimated forced idle time. Forced idle time may be estimated by the snapshot principle. This principle (Reiman & Wein, 1999) asserts that in a limiting time scale, the vector of machines’ idle time does not change during a work order sojourn in the shop. According to this principle, we assume that forced idle time of machine k during the planning horizon is equal to the forced idle time of the historical period. As an illustration, we assume that the historical period is the last planning horizon, and forced idle time in this period on machine Type 4 was 70 hours. Table 4 presents data for the Table 3 example when the available capacity of machine Type 4 was reduced by 70 hours: from 78.4 hours to 8.4 hours. In this case, the Gantt chart and the improved rough-cut model show the same results. Of course, accuracy of cost estimation strongly
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Rough-Cut Cost Estimation in a Capacitated Environment
Table 3. Data for precedence illustration (workload is 100%) Station 1 Machine Type 1 Total Available Capacity (hours) Prod.
Batch
Oper.
IHWM
1
1
1
0.26
2
2
2
0.44
2
2
3
0.34
2
3
2
0.44
2
3
3
0.35
3
4
4
0.57
3
4
5
0.26
3
4
6
0.25
3
5
4
0.57
3
5
5
0.26
3
5
6
0.25
4
6
7
0.39
180.92
Station 3
Machine Type 3
Machine Type 4
96
179.2
78.4
Scheduled Capacity (hours) 22.51 44.51
Gantt Chart
Rough Cut
1
1
1
1
0
1
1
1
19.06
0
1
1
1
1
1
0
1
1
1
1
1
0
1
1
1
34.99 16.57 11.10 34.99 16.57 11.10 41.40
ximbk
37.12 23.26
5
7
8
0.33
44.52
1
1
5
7
9
0.43
59.76
1
1
5
8
8
0.33
23.26
1
1
5
8
9
0.43
30.88
1
1
6
9
10
0.18
1
1
Figure 5. Gantt chart before correlation
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Station 2
Machine Type 2
62.86
Rough-Cut Cost Estimation in a Capacitated Environment
Table 4. Adjusted available capacity illustration (workload is 100%) Station 1 Machine Type 1 Total Available Capacity (hours) Prod.
Batch
Oper.
IHWM
6
9
10
0.18
3
4
6
0.25
3
5
6
0.25
180.92
Station 2
Station 3
Machine Type 2
Machine Type 3
Machine Type 4
96
179.2
8.4
ximbk
Gantt Chart
Rough Cut
1
1
11.10
0
0
11.10
0
0
Scheduled Capacity (hours) 62.86
1
1
1
0.26
1
1
3
4
5
0.26
22.51 16.57
1
1
3
5
5
0.26
16.57
1
1
5
7
8
0.33
44.52
1
1
5
8
8
0.33
23.26
1
1
2
2
3
0.34
0
0
37.12
2
3
3
0.35
4
6
7
0.39
5
7
9
0.43
59.76 30.88
5
8
9
0.43
2
2
2
0.44
19.06 41.40
44.51
0
0
1
1
1
1
1
1
1
1
2
3
2
0.44
23.26
1
1
3
4
4
0.57
34.99
1
1
3
5
4
0.57
34.99
1
1
Figure 6. Comparison between the rough-cut model and the model that takes into account precedence between operations
Product unit cost (normalized values)
1.10
0.90 Rough-cut p3
0.70
Rough-cut p6 Rough-cut av With Prec p3
0.50
With Prec p6 With Prec av
0.30
0.10 0.5
0.6
0.7
0.8
0.9 1 2 Workload level
3
4
5
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Rough-Cut Cost Estimation in a Capacitated Environment
depends on the accuracy of the forced idle time estimation. Figure 6 presents a comparison of the rough-cut model with the model that takes into account the precedence between operations for the example of Table 1. The unit costs of Product 3 and Product 6 and the average cost over all six products, calculated by the two methods, are presented. We can see that the difference in Product 3’s unit cost estimations is significantly larger than for Product 6. This is because the operations of Product 6 were not influenced by the available capacity correction. At very low and very high workloads, the difference between the two methods is not as large as at reasonable workloads. At very low workloads, in spite of the available capacity correction, the majority of the operations are still produced in-house. At very high workloads, the majority of the operations are outsourced so that the available capacity correction does not influence the outsourcing decision.
dIscussIon And conclusIon We demonstrate that in a make-to-order environment, the product unit cost is affected by the current product mix, the total shop workload, machine loading, and outsourcing decisions. Since all these parameters change over time dynamically, product unit costs cannot be considered constant values, as traditionally accepted. Costing should be performed on a current basis, taking into account the current product mix, machine loading (including the status of the in-process batches), shop workload, and outsourcing decisions. The proposed costing model enables current estimation of the product unit cost taking into account all these aspects. The model estimates product unit costs on the basis of the shop floor’s current status and the operations that are planned for production within a certain planning horizon. The model also recommends which operations
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to outsource if necessary. In order to reduce the run times, a greedy heuristic algorithm was developed. A comparison between the rough-cut model and the traditional costing approach was done. In the proposed model, direct costs are allocated to products on the basis of their rough-cut planned schedule. An assignment of a specific unit for production in regular rather than in extra hours decreases its product unit cost while increasing the unit cost of all other products. Hence, the product unit cost is affected directly by the scheduling decisions. This is in contradiction to traditional costing approaches. In order to understand how precedence between operations, order priorities, and dispatching rules influence unit cost estimation, a comparison between the rough-cut model and the model that takes into account these parameters was conducted. Available capacity correction by subtracting estimated forced idle time, estimated by the snapshot principle, was suggested. At very low and very high workloads, the difference between the two methods is not as large. At very low workloads, in spite of available capacity correction, the majority of the operations are still produced in-house. At very high workloads, the majority of the operations are outsourced so that the available capacity correction does not influence the outsourcing decision. The research ignores the stochastic nature of the shop floor. Machines were loaded and capacities were calculated without taking into account important factors, such as the variability of processing times and machine breakdowns. These factors affect the shop utilization, the scheduled capacity, and therefore the product unit costs. Future research may focus on the effect of taking into account these factors on the product unit cost estimation.
Rough-Cut Cost Estimation in a Capacitated Environment
AcKnoWledgment This article was presented at the Second GermanIsraeli Symposium for Design and Manufacture, Berlin, Germany, July 2005 (a closed meeting). This research was partially supported by the Hal and Inge Marcus Endowment Fund.
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Bode, J. (2000). Neural networks for cost estimation: Simulations and pilot application. International Journal of Production Research, 38(6), 1231-1254. Cochran, E. B. (1976a). Using regression techniques in cost analysis: Part 1. International Journal of Production Research, 14(4), 465-487. Cochran, E. B. (1976b). Using regression techniques in cost analysis: Part 2. International Journal of Production Research, 14(4), 489-511. Dean, E. B. (1989). Parametric cost estimating: A design function. Paper presented at the 33rd Annual Meeting of the American Association of Cost Engineers, San Diego, CA. Ellis, G. (1992). Make-or-buy: A simpler approach. Management Accounting, pp. 22-23. Ellis, G. (1993). Solving make-or-buy problems with linear programming. Management Accounting, pp. 52-53. Falco, M., Nenni, M. E., & Schiraldi, M. M. (2001). Development of a product-costing model oriented to productive capacity analysis. In The 4th SMESME International Conference, Alborg, Denmark (pp. 180-187). Feldman, P., & Shtub, A. (2006). A model for cost estimation in a finite-capacity environment. International Journal of Production Research, 44(2), 305-327. Fowler, K. (2004). Build versus buy. IEEE Instrumentation & Measurement Magazine, 7(3), 67-73. Geiger, T. S., & Dilts, D. M. (1996). Automated design-to-cost: Integrated costing into the design decision. Computer-Aided Design, 28, 423-438. Gunasekaran, A., Marri, H. B., & Yusuf, Y. Y. (1999). Application of activity-based costing: Some case experiences. Managerial Auditing Journal, 14(6), 286-293.
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Raunick, D. A., & Fisher, A. G. (1972). A probabilistic make-buy model. Journal of Purchasing, 8(1), 63-80. Reiman, M. I., & Wein, L. M. (1999). Heavy traffic analysis of polling systems in tandem. Operations Research, 47(4), 524-534. Ross, R. B. (2002). Regression analysis as a cost estimation model for unexploded ordnance cleanup at former military installations. Unpublished master’s thesis. Shtub, A., & Versano, R. (1999). Estimating the cost of steel pipe bending: A comparison between neural networks and regression analysis. International Journal of Production Economics, 62, 201-207. Smith, A. E., & Mason, A. K. (1997). Cost estimation predictive modeling: Regression versus neural network. The Engineering Economist, 42(2), 137-161. Son, Y. K. (1991). Cost estimation model for advanced manufacturing systems. International Journal of Production Research, 29(3), 441452. Sonmez, R. (2004). Conceptual cost estimation of building projects with regression analysis and neural networks. Canadian Journal of Civil Engineering, 31(4), 677-683.
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This work was previously published in International Journal of Information Systems and Supply Chain Management, Vol. 1, Issue 2, edited by J. Wang, pp. 19-39, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.18
Knowledge Management Success:
Roles of Management and Leadership Vittal S. Anantatmula Western Carolina University, USA
AbstrAct Globalization and free market philosophy characterize the current economic environment of increased competition, and it has posed far greater challenges than ever for organizations to meet customer needs and demands. The global competition is compelling organizations to develop products and services faster, cheaper, and better in order to sustain competitive advantage in the marketplace. Twenty-first century economy is setting new trends and unique styles of business operations because of continuous advancement of information technology and communication technologies. These technologies have offered more avenues to conduct business effectively and efficiently. Many organizations participating in the global economy have two distinct features associated with their operations, outsourcing and virtual teams, which have become feasible because of these technological advances. These
two features have an impact on how organizations manage knowledge, and they deserve further discussion.
outsourcIng And vIrtuAl teAms Outsourcing is a common business practice because it helps acquire quality services and expertise at a lower cost. General Motors, Toyota, Siemens, Hewlett-Packard, General Electric, and IBM—among many other major organizations— are using outsourcing as a strategy to cut down costs. Also, global economy is compelling organizations to establish operating divisions and factories close to marketplaces and other strategic locations where the labor costs are cheaper. Consequently, virtual teams are integral to many organizations in the current economy. A case in point is Infosys
Technologies Limited—one of the leading software consultants in the world. The company has a conference room in Bangalore, India that can hold a virtual meeting of the key players from its entire global supply chain on a super-size screen to integrate project functions and work as an effective project team (Friedman, 2005). These virtual teams span various time zones, different languages and cultures, and possess a wide range of competencies and skills. Needless to say, outsourcing and consequent virtual teams are challenging the traditional structures of organizations. Two questions come to our mind: How do they impact the way organizations run their business operations? And how do they impact the manager’s role? It is critical for organizations to find answers to these questions. More importantly, both these distinct features—outsourcing and virtual teams—have one thing in common: the explicit and tacit knowledge of the organization is no longer confined within the organization. The daunting task that faces organizations is how to manage knowledge resources to gain and sustain competitive advantage. In this chapter, we will attempt to address all these important questions.
KnoWledge mAnAgement Intense competition, indecisive consumers, and globalization are some of the driving forces that have led to increased interest in studying how knowledge is used, applied, and leveraged. This has led to placing greater emphasis on understanding and developing better frameworks for assessing knowledge management effectiveness, thereby determining its impact on bottom-line business results (Lim & Ahmed, 2000). A recent study (Nidiffer & Dolan, 2005) observed that in the current economy, top management priorities are building virtual teams with a minimum of face time, clearly defining work, measuring cybernetic worker productivity, and
managing employee communications across time zones. These priorities are relevant to projects and processes of several management functions including knowledge management (KM) and have a significant impact on a manager’s role. It is obvious that technology plays a critical role in supporting management’s efforts to meet these priorities. Before we discuss knowledge and knowledge management further, it is important to have a common understanding of these terms.
data, Information, Knowledge and Knowledge management The word “data” generally refers to numerical facts collected together for reference. According to Ellis (2003), the distinction is that data are the facts that are organized into information; when used by someone to solve a problem, information in turn becomes personal knowledge (see Figure 1). When we convert it to explicit knowledge, it becomes an intellectual asset that can be shared within an organization. Information is a subset of knowledge, which denotes understanding of the information. Knowledge is derived from thinking, and it is a combination of information, experience, and insight. This insight, in turn, is developed with the use of tacit knowledge. Deriving knowledge from information requires human judgment, and is based on context and experience. As a resource, knowledge increases its value with use. Ironically, knowledge will remain dormant and not Figure 1. Relation between data, information, and knowledge
Experience
Knowledge
Insight
Information data
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Knowledge Management Success
very useful until it is reflected in action (Rad & Anantatmula, 2005). The primary focus of knowledge management is to utilize information technology and tools, business processes, best practices, and culture to develop and share knowledge within an organization, and to connect those who possess knowledge to those who do not. In this definition of KM, the keywords are developing and sharing knowledge. Thus, important functions of KM are creating and transferring knowledge. Developing and sharing knowledge should lead to performance improvements at an individual level then at an organizational level. With this premise, organizations are using KM systems to improve their business performance. KM has several advantages: importantly, it presents an opportunity to develop processes that would help to prevent from continually reinventing the wheel. KM and consequent intellectual capital offer unique competitive advantage to an organization because it is not easy to replicate.
It and Km Information technology (IT) refers to a combination of computer-related hardware and software systems intended to develop and manage data and information. Organizations invest in technology systems to improve business performance and sustain competitive advantage. Several research studies link IT and/or KM systems to improved organizational performance (Ahn & Chang, 2002; Jennex & Olfman, 2002; King, 2002; Marchand, Kettinger, & Rollins, 2000). Marchand et al. (2000) found that information operation, which measures an organization’s capabilities to effectively manage and use information, influences business performance. It is common experience that IT facilitates efficient storage and quick retrieval of large amounts of data and information. From a KM perspective, however, IT is considered useful for efficient conversion between data and information,
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but it is a rather poor alternative for converting information into knowledge (Ra, 1997). Prieto and Rivella (2004), citing research studies, suggested that conversion from information to knowledge is best accomplished by human actions; however, they reminded us that humans are slow as compared to IT systems for converting data into information. In a research study to explore the relation between IT, KM, and business performance, Martin, Hatzakis, Lycett, and Macredia (2004) showed that KM can be seen as a holistic way to manage the complex relation between business and IT. Martin et al. contend that effective KM, which promotes one vision and improved communication, will have a direct impact on the ability of firms to bridge the gap between IT and end users, thereby impacting organizational performance. A recent research study (Anantatmula & Kanungo, 2005)—after identifying measures of effectiveness for technology (IT and KM) and project performance, and studying the relationship among these measures—suggested that organizations should develop technology systems to meet specific business and project needs, and they should not be designed in isolation with the assumption that people will use it for productive purposes. Anantatmula and Kanungo (2005) concluded that developing technology systems to meet specific business and project needs will help link technology with business results. From these research findings, one can see IT in conjunction with KM as a remedy to address the issue of converting information into useful knowledge.
Km And orgAnIZAtIonAl perFormAnce In the previous section, we discussed the relation between IT and KM with reference to organizational performance and business results. However,
Knowledge Management Success
it is people who make use of these systems, and thus it is imperative to understand the extent to which these systems help people in their day-today activities. Earlier discussions suggested that KM acts as a bridge between IT and end users. So, our focus in this section is to understand the impact of KM on people and the consequent impact on organizational performance. A research study to assess KM success that included 147 organizations in 21 countries identified improved communication enhanced collaboration, improved employee skills, better decision making, and improved productivity as the most useful outcomes of KM (Anantatmula, 2005). Using interpretive structural modeling (ISM) to develop relations among these outcomes, Anantatmula and Kanungo (2006) showed that enhanced collaboration leverages employee skills in the context of decision making to influence productivity and quality. In principle, KM criteria must be guided by an organization’s goals and bottom-line results. If KM initiatives do not contribute to an organization’s business performance, top management would not support such initiatives. However, these research findings revealed that KM efforts result in soft measures, which are not directly tied to end results. These results also imply that KM outcomes are difficult to measure and all of them are people-related factors, which emphasize the importance of management and leadership roles in directing KM efforts successfully. Discussions so far have set the platform to discuss management and leadership roles in successful implementation of KM. For this purpose, we have discussed the business environment of global economy and the consequent impact of such virtual teams and outsourcing; the relation among IT, KM, and organization performance; and finally, outcomes of KM initiatives and their relation with business performance. With this as background, we will now examine the management and leadership roles in the successful implementation of KM.
Km: creAtIon And trAnsFer oF KnoWledge We have identified creation and transfer of knowledge as the two important functions of KM. Knowledge creation and, more specifically, knowledge transfer can happen only when more than one person is involved.
Knowledge creation With respect to knowledge creation, KM deals with two activities: • •
Preserving and using existing knowledge, and Creating new knowledge.
Existing knowledge includes both tacit and explicit knowledge. Creating new knowledge involves a great deal of interaction of people with the processes and among people within the organization. Before we discuss knowledge creation, we must understand the term tacit knowledge. Individuals—by virtue of having knowledge that cannot necessarily be verbalized as the knowledge that is intuitive and unarticulated—always know more than they can express and explain. This is known as tacit knowledge, which may sometimes become an important factor of competitive advantage. An important goal of KM is to tap into this tacit knowledge, and make it explicit and accessible within the organization to achieve better business results. Possessing knowledge about a situation or an event should enable people to make better decisions or act more rationally (Martin, 2000). Needless to say, knowledge creation requires people to participate and interact with each other. KM must employ both formal and informal organizational structures to accomplish the creation and dissemination of knowledge. Nonaka’s model (1994) is a process of knowledge creation and dissemination using tacit and explicit knowledge
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within the organization. The underlying concept of knowledge creation and dissemination is learning. A well-defined learning process serves as a prerequisite for knowledge accumulation and organizational learning. Individual learning— a pre-condition to organizational learning—is characterized by thinking, personal experience, needs and motives, interests and values, level of difficulty of the task at hand, and manifestation of behavioral changes (see Figure 2). On the other hand, organizational learning is characterized by collective thinking and creation of shared frame of reference. Organizational learning is defined as a process by which the organization’s knowledge and value-base is changed, thus leading to improved problem solving, which in turn leads to increased capacity for action (Probst & Buchel, 1997). While individual learning is associated with tacit knowledge, organizational learning makes use of explicit knowledge. Employees tend to develop optimum processes while performing tasks within the rules of the organization. Subsequently, organizations gain knowledge by documenting these processes, and by using these documents as reference material for sharing it within the organization. Through replicating these processes, organizations acquire additional knowledge,
which becomes independent of individuals who developed the original processes.
Knowledge transfer The present global economy—from the knowledge standpoint—distinguishes itself from earlier ones due to the size of knowledge base, innovation, and the technological advances that facilitate knowledge transfer. One of the main challenges of KM is to facilitate knowledge transfer among people within the organization (Alavi & Leidner, 2004). Many people consider knowledge as power and perceive it as a form of job security. Consequently, they would not like to share their personal knowledge with their colleagues. The inherent issue is lack of trust. It is obvious that people issues are considered important in knowledge transfer, and research supports this contention (Disterer, 2001). Research on software development teams has shown that other obstacles that lead to absence or ineffective knowledge transfer are lack of awareness about the KM, low information quality, low usage, and time-consuming maintenance of KM systems (Komi-Sirvio et al., 2002). These obstacles can be considered as general and applicable to KM systems in other work environments as well. Thus, it is important to develop
Figure 2. Individual learning vs. organizational learning (Adopted from Probst & Buchel, 1997)
Individual Learning Changes in individual behavior through thinking, personal experience, needs and motives, trial and error, and reflection
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bridge Communication Transparency Integration Transformation
Organizational Learning Changes in collective knowledge, value base, and behavior through collective reflection, which reflects through improved decision making
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KM systems keeping in view these obstacles. Special attention to increase the use of KM tools and maintaining quality will help develop sustainable KM systems and knowledge transfer. Also, KM systems should be aimed to support strategic objectives of the organization. Studies have shown that failure to align KM with the strategic goals, creation of knowledge repositories without explicitly defining the intentions behind them, and failure to relate KM to work functions and activities prove to hinder knowledge transfer (Fontaine & Lesser, 2002). Barriers of knowledge transfer discussed above are commonly applicable to organizations. People issues, lack of understanding or awareness of technology tools and processes, failure to align with strategic objectives of organizations, and not aligning individual aspirations with objectives are some of the barriers to successful implementation of KM. Both knowledge creation and transfer involve people, and to leverage best results from KM requires that people participate at different levels—functional, department, division, and organizational—because they are driven by the need to share knowledge at all these levels to enhance knowledge transfer, collaboration, and innovation. As such, being a member of a team is an inevitable feature of modern work life (Smith, 2001). Therefore, management and leadership of these teams and KM systems influence the success of KM.
Km success FActor model Before we analyze the role of management and leadership of a KM system, we need to understand the characteristics of KM. Like any other initiative, KM is considered a project. According to Rad and Anantatmula (2005), some of the common features of KM and project management (PM) are:
•
• •
•
•
Improving performance through learning is a common theme to formalized project management (PM) and knowledge management, albeit KM focuses on knowledge in all areas beyond managing projects. Specifically, knowledge development, transfer, and utilization are common functions to both. Effective communication is a critical success factor for both PM and KM. Acquisition, creation, transfer, retention, sharing, and utilization of knowledge are common to both PM and KM. By definition, projects are new entities, and all new things are associated with change. Successful implementation of projects would lead to changes, such as organizational processes and new products. Likewise, learning associated with KM will lead to changes in management functions, processes, work functions, and behavior of people. At a conceptual level, both PM and KM are associated with learning that results in behavioral change; individual as well as organizational.
These common characteristics between PM and KM help to analyze the roles of management and leadership of KM by relating to a research study on management and a leadership role for project management performance (Anantatmula, 2006). One distinction with KM systems is that IT plays a major facilitating role for KM systems. Using this study and literature review, eight factors were identified, which have significant influence on successful implementation of KM.
Km success Factors Create Clarity Clarity in defining goals and outlining likely outcomes is important during the early stages of KM initiative. Otherwise, we may fail to identify
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some of the important requirements of the KM system. As a consequence, the KM system will be perceived as a failure, and incorporating these requirements at a later stage may not help.
Define Roles and Processes
the organizational culture, which can promote transparency, openness in communication, and collaboration. Needless to say, clear definition of roles and responsibilities promotes team effectiveness.
Facilitate Organizational Support In general, many employees, in addition to their primary responsibilities and functions, participate in KM efforts for knowledge creation and sharing. Therefore, formal definition and approval of roles and processes is very important. Clear assignments of roles and responsibilities without ambiguity or overlapping responsibilities are important for conflict resolution and productivity.
Communicate Expectations Defining and establishing expectations from all the stakeholders is imperative for KM success, and if we fail to do so, KM efforts will eventually result in both perceived and actual incidences of not delivering expected results. Objective and formally defined processes in developing knowledge repositories and effective dissemination of these processes and results are some of the means to communicate what is expected of all stakeholders.
Employ Consistent Processes Organizations tend to manage KM with no formal processes. Mandating consistent and formal processes would encourage greater participation and contribution. Participation in knowledge development and sharing the new knowledge within the group and throughout the organization are the tenets of KM systems, and consistent process is the means to implement these policies.
Establish Trust Trust is critical for knowledge sharing and teamwork. An environment of trust is influenced by
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A significant success factor to implement KM systems is to gain support and participation from key personnel representing all the functions in the organization and top management. Obtaining organizational support is one of the challenges. Resources are generally controlled by functional managers, and their collaboration to KM efforts is a prerequisite to successful implementation of KM. Failure to facilitate organizational support would lead to ineffective use of KM systems and ultimate failure.
Manage Outcomes KM efforts require resources, and therefore, management would expect results that would indicate better business performance. As is true with projects, most perceptions of failure and success of KM systems are based on unspoken and personal indices. As a result, different people assess the same project differently (Rad, 2002). Therefore, there is a need for a set of performance indices that formalize the process and make explicit what is implicit in these seemingly subjective evaluations. Such an organized performance evaluation system would promote excellence.
Facilitate IT Support IT systems support electronic storage in miniscule size, and efficient and fast retrieval of large amounts of data. Thus, IT serves KM systems well in effective communication and developing KM tools such as electronic yellow pages, knowledge repositories, intranet, and virtual communities of practice. Organizations should—when developing IT systems—focus on specific business needs.
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Ism research methodology Using these success factors and based on interpretive structural modeling (ISM) to obtain input from KM professionals, a management and leadership model is developed (see Figure 3). ISM was developed by Warfield (1973) and involves structuring of goals and objectives into a hierarchical framework. In this study, the set of KM factors described above was used to develop an understanding of the shared underlying mental model in which these factors operate. ISM is selected for two reasons: first, human brains have limitations in dealing with complex problems of a significant number of elements and relations among elements (Waller, 1975); second, input data quality is better because unlike surveys, which collect data on perceptions, ISM uses an interactive discussion method to collect data, thereby compelling the participant in the research study to analyze carefully the relations among these factors. Thus, it brings out tacit knowledge of participants in the study. ISM allows structuring a complex problem of many elements while considering two elements only at a time. Thus, it is useful for developing policies and strategies, in addition to solving complex problems. ISM is used to develop a model because we usually function with mental models or Figure 3. Role of management and leadership establish trust
manage outcomes
create clarity in communications
communicate expectations
employ consistent processes define roles and processes
facilitate organizational support
facilitate IT support
relations or systems. It is useful because structure determines behavior (Senge, 1990). The results in Figure 3 represent the mental models of those who participated in the study. Therefore, they are subject to interpretation and that is why it is called the interpretive structural model. These arrows represent “leads to,” and these relations are tenable. As can be seen in Figure 3, organizational support and IT infrastructure are the independent variables; they are required to be present for a KM system to be successful. An effective KM will result in establishing trust among the participating and contributing employees. It will also establish a system to manage its outcomes.
Km: role oF mAnAgement And leAdershIp Leadership and management roles are entwined, and the distinction between management and leadership is not always obvious. Classical functions such as planning, organizing, and controlling are considered within the boundaries of management. Management is also concerned with decision making—specifically related to processes and functions—to improve operational efficiency and effectiveness. Leadership is concerned with motivation and support to people in order to realize their potential and achieve challenging and difficult goals. Among the leadership styles, situational leaders focus on various tasks and relationship behaviors (Hersey & Blanchard, 1996), and transformational leaders may inspire followers, meet their developmental needs, and encourage new approaches and more effort toward problem solving (Selzer & Bass, 1990). Resource integration and efficient and effective use of their utilization are important tenets of management and they help manage complexity. Leadership, on the other hand, has its efforts directed towards convincing people about the need to change, aligning them to a new direction and
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motivating people to work together to achieve KM objectives under difficult and demanding work environments. As is true with projects, uniqueness, complexity, and unfamiliarity are some of the characteristics of KM when it is initiated in an organization. Thus, these efforts are often associated with significant changes in working culture. As a consequence, leadership is a determinant of success as it provides vision and ability to cope with change (Kotter, 1999). Additionally, the role of management and leadership in creating and transferring knowledge within an organization is more challenging because of the dynamic nature of the organization structure and culture as a result of virtual teams and outsourcing.
management KM is aimed at making use of people in enhancing the knowledge base of the organization. To provide clarity and purpose, roles of individuals participating in the KM initiative and processes associated with KM must be clearly defined first. Without such formal definition and approval of roles, KM would lack support from top management and functional managers. Defining the roles and processes would logically lead to developing formal processes that would facilitate an understanding of the organizational requirements needed to support KM internally and externally. A KM system cannot be left to voluntary participation. KM must encourage people to interact within and across disciplines and functions; each person brings specific expertise and experience. Defining each member’s role would help in creating and sharing of knowledge. Consistent processes aid in managing a diverse group of people from different functions and divisions. By defining the roles and process, and by identifying the organizational support needs, managers can successfully lead teams and effectively accomplish the expected outcomes. It would also help managers define and manage KM goals and outcomes. 1962
In the context of virtual teams and outsourcing, management should make a prudent and informed choice to identify areas of knowledge that can be shared among all the groups. To facilitate effective communication in a virtual team, extensive use of technology tools such as intranets, videoconferencing, electronic yellow pages, and electronic bulletin boards of virtual communities of practice is desirable. For effective use of these tools and knowledge transfer, management should encourage free flow of information, and archive all the relevant and useful information. Usually, outsourcing is a choice for hiring expertise or quality of work at a lower cost. These tasks could be either familiar or unfamiliar to the parent organization, and in either case, outsourcing provides an opportunity to learn and enhance organizational knowledge.
leadership By defining processes and roles, and communicating what is expected of all the members of the KM community, one can establish both predictability and openness. Both predictability and openness, in turn, can be used to develop expectations and manage outcomes. Trust and open communication are essential to nurture human relationships; predictability and openness are important factors in establishing trust (Gray & Larsen, 2005). Establishing trust in virtual teams—where faceto-face interaction is limited or non-existent—is a challenging task. Effective and frequent communication using technology can be a solution. With virtual teams, organizations usually employ electronic media for written communication and group meetings (videoconferencing). By communicating clearly and effectively, managers can establish an environment of openness and transparency. It can lead to a work environment where team members willingly share information, experiences, and knowledge. These factors also instill trust—among all the participants—in their leader. Trust, in turn,
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encourages participants to collaborate, network, and innovate. Ring (1996) analyzed trust at the interpersonal level and found it as a precursor to forming ongoing networks. Although it should evolve mutually, trust is more important for leaders as they try motivating participating employees to accomplish a vision and to realize goals. And by establishing trust, leaders can also mitigate conflicts, a deterrent to knowledge creation and transfer. Because people are motivated by challenges and opportunities to further their career goals, participants are almost always interested in accomplishing personal and professional goals in addition to completing their routine responsibilities. Therefore, it is imperative that KM leadership understand and support the personal aspirations of the people and align them with the objectives of the organization. As a prerequisite to successful implementation of KM in organizations, leadership of the organization is responsible for practicing strategic planning and systems thinking approaches, making best use of resources, fostering a culture that encourages open dialogue and team learning, and finally, for encouraging and rewarding risk taking, learning, and knowledge sharing.
organizational support Research has shown that top management involvement, KM leadership, and the culture of the organization are important driving factors based on which a successful KM system can be built (Anantatmula & Kanungo, 2007). With the involvement of top management, KM initiatives will gain support and active participation of the senior executives of the organization. Top management involvement would also ensure that KM initiatives will have strategic focus. The research has also indicated that competent leadership of a KM initiative combined with the support from
the top management would lead to budgetary support for KM initiatives. Organization culture that encourages open and transparent communication among the employees of the organization would lead to increased collaboration and knowledge sharing at hierarchical levels of the organization, which leads to knowledge sharing. Increased communication with the aid of standard processes, along with technology infrastructure, make it easy and enhance collaboration. The organization should have a structure that facilitates personal interactions and supports communities of practice to capture tacit and explicit knowledge within the organization, and this structure should be extended to virtual teams and outsourcing personnel in applicable areas through appropriate communication tools. Likewise, technology (both IT and KM) infrastructure should promote the efficient capture of explicit knowledge and support knowledge sharing within and outside the organization by developing processes and systems that are easy to use. The organization should identify means and provide opportunities for individual learning, and link it to organizational learning and business performance. Such organizations should develop metrics to measure the results of learning and challenge people to perform better by setting tougher targets. In conclusion, KM initiative—during its implementation stage—has to deal with complexity and changes under multiple constraints. It is characterized by newness, time and budget constraints, uncertainty, uniqueness, complexity, and demanding expectations. Therefore, leadership assumes greater importance during the implementation stage. Once the KM system is in place, it becomes process oriented and well defined, and the emphasis shifts to management functions.
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conclusIon Organization culture that encourages open and transparent communication among the employees would lead to increased collaboration and knowledge sharing at hierarchical levels of the organization. Increased communication with the aid of standard processes, along with technology infrastructure, make it easy and enhance collaboration. Technology and communication systems are influencing the way we do business today. Organizations participating in the global economy and their markets have no boundaries. In this business environment of increased competition and customer demands, knowledge and knowledge workers are assuming greater importance. Virtual teams and outsourcing are commonly practiced and offer challenges to the management and leadership roles in implementing KM successfully.
reFerences
ment Institute Research Conference, Montreal, Canada. Anantatmula, V., & Kanungo, S. (2005). Role of information technology and knowledge management in influencing project performance. Proceedings of IEMC 2005 (pp. 599-603). Anantatmula, V., & Kanungo, S. (2007, January 3-6). Modeling enablers and barriers for successful KM implementation. Proceedings of the Hawaii International Conference on System Sciences (HICSS). Disterer, G. (2001). Individual and social barriers to knowledge transfer. Proceedings of HICSS34. Ellis, K. (2003). K-span: Building a bridge between learning and knowledge management. Training, 40(10), 46. Fontaine, M.A., & Lesser, E. (2002). Challenges in managing organizational knowledge. Technical Report, IBM Institute for Knowledge-Based Organizations, USA.
Ahn, J., & Chang, S. (2002). Valuation of knowledge: A business performance-oriented methodology. IEEE Computer Society.
Friedman, T. (2005). The world is flat: A brief history of the twenty-first century. New York: Farrar, Straus and Giroux.
Alavi, M., & Leidner, D.E. (2001). Knowledge management and knowledge management systemsconceptual foundations and research issues. MIS Quarterly, 25(1).
Gray, C.F., & Larson, E.W. (2005). Project management: The managerial process. New York: McGraw-Hill.
Anantatmula, V. (2004). Criteria for measuring knowledge management efforts in organizations. Doctoral Dissertation in Publication, References Number 3123064, UMI Dissertation Services.
Hersey, P., & Blanchard, K. (1996). Great ideas revisited: Revisiting the life-cycle theory of leadership. Training & Development, 50(1), 43-47.
Anantatmula, V. (2005). Outcomes of knowledge management initiatives. International Journal of Knowledge Management, 1(2), 50-67.
Jennex, M.E., & Olfman, L. (2002). Organizational memory/knowledge effects on productivity, a longitudinal study. Proceedings of the 35th IEEE Hawaii International Conference on System Sciences.
Anantatmula, V. (2006, July 16-19) Improving project performance through leadership and technology. Proceedings of the Project Manage-
King, W.R. (2002). IT capabilities, business processes, and impact on the bottom line. Information Systems Management, 19(2), 85-87.
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Kotter, J.P. (1999). John P. Kotter on what leaders really do. Boston: Harvard Business School Press.
zational learning capacity. International Journal of Management Concepts and Philosophy, 1(3), 175-197.
Lim, K.K., & Ahmed, P.K. (2000). Enabling knowledge management: A measurement perspective. Proceedings of CMIT 2000.
Marchand, D.A., Kettinger, W.J., & Rollins, J.D. (2000). Information orientation: People, technology and the bottom line. Sloan Management Review, 41(4), 69-80. Martin, B. (2000). Knowledge management within the context of management: An evolving relationship. Singapore Management Review, 22(2), 17-36. Martin, V.A., Hatzakis, T., Lycett, M., & Macredie, R. (2004). Building the business/IT relationship through knowledge management. Journal of Information Technology Cases and Applications, 6, 2. Nidiffer, K., & Dolan, D. (2005). Evolving distributed project management. IEEE Software, (September/October), 63-72. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5(1), 14-37. Prieto, I.M., & Revilla, E. (2004). Information technologies and human behaviors as interacting knowledge management enablers of the organi-
Ra, J.W. (1997). The informal structure of project organizations. Proceedings of the Portland International Conference on Management and Technology (PICMET) (p. 392). Rad, P.F., & Anantatmula, V. (2005). Project planning techniques. Vienna, VA: Management Concepts. Selzer, J., & Bass, B. (1990). Transformational leadership: Beyond initiation and consideration. Journal of Management, 16(4), 693-703. Senge, P.M. (1990). The fifth discipline: The art & practice of learning organization. New York: Doubleday. Smith, G. (2001). Making the team. IEE Review, 47(5), 33-36. Waller, R.J. (1975). Application of interpretive structural modeling to priority-setting in urban systems management. In M. Baldwin (Ed.), Portraits of complexity (Battelle Monograph No. 9). Columbus, OH: Battelle Memorial Institute. Warfield, J.N. (1973). Intent structures. IEEE Transactions on Systems, Man, and Cybernetics, 3(2).
This work was previously published in Strategic Knowledge Management in Multinational Organizations, edited by K. O’Sullivan, pp. 299-310, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.19
Effective Virtual Working through Communities of Practice Chris Kimble University of York, UK Feng Li University of Newcastle upon Tyne, UK
IntroductIon Globalization is an issue currently affecting many organizations and is one that has profound consequences for the nature of work (Karimi & Konsynski, 1991; Ives & Jarvenpaa, 1992; Sachs, 1995). In order to work effectively in an international setting, companies are increasingly turning to trans-national teams (Castells, 1996; Lipnack & Stamps, 1997). In the new, networked economy, knowledge is seen as an asset that needs to be managed and is central to the success of organizations (Boersma & Stegwee, 1996). Since the 1980s, many organizations have taken steps to outsource and downsize in an effort to remain competitive (Davenport & Prusak, 1998; O’Dell, 1998). More recently, international outsourcing, often known
as off-shoring, has been happening at a rapid pace in a growing range of activities and sectors. Outsourcing, off-shoring, downsizing and programs of planned redundancy all mean that, as people leave, they take with them a valuable stock of corporate knowledge. This can be knowledge of how the work is done in practice and domain knowledge (Sachs, 1995). Some knowledge is easy to replace, but the knowledge of how a company operates is built over years and is irreplaceable in the short term. In addition, many organizations now have to cope with the increasing internationalization of business that forces collaboration and knowledgesharing across geographical boundaries. Working in a more internationalized setting places strains on the way a team operates, as they have to cope not only with geographical distance, but also time,
Effective Virtual Working through Communities of Practice
culture and possibly language barriers. For such organizations, there is an urgent need to identify ways to work effectively in such groups.
duction. Symon (2000) describes such a setting as an Information and Communication Technology (ICT)-enabled post-bureaucratic network organisation. Such groups can be classified along three dimensions (Kimble, Li, & Barlow, 2000): the organizational level (same organization or different organization), the temporal level (same time zone or different time zone) and physical proximity (same place or different place).
bAcKground The following sections of the article will introduce four key concepts used in the analysis of such environments: Virtual Workgroups; Distributed Collaborative Working; the distinction between Physical Space and Electronic Space; and finally, Communities of Practice.
distributed collaborative Working Distributed Collaborative Working (DCW) is a form of social organization facilitated by ICT. The work is distributed either physically (e.g., carried out in different places) or temporally (e.g., carried out at different times). It can involve modes of working that are wholly synchronous, wholly asynchronous or multi-synchronous (where several activities proceed in parallel) (Dourish, 1995). It is also collaborative work, as it involves groups of people working toward a common end. DCW is sometimes further broken into “Cold” and “Hot” DCW to reflect the different types of work that take place. Cold DCW comes about when the work being done is part of a collective activity, but is performed autonomously. For example, Kindberg, Bryan-Kinns and Makwana
virtual Workgroups The concept of virtual working is not clearly defined and can include such overlapping concepts such as the virtual or networked organization, the virtual workplace, virtual communities, electronic commerce, virtual teams and teleworking (e.g., Igbaria & Tan, 1997). At the most basic level, any workgroup that has members spread across several different locations could be characterized as virtual. In this article, we will discuss workgroups that operate in the environment outlined in the intro-
Table 1. Background information on the case studies Main Activity
Location
Organisation
Time
Place
Company 1
Software support
UK
Different
Same
Both
Company 2
Software development
UK
Both
Both
Different
Company 3
Software development
UK
Different
Both
Different
Company 4
Law firm
Germany
Same
Same
Same
Company 5
Secretarial services
France
Both
Same
Different
Company 6
Research/consultancy
Italy
Same
Both
Same
Company 7
Market research
UK
Different
Both
Different
Company 8
Medical services
UK
Same
Same
Different
Company 9
Medical services
Greece
Same
Same
Different
Company 10
Phone enquiries
Portugal
Different
Same
Different
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(1999) describe how the clinician’s work is an example of ICT-enabled, distributed collaboration, as they mostly work autonomously and at separate sites. In contrast, hot DCW is where the work undertaken is more interactive and requires the active presence of other members of the group (e.g., brainstorming).
physical space and electronic space Since the late 1980s, numerous studies have been carried out on the geography of the information economy (e.g., Goddard, 1992; Li, 1995). One of the main conclusions is that the locational patterns of (networked) information cannot truly represent the geographical patterns of its use. For example, Li, Whalley and Williams (2001) argued that with the proliferation of ICTs and the rapid development of the information economy, organizations increasingly have to operate in two spaces simultaneously – the physical space and the electronic space. It is clear that our notion of time has been significantly affected by the emergence of the electronic space. Global virtual teams can pass work in progress between an organization’s main economic centers (e.g., between the United States [U.S.], Europe and Asia) around the clock. Even in the same time zone, work in progress can be suspended in time (stored), which gives people the opportunity to organize their time more effectively. Similarly, with the emergence of electronic space, the nature and characteristics of place have been radically redefined.
communities of practice The term Community of Practice (CoP) was coined in 1991 by Lave and Wenger (1991), who used it in their exploration of the activities of groups of non-drinking alcoholics, quartermasters, butchers, tailors and midwives. What linked these
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diverse groups was a mode of learning broadly based on an apprenticeship model, although the concept of CoPs is not restricted to this form of learning. In these communities, newcomers learn from old-timers by being allowed to participate in the practice of the community and, over time, newcomers move from peripheral to full participation in the community. More recently, the notion of a CoP has been expanded to encompass a far wider range of definitions (e.g., Stewart, 1996; Wenger, 1998; Wenger & Synder, 2000) that were not part of Lave and Wenger’s original idea. For example, Wenger (1998) argues that CoPs arise out of the need to accomplish tasks in an organization and provide learning avenues within, between and outside that organization. In his view, a business is not of a single monolithic community but a constellation of interrelated CoPs that can spread beyond the borders of the “host” organization.
the cAse studIes Having briefly outlined four key concepts, this paper will now analyse some of the problems faced by virtual working using evidence drawn from two sets of case studies. These case studies illustrate both the variety of forms that virtual work can take and the range of tasks performed.
study one: the experiences of ten virtual teams This study consists of 10 case studies of virtual teams in different organizations. The case studies demonstrate the different forms that virtual teams can take, their applicability across various sectors and the benefits they can afford organizations and individuals. It also highlights some of the potential barriers to virtual working posed by the spatial and temporal separation of team members.
Effective Virtual Working through Communities of Practice
Background of the 10 Virtual Teams In these examples, virtual working has allowed different organizations to work together in a more flexible and responsive way, for a single organization to share scarce expertise across geographical boundaries, to link together groups that would otherwise have remained isolated and to offer new services to geographically remote locations. In Company 1, a virtual team operates between a CASE tool (Computer Aided Software Engineering) supplier and their main customers in the United Kingdom (UK). As part of its services, the company provides constant, high-quality, technical support to its customers. In the past, the technical support staff travelled to the customers’ premises, but a hot DCW solution was produced that enabled the company to work in a more flexible way. Similar applications of virtual working were identified in Company 2 and Company 3. Virtual working can also spread expertise within a single organization. In Company 4, a large law firm in Germany had a number of small branch offices with a limited number of clients. The provision of a full range of professional legal services in such situations is expensive. The result is that a poorer, less-extensive service is offered in rural areas. In this case, a cold DCW solution was developed, which meant that a particular legal expert did not have to remain in the main office but could offer services from a branch office electronically. Similarly, Company 5 set up an information system to support communications between its central office in Paris and its satellite offices in the suburbs. Virtual working can use a mixture of both hot and cold Distributed Working to link groups together in a collaborative enterprise. In southern Italy, a system was developed to link together several academic and research institutions to provide a range of research, training and consultancy services needed by industry (Company 6). Company 7 and Company 10 adopted similar solutions.
In some circumstances, virtual working can have a social impact beyond the world of work. For example, Company 8 developed a system to link a large central hospital with a small clinic on a remote Scottish island. Similarly, for Company 9, a new system was developed to provide fulltime medical consultancy to small clinical units in remote rural areas. The above case studies illustrate some of the benefits that virtual working can bring and some of the forms such work can take. However, virtual working is not problem-free: To achieve the full potential, there are a number of barriers to overcome.
The Barriers to Virtual Team Working From the case studies, the most challenging aspect of working in virtual teams was the issue of trust. This was most clearly demonstrated when team members had to share work-in-progress electronically. For example, software developers (Company 2 and Company 3) were reluctant to share half-finished programs with others. Similarly, consultants and market researchers were often unwilling to share half-written reports with their colleagues (Company 6 and Company 7). Even when team members were prepared to share information and knowledge with each other, the time and effort required to do so could be a serious problem. Perhaps because of this, developing trust, a shared team culture and agreed procedures for effective communication – the essential common ground (Clark & Brennan, 1991) of a successful virtual work—remains elusive. In the following section, we argue that some of these barriers can be overcome through CoPs, which can provide a mechanism for building and maintaining trust relationships.
study two: distributed cops Lave and Wenger (1991) studied co-located CoPs. The investigation by Hildreth, Kimble and Wright
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Effective Virtual Working through Communities of Practice
(2000; Kimble, Hildreth and Wright, 2001) was a study of virtual CoPs in a commercial setting. This study is an illustration of the range of activities that such groups can perform.
Distributed CoPs Kimble, Hildreth and Wright (2000, 2001) describe the work of a virtual CoP in the research arm of a major international company. The CoP in question was the management team of the IT support function of the organization. This group had both a distributed and a co-located aspect and used a blend of hot and cold DCW. The group had four co-located members in the U.K., five co-located members in the U.S. and one member in Japan. The main activity during the case study was the development of a planning document for use by both the U.K. and the U.S. arms of the company. In this case, it was the degree of trust and “team spirit” that existed in the CoP that was the essential element for successful distributed working. Because they had already developed strong working relationships with their peers in the U.S. and knew them so well, the U.K. core would continue to work on the planning document when “off line,” knowing that their peers in the U.S. had confidence in them. Although a lot of the work was undertaken separately within the U.K. and U.S. cores, members met physically on a 6-monthly basis. Between these physical meetings, they maintained communication via e-mail, voice mail, telephone conferences and Microsoft NetMeeting. They felt that during the periods of electronic communication, the momentum of the group gradually slowed, until another meeting picked it up again. The importance of having a good personal relationship with the other members was regarded as essential by all of the members, as this carried the community through the periods of electronic communication. As one respondent described it, “... you need that personal relationship if you are to go the extra half-mile for someone.”
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conclusIon: eFFectIve vIrtuAl WorKIng We have seen from the two studies outlined above that virtual working can take many forms and undertake a variety of different tasks. However, today only a small proportion of virtual teams reach a level of performance beyond that which the individuals concerned could achieve independently. Further research is needed to understand the problems faced by virtual teams if they are to achieve their full potential. Working in virtual groups poses problems not usually encountered when groups of people work in the same building. For example, developing a team culture and common patterns of behavior are essential for the development of credibility and trust among team members. To be effective, geographically distributed groups have to develop new ways of sharing knowledge and understanding in the electronic space. The implications of the “two spaces” for virtual teams are profound. Instead of living in the physical space and place, and overcoming distance by transportation, organizations and individuals now have to deal with different combinations of work in both physical and electronic spaces. The geographical and organizational flexibility derived from these combinations mean that organizations need to adapt the way they manage both internal activities and external relations. The CoP appears to be one way to facilitate more effective virtual team working and make some inroads into the complexities and challenges of the new business environment. The willingness to go “the extra half mile” in a CoP may help to overcome some of the problems of forming trust relationships in virtual environments. The feelings of trust developed in this way provide a sound basis for subsequent hot and cold electronic collaborations. Group, organizational, cultural and national boundaries can be crossed by building trust and understanding, and subsequently, the CoP becomes a vehicle for sharing organizational knowledge.
Effective Virtual Working through Communities of Practice
reFerences Boersma, S.K., & Stegwee, R.A. (1996). Exploring the issues in knowledge management in information technology management in Europe. Proceedings of the 1996 Information Resources Management Association International Conference (pp. 217-222). Castells, M. (1996). The rise of the network society. London: Blackwell. Clark, H., & Brennan, S.E. (1991). Grounding in communication. In L.B. Resnick, J. Levine, & Teasley (Eds.), Socially shared cognition (pp. 127-149). Washington, DC: American Psychology Association. Davenport, T., & Prusak, L. (1998). Working knowledge: How organizations manage what they know. Boston: Harvard Business School Press. Dourish, P. (1995). The parting of the ways: Divergence, data management and collaborative work. Xerox Technical Report EPC-1995-105. Cambridge, UK Goddard, J. (1992). New technology and the geography of the UK information economy. In K. Robins (Ed.), Understanding information business technology and geography. London: Belhaven. Hildreth, P., Kimble, C., & Wright, P. (2000). Communities of practice in the distributed international environment. Journal of Knowledge Management, 4(1), March, 27-37. Igbaria, M., & Tan, M. (1997). The virtual workplace. Hershey, PA: Idea Group Publishing. Ives, B., & Jarvenpaa, S. (1992). Global information technology: Some lessons from practice. International Information Systems, July, 1-15.
Kimble, C., Hildreth, P., & Wright, P. (2001). Communities of practice: Going virtual. In Knowledge management and business model innovation (pp. 220-234). Hershey, PA: Idea Group Publishing. Kimble, C., Li, F., & Barlow, A. (2000). Effective virtual teams through communities of practice. Management Science research paper, No. 00/9. Glasgow, UK: University of Strathclyde. Kindberg, T., Bryan-Kinns, N., & Makwana, R. (1999, November 14-17). Supporting the shared care of diabetic patients. Proceedings of the Group’99 International Conference on Supporting Group Work, Phoenix, AZ. Lave, J., & Wenger, E. (1991). Situated learning. Legitimate peripheral participation. Cambridge, MA: Cambridge University Press. Li, F. (1995). The geography of business information. Chichester: John Wiley & Son. Li, F., Whalley J., & Williams, H. (2001). Between the electronic and physical Spaces: Implications for organizations in the networked economy. Environment & Planning, 33, 699-716. Lipnack, J., & Stamps, J. (1997). Virtual teams: Researching across space, time and organizations with technology. New York: John Wiley & Son. O’Dell, C., & Jackson, G.C. (1998). If we only knew what we know: Identification and transfer of internal best practices. California Management Review, 40(3), 154-174. Sachs, P. (1995). Transforming work: Collaboration, learning and design. Communications of the ACM, 38(9), September. Simonson, N.A. (1996). Cultural implications of knowledge management within the change management community of practice. Change
Karimi, J., & Konsynski, B.R. (1991). Globalization and management strategies. Journal of Management Information Systems, 7(4), 7-26.
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Management Forum, Andersen Consulting, Private communication. Stewart, T. (1996). The invisible key to success. Fortune, August 5. Symon, G. (2000). Information and communication technologies and the network organisation: A critical analysis. Journal of Occupational and Organisational Psychology, 73, 389-414. Wenger, E. (1998). Communities of practice: Learning meaning and identity. Cambridge: University Press. Wenger, E., & Snyder, W. (2000). Communities of practice: The organisational frontier. Harvard Business Review, Jan-Feb, 139-145.
Key terms Communities of Practice (CoP): The concept of a CoP was first introduced by Lave and Wenger in 1991 in relation to Situated Learning. Lave and Wenger (1991) saw the acquisition of knowledge as a social process in which people participated in communal learning at different levels depending on their authority in a group; that is, newcomers learn from old-timers by being allowed to participate in tasks relating to the practice of the community. Since 1991, the concept of CoPs has been extended and applied to areas such as Knowledge Management and virtual working. Electronic Space and Physical Space: These concepts have been coined to describe the role of geography in the information economy. Rather than marking the “end of geography” and the “death of distance,” the rapid development of telecommunications networks combined with the informatization of the economy and other activities, have enabled individuals and organizations to establish and maintain new forms of relations across time and space, often in ways impossible in the past. This essentially overlays a new elec-
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tronic, virtual space on top of the physical space in which we live. For a detailed discussion of these concepts and their implications see Li, Whalley and Williams (2001). Information Economy: This concept was created to illustrate a fundamental change in the business environment. The nature of the economy has changed as measured by the informational (intangible) elements of our products, services and production processes; and the proportion of the workforce whose primary activities are informational. Information has become the most important resource upon which the efficiency and competitiveness of all organizations depend. This is true in not only services or high-tech industries, but also across the board in primary and manufacturing industries—and in both private and public sectors. Teleworking: The concept of teleworking was originally conceived during the oil crisis of the early 1970s to describe the possibility of working from home by means of computers and telecommunications to avoid the day-to-day commuting to the central office—telecommuting. Its connotation has since been extended to include all work-related substitutions of ICT for travel. Today, teleworking is generally used to refer to a variety of flexible work organizations with different combinations of work in the central office, at customer sites, in satellite centres, on the road or at home. Virtual Teams: Lipnack and Stamps (1997) defined virtual teams as work groups that cross organizational boundaries and use ICTs to create “virtual spaces” that are real to the groups that inhabit them, yet are different from physical places. Since 1997, the use of the term has been extended to include a whole range of ICT-enabled flexible working arrangements. Today, a virtual team is defined as being a group of people who collaborate in the execution of a specific task while being distributed across space, time and
Effective Virtual Working through Communities of Practice
organization boundaries where their collaborative efforts are supported by some form of ICT.
This work was previously published in the Encyclopedia of Virtual Communities and Technologies, edited by S. Dasgupta, pp. 156-160, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 6.20
Employee Turnover in the Business Process Outsourcing Industry in India Aruna Ranganathan Cornell University, USA Sarosh Kuruvilla Cornell University, USA
AbstrAct In this chapter, we explore the problem of high turnover in the high-tech BPO sector in India, where relatively well-educated employees are performing a variety of primarily low skill, low cost jobs. We highlight the various approaches employers are taking to solve the turnover problem. As we will argue, some of these strategies are fairly traditional, focusing on various instrumental incentives to promote employee retention, while some others are new and rather radical, particularly the articulation of an organizational and work culture tailor-made for the particular demographic profile of BPO employees: young, upper middle class, well-educated graduates. Based on anecdotal evidence and interviews with industry personnel, we sense some ambiguity regarding the effectiveness of these strategies. We argue that this ambiguity is a function of (a) the recent and rapid growth of the industry and the fact that firms are experimenting with
a whole variety of retention strategies, and (b) the inability of firms to develop an integrated organizational culture that permits a focus on both longer term organizational performance, as well as retention.
IntroductIon The IT (information technology) industry in India (commonly referred to as the outsourcing industry) is touted as being crucial to the country’s economy. The industry has grown its revenues tenfold in the past decade, from U.S.$ 4.8 billion in 1997-98 to U.S.$ 47.8 billion in 2006-07. While it currently (2006) contributes only 5.4% of India’s GDP, this figure is expected to rise to 12.3% by 2012 (NASSCOM, 2007). Thus, the IT industry is expected to be a key driver of India’s economic development via its contribution to GDP growth, employment growth, and poverty alleviation (Srinivasan, 2006).
Employee Turnover in the Business Process Outsourcing Industry in India
There are three main segments in the IT industry: IT services and software, business process outsourcing (BPO), and hardware (NASSCOM, 2005). Though IT services and software accounts for the bulk of the industry at present, this segment has matured to some extent. On the contrary, the BPO sector is newer and is experiencing explosive growth. Projections indicate that the BPO sector will substantially overtake the software sector in value by 2012, other things being equal (Knowledge@Wharton, 2004b). And it is the BPO industry that has earned India the reputation of being the outsourcing capital of the world. Further, consolidation in the industry has resulted in several large software firms (e.g., Infosys, Wipro, and IBM) starting or buying out BPO units, thus blurring the distinction between software and BPO. We focus exclusively on the BPO sector in this chapter. Although low costs and a seemingly endless supply of skilled human resources have been the key to India’s leadership role in software and business process outsourcing, we argue in this chapter that continued growth of the BPO sector is contingent on it overcoming its biggest human resources problem (i.e., high turnover, which is posing a serious threat to growth and profitability in this sectora). Average turnover rates in the industry range from 25-40% (NASSCOM, 2005), imposing a significant cost on firms as they attempt to replace 40% of their employees per year in a very competitive labor market. Thus, despite possessing one of the world’s largest supplies of skilled manpower, there is a desperate shortage of people in the industry. Our goal in this chapter is modest, for example, to understand the causes and consequences of high turnover in the industry, and to document the variety of ways in which human resource departments in the BPO industry are attempting to address the critical issue of employee retention. In an industry where costs are a key source of comparative advantage, paying higher salaries to retain employees is self-defeating, as it threatens
the longer-term viability of the industry. As it is, salary growth rates of 15-20% a year over the last few years has resulted in the movement of BPO jobs from India to China and other locations. Thus, BPO firms have to find other means of employee retention. This situation therefore presents an interesting case study of a unique management problem, for example, the management of relatively welleducated employees in the high-tech sector who are doing a variety of primarily low skill, low cost jobs (although there is a growing high skills based research process outsourcing sector in India as well). Our study, based on interviews and participant observation of the BPO industry in India during 2005-2006, suggests that employers are experimenting with a variety of strategies to combat the turnover problem. As we will argue, some of these strategies are fairly traditional, focusing on various instrumental incentives to promote employee retention, while some others are new and rather radical, particularly the articulation of an organizational and work culture tailor-made for the particular demographic profile of BPO employees: young, upper middle class, well-educated graduates. In the next section, we provide a (very) brief overview of the BPO sector in India. Thereafter, we discuss the nature and causes of turnover in the industry. We then describe various human resource (HR) strategies that companies are implementing in attempts to retain their employees. In the final section (although we do not yet have clear empirical evidence on which of the HR strategies are successful), we discuss these initiatives against the broader research background of turnover and organizational culture.
the bpo sector In IndIA There were various catalysts that led to the boom in business process outsourcing in India in the mid-1990s (see Dossani and Kenney, 2003 for
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Employee Turnover in the Business Process Outsourcing Industry in India
a comprehensive discussion). The growth of the BPO industry capitalized on India’s reputation as a software services provider, a reputation that first developed during the Y2K crisis. This reputation, alongside a large English speaking workforce and low costs (Indian costs are about 20% of U.S. costs in business processes), coupled with the time differences (India works while the U.S. sleeps), resulted in the establishment of call centers and back office services. The pioneering efforts of some MNCs in attempting to re-engineer business processes for cost savings paved the way for many others to outsource to India. Specifically, General Electric, American Express, and British Airways were quick to capitalize on the huge salary cost differentials between similarly trained employees in India and the United States. These MNCs also demonstrated that relocation could be undertaken with minimum disruption. And improvements in the enabling environment— notably the availability of telecommunications bandwidth at increasingly lower rates, the ability to digitize documents, and the usage of standard software platforms in corporate information systems—played a key role too. Table 1 provides an overview of the BPO sector in India. While the $7 billion sector currently accounts for only 23.8% of the total IT industry revenue, it has seen an average growth rate greater than 55% during the 2000-2005 period. It is this dramatic growth rate, its relatively high contribution to exports and the accompanying escalating employment potential that has raised
the possibility that this sector will be the most important “development engine” for India. India has a dominant position in the global market for offshore outsourcing, expected to account for 51% of the global aggregate by 2008 (NASSCOM, 2005). This market share growth is driven largely by India’s numerous advantages (costs and availability of skilled manpower), including the newly acquired reputation of Indian firms’ ability to “ramp-up” operations quickly based on demand. Indian also benefits from an English language advantage given that the U.S. and the U.S. are the predominant adopters of offshoring. Consulting firms such as AT Kearney rank India as the most favorable location for BPO activities in the world (see the data in Table 2) and highlight India’s advantages in both compensation costs and skills. Currently, there are over 400 large BPO firms in India (DTA Consultants, 2004), and this number is growing. Within the BPO segment, there are two kinds of firms - captives and third party firms. Captives are fully owned by major MNCs (e.g., Dell, GE Capital, EDS, HP) and provide business process services only to their owners. Third party firms (both Indian-owned and foreign-owned) provide BPO services to any client, and normally service a large number of clients simultaneously. Table 3 lists notable firms in both categories. Captives thus have a relatively stable market because their fortunes increase or decrease strictly based on their parent company’s fortunes. Third party firms, on the other hand, are dependent on securing
Table 1. Overview of BPO sector in India Year
Total IT Industry Value (U.S.$ billion)
BPO Segment Value (U.S.$ billions)
BPO Exports (U.S.$ billion)
Growth Rate of BPO Segment
Contribution to Employment
00-01
12.1
1.0
0.9
66%
70,000
01-02
13.4
1.6
1.5
60%
106,000
02-03
16.1
2.7
2.5
68%
180,000
03-04
21.5
3.9
3.6
44%
253,500
04-05
28.2
5.7
5.1
46%
348,000
Source: NASSCOM, 2005
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Employee Turnover in the Business Process Outsourcing Industry in India
Table 2. Comparing alternate destinations for offshore sourcing of BPO Factors
India
China
Malaysia
Czech Republic
Singapore
Philippines
Brazil
Canada
Chile
Poland
Financial Structure (Scale: 1-4) Compensation
3.19
3.00
2.50
2.24
0.91
3.14
2.84
0.42
2.56
2.45
Infrastructure Cost
0.23
0.23
0.33
0.27
0.22
0.22
0.17
0.32
0.22
0.26
Tax and Regulatory
0.30
0.09
0.26
0.13
0.34
0.23
0.16
0.26
0.21
0.17
Sub Total
3.72
3.32
3.09
2.64
1.47
3.59
3.17
1.00
2.99
2.88
People Skills and Availability (Scale: 1-3) BPO Experience
1.03
0.48
0.19
0.23
0.61
0.42
0.41
0.82
0.25
0.19
Size & Availability of Labor
0.47
0.6
0.02
0.01
-
0.08
-
0.04
0.01
0.05
Education
0.25
0.21
0.27
0.33
0.33
0.19
0.11
0.44
0.08
0.28
Language
0.21
0.07
0.14
0.17
0.25
0.14
0.13
0.4
0.15
0.14
Employee Retention
0.13
-
0.11
0.18
0.17
0.11
0.21
0.19
0.21
0.22
Sub Total
2.09
1.36
0.73
0.92
1.36
0.94
0.86
1.94
0.70
0.88
Business Environment (Scale: 1-3) Country risk
0.83
0.68
1.03
1.06
1.41
0.57
0.91
1.26
1.03
0.91
Country Infrastructure
0.20
0.15
0.24
0.28
0.40
0.13
0.25
0.41
0.29
0.19
Culture Adaptability
0.10
-
0.28
0.38
0.43
0.05
0.01
0.40
0.11
0.24
Security of Intellectual Property
0.18
0.10
0.22
0.30
0.39
0.17
0.24
0.41
0.25
0.23
Sub Total
1.31
0.93
1.77
2.02
2.63
0.92
1.41
2.48
1.68
1.57
Total
7.12
5.61
5.59
5.58
5.46
5.45
5.44
5.42
5.37
5.33
contracts with a variety of clients, and thus face a higher degree of uncertainty, which we argue will impact their ability to introduce policies to retain employees. Some captives such as GECIS (previously owned by GE) have now become third party firms. Further, the industry is undergoing a bout of consolidation, with large software firms (e.g., Infosys, IBM, Wipro, and TCS) entering the business process outsourcing industry. What is the nature of work in the BPO industry? Customer care and support services (call centers) are the largest “service” lines, accounting for close to 38% of the BPO sector’s employee base and a third of its revenues (NASSCOM, 2005). For example, Delta Airlines outsources parts of
its worldwide reservation services to an Indian third-party vendor called Wipro Spectramind. Wipro now manages Delta’s reservations from its Mumbai call center and saves Delta $26 million per year (Kalakota & Robinson 2004). Similarly, Amazon.com outsources some of its customer service operations to Daksh (now owned by IBM) in order to respond quicker to e-mail from customers. Today, several hundred Daksh employees work exclusively for Amazon.com and they reply to 95% of e-mail received within 24 hours and 100% within 48 hours. This saves money for Amazon.com too since a full-time customer service representative would cost Amazon.com $2000 per month in the U.S., while an equivalent
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Employee Turnover in the Business Process Outsourcing Industry in India
representative costs $150-$200 per month in India (Kalakota et al., 2004). Note that these customer service center jobs are similar to the customer service jobs elsewhere that have been studied extensively (see Batt, Doellgast, & Kwon, 2006 for detailed comparative evidence). As such, work organization in this industry follows closely the “tayloristic” model (see Remesh (2004) for a description of the average customer service center operation). Although the work is done in a “high-tech” environment with the latest in telecommunications and videoconferencing technology, it is relatively low skilled work. However, since the market is primarily in the U.S. and the UK, a knowledge of good English is key. And therefore, Indian BPO companies are
forced to hire post-graduates and graduates from a variety of disciplines (a graduate from a good university guarantees, generally speaking, some English language capability). Thus, these are highly educated workers, perhaps over-qualified for the jobs that they do, that are in demand in the BPO industry. Other high growth segments in the industry include human resource outsourcing and legal and medical transcription services. Big human resource consulting firms such as Exult and Hewitt have realized that much of their lower skilled payroll and benefits functions could be relocated to India. Legal transcription services constitute the conversion of interviews between clients and lawyers into documents to be presented in court.
Table 3. Notable captive and third party outsourcers in India Captive
Third party
Banking and Financial Sector
WNS Global Services
Fidelity , HSBC, Deutsche Bank
WIPRO BPO
American Express, Goldman Sachs
HCL Technologies BPO Services Ltd.
Bank of America, Standard Chartered
IBM – Daksh
JP Morgan, ABN Amro, Goldman Sachs
ICICI OneSource Ltd.
Prudential, Morgan Stanley,
EXL-Services
Lehman Brothers
Mphasis BPO Services
Professional Services
Intelenet Global
Mckinsey & Co, Accenture, Bain
GTL Ltd.
Deloitte, Ernst & Young, Reuters
Progeon
Technology and Telecom
24-7 Customer
HP, IBM, EDS, DELL
Datamatics Technologies
Samsung, HONEYWELL
Hinduja TMT
Automotive & heavy Machinery
TransWorks Information Services
General Motors, Ford
Tracmail Group
Daimler-Chrysler, Hyundai
Convergys India Services Private Ltd.
Pharmaceuticals
Zenta India Private Ltd.
Eli Lilly, Vision Health Source
vCustomer
Pfizer, Astra-Zeneca
Sutherland Technologies
Others AOL TESCO
Source: NASSCOM, 2005
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Employee Turnover in the Business Process Outsourcing Industry in India
There has also been a long established tradition of the outsourcing of medical transcription. These are the typical, mundane, fairly low skill, limited complexity jobs that form a majority of the work in the BPO industry. However, the composition of work being undertaken in the BPO segment is in transition and there is a shift toward “high-end” outsourcing involving more advanced skills. There has been growth in higher-level technical support, account management, customer data analysis, and hosting of technology that allows for interaction with the customer. Further, new high-end BPO services are emerging and are growing rapidly, though from a small base. Over the last two years, a number of highly skilled jobs in the West have been outsourced to India. These jobs are mostly concentrated in the financial, research and pharmaceutical industries, leading to the terms financial process outsourcing (FPO), research process outsourcing (RPO), and knowledge process outsourcing (KPO). In the FPO area, equity research, actuarial analytics, data modeling, risk assessment, management of foreign commodity accounts, and the processing of home loans and mortgage services are being outsourced by the big U.S. and European companies. For example, Smart Analyst Inc. and OfficeTiger employ financial analysts in India who can scrutinize personal credit histories, access
corporate public financial disclosures, and troll oceans of economic statistics by mining databases over the Web (“New Global Shift” 2003). In the RPO arena, the kind of work being outsourced includes developing data search tools for medical research, medical research and services (clinical trials), drug development research, and engineering design. The U.S. Dept of Labor estimates that over 36,000 jobs in life sciences will move to India. A number of research and development centers have already been established (e.g., Siemens, Snecma Aerospace, Sun Microsystems, Samsung, Phillips, Delphi, Daimler, and Bosch). Finally, in the catchall KPO arena, we find the outsourcing of a variety of activities including publishing services, remote education (such as providing math tuition to U.S. school children in the Southwest), animation and simulation, and general research and development. Many of these jobs require advanced degrees. Table 4 shows the spectrum of BPO work being undertaken in India.
the turnover problem It is clear that the BPO industry will not be able to maintain its current growth rate without solving its biggest human resources problem (i.e., employee turnover, a problem that has become apparent since 2004). The dimensions of the
Table 4. The spectrum of work done by Indian BPO Firms Customer Interaction Services
Employee Turnover in the Business Process Outsourcing Industry in India
turnover problem are large by any standards. A wide variety of turnover estimates are currently available. Most reports talk about an average of 30-40% (per year). Commercial and popular reporting tends to focus on the extremes. There have been reports of turnover being as low as 12% and turnover being as high as 90%. Mccue (1995) cites one large BPO company which claimed that high staff turnover rates had forced it to replace 90% of the 14,340 employees in it’s largely call center-focused BPO business within a year. A 2004 study of turnover in seven large “third party” call centers showed a wide variation in turnover rates, ranging from as low as 12% to as high as 62%, with a mean turnover of 30% (Remesh, 2004). However, turnover in “captive” BPOs is typically much lower than in third party BPOs. In our field research, too, we found turnover rates in five captive firms as being between 15-20%, although some captives reported turnover rates as high as 30%. There is job-based variation in turnover as well. Average turnover in “voice-based processes” is between 45-50%, while in “non voice” operations it is 15-20%. Further, “infant mortality” (turnover in the first 45 days of employment after training) in voice based processes is about 20% (although anecdotal evidence suggests that this figure may vary to a significant extent). There are two types of turnover. The first kind is when workers leave the BPO sector altogether. The second is when they leave one BPO operator to go work for another, often lured by promises of higher compensation and superior incentives. Again, we do not have clear data as to which type of turnover presents a bigger problem. HR managers of well-established leading firms in the BPO industry tend to argue that much of their turnover is due to people leaving the industry altogether. However, at the same time, many other HR managers complain that there is a significant amount of job-hopping in this industry. Some argue that the cost of switching employers is really small (all one has to do is to walk down the street to
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the next BPO and if trained, one would be hired immediately). Several reports suggest that people would be induced to move with relatively small improvements in salary even as little as 500 rupees per month (approximately $10). Clearly BPO firms see this type of turnover as being significant (despite what HR managers at top firms tell us). Evidence that this kind of turnover is a problem can be seen in the efforts (largely unsuccessful) of large firms in the industry to establish a “nopoaching” pact. The key elements in these pacts are that (a) firms will not poach employees and (b) firms will refuse to hire employees from other firms within 3 months of their leaving their last employment. Large BPOs including IBM-Daksh, Dell, and EXL have openly declared the collapse of such pacts suggesting that they are unlikely to work in today’s volatile BPO environment (The Economic Times, 2006a). The problem of turnover and increased costs are interlinked obviously. The shortage of people has by itself resulted in an increase in salaries above the normal range in India (average BPO salaries are increasing at between 10 and 15% per year). Although salary costs are “taken out of competition” since it affects the whole industry, recruitment and training costs (some of which are firm specific) are also a matter of significant concern. It takes the average high-end call center about 14-16 weeks of training before an employee is ready to work. Moreover, the current average recruitment conversion rate (the number of people who are actually hired as a percentage of the total number interviewed) is really low (4%) in the big metros where these BPOs are located. Therefore, turnover is a critical problem for BPO firms.
cAuses oF turnover Interviews with human resource managers highlight a variety of reasons why employees leave their jobs. Since the BPO industry is less than 10 years old, and has grown dramatically in the last five,
Employee Turnover in the Business Process Outsourcing Industry in India
high turnover has only recently become apparent, and there has been relatively little analysis as to which causes are the most important. We also do not know whether turnover as a result of people leaving the industry altogether is higher or lower than people moving from one company to another within the industry (anecdotal evidence suggests that the latter is the more critical problem, but we need more analysis to make sure). Evidence from the HR departments of various BPO firms suggest the following reasons for high turnover.
Job related reasons There are several job related reasons, but this category is by far the most important cause of turnover. One important issue here is dissatisfaction with the immediate supervisor (the “lousy boss syndrome”). The BPO segment is less than 10 years old years old and most of the employees are between the ages of 19 to 27. Given the high turnover, people with only 6 months of BPO experience are often promoted to the position of supervisor to manage teams of 10 to 15 people. However, they receive insufficient training due to rapid growth and turnover, and lack significant managerial expertise, thus rendering them ineffective at supervision. Human resource professionals label this the “managerial bandwidth” problem and liken it to attempts at creating a “10 year old scotch in 2 years.” A second job-related problem is inherent in the nature of the work itself. Unlike other high-tech work, BPO jobs are not intrinsically interesting. In fact, employees in this sector are disparagingly called “techno-coolies.b” The nature of call center jobs has been the subject of widespread research since it is the primary reason for turnover in this sector all over the world (Batt et al., 2006, Deery & Kinnie 2004). It is widely acknowledged that call center jobs are highly repetitive and tayloristic in nature, with tightly regulated lunch and restroom breaks, stringent call targets, and extensive monitoring. Indian call centers are apparently no
different, as Remesh (2004) suggests from his extensive research on call center jobs in India. These aspects, in combination with working the night shift in order to service the U.S. market by day, have resulted in an outgrowth of what the industry calls BOSS (burnout stress syndrome). There are numerous reports of call center workers using counseling and psychological services (Pandey & Singh, 2005). Besides, dealing with customers can be tedious in itself. And in this way, employees soon begin to see call center work stripped of its glamour and leave within a couple of years. Third, avenues for career development in many BPO firms are limited. This is supported by our research and other existing evidence. Batt et al.’s (2005) survey of 60 call centers revealed that while 15% of call center workers were promoted to higher positions within the call center setup, only 1% was promoted to upper management levels beyond the call center section of the organization. Our research provides more nuanced insights. We find that captive call centers are able to provide promotions to higher levels than “third party” call centers. The market stability that captive call centers enjoy permits them to do so through an envisionment of long-term career paths for their BPO employees.
Demographic Profile of Workers A second category of causes relate to the segment of the labor market that BPO work attracts. The workforce is young (primarily aged between 18 and 25), and tend to view BPO jobs as transitory (i.e., their goal is to earn good money for a couple of years in the BPO sector before moving on in life) (the average BPO and call center salary of Rs.10,000 per month represents about 2.5 times what a graduate could earn in any other occupation) (Knowledge@Wharton, 2004a). Remesh (2004) presents a more nuanced picture by studying a cross-section of workers in a large third party BPO. His survey of 277 workers suggests that 75%
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Employee Turnover in the Business Process Outsourcing Industry in India
of BPO workers are graduates of convent schools (private schools that are more expensive but noted for their superior English-medium education, typically run by catholic or protestant churches). Ninety-four percent of their fathers and 63% of their mothers are graduates, many of whom work for the government. And they are predominantly female. This reflects a slice of the Indian middle class that has no incentive to settle for a call center job. Many aspire to high-level professional or government jobs, or further education at the graduate level, while others leave to get married and start a family.
psycho-social Factors A third category of causes are psychological factors that are in part related to the demographic profile previously noted. Working the night shift leads to chronic fatigue and insomnia, and is also linked with behavioral changes such as smoking and a poor diet among young graduates. Some workers gain weight because of the sedentary lifestyle the job promotes, involving working on a computer at night and sleeping during the day with little exercise in between. Contact with family and friends is also restricted. These young people work at night, go back to their families during the day, but find no one at home as they have all gone to work. Although there is a long tradition of night shift work in blue collar occupations all over the world, young upper middle class Indian graduates are less able to deal with the absence of a “social life” in the evenings. Further, Pradhan and Abraham (2005) argue that using a different name and adopting a different persona during work hours can cause a questioning of one’s identity and can lead to what they term the “multiple personality disorder.” (Several client firms from the U.S. require Indian call center workers to adopt American names and American accents). For example, Anjali becomes Angie during the night and talks with an American accent to American customers, leading to cultural self-alientation and
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a sense of dissonance. All these are sacrifices that a young graduate is either not willing to make or has difficulty dealing with. To compound matters, some middle-class parents disapprove of BPO jobs, leading to an increase in stress for these young graduates. Parents for example, fear that the BPO lifestyle is a corrupting influence with too much emphasis on fun and western forms of life. Pradhan et al. (2005) suggest that “the new working habits and patterns of living (i.e., working late into the night, the pub culture, the consumerism) are in complete contrast to ways of living together, value systems, traditions, and beliefs still nurtured by the middle class.” Other parents disapprove because they feel that their children are lured by easy money and will forgo the chance to pursue higher education. Yet others worry about the reputation of their daughters.c Consequently, young people face a variety of different stressors that lead to their decisions to leave the company. The relative importance of the various factors noted above is still unknown. Turnover as a function of having a lousy boss tends to involve people leaving for other jobs within the industry. Those experiencing the stress syndrome and multiple personality disorder tend to leave the industry completely, and in many cases, those wishing to pursue graduate education and marriage also tend to leave the industry completely. Firms are in the process of putting in place a range of policies designed to combat turnover, which we discuss in the next section.
humAn resource polIcIes to reduce turnover Indian BPOs are experimenting with a range of strategies to reduce employee turnover. Our goal in this section is to describe the various approaches. In the discussion section, we will take a more analytical perspective regarding these strategies, using the prior literature to gain a perspective re-
Employee Turnover in the Business Process Outsourcing Industry in India
garding the relative efficacy of these approaches. At this stage, we classify the responses of firms into two broad categories (i.e., “traditional” approaches and “new” approaches). Our category of “traditional” includes a variety of strategies by firms that correspond broadly to the existing academic literature on employee turnover. In the field of human resource management and organizational psychology (as represented by journals such as the Academy of Management Journal, the Journal of Applied Psychology, the Journal of Management, etc.), the problem of turnover has been studied almost incessantly for almost 50 years, beginning with the work of March and Simon (1958), and there have been several meta-analyses that have reviewed past studies (see Griffeth, Hom and Gaertner, 1998). Broadly this voluminous and cacophonic literature suggests (as we gleaned from a reading of several “meta-analytic” studies) that the most important predictions of turnover are variables such as job satisfaction (including satisfaction with various dimensions or facets of the job), organizational commitment (which is predicted by both job satisfaction and a number of other variables), and the perceived ease of finding alternative employment. Therefore, any action by firms to promote job satisfaction (or satisfaction with various aspects of one’s employment), we categorize as “traditional” approaches. As the discussion below shows, this includes a variety of different initiatives. Our category of new approaches below is much smaller, yet more interesting, as they do not fit easily into the prior turnover literature. Rather, these approaches appear to conform more to the notion that it is not the job that matters as much, but the culture of the organization and a variety of “non-job” aspects that are important in employee retention. There is, for example, an emerging literature in management that focuses on “job embeddedness” which highlights an employee’s non-job related links to the workplace. Clearly these “new” approaches are consistent
with this view, but they go beyond it in many ways, and appear to be tailored to the peculiar characteristics of the BPO workforce in India (i.e., young, upwardly-mobile, highly educated English-speaking middle class people). Next, we describe the strategies.
trAdItIonAl strAtegIes Increasing career opportunities In response to perceptions that BPO jobs do not offer career growth, (a widely held perception amongst BPO employees) employers are going to great lengths to convince their employees that there are sufficient career growth opportunities. According to a NASSCOM-Hewitt survey, there was a 14% increase in the number of BPO companies offering a formalized career path to their employees in 2003 alone (NASSCOM 2004). BPOs are actively encouraging employees to move up the ladder and are consciously filling their front-end leadership roles from the talent pool available within the organization. To facilitate this, employees are being cross-trained in multiple domains and are being provided opportunities to work in various lateral departments. Both vertical and lateral movements are important in career development. Thus, BPOs are highlighting that they can offer many career options and functional specializations including project management, IT, systems migration, business process consultancy, training, HR, finance and accounts, quality, business analysis, sales, marketing, proposal development, and the like. As an example, Intelenet Global Services (one of the larger BPOs) offers career growth options to its agents after two years. The company offers three career paths: vertical (agent/team leader/ team manager/operations manager), horizontal (across functions) and progress to parent company (TCS or HDFC). Further, Intelenet has made it clear to its employees that 70% of its higher level
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Employee Turnover in the Business Process Outsourcing Industry in India
vacancies will be filled from within, ensuring sufficient promotional opportunities for its entry level people. Moreover, they have emphasized that if a vertical movement is not desirable (such as not wanting to be a team leader), a person could move laterally to another function such as HR/ Training and then move vertically upwards from there. Prudential Process Management Services (PPMS), the captive BPO arm of Prudential UK, also offers vertical as well as lateral movements to its employees. The career development streams here are domain specialists, support function specialists and global exchange program (Dev 2004). These formal processes are buttressed by individual career counseling and the creation of individual road maps to career advancement. Most BPOs have established in-house counseling teams that offer employees a variety of career advice. Through face-to-face counseling as well as psychometric profiling, these counselors are devising customized action plans for employees based on their aspirations and strengths. In addition, they can assess skill sets and recommend specific career options for workers. Finally, they also offer to work with employees to build skills sets and bridge gaps that would enable them to develop their careers effectively. For example, at Infowavz International, a relatively newer BPO that operates about three call centers, a career planning sheet is given to all employees at the recruitment stage itself. This outlines the organizational structure and the skill sets required for the various functions at various levels of the enterprise. Apart from this, each individual’s competencies, strengths, and areas of improvement are evaluated under a comprehensive ‘training needs analysis’ program for both current as well as future roles (Dev, 2004). Similarly, Progeon (now called Infosys BPO) has recently started a career planning committee to guide young employees on their future prospects (Mukherjee, 2004). These efforts try to contradict the widely held perception that there are
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limited career growth opportunities in the business process outsourcing industry, especially by highlighting growth opportunities when people join the industry. It is too soon to gauge the success of these efforts. Earlier, the “captive” BPOS were better able to provide career development, largely because they had a stable market for their business. But today, the big third party BPOs such as Infosys BPO and IBM have seen their business grow to an extent to which they can essentially guarantee the same career opportunities as captive BPOs can.
providing educational opportunities Recognizing that most young upper middle class Indian graduates have higher educational aspirations (after working at a BPO firm for a couple of years after finishing college), BPO operators are beginning to sponsor executive education for employees. This is quite an extreme strategy since they are providing access to educational opportunities that will almost certainly result in the employees leaving after they complete those opportunities. At best, these efforts will result in prolonging an employees’ decision to leave by about 2/3 years. On the other hand, the “war for talent” is so acute that even 2/3 years of stability on the employee front is important in this extremely “tight” labor market. Thus, many firms have entered into agreements with premier Indian business schools (e.g. Indian Institutes of Management, Xavier Institute of management) to offer part-time MBA programs for their employees. Employees also have the option of pursuing technical certifications like MCSE and CCNA to gain domain-specific skills in the technology sector (InfotechOnline, 2006). The course content and class timings are tailored as much as possible to the specific students’ needs. Mostly, the classes are virtual, offline or held at the educational institutes. But in some cases, they are held over weekends on the BPO firms’ campus.
Employee Turnover in the Business Process Outsourcing Industry in India
Wipro Spectramind, India’s largest BPO company with 9,300 employees, has recently started such an “earn and learn” program. “We have tiedup with educational institutes like Symbiosis for MBA and BITS Pilani for computer courses so that the employees are able to work and study at the same time. We are even ready to reimburse the course fees once the employees enter into an agreement with us for an assured number of years of service,” states the VP Talent Engagement and Development at Wipro Spectramind (Shrinate, 2004). This initiative not only “up-skills” workers, but helps Wipro retain their A-level employees, and undoubtedly offers an opportunity to create future industry leaders. Since the idea is to the retain employees, Wipro is not selective about which employees they sponsor (Shrinate, 2004). Other BPOs, such as TransWorks, Sitel, ICICIOneSource, and BNKeInternational also offer their employees the opportunity to continue studying whilst in full time employment. Some firms conduct internal “entrance tests” to shortlist the promising employees while some others consider past academic performance or performance on the job. At Sitel, any employee can apply for the scholarship program, although preference is given to high performers. At Transworks, the applicant must have been employed for a minimum of six months and should have performed well on the service level agreements. ICICIOneSource also insists on the six-month rule and encourages only the top performers to apply. There are a variety of post graduate diplomas in subjects such as marketing, finance, and management. There is also diversity among firms as to whether or not they pick up the tab for these educational opportunities. Some firms pay the whole fees, while other provide a subsidy or arrange educational loans. Sitel only picks up half the fees of the student, while TransWorks often reimburses the entire course fee. ICICIOneSource has an upper limit of Rs.25,000. Further, some BPOs require employees to commit to a minimum period of employment. At Wipro
Spectramind, it is a year, while at ICICIOneSource it is six months (Shrinate, 2004). This is a germane strategy. It is well known that the typical BPO employee is interested in further professional education. Our interviews with various employees suggest that they value this “perquisite.” And although we do not yet have firm data, anecdotal evidence suggests that BPOs who are establishing these programs tend to report lower turnover than those without similar programs.
leadership development Allied to career development, BPOs are also investing heavily in leadership training. While the motivation here is clearly one of self-interest (i.e., BPOs would like to increase “managerial bandwidth” and thus simultaneously reduce turnover), there is an element of development and longer term career planning here that is of mutual interest to both employer and employee. From the employer’s perspective, leadership development is key to establishing a strong middle management cadre, but also increases the loyalty of employees who go through the training. From the employee’s perspective, management training complements the career development process and binds the employee more closer to the organization in the longer term. These training programs are quite intensive and require considerable organizational resources. BPOs are training their employees to motivate their colleagues, instill team spirit, conduct performance appraisals and take on a battery of other responsibilities. At ITC ClientLogic (CLI3L), for example, there is considerable emphasis on training beyond that required for the current job, with a wide span of skills that are covered, from workforce management, coaching and feedback, communication skills and rewarding and recognizing staff to understanding of business metrics and Six Sigma (The Economic Times 2005).
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employee stock option plans Providing employees with stock options has had a long history of building loyalty and forcing an alignment of employees’ longer term goals with the organization’s longer term goals. Thus, using stock options as a motivating tool is not new, but in most organizations, this tends to be focused on senior management. Introducing stock options for lower levels of employees, as the BPOs are now doing, is more clearly tied to a retention objective (although 52% of BPOs provide stock options to their employees, most organizations have a vesting period of between 3-6 years) (NASSCOM 2005). Among higher end BPOs operating in the financial industry and in bio tech, stock options are common as well.
Job enrichment One of the defining features of a call center job is the repetitive nature of the work. As such, observers of the customer service industry note that these are “lousy” jobs, wherever they are. The intrinsic nature of the work does not seem to vary across countries. However, HR managers in Indian BPOs, facing high levels of turnover in a tight labor market, argue that call center workers can “add more value to a company than just being an outlet for customer frustrations.” (InfotechOnline, 2006) Hence, BPOs are outsourcing work like data entry and seasonal work to smaller companies so that their employees get to do high value-added work. For example, E-Edit Solutions, a BPO in e-publishing, outsources basic composition work and XML coding work to multiple vendors (IndiatimesInfotech, 2006). This way, BPO operators get to work on new technologies. This is not possible in all cases, but the principles are transferable. These various new initiatives are in addition to traditional strategies of good pay and benefits (which do not vary much across the industry) and good human resource management practices
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(which varies quite a lot) in the industry. Indian BPO firms are also engaged in a number of other strategies, such as targeting older workers who might be more willing to see this as a long-term career.
neWer ApproAches developing a Fun culture A key development is the recent focus of several BPOs in positioning themselves as “fun” places to work in to retain their predominantly young workforce. In general, the approach here is to sponsor fun-filled activities, parties, invest in recreational facilities, construct trendy interiors, encourage employees to watch movies, play games, and relax (when workload is light). The goal of these activities is to create an ambience in which the young educated and middle class workforce will enjoy the work atmosphere and hopefully will not leave. As the Director of Business Development at Motif a BPO suggests “We understand that salary is only one part of what motivates employees… an agreeable working environment is what really allows us to retain talented individuals.” Thus, BPOs are increasingly setting aside a budget for “fun” so as to keep their employees “happy.” At Wipro Spectramind, “everything revolves around fun” according to the VP Talent Engagement and Development (Doke 2003). Fun is a core, written-down, defined value and hence, permeates all aspects of life at the organization. Wipro Spectramind’s mission statement reads “Together we create a fun-filled work environment, encouraging all to enjoy pushing their individual and original roles.” The BPO holds that fun is critical to enhancing mutual trust and building dynamic relationships amongst employees. Further, they believe that fun helps to mitigate stress arising from BPO work and allows employees to maintain high energy levels in their interactions with customers. Thus at Wipro Spectramind, fun is
Employee Turnover in the Business Process Outsourcing Industry in India
not a reward for performance but a core aspect of the organizational environment. It is even linked to the performance management system whereby employees are rewarded for living up to the value of fun in the workplace. As a senior executive warns, “make no mistake, fun is serious business here [as it] helps reinforce the values of the organization” (The Economic Times, 2004). 24/7 Customer has developed a similar company motto: FITO (fun into the organization). By budgeting $10 million per year for these activities, they ensure an engaging time for all those on their roster. The BPO believes that employees bond through such activities and then go back to work recharged. And strong bonds of friendship certainly help to retain employees in an organization. Fun activities can help foster bonds with customers too. For example, at 24/7, the procurement of an important contract was celebrated with a 30 feet long cake with the customer’s logo on it (The Economic Times, 2004). At HCL BPO and Contech, a balance between fun and work is obtained by pushing the “work hard, party hard” concept. The BPOs recognize that their employees are fascinated with western ways of living and they devise programs that capitalize on this. And as the director of business development at Motif observes, “an agreeable work culture is what allows [BPOs] to retain talented individuals” (O’Driscoll, 2005). Creating a balance between work and fun in the workplace requires a significant organizational commitment and a variety of activities as the Wipro Spectramind previous example indicates. Thus, there is focus on the physical environment with BPOs making sure that their physical layouts appeal to their trendy workforce. EXL, for example has three state-of-the-art facilities spread over 150,000 square feet at Noida, near Delhi. These facilities have a bright, colorful, and lively design on the shop floors, while exuding elegance and classiness in “common areas” and on the corporate floor. The color schemes are bright and visually appealing, given that BPO work is deskbound,
repetitive and sometimes stressful. Bright reds, pinks, and yellows have been used on the shop floor, with a textured finish to counter the glare of the bright walls (Business India Intelligence, 2003). Similarly, there is a focus on recreational facilities, which appeal to the workforce. For example, Infosys’ campus houses a state-of-theart gym, golf course, sauna, 50,000 square feet swimming pool, lake with paddling boats, grocery store, pool tables, ping pong tables, and a dance floor (Infosys, 2001). 24/7 Customer has invested in a complete range of music equipment where their seven in-house rock bands practice during work (The Economic Times, 2004). Food is also an important aspect of the environment. IBM Daksh offers free breakfast buffets to all their employees (The Times of India, 2006). The Infosys campus contains food courts that serve Chinese, North Indian, South Indian, and Western cuisine (Infosys, 2001). Then there is the focus on wellness. The negative aspects of the call center environment, including night shifts, sedentary work, talking on the phone for hours together, and their associated ailments are now well known. Therefore, specific initiatives are being taken by some BPOs to address nutritional and stress-related concerns that employees might have. For example, KGISL recently hired a physiotherapist to teach employees exercises for flexing their fingers and toes (Revathy, 2004). While the initiative is small, it is nevertheless an attempt at protecting employees’ health and spirit. Other BPOs have initiated various programs like yoga classes, neck and shoulder massages, dietary and nutrition advisory sessions and workshops on managing sleep habits and achieving work-life balance. To complement the physical attributes of the workplace catering to the young is a focus on an informal atmosphere at work. Many BPOs try to keep the work atmosphere quite informal so that employees loosen up, feel comfortable, and have fun at work. With this in mind, Wipro Spectramind
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Employee Turnover in the Business Process Outsourcing Industry in India
has no dress code. Therefore, torn jeans worn to work are just as acceptable as traditional Indian clothing (Doke, 2003). And there is a focus on “fun-filled activities” at the workplace. Events like treasure hunts, voice impersonations and rangoli competitions are common. At HCL BPO, frequent contests and team dinners are a way of life. At Contech, it is common to walk into the cafeteria and witness a round of musical chairs. Even a one-minute-game-show was organized recently during which employees had 60 seconds to stick as many bindis (Indian adornment) as possible on their colleagues’ faces. At Effective Teleservices, each time an agent secures a sale, he or she spins the office’s wheel of fortune with the chance of winning a prize. On Halloween Monday, the employee with the best costume is awarded a gift. Infowavz International celebrates Rose Day, Friendship Day, Valentines’ Day, etc. with great fervor in a way that involves all their employees (O’Driscoll, 2005). Sometimes employees put up cultural shows too. Thus, at these BPOs, at any given point in time, there is something or the other going on, with never a dull moment. And after work, there are parties. Many BPOs sponsor parties for their employees at a nightclub or a discotheque, with unlimited food and drink to ensure a night of partying and fun with friends and colleagues. BPO workers enjoy this immensely as it legitimizes partying by making it ‘official’ and therefore allows them to elude late night curfews imposed by strict parents. And there are trips. BPOs are organizing regular outings too, as an opportunity for their employees to bond with one another and with their company outside of work. There are day trips to malls, weekend trips to resorts, and so forth. And finally, various Indian festivals are celebrated on company time and at company expense. To coordinate all these activities, BPOs have hired a new cadre of employees called “fun officers.” For example, Progeon (now called Infosys BPO) has hired a “chief fun officer” (CFO) who articulates new “fun” strategies (Mukherjee,
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2004). In other BPOs, fun teams are in charge of spur of the moment activities including pizza parties, outings, and picnics. At Wipro Spectramind, each supervisor is rated for his or her efforts to encourage team members to organize and participate in events and group activities (Shahane, 2005). Clearly there is an organized effort to promote fun as a central element of one’s employment at a BPO in India.
developing Family Friendly practices A second key element that is new is the effort to integrate the employee’s family into the enterprise in some way. The underlying notion here is that if the family is engaged, then there is greater likelihood of employee retention, as the employee’s family is also in some way “embedded” in the organization. Infosys BPO and Transworks have instituted periodic family days for their employees to show off their workplaces to their parents, siblings, partners, and kids. It is also an educational experience for family members as they learn about the various facets of life in the BPO industry and are introduced to team leaders. In the words of a VP of Human Capital at Transworks “The objective is to familiarize families with the nature of the industry and the work done, so that they feel proud of their children” (Ganesh, 2006). The family is also integrated into the reward systems of the enterprise. “When an employee has performed well, we call up the parents or the family members concerned and tell them about the employee’s achievement,” claims a lead executive of Accenture’s India Delivery Centre (Ganesh, 2006). On similar lines, when an employee recognition ceremony took place earlier this year at Wipro’s headquarters in Bangalore, all awardees along with their spouses from locations across India, were flown down exclusively for the ceremony. And then there is this notion of “sharing the gains.” When Cognizant reached its $ 1 billion revenue milestone, it celebrated by
Employee Turnover in the Business Process Outsourcing Industry in India
doling out the latest 5th generation iPods to 15,000 employees who had served the organization for over a year (Chatterjee & Ramnarayan 2006). Integrating the family at the time of hiring is also common. In their own way, BPOs are addressing parental queries about their ward’s job profile, career opportunities, and the workplace environment. Accenture’s BPO arm has even re-engineered its hiring process to involve employees’ families right from the interview stage to the post-recruitment phase. During the advanced stages of an interview, the company asks the prospective candidate to bring his or her family or spouse along. “We want them to have a personal feel about our workplace and deal with their apprehensions, if any, then and there,” says the VP HR, Convergys India, who invites parents of new recruits to the firm (CiteHR, 2004). And specifically geared to retention, many BPOs offer fully paid family vacations for longer service. Wipro Spectramind gives out two-three day holiday packages to an employee’s entire family for a destination within India in appreciation of the employee’s long stint in the organization (Chatterjee et al., 2006). Finally, there is the notion of work-family balance, a response to the problems expressed by young people. For example, at Wipro Spectramind, there are times when an employee needs temporary leave from work when his or her partner has been posted abroad. Such requests are accommodated as far as possible. When a husband and wife pair works for Wipro, the company tries to ensure that both of them are always placed at the same location. GlobalLogic BPO bears the travel expenses of their employee’s spouse and dependant children if the employee is required to travel abroad for more than three months on B1/L1/H1 visas (Shahane & Savitha, 2007). Perhaps the most radical effort at retention is the complete embedding of the family at the workplace: BPOs are encouraging entire families to work together in the company. One pioneering New Delhi based call center, Vertex, with over
900 employees popularized this concept. “They are several couples employed here, a mother and son duo, and an instance of 3 brothers but this is just the beginning,” according to the CEO of Vertex India. The idea was explored when some employees who were leaving said they were doing so because they hardly spent time with their families as a result of working night shifts while their spouses were asleep. But now, families can travel together to work, spend time at work and also while commuting back home. Vertex is hoping that the emotional bond to the company will be stronger now that family ties are involved (InfotechOnline 2004b). Ness Technologies, too, always makes a job offer first to an employable spouse before moving to the general pool of applicants. “We also retrain the person if necessary,” claims the VP HR at Ness Technologies (Shahane et al., 2007). In sum, the “new” strategies category appear to focus on the one hand on non-work related aspects of the organization that serve to make their BPO an attractive environment to work, while simultaneously attempting to increase the commitment of employees family’s to the organization in order to increase employee retention. These strategies have not received much attention in the voluminous research on turnover.
dIscussIon As noted, it is too early to comprehensively evaluate the effectiveness of these ongoing retention strategies. From a more analytical perspective, it is clear that the “new” strategies are qualitatively different from the traditional variables highlighted in prior turnover research. Removing the causes of job dissatisfaction is important, as demonstrated by prior turnover research. But the interesting aspect of the “fun” and “family integration” strategies is that they tend NOT to focus on the most fundamental issue (i.e., the jobd). Thus, the new strategies give great emphasis to the creation
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Employee Turnover in the Business Process Outsourcing Industry in India
of an organizational culture that provides some avenues for “fun” and “family integration” without addressing fundamental issues with the job itself. This approach appears to turn decades of turnover research on its head. On the other hand, it is possible that decades of turnover research has not focused appropriately on the importance of such approaches. However, there is a new strand of research on turnover that seems consistent with the new approaches described in this chapter (Mitchell, Holtom, Lee, Sablynski, & Erez, 2001). They focus on the concept of “embeddedness,” which refers to three inter-related notions: the extent to which people have links to other activities at work, the extent to which their jobs and communities are similar to or fit with other activities in their life spaces, and the ease with which these links can be broken. As Mitchell et al. (2001, p. 1104) note, “we can describe embeddedness as like a net or web in which an employee has become stuck.” The higher the number of links between the person and the web, the more the person is “bound” to the organization. Thus, it is possible that an employee can become enmeshed or embedded in many different ways. For example, an employee will consider how well he or she fits in the work community and the organization, and therefore issues like amenities, outdoor activities, social and entertainment activities all play a role in this notion of fit (Mitchell et al., 2001) that leads to organizational attachment. This notion of embeddedness, is quite consistent with the concept of organizational culture (in fact, most HR managers used this term), although culture has NOT been an important variable in turnover research (thus far). Clearly Indian BPOs are ‘engineering’ a particular type of culture that increases the embeddedness of the employee in the work environment. Whether the focus on increasing employees’ embeddedness through the creation of a particular type of culture apparently will have a positive effect on retention remains an open question; more systematic research is necessary to firmly establish its effectiveness. 1990
We do however, have some preliminary anecdotal evidence regarding the effect of both classes of strategies. First, on average, we find that turnover levels at captive firms tend to be lower than those at third party BPOs (in our sample of firms, turnover ranged from 15-20%), consistent with our expectations that captive firms have a more stable environment. Second, we know that at Sitel, the attrition rate is down to 30% from 37% in just 8 months as a result of the part-time educational opportunities (Shrinate, 2004). Also, “new” strategies at 24/7 Customer has reduced “infant mortality turnover” to less than 2% (Menon, Sinha, & Urs, 2004). Finally, in a recent Dataquest-IDC survey measuring the satisfaction level of BPO workers, IBM (previously Daksh) emerged on top as a result of high satisfaction scores on a variety of human resource dimensions, including work culture and image. This is despite their low rank on “employee satisfaction with wages.” (InfotechOnline, 2004a). As a result of Motif’s fun at work strategies 97% of Motif employees said in the same DataquestIDC survey that they “look forward to coming to work in the morning.” By creating a young employee-friendly work environment, KGISL reports that it has managed to contain their attrition rate at between 5-8% (Revathy, 2004). Similarly creative human resource management initiatives geared towards fun at Effective Teleservices have helped the company maintain an impressive 5.2% attrition rate (O’Driscoll, 2005). Thus, the preliminary evidence suggests that both types of strategies appear to be delivering results. However, there is also some recent evidence of a dissatisfaction and disillusionment with these strategies as well. The chief personnel manager of 24/7 notes that “some BPOs have gone overboard with the fun theme” (The Economic Times 2006b). With the “fun” approach, the seriousness related to doing business had gone, particularly as BPOs moved up the value chain and started doing more value added work. At 24/7 the company has
Employee Turnover in the Business Process Outsourcing Industry in India
newly introduced a formal corporate dress code, and is attempting to draw a line between work and fun (The Economic Times, 2006b). And as the chief delivery officer of the company notes, they are trying to now convey to employees that working for a BPO is not fun, but a serious career (Borthakur, 2006).The Chief Executive of Progeon, for example, notes that the concept of “having fun at work” was necessary in order to attract young people to work in the industry, but now employees have realized that working in the outsourcing industry involves serious work. Similarly, a senior vice president at another BPO argues that “during the initial phase of the BPO industry, branding BPO work as “fun” was a way to attract and retain these young kids to work” (Borthakur, 2006). But now, with maturation, it is necessary to re-brand the business. Bakshi (2005) suggests that “although the fun factor has not been thrown out of the window, it has taken the backseat” and that career planning and development are replacing the “fun” factor as the key to retaining employees. Recruitment advertisements for BPOs do not emphasize the fun factor as much anymore, while highlighting the career growth possibilities in the industry. The VP HR of Tracmail argues “it is high time the industry realizes that showcasing the BPO space as a fun extension of college life is grossly incorrect” (Offshoring Times, 2005). The president of NASSCOM (the industry association) notes that companies are now shifting to growth prospects as a prime motivator rather than concentrating on fun initiatives to retain talent (Bakshi, 2005). Although the evidence above is anecdotal, it is clear that some BPOs highlight the importance of the culture of fun, while others question its effectiveness. Clearly, there is some ambiguity here. What explains these differing perceptions on the importance of the “culture” strategies? We offer two tentative and inter-related explanations here. First, we argue that the given the recent evolution (the last 8 years) and the rapid growth and development of the industry (average annual growth
rates exceed 50%—see Table 1) under tight labor market conditions, firms were following a “scattergun” approach, experimenting with a variety of strategies to solve the turnover problem. Many HR managers told us that all they seem to do is “recruit, recruit, and recruit.” Thus organizations have just not had the time during this period of breakneck growth to establish coherent human resource policies. As some of the comments above seem to suggest, the last year has seen some maturation in the industry, where some of these culture strategies are being re-evaluated. Second, we argue that it is probable that strategy of creating a “culture of embeddedness” is too narrow in its focus. Kunda (1992) suggests that an organizational culture is “engineered” (i.e., researched, designed, developed, and maintained) to attain certain strategic goals. The culture defines the social characteristics of the company and acts as a guideline for company action. Over time, the grasp of this culture runs even deeper to control the “mindsets” and “gut reactions” of the employees by creating in them a strong commitment to the company and identification with company goals (Schein, 1985). There is considerable evidence that companies with strong corporate cultures are successful (Deal & Kennedy 1982). Organizations with a strong culture create clear and coherent values (Chatman & Cha, 2002; Saffold, 1988), increase organizational performance via a better understanding of organizational objectives and increase inter-personal ties (Deal et al., 1982; Pottruck & Pearce, 2001; Tushman & O’Reilly, 1997). And there is evidence from studies of several organizations (e.g., Southwest airlines) that companies with strong cultures attain a variety of strategic advantages (Friedberg & Friedberg, 1996; O’Reilly & Pfeffer, 2000a). Further, strong cultures create organizational stability (Denison & Mishra, 1995), which appears to be the need of the hour for Indian BPOs. The debate about the usefulness of these “fun culture” strategies in Indian BPOs is, in our view, a reflection of the narrow focus of these strate-
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Employee Turnover in the Business Process Outsourcing Industry in India
gies. Indian BPO strategies on culture appear to concentrate on the creation of an environment that promotes retention, and less on the creation of a culture to accomplish broad organizational goals. Their HR initiatives, for example, focus on social engineering in the BPO workplace to create a fun, nurturing environment. Through the provision of various social activities, these initiatives establish communal ties among employees to the extent that the workplace becomes the focal point of social interaction. This is further buttressed by various policies that link employees’ families to their workplaces, further binding employees to the organization. This is a human resource initiative, not an effort to create a particular shared culture by officially propagating “values” and having employees interpret them (Hochschild, 1997). We think that what is really going on is that BPOs have failed to integrate the two categories of strategies effectively and have been as yet unsuccessful in creating a strong organizational culture that promotes not just retention but overall organizational performance. For these efforts to be successful, a more integrated corporate culture approach such as that suggested by Kunda and others may well be necessary. What appears to be required is an integrated strategy that develops a strong organizational culture, one that in the long term aligns individual and organizational goals in a more serious way. We leave it to future research to investigate our tentative hypothese further.
conclusIon In this chapter, we briefly described the problem of high turnover in the high-tech BPO sector in India. We highlighted the various approaches to solving the turnover problem (which are currently ongoing). Although we do not have evidence yet of the effectiveness of these strategies, based on anecdotal evidence and interviews with industry personnel, we sense some ambiguity regarding the
1992
effectiveness of these strategies. We argue that this ambiguity is a function of (a) the recent and rapid growth of the industry and the fact that firms are experimenting with a variety of strategies to limit turnover, and (b) the inability of firms to develop an integrated organizational culture that permits a focus on both longer term organizational performance, as well as retention. The chapter is focused on highly educated workers, many of whom are working in low skilled jobs in the high tech environment of the outsourcing industry in India. There is a contradiction here. These employees are way too overqualified for the low skill jobs that they do. It is not surprising that turnover is high, given the nature of the work itself. Yet the employees are critical to the growth of India’s BPO industry. Perhaps the answer in the longer term is to recruit employees with lower qualifications who will be more likely to see these jobs as providing long-term careers. However, this would require the Indian education system to graduate more English speakers. Alternatively, maturity and consolidation in the industry will provide a more stable basis for more effective human resource policies to contain attrition. Until then, Indian BPO employees are “having fun.”
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IndiatimesInfotech. (2006). BPOs outsourcing work to smaller cos. Retrieved January 5, 2007, from http://infotech.indiatimes.com/BPO__ITES/ Outsourcing/ BPOs_outsourcing_work_to_ smaller_cos_/articleshow/2011023.cms Infosys. (2001). Management of human assets at Infosys. Retrieved March 10, 2007, from http:// www.infosys.com/about/cases/INFOSYS6%20 case%20withchanges.pdf InfotechOnline. (2004a). BPO workers more satisfied now. Retrieved November 10, 2006, from http://infotech.indiatimes.com/articleshow/ msid-919912.cms InfotechOnline. (2004b). Invited! Your family for the BPO job. Retrieved January 5, 2007, from http://infotech.indiatimes.com/articleshow/msod940751.cms InfotechOnline. (2006). BPOs take care of your career too. Retrieved September 5, 2006, from http://infotech.indiatimes.com/articleshow/msid1456697.cms Kalakota, R., & Robinson, M. (2004). Offshore outsourcing: Business models, ROI, and best practices. Alpharetta, GA: Mivar Press. Knowledge@Wharton. (2004a). A view from the developing world. Retrieved January 25, 2007, from http://knowledge.wharton.upenn.edu/article. cfm?articleid=860 Knowledge@Wharton. (2004b) Why corporations pursue BPO. Retrieved February 25, 2007, from http://knowledge.wharton.upenn.edu/article. cfm?articleid=860 Kunda, G. (1992). Engineering culture: Control and commitment in a high-tech corporation. Philadelphia: Temple U.P. March, J. G., & Simon, H. A. (1958). Organizations. New York: Wiley. McCue, A. (2005, January 21). High staff turnover hits Indian offshore firms. Offshoring Special
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Report. Retrieved December 15, 2006, from http://www.silicon.com/ research/specialreports/ offshoring/0,3800003026,39127243,00.htm Menon, S., Sinha, S., & Urs, A. (2004, August 1). Tug of talent. The Economic Times, p. 7. Kolkata, India: The Times Group. Mitchell, T. R., Holtom, B. C., Lee, T. W., Sablynski, C. J., & Erez, M. (2001). Why people stay: Using job embeddedness to predict voluntary turnover. Academy of Management Journal, 44, 1102-1121. Mukherjee, W. (2004, June 17). Most BPO workers change careers. The Economic Times. Retrieved October 6, 2006, from http://www1. economictimes. indiatimes.com/articleshow/ msid-742807.cms NASSCOM. (2007). NASSCOM Strategic Review 2007. New Delhi: NASSCOM. NASSCOM. (2005). NASSCOM Strategic Review 2005. New Delhi: NASSCOM. NASSCOM. (2004). NASSCOM Strategic Review 2004. New Delhi: NASSCOM. O’Driscoll S. (2005, November 8). BPOs bring fun back to the workplace. The Times of India. Retrieved March 10, 2007, from http://www. timesofindia.indiatimes.com/ articleshow/msid1288762,prtpage-1.cms OffshoringTimes. (2005). BPOs-Those who look for a serious career. Retrieved January 9, 2007, from http://www.offshoringtimes.com/ Pages/2005/BPO_news330.html O’Reilly, C. A. & Pfeffer, J. (2000) Cisco systems: Acquiring and retaining talent in hypercompetitive markets. Human Resource Planning, 23, 38-52. Pandey, A., & Singh, P. (2005). Women in call centres. Economic and Political Weekly. Retrieved February 10, 2006, from http://www.epw.org.in
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Pottruck, D. S., & Pearce, T. (2001). Clicks and mortar: Passion-driven growth in an Internetdriven world. San Francisco: Jossey-Bass. Pradhan, J. P., & Abraham, V. (2005). Social and cultural impact of outsourcing: Emerging issues from Indian call centres. Harvard Asia Quarterly, Summer. Cambridge, MA: Harvard Asia Center. Rediff News. (2005). Salary hike, a threat to Indian BPO. Retrieved January 25, 2007, from http:// www.rediff.com/money/2005/apr/20bpo2.htm Remesh, B. P. (2004). Cyber Coolies’ in BPO: Insecurities and vulnerabilities of non-standard work. Economic and Political Weekly. Retrieved June 20, 2006, from http://www.epw.org.in Revathy, L. N. (2004, July 19). Live it up in office. The Hindu Business Life. Retrieved March 6, 2007, from http://www.hinduonnet.com/the hindu/thscrip/ptint.pl?file-2004071900040100. htm&date=2004/07/19/&prd=we& Saffold, G. S. (1988). Culture traits, strength, and organizational performance: Moving beyond “strong” culture. Academy of Management Review, 13, 546-558. Schein, E. H. (1985). Organizational culture and leadership. San Francisco: Jossey-Bass. Shahane, P. S. (2005, August 11). Wanna have fun sans sex? Come, join our BPO. Infotech Online. Retrieved March 10, 2007, from http:// infotech.indiatimes.com/ articleshow/msid1197310,prtpage-1.cms Shahane, P. S., & Savitha, V. (2007, January 6). It’s family first and tech cos and BPOs. Infotech Online. Retrieved March 11, 2007, from http:// infotech.indiatimes.com/ articlesehow/msid1067797,prtpage-1.cms Sheikh, Z. (2004, Nov. 1). Want a free international trip? Work for a BPO. Rediff News. Re-
trieved from http://in.rediff.com/getahead/2004/ nov/01ga-zia.htm Shrinate, S. (2004, June 6). Truly, a learning experience. Business Today, 156-157. Srinivasan, T. N. (2006). Information technology and India’s growth prospects. In L. Brainard & S. M. Collins ((Ed.), Offshoring white-collar work- the issues and implications, The Brookings Trade Forum, 2005. (pp. 203-240). Washington, DC: The Brookings Institution. The Economic Times. (2007). How to bell the BPO cat. Retrieved March 10, 2007, from http:// economictimes.indiatimes.com/articleshow/ msid-1736650,prtpage-1.cms The Economic Times. (2006a). BPOs’ nopoaching pacts fall apart. Retrieved November 26, 2006, from http://economictimes.indiatimes. com/BPOs_nopoaching _ pacts_fall_apart/ articleshow/498749.cms The Economic Times. (2006b). BPOs get serious, axe “fun job” stage. Retrieved March 9, 2007, from http://economictimes.indiatimes.com/Hot_Links/ BPO/ BPOs_get_serious_axe_fun_ job_tag/ articleshow/1486707.cms The Economic Times. (2005). Why BPO execs are given training. Retrieved October 5, 2006, from http://www.bpo.nasscom.org/artdisplay. aspx?art_id=4491 &cat_id=608 The Economic Times. (2004). BPOs make staffers boogie woogie. Retrieved March 5, 2007, from http://www.247customer.com/newsandevents/ Article -56.php The Times of India. (2006). Two Knights @ The Call Centre. Retrieved March 9, 2006, from http:// www-935.ibm.com/services/us/gbs/bus/html/ dakshnews_21apr06.html The Tribune. (2006). Future on the line. Retrieved March10, 2007, from http://www.tribuneindia. com/2006.20060111/jobs/main1.htm
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Tushman, M., & O’Reilly, C. (1997). Winning through innovation: A practical guide to leading organizational change and renewal. Boston: Harvard Business School Press.
c
d
endnotes a
b
Note that the software sector is also experiencing high turnover, although not to the same extent as the BPO sector. Coolie: A colonial Indian word meaning porter.
There is a stigma associated with women working at night. The idea of a girl staying out at night, all dressed up, and returning in the early hours of the morning looking tired raises eyebrows. Even some of the “traditional” strategies noted in this chapter, e.g., providing non-job related education opportunities, do nothing to improve the nature of employees’ current jobs.
This work was previously published in Management Practices in High-Tech Environments, edited by D. Jemielniak; J. Kociatkiewicz, pp. 110-132, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 6.21
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis:
An Exploratory Comparative Study Dhruv Nath Management Development Institute, India Varadharajan Sridhar Management Development Institute, India Monica Adya Marquette University, USA Amit Malik Management Development Institute, India
AbstrAct The off-shore software development companies in countries such as India use a global delivery model in which initial requirement analysis phase of software projects get executed at client locations to leverage frequent and deep interaction between user and developer teams. Subsequent phases such as design, coding and testing are completed at off-shore locations. Emerging trends indicate an increasing interest in off-shoring even requirements analysis phase using computer mediated
communication. We conducted an exploratory research study involving students from Management Development Institute (MDI), India and Marquette University (MU), U.S.A. to determine quality of such off-shored requirements analysis projects. Our findings suggest that project quality of teams engaged in pure off-shore mode is comparable to that of teams engaged in collocated mode. However, the effect of controls such as user project monitoring on the quality of off-shored projects needs to be studied further.
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
IntroductIon The past two decades have witnessed significant globalization of the software development process with development rapidly moving away from the traditional collocated model, often called on-site development, to the off-shoring model. With the availability of increasingly skilled, flexible, and economical IT workforce in countries such as India, Malaysia, and China, it makes financial sense for United States and European client organizations to execute a significant portion of software projects in these countries. This growing trend towards off-shoring has, in turn, spurred growth in many Asian nations, creating improved economic and IT infrastructure and enhancing the viability of these countries as software service providers. For example, India has emerged as a dominant off-shore software development industry with revenue of about $16.7 billion, which is projected to reach $60 billion by the year 2010 (Carmel, 2006; National Association of Software and Service Companies, 2005).
The Indian off-shore software industry has matured over the years, and process capability has been steadily improving. Coordination and communication problems typically encountered in off-shore development (see Battin, Crocker, Kreidler, & Subramanian, 2001, for an extended discussion), are mitigated by the use of processes such as rational task assignments and liaisoning, and tools such as centralized bug reporting system and software configuration management platforms. A case in point is India’s Infosys Technologies, which has significantly leveraged time zone differences with its clients by modifying its organizational culture, processes, and communication technologies (Carmel, 2006). The typical off-shore development model, followed successfully for over a decade by many Indian software companies such as Infosys, Wipro, TCS, and Satyam, is illustrated in Figure 1. Requirements analysis refers to that stage of the system development life cycle wherein the information and information processing services needed to support select objectives and functions
Figure 1. The off-shore software development model Off -shore Development Center
Client Location Requirement Analysis Phase Design, Coding and Testing Phases
Deployment Phase Support and maintenance Phase
Status Tracking, Issue Resolution, Task Assignment Onsite Coordinator, Client Manager
1998
Off-shore Project Manager/off-shore Development Team
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
of the organization are (i) determined and (ii) coherently represented using well-defined artifacts such as entity-relationship diagrams, dataflow diagrams, use cases, and screen prototypes (Hoffer, George, & Valacich, 1999). As suggested in Figure 1, typically this phase is conducted at the client location, since this phase requires frequent and significant interaction between users and developers. Business and systems analysts are physically located at the client site to perform this activity. Global projects consultant teams from off-shore location travel to the user site to gather and analyze requirements in face-to-face meetings (Damian & Zowghi, 2002). The consultants then communicate the requirements to the development staff in the offshore site. Depending on the nature of the project, high-level design is conducted in both on-site and off-shore mode due to comparatively lower interaction needs with the client. Detailed design, coding, and testing are executed at the off-shore site. Off-shore vendors also deploy liaisons who coordinate activities between on-site users and the off-shore development team. These liaisons are critical for effective communication and coordination between users and developers (Battin et al., 2001). Increasingly, both client and software providers are now considering the possibility of off-shoring the requirements analysis phase, traditionally done on client site, away from the client location. In such a scenario, analysts and developers located at the off-shore location would interact in a virtual mode with the clients situated at their premises to determine and structure the requirements. Such a shift could potentially improve the cost arbitrage of the projects for instance by cutting down travel costs incurred for sending analysts to the client site for face-to-face meetings. In an extreme case, the entire team of analysts and developers could be based in off-shore location such as India while the client could be in Europe or the United States. Requirements gathering would then be conducted between these virtual teams using existing computer-mediated communications
such as chat, e-mail, and video conferencing. The questions of research interest then are: 1.
2.
Can requirements analysis conducted by collocated teams using face-to-face communication be comparable or better than those produced by virtual off-shore teams using computer-mediated communication? What forms of control are necessary to facilitate high-quality outcomes from virtual requirements analysis undertakings?
Using theories of social presence, media richness (Burke & Chidambaram, 1999), as well as control theory (Kirsch, 2002), we develop and test hypotheses regarding these questions. Traditionally, user involvement in IS projects has been an important contributor to project success (Hartwick & Barki, 1994; Foster & Franz ,1999; Lin & Shao, 2000; Sridhar, Nath, & Malik, in press). Lack of user proximity in a virtual setting can potentially limit the quality of requirements elicitation due to limitations of communications media. In order to mitigate these limitations and the absence of analysts and developers at customer premises, user involvement is expected to take the form of close project monitoring and control to ensure that requirements and project goals are met. Control theory provides the required theoretical foundations for analyzing the effect of different types of controls on teams (Crisp, 2003). In this study, we specifically consider user project monitoring as a behavioral control mechanism and examine its impact on project quality during requirements analysis phase of off-shored software projects. Further, we explore the intersection of media richness and control theories to find early answers to the research questions raised earlier. This study is exploratory in nature. Without loss of generality, we restrict our attention to the requirements analysis phase as defined in the structured systems analysis and design (SSAD) methodology as defined by Hoffer et al. (1999).
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Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
We define requirements analysis as subsuming the following two phases:
vIrtuAl teAms In soFtWAre proJects
1.
In a pure off-shore mode, users at the client location and the developers at the off-shore location never meet face to face and hence operate as virtual teams, primarily linked through technology across national boundaries. It is in this context that we review previous research on such virtual teams, specifically those engaged in software development projects. Virtual teams are becoming the norm in most corporate environments such as consulting firms, technology products, and e-commerce (Lurey & Raisinghani, 2001) and are being increasingly examined in academic literature (see Powell, Piccoli, & Ives, 2005 for a comprehensive survey of virtual teams). Battin et al. (2001) described how Motorola deployed global virtual teams across six different countries for a Third Generation Cellular System product development. Software development in Alcatel was handled by a central group of several thousand engineers distributed throughout the world (Ebert & De Neve, 2001). Few studies however, have, examined the use of virtual teams for requirements analysis. Edwards and Sridhar (2005) studied the effectiveness of virtual teams in a collaborative requirements analysis practice. In that study virtual teams at near and far locations participated in requirements analysis phase of the project. This typically is applicable in collaborative global product development exercises as described in Battin et al. (2003). In contrast, in this study we look at the requirements analysis phase of off-shored software projects in which the two protagonists are (i) users who specify the requirements, and (ii) developers who determine and document these requirements together constituting a collaborative virtual teams. Damian and Zowghi (2002) studied the interplay between culture and conflict and the impact of distance on the ability
2.
Requirements determination: The process by which the analysts determine the requirements of the system from the users through discussions and interviews and exchanging forms, reports, job descriptions and other necessary documents. Requirements structuring: The process by which the analysts coherently represent the information gathered as part of requirements determination using process modeling and logic modeling tools as described in SSAD.
Our interactions with managers in client firms engaged in software development indicate that off-shoring of requirements analysis is still uncommon. Hence it is not practical to analyze this phenomenon of pure off-shoring of requirements in real-life setting. It is also difficult to do in-depth longitudinal or cross-sectional case studies. Given these arguments, an exploratory research study was conducted in an academic setting involving management students enrolled in a graduate-level information systems course at Management Development Institute (MDI), India, and management students enrolled in a graduate level IT Project Management course at Marquette University (MU), United States. MU students role-played as virtual users/project managers while MDI students were software developers for MU teams as well as user clients for collocated MDI teams. Prior to a full description of our undertaking, we first discuss existing literature on virtual teams in software projects. We then describe the theoretical foundations of this study and elaborate on our research design. Next, we discuss our measures and discuss study outcomes. The article concludes with implications for future research in this context.
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Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
to reconcile different viewpoints with respect to “requirements negotiation” processes. They found that lack of a common understanding of requirements, together with reduced awareness of local context, trust level, and ability to share work artifacts significantly challenge effective collaboration among remote stakeholders in negotiating a set of requirements that satisfies geographically dispersed customers. Damian, Eberlein, Shaw, and Gaines (2000) examined the effect of the distribution of various stakeholders in the requirements engineering process. They found that highest group performance occurred when customers were separated from each other and collocated with the facilitator or system analyst. Our study further contributes to the literature on virtual teams engaged in off-shored software requirements analysis.
theoretIcAl FoundAtIons And hypotheses development social presence and media richness theories Social presence is the extent to which one feels the presence of a person with whom one is interacting. Short, Williams, and Christie (1976) suggested that some media convey greater social presence than others. For instance, face-to-face interaction is considered to be high in social presence, primarily because of the capacity of the medium to transmit proximal, facial, and other nonverbal cues relative to other media. In contrast, computer-mediated communication such as e-mail exhibit inherently lower bandwidth than face-to-face interaction, thus permitting transmission of fewer visual and nonverbal cues and restricting socio-emotional communication (Rice & Love, 1987). In addition to differences in social presence, media richness theory proposes that, given their limited cuecarrying capacity, leaner media such as e-mail, will be less effective for groups performing am-
biguous tasks which require a variety of cues to be exchanged. However, Burke and Chidambaram (1999) pointed out that despite some support for media characteristics-dependent theories, overall empirical evidence has been mixed.
Quality of Off-Shored Projects vs. Collocated Projects Teams engaged in pure off-shored projects primarily rely on computer-mediated communications (synchronous such as chat, audio and video conferencing as well as asynchronous such as e-mail) for interaction. However, collocated teams have the luxury of rich face-to-face communication. Based on the social presence and media richness theories, we formulate the following hypothesis: H1: Collocated teams using face-to-face communication will produce higher quality project artifacts compared to virtual teams using computermediated communication during the requirements analysis phase of software projects. In a subsequent section, we define quality of project artifacts and how it is measured. To the best of our knowledge, quality of projects and performance of virtual teams engaged in the software requirements analysis has not been studied in the literature thus far. Although several researchers have compared performances of traditional collocated teams with that of virtual teams, the conclusions have been mixed. While one study reported greater effectiveness for virtual teams (Sharda, Barr, & McDonnell 1988), others such as McDonough, Kahn, and Barczak (2001) have found that virtual teams could not outperform traditional teams. Andres (2002) reported that teams working in face-to-face settings experienced greater productivity compared to those supported using videoconferencing. Generally, computer-mediated teams exhibit lower frequency of communication than face-to-face teams, although they tend to exchange more task-oriented
2001
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
messages as a proportion of total communication (Burke & Chidambaram, 1999; Chidambaram, 1996). This enhanced communication leads to comparable or even higher performance of virtual teams as compared to collocated teams (Burke & Chidambaram, 1999). Consistent with these findings, Schmidt et al. (2001) reported that virtual teams are more effective in new product development decisions as compared to face-toface teams. However, a majority of the early work has detected no difference between the two types of teams (Burke & Aytes, 1998). Other studies have found no significant differences between traditional and virtual teams when examining decision quality (Archer, 1990; Chidambaram & Bostrom, 1993) as well as the number of ideas generated by decision making teams (Archer, 1990; Lind, 1999; Sharda et al., 1988). Walther (2005) further suggested that complex human processes such as negotiation actually improve between physically distributed individuals who communicate using media low in richness. Studies comparing performance of virtual and collocated teams in software requirements analysis phase are even fewer. Damian et al. (2000) found that groups in face-to-face meetings performed no better than the electronically mediated groups in the requirements negotiation phase of the software development life cycle.
control theory Control is defined as the set of mechanisms designed to motivate individuals to work in such a way that desired objectives are achieved (Kirsch, 1996). Formal controls rely on mechanisms that influence the controllee’s behavior through performance evaluation and rewards (Choudhury & Sabherwal, 2003). Controllers utilize two modes of formal control: behavior and outcome (Kirsch, 2002). In behavior control, appropriate steps and procedures for task performance are defined by controllers, and then controllees’ performance
2002
is evaluated according to their adherence to the prescribed procedures. In outcome control, controllers define appropriate targets and allow controllees to decide how to meet those output targets. Controllees’ performance is evaluated on the extent to which targets were met, and not on the processes used to achieve the targets (Kirsch 2002). Informal control mechanisms utilize social or people strategies to reduce goal differences between controller and controllee. Self-control, one mode of informal control, occurs when an individual sets up his or her own goals, selfmonitors goal achievement, and rewards or sanctions him- or herself accordingly (Kirsch, 2002). Clan control, the other type of informal control, is implemented through mechanisms that minimize the differences between controller’s and controllee’s preferences by “promulgating common values, beliefs and philosophies within a clan, which is defined as a group of individuals who are dependent on one another and who share a set of common goals” (Choudhury & Sabherwal, 2003). Kirch et al (2002) extended the control theory to the role of client liaisons, exercising control of IS project leaders to ensure that IS projects meet their goals. The study examined the conditions under which client liaisons of IS development projects choose various modes of control. In a related work, Choudhury and Sabherwal (2003) examined the evolution of portfolio of controls over the duration of outsourced IS development projects. They conclude that in outsourced software projects outcome controls are exercised at the start of the project. Behavioral controls are added later in the project. Clan controls are used when the client and vendor had shared goals, and when frequent interactions lead to shared values. Both these studies analyzed the evolution and choice of controls in IS projects and not on the effect of these controls on project outcome. In this study we focus on the effect of formal modes of control (both outcome and behavior) on the qual-
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
ity of project artifacts produced by virtual teams engaged in software requirements analysis. Project monitoring provides opportunities for both forms of formal control previously described through tracking, interpretation and transmission of status information (Crisp, 2003). In this study, we define user control to include not only monitoring the project plan (a form of behavioral control) but also the evaluation of the formal artifacts produced (a form of outcome control) during the requirements analysis process. Monitoring of costs is excluded as requirements analysis is often part of a large IS outsourcing project. Though cost monitoring is vital, it does not assume much significance when considered for only one phase of the project and hence is excluded. Based on the control theory and literature review of virtual teams, our second hypothesis is as follows: H2: Developer teams that are closely monitored by their users in a virtual team mode will produce higher quality of artifacts as compared to developer teams that are not closely monitored by their users.
reseArch desIgn To test both the aforementioned hypotheses, we conducted two overlapping quasi experiments involving students at MU and MDI in controlled settings. Such experimental settings have been actively used in distributed software engineering laboratories and business schools to conduct virtual team exercises in their courses (Powell et al., 2005). A controlled experimental approach provides three benefits. Firstly, it makes available several teams that work in parallel, thereby generating rich data for drawing conclusions. Secondly, it permits researchers to experiment with newer approaches, which may not yet have been explored by the industry. Finally, it equips and trains software engineering students to understand and to handle the challenges of working in global software teams (Favela & Pena-Mora, 2001). A survey on virtual team research by Powell et al. (2005) cited 28 academic experiments and only 13 case study research papers. Our experimental setup is illustrated in Figure 2 and described in greater detail next.
Figure 2. The experimental set-up mu team 1 user
virtual off-shored project
mdI team A1
co-located project
developer mdI team b1
loose project monitoring
user
developer
(a) Experiment 1: Collocated vs. Virtual Teams
2003
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
experiment 1—testing h1: the Impact of media richness on project Quality
Setting for the Virtual Teams
For hypothesis 1 (H1), we compared the quality of projects produced by collocated teams with those that were produced by virtual teams. The collocated teams were students of the postgraduate program in management (equivalent to an MBA) who were attending a core course in management information systems (MIS) at MDI. One hundred and twenty-seven students were divided into two roughly equal sections, section A and section B. Students from section A were grouped into 10 teams of 5 or 6 students each. Each team played the role of users for the collocated project. Figure 2(a) shows one such team, referred to as MDI team A1. Students from section B were also grouped into 10 teams of 5 or 6 students each. Each of these teams formed developer teams for the collocated project. Figure 2(a) shows one such team, referred to as MDI team B1. Each MDI A team was then paired with one of the MDI B teams, as shown in Figure 2(a). Thus MDI team A1 served as users to MDI team B1, the developers in the collocated project. Similarly, MDI team A2 was the user for MDI team B2, and so on.
MU students, enrolled in a graduate elective course in IT project management, assumed the role of virtual users. Twenty-eight students divided into 10 teams (each with a team size of 2-3 members), referred to as MU Teams. Figure 2(a) shows one of these MU teams, team 1. Each MU team was paired with one of the MDI B teams. Thus MDI B teams became the off-shore development teams for the associated MU user teams. These teams consisting of users and developers worked in virtual team mode. In summary, each MDI team B was involved in the following two projects: (i) collocated project with MDI user team A and (ii) virtual off-shored project with MU user team. In both projects, the MDI B teams were required to submit a project plan at the beginning of the project, detailing various activities and timelines. The final delivery date was predetermined by the instructors based on the course schedule. Project monitoring was voluntary between MDI B and MDI A user teams, so as to minimize the impact of any other variables on the experiment. The MDI B development teams communicated with their corresponding user teams at MU through online means such as e-mail, instant messaging, and
Figure 2. continued mu team 1 user virtual offshored project
tight project monitoring
developer mdI team A1
user
loose project monitoring
virtual offshored project
developer mdI team b1
(b) Experiment 2: Virtual Teams Under Tight Project Monitoring vs. Loose Project Monitoring
2004
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
voice chats such as Skype and with their MDI A user teams through face-to-face meetings while having face-to-face interactions with their collocated MDI A teams. It must be noted that each developer teams (i.e., MDI B teams) had 5 or 6 members, thus controlling for the effects of team sizes on the quality of the project.
experiment —testing h2: the Impact of project monitoring on project Quality To test H2, we compared the quality of two sets of virtual teams, one in which the users imposed project monitoring (referred to as tight monitoring), and the other one in which user project monitoring was voluntary (referred to as loose monitoring). For this purpose, we used a portion of the data collected as part of experiment 1. Recall that in experiment 1 we already had a set of virtual teams, namely the teams formed by MU user team and the MDI B developer teams, operating in voluntary project monitor-
ing mode. We then formed another set of virtual teams by pairing each MU user team with MDI A teams. However, in this experiment MDI A teams performed the role of developers for their corresponding MU user teams (compared to the role of users they played in experiment 1). MU user teams were required to tightly monitor their projects with MDI A teams. This is illustrated in Figure 2(b), where MU team 1 was the user for MDI team A1, under tight project monitoring, and was also the user for MDI team B1, under loose project monitoring (part of experiment 1). Similarly, the MU team 2 was the user for MDI team A2 and B2, and so on. Once again, each of the developer teams (i.e., MDI A and B teams) had 5 or 6 members, thus controlling for effects of team size on success of the project. Tight and loose control was implemented as follows: In the case of virtual teams operating under imposed tight project monitoring (MU and MDI A teams), the developers were told to submit weekly project reports to their respective user teams. The user teams were required to review and ask
Table 1. Experimental set-up MU Teams
Experiment 1
Experiment 2
Users
Users
MDI A Teams
Users
Developers
MDI B Teams
Treatment
Hypothesis Tested
Developers
MU Users <-> MDI B Developers, Virtual Teams MDI A Users <-> MDI B Developers, Collocated Teams
H1
Developers
MU Users <-> MDI A Developers, Virtual and tightly controlled Teams MU Users <-> MDI B Developers, Virtual and loosely controlled Teams
H2
Table 2. ANOVA comparing means of variables across teams Variable Work Experience
F
Significance
0.601
0.795
Experience in Programming
1.356
0.213
Experience in Participating in Virtual Teams
0.803
0.614
Experience in Software Project Management
0.973
0.465
Experience in Systems Analysis and Design
0.543
0.841
2005
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
for changes/actions as required, thus implementing behavioral control. In addition, MDI teams were required to conduct requirements analysis in iterative model, returning a set of intermediate artifacts which would also be reviewed and commented on by their users, thus implementing outcome control. This formed the control group in our experiment. In contrast, teams operating under voluntary user project monitoring did not have to submit regular project status reports nor any intermediate artifacts to their users. They received requirements specifications from their users, asked for clarifications where necessary, and submitted the final artifacts at the end of the project. Any communication between these teams and their users was strictly on a need-be basis. This formed the experimental group in our research design. MU teams were graded partly on the communication plans and weekly project status reports they developed for monitoring their MDI A teams. This ensured that MU team users spent more time and effort in monitoring their associated MDI A teams than MDI B teams. This design resulted in the two overlapping experiments 1 and 2 described previously. Table 1 illustrates the roles of MDI and MU teams in these experiments. All student teams were formed in such a way that the technical background and average work experience of group members were almost the same across groups, thereby controlling team member heterogeneity. Table 2 provides ANOVA results comparing means of various parameters across teams. Results suggest no significant differences in the means of various parameters across teams confirming their homogeneity. Students had sufficient stake in the virtual team project as up to 30% of the course grade was assigned to the project. Our research design adopts the quasi experiment approach where the participants are allotted to teams, based on certain criterion, as explained previously, and not randomly. Hence the limitations of quasi experimentation as explained in
2006
Campbell and Stanley (1966) applies to our research setting as well.
tasks Virtual Team Exercise The virtual team interactions (in both experiments) were broken down into two phases: (1) socialization, which permitted the teams to develop relationships and negotiate communication terms and requirements; and (2) project execution, which allowed requirements gathering, clarifications, and exchange of analysis artifacts. Phase 1: Socialization It is an increasingly common practice in virtual teams to engage in formal socialization before embarking on virtual projects in order to understand each others’ work styles and expectations, negotiate communications strategies and protocols, and build trust for sustained relationships (Jarvenpaa & Leidner, 1999). In our experiment, this was not feasible due to resource and other restrictions, not unlike those faced by organizations new to off-shoring as well as those involved in small, preliminary initiatives. Furthermore, our objective was to draw benchmark conclusions regarding effects of user project monitoring on teams engaged in a fully virtual team environment. Therefore we encouraged the MU and MDI teams to communicate and socialize with each other on-line before initiating actual work on the project. The virtual teams—MU, MDI A, and MDI B—socialized with each other using on-line media such as e-mail, Internet chat, bulletin boards, and e-groups for a period of 2 weeks. Project details were withheld from all teams till conclusion of the socialization phase in order to ensure that communication was more personalized and oriented towards relationship and trust building (Sarkar & Sahay, 2002) rather than requirements exchange.
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
Phase 2: Project Execution Subsequent to socialization, the projects were initiated, and team roles were detailed. Marquette University has a service learning office that obtains information systems projects from nonprofit organizations and small businesses in and around Milwaukee. Such real-life projects were given to MU users. Examples of these projects include a donation management system for a nonprofit organization, a volunteer management system, an alumni website, a tracking system for battered and abused women, and a book inventory management system. The MDI teams elicited project requirements from MU teams through various on-line media, as described previously. SSAD methodology was used in the experiment. The gathered requirements were structured using process modeling tools such as context analysis diagram (CAD), data flow diagrams (DFDs) and process specifications. MDI teams also modeled the data and associated relationships using entity relationship diagrams (ERDs). MDI teams also created screen-based prototypes as part of the requirements analysis exercise. These artifacts were submitted by the MDI teams to MU user teams as part of the deliverables. In addition, the MDI A development teams that experienced tightly monitored projects submitted the following additional artifacts to the users: a.
b. c.
A weekly status report of the project, explaining reasons for delays and plans for overcoming any slippages. Any modifications to the project plan. A draft (intermediate) version of all the above artifacts, midway through the project Based on their requirements, users provided feedback and corrections, which were incorporated by the developers into the final version.
are shown in Table 3. The table also shows several artifacts/reports that the MU teams had to submit to the course instructors.
Collocated Exercise For the collocated team exercises, each MDI A team had at least one member who had prior work experience of 2 to 3 years. These individuals were asked to select an information system project they had encountered at work, to ensure realism and familiarity with system features. Each collocated team developed requirements analysis artifacts for these projects. The instructors had discussions with each group and scoped the projects such that the project complexity was almost the same as that of the virtual teams. The MDI B teams were asked to submit to MDI team A artifacts identical to those submitted to MU teams during the virtual team project (see Table 1). The entire project duration for both virtual and collocated projects was 8 weeks.
outcome meAsures Quality of projects Quality of MU-MDI projects were determined through (i) expert evaluation of project artifacts produced by developer teams and (ii) user perceptions about the project deliverable quality. Quality of project artifacts was measured on several dimensions—namely, correctness of the artifacts (e.g., whether the data flow diagrams were drawn correctly, whether or not they satisfied user requirements), adherence of the artifacts to user requirements, and consistency of the artifacts with each other. i.
Completeness and Adherence of the Artifacts to User Requirements
Details of all these deliverables submitted by the different teams for this virtual team exercise
2007
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
Table 3. Artifacts submitted by the different teams for the virtual team projects Artifact
MDI A Teams for the Virtual Team Projects under tight Project Monitoring
MDI B Teams for both the Virtual and Collocated Projects under loose Project Monitoring
Context Analysis Diagram
Data Flow Diagrams
Entity Relationship Diagrams
Process Specifications
Screen shots
An intermediate version of all the above artifacts
Weekly Development Status Report
Communication Plans
Risk Assessment
Contingency Plans
Weekly Project Status Report (to the Instructors)
Team A and B Assessment
Context analysis diagram Data flow diagrams (DFDs) Process specifications Entity-relationship diagrams (ERDs) Screen shots of the proposed system
The expert analyzed and scored the above artifacts for each project on a 7-point Likert-type scale. Though the expert had only 2 to 3 years of experience, by following a standard evaluation
2008
(only with MDI A teams)
Project Closure Report
Completeness and adherences were analyzed by an external expert who was not part of the MU-MDI teams. This expert had 2 to 3 years of experience in software projects and had taken courses in SSAD. The expert evaluated the completeness and adherence of each of the following artifacts: 1. 2. 3. 4. 5.
MU Teams for the Virtual team Projects (to be submitted to the instructors)
procedure such as the one outlined previously, this individual was able to arrive at an objective assessment of project quality. This evaluation was validated for consistency and accuracy by a second expert who had more than 20 years of SSAD industry experience, thus reducing possible biases in the evaluation process. The average of these scores across all artifacts for each project was taken as a measure of completeness and adherence of project artifacts to user requirements. By making the team assignments to the projects blind to the expert, we minimized subjective bias of the expert during the assessment. ii.
Consistency of the Artifacts
The expert also analyzed the consistency of the screen prototypes submitted by development
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
teams with the DFDs and ERDs submitted. Using a 7-point Likert-type scale, the expert analyzed and scored for each project the consistency across 1. 2.
Screen prototypes and DFDs Screen prototypes and ERDs
Using the same evaluation and validation procedure described in (i), an average score measuring the consistency of the project artifacts was generated. iii. User-perceived quality User perceptions about the quality of artifacts submitted by the developer teams were also collected through a survey questionnaire as the third measure of team performance. A 7-point Likerttype scale was used to elicit response from the user team members. Items adapted from Edwards and Sridhar (2005) are detailed in Appendix I. Scores given by all the users to a particular development team were averaged and were treated as measure
of user-perceived quality. Therefore, there was one rating/score per user teams. Based on measures of quality already mentioned, hypothesis H1, which was constructed in the previous section, can be refined and are presented in Table 4. By specifying the two dimensions of completeness and adherence as well as consistency, any errors in the assessment of the quality of the projects was thought to be minimized.
User Project Monitoring We also measured perceived project-monitoring practices of all users and developers involved in both tight and loosely monitored projects. Responses were elicited on a 7-point Likert-type scale at the end of the project. Items are shown in Appendix I. In order to capture the responses for perceived quality and user project monitoring based on the roles they played (user/developer) and the team (collocated/ virtual) with which they did the projects, different versions of the survey was prepared and administered to students at MDI and
Table 4. Detailed hypotheses based on different measures Research Question
Hypotheses H1a: Adherence and completeness of the requirements analysis artifacts produced by the collocated teams using face-to-face communication will be better than those produced by the virtual teams using computer-mediated communication.
Quality of Projects of Virtual Teams vs. Collocated Teams
H1b: Consistency of the screen shots and requirements analysis artifacts produced by the collocated teams using face-to-face communication will be better than those produced by the virtual teams using computer-mediated communication. H1c: The users will perceive the quality of project artifacts produced by collocated teams using face-to-face communication to be better than those produced by the virtual teams using computer-mediated communication.
Impact of User Project Monitoring on of the Quality of Projects
H2a: Quality of project artifacts (as defined by the three measures of completeness & adherence, consistency, and user perception) produced by the developer teams that are closely monitored by their associated users in a virtual team mode will be better than those produce by the developer teams that were not closely monitored by their users.. H2b: Quality of project artifacts (as defined by the three measures of adherence & completeness, consistency, and user perception) produced by of the developers that perceived higher levels of project monitoring by their users will be better than those produced by the developer teams that perceived lower levels.
2009
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
at MU. The various versions included same items for each construct but were worded differently, depending on the roles the participants played. Based on the experimental measure of perceived project management practice, hypothesis H2 can be further articulated as in Table 4.
normalization; the results are given in Table 5. Reliability of all these measures of (i) completeness and adherence of artifacts, (ii) consistency of project artifacts, (iii) user-perceived quality, and (iv) perceived user project monitoring practices are given in Table 6. Cronbach’s alpha values of 0.70 and higher indicate construct reliability.
AnAlysIs, results, And dIscussIons
performance of collocated vs. virtual teams
A principal component analysis was performed on the items constructed for the previously mentioned measures with Varimax rotation and Kaiser
To test hypothesis H1, a one-way ANOVA test was performed on the three measures of project
Table 5. Principal component analysis of various constructs indicating factor loadings of survey items Item No
Adherence and Completeness of Project Artifacts
Consistency of Project Artifacts
User-Perceived Quality
Perceived User Project Monitoring
1
.792
.892
.882
0.663
2
.869
.885
.935
0.845
3
.699
.871
0.700
4
.400
.956
0.615
5
.680
0.759
6
0.548
7
0.686
Note. Extraction method: principal component analysis; rotation method: varimax with kaiser normalization
Table 6. Reliability coefficients (Cronbach’s Alpha) of constructs Cronbach’s Alpha Value
Constructs (Number of items) Completeness and Adherence of Project Artifacts (5)
0.70
Consistency of Project Artifacts (2)
0.71
User-Perceived Quality (4)
0.93
Perceived User Project Monitoring (7)
0.73
Table 7. ANOVA Results (Collocated vs. Virtual teams)
2010
Construct
Mean (Collocated team)
Mean (Virtual team )
F-value (significance)
Completeness and Adherence of Project Artifacts
4.92
4.56
0.551(0.467)
Consistency of Project Artifacts
6.32
6.51
1.025(0.323)
User-Perceived Quality
4.91
4.75
0.616(0.435)
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
quality, as were previously described, between virtual and collocated teams that participated in Experiment 1. Note that in this case the project artifacts are produced by the same developer teams, and the project complexity of both the virtual and collocated projects were moderated by the instructors to be almost the same. However, due to constraints in conducting the experiment, the user teams could not be the same. User project monitoring was kept loose for both virtual and collocated projects. ANOVA results are represented in Table 7. Results indicate that all the variations (H1a, H1b and H1c) of hypothesis H1 can be rejected. Although two of the mean quality measures of collocated teams are better than that of virtual teams, they are not significantly different. This is contrary to expectations that the quality of projects that are produced by collocated teams and that benefit from higher social presence, media-rich face-to-face communications is no
better than that produced by virtual teams that use lean media. This potentially suggests that the requirements analysis phase of software projects may be successfully off-shored in full and conducted in virtual team mode without significantly affecting the quality of projects.
effect of user project monitoring To test H2a, we compared mean values of the quality measures between the tightly monitored control group and the loosely monitored experimental group. Results presented in Table 8 indicate that the completeness and adherence of project artifacts produced by the control group were significantly superior to those produced by the experimental group, suggesting that close project monitoring by users had a positive impact on this measure of project quality. However, neither the consistency of project artifacts nor the user-perceived quality differed significantly across the two sets of
Table 8. ANOVA results (tight vs. loose project monitoring)
Construct
Mean (Control groupimposed tight user project monitoring)
Mean (Experimental group—voluntary loose user project monitoring )
F-value (significance)
Completeness and Adherence of Project Artifacts
5.60
4.50
4.6(0.044)
Consistency of Project Artifacts
6.39
6.51
0.314(0.582)
User-Perceived Quality
4.61
4.75
0.076(0.785)
Perceived User Project Monitoring
5.18
4.35
37.2 (0.000)
Table 9. ANOVA results (perceived user project monitoring) Construct
Mean (Perceived HIGH user project monitoring)
Mean (Perceived LOW user project monitoring )
F-value (significance)
Completeness and Adherence of Project Artifacts
5.30
4.73
6.18(0.044)
Consistency of Project Artifacts
6.41
6.49
0.107(0.768)
User-Perceived Quality
5.01
4.17
8.91(0.003)
2011
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
teams. As expected, participants in the control group perceived that their projects were indeed closely monitored, compared to those in the experimental group. Mean values of the perceived monitoring of the virtual team were then computed. We categorized those responses that were above the mean value as high perceived user project monitoring and those that were below as low perceived project monitoring. The performance measured on all the three dimensions were then compared across these two sets, using a one-way ANOVA test. The results as presented in Table 9 indicate that artifacts produced by developers who perceived higher levels of user project monitoring practices were better on the two dimensions of completeness and adequacy, as well as user-perceived quality, as compared to those who perceived low user monitoring. A pair-wise correlation was carried out between perceived project monitoring and the three measures of project quality, which further confirmed these findings. (These correlations in presented in table 10.)
It is important to understand the difference between imposed project monitoring as defined in the control and experimental groups and perceived project monitoring. Though ANOVA results in Table 8 indicate that the mean values of perceived project monitoring of the control group were significantly higher compared to that of the experimental group, the mean of the experimental group was significantly higher (4.35) in the Likert scale. We also observed that in the experimental group, some of the MU teams, along with their corresponding MDI B teams, had voluntarily adopted closer project monitoring practices. These MDI B teams had been submitting their project plans and intermediate artifacts to their MU user teams, thus resulting in higher levels of perceived project monitoring. From an experimental perspective, there was a positive impact of both imposed project monitoring as well as perceived project monitoring on adherence of artifacts. At the same time, there was a positive impact of perceived project monitoring on user-perceived quality, possibly because of the close working relationship adopted by the users
Table 10. Pair-wise correlations between input and output variables Construct
Quality of Projects Completeness and Adherence of Project Artifacts (p)
Consistency of Project Artifacts
User-Perceived Quality
0.215 (0.021)
0.042(0.643)
0.281(0.002)
Perceived User Project Monitoring
Table 11. Summary of results of teams engaged in software requirements analysis Collocated Teams vs. Virtual Teams in Off-Shore Mode
User Project Monitoring of Off-Shored Projects in Virtual Team Mode Control/ Experimental
Perceived
Completeness and Adherence of Project Artifacts
-
TPM > LPM
HUPM > LUPM
Consistency of Project Artifacts
-
-
-
User-Perceived Quality
-
-
HUPM > LUPM
Note. TPM = tight project monitoring; LPM = loose project monitoring; HUPM = high user project monitoring; LUPM = low user project monitoring
2012
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
and developers. This could have occurred through informal behavioral control mechanisms such as clan control deployed by the MDI B teams and their corresponding MU user teams. However this issue warrants further analysis. Table 11 gives a summary of the results.
conclusIon In this article we have described an exploratory study that examines two aspects of virtual teams in off-shored software development projects, specifically in the requirements analysis phase. First, we examine whether the quality of projects produced by virtual teams engaged in pure off-shore mode is at par with that of traditional, collocated teams. Secondly, within the ambit of virtual teams, we examine whether user monitoring of the projects has an impact on the quality of projects.
contributions of the study Our study is one of the few to apply social presence, media richness and control theories to develop and test a research model of the antecedents of quality of software requirements analysis projects conducted in off-shore virtual team environment. As client and vendor organizations are increasingly considering off-shoring parts of requirements analysis phases, our early conclusions might enable organizations to design communications and governance structures that might facilitate virtual requirements analysis. Considering the rapid leaps in technological infrastructure globally, technology will become a moot point in this facilitation. From an academic perspective, the introduction of these two theories in an offshore context lays the foundations for extended empirical research. We find that there is no significant difference in the quality of projects produced by virtual teams that used lean media and that by collocated teams that used rich face-to-face communications. This is similar to findings reported in Burke and Chi-
dambaram (1999) where, despite the persistently lower social presence of leaner media, distributed groups performed better than face-to-face counterparts. Possibly, a more task-focused approach and limited social interaction may have enabled teams to generate higher quality outputs. This could be a potentially important result because it implies that off-shoring, which was so far restricted to the lower level phases of system development (such as low-level design, coding, and testing) could successfully be extended to the requirements analysis phase as well. A key benefit, of course, is that software firms could save significantly on costs by locating their business and systems analysts in off-shore locations and facilitating interactions with users through virtual channels. While this may currently be challenging, our study highlights the need for future research in improving these virtual interactions between users and off-shored development teams. The effect of user project monitoring (control/experimental) on the quality of off-shored requirements analysis projects is ambiguous. Formal behavioral and outcome control implemented through the experimental set up had a positive effect on one measure of quality. It did not have any effect on the other two measures. Piccoli and Ives (2003) pointed out that behavior control mechanisms, which are typically used in traditional teams, have a significantly negative impact on trust in virtual teams. It was reported that behavior control mechanisms increase vigilance and create instances in which individuals perceive team members failing to uphold their obligations. On the other hand, the perceived user project monitoring had significant positive effect on two dimensions of quality (one assessed and one perceived). We also infer that, even when project management practices were not enforced, teams might have adopted these practices to improve their performance through clan control. This observation, though anecdotal based on class observations and our analysis of perceived user
2013
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
project monitoring, has important implications. It provides clues that, apart from forced formal controls, informal controls existed between the users and developers when they share common goals (Choudhury & Sabherwal, 2003). Our findings have important implications for the industry as well. Companies engaged in off-shore software development have produced strong processes around their global delivery model. However, whether the same process and project monitoring discipline will lead to success of projects conducted in pure off-shore mode in virtual team setting during the early stages of system development work has not been explored. Our research indicates that teams engaged in virtual teamwork might develop their own informal control mechanisms and even bypass the forced control mechanisms necessitated by the standard operating procedures while doing their projects. The firms (viz. both the clients and software developers) engaged in off-shore work should develop a conducive climate for team members to develop these informal controls that seem to affect project quality. Apart from this, our study fills the gap in the literature in the area of analysis of quality of projects implemented by virtual teams engaged in off-shore system requirements analysis. Further research is needed to confirm our exploratory findings.
limitations of the study: opportunities for Future research Use of Experiments Literature in the area of virtual teams has mainly followed three research methodologies—case studies, industry surveys, and experiments. Experimental methods make possible the careful observation and precise manipulation of independent variables, allowing for greater certainty with respect to cause and effect, while holding constant other variables that would normally be associated with it in field settings (Damian et al.,
2014
2000). They also encourage the investigator to try out novel conditions and strategies in a safe and exploratory environment before implementing them in the real world (McGrath, 1984). The industry is yet to adopt off-shoring of the requirements analysis phase. This precludes the use of case study or industry survey for this research. Hence, we used experiments where we can explore this emerging phenomena. In our experiment, MDI A teams played the roles of both users (in Experiment 1) and developers (in Experiment 2). The dual roles could have created conflicts that might have affected (positively or negatively) their project quality. The same is true with MDI B teams, who performed the roles of consultants for both MU teams as well as MDI A teams. MU teams also had to manage two projects: one with tight monitoring (with MDI A teams) and the other with loose monitoring (with MDI B teams). To remove the confounding effects of dual roles played by the teams, it is recommended that a true controlled factorial experiment be conducted to verify our findings.
Use of Students as Surrogates There are criticisms for the use of students in academic experiments as surrogates. However, MBA students have been used as surrogate users in a range experiments conducted (see, e.g., Briggs, Balthazard, & Dennis, 1996; Hazari, 2005). Even in requirement negotiation phase, students with work experience were taken as users for developing a small system (Damian et al., 2000). Remus (1986) argued that graduate students could be used as surrogates for managers in experiments on business decision making. Students often represent a typical working professional and organizational member due to the variety of backgrounds and goals (Dipboye & Flanagan, 1979). Studies in industrial organization psychology and organization behavior have found that results obtained from students were similar
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
to those from managers (see, e.g., Locke, 1986). Despite the fact that users and developers in our experiments had 2 to 4 years of work experience, limitations of using students as surrogates are still applicable in our study. As the industry evolves, we suggest the extension of these experiments to business settings.
Complexity of Projects Requirements analysis is intensive, and hence it is not possible to completely replicate in student experiments. However, our objective was to study the research questions on comparable, relatively well-defined small projects in which complexity of requirements analysis is not high. Though the experiments were carefully designed, the projects were limited in scope and size compared to large-scale industrial projects. Furthermore, no formal measures of complexity were used in the study so that we could compare the projects used in the experiments with real-world industrial projects. Further research is needed to assess the impact of these findings on large-scale industrial projects with complex requirements.
Future research directions One way of dealing with the lack of realism in laboratory experiments is to use multiple methods (McGrath, 1984) so that strengths of some compensate weaknesses of others. To truly test the predictive ability of the research results, the studies must also involve a multiplicity of research methodologies in order to avoid biases due to the methods used (Jarvenpaa, Knoll, & Leidner, 1988). Simulated laboratory negotiations could be complemented by field studies or validations (whose strength is realism), if the lack of realism is an issue. In our research, internal validity of results was established through conducting experiments in a controlled environment. We expect to conduct external validity through industry survey.
Finally, while we have explored one variable of project control, quality of projects can be affected by other variables such as team motivation, trust, cohesion, coordination, and communication (Chidambaram, 1996; Jarvenpaa et al., 1998; Lurey & Raisinghani, 2001). Hence, a comprehensive model that defines all factors affecting the quality of off-shored software requirements analysis projects must be developed. Further research is required to determine how informal controls develop between the virtual team members. One cause may be the amount of initial online socialization, when the teams familiarize with each other before the start of the project, for the design of such experiments in the future. Since it may not always be feasible to make experimental and control groups adhere to experimental requirements in a classroom setting, a flexible approach is needed in experimental design.
reFerences Andres, P. (2002). A comparison of face-to-face and virtual software development teams. Team Performance Management, 8(1/2), 39-48. Archer, N. P. (1990). A comparison of computer conferences with face-to-face meetings for small group business decisions. Behavior & Information Technology, 9(4), 307-317. Battin, R., Crocker, R., Kreidler, J., & Subramanian, K. (2001). Leveraging Resources in global software development. IEEE Software, 18(2), 70-77. Briggs, R. O., Balthazard, P. A., & Dennis, A. R. (1996). Graduate business students as surrogates in the evaluation of technology. Journal of End User Computing, 8(4), 11-17. Burke, K., & Aytes, K. (1998). A longitudinal analysis of the effects of media richness on co-
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hesion development and process satisfaction in computer-supported workgroups. In Proceedings of the 31st Hawaii International Conference on Systems Sciences (pp. 135-144). Burke, K., & Chidambaram, L. (1996). How much bandwidth is enough? A longitudinal examination of media characteristics and media outcomes. MIS Quarterly, 23(4), 557-580. Campbell, D. T., & Stanley, J. C. (1966). Experimental and quasi-experimental designs for research. Chicago: Rand McNally. Carmel, E. (2006). Building your information systems from the other side of the world: How Infosys manages time zone differences. MIS Quarterly Executive, 5(1), 43-53. Chidambaram, L. (1996). Relational development in computer-supported groups. MIS Quarterly, 20(2), 143-163. Chidambaram, L., & Bostrom, R. (1993). Evolution of group performance over time: A repeated measures study of GDSS effects. Journal of Organizational Computing, 3(4), 443-469. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, 14(3), 291-314. Crisp, C. B. (2003). Control enactment in global virtual teams. Dissertation Abstracts International. (UMI No.) Damian, D. E, Eberlein, A., Shaw, M. L. G., & Gaines, B. R. (2000). Using different communication media in requirements negotiation. IEEE Software, 17(3), 28-36. Damian, D. E., & Zowghi, D. (2003). An insight into interplay between culture, conflict and distance in globally distributed requirement negotiations. In Proceedings of the 36th Hawaii International Conference on System Sciences. Dipboye, R. L., & Flanagan, M. F. (1979). Research setting in industrial and organization psychol2016
ogy: Are findings in the field more generalizable than in laboratory. American Psychologist, 34(2), 141-150. Ebert, C., & De Neve, P. (2001). Surviving global software development. IEEE Software, 18(2), 62-69. Edwards, K., & Sridhar, V. (2005). Analysis of software requirements engineering exercises in a global virtual team setup. Journal of Global Information Management, 13(2), 21-41. Favela, J., & Pena-Mora, F. (2001). An experience in collaborative software engineering education. IEEE Software, 18(2), 47-53. Foster, S., & Franz, C. (1999). User involvement in information systems development: A comparison of analyst and user perceptions of system acceptance. Journal of Engineering Technology Management, 16(3-4), 329-348. Hartwick, J., & Barki, H. (1994). Explaining the role of user participation in information system use. Management Science, 40(4), 440-465. Hazari, S. I. (2005). Perceptions of end-users on the requirements in personal firewall software: An exploratory study. Journal of Organizational and End User Computing, 17(3), 47-65. Hoffer, J., George, J., & Valacich, J. (1999). Modern systems analysis and design. Reading, MA: Addison Wesley. Jarvenpaa, S., Knoll, K., & Leidner, D. (1998). Is anybody out there? Antecedents of trust in global virtual teams. Journal of Management Information Systems, 14(4), 29-64. Jarvenpaa, S., & Leidner, D. (1999). Communication and trust in global virtual teams. Organization Science, 10(6), 791-815. Kircsh, L. J. (1996). The management of complex tasks in organizations: Controlling the systems development process. Organizational Science, 7(1), 1-21.
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Kircsh, L., Sambamurthy, V., Ko, D., & Purvis, R. (2002). Controlling information systems development projects: The view from the client. Management Science, 48(4), 484-498. Lin, W., & Shao, B. (2000). A relationship between user participation and system success: A simultaneous contingency approach. Information & Management, 37(6), 283-295. Lind, M. (1999). The gender impact of temporary virtual work groups. IEEE Transactions on Professional Communication, 42(4), 276-285. Locke, E. A. (1986). Generalizing from laboratory to field setting: Research finding from industrial organization, organization behavior, and human resource management. Lexington, MA: Lexington Books. Lurey, J., & Raisinhgani, M. (2001). An Empirical study of best practices in virtual teams. Information & Management, 38(8), 523-544. McDonough, E., Kahn, K., & Barczak, G. (2001). An investigation of the use of global, virtual, and collocated new product development teams. The Journal of Product Innovation Management, 18(2), 110-120. McGrath, J. (1984). Groups: Interaction and performance. Upper Saddle River, NJ: Prentice Hall. National Association of Software and Service Companies. (2005). Indian IT industry. Retrieved March 3, 2005, from http://www.nasscom.org/ Piccoli, G., & Ives, B. (2003). Trust and the unintended effects of behavior control in virtual teams. MIS Quarterly, 27(3), 365-395. Powell, A., Piccoli, G., & Ives, B. (2004). Virtual teams: A review of current literature and directions for future research. The DATABASE for Advances in Information Systems, 35(1), 6-36. Remus, W. E. (1986). An empirical test of the use of graduate students as surrogates for managers in
experiments on business decision making. Journal of Business Research, 14(1), 19-25. Rice, R. E., & Love, G. (1987). Electronic emotion: Socio-emotional content in a computer-mediated communication network. Communication Research, 14(1), 85-108. Sharda, R., Barr, S. H., & McDonnell, J. C. (1988). Decision support system effectiveness: A review and an empirical test. Management Science, 34(2), 139-157. Schimdt, J. B., Montoya-Weiss, M. M., & Massey, A. P. (2001). New product development decisionmaking effectiveness: Comparing individuals, face-to-face teams and virtual teams. Decisions Sciences, 32(4), 575-600. Sarkar, S., & Sahay, S. (2002). Information systems development by US-Norwegian virtual teams: Implications of time and space. In Proceedings of the 35th Annual Hawaii International Conference on System Sciences (pp. 1-10). Short, J., Williams, E., & Christie, B. (1976). The social psychology of telecommunications. London: Wiley. Sridhar, V., Nath, D., & Malik, A. (in press). Analysis of user involvement and participation on the quality of IS planning projects: An exploratory study. Journal of Organizational and End User Computing. Stevenson, W., & McGrath, E. W. (2004). Differences between on-site and off-site teams: Manager perceptions. Team Performance Management, 10(5/6), 127-132. Townsend, A., DeMarie, A. M., & Hendrickson, A. R. (1998). Virtual teams: Technology and the workplace of the future. Academy of Management Executive, 12(3), 17-29. Walther, J. (1995). Relational aspects of computer-mediated communication: Experimental observations over time. Organization Science, 6(2), 186-203. 2017
Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis
The screen prototypes submitted by the remote team adequately reflected the requirements conveyed by my local team. My local team has been satisfied with the quality of the deliverables submitted by the remote team. My local team found final deliverables to be free of errors. The final artifacts submitted by my remote team adequately reflected the requirements conveyed by my local team.
Project Monitoring 1. 2. 3. 4. 5. 6. 7.
My local team tracked the project’s progress closely. The remote team submitted the detailed project plan on time. My local team suggested changes to the initial project plan submitted by the remote team. Any changes in the project plan were communicated to us immediately by the remote team. My local team regularly monitored the progress of the project. My remote team closely adhered to the submitted project plan. My remote team regularly submitted weekly status reports.
This work was previously published in Journal of Global Information Management, Vol. 16, Issue 4, edited by J F. Tan, pp. 24-45, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Section VII
Critical Issues
This section addresses conceptual and theoretical issues related to the field of outsourcing, which include security issues, establishing trust, aligning business process, and business continuity challenges. Within these chapters, the reader is presented with analysis of the most current and relevant conceptual inquires within this growing field of study. Overall, contributions within this section ask unique, often theoretical questions related to the study of IT outsourcing and, more often than not, conclude that solutions are both numerous and contradictory.
2020
Chapter 7.1
International Outsourcing, Personal Data, and Cyber Terrorism: Approaches for Oversight Kirk St.Amant East Carolina University, USA
AbstrAct An individual’s personal information can be a valuable commodity to terrorists. With such data, terrorists can engage in a variety of illicit activities including creating false bank accounts, procuring various official documents or even creating mass panic. Unfortunately, such personal data is generally easy to access, exchange, or collect via online media including Web sites, chat rooms, or e-mails. Moreover, certain common business practices, particularly those related to data processing in international outsourcing, can facilitate such activities by placing personal information into a legal grey area that makes it easy to misuse. For these reasons, organizations and individuals need to be aware of the potential for such data misuse as well as be informed of steps they can take to curtail such abuses. This
essay examines the privacy/data abuse problems related to international outsourcing and presents approaches designed to prevent the misuse of personal information by cyber terrorists.
IntroductIon An individual’s personal information can be a valuable commodity to terrorists. With such data, terrorists can set up false addresses for receiving materials, establish unknown lines of credit, apply for visas, passports, or other documents, or siphon money from bank accounts (Lormel, 2002; Sullivan, 2004). On a large scale, terrorists can misuse personal data in ways that could cause mass panic; crash an organization’s or a region’s computer systems, or spread misinformation throughout a community (Lormel, 2002; Sul-
International Outsourcing, Personal Data, and Cyber Terrorism
livan, 2004). For these reasons, the protection of personal information is of paramount importance to combating terrorism. Unfortunately, such data is often freely exchanged and easily compiled via online media such as Web sites, chat rooms, or e-mails. As a result, personal information can be a prime and easy target for cyber terrorists—or individuals who use online media to engage in or enable terrorist activities. Moreover, certain business practices actually place large amounts of personal data into an environment where it can easily be abused by others. One of the more problematic of these practices is international outsourcing. By moving personal data beyond the reach of certain authorities, international outsourcing activities can facilitate the uses of personal data for nefarious ends. This chapter examines privacy and data abuse problems related to international outsourcing. It also presents approaches organizations can use to prevent the misuse of personal data by cyber terrorists.
bAcKground When organizations outsource, they allow other individuals or companies to perform work for them (Bendor-Samuel, 2004). The decision to outsource usually involves two factors: cost and efficiency. That is, client businesses outsource tasks to organizations that can perform them more cheaply and efficiently than the client business can. Such work, moreover, is often outsourced to persons or organizations located in other nations—a process known as international outsourcing or offshoring. While companies have been sending manufacturing work overseas for some time, the nature of the work being outsourced now includes a wide range of knowledge-based tasks including information technology (IT) management, software and video game programming, accounting, and
medical transcription. In many cases, companies based in North America and Western Europe export work to outsourcing providers located in developing nations such as India, China, and the Philippines. The benefits associated with such offshoring practices have led to an explosion in this industry. Today, international outsourcing is worth some $10 billion and accounts for almost 500,000 jobs in India alone (Baily & Farrell, 2004; Rosenthal, 2004b). These situations might be the tip of a growing outsourcing iceberg, for certain observers claim the international outsourcing market will grow 20% a year through 2008 and account for three to five million knowledge-based jobs by the middle of the next decade (Baily & Farrell, 2004; Garten, 2004; Rosenthal, 2004b). This expansion will also mean outsourcing providers will arise in a wider range of developing nations as workers in Eastern Europe, Asia, South America, and Africa try to tap into this lucrative service market (Reuters, July 18, 2004; Rosenthal, 2004a; Rosenthal, 2004c). This growth in outsourcing, moreover, will involve a wider range of knowledge-based work, particularly in the areas of financial processing and medial care. As a result, more sensitive information will move overseas to facilitate these activities. Such trends, however, create new legal situations related to data collection and distribution. By using more than one nation in a data processing activity, offshoring involves more than one legal system in the regulatory process. The problem involves the legal concept of jurisdiction, or when a particular law can and cannot be enforced. According to this idea, the laws of one nation are often only enforceable within its borders. Thus, once individuals or materials move beyond those borders, they are generally beyond the legal protection of that nation. Offshoring creates an interesting jurisdiction situation. If work is performed in another nation, then employees might be operating under a set of laws that is quite different from those that govern
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the company that provided the work. Therefore, a process that might be an illegal—or black market—activity in the nation of the outsourcing client could be a legal—or white market—one in the nation where the outsourcing employee resides. This situation is particularly problematic in relation to the protection of personal information, for the national laws dealing with this issue vary from the strict (e.g., European Union’s Data Protection Directive) to almost non-existent (e.g., the People’s Republic of China) (Swire & Litan, 1998). Such contrasts create a gray area in international law—which laws should apply where and how (Rosenthal, 2005)? This gray area, in turn, leaves personal data open to misuse by terrorists through a process of gray market informatics.
mAIn thrust oF the chApter Four major factors can provide offshoring workers with the opportunity to engage in gray market informatics. First, and perhaps foremost, the outsourcing worker could be located in a nation where the collection and sale of personal information is completely legal. As a result, there is no legal mechanism to prevent (via punishment) or dissuade (via threat of sanctions) individuals from performing these activities. Second, such information has a relatively high market value if sold to the right individual or organization (e.g., terrorists) (Koerner, 2006; Lormel, 2002). Thus, there is incentive to misuse personal data for profit with no fear of punishment to temper this incentive. Third, as such sales might occur overseas, the client organizations that supplied personal data might never realize abuses are taking place. Such a condition further mitigates the threat (and thus the deterrence) of prospective punishment for abuses via sanctions (e.g., boycotts) imposed by clients. Fourth, outsourcing providers often use external subcontractors and do not make clients aware of these practices. Subcontractors, however, introduce a new degree of separation and make
2022
monitoring and accountability even more difficult for enforcement agencies and companies. All of these situations provide terrorists with an excellent opportunity to acquire large amounts of personal data on individuals from a variety of nations. Factors of physical distance further contribute to such misuses, for they mean that such practices could go on for long periods of time before they are noticed—if they are noticed at all. Moreover, terrorists can easily insert themselves directly into overall processes—as employees or as subcontractors—and cause damage not only to individuals, but to organizations, businesses, or even overall industries. Thus, for terrorists, the benefits of gray market informatics (easy access to data) are high while the risks (being captured) remain low. Recent events have made organizations and individuals uncomfortably aware of how dangerous such misuses of personal data by terrorists are. The September 11 hijackers, for example, likely used illicitly obtained social security numbers and driver’s license numbers to get the fake IDs needed to carry out their plot (Sieberg, 2001). Additionally, raids on terrorist camps in Afghanistan produced laptop computers which contained compiled personal data on a number of U.S. citizens (Bloys, 2006). Additionally, an Al-Queda terrorist cell in Spain was caught after using stolen credit information to purchase provisions for its activities and to transfer funds to other terrorists in Pakistan (Lormel, 2002). More recently, known misuses of personal data have expanded to include abuses of medical information and have been more closely tied to offshoring activities. In one case, a Pakistanbased medical transcriptionist threatened to post patient records on the Internet unless her employer paid her $500 (Lazarus, March 28, 2004). She eventually received her payment, but there is no guarantee she did not share information with or sell information to other parties. In a second case, disgruntled outsourcing employees in India threatened to release patient information if a particular
International Outsourcing, Personal Data, and Cyber Terrorism
client failed to pay an unspecified sum of money (Lazarus, April 2, 2004). The perpetrators were eventually caught and the threat proved false. Both situations reveal the ease and the potential for abuses of personal data provided via offshoring activities. These situations also reveal that others recognize this potential. In these more recent instances, outsourcing workers could have made money selling the same information to terrorists who could have then used that data for nefarious purposes. In fact, there is no way to know that such sales did not occur. Both of these cases also reveal that the outsourcing of personal data should be regulated or monitored in order to curtail abuses of such information. Such oversight, however, does not necessarily need to be governmental in nature. Rather, companies and organizations within overall industries can address such data abuse problems by adopting five relatively simple approaches in relation to international outsourcing: •
Approach #1: Develop a sensitive data classification system and share this system with employees. The key to avoiding data abuses is to determine which information is particularly “sensitive” and should remain within a company for protection. Nonsensitive data could then be sent abroad without worry. The processing of sensitive data, however, would remain “in-house” where both organizations and national laws could oversee its uses and protect it from abuses. Organizations should therefore allocate time and money to reviewing the kinds of data they have or they use and then develop categories for different kinds of sensitive data. Personal information could then be coded and distributed according to these categories. Organizations should simultaneously develop a plan for helping in-house employees understand the importance of data security related to international outsourcing. Such
•
•
informed employees are more likely to take steps to treat the processing and the distribution of such data with care and thus reduce the potential for abuse (Goolsby, 2003; Peterson, 2002). Approach #2: Create an intranet site that instructs employees and managers in how to recognize and address different data abuses they might encounter when working in outsourcing relationships. To assist with preventing outsourcing oversights, organizations might create an intranet site that presents instructions for recognizing kinds of data abuses and provides a list of which corporate office or government agency to contact with concerns (Peterson, 2002). By increasing the number of individuals monitoring international outsourcing activities, companies can decrease the chances that violations go unnoticed. Also, by helping employees feel like they are a part of such processes, organizations increase the chances that these employees will play a more active role in preventing outsourcing oversights (Goolsby, 2003; Peterson, 2002). Such intranet sites should include regular “outsourcing updates” which encourages regular use and provide “self test” scenarios employees can use to evaluate their understanding of outsourcing policies. Approach #3: Work with outsourcing employees to develop data maps that catalog where information goes once it is sent to outsource workers. Such a map should include the names and contact information for individuals working on each part of an outsourced processes. From a data security perspective, the single greatest problem is tracking where data goes once it is sent overseas. A map that clearly traces how such data moves once sent abroad could greatly help organizations locate where data abuses or data leaks might be taking place. Organizations could then use this
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International Outsourcing, Personal Data, and Cyber Terrorism
•
•
2024
information to address problems or devise alternative solutions (require the outsourcer to move or treat data in different ways) that would help avoid abuses (Atwood, 2004). Approach #4: Raise management’s awareness of outsourcers using subcontractors and develop policies for when to use subcontractors in outsourcing. Include steps for registering subcontractors with the client or company so that clients can track the flow of information to these subcontractors (Peterson, 2002). As mentioned, a major problem with tracking violations is how subcontractors complicate dataflow situations. This problem is particularly important as many outsourcing providers use subcontractors but rarely notify the client of such uses. Approach #5: Work with other companies to develop a network for sharing information on international outsourcing within specific industries and across different industries. Ideally, companies within an industry would work together to create an easy-access registry (e.g., a Web site) companies could use to enter the names and details of the outsourcing providers with which they worked. Companies could use this site to share information and opinions on the effectiveness with which they felt an outsourcing provider performed. Such a site would thus create a registry system, similar to the U.S. Better Business Bureau, that records if and how certain outsourcing providers engaged in personal data (or other) violations when working with a particular company. Registry listings could include who the violator is, what the nature of the violation was, what the client did in response to this violation, and what results came from this action. Such a registry could help companies avoid working with “disreputable” outsourcing providers and offer strategies for addressing misuses of
personal information. Most important, this online resource would need to be updated regularly. Organizations that could oversee and update such a registry could include industry oversight bodies or the chamber of commerce or the Better Business Bureau in states where a large number of companies engage in international outsourcing. While these approaches provide a means for overseeing international outsourcing, they are not definitive. Rather, these five strategies constitute a foundation upon which organizations can develop business- and industry-wide practices. Such practices, however, need to be examined soon, for new developments could create even more opportunities for cyber terrorists to abuse personal data.
Future trends While reports of gray market informatics have been limited, certain trends could increase: • •
The opportunities for terrorists to collect personal data The kinds of personal data available for misuse
A prime example of these trends can be seen in recent legislation in the United States. There, Section 404 of the Sarbanes-Oxley Act of 2002 requires chief executive officers and chief financial officers of public companies to review their internal controls over financial transactions (“404 tonnes,” 2004). The costs and the staff needed for compliance are high, and the number of qualified, in-country employees (especially auditors) is limited (“404 tonnes,” 2004; Byrnes, 2005). Given the costs related to such activities and the fact that more complex accounting practices are being outsourced, it seems reasonable that some Statute 404 activities would be sent abroad
International Outsourcing, Personal Data, and Cyber Terrorism
for completion. It would also seem sensible that some auditing functions would become key service areas into which outsourcing providers would move—especially as demand has driven up pay for U.S. auditors by 1020% (Byrnes, 2005). Such outsourcing, however, would involve sending greater quantities and more kinds of sensitive financial data overseas. And this development is not unique to the United States. As more nations adopt more demanding and extensive accounting and reporting practices, businesses in several nations could increasingly turn to outsourcing to assist with various financial processes. In a similar way, data related to personal medical records could create openings for cyber terrorists working in outsourcing situations. In the U.S., for example, health care legislation–the Health Insurance Portability and Accountability Act of 1996 (HIPAA)—is creating data processing situations that seem well suited for outsourcing. While HIPAA involves a mechanism for protecting patient information, it also mandates all of a patient’s information be rendered into a digital format that can be easily shared (Goolsby, 2001b; Goolsby, 2001d). For health care organizations, converting all print medical records into a digital format introduces time consuming, costly, and monotonous tasks into their operations (Goolsby, 2001a; Goolsby, 2001d). Additionally, the time involved in converting information from one format to another creates delays that can affect the quality of patient health care and patient satisfaction. As a result, such HIPAA-related tasks (e.g., medical transcription and IT development) could be strong candidates for international outsourcing (Goolsby, 2001a; Salkever, 2004; “Sink or Schwinn,” 2004). These situations, however, place a growing amount of personal information into contexts where it can be misused by terrorists as revealed by the recent cases of medical transcriptionists in Pakistan and India holding such data “hostage” (Salkever, 2004). Trying to address such problem areas, however, is becoming increasingly complicated as more
nations try to move into lucrative outsourcing markets. In China, for example, public and private sector programs are increasing the nation’s online access in a way that would make it a good location for the outsourcing of knowledge work (“Wired China,” 2000). Similarly, Malaysian companies are trying to present themselves as “outsourcing friendly” destinations, while the Philippines has developed a reputation for effectiveness in the outsourcing of English-language customer service calls and IT work (Gaudin, 2003; Reuters, September 2, 2004; Rosenthal, 2004c). Additionally, Russia and the Ukraine have established an outsourcing niche in the area of software programming (Goolsby, 2001c; Weir, 2004). As more nations enter the outsourcing marketplace, the complexities of gray market informatics increase. Each new country brings with it different laws and customs related to the treatment of personal data. Each nation also becomes a prospective subcontractor or “middle person” though which data can be passed. As a result, tracking international data flows and isolating instances of abuse becomes even more difficult. These difficulties might actually become deterrents to enforcement, for the more time and money it takes to track data flows, the less likely organizations might be to pursue violators. Such situations create an ideal atmosphere in which cyber terrorists could collect large amounts of important information without attracting much attention. The convergence of these factors means now is the time for organizations to develop methods of ensuring the safe treatment of personal data in international outsourcing situations.
conclusIon International outsourcing is radically affecting the distribution of personal data. While international outsourcing offers a range of benefits, it also creates certain problem areas that cyber terrorists can exploit for their own ends. Addressing
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these problems will not be easy. Organizations must, however, develop some form of outsourcing oversight if they are to protect information from terrorist abuses. The approaches presented in this chapter offer a first step toward addressing this situation. Yet public and private sector entities must act quickly and before changes in business practices and outsourcing destinations require more complex approaches to address this situation.
reFerences 404 tonnes. (2004, December 16). The Economist. Retrieved December 27, 2004, from http:// www.economist.com/displaystory.cfm?story_ id=3503931 Atwood, M. (2004). The art of governance. Outsourcing Center. Retrieved December 27, 2004, from http://www.outsourcing-requests.com/center/jsp/requests/print/story.jsp?id=4616 Baily, M. N. & Farrell, D. (2004, July). Exploding the myths of offshoring. The McKinsey Quarterly. Retrieved November 11, 2004, from http:// www.mckinseyquarterly.com/article_ print. aspx?L2=7&L3=10 &ar=1453 Bendor-Samuel, P. (2004). Lou Dobbs: Here’s why you’re wrong! Outsourcing Center. Retrieved December 20, 2004, from http://www. outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=4565 Bloys, D. (2006, January 22). Online records linked to identity theft and worse. News for Public Officials. Retrieved August 25, 2006, from http://www.davickservices.com/Online_Records_Linked_To_Crime.htm Byrnes, N. (2005, January 1). Green eyeshades never looked so sexy. BusinessWeek Online. Retrieved January 5, 2005, from http://www.
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businessweek.com/@@na*EhYQQxu80VAkA/ magazine/content/05_02/b3915041_mz011.htm Garten, J. E. (2004, June 21). Offshoring: You ain’t seen nothin’ yet. BusinessWeek Online. Retrieved December 30, 2004, from http://businessweek.com/print/magazine/content/04_25/ b3888024_mz007.htm Gaudin, S. (2003, November 19). Offshoring IT jobs expected to accelerate. ClickZ. Retrieved November 30, 2004, from http://www.clickz. com/stats/sectors/b2b/print.php/3111321 Goolsby, K. (2001a). Healthcare’s biggest challenge. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcing-requests. com/center/jsp/requests/print/story.jsp?id=1660 Goolsby, K. (2001b). How to get ready for HIPAA. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcing-requests. com/center/jsp/requests/print/story.jsp?id=1686 Goolsby, K. (2001c). Nobody does it better. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcing-requests.com/center/jsp/requests/print/story.jsp?id=1816 Goolsby, K. (2001d). Perspectives on HIPAA. Dallas, TX: Outsourcing Center. Goolsby, K. (2003). Governing attitudes: 12 best practices in managing outsourcing relationships. Dallas, TX: Outsourcing Center. Koerner, B. (2006). Terrorist groups relying on identity theft for funding operations. About.com. Retrieved September 1, 2006, from http://idtheft. about.com/od/useofstolenidentity/p/IDTheftTerror.htm Lazarus, D. (2004, March 28). Looking offshore: Outsourced UCSF notes highlight privacy risk. San Francisco Chronicle. Retrieved March 1, 2005, from http://www.sfgate.com/cgi-bin/ article.cgi?file=/chronicle/archive/2004/03/28/ MNGFS3080R264.DTL
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Lazarus, D. (2004, April 2). Extortion threat to patients’ records: Clients not informed of India staff’s breach. San Francisco Chronicle. Retrieved March 1, 2005, from http://sfgate.com/cgi-bin/ article.cgi?file=/c/a/2004/04/02/MNGI75VIEB1. DTL Lormel, D. M. (2002, July 9). Testimony of Dennis M. Lormel, Chief, Terrorist Financial Review Group, FBI before the Senate Judiciary Committee Subcommittee on Technology, Terrorism and Government Information July 9, 2002 Hearing On S. 2541, “The Identity Theft Penalty Enhancement Act”. Federal Bureau of Investigation. Retrieved February 12, 2006, from http://www.fbi.gov/ congress/congress02/idtheft.htm Peterson, B. L. (2002). Information security in outsourcing agreements. Outsourcing Center. Retrieved December 27, 2004, from http://www. outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=2355 Reuters. (2004, July 18). France outsources, Senegal calls. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/ print/0,1294,64262,00.html Reuters. (2004, September 2). Outsourcing’s next big thing—Malaysia? News.Com. Retrieved September 7, 2004, from http://news.com.com/21001011-5344618.html Rosenthal, B. E. (2004a). How real estate choices affect offshoring decisions. Outsourcing Center. Retrieved December 12, 2004, from http://www. outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=4718 Rosenthal, B. E. (2004b). META predicts offshoring will continue to grow at 20 percent clips through 2008. Outsourcing Center. Retrieved December 27, 2004, from http://www.outsourcing-requests.com/center/jsp/requests/print/story. jsp?id=4714
Rosenthal, B. E. (2004c). Why the US and UK are calling South African call centers. Outsourcing Center. Retrieved December 12, 2004, from http://www. outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=4717 Rosenthal, B. E. (2005). New outsourcing risks in 2005 and how to mitigate them. Outsourcing Center. Retrieved January 2, 2005, from http:// www.outsourcing-requests.com/center/jsp/requests/print/story.jsp?id=4721 Salkever, A. (2004, July 7). Racing to cure sickly medical security. BusinessWeek Online. Retrieved December 30, 2004, from http://www.businessweek.com/print/technology/content/jul2004/ tc2004077_9847_tc_171 Sieberg, D. (2001, September 21). Expert: Hijackers likely skilled with fake IDs. CNN.com. Retrieved August 28, 2006, from http://archives. cnn.com/2001/US/09/21/inv.id.theft/ Sink or Schwinn. (2004, November 11). The Economist. Retrieved December 6, 2004, from http://www.economist.com/printedition/PrinterFriendly.cfm?Story_ID=3351542 Sullivan, B. (2004, August 4). 9/11 report light on ID theft issues. MSNBC. Retrieved January 2, 2006, from http://www.msnbc.msn.com/ id/5594385 Swire, P. P., & Litan, R. E. (1998). None of your business: World data flows, electronic commerce, and the European privacy directive. Washington DC: Brookings Institution Press. Weir, L. (2004, August 24). Boring game? Outsource it. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/ print/0,1294,64638,00.html Wired China. (2000, July 22). The Economist, pp. 24-28.
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Key terms And deFInItIons Cyber Terrorist: Individuals who use online media to engage in or enable terrorist activities. Gray Market Informatics: Processes in which differences in national privacy laws are used to compile and distribute personal data on individuals.
Personal Data: Any information that can be associated with a specific individual. Sensitive Data: Information, especially information on a particular individual, that requires special treatment and cannot be readily shared with individuals inside of or outside of an organization.
International Outsourcing: A production process in which different job tasks are assigned to overseas individuals who are responsible for completing these tasks. (Also referred to as “offshoring.”)
This work was previously published in Cyber Warfare and Cyber Terrorism, edited by L. Janczewski and A. Colarik, pp. 112119, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 7.2
Protecting Patient Information in Outsourced Telehealth Services: Bolting on Security When it Cannot be Baked in Patricia Y. Logan Marshall University Graduate College, USA Debra Noles Marshall University Graduate College, USA
AbstrAct Hospitals have increasingly employed outsourcing to lower the cost of healthcare delivery and improve efficiency and quality, thereby, enabling more focus on core competencies of patient care, teaching, and research. Outsourcing presents a challenge for protecting patient information when new services are implemented or integrated into an existing healthcare information system. Enabling new outsourced telehealth services often requires “bolting on” security to legacy systems rather than “baking” it into the system. This article addresses security practices necessary for healthcare organizations implementing new telehealth services as part of an outsourced relationship. While a number of recommendations are available for
security readiness assessments pursuant to HIPAA compliance, none directly addresses the challenge of implementing security for outsourced clinical services. A case study is presented for a recent implementation of teleradiology services within a large regional hospital. Using the case, system vulnerabilities are demonstrated and relevant best practices to mitigate exposing patient information are discussed.
IntroductIon Multiple pressures exerted within the healthcare industry have driven the move toward outsourcing of clinical services. They include:
Protecting Patient Information in Outsourced Telehealth Services
• • •
• •
rising costs of healthcare market competition need to focus on revenue generating core competencies (i.e., patient care, teaching, and research) lack of available specialists in key specialties (e.g., radiology) demand for quality healthcare services by the customers (Bedi, Sarma, & Arya, 2002)
The Hospital Outsourcing Trends in Clinical Services Survey (2006), questioned 266 executives from hospitals of all sizes, and reported 78% of the hospitals outsource at least one patient service, and 83% expect the level of outsourcing at their facilities to stay the same or increase over the next two to three years (Hill, Bartrum, & Guy, 2006). While hospitals have outsourced non-core activities, the clinical and diagnostics services have been slower to be adopted as outsource candidates (Outsourcing in Most Hospitals, 2007). Many clinical services have moved to offshore locations to realize greater cost savings and efficiencies (Goelman, 2007). In particular, a recent trend is to send patient radiological studies offshore to be interpreted by United States certified physicians. This process assists hospitals finding it increasingly difficult to attract and maintain on-site radiologists during evening hours. The need for such specialists has grown due to the increase in emergency room patients given scans to help diagnose their condition (Goelman, 2006; Levy & Goelman, 2005). Increasingly more common, the first interpretation of a radiology study is performed offshore in Europe or Australia with a second read done the following day within the hospital (Pollack, 2003). The electronic delivery of sensitive data to offshore locations has sparked interesting security debates on how healthcare institutions should protect a patient’s right to privacy. There are security implications and regulatory requirements at state, national, and international levels for hospitals entering into outsourced relationships. Equally important, hospitals must also determine if the 2030
security practices of the outsourced companies are acceptable. When the outsourced companies do not have adequate security for patient data, the hospital will be held liable, even if a breach of patient information happens at the third-party company. If hospitals do not protect the sensitive medical data traveling to third-party entities, the risk of exposing sensitive personal information to cybercriminals increases dramatically. The Identity Theft Resource Center (ITRC) reports that in 2007, almost four million patient records were exposed, representing 65 incidents and 14.9% of all breaches reported (Data Breach Report, 2007). While HIPAA represents the primary security guidelines for the United States, it does not mandate reporting of a security breach to patients. With no requirement for reporting, it is likely that the data from the ITRC significantly understates the actual occurrence of data loss from healthcare organizations. The complexity of hospital data security management is a result of balancing the requirement to provide proper access to the data vs. the requirement to sufficiently protect the data. Clinical users expect the data to be available when it is needed, and view security as a secondary concern, especially in emergency scenarios. Presently, there is no guidance for hospitals involved in outsourcing clinical services in how best to comply with the security expectations of patients and regulatory agencies. The goal of building any clinical information system is to improve the quality of patient care. The methods for protecting the data should not interfere. Hospitals must acknowledge patient data security is about risk management, and they must balance implementation costs with potential costs for data breach or compromise.
security Implications of outsourcing clinical services A popular mantra in IT circles is the notion that security should be “baked” into an application during the system development life cycle. Hospi-
Protecting Patient Information in Outsourced Telehealth Services
tals, as do many other organizatons, largely buy rather than build applications and then integrate them into a legacy environment (Schwartz, 2007). Outsourced services (with back-end vendor applications/systems) are frequently introduced into this legacy environment. In an outsourced environment, where applications are integrated across multiple hardware platforms, networks, operating systems, and standards, following the best practice of building security into a new system during development is seldom a possibility. The process of integrating systems and providing security more closely resembles a “bolting on” of processes and technology. It could be argued that in any legacy environment, security is seldom “baked in” due to the heterogeneity of these systems that make retrofitting functionality very complex. Given the difficulty of adding security to newly integrated systems, is an outsource vendor any more likely to provide secure systems? Vendors have a monetary incentive to provide security, as their reputation and profitability depend upon providing systems that meet current HIPAA requirements. Outsource vendors are also aware that healthcare administrators believe security to be less important than the quality and pricing of a product or service (Booz-Allen, 2006). If decisions are made on the quality of the products and services and on competitive pricing, then outsourcing may represent a vulnerability with both sides of the transaction less likely to be concerned about the security of a system. The challenges in outsourced telehealth relationships occur in two areas: (1) the absence of practice standards for implementing security within outsourced relationships; and (2) over-reliance on the assurances of vendors that security has been built into the new system. At present, HIPAA expects the responsibility for security to rest on the primary (i.e., outsourcing) healthcare institution, and much less on the outsourced vendor. In this article, we will provide a case study of a recent implementation of teleradiology services outsourced to a new business partner which includes the integration
of services. We will use the experience from this implementation to inform practitioners in the IT healthcare field of the practice points necessary to achieve an implementation that meets the security requirements of HIPAA.
the case study: outsourcing teleradiology at Fhc The Family Hospital Corporation (FHC1) is a regional hospital in the mid-Atlantic region of the United States. It is a nonprofit, 893-bed, regional referral center with more than 5,000 employees. It is the state’s largest teaching hospital, and prepares a variety of healthcare professionals in a number of clinical specialties. It has a Level I trauma center that serviced 2,900 patients in 2006. The emergency room provides care for 98,633 patients annually. FHC has three primary divisions: Memorial, South, and Children’s. In addition, there are several ambulatory care centers and also various physician practices affiliated with the FHC organization. FHC has implemented new technologies which help manage the increasing number of studies and images: Picture Archiving and Communication Systems (PACS) and Radiology Information Systems (RIS). A PACS system gives hospitals the ability to digitally store medical images so that these images can be viewed from any location or workstation capable of retrieving the digital image. This expands the possibilities of conventional systems and allows medical professionals to view images from their homes and other off-site locations over broadband Internet connections. It also removes any geographical boundaries to specialists capable of reading the images (Beck & Neufeld, 2007). Removing geographical distances as a barrier to providing care is a primary benefit of telemedicine. PACS technology is maturing and platforms are flexible and fully featured, allowing the storage of images from multiple imaging devices (called modalities) including x-ray, CT, MRI, ultrasound, and nuclear medicine (Jackman,
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n.d.). RIS systems offer hospitals customizable workflow management of images from patient registration through the production of a report. RIS can integrate with PACS for a complete system that also includes storage and archive features. The PACS and RIS systems at FHC were installed approximately four years ago. A staff of over 100 IT analysts is responsible for a variety of healthcare information systems. FHC maintains an outsourced relationship with a group of radiologists that have a contract through 2008 to read and interpret all scans and images at FHC facilities. Radiologists, Inc. (RI)1 was formed in the 1960s and employs 17 board certified radiologists. Recruiting radiologists to provide 24/7 coverage required by their contract with FHC has been difficult for RI due to the remote location of the regional medical center. Over 40% of the emergency radiology scans occur at night with the most critical cases often presenting during the evening hours from 10 p.m. to 7 a.m (NightHawk, n.d.). Due to the volume of patients seen in the emergency rooms during these evening hours requiring scans, RI began investigating the potential for outsourcing the evening services to another vendor. RI focused on a vendor with a reputation for quality and 15% of the outsource market for teleradiology services: NightHawk Radiology Services (Kelly, 2006). NightHawk Radiology Services is headquartered in Couer d’Alene, Idaho, and provides services to over 1,000 hospitals in the United States (see www.nighthawk.net). It employs United States board certified, state-licensed, and hospital-privileged radiologists who provide radiological interpretations to customers 24 hours a day, seven days a week, from centralized reading facilities located in the United States, Australia, and Switzerland (NightHawk, 2007). NightHawk establishes a secured virtual private network (VPN) connection with hospital customers. Images are sent compressed and encrypted across the Internet to radiologists in Sydney, Australia or to other NightHawk destinations. Reports
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are sent back in approximately 20 minutes and travel via encrypted fax to a hospital’s radiology department. Other centralized reading offices in Zurich, Switzerland, and Coeur D’Alene, Idaho, provide redundancy and “follow-the sun” availability. NightHawk has reported 99.9% availability with only one incident of catastrophic failure (a failure in MCI’s Internet network between the United States and Australia resulted in a 30 minute downtime for the company). In September 2006, NightHawk earned a three year renewal of its JCAHO Gold Seal of Approval (NightHawk, 2006). The JCAHO accredits healthcare organizations from the perspective of confidentiality and data security. In June 2006, a NightHawk representative presented NightHawk’s teleradiology services to the FHC Board of Executives and to radiologists from RI. The major concern for FHC was the quality of the interpretations. FHC approved a pilot and began testing the new service on a limited basis with evening studies being sent to Australia, for preliminary reads under the supervision of a radiologist. By December 2006, FHC was sending all of its late evening radiological studies to NightHawk for preliminary reads. The volume increased from approximately 600 studies sent in Fall 2006 to over 3500 studies by March 2007. Because of the Medicare/Medicaid restrictions for radiology studies being interpreted on foreign soil, the final read is always done at FHC by RI in order for reimbursement to be processed. Figure 1 shows the workflow of the proposed system using the legacy applications with PACS and RIS. The new outsourced component of the digital workflow is found in the shaded area. FHC executives worked with both RI and NightHawk on the paperwork related to HIPAA’s business associate designation to provide adequate coverage for each entity in the disclosure of protected health information (PHI). Because there was a three-way agreement between RI, NightHawk, and FHC, the business associate agreements were executed in multiple counterparts, but all of them
Protecting Patient Information in Outsourced Telehealth Services
Figure 1. Proposed workflow
summed up to one agreement. In addition, the FHC Privacy Officer drafted the Patient Consent form for sending studies overseas and ensured the new NightHawk workflow in the FHC Radiology Department followed both HIPAA and JCAHO requirements. The forms and the new workflow ensured (1) patient consent, (2) patient privacy, and (3) protection of patient data. The security of the patient data is provided through encryption, a secure VPN, password-protected access, and physical isolation of the system to a secure region of the hospital. There are two dedicated virtual private network connections to NightHawk destinations from FHC: Chicago, Illinois, and Coeur d’Alene, Idaho. Figure 2 demonstrates the VPN connections that exist. Studies are sent out from the FHC connection to Chicago for quality assurance purposes only. Quality technicians at NightHawk in Chicago verify the number of images and patient identifying information and then forward the studies via VPN to reading centers
in the NightHawk network. For FHC, this is the reading center in Australia. The second VPN connection is to the reading center in Idaho for back-up purposes. FHC network analysts worked with the NightHawk implementation team to provide two secured and encrypted VPN connections to specific host (Nighthawk) IP addresses into the NightHawk network, from the secured VPN router on the FHC network. On the FHC side, the VPN connection points to two hosts (FHC) that are part of the PACS storage archive. The VPN logs are monitored by FHC staff to detect unauthorized traffic (i.e., not in the trusted IP address range). Figure 3 visualizes the workflow for the new outsourced relationship. All FHC divisions follow this NightHawk workflow starting at 11 p.m. each day until 7 a.m. the next morning. When a study is sent to NightHawk, the radiology technologists complete an online requisition form with patient information including patient demographics, type
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Figure 2. VPN connections
of exam performed, clinical history, evidence of trauma (if any), and also the number of images to be sent to NightHawk. Once the form and images are received by NightHawk in Illinois, the Quality Assurance Center will determine if all the images made it across the VPN. This center also determines which radiologist can read the study and routes it to a specific individual in Australia. The Web-based tool used by FHC to submit studFigure 3. Outsourced workflow
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ies to NightHawk is then updated with a status that the study has been assigned to a radiologist. The Web tool flashes an update every 20 seconds and within 5 minutes, the tool will flash an update that the radiologist has started reading the study. Within 20 minutes, the Web tool flashes that the radiologist has finished reading the study and that a preliminary report is being faxed back to the Radiology Department at FHC. This commu-
Protecting Patient Information in Outsourced Telehealth Services
nication method allows the technicians waiting at FHC to know the status of the studies sent to NightHawk and be able to give important updates to physicians waiting on the results, most often from the Emergency Department. The VPN router logs determine the level of traffic sent across these two connections. Any failure in the public Internet would impact the availability of NightHawk services. In the event of a complete Internet outage, FHC will direct any emergency studies to an “on-call” radiologist from RI. The radiologist could either come to the hospital Radiology Department or a FHC facility to read studies during an outage. Although the NightHawk implementation at FHC was generally successful, there have been several items for which perceived outcomes differed from the actual outcomes. Due to the requirement that all images had to be received at the remote end before an interpretation could begin, the NightHawk application appeared very sensitive to data interruption. Initially, the size of the images was reported as a problem. Compression tools were used and the packet loss and delay were alleviated. The advertised reliability of NightHawk service has also been uncertain. An outage in March 2007 was due to another NightHawk customer sending studies that exceeded maximum study size limits, but yet still passed into the NightHawk network. This impacted the inability of other hospitals to send studies during a 45-minute outage period. Initially, NightHawk was unable to determine the root cause of the outage, but later, on the evening of the outage, NightHawk reported a single customer had inadvertently flooded the NightHawk interface with larger than anticipated (larger than normal) images. There are questions that remain about the effectiveness of the compression software used by Nighthawk and the level of monitoring of network loads. The team from FHC requested NightHawk improve the method of alerting customers to outages, perhaps by using an automated call-down or pager notification with more details.
Overall, the NightHawk implementation at FHC was successful from the executive perspective, despite the service interruption. While the FHC case does not involve a security breach, it does highlight areas where vulnerabilities exist and could increase the likelihood that PID will be compromised. There are a number of lessons-learned from this implementation. Specific vulnerabilities exist in the following areas: (1) Security was not a major factor in the selection of the outsource partners; (2) There was no security readiness assessment on any of the systems that were bolted to the outsourced application; (3) The performance of the proposed technology was not tested and verified; (4) Mobile devices were not restricted; (5) No preparations were made for incident response; and (6) No pilot study was performed or benchmarks for performance from the security perspective were used. The following discussion provides practice points for practitioners in how to achieve success in outsourced projects and for guidance in bolting on security to legacy systems that have integration to outside systems. The practice points offered can be used for any telehealth initiative and are not restricted to those involving teleradiology applications.
practice pointer 1: security from the top The FHC case highlights the absence of selection criteria and proper “vetting” for outsource vendors. The sole focus of interest was on a single criterion: quality of the image interpretations. In the case study, the radiologists chose the outsource vendor, Nighthawk, based solely on their market share and reputation. The due diligence effort was left to FHC IT staff and consisted largely of a short pilot to verify the quality of the interpretations. There were no discussions of security beyond the verification that the vendor had received certification for their practice from the JCAHO. Interestingly, the JCAHO only accredits for quality and
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safety, not security. The Gold Seal Certification also applies only to U.S.-based inspections rather than offshore locations such as the reading center in Sydney, Australia. An over-reliance on the presence of certification or vendor assurances that security is consistent with industry best practices can lead to compromises of patient data. Booz-Allen Hamilton conducted a survey in 2006 to assess the critical concerns of executives in selecting an outsource vendor and found that quality of service ranked as the first concern, with pricing and security, in second and third places respectively. Often in a rush to implement new services and realize cost savings, C-level executives ignore the usual level of due diligence required to insure the protection of PID as required by HIPAA. Due diligence requires that quality from a technology performance perspective and security be verified and that pricing should be a secondary consideration. Healthcare organizations should begin to think of quality as encompassing security as a benchmark. Such due diligence does not just include the outsourced vendor, but also the existing systems that will be integrated into the new workflow. Many of the service providers delivering outsource services are new to the healthcare arena and may not yet have policies in place to address protection of sensitive data or the technical expertise to deliver the level of service required by the covered entity. Those in IT are often assured that the vendor meets the standard required for the responsible party but it is difficult to police service providers geographically removed from the healthcare organization. Hospitals should work to develop enterprise standards for the outsource vendor selection process. These standards must include a very thorough process of investigating the security practices of all possible vendors. Security documentation from each vendor should become a requirement and failure to provide as much should be a serious consideration for elimination of the vendor. Hospitals are beginning to rely on
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vendors’ assertions of benchmark certifications similar to those used in other industries. Modernization of healthcare systems would certainly be easier if a unified certification body existed. In 2006, the Certification Commission for Healthcare Information Technology (CCHIT) was officially designated by the United States Department of Health and Human Services as a Recognized Certification Body because it has developed thorough certification criteria for vendors of Electronic Health Record (EHR) software. The mission of CCHIT is to create a sustainable certification program for healthcare information systems. According to CCHIT Chairman Mark Leavitt, MD, “vendors see significant market impact from certification” (Monegain, 2008). CCHIT has received endorsements from professional medical organizations, including the American College of Physicians. When a new telehealth partnership is formed, clearly identifying and actively engaging key stakeholders is an important practice point because the message that security is an enterprise concern, not just a technical concern, must be kept alive. The potential for new vulnerabilities to be introduced due to increased exposure, improper access by new stakeholders, or interaction with poorly secured systems will require a new understanding of the potential risks. Hospital executives must view security as a business concern and a policy effort. Enterprise security should be questioned regularly in board meetings whenever a new relationship and system is established. Executives must aggressively and visibly sponsor information privacy and security campaigns that align with the policies and procedures for employee conduct (Collman & Grimes, 2005). The C-level officers must begin to ask questions about both clinical impact and protection of patient data. Physician “champions” and organizational staff must carry the same message and execute the work to protect data. Targeted training and continuous awareness
Protecting Patient Information in Outsourced Telehealth Services
of the need to protect patient information will be required whenever outsourcing of a clinical service occurs. From the beginning, investment in security and privacy should be considered as any other strategic initiative: adequate resources must be provided, and proper education and training related to privacy and security must be made available. By identifying stakeholders and finding champions to carry the message early in the formation of the partnership, the enterprise and the outsourced entity will be setting up the strongest foundation possible for acceptance of the additional security needed to support the partnership. The following practice points include: •
•
• •
•
• •
•
Outsource vendors should have a performance standard that encompasses clinical quality and technology performance. Offshore sites used in outsourcing should be accredited or inspected for adherence to the security practices of the hospital. Board room discussions should include questions about security. Due diligence must encompass investigation of the outsource provider’s experience with privacy and data security, including examining any privacy complaints from other clients, how the service provider protects its clients’ PID, and the service provider’s privacy and security policies. Policies and procedures for tracing, reporting, and managing security incidents should be documented. The data protection laws in force in the host country should be reviewed. Outsourced service providers should be restricted from subcontracting without the healthcare organization’s prior written consent in each instance. Outsource service providers must remain contractually liable for the functions that are subcontracted.
practice pointer 2: due diligence Is not Just about business risk The FHC case highlights the absence of a security readiness assessment in preparing for the integration of systems. The readiness assessment should be performed on all systems that will be impacted by the introduction of the outsourced application. It can also identify required upgrades, changes in process, and training needs that can ultimately impact security. The PACS and RIS systems had been in place for four years without an audit or assessment with respect to security. Bolting on an application without a prior assessment of potential security issues that could be amplified by the vendor application can lead to exposure of patient data. Used to correctly identify patients for services and for billing, significant amounts of PID are revealed in these systems and would be of strong interest to cybercriminals. The Healthcare Information and Management Systems Society (HIMSS) Security Work Group created an Application Security Questionnaire that can be used as a guide in assessing security readiness in advance of implementations (http://www.himss.org/content/files/ApplicationSecurityv2.3.pdf). Within the information security context, due diligence involves both a review of policy documents and an examination of the infrastructure, in order to determine where necessary “bolts” of security must be applied. Hospitals must also determine whether the newly proposed architecture will sufficiently protect PID. The following practice pointers should be applied to effectively “bolt on” security: •
As part of a mandatory readiness assessment, an internal privacy and data audit should be performed (1) to understand PID processing activities for the targeted systems and (2) to identify the specific PID to be transferred to the service provider.
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•
•
Open architectures should be identified and partners selected based on having common platforms. Standard application protocols should be required and be consistent with the legacy environment.
practice pointer 3: monitor the technology In the FHC case, the VPN connections were not adequately monitored which could lead to intrusion and interception of transmissions. VPN’s typically encapsulate the data into a special VPN data frame that provides information to the receiving site so that it can reassemble the data at the destination (Dennis, 2002). Authentication is the primary means used to verify that transmissions originate from the authorized parties using the VPN tunnel. The least secure method of authentication is the user identification and password combination. Best practices suggest that a twoor three-factor method be used that involves a passcode in addition to a code generated by a key device (RSA, 2005). FHC used only the user ID and password combination. The critical layers of security that protected the data transmission at FHC include: • •
Encryption: The data are converted into a format unreadable by unauthorized individuals. Authentication: Secure HTTPS transfer of basic user name and password.
FHC had not performed an audit on the exisiting PACS and RIS systems and did not audit the new teleradiology system after implementation. On an annual basis, the hospital CIO should hire an independent security consultant to challenge the various security systems and provide comprehensive reports on the vulnerabilities of the hospital’s system, particularly, the remote access portion of the network. Also, particular attention
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should be given to the internal portion of the network. Employees have proven to be some of the worst offenders for security breaches of sensitive patient information. Overall, security should be addressed at various levels: transaction, application, and client. •
•
•
Transaction: each patient record that is sent/ read should be encrypted and the protected health information should not be discernable in transmission; Application: the specific clinical software should require individual log-in and should keep audit trails of the specific use of the features; and Client: the PC workstation should be hardened with VPN software, the operating systems patches should be current and the software certificates aligned with the outside systems to which it has access.
The type of threats that are possible if the end devices are not adequately protected are reconnaissance attacks, where hackers will scan for answering IP addresses and port numbers, and IP spoofing, as a first step to attempted unauthorized access to the network devices and client machines. The device doing the routing/firewalling can be hacked, opening up the hospital network to an intruder. If a hacker manages to log into the router/ firewall, then it can be reconfigured to allow free access over the Internet to the client machine, bypassing any firewall rules or access lists. If hospital uses a hardware VPN terminator, then there are not any firewall safeguards to break, and it is an easy matter to get to the network port of the client. From there an intruder may be able to access the client itself, giving them an unfettered view of confidential patient information that is not yet encrypted. Potentially, an intruder can hijack a client to gain access to the hospital network, send and receive e-mails, and log in to internal servers. Even if an intruder cannot get into the client, once on the router, they can use it to access
Protecting Patient Information in Outsourced Telehealth Services
any network service. Determined intruders can simulate a client’s connection (it is an easy matter to determine IP addresses from DHCP scopes or arp caches) and gain access to a network. With outsourced companies such as NightHawk, the hospital should discuss the partner’s present security practices and request documentation to prove privacy and security provisions are adequate to meet the expectations of hospital privacy officers, executives, and the security group in the Information Services Department. The main tenants should cover the confidentiality, availability, and integrity of the data, particularly protected health information that flows between the two sites. The contractual agreement between the two parties should spell out in enough detail how the actual data flow works and should include a visual representation that is easy to understand by all parties involved in the agreement. In this drawing, all points of access to the data should be identified. This includes identifying the level of protection that will be provided by the carrier networks, including bandwidth vendors. Additional information to address the protection measures for both the security and privacy at any of these individual access points is necessary. The hospital should not finalize the agreement with the third party until all protection is in place. In setting up security to protect the transmission of data to the third party entity, the hospital must retain the control of the connection and should be able to disconnect or fix the transmission should a security breach or a problem arise. If the hospital is the “sender” of the protected information, then it should retain the rights to control the data getting to the “destination.” Often hospitals with smaller information services departments may be encouraged by the third party entity to hand over the maintenance and repair of the connection. These institutions should consider hiring additional information security resources to support the third party connections or consider hiring independent security managers who do not have any relationship with the third party entity
receiving the data. Often, independent security consultants can find improvements to be made and may suggest additional measures to protect the data. FHC, Nighthawk, and RI entered into a three-way business associate agreement. FHC maintained control of the VPN connectivity between its network and the entry points into the NightHawk network. Only users from the Radiology Department were given access via username and password to the NightHawk Web site to track studies sent to be read. At present, the NightHawk system cannot be accessed from anywhere except hospital workstations and it is not available for remote use at home by physicians. VPN connections also involve client stations that require review and management. As the amount of PID being transmitted increases, and other avenues of interception are hardened, it can be expected that cybercriminals will turn to the weaknesses in hospital networks as their next source of identity theft and intrusion. The important practice points include: •
•
•
• •
•
A standard for auditing the VPN connection at all sites that transmit and receive patient data should be established. One-time passwords, using token mechanisms should be required for authentication. Host Intrusion Detection should be installed on the end stations that can identify anyone trying to hack into them or install back-door software. Split tunneling should not be used as it can open a network to the outside. Remote routers and firewalls should be installed with strong protection for administration access. Daily monitoring of VPN connections for IP addresses, traffic, and load should be done by both the outsource vendor and the healthcare organization.
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•
• •
• •
All attempted access and abnormal behavior on firewalls, routers, and end stations should be logged and investigated. Client log-ins should be routinely audited. Remote access VPNs should provide sufficient encryption to prevent man-in-themiddle attacks. Patches should be applied on clients used in outsourced systems. Multiple VPN clients running on the same PCs should be discouraged.
2.
practice pointer 4: secure the perimeter Hospital CIO’s should anticipate requests from clinicians to use personal devices to access data on the hospital network, including PDAs, cell phones, or small handheld devices. Firm decisions must be made to either provide protected access to patient data from these devices or to not allow any personal devices to access the hospital network. The reports of data loss at healthcare organizations by the Privacy Rights Clearinghouse show that in 2007 there were 30 incidents involving hospitals or medical centers that involved exposure or theft of PID (for the complete list, see http://www. privacyrights.org/ar/ChronDataBreaches.htm#Total). Of the data thefts, there were 19 that involved the loss of a mobile device that contained identifying and unencrypted data from hospital systems. The convenience of a mobile device offered to physicians must be weighed against the substantial risk of loss or theft both inside and outside the healthcare organization. Some concerns with respect to a nonhospital asset or nonthird party asset are the following scenarios: 1.
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A physician is at a conference, hotel, or business center and loads the VPN client on a machine, but forgets to remove it completely before they leave. VPN clients that have expiring certificates and clear out browser cache when exiting Internet Explorer will
3.
4.
5.
prevent potentially leaving patient information on a workstation that can be viewed by anyone else using the client. A radiologist uses the VPN client on their own laptop, but other people, including family members, also have access to that laptop and may use it at other times. If the VPN software uses a soft-token (already existing on the PC in the software), the VPN connectivity may not require additional authentication and the family members may be able to connect to the hospital network. If the physician is not using strong passwords, and is typical of some, keeping a list of passwords stored in a wallet, desk drawer, and so forth, this presents an easier access point for unauthorized use of the VPN connection into the hospital network and potential use of the radiology system, whereby sensitive patient data could be accessed. Web pages that allow access to the PACS systems can be easily bookmarked. Often settings on the PC with respect to the operating system can offer to “remember” passwords for users. If physicians have these pages bookmarked and have told the operating systems to assist in remembering passwords, there is the potential to allow access to hospital systems by unauthorized users, especially if they are allowed unfettered or unmonitored access to the physician’s laptop. The security features offered through local service providers (cable or DSL) may not have adequate levels of protection for data passing through these hubs. Home or small office wireless networks shared by multiple PCs may not be completely secure and are often easy to eavesdrop on with simple sniffing tools. The physician’s son or daughter could be watching him/ her work and be in a different room of the house.
Protecting Patient Information in Outsourced Telehealth Services
For today’s physicians, the remote access to patient data is important for consultation and following the progress of a patient’s care while away from the hospital facility. But the risks of exposure are great if simple protections and enforced access policies are not instituted. Even more critical, physicians accessing patient data outside of secure facilities in offshore locations must use the same mitigations against theft of data and intrusion as are followed inside the hospital. The following practice points include: •
•
•
•
•
•
VPN clients with expiring certificates or that solidly clear out browser cache when exiting Internet Explorer should be used. Violations or security breaches resulting from negligence on the part of physicians should result in penalties for the person violating the rules, up to and including suspension of privileges at the hospital. The physicians and other outside parties accessing information or patient data should read, sign, and abide by a written policy concerning access to patient data. The level of access should be designed on a “need-toknow” scale, rather than a full house-wide access to the hospital data systems. Outsourced entity users should be given access to only the hospital systems necessary. The levels of access should be designed so that their requests match up to only the specific systems to which they need access. Systems should prevent saving data to workstations that exist outside of the hospital infrastructure. The system should prevent the download and installation of the VPN client to unauthorized workstations (such as home PCs).
practice pointer 5: practice Incident response Hospitals should develop specific incident response plans that can be followed should confi-
dentiality or security be violated. A governance process should be established to handle escalation of security issues and to enforce security policies and procedures. These plans and procedures should be routinely updated and tested. Employees should know that these documents exist and know how to use them. Such a document is often helpful in determining the root cause of the information breach. Some medical centers have full-time executive level chief security officers (CSO) who actively engage vendors, clinicians, and patients in the protection of digital medical records. Also, the privacy officer can be given the responsibility for drafting security policies and procedures and the necessary forms that are considered part of the information security policies and procedures. The CSO should also be given responsibility for incident response including how breaches will be publicized to patients. Forms that were developed at FHC for the new teleradiology application and represent best practices include: •
•
Remote Access Policy: hospital employees, healthcare providers who access patient information and other outside entities must complete a remote access request form and read and sign a remote access policy statement. This document remains on file in the privacy officer’s location. The statements contained in the document represent that the individual has read, understood, and acknowledged that patient health information is private and must remain secure. Patient Consent Form: Whenever patient information is to be released to an outside entity beyond the infrastructure of the hospital, the patient must sign a consent form to authorize the release of specific information. On the form, the patient can specifically deny certain types of information from these outside entities and also can specify the destinations to receive or not receive patient information.
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•
•
Business Associate Agreements: The chief security officer keeps the business associate agreements that have been signed by vendors and third party entities with the designation as business associates with the hospital under the provisions of the HIPAA regulation. Incident Response Plan: A security incident response plan is followed whenever there is an apparent breach in the confidentiality or security of patient data. This plan is activated whenever a security incident is reported at the individual, departmental, or corporate level.
The following practice points apply: • •
•
A pilot system should be designed and implemented before moving into production. The pilot system should be evaluated according to the preproject established benchmarks and deficiencies corrected prior to the move to production. A formal review with the outsource partners of any potential risks for security should be performed.
conclusIons practice pointer 6: pilot studies and benchmarks The outsource relationship is no different than any other technology product or service that is offered to provide cost savings, efficiencies, or competitive advantage: it requires a proof of concept that the advertised virtues can be realized once installed. To maximize security and ensure perceived benefits, hospitals must plan a specific pilot study that carefully determines the system’s behavior and matches the design to the actual implementation. The pilot should be designed and implemented by all parties to the outsource partnership. Failure to implement a pilot and rushing instead into production based on the outsourced vendor’s implementation can create problems both for the later operation of the system and the effective establishment of security protocols. Early in the project planning phase, healthcare organizations should determine what the benchmarks for success will be, including the appropriate security metrics. For FHC, no benchmarks were identified except the readability of the transmitted image, and response time for the report to be faxed. Without any technology or security metrics in place, FHC is vulnerable to performance degradation and compromise of the data.
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Once the telehealth system is established, hospitals cannot rest on their laurels for implementing an outsourced system. Continued vigilance is required both from the technical team supporting the connected systems as well as the C-level executives who must regard security as a strategic initiative. New threats continue to develop and network analysts supporting the hospital network must move risk mitigation forward on a daily basis. Department managers within the hospital, including the lab and radiology managers, must carry a strong position that breaches the security of patient data will not be tolerated. Any weaknesses in the systems used within the hospital must be reported immediately. Even patients must acknowledge that sometimes treatment requires sharing data among clinicians, but that it should not be at the expense of the integrity of the data. All the involved parties must work together to ensure the highest level of security is continuously obtainable. HIPAA and, to a certain extent, the JCAHO have laid out the expectations for the protection of data in healthcare settings. The FHC case suggests that hospital management may be placing too much emphasis on the cost and quality aspects represented in outsource opportunities and less emphasis on the security aspects of the proposed system. Shortcuts to system implementa-
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tion are an invitation to a compromise of patient data. Based on the FHC case, the practice points offered in this paper can provide mitigation of threats and lower the risk inherent in outsourced systems, particularly those systems wherein security must be “bolted” on because it was not built-in originally.
reFerences Beck, G., & Neufeld, J. (2007). 2007 Indiana Critical Access Hospital Clinical and Technology Needs Survey. Retrieved June 12, 2008, from http://www.in.gov/isdh/publications/partner_rel/ pdfs/2007IndianaCriticalAccessHospitalSurve y-p1to17.pdf Bedi, S., Sarma, R. K., & Arya, S. (2002). Outsourcing CT scan: A boon for patients, physicians and hospital administrators in a general hospital. Journal of the Academy of Hospital Administration, 14(2), 7–12. Collman, J., & Grimes, S. (2005). What healthcare executives should know and do about information security. HIMSS Privacy and Security Toolkit. Retrieved June 12, 2008, from http://www.himss. org/content/files/CEOWhitePaperFinal.pdf Data Breach Report (2007). Identity Theft Resource Center. Retrieved June 12, 2008, from http://idtheftmostwanted.org/ITRC%20 Breach%20Stats%20Report%202007.pdf Dennis, A. (2002). Networking in the Internet Age (p. 208). New York: John Wiley and Sons, Inc. Goelman, A. (2006). Work without boundaries: Information technology and the extension of radiology work in time and space. Paper presented at Work Beyond Boundaries, Vancouver, BC. Goelman, A.(2007, April 26). Teleworks that work: Teleradiology and the emergence of Nighthawk Radiology firms. Presented at Sloan Foundation
Industry Studies Annual Conference. Retrieved June 12, 2008, from http://web.mit.edu/sis07/ www/goelman.pdf Hill, R., Bartrum, T., & Guy, B. (2006). Hospital outsourcing trends in clinical services. Retrieved June 12, 2008, from http://www.wallerlaw.com. sitemason.com/files/WallerSurvey.pdf HIMSS. Retrieved June 12, 2008, from http:// www.himss.org/ASP/topics_privacy.asp HIPAA Security Guidance. U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services. Retrieved June 12, 2008, from http://www.cms.hhs.gov/SecurityStandard/ Downloads/SecurityGuidanceforRemoteUseFinal122806.pdf Information Security Risk a Top Concern Among Outsourcing Executives. (2006, March 23). Booz Allen Hamilton, Inc. McLean, VA. Retrieved June 12, 2008, from http://www. boozallen.com/capabilities/services/services_ article/1876648?lpid=827466 Jackman, M. W. A digital imaging transformation in radiology departments. Healthcare Technology: The Digital Healthcare System. Retrieved June 12, 2008, from http://www.hctproject.com/ content/PDF/HCT2_wp_ jackman.pdf Joint Commission on Accreditation of Healthcare Organizations. (2000). 2000 Hospital Accreditation Standards. Retrieved June 12, 2008, from http://www.jcaho.org Kelley, M. (2006, April 9). Web handling radiology night work. The Charleston Gazette. Retrieved June 12, 2008, from http://redorbit. com/news/health/463659/web_handling_radiology_night_work/index.html Levy, F., & Goelman, A. (2005). Offshoring and radiology. In L. Brainard & S. M. Collins (Eds.), Offshoring white-collar work: The issues and implications. The Brookings Trade Forum.
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Monegain, B. CCHIT receives slew of applications just under deadline. Retrieved June 12, 2008, from http://www.healthcareitnews.com/ story.cms?id=9060 NightHawk Radiology Holdings, Inc. releases record third quarter 2007 results. (2007, October 30). Cour D’Alene, ID. Retrieved June 12, 2008, from http://ir.nighthawkradiologyservices.net/ releasedetail.cfm?ReleaseID=272186 NightHawk Radiology Services, Inc. (n.d.). Retrieved June 12, 2008, from http://www.nighthawkradiologyservices.net/ NightHawk Radiology Services awarded accreditation from joint commission. (2006, September 29). Retrieved June 12, 2008, from http://www. nighthawkrad.net/admin/editor/uploads/files/ JCAHONewsRelease.pdf Outsourcing in most hospitals. Retrieved June 12, 2008, from http://www.offshoringtimes.com/ Pages/2007/BPO_news1584.html
Privacy Rights Clearinghouse. Retrieved June 12, 2008, from http://www.privacyrights.org/ identity.htm RSA, best practices in authentication (2005). Retrieved June 12, 2008, from http://www.accusys.com/Best_Practices%20_in_Authentication_WP_0905.pdf Schwartz, M. (2007, December 6). Application developlment: Buy, build or cobble? Retrieved June 12, 2008, from http://www. bmighty.com/hardware_software/showArticle. jhtml?articleID=204701872
endnote 1
The name and location of the medical center have been changed. Some distinguishing details have been omitted to protect the people and partnerships.
Pollack, A. (2003, November 16). Who’s reading your x-ray? The New York Times. Retrieved June 12, 2008, from http://query.nytimes.com/ gst/fullpage.html?sec=health&res=9503E5D912 38F935A25752C1A9659C8B63&fta=y
This work was previously published in International Journal of Information Security and Privacy, Vol. 2, Issue 3 edited by H. Nemati, pp. 55-70, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 7.3
Grey Market Informatics Kirk St.Amant East Carolina University, USA
IntroductIon International outsourcing often involves virtual communities in which globally dispersed co-workers use online media to collaborate on projects. Such virtual work communities are associated with reduced production costs and quicker times to market. These work relationships, however, also bring with them certain detriments. While critics have focused on job losses related to international outsourcing, few individuals have examined outsourcing’s other great drawback: diminished control over information. This reduced control creates an opening for the misuse of personal data through a series of processes collectively referred to as grey market informatics. This article overviews how grey market informatics works and examines the effects it can have on organizations that use international outsourcing. The article then concludes with strategies for avoiding such misuses of data. By
realizing and addressing grey market informatics, organizations can enhance the success of their future outsourcing activities.
bAcKground International outsourcing increasingly involves the export of sensitive personal data to overseas workers who process it. For example, the outsourcing of accounting practices moves financial data beyond the legal protections of the client nation (e.g., the United States [U.S.]) (Relocating the back office, 2003; Lost in translation, 2003). Similarly, more confidential medical information is moving abroad as processes such as medical transcription are outsourced (Davino, 2004). By moving information from one nation to another, these outsourcing practices shift such data into a legal grey zone. While the outsourcing client (the client organization) might be located
in a nation where laws prevent such data from being abused, that same information might be outsourced to a nation where no such legal protections exist. As a result, international outsourcing can leave personal information vulnerable to various abuses. To appreciate this vulnerability, one needs to understand the role personal data plays in marketing and development practices. Effective marketing is based on understanding consumers, and the more one knows about an individual, the easier it is to create advertising materials that entice that person to purchase a product. Personal data, therefore, is an important commodity, for it can be used to improve product sales. Corporations, in turn, often collect and archive as much personal data on individuals as possible, even if such personal data seemingly has no value related to marketing. The idea is that such information might have value later (Whitaker, 1999; Siebel & House, 1999; Davis & Meyer, 1998). Such data can also help organizations better plan research and development activities to meet purchasing patterns within a population and thus maximize the profits they can make from a product. If, for example, a pharmaceutical company knows more individuals suffer from heart disease than stomach disorders, it can focus drug development efforts on medications designed for the larger market. Historically, the usefulness of personal data remained limited, for mass media (e.g., television, radio and print advertising) served as the primary means for sharing advertising with consumers. Advertising, therefore, had to address a broad, general audience in the hopes that the related message would persuade enough consumers to purchase a product. Online media changed marketing by allowing marketers to deliver advertising directly to specific consumers. This direct contact means advertising can now be designed to meet the interests of specific individuals. Such narrowcast advertising permits organizations to use more personalized marketing to increase sales one customer at a time.
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Additionally, this ability to focus on individuals also facilitates the sales of specific goods and services to consumers who seemed most likely to purchase them. It also provides organizations with a database of valuable data that others might be willing to purchase. As a result, the value of personal information has skyrocketed, and so has the business imperative to collect as much of this information as possible (Whitaker, 1999; Siebel & House, 1999; Davis & Meyer, 1998). These trends in data collection have also given rise to consumer concerns related to misuses of personal data. Insurance companies, for example, could rely on data a pharmaceutical company uses to target a blood pressure drug to a prospective consumer to deny coverage to the same individual. These privacy concerns have prompted many governments to enact laws that protect consumer information. In the U.S., for example, the Fair Credit Reporting Act and the Credit Reporting Reform Act place restrictions on how an individual’s financial data may be used (Cate, 1997). Similarly, the Cable Communications Policy Act and the Video Privacy Protection Act greatly limit how organizations use data related to consumer purchase or rental patterns (Cate, 1997). More recently, the Electronic Communication Privacy Act has established privacy protections related to computer use (e.g., keystroke monitoring) and online communication (e.g., “rerouting electronic communications to provide contemporaneous acquisition”) (Johnston, Handa, & Morgan, 1997, p. 81). For these reasons, organizations must often perform a complicated balancing act related to consumer privacy. On the one hand, they have a vested interest in compiling and using consumer data. On the other, legal guidelines restrict their abilities to perform such processes. Historically, this balance was kept due to limitations in the geography of the workplace. That is, organizations usually performed their data processing activities within the borders of a particular nation. As a result, the organizations performing such activities had to comply with
Grey Market Informatics
privacy laws of its “home nation.” This geographic restriction meant violations were relatively easy to track and penalties were relatively easy to enforce. The international access provided by online media altered the geography of the workplace and affected the nature of privacy protection related to corporate activities. Global use of online media has grown markedly in recent years, and much of this growth is taking place in developing nations. In mainland China, the number of Internet users grew from 2.1 million in 1999 to a projected 96 million by the end of 2004, while Brazil has seen its number of online users grow by 430,000 in recent months (Wired China, 2000; China’s coming, 2004; Active Internet users August, 2004). Now, employees located in different nations can use these media to communicate as quickly and effectively as if they were working within the same building. As a result, work groups have shifted to virtual communities comprised of employees based in various countries (Relocating the back office, 2003; Lost in translation, 2003). These virtual communities often involve international outsourcing—a process by which organizations send work overseas and monitor production from a distance. Online-based outsourcing brings with it the prospect of increased profits for two reasons. First, online media allow companies to used knowledge workers in developing nations to perform skilled tasks for a fraction of what employees in industrialized nations would charge (The new geography, 2003). Second, online media either allow individuals in different nations to work on the same project simultaneously or to forward work from nation to nation in order to keep production going non-stop (Friedman, 1999). Such processes reduce the time it takes to generate final products and get them into the marketplace. International outsourcing also creates interesting legal situations. If work is performed in another nation, then employees are operating under laws different from the company that provided the work. Therefore, a process that might be illegal in the
nation of the outsourcing client might be perfectly legal in the nation of the outsourcing employees. In terms of privacy and data protection, the various national laws dealing with such topics can range from very strict (e.g., the European Union’s Data Protection Directive) to almost non-existent (e.g., Pakistan) (Swire & Litan, 1998). The result is a grey area in international law; which laws should apply where and how? Within this grey area, a field of data collection could emerge: that of grey market informatics.
mAIn thrust Grey market informatics is a process in which differences in national privacy laws allow personal data to be used in questionable ways—many of which focus on profits. In some cases, international outsourcing could be used for purposes of data laundering. In these situations, a client organization is located in a nation that has laws restricting how personal information can be compiled into a consumer profile for marketing or research purposes. Organizations might therefore outsource personal information to nations where such data compiling is legal. Outsourcing employees could send these profiles to a subcontractor—a different individual located in that same nation or located in another nation with lax privacy laws. That subcontractor would return profiles to the original client organization. As that client organization did not violate its own nation’s laws, it could use the resulting profiles in its marketing or development activities. In other cases, national laws might make it illegal for organizations to receive profiles created from “illegally compiled data.” Again, grey market informatics allows organizations to circumvent such laws. This time, once marketing profiles are created by overseas workers, those profiles are not returned to the client organization. Rather, they are sent to a different organization (an outsourced subcontractor) that would use the data in marketing
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activities on behalf of the original client organization. In this way, the client organization does not violate the laws of its own nation, but it can still reap the benefits of using specific consumer information. Such scenarios could be viewed as indirect applications of data. In both instances, the benefit of grey market informatics has to do with tracking and punishing violations. Once information is sent beyond the borders of a particular nation, that nation’s regulatory agencies might not be able to track where that data goes. Moreover, once such data is received by a worker in another nation, that individual can re-distribute it to sub-contractors either within the same nation or in other nations. Such redistribution only increases the difficulty of tracking where information is going. And if violations cannot be tracked, it can be difficult to prove a crime was committed or that illegally complied information was used by an organization. The situation becomes equally complex in terms of punishing violations. To punish violators, enforcement agencies must catch them in a violation—a process made very difficult by data laundering. Should violators be identified,and they work in a nation where such activities are legal, little can be done to prevent them from continuing with these pursuits. Even if certain data processing laws are in place, for them to be effective, the law enforcement agencies of the related nation must have the authority to apprehend and to punish violators. If, however, a government lacks the will to enforce such laws (e.g., the enforcement of copyright infringement in Ukraine or China), then it could be difficult to stop such a process. As for the client organization, if its home country does not have laws addressing the receipt of data compiled in other nations, then it could be difficult to prevent client organizations from receiving such data. Moreover, data laundering practices provide client organizations with a degree of plausible deniability, as there was no way to track where such data went, there was no way to tell if it was illegally processed.
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In both data laundering and indirect applications of data, there is the assumption that the client organization maintains control over data once it is sent abroad. Yet, as tracking data movement overseas is difficult, a new series of unintended situations in grey market informatics could arise. First, there is multiple data sales—a process in which compiled information could be copied and sold to a variety of companies—thus maximizing the profits one can make from performing an activity. As a result, the information a client organization outsources could be sold to its competitors. Because such processes occur overseas, the original supplier of data might never realize such activities are taking place. Two variations on this multiple data sales approach are data auctioning and data hijacking. In data auctioning, no one client organization provides complete data to an outsourcing worker. Rather, the same outsource employee works for multiple clients and is able to collect various bits of data from each client. That employee can then sell—or auction off—compiled data profiles to the highest bidder (or multiple bidders) in a process that remains unknown to the organizations supplying the data. In data hijacking, client organizations send information overseas for processing, but have no intention of using that information for “questionable” purposes. The outsource employee, however, finds him- or herself in possession of information that has value to a variety of organizations. This individual can then present the original client with an ultimatum—either pay a “ransom” and have the data returned, or don’t pay, and the outsource employee will distribute or sell that data to other parties. In fact, such a data hijacking situation recently happened involving medical transcription work outsourced to Pakistan (Davino, 2004). Thus, grey market informatics creates a series of expected and unintended consequences that have important implications for organizations. While instances of grey market informatics remain limited, they could easily increase and
Grey Market Informatics
have severe effects on organizations that engage in international outsourcing.
Future trends International outsourcing has led to a financial boom for nations engaged in such processes. In India, for example, international outsourcing has led to the creation of 245,000 new jobs and to the development of an industry worth some $3.6 billion a year (Reuters, Indian firms, 2004). For these reasons, nations such as Malaysia, Russia and Vietnam are trying to become involved in international outsourcing practices (Reuters, Outsourcing’s next, 2004; The new geography, 2003). Moreover, as demand for outsourcing grows, outsourcing hotspots have begun distributing work to subcontractors in other countries. India, for example, is currently setting up outsourcing centers in Sri Lanka (Reuters, Indian firms, 2004). From the perspective of grey market informatics, both trends are problematic, for the more nations (and thus the more legal systems) involved data processing, the more difficult it becomes to track where outsourced data is going and how it is being used. Another problem related to grey market informatics is the potential for consumer backlash. In certain cases, consumers might become aware that a company is using their personal information for profit. This consumer base could become outraged and boycott the offending organization. When done on a large enough scale, such a backlash could affect a company’s ability to generate profits. As a result, organizations could find themselves devising privacy protection practices in order to maintain a consumer base. In fact, such a backlash served as the driving force behind many of the current practices designed to protect patient data (Smith, 1994). What makes such a consumer backlash particularly problematic is how grey market informatics limits one’s ability to track the international move-
ment of data. That is, many consumers might not know it was actually an outsourcing worker who was using their data in a “questionable” manner, for these consumers could not track such use. What they can track is the organization to which they originally disclosed that data. This organization, however, might have been using outsourcing for benign purposes and not have intended for such a violation to take place. Regardless of intentions, the logical target of a consumer backlash would be that original data collector—the client organization. Thus, companies could unknowingly spark a consumer backlash by outsourcing data without considering possible consequences.
conclusIon Grey market informatics creates complicated legal and ethical situations that can harm both individuals and organizations. Such situations, however, can be addressed through certain preemptive activities: •
•
Creating a Category of Sensitive Data: If certain data is not sent overseas, it cannot become the target of grey market informatics. Curtailing grey market informatics, therefore, requires organizations to restrict the kinds of data they outsource. To achieve this goal, organizations would need to identify certain information as “sensitive data” that should not be outsourced. (Such data might include certain medical or financial information.) Next, organizations would need to create a data screening process in which all materials are reviewed for sensitive data, which would be removed before materials were sent overseas. Developing Industry-Wide Standards: For data screening to counter grey market informatics, all organizations within an industry need to agree on what information should be labeled “sensitive data” and not be
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Grey Market Informatics
•
•
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outsourced. If such a uniform definition is not created and a standard data screening practice not developed, grey market informatics could continue as different organizations could still outsource sensitive information. One way to make sure practices remain uniform is to have an annual industry-wide summit in which participating organizations review, revise or update the classification of “sensitive data” and related screening practices. Establishing Industry-Wide Penalties: If one member of an industry refuses to comply with standards related to outsourcing sensitive data, there needs to be some mechanism for punishing that violator— otherwise the purpose of creating such a system is in vain. For this reason, industries should create penalties (e.g., boycotts) that organizations could apply to offenders in order to curtail violations. Employing Fragmented Outsourcing: Should developing sensitive data classifications and related screening processes seem too cumbersome, organizations must, at a minimum, protect themselves form data auctioning and data hijacking. To do so, organizations should take advantage of the increasing number of nations involved in international outsourcing. That is, instead of sending all data to one location for processing, organizations should divide information into “unusable segments”—or items that, when presented outside of a particular context, have no meaning or market value. Each of these unusable segments would be outsourced to a different nation, and the outsourcing workers involved in this process would not be made aware of other individuals working on the same project. Rather, once activities are completed, disparate pieces of information would be returned to the client organization that would compile them into usable information.
The complexities of grey market informatics are not insurmountable. Rather, by working together or by working wisely, organizations can prevent data from being used in unintended ways. By understanding grey market informatics, organizations can avoid some of the unintended consequences of international outsourcing. Once organizations raise their awareness of these issues, they can develop more effective methods of using international outsourcing.
reFerences Active Internet users by country, August 2004. (2004, September 22). ClickZ. Retrieved October 6, 2004, from http://www.clickz.com/stats/ big_ picture/geographics/article.php/3410261 Cate, F.H. (1997). Privacy in the information age. Washington, DC: Brookings Institution Press. China’s coming of age online. (2004, November 16). eMarketer. Retrieved November 17, 2004, from http://www.emarketer.com/Article. aspx?1003139& printer Friendly=yes Davino, M. (2004). Assessing privacy risks in outsourcing. American Heath Management Association. Retrieved November 25, 2004, from http://library.ahima.org/xpedio/groups/public/ documents/ahima/pub_bok1_022546 .html Davis, S., & Meyer, C. (1998), Blur: The speed of change in the connected economy. Reading, MA: Addison-Wesley. Friedman, T.L. (1999). The Lexus and the olive tree. New York: Farrar, Strass and Giroux. Johnson, D., Handa, S., & Morgan, C. (1997). Cyber law: What you need to know about doing business online. Toronto: Stoddart. Lost in translation. (2003, November 27). The Economist. Retrieved December 20, 2003, from http://www.economist.com/displayStory. cfm?Story_id= 2248308
Grey Market Informatics
Relocating the back office. (2003, December 11). The Economist. Retrieved December 20, 2003, from http://www.economist.com/displaystory. cfm?story_ id= 2282381 Reuters. (2004, September 2). Indian firms set up shop in Europe, Mexico. News.Com. Retrieved September 7, 2004, from http://www.news.com. com/2100-1011-5344275. html Reuters. (2004, September 2). Outsourcing’s next big thing—Malaysia? News.Com. Retrieved September 7, 2004, from http://news.com.com/21001011-5344618. html Siebel, T.M., & House, P. (1999). Cyber rules: Strategies for excelling at e-business. New York: Doubleday Press. Smith, H.J. (1994). Managing privacy: Information technology and corporate America. Chapel Hill: University of North Carolina Press. Swire, P.P., & Litan, R.E. (1998). None of your business: World data flows, electronic commerce, and the European privacy directive. Washington, DC: Brookings Institution Press. The new geography of the IT industry. (2003, July 17). The Economist. Retrieved October 13, 2003, from http://www.economist.com/PrinterFriendly. cfm?Story_ ID=1925828 Whitaker, R. (1999). The end of privacy: How total surveillance is becoming reality. New York: New Press. Wired China (2000, July 22). The Economist, 24-28.
Key terms Client Organization: Public or private entity that uses international outsourcing workers to perform different tasks. Data Auctioning: Process in which an individual uses data provided by multiple sources to create a profile of particular individuals; this profile is then auctioned off to the highest bidder(s). Data Hijacking: Process in which an individual charged with a data processing activity demands more money for the task in exchange for not publicizing the data with which he or she is working. Data Laundering: Process in which international outsourcing is used to circumvent different national privacy laws when compiling personal data on individuals. Grey Market Informatics: Processes in which differences in national privacy laws are used to compile and distribute personal data on individuals. International Outsourcing: A production process in which work is sent to overseas employees for completion. Multiple Data Sales: Process in which a client organization asks an outsourcing employee to compile personal data on behalf of that organization; the individual compiling this data then proceeds not only to provide the client organization with that information, but to sell copies of that data to as many interested parties as possible.
This work was previously published in Encyclopedia of Virtual Communities and Technologies, edited by S. Dasgupta, pp. 223-227, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 7.4
Security Issues in Outsourced XML Databases Tran Khanh Dang National University of Ho Chi Minh City, Vietnam
AbstrAct
IntroductIon
In an outsourced XML database service model, organizations rely upon the premises of external service providers for the storage and retrieval management of their XML data. Since, typically, service providers are not fully trusted; this model introduces numerous interesting research challenges. Among them, the most crucial security research questions relate to data confidentiality, user and data privacy, query assurance, secure auditing, and secure and efficient storage model. Although there exists a large number of related research works on these topics, the authors are still at the initial stage and the research results are still far from practical maturity. In this chapter, they extensively discuss all potential security issues mentioned above and the existing solutions, and present open research issues relevant to security requirements in outsourced XML databases.
In the early days of ubiquitous computing and up through the late 1990s, owning and operating a sophisticated database was a strategic advantage for an organization (Bostick, 2008). Nowadays, however, nearly every organization possesses some sort of database containing different valuable information, which is considered the lifeblood of the organization. The ability to store data is therefore no longer a strategic advantage in and of itself. Recent investigations also report that storage capacity and security requirements will soon become a big problem for organizations if they still want to manage large in-house databases (Gantz, 2007). The management of the database infrastructure and the data needs has become much more of a commodity (IBM, 2008a; DBADirect, 2008). As a result, the value is not in owning a database but in how it is used and what can be got from it.
Recently, with rapid developments of the Internet and advances in the networking technologies, outsourcing database services has been emerging as a promising trend to overcome the limitations of the in-house database storage model (Hacigümüs et.al., 2002b; Bouganim & Pucheral, 2002). Basically, there are two kinds of database outsourcing models: housing-based and hosting-based. With the housing-based database outsourcing model, the server and data are the property of the outsourcer (i.e., the data owner as illustrated in Figure 1a) and the outsourcer installs the servers. In this case, the outsourcing service provider provides the physical security of machines and data, and monitors (and if necessary restores) the operating condition of the server. Of course, the service provider protects the outsourced data against physical attacks both from outside and inside. Notwithstanding, the access rights of the service provider depend on a particular contract with its client (i.e., the outsourcer). Basically, the service provider only gets a special account with the server for special managerial purposes, but
the outsourcer can determine the necessary access rights of that account. As for the hosting-based database outsourcing model, instead of keeping data in local servers, accommodated internally inside an organization, and having a professional technical team to manage the relevant database services such as software and hardware updates, server performance tuning, or security and authorization management, etc., now all data management needs can be outsourced to outside database service providers (see Figure 1b). In this case, the service provider provides all needed facilities, such as hardware, operating system, etc. to host and manage the outsourced data. In particular, it is different from the housing-based model in that the database administrator in this hosting-based model belongs to the service provider, but not the outsourcer’s. By employing this hosting-service outsourcing model, usually called the outsourced database service (ODBS) model (Dang, 2005; Hacigümüs et. al., 2002b), organizations have more freedom to concentrate on and invest in their core business activities. The ODBS model
Figure 1. Two database-outsourcing models: Housing-based (a); and hosting-based (b)
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Security Issues in Outsourced XML Databases
is obviously preferable to the housing-based one. In both models, however, a service provider is typically not fully trusted, and thus they raise numerous interesting research challenges related to security issues (Hacigümüs et.al., 2002a; Smith & Safford, 2001; Dang, 2008; Damiani et al., 2003; Dang, 2006a; Dang, 2006b; Narasimha & Tsudik, 2006; Sion, 2005; Du & Atallah, 2000; Pang & Tan, 2004; Thuraisingham, 2005; etc.). To make the outsourcing model full-fledged and practically applicable, security-related issues must be addressed radically. Moreover, data management needs constitute the essential enabling technology for scientific, engineering, business, and social communities (Carminati & Ferrari, 2006). In order to facilitate the data exchange efficiently across heterogeneous systems, organizations should use a common standard data model/language like EDI (electronic data interchange), XML (extensible markup language), etc. Among such data models/languages, XML has been widely accepted and adopted as the basis for developing a variety of modern application domains/architectures (W3C, 2008; Brinkman et al., 2004; Bertino et.al., 2007). Emerging simultaneously with the important new database outsourcing trend above, i.e., the ODBS model, security issues in outsourced XML databases have been and will be among the most active topics in the research community as well as commercial world. Those security issues range from fundamental to advanced topics in the information security area, namely data confidentiality, user and data privacy, query assurances and quality of services, secure auditing, and secure and efficient storage. In this chapter, for convenience, we call the outsourced XML database service model, i.e., the XML data are outsourced to the service provider using the hosting-based model, the OXMLDBS model. This chapter will discuss all known security issues and existing solutions, and will cover the open issues relevant to security requirements in outsourced XML databases. Although we will focus our discussions on the OXMLDBS (and ODBS) model,
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a brief discussion about potential security issues in the housing-based database outsourcing model will also be given in section 2. The rest of this chapter is organized as follows: Section 2 presents background knowledge, security issues, and related work in the area of ensuring data outsourcing security. Most of existing approaches to security issues in outsourced XML databases are based on the proposed solutions and mechanisms in this area. Section 3 presents and discusses state-of-the-art approaches dealing with security issues in outsourced XML databases. Section 4 introduces open research issues and future trends. Finally, section 5 provides discussions of the overall coverage of the chapter and concluding remarks.
bAcKground security Issues in outsourced database services According to the two outsourcing models as illustrated in Figure 1, each of them in general consists of three entities: (1) the data owner(s)/ outsourcer(s), (2) the database service provider, and (3) the client(s). The data owner creates, modifies and deletes the contents of the database. The server hosts the owner’s database. At the server side, for both models, there are technicians responsible for normal technical maintenance tasks except for the database administration, which is under the control of some database administrator(s). The database administrator belongs to the outsourcer in the housing-based outsourcing model, while they are the service provider’s manpower in the hosting-based one. This is the major factor that causes many security concerns in the ODBS and OXMLDBS models as we will discuss later. The clients issue queries about the database to the server (Dang, 2006b; Hacigümüs et.al., 2002b). Moreover, in many real-world cases, the data owners are also
Security Issues in Outsourced XML Databases
the unique clients (Du & Atallah, 2000; Dang, 2006b; Narasimha & Tsudik, 2006) (see Figure 3). Interestingly, due to its much more inherent simplicity, most of existing research works limit their focus to this special case (Hacigümüs et.al., 2002b; Damiani et al., 2003; Schrefl et. al., 2005; Li et. al., 2006; Nguyen et. al., 2007; Xie et. al., 2007; etc.). Even then, security issues of concern in the OXMLDBS model are not identical to those of the housing-based model. Below, we discuss the challenging security issues in both interested outsourcing models. Intuitively, with the housing-based outsourcing model, the data owner is no more responsible for the server accommodation, internet connection, and other infrastructures. Data managementrelated tasks, however, are still their regular duties. Even then, concerning security issues in the housing service business model, “soft” security-related aspects are usually ignored or understood that “the installed software or the data owner must be responsible for it”. For example, if a data owner chooses this database housing service at a company M and M gets a special account A for some special managerial activities (A was assigned very limited rights on the data owner’s “outside-housed” database DB), then M is typically liable only for the so-called physical security of the data owner’s hardware and data. It means that M is responsible only for physically securing the server containing the outsourced data (e.g., power, seamless internet connection, etc), but not the data contents from malicious activities (e.g., hacking, inference attacks etc). This is reasonable only if (the client believes that) the DBMS is working as expected in terms of security. In practice, serious problems can occur as the DBMS has some security flaws and the client may not be aware of these “soft” flaws before they are discovered by the housing company M. In this case, M may make use of A and the found security flaws to get control (or so) of the client’s DB, which is currently housed on M’s premises. This is an interesting research
problem and it will be very much better if M can provide the client with a means (tools/software) of detecting the database security flaws and visually monitoring the account A’s real-time activities, especially with the possible DB security flaws. If M can do this, the client will be more than happy because they are assisted in detecting their DB security flaws and can control or anticipate the potential harms that may be caused by A. Although a lot of research work has been carried out to propose effective mechanisms for detecting database security breaches (Dang et al., 2008), the proposed solutions still do not satisfy users. Much more work will have to be done to secure the outsourcer’s DBMSs and data in the housingbased outsourcing model. Nevertheless, in this chapter, we will not go into further detail about the security issues in this model. Next, we discuss security concerns in the ODBS (and OXMLDBS) model, a client-centric classification of the model and crucial security issues in each subclass. It is obvious that in the ODBS (and OXMLDBS) model, the data owner is no longer responsible for data management; rather, it outsources its data to one or more service providers that provide management services and query processing functionalities. Clearly, this method of data outsourcing leads to challenging security issues in that, by outsourcing its data, the data owner may potentially lose control over them. More concretely, both data and users’ queries can now be exposed to the server and hackers/malicious users (cor responding to inside and outside attackers as shown in 1b, respectively). Therefore, in this ODBS model, apart from secure network communication channels and other necessary security procedures at the user side (Axelrod, 2004), efficient and effective solutions to security threats inside the server are indispensable. Consequently, a lot of research work is currently being carried out to ensure secure management of data even in the presence of an untrusted server (Carminati & Ferrari, 2006; Li et. al., 2006; Dang, 2008; Xie et.al., 2007; Nguyen & Dang, 2008; etc.). We discuss these server-side security-related issues below. 2055
Security Issues in Outsourced XML Databases
Security issues in the ODBS model and outsourced XML databases. First, because the lifeblood of every organization is the information stored in its databases, making outsourced data confidential is therefore one of the foremost challenges in this model. In addition, privacy-related concerns must also be taken into account due to their important role in the real-world applications (Thuraisingham, 2005). No less importantly, to make the outsourced database service viable and applicable, the system has to provide users with some means of verifying the query assurance claims of the service provider. Last but not least, solutions to secure auditing and efficient storage must also be addressed radically to fulfill major security requirements of concern. Overall, most crucial security-related research questions in the ODBS model in common, and for outsourced
XML databases in particular, relate to the issues below (see Figure 2): •
•
Figure 2. Security issues in outsourced (XML) databases
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Data confidentiality: Outsiders and the server’s operators (database administratorDBA) cannot see the user’s outsourced data contents in any cases (even as the user’s queries are performed on the server). Herein, the user may be the data owner/outsourcer or its clients. Privacy concerns: Although privacyrelated issues have been widely investigated (PRIME Project, 2004), the question “what is the complexity of the privacy problem?” is still open in as much as the answer is quite different, depending not only on technology, but also on sociology and politics (Thuraisingham, 2005). In our context, however, user
Security Issues in Outsourced XML Databases
Figure 3. A user’s database access-based classification for ODBS/OXMLDBS models
and data privacy issues are clearly identified and defined as follows (Chor et. al., 1995; Gertner et. al., 1998; Burmester et. al., 2004; Dang, 2008): User privacy: Users do not want the server and even the DBA to know about their queries and the results. Sometimes, user identities should also be protected from the server. Ensuring user privacy is one of the keys to the ODBS model’s success. Data privacy: Users are not allowed to access more information than what they are querying on the server. In many situations, users must pay for what they have got from the server and the data owner does not allow them to obtain more than what they have paid for; moreover, even users do not want to pay for what they do not need because of the low bandwidth connections, limited memory/storage devices and so forth. This security objective is not easy to achieve and a cost-efficient
•
solution to this issue is still an open question. Query assurance: Users are able to verify the correctness (authenticity and data integrity), completeness, and freshness of the result set. Among all security objectives, the query assurance is always appealed in the ODBS model. We succinctly explain these concepts as follows and more discussions can be found in (Mykletun & Tsudik, 2006; Narasimha & Tsudik, 2006; Dang, 2008; Li et. al., 2006; Pang et. al., 2005; Nguyen & Dang, 2008): Proof of correctness: As a user queries outsourced data, it expects a set of tuples satisfying all query conditions and also needs assurance that data returned from the server originated from the data owner and have not been tampered with either by an outside attacker or by the server itself. Proof of completeness: As a user queries outsourced data, completeness implies that the user can verify that the
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•
•
server returned all tuples matching all query conditions, i.e., the server did not omit any tuples satisfying the query conditions. Note that a server, which is either malicious or lazy, might not execute the query over the entire database and return no or only partial results. Ensuring the completeness of the query result aims to detect this unexpected behavior. Proof of freshness: The user must be assured that the result set was generated with the most recent snapshot of the database. This issue must be addressed to facilitate dynamic outsourced databases, which frequently have updates on their data. Secure auditing: It is well-known that auditing and accountability play an indispensable role in e-business protocols and compliance (Jaquith, 2007; Natan, 2005). Even so, the way that the server can tackle auditing activities over encrypted databases is not a trivial matter despite recent advances in networking, data storage, and data processing. In particular, in the ODBS model, as privacy requirements are taken into account, auditing and accountability are much more difficult to achieve because their goals appear to be in contradiction (Burmester et. al., 2004). Secure and efficient storage: Although several commercial database vendors have already offered integrated solutions to provide data privacy within existing products, treating security and privacy issues as an afterthought often results in inefficient implementations (Iyer et al., 2004). Analyzing issues in current storage technologies, looking at trade-offs between security and efficiency, and proposing new secure storage models will be challenging research topics of great interest in the ODBS/OXMLDBS model.
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The above security requirements differ from the traditional database security ones (Castano et. al., 1995; Umar, 2004), and will in general influence the performance, usability and scalability of the ODBS/OXMLDBS model. Although there exist a vast number of research works on the above topics, to the best of our knowledge, none of them has radically addressed security issues in outsourced XML data. It is well-known that XML data have their own typical characteristics, which are very much different from data stored in traditional DBMSs (W3C, 2008; Thuraisingham, 2005). In particular, XML data are tree-structured data and it has been clearly proven in the literature that tree-indexed data have played an important role in both traditional and modern database applications (Dang, 2003). Therefore, security issues with outsourced tree-indexed data need to be resolved completely in order to materialize the ODBS model. Even so, this is not a trivial task, especially as tree-based index structures are outsourced to mistrusted servers. There are many challenging and open security issues in this case (Du & Atallah, 2000; Dang, 2005; Xie et. al., 2007; Nguyen et. al., 2007) (see Figure 2). The existing solutions are still considered immature. Section 3 will focus in depth on security issues in such XML databases, but in the outsourcing context. Furthermore, note that the needs of the abovementioned security requirements very much depend on particular scenarios in the ODBS model and this must be considered carefully. To identify such security enforcement needs for typical outsourcing scenarios, a classification based on users’ database access and security requirements for each subclass are given below. A user’s remote database access-based classification. As presented in (Du & Atallah, 2000; Dang, 2006b; Mykletun et. al., 2004), there are a number of different ODBS models depending on users’ database access to the remote database. In (Du & Atallah, 2000; Dang, 2006b), the authors distinguish four different e-commerce models that
Security Issues in Outsourced XML Databases
all require ensuring user privacy. Nevertheless, the two identified models are not in the context of the outsourced database because the data owner is himself the service provider. The other two are DC-UP (data confidentiality-user privacy) and DC-UP-DP (data confidentiality-user privacy-data privacy) models (Dang, 2006b). The DC-UP-DP model is exactly as illustrated in Figure 1b, where both the data owner and clients can query the outsourced database. On the contrary, in the DC-UP model, data owners are also unique clients. In this case, the data owner and clients as illustrated in Figure 1b are the same. In (Mykletun et. al., 2004), the authors distinguish between three outsourcing models: the first two, named unified client and multi-querier models, are the same as the DC-UP and DC-UP-DP ones, individually. A variant of the multi-querier model where an outsourced database is owned by a number of different owners is called the multi-owner model. We summarize all of these identified models, their variants and, based on system users’ remote database access, classify them into four ODBS/OXMLDBS models applicable in real-world application domains as depicted in Figure 3. More details of these models are given below: •
•
SS model (single user-service provider, see Figure 3a): A single data owner is also the unique client, and its data is outsourced to the external server. We call both the data owner and client in this case the user. In this model, the data owner (also the client) is very much concerned about data confidentiality and user privacy, but data privacy is usually unimportant. This outsourcing model is similar to the DC-UP one. Again, query assurances, secure auditing, and secure and efficient storage are all required for all hosting-based outsourcing models. MS model (multiple data owner-service provider, see Figure 3b): There are multiple data owners outsourcing data to the external server similarly to the SS model; however,
•
•
each data owner is also the unique client. As a result, security requirements are the same as those of the SS model. The main differences between these two models are the way of accessing a remote database, and the techniques for ensuring security requirements (see section 2.2). Notably, the motivation for this model is rather straightforward. Consider the example of an outsourced insurance database. Each record in this database is created and maintained by a salesperson (of a particular branch) responsible for a particular customer. This salesperson then ‘owns’ the records that s/ he creates. SMS model (single data owner-multiple clients-service provider, see Figure 3c): This is the most typical hosting-based outsourcing model where a single data owner outsources its database to the service provider. However, except for this data owner, multiple clients may also have access to the outsourced database on some agreement basis. This is among the most complex models in terms of security issues. The data owner is concerned about both data confidentiality and data privacy for both the external database server and its clients. The client, in turn, is apparently concerned about user privacy for both the data owner and outsourcing server. In some real-world cases, whose reasons may come from the data owner, service provider, or even the client itself (as discussed above), the client is also concerned about data privacy. Moreover, the data owner also takes the client role when accessing its outsourced data on the server and, in this case, the data owner is concerned about user privacy as well. This outsourcing model is similar to the DC-UP-DP model. MMS model (multiple data owner-multiple clients-service provider, see Figure 3d): This model is similar to the SMS one, except that there are n data owners owning
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the same outsourced database, n≥2, like the MS model. The challenging security issues for this model are the same as those for the SMS model. Besides, like the MS model, query processing and optimization are a big problem that emerges together with ensuring the security requirements. A trade-off between the two, that is, between security and performance, should be considered carefully (see section 2.2). For the sake of clarity, in Table 1 we summarize security requirements identified for the four ODBS/OXMLDBS models above. There is a special scenario in this table, the last row, that has not been discussed before and we will clarify it shortly in the next section.
existing solutions to odbs models: An overview In Figure 2 we diagrammatically summarize security issues in the ODBS/OXMLDBS model, together with major references to the corresponding state-of-the-art solutions. An overview of these solutions is given below.
Ensuring Data Confidentiality As shown in Figure 2, all crucial security objectives of the hosting-based outsourcing model have been investigated. To address the data confidentiality issue, most existing approaches opt to encrypt (outsourced) data before its being stored at the external server (Bouganim & Pucheral, 2002; Damiani et al., 2003; Dang, 2005; Evdokimov & Günther, 2007). Although an encryption schemebased solution can protect the data from outsiders as well as the server, it introduces difficulties in the querying process, as it is hard to ensure the user and data privacy when performing queries over encrypted data. We will detail these issues later. In (Aggarwal et al., 2005), the authors argued that data encryption is unnecessary due to its negative impact on the system performance. Hence, they proposed an implementation architecture for all ODBS models where the data owner(s) outsources its data to several external database servers. Figure 4 illustrates this architecture in the MMS model. The key idea in this implementation is to allow the client to partition its data across a number of logically independent database systems that cannot communicate with each other. The data partitioning is performed in such a way that it
Table 1. Security requirements in different ODBS/OXMLDBS models Security requirements Privacy concerns
No
ODBS/OXMLDBS models
1
SS
√
Data confidentiality
User
Data
privacy
privacy
√
-
Query assurances Completeness
Freshness
Secure auditing
Secure and efficient storage
√
√
√
√
√
Correctness
2
MS
√
√
-
√
√
√
√
√
3
SMS
√
√
x
√
√
√
√
√
4
MMS
√
√
x
√
√
√
√
√
-
-
(for each SP)
(for each SP)
√
√
√
5
Multiple service providers (SP)
(for each SP)
(√: fully required, -: not required, x: not fully required)
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(for each SP)
(for each SP)
Security Issues in Outsourced XML Databases
Figure 4. Ensuring data confidentiality in the MMS model using multiple service providers
ensures that the exposure of the contents of any one database does not result in a violation of privacy objectives. The client executes queries by transmitting appropriate sub-queries to each database, and then gathering the results at the client side. Clearly, if the ODBS model is developed using this architecture, with each service provider, the data confidentiality, user and data privacy, secure auditing, and secure and efficient storage are unimportant (see Table 1). Nevertheless, user and data privacy would still be challenging problems in the context of the data owner and client communications concerning the original query and final result. The original query here means the query posed by a client before it is “split” into sub-queries, which will be sent to different servers. Similarly, the final result sent to the client is a combination of results of sub-queries. In addition, a severe drawback of this outsourcing architecture is that it requires non-collusion between all service providers (see Figure 4), which is mostly impractical in the real-world. Thus, most existing and ongoing approaches still prefer some encryption scheme for the outsourced database confidentiality guarantee, and try to reduce related costs and complexities during the query processing.
Ensuring User and Data Privacy In general, in order to address the issue of user and data privacy, outsourced data structures employed to manage the data storage and retrieval should be considered. Notably, the problem of user privacy has been quite well solved, even without special hardware (Smith & Safford, 2001), if the outsourced database contains only encrypted records and no tree-based indexes are used (see (Dang, 2006b) for an overview). Conversely, the research result is less incentive if such trees are employed, although some proposals have been made recently (Lin & Candan, 2004a; Dang, 2006b). In our previous work (Dang, 2006b), we proposed an extreme protocol for the ODBS model based on private information retrieval (PIR)-like protocols (Asonov, 2001). It would, however, become prohibitively expensive if only one server were used to host the outsourced data (Chor et. al., 1995; Asonov, 2001). Damiani et al. (2003) also gave a solution to query outsourced data indexed by B+-trees, but their approach does not provide an obvious way to traverse the tree, and this may compromise security objectives (Lin & Candan, 2004a; Dang, 2006a). Lin and Candan (2004a; 2004b) introduced a computational complexity approach to solve the problem with sound experimental results reported over XML
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datasets. Their solution, however, supports only an obvious search on outsourced search trees, but not any insertion, deletion or modification. Hence, their solution cannot be applied to dynamic outsourced search trees where several items may be inserted and/or removed, or existing data can be modified. In our recent work (Dang, 2005; Dang, 2006a), we analyzed and introduced techniques to completely solve the problem of data confidentiality and user privacy, but query assurance, in the ODBS model with dynamic tree-indexed data supports. In (Dang & Son, 2006) (also Dang, 2008) we extended the previous work to solve all the three security objectives of query assurance as discussed in section 2.1. In particular, the extended approach can be applied to all kinds of search trees, including multidimensional index structures that have played an important role in both traditional and modern database application domains (Dang, 2003). Contrary to user privacy, although there are initial research activities (Gertner et. al., 1998; Du & Atallah, 2000; Boneh et. al., 2004; Dang, 2006b; Evdokimov & Günther, 2007), the problem of data privacy still needs much more attention. Gertner et al. (1998) first considered the data privacy issue in the context of PIR-like protocols and proposed the symmetrical PIR (SPIR) protocol to prevent users from knowing anything more than the answers to their queries. Unfortunately, such PIR-based approaches cannot be applied to the ODBS model because the data owners in PIR-like protocols are themselves the database service providers. Du and Atallah (2000) introduced protocols for secure remote database access with approximate matching of four different ODBS models requiring different security objectives among those presented in the previous section. Even so, their work did not support outsourced tree-indexed data. In our recent work (Dang, 2006b), we presented a solution to ensure data privacy in the ODBS model that can also be applied to tree-indexed data. Nevertheless, our proposed solution must resort to a trusted
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third party, which is currently uneasy to find in practice. Of late, Evdokimov and Günther (2007) proposed a new data privacy-enabling ODBS scheme. This newly proposed scheme can avoid a problem of many previous solutions: erroneous tuples that do not satisfy the select condition may be returned to the client in the result set but the probability of such an error is negligible. This capability improves the performance and simplifies the development process of a client’s software. Even then, though with a small probability, data privacy is theoretically still prone to be erroneous. The only introduced scheme that allows performing search on encrypted data and does not require post-filtering is described in (Boneh et. al., 2004). This scheme, however, can hardly be applied to most ODBS models since searching an encrypted database is restricted to the search with predefined keywords. Importantly, neither of these approaches takes indexed data into account radically. Actually, a crucially challenging problem related to security in all models is to provide data privacy. This requirement is still open to the research community due to its interdisciplinary complexities.
Ensuring Query Assurance Recently, addressing the three issues of query assurance has attracted many researchers and, as a result, a number of solutions have been proposed (e.g., Boneh et. al., 2007; Mykletun et. al., 2004; Pang & Tan, 2004; Pang et. al., 2005; Narasimha & Tsudik, 2006; Sion, 2005; Dang & Son, 2006; Li et. al., 2006). However, except for (Dang & Son, 2006; Li et. al., 2006), none of the previous work has given a solution to the problem of guaranteeing the query result freshness. To prove the correctness of a user’s query results, the state-of-the-art approaches (Boneh et. al., 2007; Mykletun et. al., 2004; Pang & Tan, 2004; Sion, 2005) employed some aggregated/condensed digital signature scheme to reduce the communication and computation costs. First, Boneh et al. (2003)
Security Issues in Outsourced XML Databases
introduced an aggregated signature scheme that allows aggregation of multiple signers’ signatures generated from different messages into one short signature based on elliptic curves and bilinear mappings. Despite the big advantage that this scheme can be applied to different ODBS models, it must bear a disadvantage related to the performance. As shown in (Mykletun et. al., 2004), the computational complexity of Boneh et al.’s (2003) scheme is quite high for practical uses in many cases. Second, Mykletun et al. (2004) introduced an RSA-based condensed digital signature scheme that can be used for providing the proof of correctness in the ODBS model. Their scheme is concisely summarized as follows. Condensed-RSA digital signature scheme. Suppose pk=(n,e) and sk=(n,d) are the public and private keys, respectively, of the RSA signature scheme, where n is a k-bit modulus formed as the product of two k/2-bit primes p and q. Assume φ(n)=(p-1)(q-1), both public and private exponents e, d and must satisfy ed≡1 mod φ(n). Given t different messages {m1, ..., mt} and their corresponding signatures {s1, ..., st} that are generated by the same signer, a condensed-RSA signature is computed t s mod n. This signature is of as follows: s1,t = 1 i the same size as a single standard RSA signature. To verify the correctness of t received messages, the user must multiply the hashes of all t messages t h(mi ) mod n. and check that (s1,t)e ≡ 1 The above scheme is possible because RSA is multiplicatively homomorphic. However, this scheme is applicable only for a single signer’s signatures. In (Dang & Son, 2006; Dang, 2008) we applied this scheme to the SS model to provide correctness guarantees of the received tree nodes from the server (see section 3). Sion (2005) also employed it to address the correctness of query results in his proposed scheme for the SS model. Besides, Pang and Tan (2004) applied and modified the idea of Merkle Hash Trees (MHT) (Merkle, 1980) to provide a proof of correctness for edge computing applications, where a trusted central server outsources parts of the database to
∏
∏
proxy servers located at the edge of the network. However, the proposed approach does not check for completeness of query results. More seriously, Narasimha and Tsudik (2006) pointed out possible security flaws in this approach. Furthermore, there are a number of approaches to deal with the completeness of a user’s query results (Sion, 2005; Pang et al., 2005; Narasimha & Tsudik, 2006; Dang & Son, 2006). First, Sion (2005) proposed a solution to provide such assurances for arbitrary queries in outsourced databases. This solution is built around a mechanism of runtime query “proofs” in a challenge-response protocol. Concretely, the data owner partitions its data into k segments {S1, ..., Sk}, computes hashes for each segment, H(Si), i= , then stores them all together at the service provider. In addition, the data owner also calculates some “challenge tokens” for Si. Actually, the challenge tokens are queries that the data owner already knows their results, which can be used for verification later. Whenever a batch of queries is sent to the server, certain challenge token(s) are also sent together. The result set is then verified using the challenge tokens for its completeness. Although this approach can be applied to different query types, query completeness cannot be guaranteed 100% because there is the chance that a malicious server can “guess” and return the correct answer to the challenge token together with fake result sets for other queries in the batch. Moreover, this approach is cost-inefficient for database updates because the challenging answers must be recalculated. Seriously, although the author did not aim to address the user privacy issue, we should note that user privacy in this approach may be compromised because the server knows what data segments are required by the user in order for inference and linking attacks to be be conducted (Dang, 2006b; Damiani et al., 2003). Second, Pang et al. (2005) introduced a solution based on aggregated signature schemes and MHT. It is an extension of their previous work (Pang & Tan, 2004), which has been proven insecure
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due to some possible security flaws (Narasimha & Tsudik, 2006). Last, Narasimha and Tsudik (2006) developed an approach, DSAC–digital signature aggregation and chaining, that achieves both correctness and completeness of query replies. However, in their approach, tuples must be pre-sorted in ascending order for each searchable dimension for calculation of the signature chain, and thus it does not support outsourced treeindexed data because the order of the contents of tree nodes is undetermined. This requirement also has a tremendous negative impact on data updates, causing degeneration of the system’s total performance. Recently, in (Dang & Son, 2006; Pang et. al., 2005) the authors presented comprehensive solutions to address all the three aspects of query assurance in the SS model. These approaches are considered as the vanguard ones to address dynamic outsourced databases. Notably, Dang and Son’s (2006) presented approach, which is based on access redundancy and node swapping techniques (Lin & Candan, 2004a; 2004b), also supports outsourced multidimensional index structures.
Ensuring Secure Auditing Furthermore, assume that we have a running system with the above security objectives being satisfied, then the question “How can the server conduct auditing activities in systems provided with such security guarantees?” is still left open to date. Due to the user privacy (see section 2.1), the server may not know who is accessing the system (e.g., Lin & Candan, 2004a; Dang, 2006b; Dang, 2008), what they are asking for, what the system returns to the user, and thus how it can effectively and efficiently tackle the accountability or develop intrusion detection/prevention systems. The goals of privacy-preserving and accountability appear to be in contradiction, and an efficient solution to balance the two is still open. There is just some research work on this topic. Typically, in (Burmester et. al., 2004) the authors, among the trailblaz-
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ers, did investigate the problem of the conflicts existing between secure auditing/accountability and privacy in a variety of application domains. Research directions for balancing the needs of both were also highlighted. In the past, although there are some hardware-based approaches to solving security issues in ODBS models such as (Smith & Safford, 2001; Mykletun & Tsudik, 2005) and the secure auditing problem is also of their concerns no practically proven solution has been given. In section 4, we will further discuss these hardware-based approaches.
Ensuring Secure and Efficient Storage As we can observe in Figure 2, there exists another interesting question: Is there a secure and efficient storage model for the outsourced database? However, all existing approaches for dealing with the concerned security problems do not make any assumption about the DBMS and its storage model. It is simply understood that existing commercial DBMS can be employed with some additional settings for the stored data at the server site, while the underlying storage model remains unchanged (Hacigümüs et. al., 2002; Bertino et. al., 2004; Damiani et al., 2003; Dang, 2008; etc.). In a recent research (Iyer et al., 2004), the authors carried out insightful studies on this problem, and proposed a framework for efficient storage security in RDBMS. Their approach is motivated by crucial weaknesses of today’s database security solutions, namely poor efficiency, inflexibility, and non-encryption of indexes. The poor efficiency appears because the underlying model used by DBMS introduces significant computational overheads. A new solution can be possible only if the means of storing records on the disk blocks is modified. The inflexibility is manifested by the wrong encryption granularity, leading to the fact that even non-sensitive data is also encrypted in many cases. Lastly, most existing solutions offered by commercial DBMS to data encryption problem do not al-
Security Issues in Outsourced XML Databases
low indexing techniques or must sacrifice some important functionalities (e.g., most encryption schemes are not order-preserving, thereby losing range query functionality). More concretely, Iyer et al. (2004) introduced a secure storage model and a key management architecture that enable efficient cryptographic operations while trying to maintain an acceptable level of security. The proposed approach is based on grouping sensitive data and non-encryption of non-sensitive data to minimize the number of encryption operations. Although some preliminarily sound experimental results have been reported, this model is only the first step towards a sustainable, secure and efficient storage model for ODBS/OXMLDBS models because it still assumes that the server is trusted, which typically does not exist in ODBS/ OXMLDBS models. Until now, it has been clear that dealing with security issues in ODBS models encounters many difficulties if tree-structured data is outsourced to untrusted servers (Du & Atallah, 2000; Dang, 2006b). On the other hand, as discussed in the literature, tree-based index structures play an indispensable role in both traditional and modern database applications (Dang, 2003). Unfortunately, XML data is tree-structured inherently. Most of approaches to security issues in outsourced XML databases were inspired by, and originated
from, the findings of solutions to the same issues in ODBS models with traditional numeric and text databases. In the next section, we will present and discuss the state-of-the-art approaches proposed in the most recent publications to securely managing the storage and retrieval of outsourced tree-indexed/XML data.
stAte-oF-the-Art ApproAches to securIty Issues In oXmldbs models Authentic publication of Xml documents: A semi-oXmldbs model At the very beginning, in (Devanbu et al., 2001) the authors proposed an approach for signing XML documents allowing untrusted servers to answer certain types of path and selection queries. The main research idea in this work and other similar ones is very similar to that of the SMS model (see Figure 3c). Figure 5 depicts this working model. In this model, the XML data owner and clients play the same role as those in the SMS model. The publisher in the authentic publication of XML documents, however, is slightly different from
Figure 5. Authentic publication of XML documents: Document is created by owner, who uses a one-way hash function to digest it. Clients receive the digest through an authentic channel, e.g., using a public-key signature (1) and the document itself is sent to a publisher (2). In response to a query from a client (3) the publisher returns both an answer and a verification object using the MHTs and digital signatures, certifying the correctness and completeness of the answer (4).
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the service provider in the SMS model: this publisher may not store the owner’s encrypted data, but it can keep only the owner’s plaintext XML data. Although Devanbu et al.’s (2001) solution, which is based on the MHT and a newly proposed data structure (xtrie), to provide correctness and completeness of the query results, overcomes several limitations of previous work (e.g., only one digital signature over an XML document is needed to certify answers to arbitrary selection queries over such documents, providing both correctness and completeness of answers, etc.), not all privacy-related issues are considered (i.e., user and data privacy). Therefore, this working model is not considered as an OXMLDBS model, but a semi-OXMLDBS model. Moreover, the auxiliary structure, the xtrie, is based on the DTD, but the proposed solution works best only on non-recursive DTDs. Even then, the empirical analysis indicated that a majority of published DTDs are non-recursive, and thus this approach will be quite useful in a variety of contexts. In general, the proposed techniques for ensuring query assurance objectives in Devanbu et al.’s (2001) solution can be further explored for possible application to OXMLDBS models where a server truly stores and manages a data owner’s encrypted data. Very similarly to the above approach, in (Bertino et. al., 2004) the authors carried out extensive research in secure XML document distribution and provided a comprehensive architecture for selective, authentic, and complete third-party publication of XML documents. In the same line as Devanbu et al.’s (2001) solution, this approach also considered the publisher to be untrusted for the requirements of correctness and completeness. MHTs, digital signature schemes, and credentialbased techniques have been employed to provide correctness as well as completeness proofs for the query answers. Only one thing would be considered as being new in Devanbu et al.’s (2001) solution: that this introduced comprehensive architecture also incorporates a policy configuration
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that is technically a certificate issued and signed by the XML data owner containing information about access control policies that apply to the user. By utilizing this, the publisher can determine and filter out (certain portions of) XML documents before returning the query result to the client. Once again, none of these approaches is for encrypted XML databases and, consequently, data confidentiality and privacy-related issues for the publisher are not assured. Recently, in (Bertino et. al., 2007), the authors further developed the above ideas and introduced a push-based system for distributing information through the Internet. Such systems are today becoming increasingly popular and widely used. The widespread use of such systems raises significant security concerns like those in OXMLDBS models, such as confidentiality, integrity and authenticity, and completeness of the distributed data. To cope with such issues, Bertino et al. (2007) described a system for securing push distribution of XML documents, which adopts digital signature and encryption techniques to ensure the abovementioned security requirements and allows the specification of both signature and access control policies. The authors also described the implementation of the proposed system and presented an extensive performance evaluation of its main components. Although all privacy-related issues were still not addressed, this is a good reference for further investigations into such semi-OXMLDBS models and security concerns.
oblivious operations on outsourced search tree Basic settings. As we know, XML documents have tree-like structures (W3C, 2008; Lin & Candan, 2004a; Brinkman et. al., 2004) and XML has become a de facto standard for data exchange and representation over the Internet. It is also well-known that basic operations of tree-based index structures include search and updates (modify, insert, delete). To facilitate se-
Security Issues in Outsourced XML Databases
curity requirements in OXMLDBS models (see section 2.1), techniques allow users to operate on their outsourced tree-structured data on untrusted servers without revealing information about the query, and result, and outsourced data itself must be studied. Although tree-based index structures have proven their advantages over both traditional and modern database applications, they introduce numerous research challenges as database services are outsourced to untrusted servers (Du & Atallah, 2000; Dang, 2006b). To detail the problem, Figure 6a illustrates an example of B+-tree for an attribute CustomerName with sample values. Assume a user is querying all customers whose name is Ha on this tree. If we do not have a secure mechanism for tree storage and query processing, a sequence of queries that will access in sequence nodes 0, 1, and 5 for the above query will be revealed to the server. In addition, the server also realizes that the user was accessing nodes 0, 1, and 5, which are the root, an internal node, and a leaf node, respectively, of the tree, and so the user privacy is compromised. More seriously, using such information collected gradually the server can rebuild the whole tree structure and infer sensitive information from the encrypted database. Besides, the user will
also receive information showing that there are at least two other customers named John and Bob in the database. To cope with these issues, some settings must be prepared to facilitate oblivious operations on the tree. Damiani et al. (2003) showed that encrypting each tree node as a whole to ensure the data confidentiality is preferable because protecting a tree-based index by encrypting each of its fields would disclose to the untrusted server the ordering relationship between the index values. Besides, each node is identified by a unique node identifier (NID) and the unit of storage and access is a tree node. The original tree is then stored at the server as a table with two attributes: NID and an encrypted value representing the node content. In our running example, Figure 6b shows the corresponding plaintext and encrypted table used to store the B+-tree at the server over schema B+EncryptedTable = {NID, EncryptedNode}. Oblivious basic operations on outsourced XML data trees. Based on the above settings, there are some proposed approaches to facilitate basic operations on the outsourced search tree. Firstly, Damiani et al. (2003) analyzed potential inference and linking attacks, and proposed a hash-based indexing method suitable for exact
Figure 6. An example of B+-tree (a) and the corresponding plaintext and encrypted table (b)
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match queries. To process range queries, they proposed a solution employing B+-trees with the above settings. However, Dang (2006b) indicated that this solution does not provide an oblivious way to traverse the tree and this can be exploited by the untrusted server to carry out inference and linking attacks. Moreover, it also does not support outsourced multidimensional index structures. Later, Lin and Candan (2004a) developed an algorithm based on access redundancy and node swapping techniques to provide oblivious search on outsourced tree-indexed data. Access redundancy and node swapping: Each time a user requests access to a node from the server, it asks for a redundancy set of m nodes consisting of at least one empty node along with the target one. The user then: (1) decrypts the target node, (2) manipulates its data, (3) swaps it with the empty node, and (4) re-encrypts all m nodes and writes them back to the server. Note that, to prevent the server from differentiating between read and write operations, a read operation is always followed by a write operation. This requires re-encryption of nodes using a different encryption scheme before they are rewritten to the server. With this technique, the possible position of the target node is randomly distributed over the data storage space at the untrusted server, and thus the probability that the server can guess the target node is 1/m. To realize oblivious tree traversal, securely managing the root node address and empty node lists is also important: A special node called SNODE whose NID and decryption key are known Box 1.
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to all valid users keeps pointers ROOTS pointing to the roots of all outsourced search trees; and empty nodes are stored in hidden linked lists. Based on these basic settings, Lin and Candan’s (2004a) algorithm is presented as shown in Box 1. Note that the original approach above works only with uniformly distributed data sets. In (Lin & Candan, 2004b), the authors enhanced this approach so that it can also work with non-uniformly distributed datasets, i.e., from the server’s view, node accesses are always uniformly distributed. Furthermore, although the above approach supports only oblivious tree search operations, the two employed techniques have served as the basis for our further investigation. In (Dang, 2005; Dang, 2006a) we identified critical issues and limitations of Lin and Candan’s approach and developed pragmatic algorithms for privacy-preserving search, insert, delete, and modify operations that can be applied to a variety of dynamic outsourced tree-based index structures and the SS model. Despite our previous work providing the vanguard solutions for this problem with sound empirical results, it did not consider any of the query assurance aspects. Query assurances for outsourced tree-indexed/ XML data. In (Dang & Son, 2006; Dang, 2008) we extended our previous work and presented a full-fledged solution to the problem of ensuring the correctness, completeness, and freshness for all basic operations (insert, delete, modify, point, and range queries) on dynamic XML/outsourced tree-indexed data. Experimental results with real
Security Issues in Outsourced XML Databases
multidimensional datasets (R-Tree Portal, 2006) and the kd-tree have confirmed the efficiency of our proposed solution. Figure 7 shows core settings in our extended approach. Firstly, the data owner computes and signs the hash h(m) of each encrypted node m. Next, it stores the signature together with EncryptedTable at the server. The table schema stored at the server now becomes EncryptedTable = {NID, EncryptedNode, Signature} (see Figure 7). With this setting, users can then verify each returned node using the data owner public key, thereby ensuring the correctness of the result set. To minimize the costs, we adopted the condensedRSA digital signature scheme (see section 2.2) for nodes in the redundancy set. Secondly, in order to guarantee the query completeness, in our context, as a user asks the server for a redundancy set A of t nodes A={m1, ..., mt} and the server returns him a set R of t nodes R={n1, ..., nt}, the user must be able to verify that A=R. As presented above, a user asks for any encrypted nodes through their NIDs. Therefore, the user should be provided with a means of verifying that NID of each mi, i= , equals NID of each corresponding ni, i=. To ensure this, our solution is embarrassingly simple: an NID is encrypted with the corresponding node contents and this encrypted value is stored at the server side, together with its signature as described above. Users can then check if the server returned the required NIDs (the completeness) and verify the query result correctness all together. Lastly, in order to address the freshness issue, users must
be able to verify if the server returned the most up-to-date required tree nodes. Our solution is uncomplicated but sound and complete: A timestamp of each child node is stored at its parent node. This timestamp changes only as the child node contents (but not its address) are updated. A user can then check (from the root) if the server returned the latest version of the required node (the freshness). Note that, SNODE should keep the root’s timestamp in addition to other information as discussed previously, and each qualified user must be informed about SNODE’s timestamp (e.g., by the data owner who made the changes to the root’s contents). Remarkably, to the best of our knowledge, none of the previous work has addressed all the above three security issues of query assurance in the ODBS/OXMLDBS model with regards to dynamic multidimensional outsourced trees. Our work therefore provides a vanguard solution for this problem. In addition, since XML data has tree-like structures and queries can be expressed as traversal paths on these trees, the solution introduced above can be utilized for secure outsourcing of XML documents. Compared with existing PIR techniques (Asonov, 2001), this proposed solution does not need database replication and requires less communication, and is thus practical (Lin & Candan, 2004b; Dang, 2006a). However, because these solutions have been developed only for the SS model, they are not directly applicable to other OXMLDBS models due to their different security requirements.
Figure 7. Settings for verifying correctness, completeness, and freshness guarantees
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secure multi-party computationbased Approaches In a multi-party computation (MPC) we have a given number of participants p1, p2, ..., pN, each having a private data, respectively d1, d2, ..., dN. The participants want to compute the value of a function F on N variables at the point (d1, d2, ..., dN). An MPC protocol is said to be secure if no participant can learn more from the description of the public function and the result of the global calculation than what s/he can learn from his/her own entry under particular conditions depending on the model used. In (Brinkman et. al., 2004), the authors, inspired by secure MPC, introduced a new approach to query outsourced XML databases. First, a plaintext XML document is transformed into an encrypted database as follows: 1.
Define a mapping function Ω : node → Fp , which maps the nodes’ tag names to values of the finite field Fp , where pe is a prime power
2.
(p is a prime and e is a positive integer) which is larger than the total number of different tag names (see Figure 8b). Although Ω may be chosen arbitrarily, the client should keep it secret to prevent the server from seeing the query. Transform the tree of tag names (see Figure 8a) into a tree of polynomials (see Figure 8c and Figure 8d) of the same structure where each node is transformed to f(node) where function f: node → [x]/(xp−1−1) is defined recursively: f(node)=x− Ω(node) if node is a leaf node, or (x− Ω(node)),∏ d ∈child ( node ) f ( d ) otherwise. Here child(node) returns all children of a node. To avoid large degree polynomials a finite ring is chosen. Two different rings have been investigated: Fq[x]/ (xq−1−1) (where q is a prime power q=pe) and Z[x]/(r(x)) (where r(x) is an irreducible polynomial). In the first case, the coefficients of the polynomials are reduced modulo q. With Z[x]/(r(x)), the polynomial is reduced
Figure 8. An example for Brinkman et al.’s (2004) approach based on secure MPC
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3.
4.
modulo an irreducible polynomial r(x). The running example as shown in Figure 8 is according to the first finite ring. Split the resulting tree into a client (see Figure 8e) and a server tree (see Figure 8f). Both trees have the same structure as the original one. The polynomials in the client tree are generated by a pseudorandom generator. The polynomials of the server tree are chosen such that the sum of a client node and the corresponding server node equals the original polynomial. Since the client tree is generated by a pseudorandom generator, it is sufficient to store the seed on the client. The client tree is discarded and, when necessary, it can be regenerated using the pseudorandom generator and the seed value.
Next, in the querying phase, it is simple to check whether a node N is stored somewhere in a subtree by evaluating the polynomials of both the server and the client at Ω(N). If the sum of these evaluations equals zero, this means that N can be found somewhere in the subtree N. Note that everything is calculated modulo q. To find out whether N is the root of this subtree, we have to divide the unshared polynomial by the product of all its direct children. The result will be a monomial (x−t) where t is the mapped value of the node. The above approach, however, is only for storing and retrieving trees of tag names, but not the actual data between the tags. Later, Brinkman et al. (2005) presented an extension of their previous approach to address this problem. They proposed a representation of XML documents allowing for searching in data nodes by simply transforming all data nodes to their trie representation (Fredkin, 1960). Having translated the original XML tree into a trie, the same presented strategy can be employed to encode the document and carry out the search. Even now, clients still have to store a sheer volume of XML meta-data and tackle
heavily computational tasks as does the service provider. Next, because the tree structure transformed from the XML document is in plaintext at the server, reference attacks may be launched to compromise data confidentiality and user privacy. In addition, data privacy has not been discussed because the proposed approach is applicable only to the SS model. More seriously, query assurances have not been investigated and they are difficult to address efficiently because no efficient multipurpose schemes for secure MPC are known to us at the moment. Finally, dynamic outsourced XML documents have also not been studied in this approach.
trusted third party-based Approaches As far as we know, there is no solution to the SMS/MMS models for outsourced tree-structured data for all concerned security objectives. Relying on an assumption that quite solid solutions have been developed for the SS/MS models, Dang (2006b) proposed a protocol to ensure all security requirements of the SMS/MMS models resorting to a trusted third party (TTP), namely K. The use of a TTP is to change this outsourcing model, which is very hard to address directly, to a better solved SS model. We describe five basic steps to process a query Q sent from a client A as follows (see Figure 9): 1. 2.
3.
4.
Client A sends Q to K for querying the data owner M’s outsourced XML database DB. When receiving Q, K informs M (for billing, for example) and waits for approval from M in order to access DB. On receiving A’s access request from K, M informs DB so that K can query DB on behalf of M. After receiving DB’s acknowledgement, M informs K. From this time, K takes M’s role in the SS model as discussed in section 2, and it can access DB using any security protocols de-
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Figure 9. A secure protocol for trusted third party-based approaches
signed for the SS model (note that A is only capable of retrieving information from DB, but not updating M’s outsourced XML data in DB). Finally, K filters and returns to A only the results of Q. Obviously, K has been informed by M what A is able to get from the database, but M will not be informed what A has got regarding any Qs to ensure A’s privacy wrt. M.
databases, but also any general tree-indexed data outsourced. Nevertheless, even though special hardware is employed, a number of challenging problems related to improving the system performance must be taken into account (Dang, 2006b; Mykletun & Tsudik, 2005). This presents new significant research problems of great importance in the future.
In practice, a TTP is difficult to find and it is also the only weakness of this protocol. With the assumption that we can establish such a TTP, it is easy to prove that the above protocol ensures all security objectives for this SMS/MMS models, i.e. data confidentiality, user and data privacy, as well as query assurances. Eliminating K from this protocol, while still ensuring all security objectives for this ODBS/OXMLDBS model, is an open research question. In the same line as our approach but relying on special hardware equipment, IBM has developed secure co-processors acting like K (IBM, 2008b; Smith & Safford, 2001). We will elaborate on this hardware-based approach in the next section. The above approach is a general idea to address security issues in the SMS/MMS models and it can be applied to not only outsourced XML
Contrary to the past claims that special-purpose computers for security requirements like those of OXMLDBS models are infeasible but trivial (Goldreich & Ostrovsky, 1996), the hardware-based approach is no longer infeasible. Secure coprocessor (SC) research has advanced the state-of-the-art (IBM, 2008b), and now permits any researcher at a reasonable cost to build a private information server by taking a host machine with ample PCI slots and inserting these coprocessors. In (Smith & Safford, 2001), the authors presented an IBM secure coprocessor-based server architecture that can efficiently process a user’s queries without violating security and privacy objectives, such as data confidentiality, user and data privacy. Figure 10 depicts this server architecture. This system consists of a single server that has a number of SCs, and that provides a query service to a data-
5.
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hardware-based Approaches
Security Issues in Outsourced XML Databases
Figure 10. A server architecture based on secure coprocessors
base containing records. The stored records are encrypted and authenticated. Actually, the SCs act like the TTP as described in Figure 9, and thus this architecture could be considered as a practical implementation of the general idea presented in Dang (2006b). With the support of such special hardware, it is clear that the new server is partly capable of satisfying security objectives in OXMLDBS models. Recently, some hardware-based solutions to security issues in OXMLDBS models have been proposed (Bouganim & Pucheral, 2002; Mykletun & Tsudik, 2005), employing IBM-like SCs, e.g., IBM 47xx SC family (IBM, 2008b). More technically, a SC is a general-purpose computer that can be trusted to carry out its computations unmolested, even if an adversary has direct physical access to the device. It is equipped with a processor, non-volatile secure memory, input devices, back-up battery and is fully enclosed in a tamper-proof container that cannot be opened without triggering sensors that alert that an attack is taking place. In the case that a penetration of the device is detected through the signaling by sensors that are monitoring possible attack venues, an alarm is triggered and all contents in the secure memory are erased, possibly by destroying the physical memory chip by leaking acid onto it (IBM, 2008b; Mykletun & Tsudik, 2005). Notwithstanding, SCs are still far away from meeting the functionalities expected by users due to the hardware-related technologies (see
section 4), and thus they still do not completely solve the security issues of concern.
hybrid tree-based Approaches Although there exist approaches employing hybrid tree-based structures to address security issues in ODBS model like (Li et. al., 2006), they unfortunately have not been studied for OXMLDBS models. Very recently, in (Nguyen et. al., 2007; Nguyen & Dang, 2008), on the basis of MHTs and B+-tree, the authors introduced a new indexing structure for outsourced XML data to solve the data confidentiality and query assurances in OXMLDBS models. Even now, their approach can be extended by employing techniques presented in section 3.2 to deal with the privacy-related issues. Below, we introduce Nguyen and Dang’s (2008) original approach. Node-based XML document transformation. Each XML document has a schema tree that defines the relation between nodes and their attributes. A schema tree consists of two node types: element node (t-node) and attribute node (a-node). t-nodes and a-nodes are stored in a single table and each node has enough data to reconstruct the original XML text: t-node(nodeid, xtype, datatype, nameID, pnodeID, lmaID, value) a-node(nodeid, xtype, datatype, nameID, pnodeID, sibID, value)
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Security Issues in Outsourced XML Databases
2074
) e id am (n
... (v
de
a lu
id ,
e)
va
lu e
)
N a m e T re e
no
Nested Merkle B+-Tree. An important factor for a feasible solution to query assurance of outsourced XML databases depends on index structures. By embedding extra information into this structure, we could achieve query assurances. MHTs and digital signature schemes, as discussed in (Li et. al., 2006; Nguyen & Dang, 2008), are typically employed to provide the proof of query correctness. To obtain an effective proof for query completeness, as shown in (Narasimha & Tsudik, 2006; Nguyen & Dang, 2008), all elements must be sorted by two criteria: (path, value) and (path, parent, value), where path is the path from the tree’s root to a given node. However, no existing data structures could help this. Nguyen and Dang (2008) introduced a novel Nested Merkle B+-Tree to facilitate the storage/retrieval and ensure the query assurance for outsourced XML databases. First, all possible paths from root to leaves are listed out, and each path is associated with a unique integer called nameid. To maintain this, a B+-Tree, named NameTree, with the search key being nameid is employed. At each entry of a leaf node of NameTree, instead of the links of records, there are two links to two new B+-Trees having value and (parent, value) as their search keys, respectively. We call these trees ValueTree and ParentTree. The leaves of ValueTree and ParentTree store links to a-node or t-node records (data records). Combining these three trees, we have a Nested B+-Tree (NBT) as shown in Figure 11. Second, based on the idea of the MHT, the NBT is attached with more information to facilitate the
Figure 11. Nested B+-Tree
P arentT ree
V alueT ree
...
(p
where, xtype is used to distinguish t-node and a-node; datatype determines type of the data value; nameID is the node’s identifier; pnodeID refers to parent node’s tuple; lmaID refers to the left-most attribute of the node; sibID refers to the right-sibling attribute; value is the value of the node/attribute. For data confidentiality, each record is serialized into an encrypted binary string before outsourcing.
...
proof of query assurances. First, each node keeps hashes of its children: a-node:
Ha-node
=
h(nodeid||xtype||…
||value) t-node:
Ht-node = h(h(nodeid|| …||value)||∪i
Hattr) Leaf of ValueTree, ParentTree:
HL= h(∪i
Hdata-record) Internal node: Leaf of NameTree:
HI = h(∪i Hchild-node) HL-N = h(Hvtree ||
Hptree) Root of NameTree: HR = h(ε || ∪i Hchild)
node
where Hattr is hash value of an a-node of a given t-node; Hdata-record is either Ha-node or Ht-node that associated to the link; Hchild-node is one of HL, HI or HL-N; Hptree and Hvtree are hash values of ParentTree’s and ValueTree’s roots; ε denotes a timestamp value and h() is a non-invertible hashing function. Additionally, NameTree’s root is signed by the outsourcer’s private key and the corresponding public key and timestamp ε are communicated to all valid users. With these settings, the resulting tree, named the Nested Merkle B+-Tree, is capable
Security Issues in Outsourced XML Databases
of ensuring query assurance objectives. A concrete example below makes this clearer. Figure 12 illustrates an example of a labeled XML schema tree, where round, rectangular and sharp corner nodes denote elements and attributes, respectively, of the XML document. The number next to a node is nameid value. Assume a user poses a query to the service provider: “List all sold items named ‘TV’”. The corresponding query in XPath is /Customer/Order/Item[@name =”TV”]. To answer this query, the server should process the mapped query (nameid=13, value=’TV’). To do this, the server scans NameTree with nameid=13 to get the ValueTree, then it scans on the found ValueTree with value=‘TV’ to list out all satisfied attributes name_13 and builds a verification object (VO) for authenticity. With the pnodeid field in each found name_13, it reads and appends these Item_8 into the VO. Because there is only one Item_8 for each name_13, the server does not need to provide any information to prove query assurance. For each Item_8, it returns two remain attributes. Note that, although user privacy can be incorporated into this approach by employing, for example, techniques proposed in (Lin & Candan, 2004a; Dang, 2005; Dang, 2008), this approach supports only the SS model and data privacy has not been discussed. This aspect is also typical of other hybrid tree-based approaches like (Jammalamadaka & Mehrotra, 2006). This is quite a similar approach with different auxiliary information being embedded in the outsourced XML tree
to facilitate several query types. Although data confidentiality is ensured, this approach does not provide query assurances. Even so, there are two notable points of this approach: (1) the proposal of a set of encryption primitives using which a client can propose fairly complex set of security policies on XML documents; (2) the introduction of a novel multi-dimensional partitioning strategy that allows query processing to take place at the server side and overcomes the limitations of single-dimensional partitioning techniques.
other Approaches First of all, in (Brinkman et. al., 2004) the authors, inspired by an approach in (Song, Wagner, & Perrig, 2000), proposed a method based on the linear search algorithm to apply queries on encrypted XML documents. Basically, Song et al. (2000) introduced a way to search for the existence of a word in an encrypted textual document. However, it does not scale well for large databases because the performance is linear in the document size. Based on this idea, Brinkman et al. (2004) developed a tree search algorithm applicable to encrypted XML databases. The newly proposed algorithm is more efficient in this specific context since it exploits the XML tree structure. Experiments showed that the encryption speed of the new algorithm remains linear in the input size, but that a major improvement in the search speed can be achieved. Nevertheless, this new algorithm needs to store a table containing structural information of
Figure 12. An example of labeled XML schema tree C u sto m e r
1 Nam e
A d d re ss
O rd e r
2 S ta te
5
C ity
4
3 Ite m
E m p lo ye e
7
6 Nam e
Code
11
12
Am ount
8 Nam e
13
P rice
14
D a te
9
10
Q ty
15
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Security Issues in Outsourced XML Databases
the XML database at the server, thus compromising data confidentiality and opening a backdoor to inference attacks. Besides, it does not support flexible levels of encryption granularity. Furthermore, there are three other previous works in the literature addressing queries over encrypted XML documents (Schrefl et. al., 2005; Yang et. al., 2006; Wang & Lakshmanan, 2006). First, Schrefl et al. (2005) proposed a technique that allows XPath selection queries to be executed at the server. Their technique supports both static and dynamic documents but it incurs two crucial limitations (Jammalamadaka & Mehrotra, 2006): (1) cannot support range queries; and (2) requires multiple rounds of communication between the client and server to answer a single query, thereby potentially undermining the performance. Next, Yang et al. (2006) presented XQEnc and XML encryption technique based on vectorization and skeleton compression of XML paths. The proposed XML encryption technique is in accordance with W3C standards (W3C, 2008). To facilitate query processing, the authors proposed using any of the existing techniques such as single-dimensional partitioning or order-preserving encryption. Last, Wang and Lakshmanan (2006) introduced a scheme for storing the meta-data on the server to support efficient query processing but, as pointed out by the authors, their approach still incurs performance penalties and is vulnerable to inference attacks. Moreover, this approach is also not cost-efficient for supporting dynamic outsourced XML databases. We must emphasize that all the four approaches above and most of the introduced ones in previous sections belong to the SS model. Therein, security requirements are very much easier to address comparing with those of the SMS and MMS models (see Table 1). Therefore, much work still remains to be done in order to make outsourced XML databases practical. We succinctly point out major open issues and future trends in the next section.
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open Issues And Future trends Clearly, we are at the initial stage of the research for resolving security issues in outsourced XML databases. In order to apply the research results to real-world applications, we will need more time (Evdokimov et. al., 2006; Wang & Lakshmanan, 2006). Our discussions in previous sections have demonstrated that none of the existing approaches has dealt radically with all crucial security issues concerning its model. Hence, there are still a vast number of security- and privacy-related issues/ protocols that need to be solved. We introduce open research issues based on the five well-defined security problems of outsourced XML databases as follows: •
Data confidentiality: As discussed, the use of certain data encryption schemes for the outsourced database has drawn much more attention in comparison with a multiple service provider-based solution for data distribution. It is clear that this choice is natural and reasonable when developing a practical ODBS/OXMLDBS model. Nevertheless, currently existing encryption schemes, including all state-of-the-art symmetric and asymmetric encryption algorithms, create many obstacles and limitations for the querying process and for ensuring security requirements like those in in-house database services. Is there any completely new encryption scheme that fits well with the hosting outsourcing model? This big challenging question is now open to the research community. This new encryption scheme should be able to facilitate both the confidentiality of the outsourced database and an effective and efficient querying method. To the best of our knowledge, no previous or ongoing work has focused on this direction. Note that, however, if such an encryption algorithm were devised, the
Security Issues in Outsourced XML Databases
•
rest of all implementations for OXMLDBS models would be very much simpler. User and data privacy: Assuming that we are still using the state-of-the-art encryption schemes because an encryption algorithm ideal for the aforementioned OXMLDBS models does not exist, user privacy is not a big issue. The research results have shown that user privacy can be assured at a computationally secure level, and this is enough for most real-world applications. Notably, this problem can be solved without special hardware supports. On the other hand, current solutions to data privacy in OXMLDBS models have less incentive. Some of the typical existing solutions like (Dang, 2006b; Smith & Safford, 2001) must resort to special hardware or a TTP to mitigate the complexity of this very challenging issue. Therefore, there are two issues that need to be further investigated: (1) studying new protocols/techniques for ensuring data privacy in OXMLDBS models; and (2) addressing technological issues with current special hardware, say IBM SCs, in order for them to be viable and applicable. As pointed out in previous work such as (Smith & Safford, 2001; Mykletun & Tsudik, 2005), a secure coprocessor is somewhat limited in its computing resources, both in processor speed and the amount of on-board memory available. This is a consequence of a variety of factors, predominantly that of heat dissemination. For instance, an IBM 4758 SC, at the beginning, is equipped with a 99 MHz processor and 2 MB on-board memory only (IBM, 2008b). With the continued growth of the hardware technology, we are expecting a brighter future for such special hardware. Again, with the future technologies, what does a TTP looks like? If TTPs can be developed effectively, data privacy and many other challenging security issues will also be able to be resolved much easier and more cost-efficiently.
•
•
Query assurance: Clearly, this problem has not been studied extensively for outsourced XML databases. Ensuring the correctness of query answers, however, has not been a big problem, but completeness- and freshness-related aspects are more challenging. Existing solutions still incur the severe limitation of having heavy computation on the client side. This reduces the benefits that the OXMLDBS models offer. Therefore, new protocols/techniques to address the completeness and freshness of query results will be of great interest in the future. Many new related problems are also foreseen (Dang, 2008), such as the over redundancy problem whereby the server sends the user more than what should be returned in the answers. This may cause a user to pay more for the communication cost, to incur higher computation costs, and so this issue (and many others) needs to be investigated carefully. Secure auditing: Except for (Dang, 2006b), which must resort to a TTP to accomplish this challenging task, none of the previous research work has addressed this vital security issue, even though it is not new. Much more work will need to be done in the future to solve this issue. Moreover, the problem is exacerbated increasingly due to the new rules related to secure auditing and compliance such as SOX, HIPAA, PCI, etc. (Dang et. al. 2007; Jaquith, 2007). In complying with these rules, companies are forced to deal with new aspects of the expanding digital universe – since the rules set standards for record keeping, records retention, information security, and privacy protection, among other things. New rules for things like the legal discovery of documents, called “e-discovery,” are driving companies to formalize new records management policies, develop archiving standards, and institute policy changes and employee train-
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Security Issues in Outsourced XML Databases
•
ing (Gantz, 2007; Dang et. al. 2007). These new requirements will significantly affect the problem with which we are concerned and will undoubtedly exacerbate it. Secure and efficient storage: This issue is totally new to outsourced XML databases. However, it is not difficult to understand because a cost-effective model for secure and efficient storage of unencrypted XML data has never been created.
Apart from the individual security requirement as shown above, we will also have to solve the very difficult problem of how to develop a fully-fledged solution to satisfy integrated assurances (e.g., confidentiality, privacy of access, and query assurance all together) for each concerned OXMLDBS model. Besides, consolidating and further developing the existing research results to facilitate arbitrary operations on outsourced XML databases like those of the in-house DBMSs (Evdokimov & Günther, 2007; Mykletun & Tsudik, 2006) will also be among the most challenging of future research activities. Addressing all of these problems is the main goal because it will make the OXMLDBS models practical. In addition, it is not difficult to guess that future trends of the data outsourcing paradigm will not only focus on outsourcing RDBMS or XML database services, but also on other large file systems like huge streaming databases, for example. This will, in turn, need new outsourcing models, new querying and security protocols to meet data management needs as effectively and efficiently as can an in-house service. The increasing importance of XML data in emerging applications, such as SOA-based systems, web services, e-business, etc., is a solid and well-grounded basis to consolidate our aforementioned prediction. Going along with this trend, it is foreseen that hardware-based solutions will become much more popular among end users because of their inherent natural simplicity.
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conclusIon In this chapter, we conducted an in-depth discussion of security issues in outsourced XML databases, and proposed several related future research directions. Because the outsourcing of XML databases is only a sub-problem of a very much broader field, namely the outsourcing of database services, we firstly presented background knowledge, security issues, and related work in the area of ensuring data outsourcing security. Moreover, because most existing approaches to security issues in outsourced XML databases are based on those of the broader field, we have also clearly defined and classified security issues into five major issues: data confidentiality, user and data privacy, query assurance, secure auditing, secure and efficient storage model. On this basis, we next presented and discussed the state-ofthe-art approaches to deal with security issues for outsourced XML databases in four typical OXMLDBS models. We have categorized these approaches into seven classes: (1) authentic publication of XML documents: a semi-OXMLDBS model; (2) oblivious operations on outsourced search tree; (3) secure multi-party computationbased approaches; (4) trusted third party-based approaches; (5) hardware-based approaches; (6) hybrid tree-based approaches; and (7) other approaches. With each class, technical details of the related approaches were introduced, and real-world case studies and intuitive examples were used to clarify the discussions. We have emphasized that most existing approaches focus on the SS model (see Figure 3) and none of them has radically addressed related security issues. We introduced open research issues relevant to the problem of concern in section 4. Therein, we also provided general discussions of future trends that have been identified from the previous works, and the needs of emerging application domains. Finally, we must conclude that research results of dealing with security issues in outsourced XML databases are currently too immature for practical
Security Issues in Outsourced XML Databases
purposes. Many more research activities will have to be carried out to make the outsourced XML database service model viable in practice.
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Chapter 7.5
Quality Standardization Patterns in ICT Offshore Esther Ruiz Ben Technische Universität Berlin, Germany
AbstrAct In recent years, the ICT branch has experienced new internationalization impulses through the improvement of offshore practices. Particularly the development of modularization and standardization of some production processes have crucially contributed to enabling offshoring in globalized areas of ICT. Competencies as well as innovation sources have increasingly fragmented; resting upon cooperation and trust principles. Quality standards play a crucial role to satisfy and optimize these coordination and regulation needs so to warrant quality outcomes. In this chapter, I will give an overview of the development of quality standards related to offshore projects, focusing particularly on recent practices in Europe. To illustrate the importance of quality standards and quality management for ICT off- and nearshore projects, and moreover for the internationalization of the ICT branch, I present some preliminary
results of my work in progress. From the perspective of project managers in large ICT firms, quality standards play a very important role as the internal controlling instrument of working and communication processes; as well as an external mechanism beyond the ICT network in order to get market advantages.
IntrodutIon During the late 1990s and particularly in 2000, the ICT sector has shown an enormous expansion, especially influenced by the development of the Internet, extended application areas and the former favorable economic situation. The commercialization and expansion of the Internet as a working basis, particularly in the 1990s, played in this phase a crucial role to begin enabling compatibilities in cross-national working practices; as well as creating a basis to build
common knowledge exchange arenas that are fundamental for the further internationalization of the ICT branch. Thus, the use of the internet as an exchange working platform represented one of the first enabling steps toward the organization of work in global contexts in the sector, overcoming time and space barriers in working processes (Castells, 2001) (Editor note: Castells is not listed in the references section.) Whereas organization control during the early 1990s concentrated on core firms that operated with local outsourcing companies to compete in an increasingly dynamic environment, involving new actors and customers around the world. In the late 1990s, the new diffusion and communication basis, supported by the Internet, contributed to the development of a new organizational paradigm known as network organization. Competencies, as well as innovation sources, have increasingly fragmented; resting upon cooperation and trust principles. Nonetheless, networks need to coordinate their operation activities and their innovation expectancies to guarantee the quality of their working processes, their staff and their customer-focused outcomes. And moreover, they are often bound to national and international regulations of working and production practices. Network organizations must find a consensus regarding customer groups, innovation, quality and performance goals. Once these goals, as well as coordinative and regulative standards, are integrated within quality management systems, they serve as a legitimate basis for network performance. Particularly in recent years, the ICT branch has experienced new internationalization impulses through the improvement of task delegation to foreign organizations, or in other words, offshore practices. The development of modularization and standardization of these production processes have crucially contributed to enabling offshoring in globalized areas of ICT. Offshore tasks and production segments in the ICT sector are part of the internationalization of
the sector and must be understood in the context of the globalization of the whole economy (Ruiz Ben & Wieandt, 2006). In the last few years, offshoring has expanded in the ICT sector due to the maturity of the branch in terms of standardization and consolidation of certain segments of the sector, mostly within the production part and related to the development of standard products. Some authors argue that offshoring constitutes a “prelude to software automation and mechanization,” taking for example the automation of labor-intensive tasks in data centers, software customization, translation, website hosting and reuse of code that is currently taking place in software service companies (Carmel & Tjia, 2005, p. 7). Although, this argument is still far away from the present situation. Particularly important in the adoption of international quality standards by the current impulse towards internationalization and the increasing global competition in the ICT sector. Thus, even if resistance towards the adoption of international quality standards exists in ICT organizations, due to the additional work it represents for the employees by way of documentation pressure, particularly large ICT organizations adopt them in order to accomplish the perceived expectations in the sector (Boiral, 2006). Another way to accomplish such market expectations is for the organization to develop particular quality management systems on the basis of internationally recognized quality standards (Ruiz Ben, 2007). However, the speed of innovation in the ICT sector is often too fast and the documentation of software development process needed in quality management systems is often neglected due to time pressure or lack of habitualization among employees (Ruiz Ben, 2005). In the context of the internationalization of the ICT sector, the adoption and adaptation of quality standards and documentation practices are not yet very well researched. Questions such as the existence of quality management systems in organizations or of the dynamics brought about in organizations when new quality stan-
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dards are implemented to address qualification development, task definition and performance in international settings are still unexplored. In this chapter, I will give an overview of the development of quality standards and management mechanisms related to offshore projects, focusing particularly on recent practices in Europe and especially in the German ICT branch. I will present definitions of offshoring in ICT, explanations about quality standards in this field and discuss the institutions involved in the development of international standards. Moreover, I will present some of the results of my research regarding the transformation of tasks and qualifications in the internationalization process of the ICT branch, focusing on the importance of quality standards and management systems.
bAcKground Quality management and the current Internationalization process of the Ict sector The increasing development and introduction of quality standards in management systems experienced an important impulse during past years due to the expansion of ICT offshore practices. Quality standards support the foundation of tasks and work processes and represent a common communication base for international teamwork. Quality initiatives such as Six Sigma serve as a tool to implement existing quality standards, defined by organizations such as ISO, using data and statistical analysis to measure business processes, recruiting and outcomes. Principally, Six Sigma represents the practical realization of the total quality management (TQM) approach. The main philosophy of this tool is to define and identify defects as failures in relation to the customers´ demands. Moreover, from the perspective of the market, quality standards are important for competing in a very dynamic environment.
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Particularly, quality standards are becoming a crucial role for the orientation of customers, but also for ICT enterprises, in order to better choose their partners in the framework of a globalized economy and international ICT industry. In India for instance, managers in major ICT firms have developed their own teams to identify customers’ needs and have designed various pathways towards TQM. Nevertheless, the transfer of knowledge and technology also becomes necessary for emerging smaller ICT firms that play a very important role in consolidating the market (Dutka & Sekhar, 2004). Thus, the establishment of interaction and learning platforms among ICT firms are very important for industry improvement (Crevoisier, 1999). Moreover, the national environment in which the firm is embedded plays an important role to establish a competitive ICT industry in the country and also the regional conditions of the country, which we can especially observe in the case of the EU. The political environment from a national, regional and international perspective influences offshoring and also standardization processes regarding quality management in aspects related to working practice regulations. At the same time, as (author’s first name needed) Jakobs (2005) remarks, standardization politics change and national interests can become more important. Thus, Jacobs (2005, p. 25) comments, “…governments now have a vested interest in pushing such standards to support domestic firms. These firms, in turn, will look to standards setting for several reasons which are typically, though not necessarily, related to their own economic well-being.” Therefore, standardization can be considered, according to this author, as an arena in which technical and non-technical (e.g., economic, organizational, or social) issues concur due to the importance of social interactions between diverse stakeholders (e.g., vendors, service providers, users, consumers, administrations, etc.) and technical experts who develop the standards. The gap between the needs and perspectives of
Quality Standardization Patterns in ICT Offshore
the standard developers in the organization and the users who abide by the standards often leads to ad hoc solutions that do not always bring an effective and timely output. Especially for examining quality standardization patterns in relation to ICT offshore projects, it is important to take into account the actors interacting in the standardization process of quality systems and how they legitimate the establishment of standard settings in organizations. Intercultural aspects, as well as national regulations and rules, must also be considered in the analysis of this process; not to mention the financial aspects and embedded risks in offshoring practices that ICT organizations have to confront and that standardization may sometimes even veil.
Quality standards in the context of the Ict branch in europe According to the British Standard Institution, a quality standard in accordance with ISO (2001, p.2000) provides an organization “with a set of processes that ensure a common sense approach to the management.” Moreover, “the system should ensure consistency and improvement of working practices, which in turn should provide products and services that meet customer’s requirements. ISO 9000 is the most commonly used international standard that provides a framework for an effective quality management system.”1 ISO Standards are widely used in the ICT branch and represent a very important basis for the development of management systems in organizations. The ISO 9000 series of quality system standards have been applied to industrial practices for a long time (Van der Wiel, van Iwaarden, Williams, & Dale, 2004). By origin, they were developed on the basis of military standards (e.g., AQAP) and the British Standards (BS 5750) and were first published in 1987. Since then, two upgrades have followed in 1994 and 2000. Following these authors, the initial aim of the ISO 9000 series was to build a trust basis for sup-
pliers and manufacturers practicing business-tobusiness transactions. Tummala and Tang (1996) explain that the basic concept behind ISO 9000 is the notion that a set of characteristics of quality systems can be standardized and yield benefits both for organizations, as well as for their suppliers, due to the common certainty that they both should meet certain requirements. ISO 9000 standards help ensure that organizations follow well-documented procedures in the production process, as well as in the delivery of their products or services. These procedures aim to guarantee that the products or services of an organization comply with customer specifications, but are still basic recommendations that must be further adapted to the special situation of the organization, its environment and its production scope. Thus, the tension between the quests for universality embedded in ISO standards and the need to take into account the various stages of technological and commercial development are reflected in the adaptation of new quality management systems; especially in its implementation. Nonetheless, ISO is not the only existing standard used to develop quality management systems in the ICT branch. Standards in this branch are very heterogeneous. Several classifications have been suggested.For instance, the one suggested by Blind (2004) distinguishes among product standards, control standards and process standards. Regarding the way standards are produced, Blind talks about three additional categories: standards that are set through the market (such as IBM’s systems network architecture [SNA] and Microsoft Windows); standards that are set by government, through a regulatory process (mandatory standards); and standards that are negotiated through a voluntary consensus process (formal public standards developed by a publicly recognized standardization organization such as ISO, IEC and ITU) (2004). Moreover, standards can also be defined in relation to their use: mandatory by law for every product concerned (for example when safety considerations
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have prompted regulations); those requested by a vendor or system integrator; or those including numerous instances where the application of a standard is mandatory for public procurement (as in the case of the European Handbook for Open Systems according to a decision of the European Council). Therefore, considering this complexity regarding standard types, the definition of a typology of standards is still not totally satisfactory (OECD, 2001). Regarding the motivation to implement formal standardization in organizations, some authors point out that the focus tends either to be on the reduction of transaction costs, especially related to information, or it is associated with network externalities (Schmidt & Werle, 1998). Standards can also be associated with reducing uncertainty or with enhancing competition by clearly defining the information required to serve a market. Mansell (1995) refers to the use of standardization for the facilitation of scale economies, either for suppliers or for influencing the distribution of cost and benefits related to the building and operating of large, complex technical systems. Moreover, in order to develop themselves in new markets while protecting established ones, companies utilize standardization so to prevent compatibility and avoid the participation of competitors in the market. Thus, as some authors remark, companies use standards as strategic tools to consolidate a market position and gain advantage over competitors (Cargill, 1989; Bonino & Spring, 1991). Particularly regarding quality standards, Van der Wiele, van Iwaarden, Williams, and Dale (2004) remark on the basis of a literature review that there is evidence of a positive impact created by ISO standards in some business countries and sectors. Heras (2002) points out that most of the studies conducted on the benefits of ISO standards are mainly anecdotal, case study based, and report descriptive statistics (Van der Wiele, van Iwaarden, Williams, & Dale, 2004).
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Van der Wiele, van Iwaarden, Williams, and Dale (2004) report a positive impact of ISO 9000 on companies in The Netherlands and in the UK. Nevertheless, it is important to consider that the implementation of ISO needed changes in the organizations, especially when the last version of ISO 9000 was used. The participation of auditors in the process was also very important in the implementation of the quality recommendations. Especially the participation of external and internal consulting in ICT offshoring plays a crucial role to legitimate the consequent organizational change (Ruiz Ben & Claus, 2005; Ruiz Ben & Wieandt, 2006; Wieandt, 2006; Ruiz Ben, 2006). Thus, as we mention elsewhere (Ruiz Ben, Wieandt, & Maletzky, 2008) in offshore processes, the selection of the providers in host offshore countries involves legal and consulting costs, and contracting issues (Morales, 2005). When organizations do not have experience with ICT offshoring, they usually work with benchmarking companies, utilizing consultants that provide an overview and evaluation of the specific chances and risks of ICT offshoring for the company (Amberg & Wiener, 2004). Thus, from my point of view, to analyze quality standardization patterns in ICT offshore processes, it is important to consider the actors involved in the development of quality standards and the embedded environments of ICT organizations and networks, especially regarding legal, social and financial issues. Moreover, at the organizational level, we must take into account in which way the workers adopt or resist the introduction of quality standards in their working routines, particularly when they work on international projects. In the next section, I will focus on the actors involved in the development of quality standards, considering the particular situation in Europe and especially the framework of the European Union after previously explaining the role of standards in ICT offshoring.
Quality Standardization Patterns in ICT Offshore
QuAlIty stAndArdIZAtIon pAtterns In Ict oFFshore Standards play a particularly important role as a ‘selection mechanism’, especially in the case of ICT networks in which alliances are often based upon trust and efficiency and in which narrowing diversity can benefit internal cohesiveness and support stability against external threats. Particularly in ICT offshoring processes, the standardization of working processes through methodologies such as CMM has played a crucial role in some offshore countries. These formal processes explain, in part, the tremendous success of the offshore industry in India (Carmel & Tjia, 2005). Nonetheless, particularly regarding quality standards, the Indian ICT Branch has played a very important role in developing new settings. A significant number of major Indian ICT companies have adopted a central measure for achieving quality, particularly Six Sigma methodology and/or its multivariate branches like TQM, supply chain management (SCM), and customer relationship management (CRM). Also, ITIL recommendations aligns with the international standards of ISO 20000 and represents a customizable framework that defines how service management is applied within an organization and how it plays an important role in the development of off- and nearshore projects. Regarding production standards, already in the previous phases of the Internet expansion, the Directive on ICT Standardization of 1996 formulated by the Expert Group of the OECD represents an important milestone in the establishment of ICT standards. In order to assess the implications of emerging globalization and the consequent need for standardization in the ICT, the OECD sought the advice of a group of experts, who were responsible for the standardization of ICT in their respective companies. This group formulated several recommendations regarding the development of ICT standards, their coordination, management, tasks distribution, participation of the users,
standardization ethics, etc. Particularly relevant in the recommendations is the role assigned to official standardization agencies, which shall be referred to below as “Standards Development Organizations,” or “SDOs.” The question is, how do these organizations define standards and how do they support their stability and diffusion? Werle and Iversen (2006) examined in a recent article the legitimacy of committee standardization in comparison to market processes of the technical standardization of ICT. Responsible for the development of a significant number of standards in the ICT branch are SDOs, in which agents of firms represent the majority of participants, due to the fact that enrollment in standardization development constitutes a time-consuming and resource-intensive activity requiring technical expertise (Werle & Iversen, 2006). Thus, these authors remark on the bias existing in SDOs towards industry interest representation. Blind (2005) also refers to the requirement of qualified personnel for the participation in standard development in SDOs (2005). Therefore, the chances for the enrollment of persons from developing countries or even from small- and medium-sized enterprises (SMEs) are rather limited (Jackobs, 2005). Taking into account the composition of the ICT branch in Europe that in its majority is represented by SMEs, also in Europe such bias is something important to consider. Nevertheless, in the framework of the EU, where the exchange of services and goods is free, due to recent regulations (OECD, 2004), European ICT companies can develop a self-reinforcing dynamic, gaining cost or quality advantages through offshoring (OECD, 2005; see also Aspray, Mayadas, & Vardi, 2006). At this point, it is very important to consider labor and employment rights, as well as issues related to privacy and data transfer, that are related to ICT offshoring processes in Europe. Regarding data privacy laws, the European Union Data Privacy Directive adopted in 1995, applies to companies collecting or processing data within the EU or reciving data from the EU and
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is implemented by the respective EU countries through their national legislation (Eisner, 2005). Eisner (2005) points out that EU-approved transfer contract clauses are the most efficient way to handle data transfer in ICT offshoring processes in the EU. These clauses consist of an agreement between the transferring parties about a set of contracted provisions consistent with data privacy laws, allowing enforcement by EU authorities. Another important issue related to EU regulations in the context of ICT offshoring is the EU Acquired Rights Directive, approved in 1977, that gives employees protection in the event of a business transfer2. This means that transferred employees must maintain the same working conditions that they had before the transfer took place. In the case of replacement, employees must be informed and consulted about related measures and sometimes be awarded a particular payment (Eisner, 2005). These regulations are very important in the development of ICT offshoring in the EU context. Nevertheless, at the level of the implementation of working policies in organizations, and particularly regarding the employer’s representation in the decision processes of the companies, there are many differences among the European Member States. Especially the differences between the former EU15 and new European Member States are very significant. Because of the political divide in Europe before 1989, we can show specific conditions in regards to off- and onshoring. The former division led to the establishment of a highly developed and well performing western part (the Europe-15 Member States, Norway, and Switzerland) and a transforming, but well qualified and low regulated eastern part (the new member states Bulgaria and Romania). Thus, in Europe, even both home and host countries using offshoring practices occur in one market area regulated by the European Union. According to specific historical, political and socio-cultural conditions, and also in regard to the particular economic and industrial situa-
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tion, as well as to the special position in the global ICT branch, each country has developed specific strategies to confront innovation demands and to cope with high qualified labor shortages and skill mismatches. ICT companies, each depending on their size and market scope, had to react very fast to innovation pressures developing special internal training measures as well as hiring foreign workforces. Particularly important for the adoption of quality standards in an organization is the speed of change. At the international, as well as the European level, some measures have been developed to confront this problem. Egeydi (2001, p. 39) comments the following: According to the ISO/IEC Directives, 7 years were needed to take a standard from start to Draft International Standard in 1989, while in the Directives of 1992 this period had been reduced to 3 years. … the approval time of recommendations in the ITU-T has been reduced from 4 years in 1988 to a maximum of 9 months in 2000 (ITU-T, 2000). This represents an improvement in standardization processes; however, ICT networks often adopt their own quality standards embedded in more general management systems, such as Six Sigma. At the regulative level, Egeydi (2001, p. 44) remarks that formal standards constitute an important point of reference for European regulation: “The European Commission requires a degree of democratic accountability if it is to refer to such standards in a regulatory context. However, in the field of ICT standards have emerged with a high market relevance, standards that stem from standards consortia.” Egydi (2001) points out, however, that in the field of ICT, standards will seldom be part of regulation. Thus, this author pleads for more clarity from European regulators about what type of democracy is needed and for what purpose.
Quality Standardization Patterns in ICT Offshore
Additionally, Egydi remarks that a systematical monitoring of democratic requirements by ‘democratic’ standards by developing organizations should be considered. In sum, especially for ICT offshoring practices, this kind of monitoring would be positive and would establish clear cooperation environments among the EU15 countries and the new European Member States. However, the rapid dynamics in the ICT sector and the need to develop quality standards in line with the velocity of change lead to an internal adaptation of quality standards in organizations on the basis of internationally recognized standards. Adding to the problem of high dynamic changes in the ICT sector, increasing internationalization of the sector means that intercultural problems can emerge among project networks that use quality management systems established in home enterprises (Ruiz Ben, 2006). Thus, it is crucial to consider emerging expertise in international teamwork and prevent the overemphasizing of focusing on narrowed, organizational quality management standards and systems. The awareness of network interactions in projects and beyond them of emerging expertise and knowledge creation is crucial to developing effective quality management systems in internationalized ICT organizations. In the next section I will focus on this issue, presenting some results of our work in progress regarding the transformation of tasks and qualifications related to ICT off- and nearshoring. Preliminary empirical results: Quality standards and quality management systems in the internationalization of the German ICT branch In our current research about the transformation of tasks and qualifications in the framework of the internationalization of the German IT sector (INITAK), we have conducted interviews with personnel and quality managers in several IT enterprises (see description above and in appendix) that expand their activities in foreign
countries and especially in Eastern Europe. The preliminary analysis regarding qualification and expertise requirements are related to one of our case studies in a large software development enterprise (F3). This enterprise is an affiliated company of a large, multinational enterprise with many establishments all around the world. Academically acknowledged persons founded the German establishment in the early 1980s. During the 1980s and 1990s, the enterprise expanded and founded six further locations in Germany, Switzerland and recently in Eastern Europe. The enterprise has an academic origin which still remains, as it is reflected for instance in the links to academicallybased professional federations (GI – Gesellschaft für Informatik). The motivation for off- and nearshore is basically to reduce costs, but also to expand the firm market scope and moreover to remain innovative in the rapidly internationalizing environment of the ICT sector. Particularly the German establishment of F3, where we conducted our interviews in 2006 has itself experience with nearshore since 2004 in Eastern Europe. In the first phases of this nearshore project, the enterprise used the platforms of the multinational enterprise they belong to, which brings advantages regarding the availability of adequate personnel and infrastructure and the knowledge management of the enterprise. Nearly 50 employees are working in the nearshore establishment of F3. The standard integration procedure for these individuals is a visit in Germany for a training period of one year, in which they learn the project and quality standards of the enterprise. Regarding the tasks that the F3 firm keeps in Germany during its current internationalization, the first specification phases of software development projects, during which the contact with customers is very intensive, remain in the German headquarters. However, some nearshore workers participate sometimes in the discussions with the customers, as a part of their integration training. The architecture phase also remains in Germany,
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whereas the developers in the nearshore center conduct the detailed design of the architecture. Therefore, the recruitment strategy of the firm F3 in its nearshore center is oriented towards hiring both very young university graduates and also experienced personnel that can rapidly adapt to the growing present project demands, as well as train and help to integrate young newcomers. The long-term internationalization perspective of F3 in the nearshore location is to expand their market opportunities in the country, building an increasingly autonomous center with high-qualified personnel. Apart from the high qualification requirements in computer science, one of the prerequisites for recruitment is high communication skills and an ability to speak in German. For coordinating international teamwork between German and the software developers in the nearshore center due to the differences in work habits in Germany and in the nearshore country perceived by personnel managers, firm F3 uses as a common background the German institutionalized sense of professionalism and an especially strong hierarchical quality management system that goes beyond the firm through to the core, multinational owner enterprise. This system has been developed and institutionalized in the enterprise through the years, taking internationally recognized quality standards as a basis and functions as the internal control system for the whole, teamwork-oriented organization. Although the software developers who took part in our interviews were satisfied with the quality systems in the organization, a quality manager in firm F3 argues that this kind of system sometimes makes the organization “self-blind” if it does not permit acting in a reflexive way from the ground floor to reflect the typical, workday problems within projects. Thus, according to the quality manager, communication and social skills are especially important for two main reasons: first, to understand the problems of the software developers, as well as the technical and management problems within a project and second, to solve
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these problems according to three basic quality principles, or in the words of a quality manager, “the magical triangle for decision making: budget, timing and quality.” The quality manager in firm F3 emphasizes the importance of the “social component” in teamwork to reach high quality in production. Thus, in contrast to offshore projects in India, nearshore projects in Eastern Europe, as the quality manager points out, are easier to coordinate because the team members and the quality and project managers know each other and can more easily establish a communication basis: We need the social component. We have observed this precisely in our nearshore center; the nearshore center people were first here and thus we could build a social relationship. You know each other, you get out together for a drink and then, when we telephone it is like as if he were in the neighbor room. However, the firm plans to expand in the nearshore center country market, so that the autonomy requirements for software developers in the nearshore country will grow and they will have to act as mediators between different cultural backgrounds. Taking into account that the nearshore experience of the firm F3 beginning 2004 is still very short, I cannot yet give a clear picture about the teamwork culture in this international software development environment. However, it is important to note that although the German based corporate professionalism dominate the expectations of the personnel managers, due to some reported misunderstandings in teamwork practices between nearshore center and German software developers, the firm F3 has reacted initiating the design of common “corporate rules” for the nearshore projects that sometimes are developed “ad hoc” within the project, but takes also international quality standards as a basis. In which way the German based corporate professionalism will prevail or coexist with local habits in the
Quality Standardization Patterns in ICT Offshore
international software development environment of the firm F3 or in other words, how expertise in both locations will be institutionalized is yet an open question that we will seek to answer in the next phases of our research. The second firm about which I report in this paper, F1a, is an operation segment of a multinational company operating in the telecommunication and software areas of the ICT branch. F1a was recently established as operation segment and has since its origins experience with off- and nearshoring in India and Eastern Europe. As a part of a multinational company, F1a is tied to the cultural identity of its owner and particularly rooted in the tradition of the German industrial culture with a strong “Beamtentum” influence. The experiences with off- and nearshore of F1a remain linked to the long internationalization tradition of the core owner company. This means a good starting basis for projects, since F1a can use the existing recruitment pool with experience in the company in base countries. Moreover, some team workers and specially the team coordinators often travel to the home or host locations of the nearshore projects to maintain face to face contacts, which is high valued to improve the communication and interaction of the team members. Particularly F1a has currently nearshore projects in Poland, Romania, and Slovakia. The programming phases of ICT projects have been delivered to these countries. The consequences for the organization of work processes are that tasks, work modules and deliveries must be clearly defined as well as the interfaces between work modules. This strong definition requirement in off- and nearshore projects is the main difference to local focused projects in the opinion of a project manager. This means a stronger standardization of processes and documentation practice as it was the case in the past and a rapid adaptation to current needs selecting just some aspects of past documented processes. Documentation represents at this point a double-edged sword, since at the one hand it is needed to identify possible process
failures and to find solutions as well as to check the processes with quality standards, but on the other hand it retards the working process and moreover, it is sometimes not clear what is relevant to be documented. As a project manager in the enterprise F1a remarks, definition of modules and tasks, documentation and process adaptation run parallel in successive constant iteration moments. In the words of the project manager: The whole experience stored since an eternity resides somehow inside documentation and we cannot adopt just as it is. We look at what makes more sense and what makes less, in order to bring it to an extension that we can use in the project. Otherwise we lose too much time. We make everything parallel, we begin to define everything, to document and then the processes are adapted. And it is a kind of iterative process in which everything size by size puzzles together. Quality management systems live and develop together within this process and they are extremely important for the improvement of the working process in internationalized software development environments. However, such systems did not exist in the past years or they were only available on the call, and were moreover not documented. Currently, in the enterprise F1a, documentation plays a crucial role in relation to quality systems and particularly in relation to offshore, since the teams work within an integrated global environment and structure in which the communication of work steps and developments, but specially the secure run of the process must be guaranteed and arbitrated. As the project manager puts it: (…) looking back to the past, regarding the configuration system, there were no quality criteria or only few ones just on the call and not documented. And here due to this ongoing structure that we have set up, and taking into account the conjunction and succession of work process parts, we must of course lay down on something and we must document. Specially because with such an ongoing system, in which we say to sales and
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marketing department: work with it, they can in fact work with it in the whole world just with the push of a button and in a critical moment they can also risk lots of money. Particularly risks in the interfaces among several modules in home and host locations in off- and nearshore projects represent a difficult problem, which has sometimes lead to relocating offshore projects to nearer host destinations. As a controlling instance, consulting firms play a crucial role. In the case of F1a, the supervision of the projects is conducted by an external consulting enterprise, which in the particular case of the project to which the interviewed project manager belongs, is extremely important due to its huge volume and complexity. As the consultant working in this project comments, quality standards are crucial in off- and nearshore projects, both for coordination and also as a basis to find solutions in case of work process problems. Quality standards are important for the external consultant also as a legitimating basis for possible changes in work processes that the consultant has to achieve and implement in the “client” enterprise, to which somehow he plays a twofold role as a external worker and also interacting in the day to day practice of the project with the employees “clients” as a colleague and supporter within the project. Thus, quality standards are the instrument to legitimate decisions in the work processes. The knowledge of such standards and also of the quality management systems of the company is also important for the team workers, since they have to implement them in the day to day project life. Thus, quality standards, as well as quality management, becomes more and more institutionalized in the company, which is reflected in the increasing number of courses that the company offers to the employees. Moreover, employees can only learn about quality standards and their implementation as well as about quality management within the company, since, first, it is not usual to get training in these
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issues at the universities and second, even if the employees have some knowledge having studied informatics or mathematics, they do not have the particular knowledge of their implementation in such a complex environment of a multinational company. As the project manager puts it: What we make here you cannot learn at the university. Either I know it from my studies, if I learn informatics or mathematics and there also especially software development and I know what a docmentation and a test as a whole means or I do not know. And even if I know it, I have never known it in such an environment like this. Thus, internal continuous training in quality standards and in quality management is crucial for the employees working in off- and nearshore projects. And this means both in home and host countries. Nevertheless, quality standards must be also developed in line with the different internal improvement of quality management systems in different companies, which means that training about quality issues remains within the organization. This training should attend to the needs of the organization including its foreign locations, in which differing qualification and working habits exist and also different interpretations of the recommendations included in quality management systems. Thus, as quality managers in our two case studies remark, quality standards and management systems represent a double-edged sword making the organization blind about day-to-day problems among project workers in international teams. A balance between the recommendations included in quality management systems and the day-today expertise emerging in different projects and locations is needed in order to integrate working experiences into future projects and to establish an organizational knowledge basis. In other words, quality standardization as coordination tool for off- and nearshore projects should both establish a common working basis for different organizational settings and represent a dynamic
Quality Standardization Patterns in ICT Offshore
process of self-reflection on working experiences. In off- and nearshore projects distance play a crucial role that is very often underestimated. At the organizational level the participation of project workers from different locations in the development of quality standards could represent a chance to establish more realistic working and communication patterns in international ICT organizations. Moreover, the cooperation of ICT organizations with educational institutions for the integration of quality standard and management issues in educational curricula in computer science or other related studies could support a common basis for the implementation of ICT qualifications in different national settings. In the next section I comment some future trends regarding quality standardization patterns in offshore in Europe.
Future trends Taking into account the development in the European ICT Branch regarding offshoring (Ruiz Ben & Wieandt 2006; Ruiz Ben, Wieandt, & Maletzky, 2006), quality standardization will gain importance, first as coordination instruments in the development of the ICT branch in new geographical areas of the European Union. Due to this increasing significance of quality standards in the region, there will be a growing need for professionals with skills needed to engage in both standard setting activities in ICT companies and in Standard Setting Organizations. This represents an additional challenge for the educational institutions in the respective countries of the European Union that sum to the long-discussed problem of qualification mismatch in the ICT branch (Ruiz Ben & Claus, 2005; Ruiz Ben, 2003; Dostal, 2004). Educational institutions should more intensively cooperate with companies to prevent qualification mismatch in quality management, but also in project management issues. Internships about quality management should be established as a part of the curricula.
Intercultural aspects will gain also importance in the development of quality standards. The need to address these issues is crucial, in order to ensure equal access and opportunity for all European countries. From a global perspective, the World Summit on the Information Society represents an example for creating a discussion forum for these kinds of issues. Global SDOs like the ITU are also assigning growing focusing to equity aspects. Considering the future trend towards increasing standardization, German companies seem to play in an advantage position, since as Tate (2001, p. 472) remarks: In Germany, firms have been world leaders at creating a transnational infrastructure for standards, transferring their routine national standards work to the European and international levels which in turn remain closely integrated with more specialized national standards capable of supporting diversified quality strategies. Nevertheless, as Tate further remarks, national varieties in standard settings in Europe are being compressed, but not eliminated. In the case of Germany, firms need “a comprehensive standards infrastructure capable of supporting high level product engineering” (2001, p. 472). Particularly at the process level, it is very important that standards develop in the line of process innovation rhythms. Therefore, firms will probably increasingly use international standard setting organizations for establishing their own standards in trans-national arenas. Particularly in Europe, this trend will be enhanced with the participation of the EU as harmonization, for instance. This could be a chance to better involve small and medium enterprises and also the new European Member States in the development of quality standards in the ICT branch.
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conclusIon In this chapter, I have shown which role quality standards play in the current internationalization process of the ICT branch focusing in the situation in Europe and particularly in Germany presenting some preliminary results of my work in progress. First, I have given an overview of the importance of quality standards for the development of ICT off- and nearshore processes, as well as the role of the main actors in standards setting processes. Firms very often adopt ad hoc solutions in order to try to timely bring production outputs in line with the innovation rhythm of the market,due to the gap between the needs and perspectives of the standard developer, the organizations and the users of the standards. However, such solutions are very often ineffective. ICT companies practicing offand nearshore mostly use quality standards as an instrument to reduce transaction costs, especially related to information and communication efforts among home and host centers, or as a basis to confront network externalities related to market competition. Thus, we can distinguish two main aspects of the adoption of quality standards in relation to off- and nearshore processes: an internal controlling aspect of working and communication processes and an external one beyond the network in order to get market advantages. Such advantages are mostly dominated by large enterprises playing the mayor role in the process of standards setting in SDOs and moreover due to their time and personnel resources to implement and adapt quality management systems in their network environments and to continually train their employees in order to implement quality standards in their day to day working practices. In order to improve more democratic processes for the development of quality standards, the EU could adopt a harmonization entity role in the European context of the ICT branch. At the national level, a more intensive cooperation among small, medium and large enterprises with educational
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institutions and especially with universities could serve as a basis to reduce the particular disadvantages mentioned above and reduce possible qualification mismatches.
Future reseArch dIrectIons The research on quality standardization patterns in ICT off- and nearshore projects has been mainly focused on the level of the institutional support and composition development of quality standards. Also, management issues have been an important focus of research (Boiral, 2006; Tate, 2001; Carmel & Tjia 2005; Tummala & Tang, 1996). From the point of view of the day-to-day working practices, the question about how quality standardization patterns influence the working habitus of ICT professionals at different levels of the organizations is still open. Also, the transformation of tasks profiles in off- and nearshore projects and the related importance of quality managers for the implementation of international ICT projects are not yet fully researched. Aspects such as the balance between standardization of working processes and the emerging expertise of off- and nearshore projects in quality management systems are in some cases internally considered in organizations and represent an important problem in off- and nearshore projects. Here it is important to investigate which interaction and communication models between home and host organizations are best suited and how different actors in participating organizations can integrate their working experiences in the development of quality management systems. Moreover, the relation between innovation and implementation of quality standards in ICT organizations from an international perspective is another important issue for research. The question at this point is how quality standards contribute to the development of product and working process or on the contrary, they hindering dynamicsof innovation. Particularly the adaptation of host organizations in
Quality Standardization Patterns in ICT Offshore
off- and nearshore locations to quality standards implemented in home organization countries represents interpretation risks that can constitute a communication and creativity obstacle. Furthermore, the acceptance of imported quality management systems in host organizations should be better investigated in order to confront conflicts among workers in international ICT projects. From an institutional perspective, the integration of quality standardization and quality management issues in university curricula is an important theme for research in order to confront the persisting mismatch between ICT educational and industrial development. At this point, it is important to investigate which models of institutional knowledge transfered in different regional settings have more successfully contributed to establishing learning patterns between educational institutions and ICT organizations. The chances and challenges for transferring such models to other contexts should be furthermore researched.
reFerences Boiral, O. (2006). La certification ISO 14001: une perspective néoinstitutionnelle. Management International, 10(3), 67-79. Carmel, E., & Tjia, P. (2005). Offshoring information technology. Sourcing and outsourcing to a global workforce. Cambridge: Cambridge University Press. Crevoisier, O. (1999). Innovation and the city. In E. J. Malecki & P. Oinas (Eds.), Making connections: Technological learning and regional economic change. UK: Ashgate Publishing Company. Dutka, D., & Sekhar, A. (2004, April 27-28). Major Indian ICT firms and their approaches towards achieving quality. Paper presented at an International Conference to Mark 20 Years of ASARC, University House, Australian National University.
Eisner, R. (2005). Offshore legal issues. In E. Carmel & P. Tjia (2005). Offshoring information technology. Sourcing and outsourcing to a global workforce (pp. 112-129). Cambridge: Cambridge University Press. OECD. (2002a). Technology outlook: ICTs and the information economy. OECD & Dev. OECD. (2002b). Reviewing the ICT sector definition: Issues for discussion. Paper DSTI/ICCP/ IIS(2002)2. Retrieved August 25, 2006, from http://www.oecd.org/dataoecd/3/8/20627293. pdf OECD (2002c). Measuring the information economy. Retrieved August 25, 2006, from http:// www.oecd.org/dataoecd/16/14/1835738.pdf Ruiz Ben, E., & Claus, R. (2004). Offshoring in der deutschen IT Branche. Eine neue Herausforderung für die Informatik. Informatik Spektrum, (4), 1-6. Ruiz Ben, E., & Wieandt, M. (2006). Growing East: Nearshoring und die neuen ICT Arbeitsmärkte in Europa. FifF-Ko, (3). (forthcoming) Tate, J. (2001). National varieties of standardization. In P. A. Hall & D. Soskice (Ed.), Varieties of capitalism (pp. 442-474). Oxford: Oxford University Press. Tummala, V.M.R., & Tang, C.L. (1996). Strategic quality management. Malcolm Baldrige and European Quality Awards and ISO 9000 certification: Core concepts and comparative analysis. International Journal of Quality and Reliability Management, 13(4), 8-38. van der Wiele, T., van Iwaarden, J., Williams, R., & Dale, B. (2004). Perceptions about the ISO 9000 (2000) quality system standard revision and its value: The Dutch experience. ERIM Report Series ERS-2004-081-ORG (Organizational behavior and HRM). Rotterdam: Erasmus Research Institute of Management.
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AddItIonAl reAdIngs
Corrigan, J. (1994). Is ISO 9000 the path to TQM? Quality Progress, May, 33-6.
Adam, E.E. Jr., Corbett, L.M., Flores, B.E., Harrison, N.J., Lee, T.S., Rho, B., Ribera, J., Samson, D., & Westbrook, R. (1997). An international study of quality improvement approach and firm performance. International Journal of Operations and Production Management, 17(9), 842-73.
Ebrahimpour, M., Withers, B.E., & Hikmet, N. (1997). Experiences of US- and foreign-owned firms: A new perspective on ISO 9000 implementation. International Journal of Production Research, 35(2), 569-76.
Askey, J.M., & Dale, B.G. (1994). From ISO 9000 series registration to total quality management, an examination, Quality Management Journal, July, 67-76. Binney, G. (1992). Making quality work: Lessons from Europe’s leading companies. The Economist Intelligence Unit, London. Special Report No. P655. Blind, K. (2001). Standardisation, R&D and export activities: Empirical evidence at firm level. Proceedings of the Third Interdisciplinary Workshop on Standardization Research at the University of the German Federal Armed Forces (pp. 165-186). Hamburg, Germany: Univ. der Bundeswehr. Bradley, M. (1994). Starting total quality management from ISO 9000. The TQM Magazine, 6(1), 50-4. Brecka, J. (1994). Survey of registrars for ISO 9000: Prices down, success rate up. Quality Progress, February, 20-1. Brown, A., & Wiele, A. van der (1996). A typology of approaches to ISO certification and TQM. Australian Journal of Management, 21(1), 57-72. Brown, A., Loughton, K., & Wiele, A. van der (1998). Smaller enterprises’ experiences with ISO 9000. International Journal of Quality and Reliability Management, 15(3), 273-85. Buttle, F. (1997). ISO 9000: Marketing motivations and benefits. International Journal of Quality and Reliability Management, 14(9), 939-47.
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Flynn, B.B., Schroeder, R.G., & Sakakibara, S. (1995). The impact of quality management practices on performance and competitive advantage. Decision Sciences, 26(5), 659-92. Forker, L.B., Vickery, S.K., & Droge, C.L. (1996). The contribution of quality to business performance. International Journal of Operations and Production Management, 16(8), 44-62. Gotzamani, K.D., & Tsiotras, G.D. (2001). An empirical study of the ISO 9000 Standards’ contribution towards total quality management. International Journal of Operations & Production Management, 21(10), 1326-42. Heras, I., Casadesus, M., & Dick, G.P.M. (2002). ISO 9000 certification and the bottom line: A comparative study of the profitability of Basque companies. Managerial Auditing Journal, 17(1/2), 72-8. Institute of Quality Assurance. (1993). Survey on the use and implementation of BS5750. London: Institute of Quality Assurance. Hawkins, R. (2000). Study of the standards-related information requirements of users in the information society. Final report to CEN/ISSS. Retrieved February 14, 2000, from www.cenorm.be/isss International Organisation for Standardization (ISO) (2004). The ISO survey of ISO 9000 and ISO 14000 Certificates (Twelfth Cycle). International Organisation for Standardisation, Geneva. Jacobson, R., & Aaker, D. (1987). The strategic role of product quality. Journal of Marketing, 51(4), 31-44.
Quality Standardization Patterns in ICT Offshore
Johannsen, C.G. (1995). Application of the ISO 9000 standards of quality management in professional services: An information sector case. Total Quality Management, 6(3), 231-42.
Phillips, L.W., Chang, D.R., & Buzzel, R.D. (1983). Product quality, cost position, and business performance: A test of key hypotheses. Journal of Marketing, 37(1), 26-43.
Jones, R., Arndt, G., & Kustin, R. (1997). ISO 9000 among Australian companies: Impact of time and reasons for seeking certification on perceptions of benefits received. International Journal of Quality and Reliability Management, 14 (7), 650-60.
Quazi, H.A., & Padibjo, S.R. (1998). A journey towards total quality management through ISO 9000 certification. A study of small and medium sized enterprises in Singapore. International Journal of Quality & Reliability Management, 15(5), 364-71.
Kanji, G.K. (1998). An innovative approach to make ISO 9000 standards more effective. Total Quality Management, 9(1), 67-78.
Rada, R. (1998). Corporate shortcut to standardisation. Communications of the ACM, 41(1), 11-15.
Kochan, A. (1993). ISO 9000: Creating a global standardisation process. Quality, October, 2634. Lee, T. (1995). The experience of implementing ISO 9000 in Hong Kong. Asia Pacific Journal of Quality Management, 4(4), 6-16. Llopis, J., & Tarí, J.J. (2003). The importance of internal aspects in quality improvement. International Journal of Quality and Reliability Management, 20(3), 304-24 McAdam, R., & McKeown, M. (1999). Life after ISO 9000: An analysis of the impact of ISO 9000 and total quality management on small businesses in Northern Ireland. Total Quality Management, 10(2), 229-41. Meegan, S.T., & Taylor, W.A. (1997). Factors influencing a successful transition from ISO 9000 to TQM: The influence of understanding and motivation. International Journal of Quality & Reliability Management, 14(2), 100-17. Meeus, M.T.H., Faber, J., & Oerlemans, L.A.G. (2002). Why do firms participate in standardization? An empirical exploration of the relation between isomorphism and institutional dynamics in standardization. Working Paper Department of Innovation Studies, Utrecht: University of Utrecht.
Rada, R. (2000). Consensus versus speed. In K. Jakobs (Ed.), IT standards and standardisation: A global perspective (pp. 19-34). Hershey, PA: Idea Group Publishing. Rust, R.T., Zahorik, A.J., & Keiningham, T.I. (1994). Return on quality (ROQ): Making service quality financially accountable. Journal of Marketing, 59(2), 58-70. Seddon, J. (1997). Ten arguments against ISO 9000. Managing Service Quality, 7(4), 162-8. Singles, J., Ruel, G., & Van de Water, H. (2001). ISO 9000 series—Certification and performance. International Journal of Quality and Reliability Management, 18(1), 62-75. Stephens, K.S. (1994). ISO 9000 and total quality. Quality Management Journal, 2(1), 57-71. Taylor, W.A. (1995). Senior executives and ISO 9000. The International Journal of Quality and Reliability Management, 12(4), 40-57. Terziovski, M., Samson, D., & Dow, D. (1997). The business value of quality management systems certification: Evidence from Australia and New Zealand. Journal of Operations Management, 15(1), 1-18. Terziovski, M., Power, D., & Sohal, A.S. (2003). The longitudinal effects of the ISO 9000 certification process on business performance. Euro-
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pean Journal of Operational Research, 146(3), 580-95.
endnotes 1
Tsiotras, G., & Gotzamani, K. (1996). ISO 9000 as an entry key to TQM: The case of the Greek industry. International Journal of Quality and Reliability Management, 13(4), 64-76. Tummala, V.M.R., & Tang, C.L. (1996). Strategic quality management, Malcolm Baldrige and European Quality Awards and ISO 9000 certification: Core concepts and comparative analysis. International Journal of Quality and Reliability Management, 13(4), 8-38. Weiss, M., & Cargill, C. (1992). Consortia in the standards development process. Journal of the American Society for Information Science, 43(8), 559-565. Weiss, M.B.H., & Sirbu, M. (1990). Technological choice in voluntary standards committees: An empirical analysis. Economics of Innovation and New Technology, 1, 111-133. Wiele, A. van der, Dale, B.G. & Williams, A.R.T. (1997). ISO 9000 series registration to total quality management: The transformation journey. International Journal of Quality Science, 2(4), 236-52. Williams, N. (1997). ISO 9000 as a route to TQM in small to medium sized enterprises: Snake or ladder? The TQM Magazine, 9(1), 8-13. Yahya, S., & Goh, W.K. (2001). The implementation of an ISO 9000 quality System. International Journal of Quality and Reliability Management, 18(9), 941-66.
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http://www.bsi-emea.com/Quality/Overview/WhatisaQMS.xalter (Retrieved August 20, 2006) The following example illustrates the use of the EU Acquired Rights Directive for ICT offshoring: “When multinational companies are applying ‘global sourcing’ strategies, suppliers can be played off against one another and as a result, they can either win or lose a contract. In the case of long-term contracts for service delivery, staff can be transferred together with their jobs to do the same work for their new boss. This is necessary to ensure the continuity and quality of the service delivery. Such transfer of employees from one service provider to another requires special attention to maintaining the acquired working conditions. Recently, Siemens Business Services (SBS) took over a contract of Electronic Data Systems (EDS) to supply business services to the Coca-Cola Company. SBS agreed with the EDS on the transfer of a number of dedicated employees from the latter to the former in certain countries. These transfers were carried out within the EU Acquired Rights Directive that regulates the transfer of working conditions.” Accessed August 29, 2006, from http://www.union-network. org/Uniindep.nsf/f73728e0eb1f5ca5c1257 00e003ccdbb/$FILE/MOOSNewsletter3. pdf#search=%22acquired%20rights%20 directive%20eu%20offshoring%22
This work was previously published in Handbook of Research on Global Information Technology Management in the Digital Economy, edited by M. Raisinghani, pp. 312-327, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 7.6
Establishing Trust in Offshore Outsourcing of Information Systems and Technology (IST) Development Rachna Kumar Alliant International University, USA
AbstrAct This chapter explores the issues and challenges faced in establishing trust among individuals and teams participating in offshore outsourcing of software development projects. While technical and project management aspects have been recognized as important for the success of offshore software outsourcing, the issue of establishing trust among the participants has not received specific recognition. The chapter discusses the special characteristics of offshore software outsourcing relationships which make the establishment of trust a challenge. The discussion emphasizes that a specific and planned approach of utilizing communication and coordination technology in software offshoring relationships will contribute towards trust formation. Use of communication and coordination technology in offshoring en-
vironments is recommended to be designed to increase the culture of communication, to establish a culture of transparency in communication, and to systemically maintain a trail and evidence of the communication.
IntroductIon Over the past few years several organizations have embarked on ambitious offshoring projects as a way to respond to pressures for keeping profits up and keeping costs down. “Offshoring” refers to the practice of organizations transitioning part of their business operations to lower cost overseas destinations. The basic idea entails utilizing equivalent skill levels at lower wages in the destination country.
The information systems and technology (IST) services industry segment has been the forerunner in establishing offshore bases. Offshore IST services, involving applications development, maintenance, and R&D services, is approximately 75% of the total global offshoring market today (Hatch, 2005). Several other industry segments have been increasingly utilizing offshore destinations, notably among them hardware and software maintenance, network administration, help desk services, call centers, and telemarketing organizations. The latest entrant in the offshoring race is back-office processing for a myriad of industries ranging from banking and insurance to retail banking, deposits and lending, credit card processing, and mortgage processing to corporate finance and accounting. Irrespective of the industry or organizational operations, offshored projects entail distance coordination between virtual teams. As a result, one major characteristic shared by all offshored projects is that they are, in large part, IST-mediated. Unlike in offshoring relationships of the manufacturing era, the offshoring relationships in the IST-mediated era (sometimes referred to as computer-mediated communication) require very frequent coordination, sometimes multiple times a day. The ironic part of this close and frequent coordination is the fact that offshored relationships are usually managed by employees in the home-base country, who often harbor ill-will and insecurity against the offshore partners because offshore projects almost always threaten jobs in the home-base country. In addition, differences in culture and work practices between the two participating teams from two different countries also increase the tension between the two teams in the offshoring context. With this backdrop, establishing trust between participating individuals and teams in offshoring relationships is critical for success in the project but presents several challenges. In this chapter we will explore some of the structural and procedural mechanisms that can be utilized and
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established as antecedents for trust in offshoring relationships. A short case study of offshoring relationships in a large Fortune 100 company in the U.S. is utilized for illustrating a trust building framework in action. In the case study discussed here, the offshoring destination nation is India, an increasingly popular venue.
bAcKground The explosion of the Internet along with a boom in telecommunications capacity has made it feasible to get IST projects completed remotely. The communications between the U.S. and offshore locations became not only feasible but also efficient and cheap. At the same time, foreign offshore locations produced a worker pool that was welltrained in a wide array of technology skills, who also worked at much lower wages compared to the U.S. So, with available supply of technology skills, favorable economics of IST production, and a means to accomplish the projects, offshoring became a natural business initiative. Experts assess the global offshore market to be close to a $300 billion opportunity and the size of offshored IST services and business processes is regarded to have almost tripled since 2001 (Chakrabarty, Gandhi, & Kaka, 2006). They estimate that the market has grown by nearly 21% a year in the past five years and over the next five years it will grow by an additional $80 billion. Offshoring is a relatively young market and widely different statistics and trends are quoted. For example, according to Robinson and Kalakota (2004), a McKinsey and National Association of Software and Service Companies (NASSCOM) study estimates that the information technology and enterprise solutions market in India is likely to reach $142 billion in 2009. This estimate contrasts with the current price tag of $532 billion to provide these services in the United States. The difference of $390 billion would be the net savings for the U.S. economy due to offshoring. The
Establishing Trust in Offshore Outsourcing
information technology and enterprise solutions sector has the potential to generate job opportunities for more than 1.1 million Indians by 2008 (Robinson & Kalakota, 2004). By every account though, the offshoring market segment is large and is growing at an impressive rate. In the past 10 to 15 years, the vast majority of offshore service jobs have gone to just a handful of cities in India, Eastern Europe, and Russia. Only a handful of cities, such as Hyderabad, Bangalore, Delhi, Mumbai, Budapest, Prague, and Moscow, have been popular as offshore destinations. Currently, new destinations in China, Dubai, South Africa, Morocco, Argentina, and Brazil are growing in popularity (Farrell, 2006). India has been in a leadership position as an offshore destination and has captured two-thirds of the current global market for offshored IST services and almost half of the global market for all offshored business processes. The major motivation for going offshore is popularly understood as cost savings (Bennatan, 2002; Stiffler, 2006). But a survey of articles published over the past 2 to 3 years finds several other advantages being recognized (Bennatan, 2002; Daga & Kaka, 2006; Hayes, 2003; Jones, 2003; Lacity & Willcocks, 2001; Overby, 2003; Pfannenstein & Tsai, 2004). Other advantages include availability of scarce and cutting-edge software development skills in destination countries, increased responsiveness to business needs and customer service in the home base country, and ability to shorten time to market in the home base country. At the same time, with the benefit of experience from almost half a decade of offshoring in the IST arena, several risks and concerns are being recognized as well. Chief among these concerns are loss of intellectual property, loss of core business knowledge, vendor delivery failure, scope creep, turnover of key personnel, and political instability (Davison, 2004). As a result, several studies have tried to estimate success factors as well as success rates of offshore projects. A study of 116 outsourcing projects found that 38% of
outsourcing arrangements were successful, 35% were failures, and 27% had mixed results relative to cost, quality, flexibility, and other considerations (Kern & Willcocks, 2003). Market watchers, AMR Research Inc., surveyed more than 220 companies and found less than one-third were satisfied with the amount of money they had saved by outsourcing (Travis & Durocher, 2003). More recently, a survey by McKinsey & Co. found that offshore outsourcing can reduce an organization’s costs by anywhere from 45% to 55% (Daga & Kaka, 2006). But Gartner reports that most customerservice offshore outsourcing not only fails, but could end up costing companies one-third more than keeping them in-house (Huntley, 2006). Their study concludes that almost 80% of companies that outsource customer service operations to cut costs won’t be successful in realizing the targeted cost savings. Thus, while offshore outsourcing appears to be an unstoppable tidal wave, the success of any offshoring endeavor is far from certain. Following this, the IST industry has come to a point where there is a general realization that the soft skills of people and project management are as important to the success of offshore outsourcing as the hard skills of technical and computer system implementation (Doh, 2005; Foote, 2004; Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003; Robinson & Kalakota, 2004). Success factors for offshore outsourcing projects have been emphasizing organizational and human factors in managing projects in addition to factors such as contracts, technology, vendor selection, and infrastructure standards. Given this context, building trust among the members of the offshore outsourcing team is one of the most important people and project management factors to impact the success of offshoring projects. However, building trust in this environment has several challenges and pitfalls. For one, the team is a virtual team located in two separate locations and time zones and the team works and interacts primarily with IST and computer media-
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tion. In addition, while the team has to adjust to cultural differences and boundaries, they start off by being naturally pitted against each other since the onshore members’ work has been intentionally transitioned offshore for cost savings. The next section will further discuss the nature of these challenges with a view to understand their implications for designing systems and procedures for building trust among the members.
2.
Issues And chAllenges IST offshore outsourcing teams have six separate components contributing to the character of their relationships. The “outsourcing” component of the relationship gives rise to (1) virtual teams in separate locations, and, (2) in-house vs. outsource employee rivalry and insecurity. The “offshore” component of the relationship gives rise to (3) teams working across cultural differences and geographical boundaries, and, (4) teams working under separate time zones. The IST component of the relationship gives rise to (5) teams being required to be in close coordination with frequent work hand-offs due to the compatibility requirements of IST projects, and, (6) teams’ work and interaction is primarily conducted with computer and other IST mediation. This section will attempt to help the reader understand the interplay of each of these characteristics with trust building among the team members. 1.
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Virtual teams: Virtual teams can cross boundaries related to time, distance, and organization. As members of a virtual team come together on projects, integration of work methods, organizational policies, norms and traditions, workplace cultures, and task technologies becomes difficult. Sometimes establishing an unambiguously shared goal is itself an exercise and increases coordination and collaboration overheads. This leads to the possibility of miscommu-
3.
4.
nication, misunderstanding, and alienation that are the antecedents of mistrust in relationships. In-house vs. outsource employee rivalry and insecurity: In outsourcing initiatives, varying degrees of competition between the in-house and offshore teams exist. The inhouse team is trying to prove the organization still needs them and the outsource team postures for greater responsibilities. This leads to possibilities of sabotaging success, low employee morale, and employees being unwilling and unsupportive participants of the endeavor. Establishing trust among the members in such an environment is a difficult task. Teams work across cultural differences and geographical boundaries: Overcoming cultural differences is not merely differences in language and social interaction. Cultural differences also include differences in work practices, work conduct and behavior, manager roles and responsibilities, professional values and assumptions. For example, cultures that function with large power distances and hierarchical distance between boss and employees find it hard to trust colleagues from individualistic cultures where individuals are given more control over their work and output. Teams work under separate time zones: Depending on the geographical distance between the target and destination locations, especially in offshoring situations, the time difference could be between 8 to 15 hours. In fact organizations prefer this because then their offshore outsourced teams are working “24/7” round the clock and the implications for customer service or for time to market are very beneficial. However, it also means that real-time coordination and communication is almost non-existent and most communication is IST mediated or asynchronous. Building trust among members in
Establishing Trust in Offshore Outsourcing
5.
6.
such situations requires presence of several structural mechanisms which produce hard facts of trustworthiness. Teams in close coordination and frequent work hand-offs: When offshore outsourced teams work on IST projects, the projects typically require much coordination between the in-house and offshore teams. Compatibility issues necessitate that work originated by members in one team often gets re-worked and commented upon by members of the other team. If the roles and responsibilities are not very well defined and the processes are not entirely transparent throughout the team, the possibility of ruffled egos and of misconstrued work requests could cause problems. This excessive interdependence requires ever present evidence of the competence and commitment of team members to establish trust within the team. Teams work and interact primarily with computer and other IST mediation: The absence of face-to-face mediation presents a special challenge which has to be made up by the technology used to complete work as well as communicate and coordinate. The richness of media and cues in personal interaction has been widely documented as leading to establishing rapport, understanding, working relationships, and trust. Video or phone conferencing, net meeting, e-mails are all used but fall short in providing social presence and data richness at the same time. Establishing trust in such settings will require specific promotion of opportunities and incentives that go beyond the naturally occurring work mediation. And yet, since major portions of work is done on the computer and computer-mediation is both the tool for work as well as the media for monitoring and coordinating the relationship, in some senses the openness and complete sharing of work components can actually be harnessed for increasing the trust in offshoring relationships.
crItIcAl success FActors: It oFFshore outsourcIng And trust buIldIng Several issues and challenges were discussed in the context of offshored outsourcing of IST projects. This section will synthesize their implications and consolidate them into a common framework for trust building in the offshoring context. This framework can then be utilized in analyzing the trust building procedures and mechanisms in place at a successful Fortune 100 organization engaged in extensive offshoring.
role of communication and Information sharing in building trust Trust is a very complex area of interpersonal communication within the context of any type of business transactions, but when trust formation is needed among members of different cultural backgrounds, it can be even more complex. Building trust in business relationships and economic transactions requires business partners or teammates to establish continuity and predictability through cooperative transactions. Additionally, the formation of trust among virtual team members emphasizes open, consistent, transparent information and communication. In the virtual environment of online shopping, Kim, Ferrin, and Rao (2003) found that trust among members is positively related to satisfaction and confirmation of expected trust feeds back and leads to increased trust. Similar mechanisms for trust formation in ecommerce environments have been observed in several other studies (Ba, Whinston, & Zhang, 1999; Gefen, 2000, 2002). Zolin and Hinds (2002) looked at how trust would be formed in geographically dispersed work teams. They found that trust was based on an individual’s perceptions about the team member’s perceived performance and perceived trustworthiness. A study done by Jarvenpaa and Leidner in 1999 looked at the area of
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trust and communication in global virtual teams. These teams used e-mail and message boards to communicate and came from different countries and cultural backgrounds. Jarvenpaa and Leidner (1999) found that frequency and richness of communication influenced trust levels. Even when communication levels were high, trust was hard to maintain in virtual teams with homogenous members; when culturally diverse teams are formed, the trust factor becomes even harder to obtain. In studies where virtual teams have been observed making financial decisions requiring trust, it has been found that teams build trust depending on explicit and implicit communication about how much information disclosure they are exposed to about their team mates’ performance, competence, and operations (Jettmar & Rapp, 1996; Johnson-George & Swap, 1982). The good news is that results of these studies show that the culturally diverse virtual teams which utilized rich, transparent, specific, systematic, and adequate levels of communication built high levels of trust and were more capable of managing the uncertainty, complexity, and expectations of the virtual environment than teams who did not build the same levels of trust. Their performance, where measured, was also better than the low trust teams. Another good point to note here is that several of the issues which were discussed above in the context of building trust in offshoring teams could be well addressed with communication and information sharing. The offshoring enterprise can define what rich, transparent, specific, systematic and adequate levels of communication would mean for their enterprise or project. They would also design procedures and mechanisms to institutionalize and systematize these communication requirements appropriate to their own content. Figure 1 synthesizes the issues and their link to the factor of communication and information sharing as a trust building mechanism.
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role of cultural sensitivity in trust building Culture refers to a set of learned values, attitudes, meanings, and norms that are shared by members of a group. It is a collective programming that gives scripts of behaviors and understanding and separates one group of people from another. Culture becomes second nature for members of the group and affects the group members’ assumptions, behaviors, and expectations about work habits, practices, norms, and decisions. Interestingly, culture is often partially or totally hidden and usually has to be learned and absorbed over a period of time naturally. However, with the realization that cultural differences and insensitivity to cultural practices can have serious consequences on the success of two groups working together, several training programs have been designed. The culture of a virtual team is a blend of national, organizational and functional culture (Jarvenpaa, Knoll, & Leidner, 1998). In offshore outsourcing, differences in the national culture and generally accepted norms between the home country and the destination country become a critical factor to counteract. Offshore outsourcing teams are usually multinational from at least two nations, sometimes more. Although organizational culture is also different and can very importantly impact expectations of norms, quality, schedules, values, and so on, national culture differences are accepted as the major hurdle to overcome in offshore outsourcing teams. The most widely accepted framework for understanding impacts of national culture in the global arena comes from Geert Hofstede’s work in 1967, discussed and expanded in his 1980 book (Hofstede, 1980). From responses of IBM employees in many countries, he discerned patterns of national behavior and derived four dimensions along which national cultures can be classified. The first, power distance, refers to degree of hierarchical difference and inequity
Establishing Trust in Offshore Outsourcing
Figure 1. Synthesizing critical success factors for building trust in offshoring situations
ImplIcAtIons
crItIcAl trust FActor
teams Work and Interact primarily with computer and other Ist mediation
Easy Access to modes and options for communication providing rich social cues and informational base for relationships.
Easy access to communication and coordination technology.
teams in close coordination and Frequent Work handoffs
Specific, transparent, systemic procedures for work flow needed which don’t assume trust.
Specific, transparent communication of procedural mechanisms without assuming trust and for evidence of trustworthy interaction.
TRANSPARENT COMMUNICATION WITH BODY OF EVIDENCE
teams Work under separate time Zones
Structural mechanisms to: (1) allow easy access to team members’ work & output; (2) document evidence of trustworthy interaction history.
Specific, transparent communication of procedural mechanisms without assuming trust and for evidence of trustworthy interaction.
TRANSPARENT COMMUNICATION WITH BODY OF EVIDENCE
teams Work across cultural differences and geographical boundaries
Training for cultural sensitivity and inclusion.
Cultural sensitivity training.
CULTURAL SENSITIVITY TRAINING
In-house versus outsource employee rivalry and Insecurity
(1) Transparent communication; (2) Documentation of roles and work output of participants.
Specific, transparent communication of procedural mechanisms without assuming trust and for evidence of trustworthy interaction.
TRANSPARENT COMMUNICATION WITH BODY OF EVIDENCE
virtual teams
(1) Specific, transparent, systemic procedures for work flow needed which don’t assume trust; (2) Easy access to structural mechanisms for communication and coordination.
Specific, transparent communication of procedural mechanisms without assuming trust and for evidence of trustworthy interaction.
TRANSPARENT COMMUNICATION WITH BODY OF EVIDENCE
among people that the population expects and accepts. Nations with low power distance have a culture where team members are more participative and managers seek inputs from members and get challenged on decisions routinely. In a high power distance nation such as India, Mexico or Singapore, offshore team members might expect to be told their task responsibilities rather than be self-starters. On the other hand, offshore team members from low power distance nations such as the U.S. or Germany might openly challenge
COMMUNICATION & COORDINATION TECHNOLOGY
It oFFshore outsourcIng
trust buIldIng mechAnIsm
Issues
their superior if given very restrictive steps for task performance. The second culture dimension, uncertainty avoidance, is the extent to which people from the culture are comfortable with uncertainty. Team members from nations (such as Mexico and Japan) with high uncertainty avoidance look for detailed plans, need defined rules and procedure, formalized responsibilities and outcomes. Cultures with low uncertainty avoidance, such as India and U.S., are more comfortable with ambiguous situations and open-ended
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Establishing Trust in Offshore Outsourcing
plans. The third dimension for national culture, individualism-collectivism, is the degree to which people prefer to act as individuals rather than as members of a group. Teams in cultures with high collectivism expect cohesive work groups, expect team members to put the needs of the team before their individual needs. Examples of high collectivist nations are most of the Asian nations. Low collectivist nations, such as U.S. and Australia, have teams which accept individual needs and identities, act in the job situations with individual preferences. The fourth culture dimension, masculinity-femininity, refers to the extent to which the people are oriented towards the traditionally masculine concerns such as earnings, possessions, success achievements as opposed to concerns such as nurturing, caring, sharing. Team members from high masculine cultures such as Mexico and U.S. will tend to be motivated with earnings and achievements much more intensely than team members from low masculine cultures such as Norway and Sweden. Certainly cultural sensitivity is important for team performance and achievement of task goals. How does cultural sensitivity impact trust building amongst offshore outsourcing teams? Duarte and Snyder (2001) have explained that the cultural dimensions impact team members’ expectations and understanding of each others’ integrity, performance and competence, and person quality about concern for the team members. For example, expectations on performance and competence could be affected if a team member from a high power distance culture does not go the extra mile in follow through of the task deliverable. The high power distance culture will expect to be given specific go-aheads and authorizations from the boss before making any decisions, while the low power distance culture would expect that the need for the deliverable would guide the member to take the decision initiative in his/her own hand. The evaluation of performance and competence of members in cultures with high uncertainty avoidance could
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similarly get affected because it may seem that they cannot work independently and need to be given detailed plans and directions. As another example, members from highly collectivist cultures may evaluate a team member as having doubtful integrity because they actually transfer out of a project due to concern for their own individual career gain while ignoring concern for the team performance. As a final example, over-emphasis on wage earnings and achievement recognition of a team member might appear to other members from low masculine cultures as implying low person quality, having low concern for the welfare of the earnings of other team members. Members from highly masculine cultures see this as merely “looking out for oneself,” a moral responsibility in all individualist cultures. So, cultural dimensions provide us a way to understand differences and address them so that trust building (via expectations of performance and competence, integrity, and person quality) is not diminished. Organizations engaged in offshore outsourcing need to provide cultural sensitivity training in order to allow their team members not only to understand the differences but also to understand how they impact personal trust as well as how to learn ways and means to address the differences such that trust among individuals gets built seamlessly and surely.
role of communication and coordination technology in building trust Technology and systems’ role as it facilitates task completion of IT projects is critical to performance, but not our focus here. This section will discuss its role as it facilitates the dimension of communication and coordination, leading to trust building. Technology mediated communication and coordination impacts the perception and evaluation of integrity, of performance and competence, and of personal quality of other team members.
Establishing Trust in Offshore Outsourcing
Technology for communication and coordination can be classified in several different ways (Rice, 1980). Primarily, the technology options can lead to synchronous, real-time communication and coordination or to asynchronous, anytime, anyplace communication and coordination. Synchronous communication and coordination options tend to have higher social presence that refers to promoting a personal connection and individual association leading to better possibilities of trust building. The second dimension to note is whether the media provides rich information in the communication and coordination process involving video, audio and data or lacks one of these types of information. The more the information provided about the team members interaction, the more the cues and data to build trust. Information rich media and technology options are therefore usually preferred in trust building phases of offshore outsourcing endeavors. A third dimension for evaluating technology options for communication and coordination is that of permanence. Permanence is described as the degree to which the technology is capable of creating a historical record of team communications and coordination (Poole & Jackson, 1993). From the point of building trust, technology mediation should be transparent and specific with the ability to provide a body of evidence and history of interactions. When team members utilize history
of performance, integrity and personal concern to form expectations of future, it promotes trust. Audio phone conferences are sometimes not high on permanence while e-mails and bulletin boards are high on a interaction history. Figure 2 outlines some technology options in these different categories. In summary, technology can act as a medium for open, specific, transparent, rich, and adequate communication and coordination between offshore teams, thus contributing to trust building. Technology options can also be utilized to send specific or subtle messages which reinforce expectations about the performance and competence of team members, or of the integrity expectations of the team, or about the personal values of the team. The characteristics of social presence, information richness, and permanence can be utilized to advantage in fostering structural mechanisms such as interaction history (e.g., using e-mails) or fostering social connections (e.g., introducing new recruits in a video conference rather than through e-mails). Organizations engaged in offshore outsourcing should evaluate technologies for their communication needs given the type of project tasks and situational needs they have. In addition, they should carefully lay out mechanisms to be followed when using the technology options in order to specify procedures and mechanisms so that team members can clearly expect speci-
Figure 2. Technology mediation options for communication and coordination
Time factor
SYNCHRONOUS
ASYNCHRONOUS
Audio Only
Phone conference
Phone messages
Video and audio
Video conference
Video messages
Data Only
Data conferencing, chats
E-mail, fax, letters, group calendars, bulletin boards,
Video, audio, data
Electronic meeting systems, net meeting
Information Richness
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ficity and transparency in communication and coordination.
trust buIldIng In oFFshore outsourcIng endeAvors: A cAse study A Fortune 50 company that we will call OOE, with revenues of about $80 billion, is currently a big player in the offshore outsourcing of software development. The company is a pioneer in technology and a market leader in its IST product segment. It is headquartered in the U.S., with branches throughout the west coast. OOE first started exploring the possibility of offshoring software development for one of its $25 million product division in 2000. Cost and performance pressures were cited as the major motivations for considering offshoring. Between 2001 and 2004, the company started small offshoring projects in several destinations, more specifically in India, China, Mexico, Brazil, and Ukraine. The operation in India became their major offshore center and grew in size dramatically. In 2006, their India center supported software development volume requiring over 1,000 full time equivalent developers. These developers are organized into several teams developing software for the company’s product division.
organization to organization level of trust The first phase of trust building which the organization engaged in was organization to organization. OOE had to pick a vendor in India to offshore and outsource their software development. The trust at the level of organization-to-organization involved three different dimensions: (1) Will the performance and competence promised actually be delivered? (2) Will our intellectual property (IP) shared in the software development project be sold to competitor companies? And, (3) Will
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our IP shared in the software development project be exploited for personal gain by the vendor company in other situations? Legal contracting was the means by which the trust in the IP-related issues could be best ensured. In the early phases, organization-to-organization level of trust is often one of faith. Although legal contracting is used to specify several items, it still leaves room for breaks in expectations of performance and failures due to miscommunication and learning. The organization-to-organization level of trust is best built with evidence of performance and history of competence. In later phases, when larger volumes of development are planned, the IP issues are solved by establishing solely owned subsidiaries which employ developers with inhouse loyalties.
team member to team member level of trust In the next phase, the team member to team member trust must be built in order for projects and tasks to be completed and delivered in time, within budget, and of required quality. This phase is where the critical success factors discussed earlier in this chapter come into play. Interestingly, the part of offshore outsourcing team based in the U.S. as well as the ones based in India have not undergone any specific training regarding trust building in computer mediated offshoring situations. However, several of the issues such as cultural sensitivity, communications, and coordination had to be addressed as OOE management gathered experience in this endeavor. Cultural sensitivity is one area that has been well understood as critically impacting working relationships. All U.S. team members are given brief training on the cultural differences, norms, practices, values, traditions, and expectations of the Indian workplace and the Indian employee. Similarly, the Indian employees are trained in cultural differences in the U.S. workplace. However, a piece of training that was missing was
Establishing Trust in Offshore Outsourcing
how an understanding of cultural differences can be translated into ways and behaviors to foster trust between team members. The team members learn it over time with varying levels of success. For example, since India is high on the power distance dimension of national culture, one idea would be to train the U.S. team member to honor reporting structures and hierarchy when their U.S. counterpart is supervising a project module. If the U.S. team member continues to make or challenge decisions as is appropriate in the U.S., it could lead to a perception of low trustworthiness by the supervisor as well as by team peers. Cultural sensitivity training from the point of view of trust building is essential to complete the cycle of understanding the issues and then having the tools to address the issues to the advantage of the business goals and the team. Communication and coordination for trust building is the other success factor and has several procedural and structural mechanisms to systemically implement and institutionalize it. The very nature of software development performed by team members separated by time and distance requires mechanisms for communication and coordination which are often computer-based. This organization has adopted high speed, high bandwidth video conferencing utilities as well as electronic meeting (audio and data) options such as Net Meeting. In addition, some of the other mechanisms such as open and shared team calendars, Web dissemination of minutes and action items, regularly scheduled status meetings, and commonly shared and developed meeting agendas are strongly woven into the organizational culture as well as encouraged. The communication and coordination between team members is emphasized to be frequent, transparent with log and audit trails, specific, and as rich as possible. Interestingly, the general approach OOE used in the offshore outsourcing management of trust was to employ natural mechanisms to transfer the U.S. organizational culture to the offshore unit. The thinking seemed to be that if the U.S.
organizational culture and mechanisms worked for establishing adequate levels of trust among team members, it would work for the offshore unit as well. Although that may be true, it would still be beneficial to systematically announce the specific structural and procedural mechanisms that need to be followed for task performance, thereby maximizing the evidence and opportunity for trust building. For example, if a time limit for responding to any e-mail is publicly set within the offshoring teams, then the expectation for follow-through on commitments and coordination will be ensured. Moreover, if trust building is emphasized as one of the desirable dimensions of performance within teams and specific procedures such as surveys which conduct a trust audit or seminars which specifically talk about trust mechanisms and procedures for fostering trust are conducted, this issue of communication and coordination for building trust would be more intentionally managed. OOE’s approach currently is to trust the expertise of individual managers and team members to adopt sound principles of interpersonal business relationships and of communication for team building. No specific customization of expertise is undertaken to the needs of offshoring, to the needs of outsourcing, to the needs to technology mediation, or to the needs of virtual software development.
conclusIon And Future trends Trust formation in offshore outsourcing teams is one of the most critical needs for project and team success. The teams are virtual and separated by time and distance which makes trust building more challenging. The teams are in two nations separated by cultural differences and that adds complexity to building and maintaining trust relationships. These teams are developing software which has compatibility and modularity issues making coordination and work hand-off require-
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ments very frequent. So, trust building in such teams presents special challenges and pitfalls. Although critical for success, several organizations deal with trust building in offshoring situations in ways similar to the one home-base organization case. Managerial skills of the managers and interpersonal skills of the team members are often trusted as the mechanisms to ensure trust building in offshoring contexts. Several structural and procedural mechanisms naturally instituted for communication and coordination and for cultural sensitivity training do in fact promote trust formation. But the approach is not specific and several trust fostering opportunities are neglected or ignored. Several offshore outsourcing team members learn by trial and error and are forced to learn on the job as they hit the ground running. This may result in many tensions and pressures being generated and extended growing pain phases when setting up offshore outsourcing operations. As a result, offshore outsourcing teams might be functioning in suboptimal relationships which impact performance, results, and goal achievement. Specific training designs that emphasize trust as a desirable characteristic in the workplace and impart knowledge, tips, and ideas about fostering trust in offshore outsourcing teams should be undertaken. In addition, specific structural and procedural mechanisms need to be designed and instituted which make trust building systemic and a natural outcome rather than an art dependent on the team members’ individual skills. The use of technology for communication and coordination is already part of the fabric of the workplace today. In offshore IT outsourcing teams these technology options can be harnessed to increase evidence and history of performance and behaviors, thereby improving trust amongst team members. These ideas could possibly contribute to resolving some of the mysteries of mixed performance results and cost savings in offshore IT outsourcing endeavors.
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reFerences Ba, S., Whinston, A. W., Zhang, A. (1999, December 12-15). Building trust in the electronic market through an economic incentive mechanism. In Proceedings of the 20th International Conference on Information Systems (pp. 208-213). Charlotte, NC. Bennatan, E. M. (2002, November). Globalization: Boon or bane. Cutter IT Journal, 15(11). Chakrabarty, S. K., Gandhi, P., & Kaka, N. (2006). The untapped market for offshore service. McKinsey Quarterly, Issue 2. Daga, V., & Kaka, N. F. (2006, May). Taking offshoring beyond labor cost savings. The McKinsey Quarterly. Davison, D. (2004). Top 10 risks of offshore outsourcing. CIO Magazine. Retrieved March 15, 2007, from http://search.cio.techtarget.cotn/ orginalComent/0,289142.sidl9_gci950602,00. html Doh, J. (2005, May 3). Offshore outsourcing: Implications for international business and strategic management theory and practice. Journal of Management Studies, 42, 696-704. Duarte, L. D., & Snyder, N. T. (2001). Mastering virtual teams: Strategies, tools, and techniques that succeed. Jossey-Bass, a Wiley Company, San Francisco, USA. Farrell, D. (2006, June), Smarter offshoring. Harvard Business Review, 85-92. Foote, D. (2004, September). Recipe for offshore outsourcing failure: Ignore organization, people issues. ABA Banking Journal. Gefen, D. (2000). E-commerce: The role of familiarity and trust. The International Journal of Management Science, 28, 725-737. Gefen, D. (2002, Summer). Reflections on the dimensions of trust and trustworthiness among
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online consumers. ACM SIGMIS Database, 33(3), 38-53. Hatch, P. J. (2005). Offshore 2005: Research, findings and conclusions (White Paper). Retrieved March 15, 2007, from http://www.ventoro.com/ Offshore2005ResearchFindings.pdf Hayes, I. S. (2003, August). Ready or not: Offshoring: Is it a win-win game? McKinsey Global Institute Research Papers. Hofstede, G. H. (1980). Culture’s consequences: International differences in work related values. Beverly Hills, CA: Sage Publications. Huntley, H. (2006, March). Offshore deal failure: What providers need to know. Gartner Research. Jarvenpaa, S. L., Knoll, K., & Leidner, D. E. (1998). Is anybody out there? Antecedents of trust in global virtual teams. Journal of Management Information Systems, 14(4), 29-64. Jarvenpaa, S. L., & Leidner, D. E. (1999). Communication and trust in global virtual teams. Organization Science: A Journal of the Institute of Management Sciences, 10(6), 791-815. Jettmar, E. M., & Rapp, M. W. (1996). Computer mediated communication: A relational perspective. Paper presented at the Annual Convention of the Western States Communication Association, Pasadena, CA. Johnson-George, C., & Swap, W. C. (1982). Measurement of specific interpersonal trust: Construction and validation of a scale to assess trust in a specific other. Journal of Personality and Social Psychology, 43(6), 1306-1317. Jones, W. (2003). Offshore outsourcing: Trends, pitfalls, and practices (Executive Report No. 4(4)). Cutter Business Technology Council. Kern, T., & Willcocks, L. (2003). Exploring relationships in information technology outsourcing: The interaction approach. European Journal of Information System, 11(1), 3-23.
Kim, D. J., Ferrin, D. L., & Rao, H. R. (2003) A study of the effect of consumer trust on consumer expectations and satisfaction: The Korean experience. In ACM International Conference Proceedings, 50, 310-315. Kishore, R., Rao, H. R., Nam, K., Rajagopalan S., & Chaudhury, A. A. (2003, December). Relationship perspective on IT outsourcing. Communications of the ACM, 46(12), 87-92. Lacity, M. C., & Willcocks, L.P. (2001). Global information technology outsourcing: In search of business advantage. Chichester, West Sussex, England: John Wiley & Sons. Overby, S. (2003). The hidden costs of offshore outsourcing. CIO Magazine. Retrieved March 15, 2007, from http://www.cio.com/archive/090103/ money.html Pfannenstein, L., & Tsai, R. (2004). Offshore outsourcing: Current and future effects on American IT industry. Information Systems Management, 2(4), 72-80. Poole, M. S., & Jackson, M. H. (1993). Communication theory and group support systems. In L. M. Jessup & J. S. Valacich (Eds.), Group support systems: New perspectives. Old Tappan, NJ: Macmillan. Rice, R. E. (1980). Computer conferencing. In B. Dervin & M. J. Voight (Eds.), Progress in communication science. Norwood, NJ: Ablex. Robinson, M., & Kalakota, R. (2004). Offshore outsourcing: Business model, ROI, and best practices. Alpharetta, GA: Mivar Press. Stiffler, D. (2006). Outsourcing transition case study: Customized communication speeds savings. Travis, L., & Durocher, C. (2003, November). Strategic use of offshore resources can double labor savings (AMR Research Report).
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Zolin, R., & Hinds, P. J. (2002) Trust in context: The development of interpersonal trust in geographically distributed work teams. Center for Integrated Facility Engineering.
This work was previously published in Computer-Mediated Relationships and Trust: Managerial and Organizational Effects, edited by L. Brennan and V. Johnson, pp. 253-266, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 7.7
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk Evaluation Guodong Cong Huazhong University of Science and Technology, China Jinlong Zhang Huazhong University of Science and Technology, China Tao Chen Huazhong University of Science and Technology, China Kin-Keung Lai City University of Hong Kong, China
ABSTRACT
INTRODUCTION
Risks evaluation is critical for the success of IT offshore outsourcing. Based on fuzzy group decision-making (FGDM) and variable precision fuzzy rough set (VPFRS), this article proposes a new integrated model, variable precision fuzzy rough group decision-making (VPFRGDM), to evaluate the risk in IT offshore outsourcing. This model can improve the capability to handle potential errors fairness and efficiency of risk evaluation, and is verified by a numerical case.
Offshore outsourcing is impacting many industries especially in information technology (IT). According to the Meta Group IT consulting firm’s forecasting, the annual offshore outsourcing rate will continue to grow at 20%, reaching $10 billion in 2005 (Rottman, 2006). Offshore outsourcing brings up opportunities and changes for both companies and many countries. Its benefit, as literally and practically illustrated, includes substantial cost savings, increased productivity, better
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
access to new technology, and higher quality of service. However, there have been reported a lot of unsuccessful cases, for example, cost exceeding, deterioration in service quality, or even cultural conflict, and so forth. The Gartner IT consulting firm estimates a 50% failure rate for offshore outsourcing initiatives (Rottman, 2006). To some extent, IT offshore outsourcing is more risky than IT outsourcing. IT offshore outsourcing inherits naturally risks of IT outsourcing, such as information dissymmetry, high dependency on service providers, and contains some unique characteristics. The first one is cost, as IT offshore outsourcing means much higher expense on selecting providers and instructing transaction, which might even offset the expected savings from outsourcing; the second one is culture, as IT offshore outsourcing involves potential conflict in region, moral, or even history between two countries in addition to differences between two company styles. Moreover, there might be more risk and difficulty in policy, law, security, and intellectual property, and so forth. The complication mentioned results in more difficulty to achieve objectives of cost, quality, and schedule. In order to guarantee the success of offshore outsourcing, risks need to be evaluated and managed more precisely due to the unique challenges posed by geographical, cultural, and other differences. IT offshore outsourcing risk attracts much research interest and is discussed at great lengths. Rottman (2006) suggests that both the people involved in offshore projects and the projects themselves must be treated differently from internally developed projects, and instructs to establish processes that ensure successful delivery and protection of its intellectual property. Verhoef (2005) identifies the most prominent quantitative input needed to close goal-driven outsourcing deals, forwards five executive issues enabling rational decision making concerning cost, duration, return, ,financing, and especially risk aspects of outsourcing. Doh (2005) suggests that international labor and environmental
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standards and corporate codes of conduct could mitigate some of the most intense concerns raised about offshoring. Kliem (2004) believes that the risks should be managed throughout the life cycle of the offshore outsourcing projects to achieve benefits, and provides a framework of risks associated with outsourced projects and a process that can be used to develop a matrix of risks and controls appropriate for the project’s objectives. Qu and Brocklehurst (2003) outline a framework for analyzing transaction costs and uses the framework for pinpointing where China is unable to compete with India. Nair and Prasad (2004) utilize a SWOT analysis technique for identifying a potential IT offshore outsourcing location. Carmel and Nicholson (2005) examined the factors using transaction cost theory (TCT) three stages, identify nine mitigation approaches to reduce transaction costs for small firms. Bahli and Rivard (2005) validated measures of risk factors based on transaction cost theory, which are adopted in this article. The papers mentioned focus mainly on identification, analyzing framework, prioritization, and management planning of IT offshore outsourcing risks; yet further emphasis is needed on quantitative methodology for analyzing and assessing risks in order to support decision-making in uncertain environments. As literally and applicably demonstrated, IT offshore outsourcing risk evaluation is a complex, unstructured, or semi-structured decision-making process involving linguistic assessment and ambiguity. Additionally, IT related technology, product, and service evolve too fast for any decision-maker to handle. Consequently, a synthetic methodology is needed, which is able to utilize both experts’ knowledge and historical data, able to handle the ambiguity involved in data evaluation, able to eliminate bias of possible personal preference or discrimination, and the capability to handle potential errors.. FGDM is not only fit for handling the ambiguity involved in data evaluation and the vagueness of linguistic expressions (e.g., very high, high,
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
middle, low, very low), but is also fit for alleviating bias arising from particular evaluator’s personal preferences, which has been applied in propulsion/ maneuvering system selection (Ölçer & Odabasi, 2005) and selection among computer integrated manufacturing systems (Bozdağ, Kahraman, & Ruan, 2003) and so on. Meanwhile,variable precision fuzzy rough set (VPFRS) forwarded by Mieszkowicz-Rolka & Rolka (2004), which inherits the advantages of both VPRS (Ziarko, 1993) and fuzzy rough set (FRS) by Dubois and Prade (1992). With a given upper limit u, VPFRS admits some level of misclassification, which is useful in analysis of fuzzy knowledge with uncertainty in inconsistent decision tables. Therefore it is reasonable to incorporate VPFRS and FGDM to risks in evaluate IT offshore outsourcing. This article proposes a new integrated model called variable precision fuzzy rough group decision-making (VPFRGDM) to evaluate IT offshore outsourcing risk. After the historical knowledge is represented in a fuzzy decision table (FDT), based on recent work on FRS (Shen & Jensen, 2004) and VPFRS (Mieszkowicz-Rolka & Rolka, 2004), the model is utilized as follows: under a certain upper limit u of admissible inclusion error, it derives the weight of each feature to guide the subsequent process, turns linguistic evaluation given by evaluators into triangular fuzzy number (TFN), and then rates and ranks the aggregative risks of alternatives with the fuzzy technique for order performance by similarity to ideal solution (TOPSIS) approach in FGDM. Finally, it evaluates the risk on the whole admissible inclusion error interval to optimize decision-making. The model enhances the reasonableness of FGDM, further reduces bias possibly caused by preferences of evaluators, and improves the efficiency with better flexibility and comprehensiveness in IT offshore outsourcing risk decision-making. This article is organized as follows: The second section first summarizes the theoretical background of basic ideas of VPFRS and TFN that are relevant to this work. Then it describes
the proposed model in detail. The third section, based on the work of Bahli and Rivard (2005), newly develops main metrics of the risk index system and briefly explains the reason of selecting those metrics. The fourth section, in order to demonstrate the applicability of the model, provides a numerical case of a synthetic evaluation of IT offshore outsourcing risk. The fifth section then provides the final concluding remarks and future work required.
THE MODEL At the beginning of this section, some basic definitions, notations, and principles will be reviewed briefly. They will be used throughout this article, until otherwise stated.
Basic Ideas of VPFRS As shown in Shen and Jensen (2004), let I =(U, A) be an information system, where U is a non-empty set of finite objects (the universe of discourse); A is a non-empty finite set of features. Let C D = A and C D = ∅, where C is the set of conditional features and D is the set of decision features.
Basic Concepts of the Rough Set Theory (RST) For any P ⊆ A, IND(P) represents an indiscernible relation where IND(P)={(x, y)□U 2|∀a□P, f(x)=f(y)}.
(1)
The partition of U, generated by IND(P) is denoted as U/P. Let X ⊆U, the P-lower approximation of a set is defined as PX={x| IND(P) ⊆X}.
(2)
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A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
Let P and Q be equivalence relations over U, then the positive region is defined as POSp(Q) =
PX ,
(3)
X ∈U / Q
which is the set of all elements of U that can be uniquely classified into different classes of the partition U/Q, by the knowledge in features P.
Fuzzy Lower Approximations of FRS For typical FRS applications, the decision values and the conditional values may all be fuzzy. The fuzzy P-lower approximations could be alternatively defined as: PX
( x ) = sup min( F ∈U / P
F
( x ),inf{ y ∈U
F
( y ) → X ( y )})
,
( x ) = sup
X ∈U / Q
PX
( x ),
(5)
which means that object x will not belong to the positive region only if the equivalence class it belongs to is not a constituent of the positive region. Using the definition of the fuzzy positive region, the dependency function can be defined as follows: ’ P
(Q) =
|
POS P ( Q )
( x) |
card (U )
=
∑
x∈U
POS P ( Q )
card (U )
( x)
AB
( x) → ( x) = A 0
B
( x)
if
A
( x) > 0
otherwise
(6)
(7)
Only the proper elements of A (support of A) are considered as relevant. Herein the “→” stands for the fuzzy implicator. There are many kinds of definitions of fuzzy implicators, the Lukasiewicz implicator is adopted for its advantage (Mieszkowicz-Rolka &Rolka, 2004), where x → y = min (1, 1 − x + y). With the well known notion of α-cut, by which for any given fuzzy set A, a crisp set Aα is obtained as follows: Aα = {x□X: µA(x)≥α} where a ∈ |0, 1|.
,
where card (U) stands for the cardinality of set U.
2116
It is natural to bring VPRS into the fuzzy environment. A way of evaluating the variable precision fuzzy rough approximations is introduced (Mieszkowicz-Rolka & Rolka, 2004). Consider a fuzzy compatibility relation R, and denote it by compatibility class Xi on universe U. Any given fuzzy set F defined on the universe U can be approximated by the obtained compatibility classes. In order to evaluate the inclusion degree of a fuzzy set A in a fuzzy set B regarding particular elements of A, a new fuzzy set is obtained in a way, which is called the fuzzy inclusion set of A in B and denote by AB. To this end an implication operator → is applied as follows:
(4)
where “→” stands for fuzzy implication and µF (x) is the membership degree of an object x ∈ F. The membership degree of an object x ∈ U, belonging to the fuzzy positive region, can be defined as: POS P ( Q )
The Mean Rough Fuzzy u-approximation of VPFRS
(8)
With a given upper limit u, for the u-lower approximation of the set F by R is a fuzzy set on X/R with the membership function, which is defined as follows:
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
R uF
( Xi ) =
where f iu = inf inf
x∈siu
f iu . 0
if ∃
Xi
u
( x) →
F
( x ), Siu = supp( X i X iF ) u
= sup{ ∈ (0,1] : e ( X i , F ) ≤ 1 − u}
otherwise
(9)
The set Si contains those elements of the u approximating class Xi that are included in F at least to the degree αu provided that such αu exists. The membership f i is then determined using the u “better” elements from Si instead of the whole u class Xi. The given definition helps to prevent the situation when a few “bad” elements of a large class Xi significantly reduce the lower approximation of the set F. The measure of α-inclusion error eα (A,B) of any nonempty fuzzy set A in a fuzzy set B: power (supp(A A )) . power (A)
e ( A, B ) = 1 −
respectively, of the fuzzy number Ã, and M stands for the middle value. As shown in (Chen, 2000), the sum of two fuzzy numbers Ã1 = (L1, M1, U1) and Ã2= (L2 , M2 , U2) is: Ã1 ⊕ Ã2 = (L1, M1, U1) ⊕ (L2 , M2 , U2) = (L1 + L2 , M1 + M2 , U1 + U2). (12) The distance between two TFNs can be calculated as follows: d ( A1 , A 2 ) =
1 [( L1 − L2 ) 2 + ( M 1 − M 2 ) 2 + (U 1 − U 2 ) 2 ] 3 .
(13)
The Model and Analysis
B
(10)
where power(F) = ∑mF (xi)(∀xi ∈ U).
Triangular Fuzzy Numbers Fuzzy numbers are a fuzzy subset of real numbers, representing the expansion of the idea of the confidence interval. TFN are adopted to characterize the membership function of the linguistic terms. According to the definition (Laarhoven & Pedrycz, 1983), a TFN should possess the following basic features: A fuzzy number à on R would be a TFN if its membership function mà :R → [0, 1] is equal to: ( x − L) /( M − L) L ≤ x ≤ M ( x ) = (U − x ) /(U − M ) M ≤ x ≤ U A otherwise . 0
In FGDM, one of the most popular methods to evaluate alternatives is FTOPSIS (Chen, 2000). That is, the chosen alternative should have the biggest relative closeness to the ideal solution. In the model, VPFRS is initially utilized as a pre-processor for FGDM. Assume that there are a total of m features, denoted as Ci (i=1, 2,…, m). In fact, IT offshore outsourcing risk evaluation on alternatives can also be dealt with as a FGDM problem, which may be described by means of the following sets: a set of n evaluators called E = {E1, E2 ,..., En} ii. a set of N possible alternatives called A = {A1, A2 ,..., An} iii. a weight vector of feature WC = (WC , WC ,..., WC ), derived from fuzzy decision table; and that of evaluator W E = (WE ,WE ,...,WE ), attained from distance iv. a matrix of fuzzy evaluations E = ( E ij), where E ij = (LEij, MEij, UEij,) is the evaluation of feature j of alternai.
1
(11)
TFN can be denoted by à = (L, M, U), where L and U stand for the lower and upper bounds,
m
2
1
2
n
2117
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
tive i and n
n
k =1
k =1
E ij = (LEij, MEij, UEij,) = n
(∑ LEijkWEk ,∑ MEijkWEk ,∑UEijkWEk ). k =1
(14)
Herein, ( Lkij , M ijk ,U ijk ) is the TFN given by evaluator k to feature j of alternative i. The fuzzy positive-ideal solution (FPIS, denoted as Ã*) and fuzzy negative-ideal solution (FNIS, denoted as Ã-), are preset beforehand or calculated from evaluations. In this article, they are represented as TFN matrix and are obtained as follows:
v.
Definition 1. The u-dependency function of feature D on feature Ci is u Ci
( D) = sup
sup {
R uF
X j ∈U / Ci F ∈U / D
( X j )}
.
(17)
Referring to Shen and Jensen (2004), for any x ∈ U, if the definition of lower approximation in equation (4) is alternatively defined as follows ( x ) = sup {min(
PX
F ∈U / P
à =( A1* , A2* ,...., Am* )T , where A *j = ( LA*j , MA*j ,UA*j ) = ( MAX {LEij }, MAX { MEij }, MAX {UEij }).
F
( x ),
X
( x ))}
.
(18)
*
1≤ i ≤ N
1≤ i ≤ N
Then equation (6) will be:
1≤ i ≤ N
(15)
’ Ci
Ã-=( A1 , A 2 ,...., A m ) , − − − − where Aj = ( LAj , MAj ,UAj ) −
−
− T
=
= ( MIN { LEij }, MIN { MEij }, MIN {UEij }) 1≤ i ≤ N
1≤ i ≤ N
1≤ i ≤ N
( D)=
∑
x∈U
∑
x∈U
POSCi ( D )
( x)
card (U ) sup sup {min(
X j ∈U / Ci F ∈U / D
F
( x ),
Xj
( x ))}
.
card (U )
.
(16)
With a given FDT, rating and ranking of the risk of each alternative, in the model, involves four steps: Firstly, under a certain upper limit u, calculate the weight of each feature. Secondly, calculate the weight of each evaluator. Thirdly, rate and rank the risk of each alternative. Fourthly, utilize the mean method to evaluate the risk on the whole admissible inclusion error interval and make the final decision. Step 1: Calculate the weight of each feature
There is a linkage between the two definitions in equations (17) and (19), namely, under certain conditions, the two definitions are equivalent as shown in proposition 1, which means C ’( D) can be calculated by either definition. i
Proposition 1. For a given upper limit u, if ∃ (Xj) > 0 (∀Xj ∈U/Ci, ∀F ∈U/D), then ’ Ci
( D) ==
sup
X j ∈U / Ci
sup {card (supp( X j F )) ×
F ∈U / D
card (U )
Assume that there are m conditional features and one decision feature in FDT in all, denoted as Ci (i=1,2…m) and D respectively. Then set P= {Ci}, Q= {D}, according to equations (8) ~ (10), the dependency of each feature will be calculated individually.
2118
(19)
Proof. According to equation (5), (18) & (19): ’ Ci
( D) =
∑
x∈U
POSci ( D )
card (U )
( x)
R uF
R uF
( X j )}
. (20)
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
=
∑
sup
x∈U
sup {min(
X j ∈U / Ci F ∈U / D
F
( x ),
Xj
After the weight of the feature is calculated, the weight of the item is calculated through AHP, within the same hierarchical feature. The reason is, compared to the weight of the feature that is critical to the evaluation result, the weight of the item is small enough to deny the bias. Though it could also be determined by calculating TFN, and so forth, it is efficient and practical to calculate them through AHP. While all the weights are calculated, they are fixed in the system and guide the whole rating and ranking process.
( x ))}
card (U )
According to equation (9), fi =
=
power ( X i F ) card (supp( X i F ))
∑
min(
x∈U
F
( x ),
Xi
( x ))
card (supp( X i F ))
That is card(supp(Xi F)) × f i = ∑ x∈U min(mF (x), mx (x)) i
According to equation (9): R uF
( X i ) = f i or 0,
and if ∃ R u F(Xi) > 0 (∀F ∈ U/Ci, ∀Xj∈ U/D), which means R u F(Xi) = f i, then card(supp(X i F )) × R u F (X i) =
In order to reflect the difference between each evaluator and others, construct the distance matrix D’ as follows:
Since the dependency degree implies the importance of a conditional feature for the decision feature, the weight of each conditional feature can be calculated on the basis of the dependency function. Then the weight of feature Ci will be calculated as follows: u Ci
m
This completes the proof.
WCui =
N
∑ ∑
( X j )} =
F
F ∈U/D ’ Ci
R uF
min(
x∈U
After the weight of the feature is calculated, it is time to determine the weight of each evaluator, which will be calculated through the distance from each other (Xie, Zhang, & Lai, 2005). Based on equation (13), the distance between evaluator k and l will be a weighted Euclidean distance defined as follows:
( x ))
Since sup{a, 0} = a, ∀a ≥ 0, thus: X j ∈U/Ci
Step 2: Calculate the weight of each evaluator
(21)
0 d u ( E1 , E2 ) d u ( E1 , E3 ) ⋅ ⋅ ⋅ d u ( E1 , En ) 0 d u ( E2 , E3 ) ⋅ ⋅ ⋅ d u ( E2 , En ) ⋅⋅⋅ D ’ = symmetrical 0 0 .
(23)
n
Let d ku = ∑ d u ( Ek , E j ).
(24)
j =1
which reflects the difference between evaluation of evaluator k and of the others. The less is,d ku the
2119
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
more similar is the evaluation of evaluator k to those of the others. Thus, weight of evaluator k will be: W = u Ek
1/ d ku
.
n
∑ (1/ d k =1
u k
Step 3: Evaluate the risk of each alternative under a given upper limit u After all the weights are calculated, the distance of each alternative to FPIS (Ã*) and FNIS (Ã-) respectively will be calculated. The distance of alternative i to FPIS (Ã*) will
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
be seen in Box 1. Similarly, the distance of alternative i to FNIS (Ã-) will be seen in Box 2. The relative closeness to the ideal solution of alternative i is: RCiu =
d u ( Ai , A − )
[d u ( Ai , A − ) + d u ( Ai , A * )]
i = 1,2,..., N .
(28)
And the larger RCiu (i = 1, 2,..., N) is, the better the alternative will be. Additionally, if there were two or more alternatives very close to each other by RCiu, there will be a complementary standard that, the larger du(Ãi, Ã*) is, the better the alternative will be. Step 4: Evaluate the risk on the whole admissible inclusion error interval Since the ranking of results is calculated under certain u, it is reasonable to consider the mean relative closeness to the ideal solution on the whole interval [γ, 1]. From the process, it is easy to know WCu is piecewise constant function of u, and that u WE a linear function of u (∀i ∈ [1, m], k ∈ [1, n]) Since the TFNs are fixed, then functions du(Ãi, Ã*) and du(Ãi, Ã-) are Riemann integral and the mean distance will be shown in Box 3. Thus, the mean risk of alternative i will be: i
k
RCi =
d ( Ai , A − )
d ( A , A − ) + d ( A , A * ) i i
,
i = 1,2,..., N
have been other offshore outsourcing risk index systems focusing on risk origin, such as financial, technical, and legal (Kliem, 2004). However, it is confusing and controversial to analyze and evaluate risk this way due to different viewpoints or standards of different groups, as well as due to the difficulty in validating the index system and so on. To solve the problem, the TCT is a better option. The reasons are manifold. First of all, since the primary reason for outsourcing IT operation is to reduce cost, the cost should undoubtedly be the first objective to consider. Moreover, as any outsourcing deal shows, typical challenges and associated risks mainly consist of how to collaborate the resources among two organizations that are geographically or culturally spread apart. That is to say, risks from the process of transaction are the key to outsourcing risks. Finally, if risks in outsourcing are analyzed with just one uniform measurement, it will be more efficient, less controversial, and easily understood, as demonstrated in the case of Intel in measuring IT value. All in all, particular requirement is investigated in IT offshore outsourcing, and the index system is established on the basis of the work (Bahli & Rivard, 2005). That is, IT offshore outsourcing risk is divided into three features, with 10 items altogether. The more important is, for the convenience of monitoring and measuring, the main metrics for each item are newly developed, as shown in Table 1. The newly developed metrics for each risk item are briefly explained as follows: 1.
(31)
THE INDEX SYSTEM OF IT OFFSHORE OUTSOURCING RISK Categorizing IT offshore outsourcing risks is not only the initial phase but is also the deterministic factor of the correctness of risk evaluation. There
Asset specificity refers to investments in physical or human assets that are dedicated to providing a specified service. In order to guarantee and enhance the capability of service providing, suppliers should focus on what the clients need and require. Since safety failure is always the most hazardous threat, suppliers should trace the threats and invest in safety related hardware and software. Needless to say, financial condition,
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A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
Table 1. Risk factors in IT offshore outsourcing operations Risk features
Risk items
Main metrics (newly developed) Software/hardware for the highest level of safety of supplier investment
Asset specificity (A1)
Financial condition of supplier HR structure of supplier Training to be provided by supplier
Small number of suppliers (A2) Transaction
Reputable suppliers>4 Trustworthy suppliers>2 Technology obsolescence and effect on safety
Uncertainty (A3) Times of client requirement changing in main task Internal relatedness (A4)
Quantity of affected internal process and possible loss
External relatedness (A5)
Degree of interdependency among outsourced operations and possible loss
Measurement problems (A6)
Percentage of unclearly defined jobs Agreement on degree of satisfaction, cost saving
Degree of expertise with the IT operation (B1) Client
Qualification of end users Performance of IT department Maturity of project management
Degree of expertise with outsourcing (B2)
Degree of understanding service level agreement (SLA) within end users group Qualifications of the service team
Degree of expertise with the IT operation (C1) Supplier
2122
Matching degree of business and IT architecture Level of service oriented architecture (SOA)
Degree of expertise with outsourcing (C2)
2.
Quantity of successful projects
human resource structure, and training are the basics to ensure normal operation and efficient work. Multiple sources will reduce the risk in switching suppliers, which offer the client sufficient space to control and collaborate with suppliers. The two numbers listed in Table 1 are the bottom-line for the client to keep this kind of risk within an appropriate degree, though the cost might increase slightly.
Communication ability Maturity of project management
3.
Uncertainty reflects human limitations to predict changes in environment, no matter where the changes come from. As the fast evolving technology is one of the most important characteristics of the IT offshore industry, and changes in client’s requirements pose tremendous challenge and will affect the performance of IT offshore outsourcing, it is necessary and reasonable to concentrate on the effect of changes in technology and the resultant changes in requirements.
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
4.
5.
6.
Relatedness, which is sometimes called interdependence or connectedness, refers to the interconnections between tasks, business units or functions, and even processes (Doh, 2005). Relatedness is universal and complicated, which increases the difficulty in analyzing and measuring it. A practical way to measure the relatedness risk among main processes is to assess approximately the probability and possible loss, which is similar with the generally used method for measuring of risk exposure. Two types of measurement problems have been identified (Alchian & Demsetz, 1972): one is the team production, where it is impossible to evaluate individual contributions of the parties; the other is the measure of the fair value of these contributions. As a matter of fact, disagreement over measurement may bring negative effect on provider’s morale and attitude, which will lead to service deterioration. Based on a detailed and flexible SLA, the first topic for both client and supplier to bear in mind is how to measure satisfaction. Meanwhile, unclearly defined jobs often trigger disagreement and need much attention.
7.
8.
Expertise is defined as “special skill or knowledge that is acquired by training, study, or practice” (Sinclair, 1992). End users and IT department are more than the receivers of service, since they play an important role in evaluation and even judgment of service. Moreover, IT service involves so many intangible and ambiguous factors, for example, satisfaction, that it is indispensable and beneficial to require their qualification, including technical, managerial, and even moral. Furthermore, IT department usually manages IT assets of the whole organization and offers aid for both users and providers, its performance should be taken into account because of its effect on the performance of IT offshore outsourcing. IT offshore outsourcing is executed via projects, which requires outstanding ability of project management. Just as mentioned, end users are important in the offshore outsourcing process, so the better they understand SLA, the better they will cooperate with suppliers, which will certainly propel and enhance IT offshore outsourcing. The requirements for suppliers are different from, and undoubtedly more strict than, the client. The team, namely, the executor
Table 2. Fuzzy decision table of risks in outsourcing IT operations U
B
A
C
D
L
M
H
L
M
H
L
M
H
L
M
H
1
0.8
0.2
0
0
0.3
0.7
0.7
0.3
0
0.85
0.15
0
2
0.75
0.25
0
0.2
0.8
0
0.75
0.25
0
0.8
0.2
0
3
0.6
0.3
0.1
0.25
0.65
0.1
0.65
0.35
0
0.6
0.4
0
4
0.2
0.7
0.1
0.1
0.7
0.2
0.9
0.1
0
0.7
0.3
0
5
0.25
0.75
0
1
0
0
0.65
0.35
0
0.7
0.3
0
6
0
0.85
0.15
0
0.1
0.9
1
0
0
0.3
0.7
0
7
0.25
0.75
0
0.65
0.35
0
0.1
0.6
0.3
0.1
0.8
0.1
8
0
0.25
0.75
0.9
0.1
0
0.8
0.2
0
0.5
0.5
0
9
0
0.3
0.7
1
0
0
0.85
0.15
0
0.1
0.5
0.4
10
0
0.2
0.8
0
0.8
0.2
0.2
0.7
0.1
0
0.2
0.8
2123
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
and implementer of service, should possess sufficient expertise accumulated in similar projects. Deep insight, clear understanding, and professional expression of the client’s business process are critical for service quality. Besides maturity of project management, communicating skills of the supplier can be seen as one of the principal deterministic factors of successful project management, especially for the existence of culture difference and language obstacle.
A NUMERICAL CASE FSC is one of the biggest semiconductor companies in the U.S., about $6B in annual revenue. This time, they want to develop a kind of embedded software, so they will select a supplier from three companies in P.R. China, who have provided similar IT service for FSC. The generation of FDT is fulfilled among CIO and experts from the IT department and the business department, by analyzing the historical data in most representative cases, both successful
Table 3. Evaluation to each item E
Alt 1
1
2
A5
A6
B1
B2
C1
C2
L
VL
L
L
H
M
L
M
L
L
L
VL
M
M
L
L
M
M
L
L
L
VL
M
L
L
VL
M
H
L
VL
M
M
L
L
M
M
VL
2
M
L
L
L
M
M
M
M
VL
M
3
L
M
L
H
M
M
M
VL
L
H
M
M
L
VL
M
M
M
M
L
VL
2
M
L
M
M
L
L
L
M
M
M
3
L
M
L
L
M
VL
M
L
M
L
M
L
M
M
VL
L
L
L
M
L
2
L
M
L
L
M
M
M
M
L
M
3
L
M
L
M
M
VL
M
L
M
L
L
M
VL
M
H
M
M
L
M
M
2
L
M
L
L
M
M
M
M
L
VL
3
L
M
VL
L
M
M
L
L
L
M
1 5
A4
M
1 4
A3
L
1 3
A2
M
3 1 2
A1
Table 4. Linguistic value of evaluator E
2124
VH
H
M
L
VL
1
30
40
50
40
50
60
60
75
85
75
85
90
90
95
100
2
35
45
55
50
60
70
65
75
80
80
85
90
85
92
98
3
30
40
50
45
55
65
65
75
80
80
88
90
85
95
100
4
25
35
50
40
50
60
60
70
80
70
80
85
80
90
100
5
30
40
55
40
55
65
65
75
88
75
85
90
85
95
100
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
Table 5. The TFN evaluation of each feature by evaluators E
Alt
A
B
C
L
M
U
L
M
U
L
1
69.4
80.45
87.25
65.25
78.5
86.75
75
85
90
2
71.5
82.85
89.7
60
75
85
78.75
88.75
93.75
3
75.6
85.75
91.6
84.75
91.5
96.5
55
68.75
78.75
1
74.5
82.42
87.68
70.25
78.5
83.5
70
79.25
84.5
2
72.7
81
86.2
65
75
80
80
87.75
93.5
3
70.15
78
83.8
78
86.05
91.7
72.5
78.75
85
1
71.8
81.48
85.9
65
75
80
81.25
89.75
92.5
2
71.8
81.08
84.9
70.25
79.55
83.5
65
75
80
3
79.65
88.55
91.8
74.75
83.45
86.5
68.75
78.25
82.5
1
68.1
78.2
85.55
70
80
85
62.5
72.5
81.25
2
66.6
76.7
83.8
60
70
80
67.5
77.5
83.75
M
U
1
2
3
4
5
3
72.5
82.6
91.65
66.5
76.5
83.25
62.5
72.5
81.25
1
69.75
80.35
89.58
71.5
81.5
89.3
65
75
88
3
73.75
83.85
92.18
65
75
88
77.5
87.5
92.5
4
73.75
83.85
92.18
75
85
90
72.5
82.5
89.5
and failed. Based on Table 1, the team generated FDT as shown in Table 2. In Table 2, feature ‘Transaction’ is denoted as ‘A,’ ‘Client’ as ‘B,’ ‘Supplier’ as ‘C,’ the risk of the decision as ‘D;’ ‘L’ represents ‘low,’ ‘M’ ‘medium,’ and ‘H’ ‘high.’ Every data is the membership degree of an object belongs to the class ‘low,’ ‘medium,’ or ‘high,’ within the feature.
Risk Rating and Ranking The evaluators are divided into five groups of evaluators, including CIO, IT department, two user groups, and experts from a consulting company. Herein γ=0.4, namely u ∈ [0.6, 1]. The process is described as follows: Herein five linguistic values are used, namely, very high, high, medium, low, and very low; and they are abbreviated into VH, H, M, L, and VL respectively. To improve the accuracy, each evaluator will give a TFN to each item and the
Table 6. Weights of features under various u u
WC1
WC2
WC3
[0.6,0.67)
0.321
0.302
0.377
[0.67,0.79)
0.327
0.288
0.384
[0.79,1]
0.46
0
0.54
TFN of each feature will be the weighted sum of the items. The evaluation of each evaluator is shown in Table 3. In Table 3, the linguistic values seem to be the same among different evaluators, but the value is different from each other. TFN of each evaluator to each linguistic term are shown in Table 4, which reflect the difference among evaluators’ opinion on the linguistic terms. In the tables, ‘evaluator’ will be abbreviated into ‘E’ and ‘alternative’ into ‘Alt,’ and they will be used throughout this article, until otherwise stated. The TFN evaluation of each feature, after calculation and transformation, is shown in Table 5.
2125
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
Table 7. Weight of evaluator under various u u
WE1
WE2
WE3
WE4
WE5
[0.6,0.67)
0.194
0.224
0.178
0.184
0.22
[0.67,0.79)
0.195
0.224
0.178
0.184
0.219
[0.79,1]
0.202
0.218
0.173
0.192
0.214
Step 1: Calculate the weight of each feature According to equations (8) ~ (10), (21) & (24), the weight of each feature will be calculated, for example, when u= 1, the weight vector of each feature will be (WC , WC , WC )=(0.46,0,0.54). Similarly, all the weight of each feature under variable u can be calculated; the results are shown in Table 6. It is easy to see that the weights vary with u. When u is big, they vary violently but they get stable after u is small enough (0.6< u <0.79). It demonstrates that, the risk of mistaken classifica1
2
[0.6,0.67)
[0.67,0.79)
[0.79,1]
4
5
6
Step 2: Calculate the weight of each evaluator According to equation (22) ~ (25), when u = 1, the weight vector of each evaluator is: (WE , WE , WE , WE , WE ) = (0.202, 0.218, 0.173, 0.192, 0.214). 1
3
2
5
4
Similarly, all the weights vectors of each evaluator under various u can be calculated; the results are shown in Table 7. Table 10. The result with EFWA algorithm Alt
L
M
U
Rate
Alt
P-dis
N-dis
RCi
Rank
1
70.027
79.907
86.525
L
1
4.163
3.061
0.424
3
2
70.025
80.059
86.638
L
2
5.233
4.507
0.463
2
3
71.728
81.111
87.454
L
3
4.499
5.306
0.541
1
1
4.086
3.05
0.427
3
2
5.019
4.597
0.478
2
3
4.589
5.098
0.526
1
1
3.89
3.557
0.478
2
2
2.062
6.573
0.761
1
3
6.562
2.418
0.269
3
Table 9. Final result of alternatives with the mean method
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3
(WA1, WA2, WA , WA , WA , WA ) = (0.24, 0.06, 0.20, 0.15, 0.10, 0.25) (WB1, WB2) = (0.35, 0.65), (WC1, WC2) = (0.75, 0.25)
3
Table 8. The rating and ranking results under various u u
tion is significant when u is big, but the risk will be under control when u is small enough. The weight vector of items is calculated through AHP and maintain unchanged as follows:
Table 11. The result with the possibilistic method Alt
LE
ME
UE
AR
s2
RANK
1
70.027
79.907
86.525
79.363
11.343
3
2
70.025
80.059
86.638
79.483
11.502
2
3
71.728
81.111
87.454
80.605
10.305
1
Table 12. The result with the method FTOPSIS
Alt
P-dis
N-dis
Rank
Alt
P-dis
N-dis
1
3.296
3.318
0.502
2
1
4.030
3.272
0.448
3
2
2.618
5.619
0.682
1
2
5.207
4.395
0.458
2
3
4.852
3.727
0.434
3
3
4.388
5.283
0.546
1
RCi
RCi
Rank
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
It is easy to see that weights of evaluators vary with u less violently than the weights of the features. However, there occurs a subtle fluctuation, which will affect the evaluation result too. After all the weights are calculated, according to equation (28) ~ (31), the risk of each alternative will be calculated. The evaluation results, according to various u, are shown in Table 8, and the results of the mean method in Table 9, where ‘positive distance’ and ‘negative distance’ are abbreviated into ‘P-dis’ and ‘N-dis’ respectively. Based on Table 9, the final decision-making is to select alternative 2 and designate alternative 1 as backup. To demonstrate the advantage of the model, this article will also employ three other methods: the fuzzy evaluating algorithm (EFWA) presented by Ngai (2005), the possibilistic method by Carlsson and Fuller (2001), and FTOPSIS (Chen, 2000). For convenience and ration, the evaluation data are all from Table 5, the weight of each evaluator is assumed be the same, and the weights of each feature is (0.321, 0.302, 0.377) when u falls in (0.6, 0.67). Then the overall risk level and result of the three alternative obtained with EFWA algorithm is shown in Table 10, where the rate is Linguistic Value. And the result with the possibilistic method and FTOPSIS are shown in Table 11 and Table 12 respectively.
Discussion With the results in Table 8 compared, it is easy to see that the ranks of the alternatives are varying. The reason of these variations is the violent fluctuations in weights of features when u is big. When u>0.79, the weight of supplier’s expertise is zero, which is inconsistent with common sense. The fact is, from the client’s view, its own expertise is indeed less important and less relevant than the supplier’s. However, the weight, namely, the importance of client’s expertise, should never be denied. The extraordinarily small weight demon-
strates the fact that, even though fuzzy method has been adopted to alleviate possible errors in data preprocessing, there might still exist significant classification errors, which might even be hazardous enough to cause negative influence leading to mistaken decision-making. When u<0.79, either the weight or the evaluation turns stable and more reasonable. It is the evidence that the classification error and its associated negative influence are under better control. The final result in Table 9 is clear and convincing, which demonstrates the effectiveness of the mean method to eliminate bias. The risk of the 2nd alternative is the lowest, which takes all possible u into consideration and is more reliable. With the results in Table 10~12 compared, it is uneasy or even impossible to distinguish the best alternative from others, even mistaken rank occurs. However, this is not an issue in Table 9, which demonstrates the advantage of the model. The model is capable of dealing with all possible precision u and all possible evaluation is incorporated into just one model. It is also clear and ‘transparent’ enough for decision-makers to find out the stable and reasonable subinterval of u, that is, the convenience to probe into all ways of evaluation under variable precision requirements. In other words, they can easily decide which precision level to select in order to make a satisfactory resolution. Additionally, the process of calculating weight is simplified. Consequently, the decision-making efficiency is improved.
CONCLUSION This article focuses on facilitating evaluation of IT offshore outsourcing risk, and proposes a model to evaluate IT offshore outsourcing risk, which is applied to select the most appropriate service supplier. The index system based on the TCT integrates risk features into three categories, which is easy to measure, and highlights the characteristics of IT offshore outsourcing. Furthermore, in the
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A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
model, the weight of feature is derived directly from the fuzzy decision table, the weight of the evaluator is attained by distance, the rating and ranking of risk is achieved with the FTOPSIS approach, and the final decision is made on the whole admissible inclusion error interval. The model further enhances the capability to handle potential errors, improves fairness and efficiency in IT offshore outsourcing risk measurement and decision-making, which is verified by the provided numerical case. As demonstrated in this article, the model is not only particularly suitable for FGDM in analyzing IT offshore outsourcing risk, it could also be generalized to other domains and other industries. Furthermore, VPFRS could certainly be more helpful in FGDM. For instance, since the greatest advantage of FRS is the capability to induct fuzzy rules, further research may be conducted in searching for fuzzy rules and fuzzy reasoning, which might be another tool to solve universal problems in evaluation of, and knowledge discovery in, risk. Thus, the decision-making process in risk management could be fulfilled by multiple methods and the decision-making could also be more efficient and reliable.
ACKNOWLEDGMENT The work described in this article was fully supported by the grant from National Natural Science Foundation of China (No. 70571025).
REFERENCES Alchian, A. A., & Demsetz, H. (1972). Production, information cost and economic organization. American Economic Review, 62(1), 777-792. Bahli, B., & Rivard, S. (2005). Validating measures of information technology outsourcing risk factors. Omega, 33, 175-187.
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Bozdağ, E. C., Kahraman, C., & Ruan, D. (2003). Fuzzy group decision making for selection among computer integrated manufacturing systems. Computers in Industry, 51(1), 13-29. Carlsson, C., & Fuller, R. (2001). On possibilistic mean value and variance of fuzzy numbers. Fuzzy Sets and Systems, 122, 315-326. Carmel, E., & Nicholson, B. (2005). Small firms and offshore software outsourcing: High transaction costs and their mitigation. Journal of global information management, 13(3), 33-54. Chen, C. T. (2000). Extensions of the TOPSIS for group decision-making under fuzzy environment. Fuzzy Sets and Systems, 114, 1-9. Doh, J. P. (2005). Offshore outsourcing: Implications for international business and strategic management theory and practice. Journal of management studies, 42(3), 695-704. Dubois, D., & Prade, H. (1992). Putting rough sets and fuzzy sets together. In R. Slowinski (Ed.), Intelligent decision support: Handbook of applications and advances of the rough sets theory (pp. 203-232). Dordrecht: Kluwer Academic Publishers. Kliem, R. (2004). Managing the risks of offshore IT development projects. Information systems management, 21(3), 22-27. Laarhoven, P. J. M., & Pedrycz, W. (1983). A fuzzy extension of Saaty’s priority theory. Fuzzy Sets System, 3, 229-241. Mieszkowicz-Rolka, A., & Rolka, L. (2004). Variable precision fuzzy rough sets. In J. F. Peters et al. (Eds.), Transactions on rough sets I, LNCS (3100) (pp. 144-160). Berlin Heidelberg: Springer-Verlag. Nair, K. G. K., & Prasad, P. N. (2004). Offshore outsourcing: A SWOT analysis of a state in India. Information systems management, 21(3), 34-40.
A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk
Ngai, E. W. T., & Wat, F. K. T. (2005). Fuzzy decision support system for risk analysis in e-commerce development. Decision Support Systems, 40(2), 235-255.
Shen, Q., & Jensen, R. (2004). Selecting informative features with fuzzy-rough sets and its application for complex systems monitoring. Pattern Recognition, 37, 1351-1363.
Ölçer, A. I., & Odabasi, A. Y. (2005). A new fuzzy multiple attributive group decision making methodology and its application to propulsion/ maneuvering system selection problem. European Journal of Operational Research, 1, 93-114.
Sinclair, J. (1992). Collins Co-build English language dictionary. London: Collins.
Qu, Z. H., & Brocklehurst, M. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of information technology, 18(1), 53-67.
Xie, G., Zhang, J. L., & Lai, K. K. (2005). A group decision-making model of risk evasion in software project bidding based on VPRS. (LNAI 3642, 530-538). Springer-Verlag GmbH.
Rottman, J. W. (2006). Successfully outsourcing embedded software development. IEEE Computer, 39(1), 55-61.
Verhoef, C. (2005). Quantitative aspects of outsourcing deals. Science of computer programming, 56(3), 275-313.
Ziarko, W. (1993) Variable precision rough sets model. Journal of Computer and System Sciences, 46, 39-59.
This work was previously published in Journal of Global Information Management, Vol. 16, Issue 2, edited by F. Tan, pp. 1834, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 7.8
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data Tran Khanh Dang National University of Ho Chi Minh City, Vietnam
AbstrAct In an outsourced database service model, query assurance takes an important role among wellknown security issues. To the best of our knowledge, however, none of the existing research work has dealt with ensuring the query assurance for outsourced tree-indexed data. To address this issue, the system must prove authenticity and data integrity, completeness, and freshness guarantees for the result set. These objectives imply that data in the result set is originated from the actual data owner and has not been tampered with; the server did not omit any tuples matching the query conditions; and the result set was generated with respect to the most recent snapshot of the database. In this paper, we propose a vanguard solution to provide query assurance for outsourced tree-indexed data on untrusted servers with high query assurance and at reasonable costs. Experimental results
with real datasets confirm the effciency of our approach and theoretical analyses.
IntroductIon Outsourcing database services is emerging as an important new trend thanks to continued growth of the Internet and advances in the networking technology. Organizations outsource their data management needs to an external service provider, thereby freeing them to concentrate on their core business. In this outsourced database service (ODBS) model, organizations rely on the premises of external service providers, which include hardware, software, and manpower, for the storage and retrieval management of their data, and they operate other business applications via the Internet without having to maintain applications in-house. Figure 1 depicts key “actors” in
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
the most general and complicated ODBS model (Mykletun, Narasimha, & Tsudik, 2004),1 where multiple data owners (say, separate departments of an organization) outsource their data to a cer tain database server (which may be untrusted) and allow users (may be other departments, partners of the organization, or even themselves) to access the outsourced data. This service model is a recent and important manifestation of the outsourcing trend of different information technology services. As we can see, however, among issues needing to be addressed in order to make this model reality, security-related issues must be of crucial concern due to the fact that the server may be untrusted, and both data as well as users’ queries can now be exposed to the server and hackers/malicious users (corresponding to inside and outside attackers as shown in Figure 1, respectively). This means that, in this ODBS model, apart from secure network communication chan nels and other necessary security procedures at the user side (Axelrod, 2004), efficient and effective solutions to security threats inside the server are indispensable. We discuss in more detail these server-side security-related issues below.
ing research challenges related to security issues. First of all, because the life-blood of every organization is the information stored in its databases, making outsourced data confidential is therefore one of the foremost challenges in this model. In addition, privacy-related concerns must also be taken into account due to their important role in real-world applications.2 Not less importantly, in order to make the outsourced database service viable and really applicable, the query result must also be proven qualified. This means the system has to provide users with some means to verify the query assurance claims of the service provider. Overall, most crucial security-related research questions in the ODBS model relate to the below issues: •
•
security Issues in the odbs model • Since a service provider is typically not fully trusted, the ODBS model raises numerous interest-
Data confidentiality: Outsiders and the server’s operators (database administrator– DBA) cannot see the user’s outsourced data contents in any cases (even as the user’s queries are performed on the server). User privacy: Users do not want the server and even the DBA to know about their queries and the results. Ensuring the user privacy is one of the keys to the ODBS model’s success. Data privacy: Users are not allowed to get more information than what they are querying on the server. In many situations, users
Figure 1. The ODBS model and security threats at the server side Outside Attackers Inside Attackers
Data Owner(s) Internet
Server Outsourced Database Outside Attackers
Clients
Untrusted Server
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Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
•
2132
must pay for what they have got from the server and the data owner does not allow them to get more than what they have paid for, or even users do not want to pay for what they do not need because of the low bandwidth connections, limited memory/ storage devices, and so forth. This security objective is not easy to obtain and a costefficient solution to this issue is still an open question (Dang, 2006b). Query assurance: Users are able to verify the correctness (authenticity and data integrity), completeness, and freshness of the result set. Among all security objectives, the query assurance is always appealed in the ODBS model. We succinctly explain these concepts as follows, and more discussions can be found in Narasimha and Tsudik (2006), Mykletun et al. (2004), Boneh, Gentry, Lynn, and Shacham (2003), Pang and Tan (2004), Pang, Jain, Ramamritham, and Tan (2005), and Sion (2005): Proof of correctness: As a user queries outsourced data, it expects a set of tuples satisfying all query conditions and also needs assurance that data returned from the server originated from the data owner and have not been tampered with either by an outside attacker or by the server itself. Proof of completeness: As a user queries outsourced data, completeness implies that the user can verify that the server returned all tuples matching all query conditions, that is, the server did not omit any tuples satisfying the query conditions. Note that a server, which is either malicious or lazy, might not execute the query over the entire database and might return no or only partial results. Ensuring the query result completeness aims to detect this unexpected behavior.
Proof of freshness: The user must be ensured that the result set was generated with respect to the most recent snapshot of the database. This issue must be addressed so as to facilitate dynamic outsourced databases, which frequently have updates on their data.
The above security requirements differ from the traditional database security issues (Castano, Fugini, Martella, & Samarati, 1995; Umar, 2004) and will in general influence the performance, usability, and scalability of the ODBS model. Although there exist a number of research works on the above topics (e.g., Du & Atallah, 2000; Hacigümüs, Iyer, Li, & Mehrotra, 2002a; Bouganim & Pucheral, 2002; Damiani, Vimercati, Jajodia, Paraboschi, & Samarati, 2003; Lin & Candan, 2004; Chang & Mitzenmacher, 2004; Dang, 2006a, 2006b), to the best of our knowledge, none of them has dealt with the problem of ensuring query assurance for outsourced tree-indexed data. It has been clearly proven in the literature that tree-indexed data have played an important role in both traditional and modern database applications (Dang, 2003). Therefore, security issues in query assurance for outsourced tree-indexed data need to be addressed completely in order to materialize the ODBS model. This is even then not a trivial task, especially as tree-based index structures are outsourced to untrusted servers (Du & Atallah, 2000; Dang, 2005). In this article, we will discuss and propose solutions to security issues in order to provide query assurance for dynamic outsourced databases that come together with tree-based index structures. Our techniques allow users to operate on their outsourced treeindexed data on untrusted servers with high query assurance and at reasonable costs. Our proposed solutions will address all three desired security properties of query assurance. In addition, as presented in Du and Atallah (2000), Mykletun et al. (2004), and Dang (2006b),
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
there are a number of different ODBS models depending on desired security objectives. In this article, however, due to the complexity of the big problem, we will focus on the most basic and typical ODBS model where only data confidentiality, user privacy, and query assurance objectives should be taken into account. Our holistic solution allows users (also the data owners in our considered ODBS model) to manipulate their outsourced data as it is being stored in in-house database servers. The rest of this article is organized as follows. We briefly summarize main related work and introduce a state-of-the-art approach to managing outsourced tree-indexed data without query assurance considerations. After that, we present our contributions to completely solve the problem of query assurance in dynamic outsourced treeindexed data. We then show experimental results with real datasets and brief security analyses in order to establish the practical value of our proposed solutions. Finally, the last section gives conclusions and future work.
relAted WorK Although various theoretical problems concerning computation with encrypted data and searching on encrypted data have appeared in the literature (Fong, 2003), the ODBS model which heavily depends on data encryption methods emerged not long ago (Du & Atallah, 2000; Hacigümüs, Mehrotra, & Iyer, 2002b; Dang, 2006b). Even then it rapidly got special attention from the research community due to a variety of conveniences brought in as well as interesting research challenges related (Dang, 2005). The foremost research challenge relating to security objectives for the model was introduced in the previous section. In Figure 2 we diagrammatically summarize security issues in the ODBS model, together with major references to the corresponding state-of-the-art solutions. As shown in Figure 2, most security objectives of the ODBS model have been investigated. To deal with data confidentiality issue, most approaches adopted to encrypt (outsourced) data before its
Figure 2. Security issues in the ODBS model User Privacy (Hacigümüs,2002a; Lin et al., 2004; Chang et al., 2004; Dan , 2006a
Confidentiality (Bouganim et al., 2002; Damiani et al., 2003; Dang, 2005)
ODBS model
Privacy
2006b)
Correctness
Auditing
(Boneh et al., 2003; Mykletun et al., 2004; Pang et al., 2004; Pang et al., 2005; Narasimha et al., 2006; Sion, 2005; Nguyen et al., 2007; this paper)
(Burmester et al., 2004; Dang, 2006b)
Completeness
(Du et al., 2000;
Hacigümüs,2002b; Dang,
Data Privacy (Gertner et al., 1998; Du et al., 2000; Dang, 2006b)
Query Assurance
(Pang et al., 2005; Narasimha et al., 2006; Sion, 2005; Nguyen et al., 2007; this paper)
Freshness (this paper)
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being stored at the external server (Bouganim & Pucheral, 2002; Damiani et al., 2003; Dang, 2005). Although this solution can protect the data from outsiders as well as the server, it introduces difficulties in the querying process, as it is hard to ensure the user and data privacy when performing queries over encrypted data. In general, to address the privacy issue (including both user and data privacy), outsourced data structures (tree or non-tree based) that are employed to manage the data storage and retrieval should be considered. Notably, the problem of user privacy has been well solved, even without special hardware (Smith & Safford, 2001), if the outsourced database contains only encrypted records and no tree-based indexes are used for storage and retrieval purposes (see Dang, 2006b, for an overview). Conversely, the research result is less incentive if such trees are employed, although some proposals have been made recently (Lin & Candan, 2004; Dang, 2006b). In our previous work (Dang, 2006b), we did propose an extreme protocol for the ODBS model based on private information retrieval (PIR)-like protocols (Asonov, 2001). It would, however, become prohibitively expensive if only one server were used to host the outsourced data (Chor, Goldreich, Kushilevitz, & Sudan, 1995). Damiani et al. (2003) also gave a solution to query-outsourced data indexed by B+-trees, but their approach does not provide an obvious way to traverse the tree, and this may lead to compromised security objectives (Lin & Candan, 2004; Dang, 2006a). Lin and Candan (2004) introduced a computational complexity approach to solve the problem with sound experimental results reported. Their solution, however, only supports obvious search operations on outsourced search trees, insert, delete, and modification ones. That means their solution cannot be applied to dynamic outsourced search trees where several items may be inserted into and removed from, or existing data can be modified. In our recent work (Dang, 2006a), we analyzed and introduced techniques to completely solve the problem of data confiden-
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tiality and user privacy, but query assurance, in the ODBS model with dynamic tree-indexed data supports. In the next sections we will elaborate on these techniques and extend them in order to deal with the three security objectives of query assurance as mentioned above. Contrary to user privacy, although there are initial research activities (Gertner, Ishai, Kushilevitz, & Malkin, 1998; Du & Atallah, 2000; Dang, 2006b), the problem of data privacy still needs much more attention. Gertner et al. (1998) first considered the data privacy issue in the context of PIR-like protocols and proposed the so-called SPIR, symmetrical PIR, protocol in order to prevent users from knowing more than the answers to their queries. Unfortunately, such PIR-based approaches cannot be applied to the ODBS model because the data owners in PIR-like protocols are themselves the database service providers. Du and Atallah (2000) introduced protocols for secure remote database access with approximate matching with respect to four different ODBS models requiring different security objectives among those presented in the previous section. Even so, their work did not support outsourced tree-indexed data. In our recent work (Dang, 2006b), we presented a solution to ensuring data privacy in the ODBS model which can be applied to tree-indexed data as well. Nevertheless, our proposed solution must resort to a trusted third party, which is not easy to find in practice. Recently, addressing the three issues of query assurance has also attracted many researchers and, as a result, a number of solutions have been proposed (e.g., Boneh et al., 2003; Mykletun et al., 2004; Pang & Tan, 2004; Pang et al., 2005; Narasimha & Tsudik, 2006; Sion, 2005; Nguyen, Dang, Son, & Kueng, 2007). We must even now note that none of them has given a solution to the problem of guaranteeing the query result freshness (see Figure 2).3 To prove the correctness of a user’s query results, the state-of-the-art approaches (Boneh et al., 2003; Mykletun et al., 2004; Pang & Tan, 2004; Sion, 2005) employed
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
some aggregated/condensed digital signature scheme to reduce the communication and computation costs. First, Boneh et al. (2003) introduced an interesting aggregated signature scheme that allows aggregation of multiple signers’ signatures generated from different messages into one short signature based on elliptic curves and bilinear mappings. This scheme was built based on a “Gap Diffie-Hellman” group where the Decisional Diffie-Hellman problem is easy while the Computational Diffie-Hellman problem is hard (Joux & Nguyen, 2001). Despite the big advantage that this scheme can be applied to different ODBS models, it must bear a disadvantage related to the performance. As shown in Mykletun et al. (2004), the computational complexity of Boneh et al.’s (2003) scheme is quite high for practical uses in many cases. Second, Mykletun et al. (2004) introduced a RSA-based condensed digital signature scheme that can be used for ensuring authenticity and data integrity in the ODBS model. Their scheme is concisely summarized as follows.
condensed-rsA digital signature scheme Suppose pk=(n, e) and sk=(n, d) are the public and private keys, respectively, of the RSA signature scheme, where n is a k-bit modulus formed as the product of two k/2-bit primes p and q. Assume φ(n)=(p-1)(q-1), both public and private exponents e, d∈Z n* and must satisfy ed ≡ 1 mod φ(n). Given t different messages {m1, ..., mt} and their corresponding signatures {s1, ..., st} that are generated by the same signer, a condensed-RSA signature is computed as follows: s1,t =∏ti=1si mod n. This signature is of the same size as a single standard RSA signature. To verify the correctness of t received messages, the user must multiply the hashes of all t messages and check that (s1,t)e ≡ ∏ti=1h(mi) mod n. As we can see, the above scheme is possible due to the fact that RSA is multiplicatively homomorphic. We will apply this scheme to our ODBS
model in order to provide correctness guarantees of the received tree nodes from the server (see the section on “Correctness Guarantees”). Note that, however, this scheme is applicable only for a single signer’s signatures. Sion (2005) also employed this approach to deal with the correctness of query results in his scheme. Besides, Pang and Tan (2004) applied and modified the idea of “Merkle Hash Trees” (MHT) (Merkle, 1980) to provide a proof of correctness for edge computing applications, where a trusted central server outsources parts of the database to proxy servers located at the edge of the network. In Narasimha and Tsudik (2006), however, the authors pointed out possible security flaws in this approach. Furthermore, there are also some approaches to deal with the completeness of a user’s query results (Sion, 2005; Pang et al., 2005; Narasimha & Tsudik, 2006). First, Sion (2005) proposed a solution to provide such assurances for arbitrary queries in outsourced database frameworks. The solution is built around a mechanism of runtime query “proofs” in a challenge-response protocol. More concretely, before outsourcing the data, the data owner partitions its data into k segments {S1, ..., Sk}, computes hashes for each segment, H(Si), i=1, k , then stores (outsources) them all together at the service provider’s server. In addition, the data owner also calculates some “challenge tokens” with respect to Si. Actually, the challenge tokens are queries that the data owner already knows their results, which can be used for verification later. Whenever a batch of queries are sent to the server, certain challenge token(s) are also sent together. The result set is then verified using the challenge tokens for its completeness. Although this approach can be applied to different query types, not 100% of the query assurance (the completeness) can be guaranteed because there are chances for a malicious server to “get away” with cheating in the query execution phase (i.e., the server only needs to “guess” and return the correct answer to the challenge token together with fake result sets for other queries in the batch,
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but nothing else). Moreover, this approach also introduces cost inefficiency for database updates because the challenging answers must be recalculated. Seriously, although the author did not aim to address the user privacy issue in the article, we should note that user privacy in this approach may be compromised because the server knows what data segments are required by the user so inference and linking attacks can be conducted (Dang, 2006b; Damiani et al., 2003). Second, Pang et al. (2005) introduced a solution based on aggregated signature schemes and MHT to provide the completeness of the query result. This approach is an extension of that presented in their previous work (Pang & Tan, 2004), which has been proven insecure due to some possible security flaws (Narasimha & Tsudik, 2006). Last, Narasimha and Tsudik (2006) developed an approach, called digital signature aggregation and chaining (DSAC), which achieves both correctness and completeness of query replies. However, in their approach, tuples must be pre-sorted in ascending order with respect to each searchable dimension for calculation of the signature chain, and thus it still does not support outsourced tree-indexed data where the order of tree nodes’ contents is not able to be determined. This pre-sorting requirement also has a negatively tremendous impact on data updates, hence the total performance of the system will be degenerated. Apart from the security issues mentioned above and in the previous section, as we can observe in Figure 2, there exists another question: How can the server conduct auditing activities in systems provided with such security guarantees (without employing special hardware equipment)? The server may not know who is accessing the system (e.g., Dang, 2006b), what they are asking for, what the system returns to the user, and thus how it can effectively and efficiently tackle the accountability or develop intrusion detection/prevention systems. The goals of privacy-preserving and accountability appear to be in contradiction, and an efficient solution to balance the two is still open.
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More discussions about this topic can be found in Burmester, Desmedt, Wright, and Yasinsac (2004). In the next section we will elaborate on the state-of-the-art approach proposed in Dang (2006a) to managing the storage and retrieval of dynamic outsourced tree-indexed data, and in the section after that we will extend this approach to strengthen it with query assurance supports, including all the three concerned security objectives.
A prAgmAtIc ApproAch to mAnAgIng outsourced tree-IndeXed dAtA As discussed in the literature, tree-based index structures take an indispensable role in both traditional and modern database applications (Dang, 2003). However, in spite of their advantages these index structures introduce a variety of difficulties in the ODBS model (Du & Atallah, 2000; Dang, 2006b). To detail the problem, Figure 3a illustrates an example of the B+-tree for an attribute CustomerName with sample values. All tree nodes were encrypted before being stored at the outsourcing server to ensure the data confidentiality. Assume that a user is querying all customers whose name is Ha on this tree. If we do not have a secure mechanism for the query processing, a sequence of queries that will access in sequence nodes 0, 1, and 5 with respect to the above query will be revealed to the server. In addition, the server also realizes that the user was accessing nodes 0, 1, and 5, and node 0 is the root, node 1 is an internal node, node 5 is a leaf node of the tree, and so the user privacy is compromised. More seriously, using such information collected gradually, together with statistical methods, data mining techniques, and so forth, the server can rebuild the whole tree structure and infer sensitive information from the encrypted database, hence data confidentiality can also be spoiled. Besides, during the querying, the user will also
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
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get more information showing that there are at least two other customers named John and Bob in the database, so the data privacy is not satisfied (note that, however, we will not address the data privacy problem in this article). Although Damiani et al. (2003) proposed an approach to outsourced tree-based index structures, it unfortunately has some security flaws that may compromise the desired security objectives (Dang, 2005, 2006b). Lin and Candan (2004) and Dang (2006a) developed algorithms based on access redundancy and node-swapping techniques to address security issues of outsourced tree-indexed data. We briefly summarize their solutions in the rest of this section. Obviously, as private data is outsourced with search trees, the tree structure and data should all be confidential. As shown in Damiani et al. (2003), encrypting each tree node as a whole is preferable because protecting a tree-based index
by encrypting each of its fields would disclose to the server the ordering relationship between the index values. Lin and Candan’s (2004) approach also follows this solution and, like others (Dang, 2005, 2006a; Damiani et al., 2003), the unit of storage and access in their approach is also a tree node. Each node is identified by a unique node identifier (NID). The original tree is then stored at the server as a table with two attributes: NID and an encrypted value representing the node content. Consider an example: Figure 3a shows a B+-tree built on an attribute CustomerName; Figure 3b shows the corresponding plaintext and encrypted table used to store the B+-tree at the external server. As we can see, that B+-tree is stored at the external server as a table over schema B+EncryptedTable = {NID, EncryptedNode}. Based on the above settings, Lin and Candan (2004) proposed an approach to oblivious traversal of outsourced search trees using two
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adjustable techniques: access redundancy and node swapping.
Access redundancy Whenever a user accesses a node, called the target node, it asks for a set of m-1 randomly selected nodes in addition to the target node from the server. Hence, the probability that the server can guess the target node is 1/m. This technique is different from those presented in Damiani et al. (2003), where only the target node is retrieved (this may lead to reveal the tree structure as shown in Dang, 2005, 2006b). Besides the access redundancy, it also bears another weakness: it can leak information on the target node position. This is easy to observe: multiple access requests for the root node will reveal its position by simply calculating the intersection of the redundancy sets of the requests. If the root position is disclosed, there is a high risk that its child nodes (and also the whole tree structure) may be exposed (Lin & Candan, 2004). This deficiency is overcome by secretly changing the target node’s address after each time it is accessed.
Additional procedures To realize oblivious traversal of outsourced search trees, some more critical issues must also be addressed: •
•
•
node swapping • Each time a user requests to access a node from the server, it asks for a redundancy set of m nodes consisting of at least one empty node along with the target one. The user then: (1) decrypts the target node, (2) manipulates its data, (3) swaps it with the empty node, and (4) re-encrypts all m nodes and writes them back to the server. Note that this technique must re-encrypt nodes using a different encryption scheme/key (see Lin & Candan, 2004, for details). The authors proved that, with this technique, the possible position of the target node is randomly distributed over the data storage space at the untrusted server, and thus the weakness of the access redundancy technique is overcome.
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•
Managing root node address: The authors proposed to employ a special entry node called SNODE whose NID and decryption key are known to all valid users. It keeps pointers ROOTS pointing to the root nodes of all outsourced search trees that the user can access. Managing empty node lists: Empty nodes are stored in hidden linked lists. To help users find out the empty nodes, two other types of pointers are also stored in the SNODE: EHEADS and ETAILS point to the heads and tails of empty node lists, respectively. Random choice for redundancy sets: A redundancy set consists of the target node, an empty node, and m-2 randomly selected nodes. To enable users to do this, the SNODE records the range of NIDs of nodes in the data storage space at the server. The user will then be able to generate m-2 random NIDs within the range. Managing the tree structure integrity: This aims to maintain node/parent-node relationships after the node swapping. The first solution is to find the empty node to be swapped with the child node and update the parent node accordingly before actually swapping the child node. The second solution is to let users keep track of all nodes from the root down, deferring all the swaps until the node containing the data is accessed. Concurrency control in the multi-user environment: The authors also presented a solution to concurrency control without deadlocks. The main idea of the proposed solution is to organize nodes in the data storage space at the server into d levels,
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
and each level requires an empty node list to store empty nodes at this level. Besides, all users access nodes in some fixed predetermined order, ensuring deadlock-free access in a multi-user environment. See Lin and Candan (2004) for detailed discussions about the proposed solutions to all of these critical issues. Although Lin and Candan’s (2004) approach only supports oblivious tree search operations, the two above techniques have served as the basis for our fur ther investigation. Based on the access redundancy and node-swapping tech niques, in Dang (2006a) we developed practical algorithms for privacy-preserving search, insert, delete, and modify operations that can be applied to a variety of dynamic outsourced tree-based index structures and the unified user model where data owners are also sole users of the system (see Mykletun et al., 2004; Du & Atallah, 2000; Dang, 2006b, for more details about ODBS models). Although our previous work provided the vanguard solutions for this problem with sound empirical results, it did not consider the query assurance problem. In the next section we will extend our previous work to address this problem. Note that, however, as with the unified user model, it is not necessary to take into account, in the remainder of this article, the clients as shown in Figure 1. The key “actors” in our concerned ODBS model now consist only of the data owners and the outsourcing database server.
Query AssurAnce For outsourced tree-IndeXed dAtA In this section, we present an extension of our previous work in Dang (2006a), which introduced solutions to the problems of data confidentiality and user privacy in the ODBS model (with respect to the unified user model), in order to incorporate
solutions to ensuring the correctness, completeness, and freshness of the query results. The next section will detail the experimental results with real datasets.
correctness guarantees As introduced in the first section, to guarantee the correctness of the query result set, the system must provide a means for the user to verify that the received data originated from the data owner as it is. As analyzed in previous sections, the state of the art employed the public key cryptography scheme to deal with this problem. With respect to our concerned ODBS model, where data privacy considerations are omitted and only single signer (i.e., only one data owner or multiple data owners using the same signature scheme) participates in the query processing, the RSA-based signature scheme is the most suitable as already discussed. In our context, outsourced tree-indexed data is stored at the server side as described in the previous sectionthat is, as a table over schema EncryptedTable = {NID, EncryptedNode}. Before outsourcing the data, the data owner computes the hash h(m) of each encrypted node m. Here, h() denotes a cryptographically strong hash function (e.g., SHA-1). The data owner then “signs” that encrypted node m by encrypting h(m) with its private/secret key sk and stores the signatures together with EncryptedTable at the server. The table schema stored at the server therefore becomes EncryptedTable = {NID, EncryptedNode, Signature} (see Figure 4).4 With these settings, users5 can then verify each returned node using the data owner public key pk, hence ensuring the correctness of the result set. Although the naive approach above ensures the security objective, it is expensive because the number of signatures to verify equals the redundancy set size. To solve this issue, we employ the condensed-RSA digital signature scheme based on the fact that RSA is multiplicatively homomorphic
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as presented in the previous section as follows: Given t input encrypted nodes {m1, ..., mt} (the redundancy set) and their corresponding signatures {s1, ..., st}, the server computes a condensed-RSA signature s1,t as the product of these individual signatures and sends it together with the redundancy set to the user. The user, in turn, will be able to verify the condensed signature s1,t by employing the hashes computed from all received nodes (in the corresponding redundancy set) as shown in the previous section. With this method, not only the query result correctness is ensured, but both communication and computation costs are also tremendously reduced. Note that in this case the server has to send only one condensed-RSA signature s1,t to the user for verification instead of t individual ones. In the following section we will show the experimental results.
ni, i=1,t . To ensure this, our solution is embarrassingly simple: an NID is encrypted with the corresponding node contents and this encrypted value is stored at the server side, together with its signature. Users can then check if the server returned the NIDs (in the redundancy set) that he or she did require (the completeness) as well as verify the query result correctness (as shown in the section, “Correctness Guarantees”). This idea is clearly illustrated in Figure 5. In more detail, Figure 5 sketches settings for verifying completeness (and correctness) guarantees of the system. First, the encrypted value with respect to the attribute EncryptedNode also includes the NID of its corresponding node (for example, in the first row, the encrypted value also includes value 0). Second, the data owner signs each encrypted node using the RSA signature scheme, then stores the signature (e.g., s0) together with the NID and its corresponding encrypted value as described in the previous section. Note that, however, verifying the completeness and the correctness must be carried out togetherthat is, the user cannot omit any of them and still be ensured that the other is also guaranteed. This is also true for freshness guarantees that we will present below.
completeness guarantees Completeness guarantees mean that the server did not omit any tuples matching the query conditions. In our context, as a user asks the server for a redundancy set A of t nodes A={m1, ..., mt} and the server returns him a set R of t nodes R={n1, ..., nt}, the user must be able to verify that A=R. As presented in the previous section, a user asks for any encrypted nodes (at the server side) through their NIDs. Therefore, the user should be provided with a means of verifying that NID of each mi, i=1,t , equals NID of each corresponding
Freshness guarantees As discussed previously, with dynamic outsourced databases, ensuring only the correctness and
Figure 4. EncryptedTable with tree node contents’ signatures B+Table NID 0 1 2 3 4 5 6 7 8
completeness of the result set is not enough. Apart from those, the system must also provide a means for users to verify that the received nodes are from the most recent database state, not the older one(s). Either motivating by clear cost incentives for dishonest behavior or due to intrusions/viruses, the server may return users obsolete nodes, which do not truly reflect the state of the outsourced database at the querying time. This is not a less important problem that also needs to be sorted out to make the ODBS model viable. Narasimha and Tsudik (2006) mention this problem and outline a possible solution based on MHTs, but no cost evaluation is given. Note that MHT-based approaches to the ODBS model are quite expensive, especially for dynamic outsourced tree-indexed data (Narasimha & Tsudik, 2006). In this section, we propose a vanguard solution to this problem, and a comprehensive evaluation for all concerned security objectives will be presented in the next section. To solve the problem of freshness guarantees, users must be able to verify that the server did return them the most up-to-date required tree nodes (at the time it processed the query). Our solution is also quite simple, but sound and complete, based on timestamps: A timestamp of each child node is stored at its parent node. This timestamp changes only as the child node contents (but not its address) are updated. In other words, a node keeps timestamps of all of its child nodes,
Signatures to guarantee the correctness (Encrypted) NIDs to guarantee the completeness
and a user can then check (from the root node) if the server returned him the latest version of the required node as follows: In accessing the root, the user knows in advance all timestamps of its child nodes, and as a child node is returned, he or she can check if this node’s timestamp equals the known value, and so on. This process is carried out for every tree node required by the user. There is, however, one question that arises: How can users check the root’s timestamp? The answer to this question is not complicated: In the settings for access redundancy and node-swapping techniques, there is a special node called SNODE that keeps some metadata and the root’s address (see the previous section). The SNODE’s address and its decryption key are known to all qualified users. Besides, in the context of our concerned ODBS model, only data owners are able to make changes to, as well as to query, their outsourced data. Therefore, for the sake of freshness guarantees, SNODE will keep the timestamp of the root in addition to other information as mentioned before (this timestamp changes only as the root contents are updated by a data owner), and each qualified user (i.e., other data owners) is informed about the timestamp of SNODE (by the data owner who made the changes6). Moreover, with the settings for access redundancy and node-swapping techniques, besides the root’s address and timestamp, the users must also use other metadata in the SNODE for performing operations on the
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Figure 6. Settings for verifying freshness guarantees B+EncryptedTable
Including NIDs and timestamps (of the child nodes)
tree (see Dang, 2006a, for detailed discussions about the outsourced tree operations). Hence, it is vitally important that the SNODE’s timestamp is communicated to all users as discussed above to ensure the freshness of the result set. Overall, with all of these above settings, all the three security objectives of the query assurance problem in the concerned ODBS modelthat is, the cor rectness, completeness, and freshness guarantees of the query resultcan be effectively verified. Note that the encrypted value representing the corresponding node contents now includes not only its NID, but also timestamps of the child nodes. The corresponding signature is computed based on this final encrypted value. This is clearly illustrated in Figure 6.
eXperImentAl results To confirm theoretical analyses carried out in previous sections and establish the practical applicability of our approach, we implemented a prototype system and evaluated the proposed solutions with real datasets. For all experiments, we used two-dimensional datasets, which were extracted from the SEQUOIA dataset at http:// www.rtreeportal.org/spatial.html. The SEQUOIA dataset consists of two-dimensional points of the format (x, y), representing locations of 62,556
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Signatures to guarantee the correctness (Encrypted) NIDs to guarantee the completeness (Encrypted) timestamps to guarantee the freshness
California place names. We extracted five subdatasets of 10K, 20K, 30K, 40K, and 50K points from the SEQUOIA dataset for experiments. To manage the spatial points, we employed two-dimensional kd-trees due to its simplicity. For all the trees, we set the maximum number M of data items that a leaf node can keep to 50 and the minimum fill factor value to 4%. This means that each tree leaf node must contain at least two points and can store up to 50 points. Furthermore, the tree was stored in a data storage space with 22,500-node capacity (see Figure 7), divided into 15 levels of 1,500 nodes each (see Dang, 2006a; Lin & Candan, 2004, for detailed meanings of these settings). Our prototype system consisted of only one P4 CPU 2.8GHz/1GB RAM PC running a Windows 2003 server. Both user and server were accommodated in the same computer, so for all experiments, we will report average time to complete a user request, which can represent the average CPU cost of each user request and analyze averaged IO and communication cost. In addition, all programs were implemented using C#/Visual Studio .NET 2003, and we employed the DES algorithm for the encryption of data and the RSA signature scheme (1024 bits key) with SHA-1 hashing for the digital signatures. We did experiments with all major basic operations, including search (for both point and range queries)
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
Figure 7. A screen shot: Costs of point and range queries with condensed-RSA scheme wrt. 50K points dataset
and updates (inserts and deletes). Note that modify operations are combinations of inserts and deletes (Dang, 2005, 2006a). In addition, because there is no previous work built on the same or similar scheme and addressing the same problem, we had to build our scheme from scratch and did experiments to evaluate our solutions to the query assurance issue on the basis of the condensed-RSA signature scheme and the naive/standard RSA signature scheme. All the security objectives of the query assurance issue (i.e., correctness, completeness, and freshness guarantees) were taken into account. The details are as follows. Initially, we did experiments with the largest dataset, 50K points, for insert, delete, point, and range queries in order to see the performance of both naive and condensed RSA-based solutions. The redundancy set size is set to 4 for the tests. Figure 7 shows a screen shot as we built the tree, stored it to the server, and performed point and range queries with condensed-RSA scheme wrt. the largest dataset. In Figure 8, we present the experimental results concerning the CPU cost for all operations. It is clearly shown that the
condensed-RSA scheme CPU cost is much better than that of the naïve-RSA scheme. Note that the average accessed node number (i.e., the IO cost) of the two is the same, but the communication cost of the condensed-RSA scheme is also better by a factor of (Redundancy_set_size -1) * RSA_signature_size. This is due to the fact that as with the condensed-RSA scheme, the server has to send the user only one condensed signature, while it has to send Redundancy_set_size signatures with respect to the naïve-RSA scheme. Verifying more signatures is the main reason for a higher CPU cost of the latter. Furthermore, to see the effect of different database sizes on the performance for each sub-dataset, we ran 100 separate queries with the redundancy set size being set to 4, and calculated averaged values for CPU time. With inserts, deletes, and point queries, we randomly chose 100 points from the corresponding dataset as the queries. With range queries, we randomly chose 100 squares as the queries. The sides of each square were chosen to be 1% of the norm of the data space side (if the dataset is uniformly distributed, this value maintains the selectivity of 0.01% for these
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range queries).The experimental results are shown in Figure 9. As we can see, the CPU cost saving of all kinds of queries is high, over 30% at the minimum between the condensed-RSA scheme and the naïve-RSA scheme. Again, as mentioned above, although the average accessed node number is equal for both schemes, the communication cost of the condensed-RSA scheme is better than that of the naïve-RSA scheme.
Security Analysis Briefings The security correctness of our proposed solutions to all the three security objectives in our holistic approach to the query assurance problem in the ODBS model is obvious and can be understood from discussions and analyses in previous sections. However, one may question the security degree of access redundancy and
Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data
node-swapping techniques introduced in Lin and Candan (2004) and their modified versions for dynamic outsourced search trees (Dang, 2005, 2006a). The proof of the security correctness is therefore focused on that of the previous work. Fortunately, Dang (2006a) and Lin and Candan (2004) did prove that when users access the outsourced tree-indexed data, the untrusted server is not able to determine if any two queries are identical and, for two different queries, it is also not able to differentiate the distribution of the queries’ redundancy sets in polynomial time. The former is to protect queries from the server and the latter aims to protect the tree structure. In summary, to conclude this section we emphasize that it has been mathematically proven in Lin and Candan (2004) and Dang (2006a) that our approach, based on the access redundancy and node-swapping techniques, is computationally secure to protect both queries and the tree structure from a polynomial time server. Hence, it is quite safe to claim that our proposed solutions in this article, which have extended the previous work, become full-fledged and can be applied to real-world ODBS models.
with respect to dynamic outsourced trees. Our work therefore provides a vanguard solution for this problem. Also, this work can also be applied to non-tree-indexed data outsourced to untrusted servers (with settings like those of Damiani et al., 2003; Dang, 2006a). Our future work will focus on evaluating the efficiency of the proposed solutions in real-world applications and on addressing related open research issues. Specially, supporting multiple data owners’ signatures (i.e., multiple signers) is a generalization of the proposed solution in this article. An efficient solution to this problem is still open. Moreover, as discussed in the section “Related Work,” auditing and accountability for the ODBS model, as well as computer criminalrelated issues and the data privacy problem, should be addressed, and they will be among our future research activities of great interest. Another problem also attracts us: how to deal with the problem of over redundancy of the result set returned from the serverthat is, the server sends the user more than what should be returned in the answers. This may cause a user to pay more for the communication cost, to incur higher computation costs, and so this issue needs to be investigated carefully.
conclusIon And Future WorK In this article, we explored the problem of query assurance in the oursourced database service (ODBS) model. Concretely, we extended our previous work (Dang, 2006a) and presented a full-fledged solution to the problem of ensuring the correctness, completeness, and freshness for basic operations (insert, delete, modify, point, and range queries) on dynamic outsourced treeindexed data. Experimental results with real multidimensional datasets have confirmed the efficiency of our proposed solution. Notably, to the best of our knowledge, none of the previous work has dealt with all the three above security issues of query assurance in the ODBS model
AcKnoWledgment The author would like to thank the anonymous referees for their insightful reviews with interesting comments and suggestions.
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endnotes 1
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Pang, H.H., & Tan, K-L. (2004). Authenticating query results in edge computing. Proceedings of the 20th International Conference on Data Engineering (pp. 560-571), Boston. Pang, H.H, Jain, A., Ramamritham, K., & Tan, K-L. (2005). Verifying completeness of relational query results in data publishing. Proceedings of the SIGMOD Conference (pp. 407-418). PRIME Project. (2004). The PRIME Project: Privacy and identity management for Europe. Retrieved from https://www.prime-project.eu Sion, R. (2005). Query execution assurance for outsourced databases. Proceedings of the 31st International Conference on Very Large Data Bases (pp. 601-612), Trondheim, Norway.
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In this article, however, we will deal with a less complicated ODBS model. Note that, although privacy-related issues have been widely investigated (PRIME Project, 2004), the question “what is the complexity of the privacy problem?” is still open inasmuch as the answer is quite different, depending not only on technology, but also on sociology and politics (Thuraisingham, 2005). In one of our very recent papers (Nguyen et al., 2007), which was written and published after this article had been accepted for publication, we also employed the timestamps as proposed in this article in order to ensure the query result freshness of dynamic outsourced XML databases. Note that Figure 4 depicts only “real” tree nodes, but the empty nodes that are not shown here are also stored in the same table, EncryptedTable, over the same schema at the server side (see Dang, 2006a, for more information). Here, in the unified user model, a user is also one of the data owners. Obviously, the data owner knows who the valid users/other data owners are, and so this solution is well applicable.
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 59-76, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 7.9
Business Continuity Challenges in Global Supply Chains Steve Cartland HP, Australia
AbstrAct
IntroductIon
This chapter examines the relevance of business continuity to supply chain management. Business continuity has focused on the business processes of individual organizations. A business process in a supply chain can involve multiple discrete organizations. This chapter draws on the approaches used by individual organizations to implement continuity and apply them to a supply chain. Typically, supply chains are dependent on IT and workplace for staff. Both can be impacted in a disaster. If one member of a supply chain is affected, this will affect other organizations in the supply chain, magnifying the impact of the initial disaster. The chapter also examines the issues of service supply chains as well as physical goods. A practical outline plan for the development, auditing, and testing of a continuity plan for a supply chain and its management within an overall supply chain governance is proposed as a starting point for supply chain managers.
Business continuity is a crucial ingredient of supply chain management. This chapter discusses this significance and the impact of business continuity on supply chain systems. The discussion is based on the author’s experience of working in an environment that is dependent on supply chains, as well as helping many of his clients in achieving uninterrupted business continuity.
busIness contInuIty todAy: A bAcKground Business continuity is essentially a simple concept. Strategically, it should be simple for an organization to implement and manage business continuity. This is not to argue that the detail of a successful business continuity plan is straightforward. In fact, the detailed planning and execution of a business continuity initiative is not always simple, as there is a staggering amount of details resulting from bringing numerous business processes together
Business Continuity Challenges in Global Supply Chains
with many knowledgeable people to develop a successful outcome for an organization. However, at the strategic level, it can be made simple. In fact, at the strategic level, business continuity is the process of ensuring that all critical business processes are available to meet the business needs under all agreed scenarios in case of an emergency or a disaster. There are three key points in this definition. 1.
2.
An organization must be able to identify and to agree on what its critical business processes are. The best approach to understand this is determined through business impact analysis. A business impact analysis is a process to identify the impact on an organization of a significant incident, such as a fire that will affect the running of the business. The outcomes of a business impact analysis are the identification of critical business processes on which the organization depends, their interrelationships, the components that the process requires, the cost of down time, and the maximum time that the organization can operate without the process. The key point is that the definition of critical business processes will differ from one organization to another, and it is reached through consensus of senior management. Critical business processes do not have to be available all the time. Therefore, senior management needs to agree on how long the organization can cope without them (this is called the maximum tolerable outage) and the hourly cost of down time. Typically, the hourly cost of down time will increase exponentially (i.e., the cost of down time for the first hour will be much lower than that of the 10t h hour). Eventually, the cost of down time will exceed the revenue from continuing business, so the private sector organization will fail. In the public sector, there will be major political intervention and significant reorganization.
3.
The scenarios that an organization needs to safeguard against need to be agreed on. This can be simplified by considering a denial of access strategy, regardless of the various causes of a disaster. Therefore, senior management should think about its various locations in order to consider denial of access to a floor of a building, the whole building, the city block, a half of a kilometer radius from the building, the whole metropolitan area, and beyond, as a denial zone. The likelihood of each scenario needs to be considered separately. To add to the reality, possible causes also ought to be considered. For instance, loss of power supply is one that senior managers can readily understand. What would be the impact if the organization lost power to its building due to a malfunction in its power distribution boards? What if there were a regional power failure that affected a significant portion of a central business district or a total blackout?
This leads to risk analysis and mitigation. For example, if we consider the power outage, an organization may protect certain parts of it premises (e.g., call center and computer room) with a UPS (uninterruptible power supply) and generator. But how often are the UPS and generator tested? Is the switch across and switch back seamless? Is the fuel for the generator checked for quality regularly, and is fuel supply service in place that can be relied on during a major prolonged power outage? We have been considering the approach a discrete organization needs to take. A supply chain could be considered to be a super-organization; therefore, the same basic issues will apply. A simple seven-step model to develop and maintain a plan at the strategic level is shown in Figure 1. •
Current Situation: Most organizations have some level of business continuity capability.
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After all, their management and staff are dealing with the daily issues of keeping the business going. However, this capability is not readily recognized and coordinated, which means its effectiveness will not be maximized in a crisis situation. Identifying and documenting this capability is the first step. Business Impact Analysis: This is a standard consulting engagement or internal process that helps to identify the critical business processes, their interconnections, the cost of down time, and maximum tolerable outage for each critical business process. Risk Assessment: This identifies the risks that may impact the organization, their severity, likelihood, and ways they can be ameliorated.
For an organization developing a continuity capability, there are advantages to using an external organization to provide guidance during these first three steps, as the experience may not be available in the organization to ensure all assumptions are appropriately challenged. •
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Define Strategy: Using the data collected during the first three steps, senior management then can determine the level of protection desired, the probable causes of an impact, and the resources they are willing
•
• •
to commit. This will depend on the organization’s appetite for risk, formal supply service levels, and the cost of various plans vs. the cost of down time. At this stage, the individual(s) and the sponsor(s) (including the CEO) that are responsible for managing the continuity plans should be identified. Define Solution: Senior management can pass on its strategic requirements, together with the implementation and operational budget plans, to departments such as facilities, IT (including voice), and human resources (HR) to work with various line managers. Select or Build Solution: An organization can choose to build its own solutions, outsource, or use a mixture of both. Document, Plan and Test: A range of documentation needs to be prepared as part of the overall solution. First, the description of the objectives, together with how these objectives will be achieved. Second, documentation for users needs to be made available. Great care needs to be taken to ensure that it is appropriately used in a crisis situation. This means that it must be brief and straightforward. Finally, the plan must be tested on a regular basis, at least annually and more regularly, if the organization is undergoing change. This is vital. Without regular complete testing, organizations have no proof that the plan will work.
Business Continuity Challenges in Global Supply Chains
Most senior managers will acknowledge readily that their organizations need a business continuity plan to ensure they can continue to operate, if they are affected by a disaster. The need is built into corporate consciousness in that only a few would state that a plan is not required. However, according to research undertaken by Macquarie Graduate School, fewer than 12% of organizations in the public and private sectors have fully tested plans. There are many reasons why organizations do not have business continuity plans. They include: • •
• • •
Denial (it cannot happen to us) The generally low likelihood of a disaster (ignoring the major impact, if one does occur) Pressure to undertake other work Inability to see a return on investment No obvious owner for the responsibility in the organization
However, regulators around the world are addressing the issue of organizations that lack business continuity preparation plans. For instance, the Australian finance industry regulator, the Australian Prudential Regulatory Authority, released a standard for business continuity plans. In part, it stated that certain categories of organizations that it regulates must have a plan as part of their risk management and assigned this responsibility to the boards of directors. With so few organizations having fully tested plans in place (and if it is not fully tested, it is of dubious worth), it will be more difficult to develop supply chain continuity plans. Until this is done, supply chains will be at serious risk. The corollary, however, is that the great incidence of supply chains may be a driver to organizations developing business continuity plans, as customers demand them of their suppliers. Some organizations delegate the task of implementing a business continuity plan to the IT
function, as IT disaster recovery has been a part of IT management for larger organizations for a number of decades. However, while this approach protects IT functionality, it isolates other critical business processes by leaving them vulnerable to disasters and unprotected. This is due to the fact that most organizations consider the cost rather than the long-term benefits of implementing a business continuity plan. Organizations should consider the cost of down time in order to recognize the urgency of planning for business continuity This requires the support of senior executives. For example, in the financial services industry, in the banking sector, in particular, certain regulations are adopted by many OECD countries because of the support and the backing of a risk management executive who can influence the decisions of top management. However, the very nature of a supply chain involves a number of organizations that are dependent on each other for daily business operations. Therefore, an increasing number of organizations are putting a greater emphasis on developing continuity plans that work. The reasons for this are: 1.
2.
The Current Worldwide Situation: Although relatively few organizations have been affected by terrorism or by any politically based activity, the headlines cause senior management to wake up and to act. Corporate Governance: This has been an issue of growing importance since the mid-1980s. The importance of good corporate governance grew out of some of the corporate excesses in the 1980s. There has been a number of reports (shown in the following chart) from many countries that have been built on the importance of good corporate governance. The most recent, the Turnbull Report (London Stock Exchange, 1999), identified risk management as a key part of corporate governance and business continuity as a key part of risk management.
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3.
Companies listed on the London Stock Exchange are now required to report annually on their risk management approaches. Outsourcing: Organizations outsource activities that are not core to their operations and that a specialized contractor will be able to undertake more efficiently and provide enhanced efficiencies through transformation of the process. Common examples are IT (infrastructure management, applications development), logistics, and manufacturing. Typically, each of these activities is critical to the operation of the organization, but they don’t define the organization, and there are savings and flexibilities to be obtained. Treadway Report
USA
1987
Cadbury Report
UK
1992
King Report
South Africa
1994
Dey Report
Canada
1994
Vienot Report
France
1995
Peters Report
Netherlands
1996
Turnbull Report
UK
1999
When activities are outsourced, they become part of a supply chain. An essential part of the outsourcing process is to review risks and benefits, which requires potential outsourcing contractors to demonstrate a business continuity plan. However, there are rarely processes in place to review that plan on a continuing basis. There is some guidance available as to what a continuity plan should contain. For example, there are two global professional bodies, the US-based DRI International and the UK-based Business Continuity Institute. The latter states that the components of a continuity plan are: 1. 2. 3. 4.
Initiation and Management Business Impact Analysis Risk Evaluation and Control Developing Business Continuity Management Strategies Emergency Response and Operations Developing and Implementing Business Continuity and Crisis Management Plans Awareness and Training Programs Maintaining and Exercising Business Continuity and Crisis Management Plans
5. 6. 7. 8.
Figure 2. Relationship between critical business process and infrastructure
Business Continuity Challenges in Global Supply Chains
9. Crisis Communications 10. Coordination with external agencies However, as each organization is different (even those in the same industry), effectively, each management will need to make its own decisions. The following model (Figure 2) can be a useful guide, because it is anchored to the critical business process. The model’s focus is to keep member organizations of a supply chain operating. This requires that the critical business processes (identified by senior management) continue to operate in order to meet the business needs under all agreed scenarios (as defined in the definition of business continuity earlier). The key force behind the operation of any critical business process is the employee (staff). It is difficult to think of any critical process that does not involve some human intervention (staff involvement). Automatic teller machines, for instance, as automated as they can be, still need some human intervention for the replenishing of cash, the removal of deposits, and the human oversight of network management systems. Generally, staff needs two facilities to operate—IT and premises. For most organizations, it is increasingly difficult to think of any critical business process that can operate effectively without some kind of IT support. For example, staff needs access to the applications; however, these applications will not run without the appropriate IT infrastructure. Staff also needs access to a suitable premises in order to work and to perform its daily operational activities. A mobile workforce may be able to satisfactorily work from home, if an IT remote access capability is dysfunctional as a part of a continuity planning exercise. Other groups may need access to different work environments or to more suitable premises. Such groups would include those where interaction is important; supervision is required; or access to special tools, information, or equipment is required.
Working from home can be an effective part of a continuity solution for organizations that have successfully implemented this approach as part of their normal working arrangements. However, the implementation of such a program often takes a long time to complete; therefore, an organization must proceed with caution and not fall into a trap of a long-term commitment that would be difficult to get out of. In addition, there may be workplace safety and liability issues, if a staff member is directed rather than being given the choice of working from home. At the new selected alternative workplace, there may be a need for specialized non-IT equipment. An example is a specialized telephone service with automatic call distribution, hunt groups, and so forth. These services are used not only by call centers but increasingly by any organization that undertakes a lot of its customer contacts via the phone. Finally, non-IT vital records also must be available at the alternative workplace. Examples are contracts and building plans, which should prove very useful, if any of the production offices were to be damaged. Using this model, it is possible to connect the cost of recovering the IT infrastructure to the cost of down time for a business process. Therefore, senior management can make a standard costbenefit analysis to determine how much should be invested in a continuity capability. So far, we have discussed business continuity planning, its various issues to consider, and its tremendous importance. We now consider the relevance and the importance of supply chain systems on the business continuity.
supply chAIn From A busIness contInuIty perspectIve When a single business considers its business continuity needs, it tends to look at its internal processes. A formal supply chain initially needs to
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take a similar approach; that is, it needs to look at the overall processes within the supply chain. The difference is that there are more potential points of failure, less control as discrete organizations are involved, and potentially less overall clarity. The greater potential points of failure arise where a process goes across a number of organizations with no single management. No matter how closely organizations work together, they are unlikely to have the same cohesion as a single organization with a single CEO. This will be compounded, if an organization is in multiple unrelated supply chains, such as a global logistics organization may be. This is where supply chain governance becomes important, which is discussed later in this chapter. As individual organizations review their own internal procedures, there is a natural boundary to the development of an internal continuity plan (i.e., internal activity only). There is a similar boundary for the supply chain, where the process relates only to the members of the private exchange, industry vertical marketplace, or other structure. If members of a supply chain already are working across organizational boundaries, they should seriously consider extending the business continuity process used in the formal supply chain to the suppliers that support their critical business processes. As organizations increase the amount of outsourcing, supply chains get more complex, which has an impact on the management of a continuity plan. For example, in a four-organization supply chain, if each organization outsources three extra-critical activities (e.g., IT, transport, plus some manufacturing activity) to different suppliers, the number of organizations in the supply chain increases to 16. Potentially, this could vastly complicate the management of a continuity plan, which is why a simple high-level approach should be adopted to manage continuity for the supply chain.
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Even when operating domestically, an organization should conduct its analysis of the whole supply chain, taking into consideration potential risks from overseas suppliers that also may become a threat, which is crucially relevant, when at least one of the member organizations of the supply chain relies on overseas supply. The process of comparing a particular impact on a domestic level is far less complex than that of the whole supply chain. Although it is a challenge to an organization, it can be simplified by addressing critical suppliers only. Again, deciding how much time to spend can be based on a simple cost-benefit analysis so it remains straightforward. As with a single vertically integrated organization, synchronization is the key to an efficient supply chain. Synchronization is more difficult to achieve than in a single organization, because there is less control, and that synchronization typically is achieved by the interconnection of IT systems. The basic driver for business continuity within an organization is risk management, which is part of corporate governance. Corporate governance and risk management together should be the driving force in any successful supply chain. Without undertaking a risk-management-driven business continuity approach, supply chain members simply would not be able to identify where the potential risks are, let alone be able to manage them. As previously mentioned at the beginning of this chapter, the point of a business continuity plan is to protect the critical business processes of an organization. A supply chain has two effects—it spreads the critical business process beyond the boundaries of the organization, and it diffuses the responsibility for continuity throughout the supply chain. In a single organization, there is a growing acceptance that the board of directors has the overall responsibility of implementing the business continuity initiative; however, depending on the nature and the infrastructure of a supply chain, the responsibility is spread among all the participants.
Business Continuity Challenges in Global Supply Chains
Figure 3. SCS for a white goods manufacturer Ca
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Supply chain governance can be implemented in many forms and will be dependent on the type of supply chain. Typically, there is one organization that is responsible for the management of the supply chain, and that is where the responsibility for governance lies. The challenge is to define the beginning and the end of the supply chain. For example, a white goods manufacturer may develop a supply chain that upstream involves suppliers of electric motors,
gear boxes, electronic control panels, packaging, steel, and other components. Downstream, the chain may involve transport, warehousing, and major retailers. It can be argued that downstream, the chain ends at the retailer. Upstream, from a supply chain management perspective, it can be argued that the supply chain ends with, for instance, the electric motor manufacturer. However, this motor manufacturer has its own supply chain for its components and may have little awareness
Figure 4. SCS for a white goods manufacturer (disrupted) Ca
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of the white goods manufacturer’s transport and warehousing issues. A simplified supply chain map for the white goods manufacturer may look like Figure 3. However, if a supplier to the electric motor manufacturer has an incident that disrupts its ability to supply, then the white goods manufacturer, warehousing, and transport contractors all may be impacted. In addition, the other supply chain lines upstream from the white goods manufacturers (e.g., gear box, control panel, etc. suppliers) also may be impacted, because there will be a reduced demand for their products. The supply chain map then looks like Figure 4, where organizations on either side of the impacted organization are most impacted, but, with the white goods manufacturer having to use its stocks of electric motors, the gear box manufacturer and packaging supplier are likely to be affected. The more tightly integrated the supply chain is, the greater is the impact. Supply chain governance needs to consider the causes of an incident. In a physical goods supply chain, these include the inability to supply physical goods or the total loss of a business process, as demonstrated in the following section. •
•
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Loss of Physical Goods: This can be caused by damage to the manufacturing plant, warehousing, or (for imported goods) by the loss of a shipping vessel. This can be addressed by increasing stock or duplicating warehouses or suppliers. However, these measures are very expensive to implement and should be weighed against the cost of not being able to supply. Failure of Business Process: An organization may have the goods but are not able to supply them, because, for example, the shipping process has failed. As explained above, some critical business processes require both IT systems and people. If a supplier organization suffers an incident that affects its
head office and computer center, it may not be able to control its manufacturing, quality checking, and shipping. This would reduce greatly its ability to ship goods, especially in a tightly integrated supply chain, where shipping advices, invoicing, and quality reports are provided electronically. The supply chain, as a super-organization, is unable to undertake one of its critical business processes. The above model needs to be considered from the ordering, fulfilment, and service supply chain perspective.
ordering Organizations typically require that ordering and confirmation take place as a single speedy process. In a supply chain situation (which implies that there is an ongoing relationship between the parties), any supplier that requires 24 hours to confirm the ability to supply is at a severe disadvantage and will introduce inefficiencies to the supply chain. Ordering, for example, is a business process (i.e., no physical goods or services are provided at this point). A business process requires that people and IT be able to react rapidly to filling orders and confirming their delivery. This must be undertaken with a predictable level of service. Within a supply chain, there may be many order receiving points, and the failure of any can affect the efficiency and, therefore, the overall cost to members of the supply chain. Therefore, such processes must be protected as part of a business continuity plan; that is, the connections between processes should be identified, the critical business periods agreed on, the cost of down time calculated, the risks identified, and the continuity processes established following a cost-benefit analysis that explicitly considers the cost of down time.
Business Continuity Challenges in Global Supply Chains
Fulfillment Predictable fulfillment increases in importance as the supply chain becomes more tightly integrated and inventory costs are reduced through just-in-time deliveries. There are two parts of fulfilment—the physical provision of the goods and the business processes that support the fulfillment process. If the goods are being supplied from inventory, the basic key processes are the suppliers’ inventory and shipping; transport contractors booking, tracking, tracing, and proof-of-delivery; and the purchasers receiving. In any supply situation of any size, it is unlikely that supply can take place if any of these processes fail. They all rely on people and IT; therefore, these critical processes must be protected by a business continuity plan. If the goods are not being supplied from inventory, the process becomes more complex, as back-order management and manufacturing processes also are involved. In addition, there is the issue of the protection of the physical goods.
services supply chains As a result of organizations outsourcing a greater number of services, this type of supply chain is increasing. Examples are IT, legal, and travel. The increasing flexibility of communications makes it possible to provide services from lower-cost countries encouraging providers of services to introduce further suppliers into the chain. For example, an IT outsourcer based in Europe may use a help desk company in India and an applications developer in Australia. Similarly, an online stockbroker in Singapore may use a number of intermediaries to enable their customers to buy shares on the New York Stock Exchange. In the IT outsourcing example, applications development has an ordering phase (i.e., we need these changes made) and a fulfillment phase (i.e.,
completion of the changes). With the help desk, ordering of the service (“I have a problem”) and the fulfillment (problem fixed) should take place in a very short time. The same applies to the online stockbroker. The failure of a help desk service or an online stockbroker can cause potential significant loss. However, the same approach to protecting the process via a business continuity plan can be taken. One of the key differences between physical goods supply chains and services supply chains is that the service supply chain may not be recognized as such; so, it may not have the same level of management recognition, governance, and, therefore, business continuity protection.
ImplementIng A busIness contInuIty plAn For A supply chAIn Essentially, there is no difference between developing a continuity plan for a single organization and a formal supply chain. Therefore, standard proven methods can be adopted. The two areas that require extra attention are the greater complexity due to the increase in the number of unrelated organizations working together and governance. Both the complexity of the supply chain architecture and the governance issue can be addressed, provided the strategic development and the tactical management of the continuity plan are not in conflict with one another. Essentially, each organization in the supply chain needs to make sure that upstream suppliers and downstream customers that support its critical business processes have a suitable continuity plan in place. It is not unusual for an organization to ask for details of a critical supplier’s continuity plan, but at this stage, it is uncommon to ask for details of a major customer’s plan. However, this is quite logical.
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A supply chain is a symbiotic relationship. Suppliers provide customers with benefits, such as lower prices, guaranteed delivery, guaranteed quality, and cooperation to improve flexibility and time to market. Customers provide suppliers with guaranteed business. This is the essence of the point and the driving force behind the architecture of a business continuity plan. The guarantee of business continuity needs to be there in the event a customer suffers an incident that disrupts the supply chain business continuity. Therefore, a tested continuity plan not only shows a commitment from the supplier but also from the customer. In addition, no organization is just a supplier or just a customer; it is both. An organization increasingly needs a continuity plan to demonstrate its commitment as a reliable supplier to downstream customers and as a committed customer to upstream suppliers. It follows that this approach will have significant benefits in reducing risk to a formal supply chain and can be used as a competitive advantage against the competition.
the steps to developing a supply chain continuity plan The key point in developing a continuity plan, whether it is internally within the organization or externally to include member organizations of a supply chain, is simplicity; keep it simple. If it becomes complex, it may develop into a tactical plan that may need to be taken up a level. The seven steps described earlier (Figure 1) to develop a continuity plan for a single organization are: 1. 2. 3. 4. 5. 6. 7.
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Review current continuity situation Undertake a business impact analysis Undertake a risk assessment Define the continuity strategy Design the solution Select or build the solution Document the plan and test
Assuming your organization has an appropriate continuity plan in place, the following steps should be followed to include a supply chain: 1. 2. 3.
4. 5. 6. 7. 8.
Map your supply chain Review suppliers’ current capabilities Compare their capabilities to meet the recovery times with your maximum tolerable outage (as identified by your business impact analysis) Review suppliers’ risk analyses for assumptions, impacts, and likelihoods Compare each supplier’s ability to satisfy your continuity strategy Develop improvement program Implement the improvement program Document and test
As can be seen, the development of a continuity plan for a supply chain is very similar to developing one for an individual organization. Indeed, if an organization has the experience and the skills from developing and managing its own continuity plans, it is in a very good position to extend its expertise across the supply chain. Assuming that a supply chain partner appreciates the benefits of a continuity plan for its business and for its customers, then senior managers that insist on or demand a business continuity plan to be adopted by all business partners will be involved. One way to do that is by making it a prerequisite to bidding for work. The following addresses the steps in detail. 1.
Mapping the supply chain.
Mapping can be a simple procedure, if organizations are in a formal supply chain run by a major manufacturer that is part of an industry vertical market. However, many supply chains do not have this formal structure. Use the process map that is the outcome of your own business impact analysis to identify all external organizations that are critical to each process. This can be done in an internal workshop.
Business Continuity Challenges in Global Supply Chains
Rank suppliers by the value they bring to your organization. Suggested categories are critical, important and transactional. These categories should be kept to a minimum to support simplicity. This categorization will enable you to prioritize the suppliers you work with. You also should rank them by the value you bring to their business. For example, if you have a supplier that is critical to your success, but you are not as critical to theirs, then you are in no position or have no leverage to influence them to develop a business continuity plan in order to protect your business. This is critically important information, because if they do suffer a disaster, you may not be a priority customer. In producing the supply chain map, service suppliers and utilities should be included. Identify supply type product (e.g., raw material, simple-built product, complex-built product) and service (e.g., utility, professional, financial, logistics). Add criticality (as perceived by management) and ease of replacement (e.g., legal services, which know the organization, but a tactical view of an agreement could be obtained from another source; and logistics, wherein a simple transport easily could be arranged, but a complex warehousing and fulfillment operation could not). This will help identify their criticality and the likelihood of easy replacement. The supply chain map can be color coded to identify criticality, supply type, and single source suppliers. In this way, the map can be used as an ongoing tool to identify weaknesses in the supply chain and threats to your organization. This is an example of using business continuity tools to improve the business process. As discussed earlier, a simple way to consider disaster scenarios is to consider denial of access. This avoids becoming caught in the detail trap of contemplating all the issues that could cause a disaster. The same approach can be used to test your supplier’s disrupted ability to supply your organization. Just consider a denial of access to
that supplier. What would be the impact on your organization? If the impact is major, and if your supplier is the sole provider of a certain category, then you need to ensure that the supplier has a strong business continuity plan. Building an accurate map is the foundation activity in ensuring business continuity for the supply chain. The emphasis should be on thoroughness rather than speed, ensuring that many people throughout your organization are involved. As with other areas of data collection and assembly in business continuity, there are advantages in engaging an outside specialist to ensure that all questions are asked, all assumptions are challenged and structured documentation is produced. 2.
Review suppliers’ current capabilities.
You are only concerned with the information that affects your critical business processes, but sometimes, other processes can have an impact, too. For example, if you are dealing with a transport company, you may be interested only in its ability to take orders, run its track, trace shipments, and provide a proof of the delivered product. However, if an organization is a unionized shop running under an agreement, there may be issues about its staff being paid on a certain day of the week. Therefore, you may need to check how the payroll system is protected, as industrial unrest could affect their ability to operate. Having said that, the main focus needs to be on their processes that affect you. Building and strengthening business continuity plans takes time, so it is better to base it on an audit plan that is consistent and sharable. The best approach is to give information about your plan and needs before asking for information so the context is set. This has the advantage of outlining the type of information you require and establishing an open, sharing environment so that broader information sharing can take place.
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Start off with key points from your recovery plan, such as the following: • • • • •
Key business processes Processes that rely on this particular supplier Maximum tolerable outage Scenarios from which you plan to protect your organization Outline of continuity plan to ensure that critical business process can continue.
This is best done with a standardized template. The following are examples of questions to ask suppliers: a.
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Do they have a continuity plan? If they do: • When was it last tested? • What were the results, and will they share the reports with you? • Have they conducted a business impact analysis? Will they provide a synopsis to you? (Few organizations will share their complete business impact analysis, because it may contain financial and other confidential information.) • Have they conducted a risk analysis? Will they provide a synopsis for you? • What are the critical business processes they aim to protect? What is the maximum tolerable outage for each of those processes? • What disaster scenarios was their planning based on? • How do they protect them? • What is the maximum tolerable outage for the processes that your organization relies on? • Who has management responsibility for the continuity plan?
b.
If they don’t: • What plans do they have? If they don’t, what plans do they have to implement one? • What are the key processes for their whole business? What agreements do they have in place? How will they be reviewed? • What do they see as the major risks to their ability to supply? • Who are their key suppliers, and do those organizations have a satisfactory continuity plan? • What workarounds do they rely on? Workarounds can be a major trap in continuity planning. They can include reverting to manual processes if a computer system is not available or assuming that a product or service is available from an alternative supplier. All workaround assumptions need to be tested rigorously. For example, in the case of reverting to the manual system that was in place before the computerized system, you should ask how often the manual system is exercised and how experienced those using the manual system are. It may be that those who used to run the manual system are no longer with the organization or are in a completely different role. In this circumstance, the future of your supply chain is in some very inexperienced hands. In the case of reliance on an alternative supply, the failure of the main supplier may lead to shortages in the market, so any secondary supplier may not be able to meet demand, unless there is a service level agreement in place. In addition, the alternative supplier may not be familiar with the level of service required. It may be necessary to provide the alternative supplier with some ongoing business in order to ensure the relationship and their interest.
Business Continuity Challenges in Global Supply Chains
All assumptions supporting workarounds need to be documented and each one challenged.
concerned parties. This is because unnecessary features would not have been included. 7.
3.
Compare their capability to meet the recovery times with your maximum tolerable outage (as identified by your business impact analysis).
Implement the improvement program.
At this point, you need to make a judgment as to whether this plan will support your processes satisfactorily. This decision will draw on your own organization’s growing knowledge of business continuity.
This needs to be run as a standard project with full project management support. It is likely that your organization and the supplier organization will use different project management methodologies; this may complicate the implementation. It also is likely that the improvement program will involve people from many different parts of the supplier organization, so adequate time and resources should be allowed.
4.
8.
Review suppliers’ risk analysis for assumptions, impacts, and likelihoods.
Again, as you will have carried out an analysis for your own organization, you will draw on your own growing knowledge. 5.
Compare the supplier’s ability to satisfy your continuity strategy.
This will require the involvement of your operations staff that has the day-to-day responsibility of running the critical business processes with which the supplier in question interfaces. They would know impacts and potential workarounds. 6.
Develop an improvement program.
On the first review, it is highly likely that a critical supplier’s continuity plan would not meet your requirements, as it would have been developed in isolation from your needs. If, however, it was developed in conjunction with you as a customer and your supplier’s upstream suppliers (based on a spirit of cooperation within the supply chain), it stands a much better chance of satisfying your needs and will probably be a lower cost to all
Document and test.
One of the traps for an organization testing its own continuity plan is that it only may test one part of its plan at a time. This is only appropriate if full locations are tested together. For example, sometimes organizations split the recovery testing of applications that are provided from a single data center. This can be quite dangerous, because a full test will not have been carried out if that data center is not destroyed. One of the benefits of testing a continuity plan for a supply chain is that parts of it can be tested at a time. In a supply chain, it is likely that the various organizations will be geographically distributed. So, individual organization testing may be appropriate. However, the locations of all facilities that support the critical business processes must be identified and their distances from each other noted. If, for example, the data center of one member of the supply chain is half of a kilometer from the data center of another member of the supply chain, the risk should be noted, and the test to recover both should be scheduled for the same time that a single incident could affect both sites. This is becoming increasingly important with the development of large technology parks. The
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Business Continuity Challenges in Global Supply Chains
trend toward outsourcing also impacts this, as two or more supply chain members may have outsourced their help desks to the same organization, making the outsourcer a member of the supply chain. There is no fixed rule as to how often a continuity test should be undertaken; however, it should not be less often than once a year. Greater frequency is driven by the rate of change within the supply chain itself and the members of the supply chains. Any significant change to a critical business process or infrastructure to support those processes should trigger a test. 9.
Ongoing Review.
After the supplier’s plan has been established to your satisfaction, it will be necessary to review it on a regular basis. A key question is how far back do you follow the chain of continuity capability? Each organization in the supply chain is dependent on others further up the chain. This is where the categorization of suppliers into critical, import, and transactional can be used. By reviewing your critical suppliers and ensuring they have reviewed their critical suppliers, you can address the most important parts of the supply chain. This also will provide an understanding of the impact of failure by an organization with which you do not have a contractual relationship, but which could have a severe impact on your business. If this can be approached as a collaborative program jointly managed by all key members of the supply chain, experience will be shared in an open forum, which will make the whole process much more efficient and will support the development of best practice. The more strategic and balanced the relationship (i.e., the more important you are to each other), the more it is reasonable to ask. The issues should be the same as those addressed within your own organization—key business processes, key external suppliers (and whether their continuity
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plans have been checked), major perceived risks, and results of last tests. The review approach should be developed so that it helps the suppliers. There should be no use of language internal to your organization, and reports should be sharable. Openness can be encouraged by sharing the results of your organization’s tests. The review comprises two functions: ensuring it meets your changing business needs (including any changes driven by regulators, legislation, the market, etc.) and ensuring it operates as documented. By keeping the critical process documentation and the supply chain map up to date, it is straightforward to check whether, at the strategic level, the continuity needs of your organization are being met. This should be a senior management responsibility and should be reviewed on a quarterly basis or more, if the organization is undergoing significant change. Ensuring that suppliers’ plans operate as documented will involve close and trusted working with suppliers. The best situation is if they will allow someone from your organization to attend their rehearsals. In this way, you will gain a greater understanding of their thoroughness of testing and continuity. Alternatively, you can ask for copies of reports that the testing team should be sending to their own management. This should include objectives and outcomes, scenario, and how the activities being tested fit into their overall plan.
conclusIon And Future trends This chapter discussed business continuity within the context of supply chain management. Continuity planning is growing slowly but principally in individual organizations. The only signs of growth in supply chain is that, as organizations outsource requirements, they are looking for strong evidence of continuity capability in potential suppliers.
Business Continuity Challenges in Global Supply Chains
As sectors become regulated (e.g., financial services), they will demand continuity from their supply partners. As regulators make boards of directors responsible for continuity, directors will question what continuity capability their organisation and supply chains have. Certain sectors, particularly financial services, are becoming increasingly regulated globally. Often, the regulators are stating that the board has overall responsibility to ensure that an appropriate continuity plan is in place. Typically, directors of financial services company boards also sit on a number of other boards so we could see these other boards also requiring that a continuity plan is in place for these other organizations. In this way, we could see the requirement for strong continuity plans spread. Some other issues and trends that may emerge include the following: •
•
•
As organization seek to concentrate on their key differentiators, more outsourcing will take place; therefore, supply chains will become more complex. As supply chains become more complex, there is an increased likelihood that organizations will be impacted by a continuity issue somewhere in their increasingly complex chains. In an attempt to effectively manage outsourcing, service level agreement will become more prevalent and sophisticated. There will be a lower tolerance of failure to meet service levels based on an incident (i.e., some type of preventable disaster), forcing organizations to develop continuity plans.
•
•
We cannot foresee events that will strike; therefore BCP development can and should be seen as a training exercise. If you undertake the planning, your organizations will be far more able to adapt than if none had taken place. Organizations should keep their thinking broad concerning likely causes and think of a denial of access. There will be a need for a standardized auditing process or maybe even a continuity standard so organizations can show they have a plan that meets a basic requirement. Singapore has adopted this approach in order for organizations to obtain certification to the business continuity standard adopted by SPRING Singapore (the Standards, Productivity, and Innovation Board). We have a long way to go before that happens more generally, as there is still too little understanding and adoption of continuity as a standard approach to business. Therefore, organizations and their supply chains will continue to be at risk. Even if this were to happen, a standardized approach still would not be satisfactory for critical suppliers, as a higher standard may be required, so an audit based on strong symbiotic relationship still would be required.
reFerences This chapter is based on the author’s work at Hewlett-Packard in Sydney, Australia.
This work was previously published in Global Integrated Supply Chain Systems, edited by Y. Lan; B. Unhelkar, pp. 320-339, copyright 2006 by Information Science Publishing (an imprint of IGI Global).
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Chapter 7.10
Aligning Business Processes with Enterprise Service Computing Infrastructure Wei Zhao University of Alabama at Birmingham, USA
Barret R. Bryant University of Alabama at Birmingham, USA
Jun-Jang Jeng IBM T.J. Watson Research, USA
Rainer Hauser IBM Zurich Research, Switzerland
Lianjun An IBM T.J. Watson Research, USA
Tao Tao IBM T.J. Watson Research, USA
Fei Cao University of Alabama at Birmingham, USA
AbstrAct Multisourced and federated business operations and IT services are the backbone of today’s enterprise. However, in most companies, there exists a natural gap and disconnection between the decision and evaluation at the business level and the execution and metrics at the IT level. This disconnection can lead to end-user dissatisfaction, diminished profit, and missed business objectives. In this chapter, we study the problem of this disconnection and provide the following frameworks and techniques toward bridging
the gap: (a) We provide a model-transformation framework that effectively transforms businesslevel decisions documented as business-process models into IT-level executable representations based on service-oriented infrastructure, (b) a framework is described that is able to monitor and synthesize IT-level performance and metrics to meet service-level agreements between business management and end users, and (c) techniques and experiments are discussed that enable dynamic adaptation of IT infrastructure according to business decision changes.
Aligning Business Processes with Enterprise Service Computing Infrastructure
IntroductIon Multisourced and federated business operations and IT services are the backbone of today’s enterprise. However, in most companies, there exists a natural gap and disconnection between the decision and evaluation at the business level and the execution and metrics at the IT level. This disconnection can lead to end-user dissatisfaction, diminished profit, and missed business objectives. In this chapter, we will discuss some frameworks and techniques to bridge the gap. First of all, we define the scope of businesses that are of particular interest in this chapter. The content of this chapter is suitable for a particular kind of business that is called dynamic e-business (DeB; Keller, Kar, Ludwig, Dan, & Hellerstein, 2002), although traditional types of business might also benefit from this chapter with some adaptation. Dynamic e-business, also called the virtual enterprise (Hoffner, Field, Grefen, & Ludwig, 2001), consists of an interconnection of loosely coupled and dynamically bound services provided by possibly different service providers with long and short business relationships. Those services together offer an end-to-end service to customers. There are three aspects of the disconnection: how the business decisions are executed by the IT professionals, how the IT services are evaluated and synthesized according to business needs, and how to effectively reflect changes from one side of the gap to the other. 1.
On one hand, senior management and lines of business tend to prescribe their decision on business operations in the form of informal drawings and policy rules, while IT-level professionals execute these decisions, after a manual translation, in terms of IT-domain technologies such as objects, classes, procedure calls, databases, and so forth. We first describe a model-transformation architecture that effectively transforms business-
2.
3.
level decisions documented as businessprocess models in a DeB environment into an IT-level executable representation based on service-oriented infrastructure. This IT infrastructure utilizes the Web and the Internet as the underlying operation environment and the Web-service technology family to realize the execution. On the other hand, the IT department usually gauges its IT services based on individual IT components such as database transaction rate, Web-server response time, and network bandwidth availability, while business managers measure their business supported by those IT components in terms of overall business services such as overall user experience and supply-chain management. Our work on system dynamics modeling (SDM; Sterman, 2002) offers a comprehensive framework for service-level agreement (SLA) management (Bitpipe, 2005). SDM establishes SLA contractual commitments at the business level, continuously monitors the IT services delivered, and synthesizes IT performance metrics against business commitment. Change management is always a hard problem. How the IT system responds to the changes in the business environment is called the moving-target problem (Schach, 2005). The agility of an enterprise depends on the responsiveness of its IT infrastructure. On the other side of the mirror, how the enterprise tolerates the changes in the IT environment is called technology drift. In this chapter, we are only concerned with the first problem. We discuss techniques that enable the dynamic adaptation of IT infrastructure with realignment to the changed business decisions and reconciliation with the existing running infrastructure. These techniques are particularly useful for a business that is mission critical and has high availability requirements.
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busIness processes And theIr lIFe cycle
6.
business-process life cycle Business processes capture automated solutions for the business operations of an enterprise. Adaptive business processes have a closed-loop life cycle (Nainani, 2004) as shown in Figure 1. A closed-loop life cycle includes the following phases. 1.
2.
3.
4.
5.
Modeling phase: Business analysts create a graphical process model using a particular business-process management (BPM; BPMI, 2005) product. Simulation phase: The process model runs through some hypothetical scenarios to identify critical paths and bottlenecks. During the simulation phase, dynamic analysis is performed to refine the process. Implementation phase: The finalized process model is transformed into an executable representation. Static analysis is performed during transformation to provide the modeler more information to refine the process model. Deployment and execution phase: The process is deployed into a run-time environment for execution. Monitoring phase: The running process is monitored continuously. Various key performance indicators (KPIs) are synthesized and reflected to the “dashboard” for viewing and controlling by the management personnel.
Optimization phase: Based on the performance metrics from the monitoring phase, the process model can be modified to achieve better performance.
Reverse engineering is necessary in both the implementation phase and the optimization phase as indicated by the dotted feedback lines in Figure 1. It is possible that software engineers will directly change the implementation. In order to make the model and implementation consistent, reverse engineering has to be performed to reflect implementation changes at the model level. Similarly, in the optimization phase, engineers could tune the implementation in order to achieve a higher performance requirement. This change again has to be reflected at the model level through reverse engineering.
business-process model and the Abstract process graph Diagramming and drawing are common and effective ways to communicate the understanding of business operations among management members. A visualized documentation of business processes resulting from the modeling phase (in the business-process life cycle) is usually a formalization of such drawings and is called the business-process model. A business-process model concerns the dynamic behavior of an enterprise. Other aspects of the enterprise such as information (e.g., products and documents), organization structure, policy rules, and security are not the primary concerns of process models
Figure 1. Business-process life cycle Model
Simulate
Implement
Optimize
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Deploy and execute Monitor
Aligning Business Processes with Enterprise Service Computing Infrastructure
but might be connected with the process model. Zhao, Bhattacharya, Bryant, Cao, and Hauser (2005) have investigated the classification of available business-process modeling tools. Similar to traditional software design (Schach, 2005), although at a higher level of abstraction, there are two categories: the tools that are based on the data-driven principle, and the tools that are based on the operation-driven principle. To model business processes, the data-driven principle takes business artifacts (Nigam & Caswell, 2003) as the first-class entity. Artifact processing is a way to describe the operations of a business. The end-toend processing of a specific artifact, from creation to completion and archiving, are captured in the artifact life cycle. The artifact life cycle is usually represented as a state machine (Kumaran & Nandi, 2003) that orchestrates a set of business activities and events that trigger state transitions in the artifact life cycle. The operation-driven principle takes business tasks as first-class entities and defines the operational order of a set of atomic business tasks and subprocesses that again consist of atomic business tasks and subprocesses. This principle underlies workflow modeling languages such as the unified modeling language (UML; UML 2.0 Superstructure Final Adopted Specification, 2003) and business process modeling notation (BPMN; BPMN Specification, 2004). Different tools offer different modeling notations. However, all these models can be normalized into an abstract model called a process graph. A process graph can be treated as a finite automaton (FA) with three differences. 1. 2.
3.
The process graph contains concurrency that is absent in an FA. In a process graph, each edge is assigned a unique identifier, while in an FA, the input symbols annotated on the edges can be repeated. For each state in an FA, there is an outgoing edge for each input alphabet symbol. This rule does not need to be true in a process graph.
A process graph is defined formally as follows. Definition 1: A process graph is a five-tuple (Q, Σ, δ, q0, qend), where 1. 2. 3.
4. 5.
Q is a finite set called the nodes, Σ is a finite set called the edges, the mapping rule δ: Σ( q1, q2) where q1 ∈ Q and q2 ∈ Q applies (i.e., for each edge e∈ Σ, there is a pair of nodes (q1, q2) such that q1 is the tail of the edge and q2 is the head of a → B is an edge the edge. For example, A a with two nodes A and B; A is the tail of a and B is the head of a.), q0∈ Q is the start node, and qend∈ Q is the final node.
bridging the gap in the businessprocess life cycle The disconnection between business and IT introduced previously reveals a disconnection between phases in the business-process life cycle. 1.
Primarily there are two ways to bring a business-process model from the modeling phase to an executable form in the implementation phase: manual transformation and automated transformation. In traditional business-process development, software engineers take the process model (or documentation of some other format) from the business analysts and manually reinterpret it into an executable language. As explained previously, manual transformation makes its way to the cultural gap between businesslevel documentations and IT representations. The model-transformation algorithm described in this chapter automatically transforms a business-process model into an executable representation. Since the business process execution language for
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2.
3.
Web services (BPEL4WS, or simply BPEL; Business Process Execution Language for Web Services, Version 1.1, 2003) has emerged as the standard executable business-process representation, we chose BPEL to be our target implementation language. During the monitoring phase, the running system has to be continuously monitored and the low-level IT metrics have to be synthesized and translated into high-level measurements understandable by the business-level personnel. SDM is particularly useful in bridging the gap during the monitoring phase. In the optimization phase, a business-process model can be statically changed and redeployed, or directly and dynamically updated. Dynamically updating the running business process is an effective way to manage changes in the optimization phase.
We will discuss model transformation, SDM, and dynamic updating later in the chapter.
model trAnsFormAtIon transformation goal The specific goals for transforming a businessprocess model into BPEL are (a) to generate the implementation code of an optimal size for any arbitrary process model, (b) to preserve the natural Figure 2. An example process graph
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structure of business-process models in the generated code, and (c) to transform the concurrent processes. The preservation of process structure is necessary because from the process model we can only generate abstract BPEL code. Software engineers and integrators have to go through the generated code to perform tasks such as implementing needed services and performing bindings to the existing executable services. The technical difficulty involved in this transformation comes from the fact that BPEL is a structured language, whereas the computation style of the business-process models is based on “go-to.” It is difficult to transform the unstructured go-to control flows into structured statements when the process model is irreducible. Our algorithm is designed specifically for solving an irreducibility problem for which a satisfactory solution has not been found in existing research efforts and tool implementations. Some individual parts of the algorithm have been presented in our earlier papers (Zhao et al., 2005; Zhao, Bryant, Cao, Hauser, Bhattacharya, & Tao, in press; Zhao, Hauser, Bhattacharya, Bryant, & Cao, 2006). Pointers to a particular paper about a specific topic will be given. We first look at what the irreducibility problem is. Figure 2 is an example process graph. A naïve transformation algorithm traverses the graph of Figure 2 and outputs two types of code at each node: a conditional statement such as “switch” or “if-else,” and a loop statement such as “while” if the node is the entry of a natural loop. A natural
Aligning Business Processes with Enterprise Service Computing Infrastructure
loop is a loop that has a dominating entry, for example, the loop with nodes B and D where B is the dominating entry (Aho, Lam, Sethi, & Ullman, 2007). Based on this scheme, the pseudocode for Figure 2 is: invoke A switch case a, invoke B while f invoke D switch case h, invoke E, exit case g, invoke B case b, invoke C ……? .
However, the loop involved with B and C cannot be represented because it does not have a dominating entry; that is, two entries B and C do not dominate each other. This type of loop is called an irreducible loop (Aho et al., 2007). Zhao et al. (2006) have an in-depth analysis of the definitions and the problems with irreducible loops. A graph that contains irreducible loops is called an irreducible graph. Irreducibility is a classic problem in compiler theory. Traditionally, irreducibility is solved by using node-splitting techniques (Cocke & Miller, 1969) to translate an irreducible graph to a reducible graph. However, node-splitting techniques result in an equivalent but exponential reducible graph (Carter, Ferrante, & Thomborson, 2003), or at most one with a controllable size but worst-case exponential complexity (Janssen & Corporall, 1997).
related model-transformation methods Different frameworks and methods have been proposed for transforming models to models or to code (Czarnecki & Helsen, 2003). However, none of these frameworks solve the irreducibility problem. •
The visitor pattern (Gamma, Helm, Johnson, & Vlissides, 1995) is a simple way of code
•
•
generation. Code is output at each node when an object structure is traversed. The above naïve transformation algorithm can be implemented using the visitor pattern. In fact, the visitor pattern does not provide a more mechanical advantage over the traditional code-generation approaches of compiler theory, but rather a better separation of concerns. The visitor pattern separates the operation (e.g., code generation in this case) from the object structure that it is operated on. Shown in the above naïve transformation algorithm, generating code by simply traversing the object structure does not solve the irreducibility problem. Template-based model-to-code or modelto-model transformation is introduced in Cleaveland (2001). According to Czarnecki and Helsen (2003), “A template usually consists of the target text containing splices of meta-code to access information from the source and to perform code selection and iterative expansion.” One typical example of the template-based approach is using XSLT (Cleaveland). The template-based approach is a major model-transformation approach underlying many model driven architecture (MDA) tools such as rational software architect (IBM, 2005a) and Codagen Architect (Codagen Architect 3.0, 2006). However, the template-based approach does not provide a solution to unravel unstructured and arbitrary go-tos into structured statements. A relational approach is proposed by Akehurst and Kent (2002) to define and implement transformations between metamodels. The idea is to treat the source and the target elements as a mathematical relation. A language is used to specify the relations. The goal is to generate transformation tools from the specification. Nevertheless, the task in our problem domain is not a definition of simple mappings from the entities in the source to the entities of the target, but a map-
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Figure 3. A business-process model in IBM WBI Modeler
Figure 4. The corresponding BPEL code of Figure 3 <source linkName=”link1”/> <source linkName=”link2”/> <source linkName=”link3”/>
•
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ping from the structure of the entities in the source model to the structure of the entities in the target model. More importantly, the source and the target are structuring entities based on different principles. For the same reason as above, the graphtransformation (Andries et al., 1999; Agrawal, Karsai, & Shi, 2003) and structure-driven (Compuware, 2005) approaches, mapping the graph pattern and model element from the source model to target model, do not solve our target problem.
Some commercially available tools such as IBM WebSphere® Business Integration (WBI) Modeler (IBM, 2005b) provide the implementation of automated transformation from businessprocess models to BPEL. However, the implementation is based on a direct transformation scheme by using links (Kong, 2005; Mantell, 2003). A link is a BPEL construct that represents synchronization between multiple concurrent threads. This translation is illustrated in Figures 3 and 4. Based on the semantics of links, the target of a link has synchronization dependency on the source of the link. Therefore, links cannot form a cycle in a single BPEL-process specification to avoid the deadlock situation. As a result, this translation scheme restricts arbitrary cycles from being drawn from downstream nodes to upstream nodes in the process model.
the proposed trAnsFormAtIon Our approach is based on the observation that a regular expression (RE) is a theoretical model of the structure of the structured programming languages. RE has structured control-flow constructs: concatenation, or, and star. Therefore, we first transform the process graph to an RE; RE is then translated into BPEL using syntax-directed translation. Instead of treating an RE as a definition of a regular language, we consider an RE
Aligning Business Processes with Enterprise Service Computing Infrastructure
Figure 5. An electronic purchase system
Figure 6. The abstracted process graph of Figure 5
sentence a program written in a regular expression language (REL). Therefore, the REL can be easily customized to support specific features of our transformation system such as concurrency. To illustrate our approach, we use an electronic purchase system as an example. The process of this example is shown in Figure 5. This process model is based on the operation-driven principle. The named rectangles denote tasks to be performed. The lines show the ordering of those tasks. The vertical bars are forks and joins. The description of the example is as follows. From the initial page, an existing user has to log onto the system. If the log-on succeeds, the authentication service is invoked. Authentication can fail if the user provides the incorrect password, in which case the log-on is repeated. If the log-on detects the user does not exist, the user should be directed to the register function. From the initial page, new users should register. If they succeed, they can go to the log-on page. The registration page can be repeated in case of mistakes. After authentication, the user can simultaneously select a new product to purchase or display the wish list. The new-product purchase process consists of
selecting a new item, configuring that item, and then placing an order for it. This process can be repeated for multiple items. After the user reviews the wish list, he or she can simultaneously place an order for some items and perform deletion on others. When the user finishes all the activity, he or she logs out of the system. For the convenience of demonstrating the algorithm, the name of each task is abstracted as a single alphabetic letter. The abstracted process graph of Figure 5 is presented in Figure 6. First, we demonstrate how to linearize a process model into an REL sentence. We use and extend the set-equation algorithm (Denning, Dennis, & Qualitz, 1978) for this purpose. The first step is to extract a set of equations. The set of equations for the graph in Figure 6 is as follows. A=aB + bC
(1)
B=cC + fD
(2)
C=eC + dB
(3)
D=gB + hl
(4)
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Aligning Business Processes with Enterprise Service Computing Infrastructure
l={iE – nH}
(5)
E=jF
(6)
F=kG
(7)
G=mE + ln
(8)
H=om
(9)
m={pI – qJ}
(10)
E
H
N
I=rn
(11)
F
M
K
J=sn
(12)
G
n=tK
(13)
Figure 7. The dominator tree of Figure 6 A
B
C
D
K=ε
(since K is the final state)
L
d.
(14)
I
J
Distributive +: R(S+T) = RS+RT, (S+T)R = SR+TR
e.
The + symbol means XOR. Each fork node starts a concurrent region denoted by the { and } symbols. Different threads are separated by the – symbol. The fork and join nodes are in bold face and underlined only for the purpose of indicating their specialty. It is not part of REL syntax. In these equations, the capital letters (nodes) can be treated as unknowns as in mathematical equations; the lower case letters (the edges) are the coefficients. To solve the equations, all the unknowns have to be substituted except the start node. The solution of the start node, node A in our example, would be the resulting RE. There are four types of rules to solve the set of Equations 1 through 14. 1.
2.
Standard algebraic substitution: Substitute an unknown with its value. For example, A=aB, B=cC => A=acC. Standard RE algebraic laws: a. Commutative +: R+S = S+R b. Associative +: R + (S+T) = (R+S) + T c. Associative concatenation: R (ST) = (RS) T
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3.
4.
Antidistributive +: is the inverse of d. Arden’s rule for the removal of self-recursion: For example, C=eC+dB => C=e*dB. Please refer to Denning et al. (1978) for the proof of Arden’s rule. Merge of join node: If multiple threads coming out of a fork node have the same join node in the equation, this join node can be merged. For example, A={ab – bb} => A={a-b} b.
Given a set of equations, there exist multiple syntactically different but equivalent REs as the solution for the start state. Since the RE is an intermediate step through which we generate the target code, the complexity of the RE directly reflects the complexity of the target code. Three strategies for the application of equation-solving rules can help us to control the complexity of the generated REL. The detailed discussion and proof for Strategies 2 and 3 are presented in Zhao et al. (2006).
Aligning Business Processes with Enterprise Service Computing Infrastructure
1. 2. 3.
Regular states are substituted before concurrent states. Arden’s rule is applied only before the node is going to be substituted. Among the regular states or concurrent states, the order of node substitution is from the bottom up in a dominator tree (Aho et al., 2007) of a graph. Node m dominates node n if and only if m is an ancestor of n in the dominator tree. The dominator tree of Figure 6 is shown in Figure 7.
A=(a + b e*d) (c e*d + fg)*fhl
(20)
l={i(j k m)*jkln – no{pr – qs}n }
(21)
n=t
(22)
Merge the node n with Equation 21, and then substitute Equation 22 into Equation 21, and 21 into 20 to obtain the final equation: A=(a + b e*d) (c e*d + fg)*fh {i(jkm)*jkl – no{pr – qs}} t.
(23) The step-by-step guide of how to solve equations that contain only regular states based on the organization of a dominator tree using equationsolving rules 1, 2, and 3 can be found in Zhao et al. (2006). After all the regular states are substituted, the following set of equations result. A=(a + b e*d) (c e*d + fg)*fhl
(15)
l={i(j k m)*jkln – nom }
(16)
m={prn – qsn}
(17)
n=t
(18)
The final REL sentence should go through the optimization step. There are two types of optimizations: (a) general RE optimizations and (b) loop look-ahead common subexpression elimination (or loop-exit optimization). General RE optimizations include common subexpression elimination and loop normalizations. Interested readers may refer to Zhao et al. (2006) for a detailed discussion on the optimizations. Loop-exit optimization puts the loop-exit indicator of brackets inside the body of the loop. After the loop-exit optimization, the REL sentence becomes: A=(a + be*d) (ce*d + f [h] g)*h {i(jk [l] m)* l – no{pr – qs}} t.
Using rule 4, we get
(24) m={prn – qsn} => m={pr – qs}n.
(19)
Substituting Equation 19 into Equation 16, we get the following set of equations.
Through syntax-directed translation, Equation 24 can be translated into BPEL (a simplified version is presented in Figure 8). The loop-exit condition indicated by brackets in REL is rep-
Figure 8. The generated BPEL code for Figure 6 <process> <sequence> <switch>
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Figure 8. continued <while condition= “c or f and not thisexit”> <switch> <sequence> <switch> <switch> <sequence> …… <sequence> ……
resented by a variable thisExit in the while loop of BPEL. Also, as indicated by the BPEL code, this process has two concurrent regions, that is, two flow constructs, and one is nested inside the other. However, based on this translation, some nodes and edges (i.e., paths) are repeated in the generated code whenever there is an irreducible loop. For example, the optimized REL sentence for Figure 6 contains repeated code “e*d” because there is an irreducible loop with nodes B and C. Strategies and optimizations can control the complexity of
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the generated code by minimizing the repetition but cannot eliminate the repetition completely. Therefore the upper bound (in the case of strongly connected components) of the generated code is exponential to the number of the nodes and edges in the input graph. The solution presented in Zhao et al. (2005) solves the problem by combining REL with another transformation scheme called the state machine controller (SMC) approach. The resulting combined method generates code of size O(n), where n is the number of edges in the process model for an arbitrary process model. The
Aligning Business Processes with Enterprise Service Computing Infrastructure
detailed discussion on transforming and analyzing concurrent process models can be found in Zhao et al. (in press), where the intermediate language REL has been proved as a powerful mechanism through which some formal properties of concurrent process models such as properly nested concurrent regions, overlapping concurrent regions, and invalid concurrent regions can be detected, analyzed, and transformed or rejected. In the next section, we will present our work on SDM and discuss how to synthesize IT-level metrics to meet SLAs concerning business-level users.
system dynAmIcs modelIng background on sdm SDM can be used to study a variety of systems. Forrester (1961) initiated systems dynamics to model various industry problems. Sterman (2000) argued that systems dynamics can be used to study business dynamics. We have also been using system dynamics to study the demand conditioning process in supply chains (An & Ramachandran, 2005) and Web-service management (An & Jeng, 2005; An, Jeng, Ettl, & Chung, 2004). In this chapter, we are interested in discussing how to use it to model business processes to establish an autonomic control system for SLA management. Autonomic SLA management includes the establishment of a service-level agreement, continuous monitoring of running processes, the synthesis of performance metrics, and an adaptation of the business processes to optimize the overall service delivered. Some issues on how to dynamically adapt the running business processes are presented later. In this section, we show how to synthesize IT performance metrics to meet overall service agreement. When applying SDM to business processes, two central aspects of a business process are addressed: dynamics and causality. SDM, com-
monly built based on system thinking and a thorough analysis of system behaviors, captures causal relationships among business tasks and the feedback-control loops for the target system. A model for system dynamics includes two major conceptual entities: stock and flow. A stock corresponds to an accumulative variable like stack or level. A flow represents dynamic changes in the content of the stock over time: inflow that increases the stock, and outflow that decreases the stock. To determine the flow rate, it is required to have system thinking about the target with a full dependency graph. Causal links from one variable to the other can be marked as positive or negative based on whether their values change in the same direction. Feedback loops are identified by checking whether all arrowed links form a loop. If the number of links with a negative sign on the loop is even, then the loop is called a positive feedback loop and causes self-reinforcement. If the number of links with a negative sign on the loop is odd, then the loop is called a negative feedback loop and causes self-correction (rebalancing).
An example We start by presenting an example businessprocess model of a supply chain shown in Figure 9 (drawn using the IBM WebSphere Business Integration Modeler). Then we will show how this process model is represented in an SDM and how the metrics can be synthesized. Major notations of this process model include activities (rectangular boxes), data repositories (cylinders), decision nodes (diamonds), merge nodes (triangles), and data (annotated lines) flowing among them. When this process model is normalized into the process graph, data repositories, decision nodes, and merge nodes can be ignored. The model starts with two parallel sequences of activities: “Order Parts” and “Receive Customer Order.” In the second sequence, a branching logic is created to calculate the demand forecast and to put records in repositories “Product Demand” and “Part De-
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Figure 9. The business-process model of a supply chain
mand.” Both repositories are used in the activities “Make Product” and “Order Parts” of the first sequence. Repositories “Finished Product” and “Part Inventory” used in the second sequence are created and modified by the first sequence. The
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activity “Check Order and Product Status” is a synchronization point of the above two sequences. The rest of the model is self-explanatory. Figure 10 shows the SDM (drawn using a software tool provided by Vensim, 2005) of the
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Figure 10. The SDM of the business-process model of Figure 9
Figure 11. The causality tree for ShippingRate
business-process model in Figure 9. There are four stocks (depicted as rectangular boxes) and each has its own in- and outflows. We omitted the part of handling payment for simplicity. The stock
“Order Backlog” in Figure 10 corresponds to the data repository “Order Backlog” in Figure 9. The activity “Place Order” by the customer will have the effect of increasing the stock “Order Backlog”
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and changing the inflow “Demand Rate”. Similarly, the activity “Shipping out Products” after the storage would have the effect of decreasing the stock and changing the outflow “Fulfillment Rate.” The stock “Finished Product” is the result of the activity “Make Product” and will be reduced by the activity “Shipping out Products.” The stock “Part WIP” is increased by “Order Parts” and is reduced by “Receive Parts”, and the stock “Part Inventory” will be increased due to the effect of “Receive Parts” and reduced by the activity “Make Product.” It is less clear how the activities in a businessprocess model affect in- and outflow rates for each stock. In the business-process model, dependencies can be expressed graphically only through data streams. Any additional dependencies could be buried in the input criterion and output criterion of the data stream for each task. It is possible to use built-in expressions or plugged-in programming languages to express the input and output criteria. On the other hand, the dependencies in an SDM can be expressed graphically with the notion of polarity, wherein the positive polarity (denoted by a plus sign) represents reinforcement feedback loops and the negative polarity (denoted by a minus sign) represents those feedback loops that can reach equilibrium. The influence map can be created by connecting direction links. Based on the visual influence map, low-level metrics can be synthesized by capturing the causal relationships in the form of mathematical formulas. The key to bridging the gap between the business operations and the IT systems is to establish the dynamic causal relationships between IT-level and business-level performance metrics in the mathematical formulas. Figure 11 gives an example causality tree for “ShippingRate.” The businesslevel variables are shown in yellow rectangular boxes; the IT-level variables are shown in green rectangular boxes. This causality tree corresponds to the business activities between “Check Order and Product Status” and “Shipping out Product” shown in Figure 9. We discuss this causality tree in a bottom-up order. 2178
Let us assume the above inventory system is monitored and controlled by a main process wherein inventory processes can handle client requests through network connections one at a time (this example is adjusted from Diao, Hellerstein, Parekh, & Bigus, 2003). Therefore, the number of inventory processes is constrained by the maximum number of connections, say “MaxClientConnections,” provided by the system. The controller monitors connections and manages their life cycles. If the connection has been idle over a certain amount of time, say “ConnectionLifeUpperBound,” the connection is terminated or returned to the connection pool. A higher “MaxClientConnections” value allows the system to process more inventory requests and increases both CPU (central processing unit) and memory utilization. Decreasing the value of “ConnectionLifeUpperBound” potentially allows inventory processes to be more active, leading to higher CPU and memory utilization. The above description can be formulated as follows (Diao et al.): CPUk+1 = A1,1 * CPUk + A1,2 * MEMk + B1,1 * MaxClientConnectionsk + B1,2 * ConnectionLifeUpperBoundk and MEMk+1 = A2,1 * CPUk + A2,2 * MEMk + B2,1 * MaxClientConnectionsk + B2,2 * ConnectionLifeUpperBoundk, where CPUk and MEMk represent the values of CPU and memory utilization at the kth time interval. The metrics MaxClientConnectionsk and ConnectionLifeUpperBoundk represent the values of “MaxClientConnections” and “ConnectionLifeUpperBound” at the kth time interval. The entries Ai,j and Bi,j represent modeling parameters at the IT level that can be obtained using statistical methods. In every time period, the controller has to decide how much of the available resources (CPU,
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memory) to allocate to each inventory process. How to realize this control strategy is beyond the scope of this chapter. Here, we only show how the business-level and IT-level metrics can be linked using the causality relationships of an SDM. The metrics “MinimalProcessTime” at the business level depends on the metrics at the IT level such as CPU and memory utilization. Good “MinimalProcessTime” is ensured by reserving sufficient capability to handle workload spikes. A particular IT-system configuration by tuning parameters such as “MaxClientConnections” and “ConnectionLifeUpperBound” gives a particular “MinimalProcessTime.” “DesiredShippingTime” can be assigned a proper value based on the average values of real processing time. The “DesiredShippingRate” is determined by “OrderBacklog” and “DesiredShippingTime”: DesiredShippingRate =
OrderBacklog . DesiredShippingTime
The “MaximalShippingRate” is determined by “FinishedProduct” and “MinimalProcessingTime”: MaximalShi ppingRate =
FinishedPr oduct . MinimalPro cessingTim e
Finally, the “ShippingRate” is determined by “DesiredShippingRate” and “MaximalShippingRate”: ShippingRate= min(DesiredShippingRate,MaximalShippingRate) An SDM tends to represent a deterministic model and is used to study the overall behavior in a certain given timescale. Compared to the business-process model, the SDM aims to cover the detailed product-shipping activities by mimicking real-world events on a smaller scale. The assigned values in an SDM can be obtained from
the simulation results of the business-process model or the average of the real data that are identified in the business artifacts of the businessprocess model. We give a few more examples of how to synthesize low-level metrics to meet overall service requirements. The stock “Finished Product” is increased through the activity “Make Product” by using “Product Demand” that comes from “Forecast Demand” and “Adjust Product Based on Finished Product.” The forecast model we have here is the exponential smoothing of historical data: SmoothedDemandRate = Smoothe(DemandRate,SmoothFactor), where the function smooth is one of the built-in functions in the SDM tool. The adjustment from “Finished Product” introduces a negative feedback loop to rebalance the amount of products we should assemble: DesiredProductInventory = smoothedDemandRate*ProductInventoryCoverage DesiredProductInventory = smoothedDemandRate
Desired Pr oductInventory − Finished Product InventoryAdjustmentTime The real assembling rate could be delayed: AssemblingRate = DelayedFixed(DesiredAssemblingRate, DelayTime). The part usage rate is transformed from “Assembling Rate” using “Bill of Material”: PartUsingRate[i] = ∑ j
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The part demand, determining how much to order from suppliers, can be adjusted based on “Part Inventory” (another negative feedback loop): PartDesiredInventory = PartSmoothedDemandRate * PartInventoryCoverage PartDesiredDeliveryRate = PartSmoothedDemandRate +
In an SDM, the dynamics of a business process is captured through stock flow diagrams with dependency graphs and mathematical formulations (systems of ordinary differential equations). A simulation of this system would expose its dynamic behavior in the time dimension. Because of the complexity of the system with nonlinearity and time delay, we may not be able to solve the system analytically. Based on available numerical methods for ordinary differential equations, like Euler’s first-order finite difference and the RungeKutta second- and fourth-order finite-difference methods, the system can be solved numerically. Both Matlab (2005) and Vensim (2005) provide such equation solvers. Furthermore, the tool provided by Vensim helps modelers to determine visually what kind of action should be taken, such as changing system settings.
frastructure to respond quickly: functional and nonfunctional. As the result of functional changes, the business-process model will change as well, for example, acquiring an additional arc, an additional node, or a modified attribute value. Any small adjustments to the business-process model potentially can change the properties of the model as a whole. For instance, one more arc in the model could change a reducible process model to an irreducible one. Thereafter, the generated BPEL code should be updated accordingly. In general, it is not a good idea to regenerate the whole business model upon any changes, especially for large-scale process models. An algorithm is presented in the chapter that can scope and localize the changes so that only the subprocess in the scope will be regenerated. A nonfunctional alteration of the businessprocess model does not change the properties of the process model, but reestablishes the linkage with the IT service that implements the same functionality while offering a better QoS (quality of service) value such as a higher response time and availability. We shall notice that our criterion of categorizing functional and nonfunctional adaptation is mechanical rather than semantic. To
Figure 12. An example flow graph from Aho et al. (2006)
dynAmIc AdAptIon 2
background We live in a dynamic and fast-changing environment. The agility of an enterprise not only depends on the sensibility of the management, but also on the responsiveness of its IT infrastructure in line with the changes in the business environment. This is the challenge to realize the so-called ondemand business (IBM, 2005c). Primarily, there are two types of changes of business-level decisions that require the IT in-
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semantically verify whether the functionality of the process model is changed is not computable or at least fuzzy if we use the techniques to verify the process model against some formal functionality specification. Hence, a revision of the structure of a process model in order to achieve a higher overall QoS value, but with the same functionality, is categorized as a functional change according to our criterion. Both functional and nonfunctional adaptation can be performed statically or dynamically. Static adaptation requires, in addition to a break in service availability, the regeneration of executable code from the process model, reloading, redeployment, and a relinking with remote IT services. In some mission-critical scenarios such as finance and military applications, there is a need for a continuous guarantee of service availability. Dynamic adaptation manipulates a business process in its IT-infrastructure run-time environment while maintaining the availability of services. Later, we discuss our experiment by using a technique that enables the dynamic adaptation of business processes running in the Microsoft .NET® (Microsoft, 2005) Web-service environment.
localize the changes The main theory used to achieve change localization in a process model is the concept of a twoterminal region from control flow-graph analysis (Allen, 1970) in compiler theory. We start by introducing several relevant definitions. Definition 2. Given a flow graph G with initial node N0 and a node N of G, the interval with header N, denoted I(N), is defined as follows (Aho et al., 2007): 1. 2. 3.
N is in I(N), if all the predecessors of some node M≠N0 are in I(N), then M is in I(N), and nothing else is in I(N).
The corresponding REL for this graph is ( (a c + b) (d( (f i + g j) (k [p n] mq)* h ) * (p + e ) )* n o ) *. Based on Definition 2, we can obtain a set of intervals for Figure 12 as follows: I(1) = {1, 2} I(3) ={3} I(4) ={4, 5, 6} I(7) ={7, 8, 9, 10}. One distinguished property of intervals is that all the intervals in one flow graph are disjoint. A two-terminal region was originally defined as follows. Definition 3. A two-terminal region is an interval with one exit node (Allen, 1970). Intuitively, our goal of localizing the changes in a process model is to locate some regions within which changes do not affect other regions. Definition 3 does not satisfy our needs as a lot of regions are excluded from it; for example, I(1) and I(4) are not two-terminal regions. We thus adopted and modified the definition of two-terminal regions from Koehler, Hauser, Sendall, and Wahler (2005), in which two-terminal regions are used to partition the process model into subgraphs so that different subgraphs can be analyzed and transformed using different algorithms based on their specific properties. In fact, the definition of a two-terminal region in Koehler et al. results in different sets from that of Allen (1970); the definition we give in this chapter yields different sets from both Allen and Koehler et al. It is not our intention to compare the detailed differences in this chapter. Therefore, we straightly give our definition. Definition 4. Node N dominates (or predominates) node M if every path from the initial node of the flow graph to M goes through N (Aho et al., 2007).
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Figure 13. The correspondence of REL constructs and two-terminal regions ( (a c+b) ( TTR(1,3)
d
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( ( f i + g j ) ( k [p n] m q )* h )* ( p + e ) )* n o ) * TTR(4,7)
TTR(7,8) TTR(4,8) TTR(3,8) TTR(1,9)
Definition 5. Node N postdominates node M if every path from M to the exit node goes through N (Allen, 1970). Definition 6. A two-terminal region is a subgraph TTR(N,M) between N and M such that: 1.
N predominates all nodes in the region, and M postdominates all nodes in the region.
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Based on Definition 6, we can obtain a set of two-terminal regions of Figure 12 as follows: TTR(1, 3) ={1, 2, 3} TTR(3, 4) ={3, 4} TTR(4, 7) ={4, 5, 6, 7} TTR(7, 8) ={7, 8, 10} TTR(4, 8) = TTR(4,7) ∪ TTR(7,8) TTR(3, 8) =TTR(3,4) ∪ TTR(4,8) TTR(1, 9) =TTR(1,3) ∪ TTR(3, 8) ∪ {9}. Different from intervals, two-terminal regions can be nested within each other or overlap with their entry or exit nodes. Now we are ready to define change localization. Proposition 1. Changes can be localized into the closest enclosing two-terminal region if and only if the changes only affect the nodes (other than the entry or exit nodes) of this region.
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Intuitively, a two-terminal region is a subgraph where everything coming from the outside of the region into the region goes through the entry node, and everything going from the inside of the region to the outside goes through the exit node. In REL (and hence in BPEL), a two-terminal region thus corresponds to a single construct. Shown in Figure 13, TTR(1, 3) corresponds to an “or” construct in REL and hence a “switch” construct in BPEL; TTR(7, 8) corresponds to a “star” construct in REL and hence a “while” construct in BPEL. Proposition 1 tells us to localize the changes onto one single construct. In implementation, a single construct is represented by a single syntax-
Figure 14. The overview of the dynamic updating approach
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tree node, therefore the adaptation is as easy as replacing a single syntax-tree node. To give an example, suppose the node 2 in Figure 12 has a self-loop denoted by letter x. Only TTR(1, 3) will be changed to (a x* c+b); the rest of the REL sentence remains the same.
dynamic updating Dynamic updating requires the manipulation of the low-level run-time environment. Our first experiment was performed on the Microsoft .NET® Web-service environment. We only sketch out our infrastructure for this experiment in this section. Detailed discussion on this technique that was originally proposed for dynamic Web-service composition and provisioning can be found in Cao, Bryant, Liu, and Zhao (2005) and Cao, Bryant, Raje, et al. (2005). Figure 14 provides an overview of the dynamic updating infrastructure. In the left pane of the execution unit, the generated BPEL is imported into the Microsoft BizTalk® Server (Microsoft, 2004) that is built on top of the .NET framework. .NET applications run over the common language runtime (CLR) environment where the .NET application is captured in the form of the common intermediate language (CIL; Gough, 2002). CIL code is just-in-time (JIT) compiled into native code and executed. Therefore, by manipulating CIL, a BPEL process can be adapted at run time. The manipulation of CIL is illustrated in the right pane of the control unit. An inference engine detects changes from the model-editing environment and computes the location for new-code insertion. The manipulation of CIL at run time requires the interception of the managed execution. Instead of reimplementing the CLR, such as rewriting the open-source CLR Rotor (Stutz, Neward, & Shilling, 2003) to invasively add a listener for execution interception, compromising the portability of CLR, we use a pluggable, configurable CLR profiling interface (Microsoft, 2002) to achieve this goal, which can be enabled and
disabled based on different needs. In contrast to the conventional publisher-listener model, which is often a client-server relationship, the profiler will be mapped into the same address space for the profiled application as an in-process server. The profiler can be initiated by the inference engine. The events generated from the CLR are the result of managed execution, including but not limited to garbage collection, class loading and unloading, CLR start-up and shutdown, and JIT compilation. The event of our interest is JIT compilation, for which we have implemented in-memory CIL manipulation for the event handler. The adapted CIL is then JIT compiled and executed, resulting in changed business-process behavior. At the execution level, the functional and nonfunctional adaptations have the same mechanical effects and thus are not distinguished by the run-time adaptation system: Functional adaptation requires a replacement of a single construct that corresponds to a modified subprocess, and nonfunctional adaptation requires a replacement of a specific Web-service invocation statement. In some occasions, a construct need not be removed, but instead needs to be decorated and enriched to realize changes such as the addition of a new variable, security and access control, or a changed local business rule. Because we only need two updating operations—replacement and decoration—we use the idea of aspect-oriented programming (AOP; Kiczales et al., 1997) to perform CIL-code manipulation. The reference engine can dynamically inject the predefined reusable adaptation advice in the compiled managed code form into the adaptation advice repository (AAR). The AAR is located in shared memory for fast access during in-memory CIL manipulation. The hook code, installed on demand by the profiler, will weave into CIL the applicable adaptation advice. There are three types of advice: before advice, after advice, and around advice. The before advice performs some preprocessing before the actual method execution, while the after advice performs some postprocessing immediately before the method execution returns. Both the before and after advice are for method decoration. The around advice is used for
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overriding original constructs or methods. Also included in the hook code are the instructions to check for whether an around advice is specified or not, and whether there is a jump instruction to redirect the execution to the exit point of the specific block if an around advice is specified.
analysis performed when a computer program is compiled. Those static analysis techniques could become an excellent resource for static model optimization.
reFerences conclusIon And Future trends The theme of this chapter is to bridge the gap between business operations and IT execution. We have explained this connection from three different perspectives: (a) how to transform business decisions into IT-level execution, (b) how to monitor IT execution and synthesize IT metrics to meet business-level commitments, and (c) how to quickly and dynamically update IT execution when business-level decisions change. It is an emerging trend that companies are realizing the importance of business-process management, integration, and monitoring. SLA management also catches many enterprises’ attention. Based on this demand, big players in consulting services and software tool construction have invested energy into tools and software for business-process management and SLA management, for example, IBM WebSphere Business Integration Modeler, the Microsoft BizTalk server, Oracle BPEL Process Manager (Oracle, 2005), and ARIS Design Platform (IDS-Scheer, 2005) in cooperation with SAP NetWeaver® (2006). It is important to establish communication between academic researchers and industry tool builders to stimulate new research topics and at the same time to disseminate research results into the real world. There are still many open research problems such as novel model-transformation techniques, business-process-model analysis and optimization techniques, and round-trip (from modeling, execution, and monitoring to model modification) engineering. Part of our future work is to design a set of static model-analysis techniques based on the mechanical power of REL, similar to static
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Vensim. (2005). Retrieved from http://www. vensim.com/software.html Zhao, W., Bhattacharya, K., Bryant, B. R., Cao, F., & Hauser, R. (2005). Transforming business process models: Enabling programming at a higher level. Proceedings of the 2005 IEEE International Conference on Services Computing (SCC) (pp. 173-180).
Zhao, W., Bryant, B. R., Cao, F., Hauser, R., Bhattacharya, K., & Tao, T. (in press). Transforming business process models in the presence of irreducibility and concurrency. International Journal of Business Process Integration and Management. Zhao, W., Hauser, R., Bhattacharya, K., Bryant, B. R., & Cao, F. (2006). Compiling business processes: Untangling unstructured loops in irreducible flow graphs. International Journal of Web and Grid Services, 2(1), 68-91.
This work was previously published in Enterprise Service Computing: From Concept to Deployment, edited by R. Qiu, pp. 25-57, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 7.11
Merging and Outsourcing Information Systems with UML Herman Balsters University of Groningen, The Netherlands
AbstrAct Businesses can change their business structure by merging with other companies or, on the other end of the spectrum, by smoothly outsourcing some of their business processes to other more specialized parties. In this paper, we will concentrate on conceptual modelling of merging and outsourcing information systems. Merging of a collection of information systems will be defined as the construction of a global information system that contains exactly the functionality of the original collection of systems. Such global information systems are called federated information systems, when we wish to address the situation where the component systems are so-called legacy systems; that is, systems that are given beforehand and that are to interoperate in an integrated single framework in which the legacy systems are to maintain as much as possible their respective autonomy. Two major problems in constructing federated information systems concern achieving and maintaining consistency, and a uniform representation of the data on the
global level of the federation. The process of creation of uniform representations of data is known as data extraction, whereas data reconciliation is concerned with resolving data inconsistencies. Outsourcing of an information system, on the other hand, will be defined as the handing over of part of the functionality of the original system to an outside party (the supplier). Such functionality typically involves one or more operations, where each operation satisfies certain input and output requirements. These requirements will be defined in terms of the ruling service level agreements (SLAs). We will provide a formal means to ensure that the outsourcing relationship between outsourcing party and supplier, determined by an SLA, satisfies specific correctness criteria. Formal specifications, as offered in this paper, can prove their value in the setup and evaluation of outsourcing contracts. We shall describe a uniform semantic framework for specification of both federated and outsourced information systems based on the UML/OCL data model. In particular, we will show that we can represent so-called exact views in UML/OCL, providing
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the means to capture the duality relation between federating and outsourcing.
IntroductIon Businesses are, by nature, dynamic, and change continuously. Because of different economic prospects they grow in size and portfolio, or they have to reduce one of these aspects. There are several ways to accomplish growth or reduction. A smooth way may consist of hiring new employees or of outsourcing parts of one’s noncore business processes to specialized parties in the market. More drastically, a company can merge its business with that of another business department, or even with that of another company. On the opposite side, a company can be forced to split its business into separate, independent business departments. The reason for such a merge or split may be of a different nature, for example, financial, organisational, or legal (Smith, Mitra, & Narasimhan, 1998). Merging is also known as integrating, and in this paper we will concentrate on integration as the result of federating. By federating we wish to address the situation where the component systems are so-called legacy systems; that is, systems that are given beforehand, and which are to interoperate in an integrated single framework in which the legacy systems are to maintain, as much as possible, their respective autonomy. Splitting is also known as unbundling, and in this chapter we will concentrate on outsourcing as a particular aspect of unbundling. A variety of outsourcing models have been developed (Looff, 1995); outsourcing can range from having all the business processes (such as development, maintenance, and operations) performed by an outsourcing partner, up to having a contract with a partner performing only one single business task. Also, we find a growing interest in offshore outsourcing, where the bulk of processing is done in a low-cost country, with a small on-site staff at the customer’s facility to handle the relationship
management and coordination with the offshore parties. The consultancy firm Forrester (2004) analyzed a number of large outsourcing ventures in the beginning of 2004; they found a European-wide trend towards large investments in outsourcing. Furthermore, the leading outsourcing category was that of infrastructure services. Second and third were the category of applications management and desktop outsourcing, and the category of outsourcing helpdesk and support services. Whether expanding or shrinking, the process of changing one’s business structure is very challenging, and necessarily addresses some critical issues. This is illustrated by the fact that in the special case of splitting, where business functions are handed over to independent third parties, more than 40% of outsourcing relationships fail to deliver the business value originally envisioned by the related parties (Gera, 2003). Due to reasons such as costs running higher than anticipated, poor service levels, and inadequate contract management, one can be faced with unsatisfactory outsourcing relationships and lack of flexibility (Sparrow, 2003). In this chapter, we will concentrate on conceptual modelling of both federating and outsourcing information systems as particular aspects of integration and unbundling. Federating a collection of information systems will be defined as the construction of a global information system that contains exactly the functionality of the original collection of systems. Outsourcing of an information system, on the other hand, is defined as the handing over of part of the functionality of the original system to an outside party (the supplier). Integration can be seen as having a certain duality relation with respect to unbundling, in the sense that integration deals with merging of existing component systems into one framework, while unbundling deals with splitting an existing system into a collection of autonomous components. In both cases, we are dealing with
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legacy systems with heterogeneous components with a large degree of autonomy. A major problem concerning federating and outsourcing of information systems that we will address in this paper is that of so-called semantic heterogeneity (Lenzerini, 2002; Sheth & Larson, 1990). Semantic heterogeneity refers to disagreement on (and differences in) meaning, interpretation, or intended use of related data. In both cases of merging and splitting, we have to convert data semantics and data formats from source systems to target systems. This conversion leads to a set of well-known problems-coined as data extraction and data reconciliation (Bouzeghoub & Lenzerini, 2001; Lenzerini, 2002)-that not only play a role in the data integration process, but also in the data unbundling process. Moreover, outsourcing of functionality of an information system usually involves one or more operations, where each operation satisfies certain input and output requirements. These requirements are typically defined in terms of the ruling service level agreements. In this paper, we describe a formal means to ensure that the outsourcing relationship between outsourcing party and supplier, determined by an SLA, satisfies specific correctness criteria. These correctness criteria will be defined in terms of consistency with respect to pre and postconditions pertaining to the outsourced operations. Formal specifications as offered in this paper can prove their value in the setup and evaluation of outsourcing contracts. In Eriksson and Penker (2000), modelling business processes and information systems is seen as a valuable tool for business to understand the changes that will be caused by federating a collection of information systems, and also by outsourcing to outside suppliers. In Blaha and Premerlani (1998), UML has been advocated not only as a means to model a broad range of businesses and business applications, but also for the conceptual modelling of underlying information systems (such as databases). Though originally developed to model software systems, UML is
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also adequately suited for business modelling purposes. This is due to the fact that UML is equipped with a wide range of high-level modelling primitives in which one can capture complex requirements pertaining to data and processes occurring in many business applications. Moreover, the accompanying constraint language OCL (Demuth & Hussmann, 1999; Demuth, Hussmann, & Loecher, 2001; Warmer & Kleppe, 2003) provides UML with a wealth of additional possibilities to define business rules and business requirements. OCL is both a high-level language for modelling a wide range of (ad hoc) constraints, and is very detailed and precise as well. In Balsters (2003), it has been demonstrated that OCL has at least the same expressive power as the relational query language SQL, thus making OCL a very powerful language for specification of constraints, queries, and views. We will employ the UML/ OCL language in this paper to model federating and outsourcing of information systems. Our approach to constructing a federated information system from a collection of (semantically) heterogeneous component systems is based on the concept of exact view (Balsters & de Brock, 2004b) in the UML/OCL data model. In particular, we will show that a global federated information system constructed by exact views integrates component systems without any loss of constraint information (Balsters & de Brock, 2003ab; Balsters & de Brock, 2004b; Cali, Calvanese, De Giacomo, & Lenzerini, 2002; Miller, Haas, & Hernandez, 2000; Rahm & Bernstein, 2001; Spaccapietra, Parent, & Dupont, 1992). Using the concept of exact view, we will establish that only when we construct a specific isomorphic mapping, called a ψ-map (where ψ stands for preservation of system integrity), from the sources to the global schema, that we will obtain this result of no information loss. On the other side of the spectrum, modelling can be used to identify outsourcing opportunities and for specifications for the suppliers, hence providing a formal description of outsourcing
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that can be used as a basis for a contract between the outsourcing party and the outside supplier. Specifying a typical SLA places high demands on the expressiveness and precision of the modelling language employed. We will employ exact views on top of existing information systems in order to eventually capture the formal requirements of the outsourcing relation. Furthermore, we will show how to construct a mapping from the source model to the target model (i.e., the model of the supplier) preserving the SLA. Such a mapping, called an ω-mapping (where ω stands for outsourcing) will be shown to abide to a so-called abstract outsourcing implementation schema (called an ω-schema) in UML/OCL, ensuring correct outsourcing of a source operation. Our correctness criterion will be given in terms of an ω-schema. Even though outsourcing is already common practice and currently attracts much attention in business circles, it should be noted that research on outsourcing (and in broader sense on unbundling) of business and information systems is very much in the stage of infancy. Theory and methodology for business unbundling has yet largely to be developed. Our paper focuses on modelling issues; for architectural aspects pertaining to outsourcing of information systems, we refer the reader to Grefen, Ludwig, and Angelov (2003). We wish to emphasize that by investigating federating and outsourcing, we address both the process aspect and the end-result aspect of outsourcing; that is, we intend to address the process of federating and outsourcing existing monolithic systems. The process aspect mainly concerns methodology of modelling and design, while the end-result aspect deals with correctness criteria applied to models and designs of both federated and outsourced information systems. This chapter is organized as follows. The first section offers a description of the correctness problem pertaining to federating, whereas the following section is devoted to outsourcing. Next, we offer an introduction to views in UML/OCL, and so-called exact views to model federated systems.
After that, we examine a general framework for federating constraints. Then we use exact views to model outsourcing based on so-called ω-schemas and ω-maps; this section also contains an illustrative example of an outsourcing relation. We also discuss the duality relation between federating and outsourcing and in particular, advocates exact views as a uniform approach in both federating and outsourcing. Finally, we discuss future trends, and offer conclusions and directions for further research.
the Integration problem: Inconsistency and Incompleteness As pointed out in Sheth and Larson (1990), schema integration has to satisfy certain completeness and consistency requirements in order to reflect correct semantics of the different local schemata on the global integrated level. These requirements can be summarized as follows: each object on the local level should correspond to exactly one object on the global federated level, and each object on the global level should correspond to exactly one combination of objects on the various local component levels. Both requirements can only be satisfied if there exists an adequate mapping from the global federated database states to the component database states. In this paper, we will coin such a mapping from the collection of local database states to the collection of global federated states as a ψ-map. Constructing a ψ-map can be a very challenging task. First of all, there are certain matters concerning inconsistency stemming from the problem area of data extraction. The process of data extraction (Balsters & de Brock, 2004a) can give rise to various inconsistencies due to matters pertaining to the ontologies (Rahm & Bernstein, 2001) of the different component databases. Ontology deals with the connection between syntax and semantics, and how to classify and resolve difficulties and classification between syntactical representations on the one hand, and semantics
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providing interpretations on the other hand. Matters such as naming conflicts (e.g., homonyms and synonyms), conflicts due to different underlying data types of attributes and/or scaling, and missing attributes, all deal with differences in structure and semantics of the different local databases. Careful analysis of these problems usually reveal that these conflicts are not real inconsistencies, but rather that by employing techniques such as renaming, conversion functions, default values, and addition of suitable extra attributes can result in the construction of a common data model in which these (quasi-) inconsistencies are resolved. Data extraction deals with the alignment of both syntax and semantics of data schemas between the existing local components on the one hand, and the global system to be constructed on the other hand. A ψ-map also has to capture the requirement that local integrity constraints restrict the set of correct database states, and also has to capture the requirement that global integrity constraints on the federated level restrict the set of correct federated database states. Hence, a ψ-map has to deal with the data reconciliation problem pertaining to the real inconsistencies due to conflicting integrity constraints. We will explain these inconsistencies following Türker and Saake (2000), using the terms local and global understandability. In databases, transparency means that users do not see the internals of a database, for example, the location of data on a disk. In the context of federated schemata, global transparency requires that global users do not see the local schemata, and also that the local users do not see the global schema. At the global level, global understandability demands that global transactions (updates, queries) are not rejected whenever they satisfy the global integrity constraints. Local understandability, on the other hand, demands that local transactions are not rejected whenever the local integrity constraints are satisfied in the corresponding local component database. The problem of global understandability arises
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when a global update operation that satisfies the global integrity constraints is rejected without an obvious reason to the global user. This can occur when the local integrity constraints are not reflected in the federated schema; due to global transparency, the global user does not see the local constraints that are possibly not satisfied. On the other hand, the problem of local understandability arises when a local update operation satisfies the local integrity constraints, but is rejected without an obvious reason to the local user. The latter situation can occur when the local update gives rise to a conflict with an integrity constraint defined in the federated schema. Again, due to global transparency, the local user does not see this conflicting constraint on the global level. Both problems of global and local understandability deal with the fact that any update on the global level is propagated to a corresponding update (or combination of updates) on the local level, and vice versa. This is due to the fact that a federated database is not materialized, and only exists in a virtual sense in terms of a certain view defined on the local databases. Ideally, both global and local understandability should be satisfied, meaning (Türker & Saake, 2000) that: 1.
2.
Local integrity constraints of the component schemata must be reflected in the federated schema in order to avoid the problem of global understandability; Global integrity constraints on the federation level, such as pure federation constraints defined by the database integrator, must be reflected in the component schemata in order to avoid the problem of local understandability.
In this paper, we will demonstrate that global understandability is indeed always feasible. Local understandability, however, is generally not feasible due to the general character that federation constraints can have. Should there be no extra purely federated constraints on the global level,
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then we can ensure local understandability. These two conditions, one in full strength and the other weakened, together constitute a criterion that we will coin as the criterion of preservation of system integrity, or psi-criterion (ψ-criterion). When this ψ-criterion is met, will there be a completeness result in the sense that: 1.
2.
Each correct global update will correspond to exactly one combination of correct local updates, and; Each correct local update, without the presence of purely federated constraints on the global level, will correspond to exactly one correct global update.
We will next examine how to construct a corresponding federated schema and a ψ-map linking the collection of local schemas and the federated schema given an arbitrary collection of component database schema.
the outsourcing problem: schema Alignment In outsourcing, one typically has the situation that a source company wishes to hand over parts of its functionality to an outside party. This outside party is called the supplier to which the functionality (or service) is outsourced. In terms of models, this situation translates to a (source) model having one or more operations that will be outsourced to an outside (target) model. To be able to perform this outsourcing activity, one not only has to locate within the source model which operation O is to be outsourced, but also all relevant attributes, relations, constraints, and auxiliary operations that are used in the definition of that particular operation O. For example, consider the situation of a company that wishes to outsource payment and calculation services pertaining to employee salaries. In order to perform outsourcing of this operation, here called calcNetSal, one might need information regarding present status, date,
employee function, employee age, employee address, number of hours that the employee works, initial date of employment, employee department, and possibly more. Once it has been decided that an operation like calcNetSal is to be outsourced, one tries to locate an outside party supplying the functionality of this operation. Once such an outside (target) party is found, the source party and the target party enter negotiations regarding the quality of the outsourcing service that the target has to provide. Once an agreement has been reached, a so-called service level agreement (SLA) is drawn up to which both parties are bound. An SLA is crucial in outsourcing, since it is the sole basis on which source and target parties provide input (responsibility of the source company) and output material (responsibility of the target company). In terms of models, the source model offers the outsourced operation, say O, as well as all relevant attributes, relations, constraints, and auxiliary operations that are used in the definition of that particular operation O. Furthermore, the source model offers its initial conditions that have to be met by a target model. These conditions are the basis for an SLA pertaining to source and target model, and could typically be given in terms of pre- and postconditions. In the case of our example, we could stipulate the following conditions (written in UML/OCL): context Employee::calcNetSal(presentDate:Date): Integer pre: status=payrolled post: age>40 implies result>3000 and result < (self.manager).presentDate.calcNetSal and self.department.depNm=`toy’ implies result<4000
This specification states that within the class Employee, an operation called calcNetSal satisfies the postcondition that all employees over the age of 40 earn at least 3,000, that no employee earns more than his manager, and that all employees belonging to the department named “toy” earn at most 4,000.
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Should one wish to outsource this operation, then the supplier is bound to this specification. This entails that the supplier is to offer an implementation calcNetSal’ of calcNetSal, such that calcNetSal’ has a pre- and postcondition that are consistent with respect to the pre- and postconditions of calcNetSal. For preconditions, this means that calcNetSal’ should not accept arguments that are not accepted by calcNetSal, and for postconditions it holds that calcNetSal’ should never produce results contradicting a postcondition of calcNetSal. In our approach, the SLA between an outsourcing party and a supplier provides the input for a contract binding both parties. The SLA is then used to produce a formal specification, in terms of pre- and postconditions, in which it is precisely (unambiguously) and completely stated what the supplier is expected to deliver. Such a formal counterpart of the SLA is coined a σ-constraint. The problem that we are now faced with, in terms of models, is to offer a mapping from the model of the outsourcing party (the source model) to the model of the supplying party (the target model) that preserves the σ-constraint. This mapping serves as a (correctness) specification of the outsourcing relation between source and target. Generally speaking, constructing such a mapping is no trivial matter, and it is the topic of this chapter to offer a methodology and a definition of a correct end result for an outsourcing mapping (or ω-map for short). The ω-maps that we are looking for show many resemblances to certain mappings encountered in the field of data integration. In data integration, we have to map a collection of (local) source models to a (global) target model integrating various aspects of the source models. Typically, these local models are models of legacy systems that have to be mapped to a newly defined global system, and is known as the problem of global as view (or GAV, cf. Balsters & de Brock, 2004b; Bouzeghoub & Lenzerini, 2001; Lenzerini, 2002). In outsourcing
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we are faced with a more-or-less dual situation: here we are moving from a global system (the system of which a part will be outsourced) to a (possibly collection of) local system(s). Typically, the global system is a legacy system that has to be mapped to an existing local system that will supply the desired outsourcing service. Mapping an existing (global) model to an existing (local) model is known as the problem of data exchange (Miller et al., 2000, Rahm & Bernstein, 2001). In general, there are no algorithms for constructing mappings solving the data exchange problem. What we can do, however, as will be done in this paper, is provide criteria by which it can be judged, in retrospect, whether the construction of an outsourcing mapping from an existing model to another existing model has been performed correctly. In our case, we will offer a criterion, formulated in terms of a so-called ω-schema, by which we can judge that an ω-map ensures correctness of the outsourcing relation between source and target models. We emphasize that in this chapter we do not offer a recipe for constructing an ω-map. What we do offer, however, is a criterion by which we can judge whether our outsourcing has indeed been performed correctly; that is, by offering a construction of an ω-map, we offer a guarantee that the outsourcing of the operation will yield results on the supplier side that are completely consistent with the original desired results from the side of the outsourcer. This process of constructing a schema on the supplier side that corresponds with a schema on the side of the outsourcing party is called schema alignment. We could also phrase this by saying that the intention of our approach is to guarantee outsourcing transparency. Moreover, we show that a strategy for constructing an ω-map could consist of devising a specific ψ-map that eventually will yield the desired ω-map. The next section is devoted to views in UML/ OCL; views will be used in subsequent sections of this chapter for constructing exact views, ψ-maps, and ω-maps in the context of federating and outsourcing.
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views in uml/ocl Consider the case that in the context of some company, we have a class called Emp1 with attributes nm1 and sal1, indicating the name and salary (in Euros) of an employee object belonging to class Emp1: Emp1 -nm1 : String -sal1 : Integer
database DB an attribute called Emp2. A database object will reflect the actual state of the database, and the system class DB will only consist of one object in any of its states. Hence, the variable self in the context of the class DB will always denote the actual state of the database that we are considering. In the context of this database class, we can then define the calculation obtaining the set of instances of Emp2 by taking the set of instances of Emp1 as input. Emp
Now consider the case where we want to add a class, say Emp2, that is defined as a class whose objects are completely derivable from objects coming from class Emp1, but with the salaries expressed in cents. The calculation is performed in the following manner. Assume that the attributes of Emp2 are nm2 and sal2 respectively (indicating name and salary attributes for Emp2 objects), and assume that for each object e1:Emp1, we can obtain an object e2:Emp2 by stipulating that e2.nm2=e1.nm1 and e2.sal2=(100 * e1.sal1). By definition the total set of instances of Emp2 is the set obtained from the total set of instances from Emp1 by applying the calculation rules as described above. Hence, class Emp2 is a view of class Emp1, in accordance with the concept of a view as known from the relational database literature. In UML terminology, we can say that Emp2 is a derived class, since it is completely derivable from other already existing class elements in the model description containing model type Emp1. We will now show how to faithfully describe Emp2 as a derived class in UML/OCL (Balsters, 2003, Warmer & Kleppe, 2003) in such a way that it satisfies the requirements of a (relational) view. First of all, we must satisfy the requirement that the set of instances of class Emp2 is the result of a calculation applied to the set of instances of class Emp1. The basic idea is that we introduce a class called DB that has an association to class Emp1, and that we define within the context of the
In this way, we specify Emp2 as the result of a calculation performed on base class Emp1. Graphically, Emp2 could be represented as follows: DB /Emp2:Set(Tupletype{nm2:Integer,sal2:Integer})
(1) where the slash-prefix of Emp2 indicates that Emp2 is a derived attribute. Since, in practice, such a graphical representation could give rise to rather large box diagrams (due to lengthy type definitions), we will use the following (slightly abused) graphical notation to indicate this derived class: /Emp2
DB
-nm2 : String -sal2 : Integer 0..*
1
(2)
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The intention is that these two graphical representations are equivalent; that is, graphical representation (2) is offered as a diagrammatical convention with the sole purpose that it be formally equivalent (translatable) to graphical representation (1). Note that we have introduced a root class DB as an aid to represent the derived class Emp2. Since in OCL we only have the possibility to define attributes and operations within the context of a certain class, and class Emp1 is clearly not sufficient to offer the right context for the definition of such a derived construct as derived class Emp2, we had to move up one level in abstraction towards a class such as DB. A derived class then becomes a derived attribute on the level of the root class DB. In subsequent sections, we will use the concept of (exact) view to model integrating and outsourcing of information systems.
Exact Views In the case that a derived class in UML is the result of a so-called ψ-map (Balsters & de Brock, 2004ab), then we speak of an exact view. Exact views belong to the domain of data extraction, and are constructed from a certain collection of injective conversion functions. Exact views have the property that they are correctly updatable, in the sense that any update on an exact view corresponds to exactly one (combination of) correct update(s) on the base class(es) it stems from. To get a flavour of what a ψ-map looks like, consider the following class Pers and a view /Emp. Pers /Emp prsno: Integer name: String sal: Integer -- in $ street: String hnr: String city: String telint: String
pno: Integer pname: String sal: Integer - - in €
addr: String city: String tel: String
The view /Emp could function as an interface between various classes pertaining to descriptions of personnel, and often such interfaces have to
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meet the requirement that one can move freely from such class objects to the common interface, and vice versa. In such cases, we have to find a one-to-one mapping from a class like Pers to a view like /Emp. We will now discuss properties of such a mapping. Notice that: • • •
•
Attributes prsno and pno are homonyms, as are name and pname (name conflicts) Attribute sal in Pers is in $, and sal in Emp is in € (conversion problem) Attribute addr in Emp is already a combination of street and house number (again, conversion problem) Pers only has an internal telephone number (conversion problem)
These are typical aspects that one encounters in the realm of data extraction. We now try to get Pers-objects in line with corresponding Emptuples. To do so, we first define the underlying tupletype of the view Emp (using OCL syntax) EmpType = TupleType(pno: Integer, pname: String, sal: Integer, addr: String, city: String, tel: String) context Pers def: convertToEmp( ): EmpType = Tuple{pno=self.prsn, pname = self.name, sal = (self.sal).convertToEuro, addr = self.street ->concat((` ’) ->concat(self.hnr)), city = self.city, tel= `+31-50-363’->concat(self. telint)}
In the definition of convertToEmp, we have assumed the existence of a function convertToEuro used to convert dollars to euros. Furthermore, we assume that the internal telephone numbers can be extended to full telephone numbers by adding some standard prefix. Notice that the function convertToEmp is injective, and hence can be used to uniquely map Pers-objects to Emp-tuples (and vice versa). Such one-to-one functions are called ψ-maps, and a view like Emp is generated from the class Pers by applying the function convertToEmp to
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each object in the set of instances of Pers; hence, Emp is the result of a particular view on Pers. A view based on a ψ-map is called an exact view. For a more elaborate discussion on properties of exact views and ψ-maps, we refer the reader to Balsters and de Brock (2004ab).
A component frame is a structure consisting of a collection of local databases, is depicted here: CF
DB1
DBn DB2
Integration and exact views Papers (Cali et al., 2002; Miller et al., 2000; Reddy, Prasad, & Gupta, 1995; Spaccapietra et al., 1992; Türker & Saake, 2000; Vermeer & Apers, 1996) have all investigated the problem of integrity constraint integration, and each (with exception of Türker & Saake, 2000), fall short in coming up with a satisfactory solution, in the sense that all constraint information offered on the local level is precisely (consistently and completely) represented on the global level of the integration. The approach adopted in these papers (with exception of Türker & Saakem 2000) basically boils down to so-called loose constraining, meaning that at least one of the contradicting integrity constraints is logically weakened on the global level. As we have seen in the previous section, this solution strategy does not solve the problem of global understandability. In contrast, we propose an approach based on so-called tight constraining, meaning that we faithfully (consistently and completely) represent all local constraint information on the global level of the federation. We will do so by employing so-called exact views; this in contrast with sound views (Lenzerini, 2002) that more or less comply with the approach based on loose constraining. We will develop an algorithm (cf. Balsters & de Brock, 2004b) that will calculate the appropriate exact view representing the (virtual) federated database state, given a collection of local database states. We will consider a so-called component frame of a collection of local databases, and define a derived attribute within this component frame in order to calculate the accompanying federated database state. This derived attribute will correspond to a view defined on top of the collection of local databases.
We will offer a definition in terms of UML and OCL (Balsters, 2003; Warmer & Kleppe, 2003) of both the component frame and the exact view corresponding to the federated database that we are targeting for. A component frame can be modelled as a root class with relations to the respective local databases. Each database, in turn, is modelled as a root class with relations to the associated database tables (modelled as classes). Hence, if there are n local databases to be considered in the component frame, then a component-frame state consists of one object with a collection of n relations, each to a database object; each database object has a number of relations, each to a class representing a table of objects. For example, consider a component frame CF consisting of two databases (DB1 and DB2), and consider the situation that DB1 has a class C1 (a.o.) representing one of its tables, and that DB2 has a class C2 (a.o.) representing one of its tables. This can be depicted as follows: CF DB1
C1
DB2
C2
Hence, a state of CF consists of two database states, one for DB1 and one DB2, and each database state consists of a collection of tables, where a table is represented as the set of current object instances of a certain class. Let us consider the situation that we wish to integrate databases DB1 and DB2, and that classes C1 and C2 are
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related in the sense that they might have some characteristics in common. We will proceed by offering a general methodology to integrate these two classes C1 and C2, resulting in a collection of classes on the global level of a database federation. But before we do so, we first have to make explicit a number of assumptions to describe the context of our approach. Basically, we wish to concentrate in this particular section on constraint integration and therefore, wish to abstract from other features that, in themselves, are possibly very relevant in the context of integration. In an earlier part of this paper, we made mention of the problem category coined as data extraction. This category deals with matters such as naming conflicts (e.g., homonyms and synonyms), conflicts due to different underlying data types of attributes and/or scaling, and missing attributes. These conflicts all deal with differences in structure and semantics of the different local databases. By employing techniques such as renaming, conversion functions, default values, and addition of suitable extra attributes, one can construct a common data model in which these (quasi-) inconsistencies are resolved. Since these techniques are well known and rather standard, in this section we will abstract from such data extraction problems, and assume that there exists a common uniform data model in which to represent the various component database schemata. The problem category we will focus on is coined as data reconciliation, and in particular we will concentrate on problems concerning constraint integration in order to tackle the problems of global and local understandability. Consider the situation that C1 and C2 have a collection of attributes in common, and that this (maximal) collection is denoted by α. Assume that β (resp. γ) is that set of attributes in C1 (resp. C2) not common to the set of attributes in C2 (res. C1). Furthermore, assume that C1 has a subclass S with a specific set of attributes (denoted by s), and assume that C2 has a relation with a class D with a specific set of attributes denoted by
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δ. This situation gives a general account of the problems that can occur when trying to integrate two classes such as C1 and C2. This situation can be depicted as follows: C1 α β
C2 α γ
1
D
*
δ
S s
What we will now show is how to construct a set of (derived) classes that, as a whole, are the result of integration of the two model situations described previously. First we will show what the integrated class-attribute structure looks like, and then we will show how to integrate the possibly occurring constraints in C1 and C2. Consider the following diagram: /I-C α diff:CKind /I-C1 β
<<enumeration>> CKind C1 C2 /I-C2 γ
1
*
/I-D δ
/I-S s diff=C2 diff=C1
The slashes prefixing the class names in this model diagram indicate that we are dealing with derived classes (as discussed in earlier). This diagram will serve as a visual aid to show the result on the global level of the integration of classes C1 and C2. Basically, we have introduced a common super class I-C consisting of an attribute section that is common to both C1 and C2. We then introduce two subclasses, I-C1 and I-C2, with attribute sections that are specific as possibly differentiating them from the common class I-C. In order to differentiate between C1 and C2, we have introduced an enumeration class
Merging and Outsourcing Information Systems with UML
CKind. Class I-C1 is added with a constraint stating “diff=C1,” and class I-C2 is added with the constraint “diff=C2.”
context Emp inv objcons: age>30 implies sal> 5000
stating that each employee older than 30 earns a salary higher than 5,000.
IntegrAtIng the constrAInts Class Constraints This section concerns the second step in the integration process. Once we have constructed a common underlying data structure for FDB as described in the previous section, we have to add the local and global integrity constraints. First we will offer a categorization of the various constraints, and then show one by one how each category of constraints obtains its place on the level of FDB. We will discern between five categories of constraints (Balsters & de Brock, 2004b), and subsequently show how each category is integrated on the level of FDB. We will first do so by some specific examples, and then treat constraint integration in more general terms.
Such a constraint pertains to the set of all instances of a class in an arbitrary database state. As an example consider: context Emp inv classcons: (Emp.allInstances -> size)<1000
stating that the number of instances of the Empclass is always less than 1,000.
Database Constraints Such a constraint states an invariant property between different classes inside one database. As an example consider:
Attribute Constraints context DB
Such a constraint deals solely with a restriction on possible values of one attribute inside a class. As an example, consider the following constraint specification: context Emp
stating that in some database DB, the number of managers (Man is a subclass of Emp) is always less than 10% of the total number of employees.
inv attrcons: age>30
Federation Constraints where we have assumed that an employee class Emp has an attribute called age, and that each age value is required to be larger than 30.
Object Constraints Such a constraint deals solely with a restriction on possible values of a combination of attributes on the level of an arbitrary object within a class. As an example consider:
Such a constraint is imposed on the collection of local databases participating in the federation; hence, it is an integrity constraint pertaining to the component frame, and it obtains its final representation within the derived class /FDB. As an example consider: context CF inv fedcons: (DB1.Emp.allInstances -> size) < (DB2.Man.allInstances -> size)
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stating that the number of employees of the Emp class in database DB1 is always smaller than the number of managers in the Man class of database DB2. We will now show how to tackle the problem of global understandability within the context of our representation of FDB. We will offer a general algorithm for treating the constraints as described previously per category. We then proceed by offering a general approach to including federation constraints on the global level, and treat the problem of local understandability.
the context
Object Constraints Denote the set of attributes involved in the object constraint by attr. If the object constraint in question pertains to class Ci (I=1,2) and is denoted by ϕ(attr) then the following prescription applies: If attribute set attr⊆α then the constraint moves up to class I-C and is changed to “if diff=Ci then ϕ(attr)” else the constraint remains unchanged and is placed in I-Ci Remark: Note that object constraints are inherited by subclasses.
Consider the situation as depicted in our component frame. What we want is to describe the integration of local constraints occurring in classes C1 and C2. That is, we want to represent the integration as a set of constraints that will be placed somewhere in classes /I-C, /I-C1, /I-C2, /I-S, /I-D, and possibly also /FDB.
Class Constraints
the Algorithm
If attribute set attr⊆α then the constraint moves up to class I-C and I-C is constrained by ϕ((o∈/I-C | o.diff=Ci)) else the constraint remains unchanged and is placed in I-Ci
We will define our algorithm per constraint category, and show how to represent local integrity constraints within FDB.
Attribute Constraints Suppose that the attribute in question is a and that ϕ(a) denotes the constraint in the local class Ci (i=1,2). On the global level, this constraint is now represented by the following prescription: If attribute a∈α then the constraint moves up to class I-C and is changed to “if diff=Ci then ϕ(a)” else the constraint remains unchanged and is placed in I-Ci Remark: Note that attribute constraints are inherited by subclasses.
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Suppose that the class constraint in question pertains to class Ci (I=1,2); denote this constraint by ϕ(Ci) and let attr denote the set of attributes involved in ϕ(Ci), then the following prescription applies:
Remark: Note that class constraints are, in general, not always inherited by subclasses.
Database Constraints These constraints remain unchanged, except for being applied to the I-prefixed versions of the classes involved in the database constraint in question.
Federation Constraints Such a constraint is actually not really available before integration of a set of local databases. Once one has agreed to integrate, then possible federation constraints can arrive on the scene. The
Merging and Outsourcing Information Systems with UML
proper place to include them is on the global level of FDB. An example of a federation constraint is that class C1 always has less instances than class C2. Such a constraint could be represented in FDB as follows: context CF inv fedcons: (FDB.I-C1.allInstances -> size) < (FDB.I-C2.allInstances -> size)
being an attribute (!) constraint (namely on the attribute FDB) within the component frame class CF. In summary, what we have done is show how to lift local constraints to the integrated level of FDB by giving them suitable new classes to which they apply. The context of FDB can now be depicted by: CF /FDB = … λ ϕ
where λ denotes the set of local integrity constraints pertaining to FDB, and ϕ denotes the set of pure federation constraints pertaining to FDB. The next section concerns a discussion on properties of our algorithm.
properties of the Algorithm computing the database Federation Our algorithm has the following properties: 1. 2. 3.
The algorithm applies to all possible categories of constraints. The integrated database FDB as the result of our algorithm satisfies the ψ-criterion. Algorithm complexity is of order O(n), where n denotes the number of local constraints.
4.
The resulting FDB does not contain indeterminate or-branches in order to integrate local constraints.
These four properties are an improvement over the algorithm offered in Türker and Saake (2000): the latter algorithm applies only to very specific (so-called decidable) local constraint sets; its complexity is of exponential order; and it introduces a possibly large number of indeterminate or-branches on the global level in order to integrate local constraints. Also, our ψ-criterion offers a sharper correctness criterion, offering a clear maintenance strategy when dealing with updates subjected to constraints on the federated level. As mentioned earlier, our algorithm is symmetric (of course), but not necessarily associative; that is, first applying our algorithm to two classes C1 and C2, and then using this intermediate result to apply the algorithm again to a class C3, will not necessarily (and often will usually not) yield the same result when applying the algorithm first to say C2 and C3, and then using that intermediate result again to apply to C1. Associativity, however, is not an issue here; since the computation of our federated database (no matter how it arises) always satisfies the desired ψ-criterion. We refer the interested reader to Balsters and de Brock (2004b) for details on the properties of our algorithm. We now (re)turn our attention to the dual process of integration, namely the process of outsourcing of the global functionality of an existing information system to a suitable local component. The next section deals with an outsourcing schema for moving from source models to target models. This outsourcing schema will rely heavily on employing exact views; these exact views will provide the mechanism to eventually construct ω-maps. We will also describe a running example of an information system used to register data concerning employees; the company owning this information system wishes to outsource payment and calculation services pertaining to employee salaries. 2201
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outsourcing and exact views It is important to note that this section has as its context the material pertaining to an outsourcing example described in the second section (called The outsourcing problem) of this chapter. We recall that problem that we are faced with, in terms of models, is to offer a mapping from the model of the outsourcing party (the source model) to the model of the supplying party (the target model) that preserves a so-called s-constraint (reflecting the formal counterpart of a service level agreement between outsourcer and supplier). This mapping serves as a specification of the outsourcing relation between source and target. Generally speaking, constructing such a mapping is no trivial matter, and it is the topic of this section to offer a methodology and a definition of a correct end result for an outsourcing mapping (or ω-map for short). The ω-maps that we are looking for show many resemblances with certain mappings encountered in the field of data integration. In data integration, we have to map a collection of (local) source models to a (global) target model integrating various aspects of the source models. Typically, these local models are models of legacy systems that have to be mapped to a newly defined global system, and is known as the problem of global as view. When constructing such mappings from local models to a global model in data integration, we encounter problems pertaining to so-called data extraction and data reconciliation. As we have seen in previous sections, both data extraction and data reconciliation can be hard to realize, because of the severe restrictions placed on the mapping from local models to the global model. It is only when such a mapping satisfies certain isomorphism properties that the mapping will ensure correct resolution of the data reconciliation problem. As mentioned previously, such constraint preserving mappings have been coined ψ-maps. In outsourcing, we are faced with a more-orless dual situation: here we are moving from a
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global system (the system of which a part will be outsourced) to a (possibly collection of) local system(s). Typically, the global system is a legacy system that has to be mapped to an existing local system that will supply the desired outsourcing service. We will provide criteria by which it can be judged, in retrospect, whether the construction of an outsourcing mapping from an existing model to another existing model has been performed correctly. In our case, we will offer a criterion, formulated in terms of a so-called ω-schema, by which we can judge that a ω-map ensures correctness of the outsourcing relation between source and target models. Consider the case of an outsourcing example, provided earlier. We can discern within our source model (called SM, for short), the following model elements: Manager
Employee
Department 0..*
1
1
0..*
The class Manager is a subclass of Employee, a manager supervises n (n ≥ 0) employees, employees belong to exactly one department, and departments have m (m ≥ 0) employees. In our example, we (i.e., the company) wish to outsource payment and calculation services pertaining to employee salaries. To be more precise, the company wishes to outsource calculation of the net salary of a given set of employees on the basis of: • • • • • • •
Status (pay rolled, or not) Present date Employee function Employee age Number of hours that the employee works Initial date of employment Employee department
Moreover, the company wishes to obtain for each employee an overview listing all amounts
Merging and Outsourcing Information Systems with UML
Figure 1. ω-schema
Employee
SV: {pre1} op1 {post1}
TV: {pre2} op2 {post2}
ψ0
/SalView
(s1)
(s2)
deducted from the employee’s gross salary. In terms of SM, not all elements of the class Employee are relevant for outsourcing of these operations. To this end, we will construct a view on the class Employee containing, in general, only those attributes, relations, operations, and constraints that are relevant for our particular outsourcing application. This particular view is called /SalView and is depicted in the following example: /SalView status: Set(payrolled, notPayrolled) function: String age: Integer hours: Integer employedSince: Date depNm: String man-id: Integer calcNetSal(presentDate:Date): Integer deductionOverview:Report
The operation deductionOverview will result in an overview listing all amounts deducted from the employee’s gross salary. A view such as / SalView is called a source view. In order to ensure a one-to-one correspondence between the view /SalView and the original class Employee (necessary to obtain a unique association between an employee object and his salary), we will proceed and provide a ψ-map ensuring that each object in the set of instances of class Employee corresponds to exactly one object in the view /SalView, and vice versa. In our example, we shall assume that there exists a ψ-map, say ψ0, between Employee and /SalView, that we, using informal (i.e., non-UML) notation, will depict.
Recall that we have the following σ-constraint pertaining to the SLA that the outsourcing party demands from a prospective supplier: context Employee::calcNetSal(presentDate:Date): Integer pre: status=payrolled post: age>40 implies result>3000 and result < (self.manager).presentDate.calcNetSal and self.department.depNm=`toy’ implies result<4000
We shall now consider the side of the supplying party, determining the target model (or TM, for short). Should the company wish to outsource the operation calcNetSal, then the supplier is bound to the σ-constraint specified. This σ-constraint entails that the supplier is to offer an implementation calcNetSal’ of calcNetSal, such that calcNetSal’ has a pre- and postcondition that are consistent with respect to the pre- and postconditions of calcNetSal. In general, in a context of outsourcing, a supplier has to abide to the following (abstract) implementation schema (employing informal (i.e., non-UML) notation), shown in Figure 1. This schema (called an ω-schema) is to be read as follows: op2 is (by definition) a correct implementation (or refinement) of op1, if and only if precondition pre1 logically implies precondition pre2, and postcondition post2 logically implies postcondition post1. We also say that σ-constraint σ2 implements (or respects) σ-constraint σ1. An ω-schema prescribes a consistency and completeness condition with respect to pre- and postconditions of the outsourcer and the supplier operation involved. The challenge of finding a correctly implemented outsourcing now boils down to constructing a mapping from a view SV (on the source model SM) to a view TV (on the target
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model TM), such that this mapping respects an ω-schema for outsourcing as described previously. We will offer a description of the requirements to be placed on these views SV and TV. Such a mapping is called an ω-map. In Balsters and de Brock (2004b) it has been shown that exact views (i.e., views constructed from ψ-maps) preserve constraint specifications in the transition from base classes (on which the view is defined) to the view in question. Hence, a mapping between source model (with its respective corresponding SLA specified as a σ-constraint) and target model consisting of a ψ-map, will automatically abide to an ω-schema, and therefore such a ψ-map constitutes an ω-map. In the remainder of this paper, we will employ this strategy to construct ω-maps as particular ψ-maps. We will assume that a target model TM is already given (defined in terms of an existing external information system, for example a specific information system that can calculate net salaries and can generate deduction reports), and we are then faced with the problem to define a view on TM-a so-called target view (say TV)-having two important properties: 1.
2.
TV contains all relevant information also available in the source view SV; we could also say that TV offers the mirror content of the data available in SV TV additionally contains from the target side extra attributes, operations, and relations (e.g., auxiliary tables with input data for operations) necessary to actually provide the calculations for the outsourced operations
Moreover, TV will typically be defined as a view on the complete target model TM. Hence, we will assume the existence of some ψ-map, say ψ0’, between TM and TV to ensure a one-to-one correspondence between an object from the view TV and some object from the original class TM. This situation is depicted as follows:
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TM
ψ0’ /TV
In our example, the supplying party has to offer an operation calcNetSal’ (or deductionOverview’, respectively) as an implementation of calcNetSal (or deductionOverview, respectively). Hence, a typical appearance of the target view could be depicted as follows: /TV –including Employee mirror data empid’—internal employee identifier status’ function’ age’ hours’ employedSince’ depNm’ man-id’ presentDate’
The view TV contains mirrored data from the Employee class relevant for the view SalView. We will use the prime-notation to reflect this mirroring aspect. As an example, attribute age’ in TV will typically represent the associated syntax for the original age attribute in SalView, and will typically also have a possibly different domaintype associated to it; for example, in Salview age could have domaintype integer, while in TV the domaintype is string, but we assume that we can somehow transform the integer representation to the string representation, and vice versa, as is common practice in the data extraction process. We will, therefore, also assume that there exists some ψ-map, say ψ1, between SalView and TV, as depicted in: /SalView
ψ1
/TV
Existence of a ψ-map like ψ1 is necessary for two reasons: 1.
ψ1 maps object data from SalView to TV, solving data extraction problems in the transition from the source model SM to the
Merging and Outsourcing Information Systems with UML
2.
target model TM. Typically, attributes in TM (primed) corresponding to attributes to SM (nonprimed), will suffer from name anomalies and differences in type domains. These are all well-known problems in the field of data integration, where ψ-maps are used to resolve matters pertaining to data extraction ([5]). We have to ensure that each object in the set of instances of view SalView corresponds to exactly one object in the view TV, and vice versa. Only in this way can we freely and unambiguously move between the source and the target models.
operations, and constraints concerning pension funds, taxes, health insurance, vacation savings, and so forth: all necessary to calculate a net salary from a given gross salary, and to describe how amounts are deducted from gross salaries to obtain a net salary. Data from the view TV, together with such auxiliary data and operations from the target model TM offer input material for a function actually enabling the concrete calculation of net salary and its accompanying deduction report. This function will offer the material to define a new view (as the result of some suitable ψ-map), in which we find, neatly organized, those attributes pertaining to an employee’s net salary and deduction report. Hence, view TV is used to obtain yet another view, say TV’, containing the following data:
Remark: Note that we have not offered a concrete specification of ψ-maps like ψ0, ψ0’, and ψ1: we only assume that such ψ-maps can somehow be constructed. Without the existence of such ψ-maps, no guarantee can be offered for correctness of the outsourcing process.
In order to actually provide sufficient material to implement calNetSal and deductionOverview by calcNetSal’ and deductionOverview’ in the view TV, we will typically employ auxiliary data found in classes in the target model TM. Examples of such auxiliary classes contain data,
where we have assumed the existence of some ψ-map, say ψ2, to map TV-objects to TV’-objects. TV’ will also be used to registrate-in OCL-style-
Figure 2. ω-schema ensuring correctness of outsourcing Outsourcing Company
Supplier
SM
TM
ψ0’
ψ0 ψ1
/SV (pure data)
/TV (pure data)
ψ2
/SV’
ψ3
(s-constraint + operations)
Ω
/TV’ (implemented outsourced operations)
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the constraint information defining the actual calculations of net salary and deduction overview. If we split our original view SalView into two parts, one called SV containing purely the attributes, and the other called SV’ containing purely the desired operations and the original σ-constraint, then we would arrive at the following situation:
where SV’ is a subclass of SV containing the desired operations defining net salary and deduction report. If we now could provide a suitable ψ-map, say ψ3, to map TV’ to SV, then we could actually, in turn, provide SV’ with the desired calculations of calcNetSal and deductionOverview. Hence, our final obligation in coming up with a correct outsourcing of calcNetSal and deductionOverview lies in finding a construction of such a map ψ3. Once we have constructed such a ψ-map (coined above as ψ3), we are in the situation that we can construct our sought after ω-map as a composition of a certain sequence of ψ-maps, which we now explain. Consider Figure 2, in which we offer an overview of the various ψ-maps encountered in our example thus far The desired ω-map, say Ω (mapping the source view to the target view), can now be defined as the inverse of the map ψ3. Note that ψ-maps ψ1 and ψ2 are essential in defining Ω, since these two ψ-maps determine the target view TV’. In the next section, we will offer a general schema for outsourcing, and discuss scope and limitations of our approach.
A general schema for outsourcing Generally speaking, our method for modelling outsourcing of operations in terms of ω-schemas is offered in primary Figures 1 and 2. Figure 1 had already been defined in general terms, and though Figure 2, strictly speaking, pertains to an example, it is a more-or-less simple matter to abstract from this specific example. By this we mean that Figure 2 can also be used to show how to construct an outsourcing relation between a company and supplier in an abstract (general) setting, employing the following concepts: 1. 2. 3.
4.
5.
6.
7.
Outsourcing company and Supplier Source Model (SM) and Target model (TM) Source View (SV) and Target View (TV), purely pertaining to data (source data in the source view, and mirrored data in the target view) Source View’ (SV’), as that subclass of SV containing both the outsourced operation and the σ-constraint (offering the formal counterpart of the SLA) Target View’ (TV’), as that result of TV containing the actual implementations of the outsourced operation ψ-maps in order to provide exact views (hence preserving constraints from base classes to views) An eventual ω-map ensuring correctness of outsourcing
Figure 2, hence, offers a clear scope of the modelling aspects employed in the process of outsourcing in the context of ω-schemas.
Future trends Not all aspects in outsourcing and integrating information systems have been covered in our
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approach. We have offered a basis from which one can start semantical analysis and move on to a correct design. Many issues, however, have been left untreated. For outsourcing, we mention the following (possible) limitations in our approach: 1.
2.
3.
Can all aspects of outsourcing of information systems be modelled in terms of UML/ OCL? Are outsourced operations always query operations, or are update operations (those that result in a state change of an object) also candidates for outsourcing? Are outsourced operations only object operations, or can they also be operations that apply to complete sets of class instances, or even complete databases?
3.
We offer the following comments on these possible limitations of our approach: 1.
2.
There are aspects of outsourcing that we have not addressed in this chapter. Our outsourcing has dealt mainly with more-or-less technical aspects, and not with other more business-oriented aspects of outsourcing. For example, we have not discussed the matter of costs when trying to get two parties to agree to an SLA, or matters pertaining to penalties should a party not respect the SLA in practice. We think that UML/OCL is an extremely powerful modelling tool, and perhaps it is possible to also, eventually, model such aspects as those described in the UML/OCL framework, but this is still largely an open question. Query operations are not the only operations suitable for outsourcing in our approach. Update operations are equally suitable for outsourcing, due to the fact that our outsourcing schema employs exact views, hence ensuring preservation of integrity constraints (including those pertaining to
state changes) from the source to the target. Update operations, however, fall into the category of transactions, and are therefore also subject to transaction protocols (of particular interest in a multiuser environment). In our case, we have to devise a transaction protocol between an outsourcer and a supplier, somehow keeping them in sync. Constructing transaction specifications and/or protocols in outsourced information systems is the next step in outsourcing of information systems. The question whether something is called an object operation or not, is of no significance when dealing with matters of complexity or operation expressiveness. For example, if an operation is to handle a whole set of instances (say of some class C) at the same time, then we construct a root class, say RC, from which we have a relation to C. We can then define an object operation inside class RC that can manipulate the class C. We can use a similar approach for an operation that has to handle a complete database. In this case, we just construct a database object containing relations to the base classes the database consists of. An operation on this database object can then refer to any collection of classes inside the database. Hence, an operation being an object operation, places no real limitations on its expressiveness.
Federating (information) systems has been the subject of a large research community in the field of databases and information systems in general. There are, however, still some topics in need of more research, of which we mention a number. 1.
We have a good idea what data integration (data extraction) and (static) constraint integration (data reconciliation) looks like. A next step could be to offer a theory of operation integration; that is, given some local operation (that we wish to share at the
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2.
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global level of the federation), how could we represent it at the global level, taking into account all possible data extraction and data reconciliation problems, and also taking into account the pre- and postconditions (i.e., dynamic constraints) associated to that operation? This is an interesting and intriguing problem that is of particular interest in the context of EAI (enterprise application integration). Once this problem is solved, the way is open towards the beginning of a theory of transactions on federated information systems (transaction specifications and protocols in a multiuser environment). One might protest against the current state of affairs that we are only able at the moment to tackle data extraction and data reconciliation problems in federated systems, while actual transactions on a federated system are the core of the matter that we are aiming at. There are, however, applications in the context of data warehouses that could benefit immensely from relatively recent results in the field of federated information systems. Data warehouses, from the point of view of conceptual design, have mainly benefitted from current insights in data extraction, while the theory of constraint integration (i.e. data reconciliation) has hardly been addressed as being relative to data warehouse applications. We advocate, however, that data warehouse applications (largely being query applications) could use constraint information at the global integrated level to write more effective (and efficient) queries. Anybody involved in standard database applications already knows that knowledge of constraints is essential in the way one specifies queries: knowledge of key constraints, foreign keys and so forth, are used to the maximum to obtain correct and efficient queries. By having general knowledge of representing (ad hoc) local constraints at
the global integrated level, data warehouse users could greatly improve the quality of their query specifications.
conclusIon Federating and outsourcing are more-or-less dual processes. Federating (or: integrating) deals with moving from a given collection of local component systems to an encompassing global system, while outsourcing deals with moving from (a part of) an existing global system to a local system. Integration, as described in this chapter, employs the global as view (GAV) approach in constructing an appropriate global system, while in outsourcing one employs a local as view (LAV) approach in constructing an appropriate local system. In both approaches, exact views provide the basis for constructing the required systems. Data extraction deals with the alignment of syntax and semantics of data schemas of the local and global systems involved. The integration process and data reconciliation subsequently addresses the issue of correctly integrating local integrity constraints, where the existence of a corresponding ψ-map offers the criterion for successful integration of data and constraints. In the outsourcing process, schema alignment tries to match an outsourcer schema with a supplier schema, where the existence of a corresponding ω-map offers the criterion for successful outsourcing of an operation, together with accompanying data and pre/ postconditions. In summary, we can say that there is a partial duality relation between integrating and outsourcing. Both integration and outsourcing employ exact views to obtain their goals; the integration process, however, is subsequently aimed at the systematic construction of a suitable ψ-map, while the outsourcing process systematically tries to construct a suitable ω-map.
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reFerences Balsters, H. (2003). Modelling database views with derived classes in the UML/OCL framework. «UML» 2003 6th International Conference (LNCS 2863). New York: Springer. Balsters, H., & de Brock, E. O. (2003a). An object-oriented framework for managing cooperating legacy databases. In Proceedings of the 9th International Conference Object-Oriented Information Systems (LNCS 2817). New York: Springer. Balsters, H., & de Brock, E. O. (2003b). Integration of integrity constraints in database federations. In Proceedings of the 6th IFIP TC-11 WG 11.5 Conference on Integrity and Internal Control in Information Systems. Norwell, MA: Kluwer Academic Press. Balsters, H., & de Brock, E. O. (2004a). An object-oriented framework for reconciliation and extraction in heterogeneous data federations. In Proceedings of the 3rd International Conference, ADVIS2004, Advances in Information Systems (LNCS 3261). New York: Springer. Balsters, H., & de Brock, E. O. (2004b). Integration of integrity constraints in federated schemata based on tight constraining. In Proceedings OTM Confederated International Conference CoopIS, DOA, and ODBASE (LNCS 3290). New York: Springer. Blaha, M., & Premerlani, W. (1998). Objectoriented modelling and design for database applications. NJ: Prentice Hall. Bouzeghoub, M., & Lenzerini, M (2001). Introduction to data extraction, cleaning, and reconciliation. Information Systems, 26(8), 535-536. Elsevier Science. Cali, A., Calvanese, D., De Giacomo, G., & Lenzerini, M. (2002). Data integration under integrity constraints. In Proceedings of the CAISE 2002 (LNCS 2348). New York: Springer.
de Looff, L. A. (1995). Information systems outsourcing decision making: A framework, organizational theories, and case studies. Journal of Information Technology, 10(4). Demuth, B., & Hussmann, H. (1999). Using UML/ OCL constraints for relational database design. «UML»’99: 2nd International Conference (LNCS 1723). New York: Springer. Demuth, B., Hussmann, H., & Loecher, S. (2001). OCL as a specification language for business rules in database applications. «UML» 2001, 4th International Conference (LNCS 2185). Springer. Eriksson, H. E., &Penker, M. (2000). Business modelling with UML. Business patterns at work. Hoboken, NJ: Wiley. Forrester (2004). Tracking Europe’s outsourcing stampede. Cambridge, MA: Forrester Research. Gera, J. (2003). Outsourcing management: Align management techniques to the outsourcing model. Cambridge, MA: Giga Research (Forrester Research Inc.). Grefen, P., Ludwig, H. & Angelov, S. (2003). A three-level framework for process and data management of complex e-services. International Journal of Cooperative Information Systems, 12(4), 487-531. Lenzerini, M. (2002). Data integration: A theoretical perspective. ACM PODS’02. New York: ACM Press. Miller, R. J., Haas, L. M., & Hernandez, M. A. (2000). Schema mapping as query discovery. In Proceedings of the 26th VLDB Conference. San Francisco: Morgan Kaufmann. Rahm, E., & Bernstein, P. A. (2001). A survey of approaches to automatic schema matching. VLDB Journal, 10(4), 334-350. Reddy, M. P., Prasad, B. P., & Gupta, A. (1995). Formulating global integrity constraints during derivation of global schemas. Data & Knowledge Engineering, 16(3), 241-268. 2209
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Sheth,A.P.,&Larson,J.A.(1990).Federateddatabase systems for managing distributed,heterogeneous and autonomous databases. ACM Computing Surveys, 22(3), 183-236.
Türker, C., & Saake, G. (2000). Global extensional assertions and local integrity constraints in federated schemata. Information Systems, 25(8), 503-526.
Smith, M. A., Mitra, S., & Narasimhan, S. (1998). Information systems outsourcing: A study of preevent firm characteristics. Journal of Management Information Systems, 15(2).
Vermeer, M., & Apers, P. G. M. (1996). The role of integrity constraints in database interoperation. In Proceedings of the 22nd VLDB Conference. San Francisco: Morgan Kaufmann.
Spaccapietra, S., Parent, C., & Dupont, Y. (1992). Model independent assertions for integration of heterogeneous schemas. VLDB Journal, 1(1), 81-126.
Warmer, J. B., & Kleppe, A. G. (2003). The object constraint language (2nd ed.). Boston: Addison Wesley.
Sparrow, E. (2003). Successful IT ousourcing, from choosing a provider to managing the project. New York: Springer.
This work was previously published in Enterprise Modeling and Computing with UML, edited by P. Rittgen, pp. 230-256, copyright 2007 by IGI Publishing (an imprint of IGI Global).
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Chapter 7.12
IT Software Development Offshoring:
A Multi-Level Theoretical Framework and Research Agenda Fred Niederman Saint Louis University, USA Sumit Kundu Florida International University, USA Silvia Salas Florida International University, USA
AbstrAct The offshoring of IT development is a significant global economic phenomenon. It influences the lives and fortunes of individuals, organizations, and nations/regions. However, because offshoring so broadly affects different stakeholders, a multi-level theory is required so that influences that may positively affect one set of stakeholders while negatively affecting another are not misinterpreted by an overly narrow analysis. This article discusses how IT development is differentiated from other global labor sourcing and argues that it is worthy of investigation as an offshoring domain. The article proposes that
the study of IT development offshoring needs to recognize precursors and results as they affect individuals, organizations, and nation/regions, and presents examples and discussion in each of these areas. The article further argues that the domain of IT development offshoring is incomplete without consideration of interactions between the individual and nation/region as well as between the organization and nation/region. The article concludes by considering the complexity of presenting a complete picture in this domain and suggesting some areas for future research.
IntroductIon Offshore outsourcing (offshoring) is the practice of distributing work, particularly in the area of information technology (IT) services and development, to workers outside the national borders of the host country. It represents an extension to global proportion of outsourcing practices that have become widely practiced since the 1980s among organizations seeking to hire others to manage IT work or to develop new IT capabilities. Offshoring is not an issue limited to multinational corporations in the U.S., but a global issue that impacts organizations (Beylerian & Kleiner, 2003) and government agencies (Gruber, 2004; Harden, 2003) around the world. This practice has received widespread attention, because it influences significantly economic activity for a diverse set of stakeholders. It shifts the equation of decision making for individual IT
workers and those considering IT as a career, for organizations embarking on offshoring activities (or considering whether to do so), and for nations/ regions competing to attract IT offshoring work or to retain that work domestically. This article argues that offshoring is a significant global, information-technology-related phenomenon of a magnitude that demands attention and understanding. It also argues that the range of stakeholders and the interaction among stakeholders suggest that comprehensive understanding of this phenomenon will require attention to each stakeholder group as well as the manner by which decisions and actions at each level have influence at different levels. Figure 1 presents a graphic representation of the relationships among stakeholder levels that will be discussed in this article. Offshoring is of significant concern to IT workers, as it potentially affects both the number and kind of jobs available to them. In the U.S., total IT employment shrank significantly from its
peak in 2000. Using the BLS, InformationWeek found that the number of Americans employed in technology has increase by 96,000 in the last year and a quarter (up to summer 2005). However, that is still 82,000 fewer jobs than at the end of June 2002 (Chabrow, 2005). For a period of time, unemployment among IT workers was higher than among U.S. workers overall for the first time since the invention of the computer (at least since statistics included IT workers) (Niederman, 2004). At approximately the same time, according to an Information Technology Association of America (ITAA) study in 2003, U.S. IT-producing companies have moved 12% of their IT work offshore, while non-IT-producing companies have moved approximately 3% of their IT work offshore. Matloff (2004, p. 28) references a study by Gartner Group projecting “that 25% of all U.S. IT jobs will move overseas by 2010, up from 5% today.” As early as 2001, more than 40% of Fortune 500 companies reportedly were engaged in offshore outsourcing (Carmel & Agarwal, 2002). The extent to which the decline in U.S. IT jobs is caused by offshoring is not clear. Other explanations of the dropoff include the completion of Y2K project staffing, the bursting of the dotcom investment bubble, and the general business downturn from the September 11, 2001, disaster. For individual IT workers, the globalization of the workforce presents a set of challenges and opportunities and a layer of uncertainty regarding the value of investment in particular skills and commitment to particular employers. From the perspective of the individual organization, the offshoring of IT work represents a shift in utilization of capital-creating opportunities either to provide the same amount of IT services at lower cost or to increase the development and deployment of IT at the same cost. In turn, this can reduce costs for transaction overhead, for producing a given amount of goods or services, or for creating new or enhanced product offerings. These reduced costs allow for some combination of reinvestment in new research and development,
lower prices or more options for customers, greater profits distributed to investors, or retention of capital for future investment. Of course the theoretical possibility of reducing costs and increasing benefits depends on organizations making a series of good choices, including whether they are individually in a position to take advantage of offshoring, where to offshore, by what agency mechanism to offshore, and how to control and manage the process. Benefits are not automatic, and there is much concern about avoiding the risks and pitfalls that are inherent in the nature of offshoring. From a national and regional perspective, offshoring implies a significant shift in the distribution of global resources. As jobs and wages move from one nation to another, there is a resulting shift in multiplier effects as those wages are spent in different localities. This may stimulate demand for other products among offshoring work recipient nations. This may, in turn, lead to a general rising wealth within the country receiving offshoring work. As a result, receiving offshoring work is of significant concern at the nation/region level. Individual countries have limited investment resources to encourage the development of new industries. Assessment of existing capabilities is a critical input into decisions regarding extension of these assets through new investment. A range of policies, including taxation and subsidies, protection of intellectual property, and investment in physical and human infrastructure, potentially can affect the ability to attract or retain IT development work and workers. This raises questions for nations/regions regarding the nature of existing assets; the investment and policy strategies most likely to yield benefits above costs; how to contain the risks to workers, private investors, and organizations; and projections for future needs of industry that might be addressed by their taxpayers. At each of these three levels of analysis — the individual, the organizational, and the nation/regional — various constituents may be affected by
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decisions, actions, and results. Some individuals will position themselves for long and prosperous careers, while others will have jobs disappear and be forced to make career changes at potentially inopportune times. Some organizations will choose to participate in offshoring and gain significant cost, quality, or revenue advantages, while others may find projects bogging down or losing significant intellectual property. Some organizations will refrain from participating and will find themselves falling behind in their industry, while others will gain advantages or experience costly mistakes. Similarly, some nations will find their investment in infrastructure to support acquisition and retention of offshoring work, while others either will not profit from their investment or will find themselves falling behind. In this article, we argue that there are significant research issues at each of these levels of analysis. Increased understanding regarding investments in skills, managing offshoring projects, and investing in infrastructure, for example, will be important in increasing benefits and limiting failures from offshoring activities. However, we further argue that a framework for offshoring research that only looks at these levels remains incomplete. A number of issues involve interplay of stakeholders among levels. For example, the outcomes of investment by nations in human and technical infrastructure will provide constraints as well as opportunities for individuals and organizations within those borders. The evaluation of decisions by nations regarding investment in offshoring infrastructure may be contingent in part on the nature of the existing workforce; the culture of the workers may determine the degree to which such investment is nurtured into successful enterprises. These relationships across levels may be non-linear or contingent. For example, an intermediate rate of taxation may allow nations to recoup costs of prior investment in human and physical infrastructure and to stimulate continuous improvement, but too high a level of taxation may render domestic offshoring work non-competitive and choke off
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expansion, while too low a rate may result in deteriorating infrastructure that eventually will not sustain growth. In response to the complexity of the phenomenon of offshoring, developing an understanding of the precursors, mechanics, and results of offshoring in a comprehensive manner will require its examination from multiple perspectives. This topic requires the application of a multilevel theoretical lens to “bridge the micro-macro divide, integrating the micro domain’s focus on individuals and groups with the macro domain’s focus on organizations, environment, and strategy” (Klein, Tosi, & Cannella, 1999, p. 243). The purpose of this article is to provide an initial step in assembling the relevant theoretical and empirical bases for developing a research agenda for offshoring. This study will take a broad perspective in considering what a comprehensive theory of offshoring would need to include. Theories from various streams of international business, strategy, and management, as well as empirical findings from MIS research, are presented in order to broaden our understanding of this wide-ranging topic and to provide a framework for future offshoring research. Discussion will begin with a consideration of why IT development is in itself worthy of special study and theorizing. What differentiates it from other offshoring services? The article then continues by examining issues within each of the three levels of analysis — individual, organizational, and nation/regional. It will continue with a discussion of some issues related to multiple levels. The article concludes with a brief synopsis and discussion of prioritization of future research work.
Why Focus on It development oFFshorIng? IT development differs from other IT services, such as staffing of help desks or operations of data centers, in several ways. The process of develop-
IT Software Development Offshoring
ing new IT generally is complex and takes many steps, from initiation and planning to coding, testing, implementation, and maintenance. These elements are relatively constant, whether the new IT is specific to a given firm or a package to be sold across multiple customers, although the emphasis and complexity of each element may vary greatly between custom and package development. Typically, significant knowledge of an organization’s other IT assets are required for custom development, because new applications generally are added to an overall portfolio of software that runs on specific hardware and telecommunications platforms. Similarly, high levels of expertise for testing systems across platforms, for balancing generic and innovative capabilities, for designing easy-to-learn and easy-to-use interfaces are crucial for package development. As a result, IT development represents a particularly complex and sophisticated work domain. These characteristics suggest that IT development falls within what Erramilli and Rao (1993) called idiosyncratic services. Given their differences with less-specific IT activities, this particular domain provides an attractive subset of service activities for examination. Given the generally higher level of skills necessary for this sort of work, it represents an arena in which the economic impact of shifting geographic location of labor would have significant impact, not only on number of jobs but on the proportion of highend work within a national portfolio. It is an area that pressures nations/regions to develop both technical and human resource infrastructures to be competitive in attracting and retaining highly skilled workers. Because of the level of complexity and sophistication represented by IT development in contrast to other IT services, there is no reason to expect that decision making, actions, and outcomes that pertain to IT development also will apply to other IT services. From a research perspective, studies that mix offshoring of IT development and other IT services risk washing out genuine effects within
each domain. We would argue that where studies span the different types of IT development and other services, separate analysis should be made within and across these domains to test whether, indeed, they behave differently. This viewpoint is indirectly supported by the work of Murray and Kotabe (1999). One would expect, as they hypothesized, that such IT development activities, because they tend to be integrated with critical organizational processes, would be sourced internally by organizations. However, as results of their study did not support this hypothesis, it is likely that the core competency and expertise of the outsourcing company may lead to greater external sourcing of this sort of service. This suggests that organizations may perceive lower cost and lower or equivalent risk using the competencies of external firms, even for development of complex systems, than the costs and risks for providing these internally. Alternatively, they may perceive IT applications not as part of the core operations and procedures but rather as a technical supplement that supports their operations. This suggests an interesting, if not unique, service industry, where the nature of the service is clearly not a simple interchangeable commodity, and yet significant amounts of offshoring, in fact, do occur.
eXAmInAtIon oF Issues WIthIn levels the Individual level Some IT professionals are affected by offshoring in terms of their immediate employment and long-term employment prospects. This shows up in layoffs but also in the creation of new job titles that have new skill demands. For example, a class of IT project managers is emerging for coordinating work between international sites. Individual effects also turn up in selection of careers among those entering the market, includ-
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ing students and those temporarily outside the job market (Niederman, 2004). Human Capital Theory Human capital theory largely is concerned with the mechanisms by which the application of human skills and abilities translate into individual and organizational profits. Some specific areas of interest include the investment in training made by individuals and organizations that result in higher levels of productivity for individuals and, as a result, increasing profits that can be divided between the individual and the organization. One particular concern of this line of research is the varied outcomes from training because, as an individual’s skill and productivity increase, unless the payoff from that investment is recognized and rewarded by the organization, there is some chance of a different organization hiring that individual and profiting from the original company’s training investment. Taking current wage differentials between the U.S. and India for programmers, for example, that difference is explained logically by differences in overall economic standards between the two countries. Cost of living averages are so much lower in India that even receiving a fraction of the pay for Indian programmers in contrast to equivalent workers in the U.S. may result in little living standard difference. Another consideration is that, to the extent that the U.S. and India represent different labor markets, their supply and demand curves may differ significantly. In this explanation, there is a relatively small gap in supply and demand for programmers in the U.S. but a very high supply of programmers relative to demand in India, thus resulting in far lower pay in India for the equivalent work. Another explanation revolves around wage stickiness. In good times for employees (when demand is greater than supply), wages will rise, but in bad times, as supply exceeds demand, wages will freeze, and employers will be inclined to reduce the number of employees or to stop hiring, and to reduce
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total numbers through layoffs or attrition. New workers will be hired at lower wages, raises will be curtailed or diminished, and the average wage will stay the same. This analysis would lead to speculation that India simply may have not gone through enough periods of upward wage pressure in order for labor costs to be equivalent to those in the U.S. It is also interesting to consider the effects of the overall economic strength of the U.S. and India and how those translate into currency exchange rates. In recent years, the U.S. dollar has weakened against key world currencies such as the Euro (although, at the time of this writing in July 2005, the dollar had made up some ground), which may tend to narrow the price differential between U.S. and Indian programmers, once currency differences are accounted for. It is also interesting to note that as offshoring gains momentum, more Indian programmers are hired, and their average wages can be expected to rise. Agrawal and Thite (2003) estimated that salaries have been rising at an annual 20% rate in recent years in India. Increasingly Indian firms are reported to be looking to China, Singapore, and Eastern European countries to offshore some of their workload. In countries that predominantly are sending work overseas, the threat of offshoring can cause individuals to increase investment in their own knowledge base and skill levels through on-thejob means, such as volunteering for work with the latest technologies and off-the-job means such as courses, tutorials, volunteer work, and self-motivated projects. At the same time, the opportunity to expand work overseas may cause organizations to invest less money in training their own employees, who may become redundant in any case. This also may cause decision making among those entering the work force to emphasize jobs expected to be difficult to offshore. This, in turn, may create local labor shortages in both the near and long term with the unintended result of stimulating forecasts showing even more long-term benefit in moving jobs offshore. In
IT Software Development Offshoring
another scenario, however, training dollars may not diminish overall but may shift from skills emphasizing the execution of development of new applications to planning and integrating new applications into the support of core competency areas within the firm. Individual-Level Research Questions. Research questions pertaining to the individual level fall into three categories: (1) how does offshoring or, more generally, the integration of labor markets, affect IT workers’ jobs in terms of human resource management variables, such as compensation, working conditions, and skill requirements? (2) Given that there is a significant effect of offshoring, how does it differentially affect IT workers in countries primarily offshoring work from those primarily receiving offshored work? and (3) For the individual IT worker, what strategies and approaches work best for maximizing opportunities created by offshoring and ameliorating associated risks? As a corollary to the third question, what skills and abilities provide the most likely return on investment for IT workers in both highly offshore sending and receiving countries?
the organization level To Offshore or not to Offshore. The decision of whether or not to offshore IT development is not monolithic. Organizations ultimately may offshore all of their IT development, or, to the extent that it can be deconstructed into modules, they may select particular pieces to outsource. If the organization is going to offshore some portion of its IT development, what should be retained inhouse and what should be offshored? Knowledge creation and enhancement of human capital is thought largely to be the core driving force for success in today’s global marketplace (Ambos & Schlegelmilch, 2005; Chaharbaghi & Nugent, 1996; Hatch & Dyer, 2004; Lev, 2004; Tirpak, 2005). Insights into the nature of knowledge and its use in organizations can affect our understand-
ing of offshoring, particularly in opportunities for creating new intellectual property (or expanding the risk of losing it). Teece (2000), for example, addresses this issue in terms of the decision to outsource work for companies seeking innovation as a basis for competitiveness. This clearly would be the case in many instances for IT product companies, given that the work largely will be involved in the creation of their main products. Teece (2000) frames the offshoring question in global economics terms: under what conditions is it best to develop new products from internal development, joint venture, strategic alliance, long-term purchase agreement, or simply buying it on the market? The answer, he suggests, depends on the type of innovation — the degree to which it stands alone or is intertwined with other production, marketing, or scientific processes — and on its degree of newness. It depends on how difficult it is to replicate the knowledge or, conversely, to defend exclusive access to its use. Offshoring Providers of Differing Structure. It is important to recognize that IT-producing firms may vary greatly. At the one end are firms like Microsoft and IBM that produce software products and services for arms-length customers in the open market. These products may be tailored for particular customers and implementations, but at their core are largely packages with standard content developed for application in many environments. At the other end are firms like Nestle or Proctor and Gamble that have evolved to consume predominantly software packages developed by companies like Microsoft and IBM but that also produce custom products to fill particular niches and to retain intellectual property regarding strategic business processes. The approach to offshoring can be expected to vary significantly for these firm types. When offshoring is undertaken by a firm whose primary products are not IT (e.g., Boeing primarily makes airplanes and incidentally may spin off some software made for the purpose of
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supporting its primary product lines), the firm generally will outsource to development specialists. However, such specialists come in different flavors. Such outsourcing could be (1) to a domestic IT firm operating solely domestically, (2) to a domestic firm with multinational staffing, (3) to a foreign firm relative to the outsourcer (e.g., in the U.S., such firms would include Infosys or Tata Consulting) that may use labor in the same domestic market but is more likely to produce the work largely or exclusively in the outsourcing work receiver’s primary country of activity (e.g., for Infosys or Tata Consulting, the work would be in India), or (4) to a foreign outsourcing firm that operates exclusively overseas relative to the outsourcing company. The selection of the type of offshoring provider will have managerial implications. These implications likely will include areas of cost and management requirements. It is likely that cost differentials would mirror different amounts of the outsourcing of the management of the offshoring process as well as the work. In interacting with a domestic offshoring firm, the preponderance or totality of cross-cultural relationship management would be handled by the offshoring work recipient. In interacting directly with a service provider in the offshore receiving country, much more of that level of management would need to be undertaken by the offshoring firm. As a result, one would expect that costs for this sort of management might be passed on by the domestic provider and, conversely, be absorbed as overhead or risk, if dealing directly with an overseas provider. The other arrangements should fall somewhere between the two extremes in both cost and management requirements. How to Manage Offshoring Programs and Projects. When offshoring is undertaken by an IT development firm (e.g., Oracle, IBM, Microsoft), it typically would be a core service function and, therefore, should be expected to be sourced internally. However, this internal sourcing would involve staff across any of the geographic locations
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of the organization and, therefore, may be domestic or multinational in nature. The decision making for where to undertake work within the umbrella of a multinational development firm will be based on at least two factors: workload distribution at a current point in time (i.e., the availability of labor resources relative to the required work timeline) and the level of development for distributing projects globally or managing multinational projects. These approaches contrast sending an entire project overseas with the expectation of the return of completed project objectives vs. ongoing collaborative work among IT developers in multiple national locations. Each of these will have different managerial requirements, although both will necessitate the clear specification of expectations and requirements. The latter also will necessitate the technical and human communications skills, procedures, and execution for ongoing coordination of tasks. The proliferation of offshoring and/or outsourcing has led to geographical, cultural, and institutional scattering of corporate activities globally, which, in turn, has led to increased transaction (Jones & Hill, 1988) and agency costs (Morck & Yeung, 1992). The issues of internal costs (opportunism, free rider, monitoring, bargaining, negotiation, bounded rationality) and external costs (political stability, financial- and market-related risks) has been of concern to organizations involved with international business activities. In short, the liability of foreignness (Coviello & McAuley, 1999; Zaheer & Mosakowski, 1997) has an important impact on the firm’s offshoring activities as it seeks to minimize transaction costs. If an organization decides to enter into offshoring operations, there are a number of managerial issues that logically affect the probability of successful completion. To the extent that offshoring remains a relatively new phenomenon, it is possible that best practices may become standardized and well-known. On the other hand, even individual organizational IT development and routine out-
IT Software Development Offshoring
sourcing have not developed a reputation for routine success. MIS projects, in general, are estimated to have as many as 80% unsuccessful outcomes in terms of delivery on time, at cost, and with expected features at a given level of quality. According to one Dutch study, in particular, “7080 per cent of the projects failed, either completely or partly” (Cozijnsen, Vrakking, & van IJzerloo, 2000). There is no guarantee that offshored projects will be more successful, particularly given the additional overlay of time, culture, financial, technical, and legal issues (Kobayashi-Hillary, 2005; Kliem, 2004). The stresses of offshored projects can have multiple effects: on the one hand, it is very easy for organizations to underestimate the difficulty of this sort of project, experience failure with an initial project, and terminate relationships and programs of offshoring; on the other hand, offshored projects, given the clearly additional complexities, might enforce a standardization, a use of methodology, and a formalization of communication that may eat away part of the gain from labor cost differential but represent a needed discipline for projects in general (and may return to the outsourcing company as new knowledge and best practice that lower lifetime costs of all project development). A growing number of books presents the opinions and experiences of individuals, largely consultants, who have been involved in offshoring projects (although they do not necessarily focus specifically on IT development in contrast to other offshoring activities) and present useful lists of issues that managers need to address in preparing for commitment to offshoring activities. Kobayashi-Hillary (2004), for example, focuses specifically on offshoring to India and, in addition to a general introduction to Indian culture and business climate, describes several key concerns for offshoring managers. These concerns include outcome metrics and benchmarking service levels, the vendor selection process, developing legally binding contracts, securing intellectual property as well as transferring knowledge where appro-
priate, developing communication channels, and working with staffing for blending labor forces or integrating labor results. From a research perspective, each of these concerns represents a set of managerial decisions and implementations that can add to or detract from a successful offshoring program. The relationship among these may be complex in that excellent procedures for securing intellectual property may be rendered of little value without appropriate legal contracts and methods of enforcement, but excellent contracts and enforcement may have no value, if the original planning for securing intellectual property is flawed. In other words, an index of quality of these variables may be captive to some variables that doom a project to failure, regardless of the quality of all other factors, if they do not reach a sufficient quality threshold. Similarly, Robinson and Kalakota (2004) present a rich set of cases that illustrate their discussion of various issues and practices across a wide range of offshoring services, including IT development. Another useful approach to studying the management of offshoring operations is to consider the extension of lessons learned from the more constrained cases of domestic outsourcing. Outsourcing, in general, is a well-researched area within the MIS scholarly community. The study of IT outsourcing, in general, has been researched widely. Lacity and Willcocks (1998, 2000) have addressed this sort of IT outsourcing in a series of detailed studies. A major finding of these studies suggests that selective outsourcing (e.g., outsourcing carefully selected subsets of the information technology function) generally produces better results in terms of cost savings than either completely outsourcing or not outsourcing at all. Another source of guidance regarding the understanding of offshoring comes from consideration of the project and program level of IT management. The IT project control literature differentiates four modes of project control mechanisms: outcome-oriented, process-oriented, self-managed, and clan-managed (Kirsch, 1996).
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There is logic to these differentiations, and it might be possible to separate offshoring projects into these categories. Two issues, however, present themselves—are these mutually exclusive, and are these at the right level of analysis? Observed actual methods used for controlling projects may be categorized along these lines; these categories may generate specific behavioral actions that become available for managing these tasks. Do multicultural project teams require specific control techniques for successful outcomes? If an organization decides to enter into offshoring, Carmel and Agarwal (2002) present a stage model of offshoring activity maturity. They suggest that firms move through the following stages: (1) no offshoring but internal advocates of the practice; (2) pilot projects for non-core IT processes; (3) leveraging of cost efficiencies through offshoring; and (4) offshoring as a strategic initiative. By implication, much of the risk of entering into offshoring arrangements come from jumping to sophisticated operational models without developing the requisite managerial skills and experience through smaller-scaled entry mechanisms. Kaiser and Hawk (2004) observe in practice the use of a similar stage model describing the sequence of changes for a particular relationship between a large U.S. multinational company and its Indian offshoring partner. Organization-Level Research Questions. What types of IT development are most effectively offshored? Under what conditions is it best to use various types of partners for offshoring? How do organizations go about choosing the location for sending their offshoring work? What is the net effect of increasing transaction costs through adding cultural diversity relative to lower costs of labor to handle transactions? How can organizations project the transaction costs of starting offshoring relationships? How can organizations minimize transaction and other costs of offshoring through technical and human infrastructure and process management?
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the nation/regional level The Location Decision — The Country Perspective. Davidson (1980) focuses directly on the role of country characteristics and experiences in determining foreign direct investment (FDI) location decisions. Important country variables include natural resources, transportation and infrastructure, tax and investment policies, market size and characteristics, labor costs, and government incentives. Each of these may influence the MNE’s decisions of whether to make a foreign equity investment and where to locate such an investment (Porter, 1990). These factors also can be examined for clues to explain the relatively quick and extensive shift to offshoring of labor. As a service, rather than physical product, some elements, such as natural resources and transportation are likely to play a lesser role. However, labor costs, tax and investment policies, and government incentives are likely to be crucial. We would particularly suggest considering labor costs in the broadest sense of not only expenditures but also costs against benefits. Issues such as quality, turnaround speed, and maintainability of code will sustain or erode advantages simply from cost. We would argue that even straightforward programming from clear specifications has not yet reached the level of commodity. Pries-Heje, Baskerville, and Hansen (2005) present a case highlighting barriers to development of offshoring capabilities in Russia. In conclusion, they identify four key barriers: (1) increased stress on foreign language training; (2) improved training for software development managers; (3) legislation to support more autonomous Russian software houses; and (4) enforcement of laws on intellectual property. Clearly, these recommendations span issues of human resource skills in language and management through governmental policies regarding property guarantees. These concerns are echoed in a similar work by Hawk and McHenry (2005), who differentiate between strengths and challenges for Russian firms going
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after high-end innovative projects and going after the lower-cost market. Carmel (2003) presents what he calls the oval model of success factors for software-exporting countries. The model elaborates on an earlier model by Heeks and Nicholson (2002). The oval model consists of eight elements: (1) government vision and policies, including funding and tax benefits; (2) human capital, including traditions, quantity, composition, language, and managerial skills; (3) wages; (4) quality of life; (5) linkages that emerge among individuals, work groups, firms, and nations due to geographic, cultural, linguistic, or ethnic connections; (6) technological infrastructure; (7) capital from domestic or foreign sources; and (8) industry characteristics, such as number of firms, their size, associations, common vision and branding, and aspirational standards. As the author points out, the relationships among these variables are subtle. It is not clear that all are necessary for the creation of a successful national environment to support offshoring and that some may represent tradeoffs (e.g., lower wages may attract more business but a lower quality of life). Human capital also is not a simple variable, as it includes not only a threshold number of talented individuals but a concentration in particular skill and talent areas. Moreover, expenditures on training human capital may be lost, if the individuals choose to move to other nations/regions; on the other hand, attracting individuals following extensive training elsewhere may be an effective strategy (e.g., the H1B program bringing a large number of highly trained Indian IT professionals to the U.S.). Although Carmel’s (2003) argument primarily is addressed to nation/regions and what they need to do to attract offshoring investment, from another perspective, it describes the factors that individual firms need to look for in countries where they are considering offshoring some of their work. Much literature in the global information systems arena presents snapshots of particular
countries or regions at a point in time in terms of their infrastructure or a particular element of their computing capabilities. Communications of the ACM published a series of articles on this topic (e.g., Burkhart et al., 1998; Tan et al., 1999; Goodman, 2003). Individually, these articles tend not to be highly theory-oriented; however, viewing them collectively tends to reveal patterns of development. One pattern pertains to the digital divide and the tendency for high per capita income countries to correlate closely with high information density. It is not clear the degree to which information density creates wealth vs. the degree to which wealthy people can afford to invest in information technology, or whether both attributes exist in a positive feedback cycle. Carmel (2003) has produced a taxonomy of nations in terms of their software exporting sophistication. This model differentiates four levels of sophistication, which he calls tiers 1, 2, 3, and 4. These categories are differentiated by maturity in terms of how long they have been exporting software, the number of firms that suggests a critical mass; and cumulative export revenues. Tier 1, according to this schema, includes countries such as the U.S., Canada, UK, Germany, Japan, and Australia. It also includes India, Ireland, and Israel. Tier 2 includes only Russia and China. Tier 3 includes Brazil, Costa Rica, Mexico, the Philippines, Pakistan, the Czech Republic, and Hungary, for example. Tier 4 includes Cuba, Egypt, Vietnam, and Indonesia. Of course, this listing represents the placement of countries at a particular time period. A successful taxonomy provides the ability to compare current status and strategies for advancement within each category, excluding the substantial differences that such extreme contrasts in scale represent. Following the progress of countries within these various categories relative to the various key success factors, including human capital, governmental policies, and technology infrastructure, forms the basis for a natural experiment in order to consider and refine
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the relative value of different investments, given the various contingencies that differences among countries within each category represent. Global Competition for Work. From the perspective of nations/regions, the offshoring issue is framed inversely to the issues facing individuals and organizations. The overriding questions are (1) whether to create an environment that supports offshoring (i.e., to invest in programs and policies with the intention of encouraging such transactions or creating the infrastructure to enable them) and (2) if creating such an environment, which investments will maximize probability of successfully attracting offshoring business while minimizing the risk of expenses that do not generate adequate return. There is an inherent risk that efforts to create such an environment will not yield all of the desired results. These come largely from the answers to several questions: (1) Will the business climate continue to stimulate offshoring in general? (2) Will investments be able to create a competitive environment when investments of competitors are only partially known? and (3) Even if strategies and intentions target the correct elements of the environment, will the implementation allow full realization of anticipated benefits? On the other hand, the potential benefits of attracting offshoring business include the potential for generating foreign investment, highly paid jobs in relatively environmentally friendly industries, supplemental business activity supporting highly paid workers, additional educational and training opportunities, positive feedback between export and internal markets, and increased participation in world markets with resulting exposure to world-level standards and practices. A growing body of labor economics literature provides evidence from U.S. census data of a connection between investment in computer resources and higher wages and productivity in general (Dunne, Foster, Haltiwanger, & Troske, 2004). It shows an even stronger relationship between wage and skill
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increases in research and development relative to high-tech industries (Allen, 2001) but even here shows a significant role for computerization in changing the structure of skills and wages in the U.S. labor market. Nations/regions already can be seen competing to serve as the target for offshoring ventures. Without necessarily intending to do so specifically for offshoring, India’s investments in engineering and business education since its independence have created a human resources pool that has been competing successfully for IT development work on the world market. Other countries, such as Ireland, Singapore, Israel, New Zealand, and Finland, have been documented to support programs to stimulate IT development and related computer and telecommunications industries (Ein-dor, Myers & Raman, 1997; Watson & Myers, 2001). Arora and Gambardella (2004) contrast the approaches by India, Ireland, and Israel — developing software production capabilities largely through export — with strategies of Brazil and China that also have fueled significant growth but more largely through their domestic market. It is clear that simple replication of another country’s successful strategy does not necessarily work. Nations do not start off on an even footing but vary with respect to natural resources, legacy infrastructure, and geographic positioning. There are also natural advantages and risks of being a first mover to use any particular strategy to create business opportunity. For example, the first mover has the challenge of convincing potential clients of the viability of programs that have never existed; on the other hand, once those clients are convinced, there are no existing competitors, and the first mover may establish an unassailable body of knowledge and stable of clients. However, the first mover often has taken on significant investment in research and development, which the followers may be able to trim significantly while potentially finding relatively inexpensive but highly customer-satisfying improvements on the original idea. There may be room only
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for one or a few entities to succeed in a business environment such that many followers quickly may exhaust the original opportunity.
sites for developing offshoring relations involves both the attributes of the firm and of the nation/ region levels.
Nation/Region-Level Research Questions. How do nation/regions identify the key factors that will lead to success in competition for offshoring work (or for retaining work onshore)? How do nation/ regions implement their investment strategies to maximize the return on their investment? How can nation/regions adapt strategies and learn from the successes and failures of others in improving their overall environment for support of offshoring?
Cost and Other Factors. We see issues of cost and measuring costs as an interaction between organizations and locations. Dunning (1981) and Davidson (1980) suggest that labor is one of several key factors believed to influence where firms choose to locate business activity. However, we would argue that firms will vary on their ability to capitalize on labor cost differentials. Although offshore salaries can be substantially lower relative to some domestic economies, they do not represent the total cost comparison to domestic development. The full cost includes costs of vendor selection, transitioning the work, layoffs and retention, lost productivity, cultural issues, improving development processes, and managing the contract. One estimate puts these costs from 15% to 55% above the contract (Overby, 2003). Nations/regions with lower gross salary cost but less developed infrastructure, for example, may have equivalent total costs of production. Organizations with work that is more reliant on pure labor will observe a different cost structure than those more reliant on telecommunication or other infrastructure, as they evaluate different locations. Organizations with many different kinds of projects also will have to decide whether there are more economic benefits optimizing the location of each project or reducing complexity and perhaps overall management costs by locating all offshoring in a single location, even if, project-by-project, some or all locations are non-optimal. Finally, there is the feedback loop, where an environment is so strong that many organizations select locating there, but the onslaught of organizations changes the profile of the environment, perhaps by pushing the environment’s resources to or beyond capacity. We have noted earlier the estimates that India’s salaries have increased an estimated 20% annually in recent years (Arora & Gambardella,
eXAmInAtIon oF Issues betWeen levels In this next section, we focus on issues that cross between organizations and national/regional entities and then on those between individuals and national/regional entities. Issues regarding offshoring between individuals and firms largely will involve the matching of new work opportunities with new skill configurations, and it is not clear that offshoring creates unique issues in this regard. As new factory equipment, for example, comes online, organizations have similar issues in identifying new skill needs and shuffling their workforce through a variety of mechanisms, including training, reassignment, hiring, and reduction in force, to make these adjustments. The specific offshoring issues of interest pertaining to these matters mostly will be at the individual level regarding the reaction of workers to a need for skills or at the organizational level of identifying and realigning job descriptions in response to new environmental demands. Organization-Nation/Regional. Issues regarding the selection of a particular location for offshoring can be viewed as an interaction between organizations and nations/regions. Decision making with regard to selecting national
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2004; Agrawal & Thite, 2003). This is a possible indicator that even with the excellent educational system and large population, the demand for IT workers may push the capacity of any given nation to deliver. Organization-Nation/Region Relationship Research Questions. How do nations/regions anticipate the future competitive factors determining the location of offshoring work in order to invest effectively in these areas? How do organizations trade off the strengths and limits of nations/regions as they make their decisions regarding location of ongoing operations and for specific work allocation? Individual-National Interaction. Unfortunately, even as offshoring brings prosperity to those receiving contracts, it provides upheaval for those left behind. It is argued that, in many cases, net employment of IT personnel in the organizations engaging in offshoring tends to remain constant with the bulk, if not the entirety, of staff moving into higher-end activities; for example, from programming to analysis and design. In this case, the individual employees, at a minimum, need to develop new skills and mindsets in order to adjust to the new opportunities. Some, of course, cannot make this adjustment. Of those, some find employment using their existing skills in other locations, not necessarily for the same level of compensation. In the end, although some IT personnel are ultimately without jobs, sometimes it is for significant periods of time and, at times, requires a change of career field for reentry into the labor market. Recent compensation and job satisfaction surveys have found that although Information Technology (IT) employees’ salaries have increased slightly in the last year, employee morale declined sharply and may be impacting the company’s performance and productivity (Johnson, 2004). With the emerging trend of offshoring skilled jobs to cheaper labor markets on the rise,
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IT employee morale has declined dramatically in 75% of the organizations surveyed (out of 650) by the META Group in their 2004 IT Staffing and Compensation Guide (McGee, 2004). However, several organizations have learned by trial and error that there are hidden costs and repercussions associated with outsourcing that are not anticipated up front, including the impact to remaining employees or survivors (Brockner et al., 1986, 1993, 1995; Mishra, Spreitzer, & Mishra, 1998) and the long-distance relationship with the new foreign workers (Rao, 2004). Although there is no leading theory on offshoring and the surviving employees, it is possible to integrate survivor’s guilt/syndrome (downsizing) and the effect of cultural and geographic differences to encapsulate the impact of offshoring on the surviving employees. Survivors have feelings of fear, insecurity, frustration, anger, sadness, depression, and unfairness (Mishra & Spreitzer, 1998) as a result of an organizational layoff. These symptoms can cause employees to “become demotivated, cynical, insecure and demoralized” (Baruch & Hind, 2000, p. 29); they also can cause increased turnover and lower productivity (Brockner et al., 1995). In fact, numerous reports have been made in the U.S. of individuals whose jobs were outsourced, and, in some cases, the affected individuals were asked to train their lower-wage replacements (Worthen, 2003). Furthermore, it was discovered in leading studies that specific physical and mental health risks for surviving employees are directly associated with downsizing, caused by “intensification of job strain, time pressure, reduction of social support, lack of control, role ambiguity and the uncertainty regarding job future” (Pepper et al., 2003). The study also found varying degrees of medical symptoms exhibited by employees, of which the variance was attributed to the employee’s closeness to the layoff process. For example, if the employee was directly involved in the layoff process (i.e., notifying employees that they were being laid off, etc.), then they
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exhibited an increase in medical symptoms, as opposed to those employees who were separated from the process, which rarely exhibited medical symptoms at all. Mechanisms found to link downsizing and health problems included changes in work situation, the impact of negative or lack of social support, and an increase in harmful habits (i.e., increased alcohol consumption) due to anxiety and stress (Kivimaki et al., 2000). A secondary effect of layoffs after the immediacy of mental and physical ailments is the decrease in productivity and increase in turnover. This negative impact on the organization stems from the reactions of surviving employees, which can be passive, such as worrying and anxiety (walking wounded) or as aggressive as outrage, anger, and cynicism (carping critics) (Mishra & Spreitzer, 1998). As a result, offshoring can create unanticipated costs for the organization with its remaining employees as well as affect the levels of productivity and innovation (Mishra & Spreitzer, 1998). For those organizations that have decided to offshore, there are several steps that management can make to help reduce the employee’ stress level and uncertainty and to bolster employee morale (Laribee & Michaels-Barr, 1994). First and foremost is honesty. Lack of real and meaningful communication is cited increasingly as the source of employee fear and insecurity (Gallagher, 2003). In addition, putting a transition plan in place and helping the laid-off employees find new work can mitigate the negativity inspired by outsourcing (Brockner, 1992). Other factors included how the announcement or communication surrounding the layoffs were framed (context) (Brockner et al., 1995), whether or not employees perceive that the decisions surrounding the layoffs were fair and procedural justice or “the fairness of the methods used to make or implement a resource allocation decision” (Brockner et al., 1995; Wiesenfeld et al., 2000). There are also issues regarding the role of nations in mitigating the effects of IT worker
layoffs that may result from offshoring or other causes. One approach suggested by Friedman (2005) would be the creation of an employment insurance that would supplement wages for individuals moving to new jobs. IT workers tend to be an independent bunch, noting the failure of periodic attempts to create unionization, at least in the U.S., and perhaps are more motivated by providing challenge and opportunity than safety nets. On the other hand, again in the U.S., surveys of job attributes sought by IT workers in recent years have moved significantly toward security and benefits relative to challenge (Sethi et al., 2004). Individual IT workers take significant risk in their choice of training and skill development; it could become a competitive advantage for nations seeking the middle level as well as highest quality IT workers to provide some kind of insurance to lessen the effects of periodic market adjustments. Insourcing vs. Offshoring — Immigration Policies. From another perspective, organizations make the decision to offshore some IT work as a preference over insourcing IT workers from other countries. Although the number of IT workers coming to the U.S. through the H1-B visa program has diminished since peaking in the years 2000 and 2001, the program has had a significant impact on the American IT workforce. The H1-B visa is intended to supplement the U.S. workforce in critical areas, allows for a six-year stay in the U.S., and is based on sponsorship of a particular organization. It is estimated that as many as 80% of the Indian IT workers who come to the U.S. on this program end up becoming permanent residents or citizens (Agrawal & Thite, 2003). Assuming that skills and knowledge are embedded in this set of workers, on what basis do organizations decide whether to recruit workers rather than to relocate work to another country? Some likely factors include (1) evolving political risks involved in not using domestic workers to perform the task; (2) costs of labor and total cost
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of outsourcing IT work; (3) a threshold technical infrastructure, management, and labor force that allows a receiving country to be positioned to provide services; and (4) cultural similarities, particularly in terms of common language, that provide an advantage to countries like India and Singapore in receiving outsourcing assignments from English speaking countries in North America and Europe. However, formal analysis of the relative strength of these influences also should account for broader consideration of transaction costs as well as the legal and environmental factors noted by Dunning (1981) and Davidson (1980). From the level of national policy, while there is risk of a brain-drain from talented individuals leaving their country of origin, some workers return home having received significant investment in their intellectual capital. Moreover, regardless of the costs and benefits to individual firms, there are many advantages for insourcing people relative to outsourcing jobs. These advantages include (1) the multiplier effect, as insourced people buy homes, cars, and food and otherwise stimulate the overall economy; (2) the potential for innovations by these folks to create new companies hiring U.S.-born as well as newcomers in additional jobs; and (3) a decreased risk of loss of intellectual capital to potentially competing organizations (Agrawal & Thite, 2003). Individual-Nation/Region Research Questions. What responsibilities do nation/regions have for assisting those made redundant by jobs lost to offshoring and those survivors who might be affected by offshoring? What mechanisms are available to nation/regions for addressing individual worker issues, and how successful are they when applied? What are the trade-offs for countries between offshoring work and insourcing labor?
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conclusIon The offshoring of IT development is a significant global economic phenomenon. It represents an important component in worldwide global labor sourcing. Its importance derives from the high value-added products produced and the high skill and generally high compensation of its workers. It influences the lives and fortunes of individuals, organizations, and nations/regions. It is worthy of significant study both empirically to understand its dimensions and theoretically to understand key relationships, where practices, policies, and actions may influence outcomes. However, because offshoring so broadly affects different stakeholders, a multi-level theory is required so that influences that may positively affect one set of stakeholders while negatively affecting another are not misinterpreted by an overly narrow analysis. Such a multi-level theory is complex. It will need to incorporate or extract from theories that currently exist, illuminating issues at each stakeholder level. It also will need to build new conceptual, measurement, and theoretical viewpoints and tools in order to identify and quantify the interactions between various stakeholder levels, to consider non-linear relationships, and to identify feedback loops that may shift relationship strength and even direction across different time periods. Although not discussed in this article, the authors observe at least two other possible levels of analysis that should be explored for a thorough examination of the offshoring phenomenon. Although not quite as clearly defined as the organization or nation/region, the industry level also offers opportunities for investigation into offshoring of IT development in contrast to offshoring of other tasks or domains. We have avoided this level of analysis in this article for the sake of parsimony and for limiting the scope of discussion specifically to a special type of labor sourcing. However, contrasting IT development with other industries would show what relationships prevail for all service sourcing and which
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ones are unique to particular industries. Also, there is a theoretical global perspective. In a simplistic two-nation situation, jobs leaving the U.S. and arriving in India, for example, would show up as a loss for the U.S. and a gain for India. However, as the situation includes more observable factors — Indians using profits to buy U.S. products and services — the sum total effects may create offsetting benefits and losses as well as present treacherous measurement issues, particularly if intangibles are considered; even at the same rate of compensation, some jobs are more hazardous or routine, for example, than others. Nevertheless, in principle, a kind of global scorecard, whether balanced or not, would address the net impacts of offshoring. Do all nations/regions benefit (to what extent are the benefits distributed within the nation/regions)? Do some benefit at the cost to others? Do the net benefits outweigh the net costs when all effects are calculated? In this article, we have attempted to identify key issues and some directions for application of existing theory to the study of offshoring at three levels of analysis and have suggested relationships that cross the individual-nation/region and the organization-nation/region dimensions. For each of these, we have identified a set of critical research questions. These questions are formulated largely from the perspective of practice with the view that answers to these questions would have significant applicability. Much work remains to translate these over-arching questions into manageable examples, the measurement of which illuminates both cases and general principles pertaining to offshoring IT development labor. However, we believe that such work will have much value, as offshoring evolves from a special case of labor sourcing to a well-structured practice. We believe that this examination of this phenomenon can serve as a research agenda helping to define distinctions in types of offshoring, the presentation of highlevel research questions, and the suggestion of the range of issues that comprise a full picture of the domain. Future research also should target the
development of specific measures to replace the more general concept of outcomes related to each stakeholder level. For example, what are the appropriate measures for individual outcomes (e.g., income, mobility, job satisfaction, index of several variables)? What are the appropriate measures for the nation/region outcomes (e.g., GDP, percent of GDP derived from offshoring, performance relative to other countries? tax revenue generated from offshoring)? The definition of such variables will be needed to move to another level of testing the degree to which various policies have influenced particular outcomes.
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Pepper, L., Messinger, M., Weinberg, J., & Campbell, R. (2003). Downsizing and health at the United States Department of Energy. American Journal of Industrial Medicine, 44(5), 481-491.
Tirpak, T. M. (2005). Five steps to effective knowledge management. Research Technology Management, 48(3), 15.
Porter, M. E. (1990). The competitive advantage of nations. New York: The Free Press.
Watson, R., & Myers, M. D. (2001). IT industry success in small countries: The cases of Finland and New Zealand. Journal of Global Information Management, 9(2), 4-14.
Pries-Heje, J., Baskerville, R., & Hansen, G. I. (2005). Strategy models for enabling offshore outsourcing: Russian short-cycle-time software development. Information Technology for Development, 11(1), 1-26.
Wiesenfeld, B. M., Brockner, J., & Thibault, V. (2000). Procedural fairness, Managers’ selfesteem, and managerial behaviors following a layoff. Organizational Behavior and Human Decision Processes, 83(1), 1.
Rao, M. T. (2004). Key issues for global IT sourcing: Country and individual factors. Information Systems Management, 21(3), 16.
Worthen, B. (2003). The radicalization of Mike Emmons: Until he was laid off by a company moving jobs offshore, Mike Emmons rarely voted. Now the computer programmer is considering a run for Congress. CIO, 16(22), 1.
Robinson, M., & Kalakota, R. (2004). Offshore outsourcing: Business models, ROI, and best practices. Alpharetta, GA: Milvar Press. Sethi, V., King, R. C., & Quick, J. C. (2004). What causes stress in information system professionals? Communications of the ACM, 47(3), 99-102.
Zaheer, S., & Mosakowski, E. (1997). The dynamics of the liability of foreignness: A global study of survival in financial services. Strategic Management Journal, 18(6), 439.
This work was previously published in Journal of Global Information Management, Vol. 14, Issue 2, edited by F. Tan, pp. 5274, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Chapter 7.13
Outsourcing to the Post-Soviet Region and Gender Elena Gapova European Humanities University, Belarus
IntroductIon The purpose of this article is to analyze the outsourcing of information technology (IT) jobs to a specific world region as a gendered phenomenon. Appadurai (2001) states that the contemporary globalized world is characterized by objects in motion, and these include ideas, people, goods, images, messages, technologies and techniques, and jobs. These flows are a part of “relations of disjuncture” (Appadurai, 2001, p. 5) created by an uneven economic process in different places of the globe and involving fundamental problems of livelihood, equality or justice. Outsourcing of jobs (to faraway countries) is one of such “disjunctive” relationships. Pay difference between the United States (U.S.) and some world regions created a whole new interest in the world beyond American borders. Looking for strategies to lower costs, employers move further geographically; and with digital projects, due to their special characteristics,
distribution across different geographical areas can be extremely effective. First, digital networks allow reliable and real-time transfer of digital files (both work in progress and final products), making it possible to work in geographically separated locations. Second, in the presence of adequate mechanisms for coordination through information exchange, different stages of software production (conceptualization, high-level design and low-level analysis, coding) are also separable across space (Kagami, 2002). In the Western hemisphere, the argument for outsourcing is straightforward and powerful. It is believed that if an Indian, Chinese, Russian or Ukrainian software programmer is paid onetenth of an American salary, a company that develops software elsewhere will save money. And provided that competitors do the same, the price of the software will fall, productivity will rise, the technology will spread, and new jobs will be created to adapt and improve it. But the
argument against outsourcing centers on the loss of jobs by American workers. Although there is no statistics on the number of jobs lost to offshore outsourcing, the media write about the outcry of professionals who several years ago considered themselves invulnerable.
bAcKground With digital networks, global enterprises gained access to a skilled labor force like never before. Roughly at the same time, former Soviet hightech professionals became available for the global employment market after the disintegration of the USSR in 1991 and the decay of its sciencemilitary-industrial complex, previously their main employer. Though the bigger nations of India and China continue to be main outsourcing destinations, Eastern Europe has been noted as a promising region. Science and technological development used to be a part of the Soviet pride, and Whitepaper on Offshore Software Development in Russia (2001) admits that: Russia’s major advantage over other common offshore software development locales is the technical skills and education of its workforce. Russia has more personnel working in R&D than any other country, and ranks 3rd in the world for per capita number of scientists and engineers. Many of these engineers have solid experience and accomplishments in advanced nuclear, space, military, energy and communications projects. (p. 4) The same is true for Ukraine, Belarus and, to some extent, Kazakhstan, which used to be highly technological areas during the Soviet period.
current trends The mechanism of the region’s interaction with international IT jobs providers was (and still is,
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in part) shaped by the specific trends peculiar to the period after 1991, termed as “transition.” The reconfiguration of the fundamentally important social institutions and economic restructuring, to an extent, took the form of “privatization of the state” by those best positioned in the old society and now becoming capital owners. At the same time, national output declined drastically (and still has not reached the level of prior to 1991 in any post-Soviet countries), and the new businesses were emerging in the climate of downward movement and the absence of strong governing and market institutions. Initially, much of the subcontracting into the region arose within informal economy. First, IT groups that developed projects for Western customers were growing on the basis of friendly networks in research laboratories or departments whose members would establish contacts with a western IT contractor, often through a colleague who had relocated, and were paid in cash for short-term projects. With time, transnational employers working with semi-formal or informal groups were complemented with foreign-owned/ offshore ventures, establishing permanent offices in the country, but hiding their real outputs from state fiscal agencies. Much of the outsourcing into the region is involved with shadow economy, and “many programmers are paid in cash,” the Whitepaper (2001, p.12) recognized. According to my data, based on interviews conducted in Minsk in 2005, employees may get about 30% of their salary “officially,” while 70% is provided ”in an envelope,” which implies tax evasion. Cash flows to thousands of people employed in offshore software services via global banking systems, as IT (electronic communications and computer technologies in general) is at the core of these systems. Some virtual employers, which may be “non-existent” in the legal space of post-socialist countries, might be interested in this arrangement as well, when the very “concept of a ‘job’—a working place with a contract, employees’ rights, sick leave, retirements, working hours—is being abolished” (Rotkirch, 2001). What matters is the
Outsourcing to the Post-Soviet Region and Gender
final product: its cost, quality and availability to a deadline. In the 1990s, post-Soviet societies seemed to have lacked the political will to make use of the opportunities for national economies, arising from a strong base in science and technology, while universities continued to provide, as a legacy of socialism, nominally free education for IT (and most other) specialists (alongside with new “commercial” educational opportunities). Currently, 200,000 engineers (of all types and specializations) are prepared annually in Russia alone. Many of these find jobs with transnational IT employers, while benefiting from national social resources: free education, almost free healthcare, extensive systems of affordable public transportation or housing, to name a few. Largely functioning within shadow economy, employing specialists on a temporary basis, withholding from involving with institutions and paying their virtual employees non-taxable cash, some of the outsourcing is similar to the “hijacking” of public resources and has smaller beneficial effects on host societies than they potentially might be. The trade-off, involving a restricted social group and in the absence of methods of administration of the technological-social system as a whole, does not yield adequate investments into national social needs nor spreads extensively across industries: It rather implies buying, at discount prices, its intellectual resources. The local computer lobby, though, normally resorts to the rhetoric of the good of the nation or even national salvation when justifying the place of honor for IT. The logic of IT as national salvation in the long run is about economic interests of a certain group of people and of particular companies, and thus, is a part of the discourse over wage/economic inequality that emerged in post-socialism. Economists tend to explain higher wages of IT professionals in most national economies by the growing demand in skilled labor (James, 1999). This is only partially the case with post-Soviet high techs, whose salaries
tend to be higher because they participate in the global, not national, employment market. The role that IT may play in national economies depends on the social context. It may tend to accentuate, rather than ameliorate, economic and technological differences. Gains from IT accrue mainly to economic agents that form part of the modern technological system in respective countries, as distinct from agents who belong to the traditional system (James, 1999); small business, unable to introduce high-end products; or state-funded sectors (teachers and doctors). These latter groups may be worse off than before new IT products were introduced, which they are unable to buy (James, 1999). IT elites (predominantly male), arguing their corporate interests of “world-scale” pay, are among the youngest, most energetic and well-off Russians, as well as Ukrainian or Belarusian urbanites, who, according to the sociological polls, are also the group most favorably looking at tax evasion (Klyamkin, 2000), because they are well positioned to take advantage of it. Young professionals possess expert capital, rooted in certain competencies that, in the era of global labor force, has greater value than before and becomes a basis for moral capital. Their class situation might be viewed as that of a distinct group based on their common unique relationship to the new technological base of modern capitalism. The claim of national salvation through new technologies veils the fact that in the neo-liberal economic restructuring, those benefiting from it are largely those involved with it. In the post-Soviet job market, corporations granted some high-tech specialists an increase in wages; in return, they demanded a different type of work contract. The new arrangement is based on the idea of an autonomous and competitive, risk-taking “global” worker whose private matters are not supposed to interfere with the pursuit of profit in a market-driven system, while someone else just takes care of them. As corporations were moving overseas in search of skilled labor, out-
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Outsourcing to the Post-Soviet Region and Gender
sourcing became embedded in the general process of reconfiguration of gender relations in the postSoviet region. Under socialism, power relationships were structured differently, as Soviet women were more dependent on the socialist state than on men for their livelihood. Historically, USSR had the highest rates of female labor participation in the world: Nine out of 10 women of reproductive age worked. They entered the workforce massively in the early 1930s, when the socialist industrialization project was launched, and by the 1980s were better educated than men (in terms of their ratio among those with college degrees). Their numbers in science and technology were equally significant and, probably, higher than in any other country: According to some estimates, they made 40%. As women were very intensively involved in the workforce, the birthrates were falling, and eventually a system of extended benefits was worked out to support motherhood through social policy. It embraced paid parent leaves (e.g., partially paid leave of 3 years to take care of a new child, or fully paid leaves to take care of a sick child, available for any family member, but usually taken by mothers, were counted as work time for retirement), free childcare and healthcare, and so forth. The Soviet gender arrangement was mostly a dual earner/ state career contract (Rotkirch, 2001) that did not radically reverse the traditional belief that family obligations are more women’s work than men’s. The benefits were especially good with richer employers, like the military/science/industrial complex, which provided its workers with holiday packages, sanatoria, children’s camps, daycare centers, sports facilities and so forth. Thousands of women were employed there as researchers and engineers and especially programmers, while men were more involved with hardware development (believed to be a male thing). Programming was viewed as less prestigious. Post-Soviet radical economic and social reforms, carried with the advice of such proponents of neo-liberal economics as the World Bank and
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International Monetary Fund, included partial dismantling of the system of social services. Sperling (1999) states that when receiving Western loan money, enterprises were required to turn their social services elsewhere, as these were impending economic efficiency. The employees most dependent on leaves and benefits because of family responsibilities turned out as inconvenient in the new system and were massively rejected (under various pretexts) by the market-oriented companies. In the post-communist neo-liberal discourse, social issues began to be largely seen as individual, not collective, responsibility and largely associated with women. As the social policy changed, caring work, without which no economic or social system can function (Jochimsen, 2003), was relegated from the state to the private sphere. In households with perceived lack of time, care may be provided by hired domestic workers, but most often it comes from wives (Rotkirch, 2001). Meanwhile, as hardware development, which requires investments into facilities and equipment, was largely gone from the job market, and programming became relatively well paid, it turned into a prestigious and mostly male occupation. Ahuja (2002) states that recent trends towards globalization hamper women’s chances of hiring or retention IT positions, due to structural and cultural factors. Women were drifting out if IT, as high-tech jobs in the state sector disappeared, and corporations, not concerned with any social provisions, became main employers. New software groups and joint ventures, started through the old boys’ net, were either reluctant to hire women or organized in a way that did not imply the private sphere and demanded what was perceived as “male qualities” but, in fact, implied a certain lifestyle, characterized by long working hours and excluding participation in caring work, which is viewed as distracting employees from exclusive concentration on their task. Work-family conflict, social expectations and occupational culture together produce barriers in women’s professional lives.
Outsourcing to the Post-Soviet Region and Gender
conclusIon Outsourcing to the post-Soviet region became possible after the disintegration of the USSR in 1991 and the decay of its science/military/ industrial complex. It became involved with the economic restructuring (transition from central administrative economy to the market economy) and post-socialist emergence of a new systemic superiority of men over women, as the system of social security was reshaped. In this situation, outsourcing was benefiting smaller groups of knowledge workers involved with it. Recently, post-socialist governments that became aware of the potential of outsourcing began developing some policy decisions to use it in the interests of local societies.
reFerences Ahuja, M. K. (2002). Women in the information technology profession: A literature review, synthesis, and research agenda. European Journal of Information Systems, 11, 20-34. Appadurai, A. (2001). Grassroots globalization and the research imagination. In A. Appadurai (Ed.), Globalization. Durham; London: Duke University Press. Information Technologies and Telecommunications Committee of The American Chamber of Commerce in Russia. (2001, April). Whitepaper on Offshore Software Development in Russia. Information Technologies and Telecommunications Committee of The American Chamber of Commerce in Russia. James, J. (1999). Globalization, information technology and development. New York: St. Martin’s Press. Jochimsen, M. A. (2003). Careful economics. Integrating caring activities and economic science.
Boston; Dordrecht; London: Kluwer Academic Publishers. Kagami, M., & Masatsugu T. (Eds.). (2002). Digital divide or digital jump: Beyond ‘IT’ revolution. Institute for Developing Economies, Japan External Trade Organization. Klyamkin, I., & Timofeev, L. (2000). Tenevaya Rossiya. Economico-sociologicheskoe issle dovanie. Moscow: RGGU. Rotkirch, A. (2001). The internationalization of intimacy: A study of the chains of care. In Proceedings of the 5t h Conference of the European Sociological Association Visions & Divisions. Retrieved August, 2005, from http://www.valt. helsinki.fi/staff/rotkirch/ESA%20paper.htm Sperling, V. (1999). Organizing women in contemporary Russia. Engendering transition. Cambridge, MA: Cambridge University Press.
Key terms Military-Science-Industrial Complex: The aggregate of a nation’s armed forces (military establishment), the industries that supply their equipment, materials and armaments, and research units that conduct military-funded research and development. Neo-Liberal: Neo-liberalism is a politicaleconomic philosophy that de-emphasizes or rejects government intervention in the economy, focusing instead on achieving progress and even social justice by encouraging free-market methods and fewer restrictions on business operations and economic development. The main points of neo-liberalism include the rule of the market; cutting public expenditures for social services; reducing government regulation; privatization; and replacing the concept of “public good” with “individual responsibility.”
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Outsourcing to the Post-Soviet Region and Gender
Outsourcing: Work done for a company by people other than the company’s full-time employees. Offshore outsourcing in IT involves the “relocation” of jobs oversees to areas with noticeable pay difference. Transition: The period of political and economic change in the former communist (socialist)
states after the fall in 1989 (1991 in the former USSR) of communist-led governments. The changes involve the transition from the administrative (centrally planned) economy to the market economy, and from the one-party system to liberal democracy. Sometimes termed “the transition to capitalism.”
This work was previously published in Encyclopedia of Gender and Information Technology, edited by E. Trauth, pp. 952-956, copyright 2006 by Information Science Reference (an imprint of IGI Global).
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Chapter 7.14
Analysis of a Large-Scale IT Outsourcing “Failure”: What Lessons Can We Learn? Anne C. Rouse Deakin University, Australia Brian J. Corbitt Shinawatra University, Thailand
AbstrAct Much of the research that has been carried out into outsourcing is based on relatively successful case studies. Yet drawing inferences from case studies when those with largely negative outcomes rarely see the light of day represents a significant problem. When negative cases are systematically unrepresented, there is less opportunity to subject theory to scrutiny. This chapter goes some way towards redressing this trend, by reporting on a large scale “selective” outsourcing arrangement that has been publicly described as a failure — the Australian Federal Government’s “whole of government” IT infrastructure outsourcing initiative. This initiative, originally promoted as likely to lead to a billion dollar saving, was abandoned early in 2001, after a damning public report by the Australian Auditor General. However, a detailed study of the initiative suggests that the “failure” occurred despite the project
adhering to many of the recommended guidelines for successful outsourcing that had been derived from earlier case analysis. The findings have important implications for decision makers confronted with outsourcing choices. The study suggests that the risks of outsourcing are often downplayed, or ignored in the rush to reap the expected benefits. The study also suggests that expectations of savings from outsourcing IT are often substantially higher than those that have been empirically confirmed in the field. Decision makers are advised that key assumptions about costs, savings, managerial effort, and the effects of outsourcing on operational performance might be incorrect, and to plan for their outsourcing activity accordingly. They should pay particular attention to coordination and transaction costs, as these tend to be overlooked in the business case. These costs will be magnified if “best in breed” multiple-vendor outsourcing is chosen, and if contracts are kept short. Decision-makers are also
Analysis of a Large-Scale IT Outsourcing “Failure”
warned of the difficulties they are likely to have at the end of an outsourcing contract if there is not a large and robust pool of alternative vendors willing to bid against the incumbent.
IntroductIon This chapter describes the outcomes of a decision by the Australian Federal Government to outsource the provision of supposedly low-risk, IT (information technology) infrastructure services. The government initiative was an attempt to save up to $1 billion (AU) dollars. The decision caused substantial controversy within Australia, and therefore a large body of public documentation became available to researchers. This documentation, supplemented by anonymous interviews with key players, provided a unique opportunity to explore a “failed” outsourcing case study. Most large-scale outsourcing arrangements are treated as highly confidential by all players, because both the purchaser and vendor do not wish potential competitors to have information about costings, and because outsourcing announcements tend to have positive impacts on share prices (Loh & Venkatraman, 1992). Any public announcement that the anticipated benefits of outsourcing were not achieved would lead to depressed share prices. In the circumstances, it is not surprising then that few announcements of this nature are made by commercial organizations. Consequently, the trade literature is saturated with positive announcements of attractive benefits that outsourcing is expected to bring, but very little evidence of actual experiences. The case analyzed in this chapter provides an opportunity to explore a widely reported outsourcing failure, and so to reconsider the “evidence” that has been used to promote outsourcing. The chapter discusses the methodology and some of the key findings, and then considers the implications of these findings for practitioners.
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bAcKground There is a relative shortage of negative case studies in the outsourcing literature — with the notable exception of the early work of Lacity and Hirschheim (1993, 1995) and a handful of more recent cases reported by Kern and Blois (2002), Kern, Willcocks, and Van Heck (2002) and Dalcher (2005). This probably reflects the political realities of case study research — organizations that have unhappy experiences with their outsourcing do not tend to talk about it “outside” for fear of appearing badly managed. Moreover, university ethics committees tend to insist that research participants should be free to withdraw from research at any time, and this, combined with a reluctance to publish anonymous cases, acts to prevent the publication of negative organizational experiences. The result of a process that favors the positive over the negative is that decision makers can be lulled into perceiving outsourcing as more successful, and less risky than it really is. As a result, it has almost become an article of faith that outsourcing business services saves money and improves service quality, even though the quantitative empirical evidence does not necessarily support this. When the IT outsourcing literature is examined, it is also clear that the majority of IT outsourcing cases reported in the academic and trade literature has involved private sector organizations (illustrated in Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). Yet substantial proportions of IT investment within western economies are made by the “not for profit” and public sectors, and over the past two decades governments all around the world have been outsourcing IT services as a key part of public sector reforms. This chapter attempts to address the imbalance in the literature by reporting on a large-scale public sector outsourcing exercise that was widely reported in the literature to be a “failure”, or even, in some cases a “fiasco” (Rouse & Corbitt, 2003).
Analysis of a Large-Scale IT Outsourcing “Failure”
The case involved the attempt by the Australian Federal Government to outsource the provision of most of its IT infrastructure through a series of rolling contracts with large, multinational outsourcing vendors. These contracts, while large, involved selective outsourcing of particular IT services that were thought by decision makers to involve relatively low risk. The case presents audited data on the costs of outsourcing that is rarely obtained. This is important because there have been virtually no studies of IT outsourcing that have involved detailed, forensic investigations of the cost assumptions and outcomes. Such studies would (as with the case reported here) take months, and cost in the realm of hundreds of thousands of dollars. Thus of the handful of IT outsourcing studies in the literature that have examined cost outcomes, none involved in depth audits. Instead, studies into cost outcomes have tended to rely on global judgments by either informants, or sometimes the interviewer, about whether or not cost expectations were met. Experienced auditors know that such surface judgments tend to understate the transaction costs substantially (Walker & Walker, 2000). Fortunately, because the Australian Auditor General examined the outsourcing arrangements in some depth the case provides a relatively unique opportunity to explore the issues thoroughly. It also provides an opportunity to investigate whether the rosy projections for outsourcing that are announced to the press actually unfold.
methodology The chapter draws on a large number of public sources related to the case that were gathered over a four-year period. These were supplemented by in-depth interviews with 20 industry personnel, many of whom were consulted several times during the study period (individual interviews totaled more than 41 hours). The informants were highly placed within either Federal government agencies
or vendors, but the interviews were conducted on the basis of confidentiality and anonymity for individuals and organizations (Rouse, 2002). Public documents analyzed included:
• •
• • •
Press reports related to Australian IT outsourcing between 1997 and May 2001; A number of Federal and State government reports, particularly the 1997, 1998 and 2000 Senate Finance and Public Administration References Committee Inquiries into outsourcing initiatives (SFPARC 1997, 2001), the Auditor General’s Report (ANAO, 2000); and the Humphry Report (cited as Humphry, 2001); Walker and Walker’s (2000) broad based analysis of government outsourcing in Australia; A study of the Humphry and Auditor General’s reports by Seddon (2001); and Analyses prepared for members of parliament by the Parliamentary Library Politics and Public Administration Group (Verspaandonk, 2001).
In addition, the authors draw upon notes (Rouse, 2002) from a series of Australian focus groups involving 56 respondents reporting on their experiences of IT outsourcing. These were conducted at the time the case was unfolding. The case study was analysed using hermeneutic textual analysis. Hermeneutic analysis involves a cyclical interpretive analysis of textual materials and narrative. The textual material is repeatedly sifted and compared to find cross-verification and contradictions. Understanding emerges from the comparison between new and previous information. The strategy is akin to the work of a historian sifting through competing accounts of past events and motivations. Hermeneutic analysis has been used in several qualitative case studies in the information systems discipline (Myers, 2004).
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Analysis of a Large-Scale IT Outsourcing “Failure”
the Australian Federal government outsourcing Initiative In 1997, the Australian Federal Government announced that by 1999 it intended to outsource the delivery of IT infrastructure (mainframe, server, desktop services and in some cases telecommunications) for most federal agencies. The Federal Government’s Whole of Government IT Infrastructure Outsourcing Initiative, (referred in this chapter as “WOGITIOI”), was a key plank of the Federal Liberal Coalition party’s 1995 election policy and amounted to some 50% of the Federal IT budget (SFPARC, 1997). The initiative was expected to save “up to $AUD 1billion” through the use of external vendors and the consolidation of requirements across government agencies which would be clustered to form cross-agency contracts. The decision to outsource on this scale created considerable controversy and became the subject of examination by an ongoing Senate Inquiry (SFPARC, 1997). In 1999, the Auditor General independently decided to review the outcomes
of the first four contracts under this WOGITIOI initiative. These four contracts totaled spending of about $1.04 billion dollars. Table 1 summarizes the major outsourcing initiatives instigated by the Australian government throughout the 1990s. These initiatives included an early series of contracts amounting to something more than $AUD 295 million, and a later series of WOGITIOI policy initiatives amounting to around $AUD 1.521 billion. Over the decade, these IT outsourcing initiatives encompassed contracts to the value of some $AUD 1.816 billion overall. The four WOGITIOI arrangements that were reviewed by the Auditor General (ANAO, 2000) are highlighted.
the WogItIoI context and timing The controversial WOGITIOI initiative was the subject of considerable attention and some criticism from the start. This particularly came from unions, Opposition parties, and the Oppositiondominated Senate Finance and Public Administration References Committee Outsourcing Inquiry,
Table 1. Federal Government IT Outsourcing Initiatives 1994 – 2000 Agency
Value
Won by
Date
ns*
Ferntree/GE
Feb 92
Early Outsourcing Initiatives Department of Veterans Affairs Department of Veterans Affairs
$65m
IBM-GSA
Feb-97
Department of Finance & Administration
$30m
IBM-GSA
Sep-97
Australian Customs Service
$200m
EDS
Dec-97
“Whole Of Government IT Infrastructure Outsourcing Initiative”
2240
“Cluster 3” - two large and four small agencies
$160m
CSC
Mar-98
Department of Employment, Training and Youth Affairs
$300m
Cancelled
Jun-98
Australian Tax Office (ATO)
$490m
IBM/GSA
Jun-99
“Group 5” – five small agencies
$90m
Advantra
Jul-99
“Group 2” – Department of Health, Health Insurance Commission, and Medibank Private
$351m
IBM/GSA
Jan –Jul 2000
“Group 8” – seven small agencies
$130m
Ipex ITG
Jun-2000
Analysis of a Large-Scale IT Outsourcing “Failure”
which first met in 1997 (SFPARC, 1997). A range of concerns was expressed, including worries about privacy provisions, effects on departmental business initiatives, industry development, and staffing implications1 . Observations were made that the likelihood of substantial cost savings from such an initiative was low (Rouse & Corbitt, 2003). However, these concerns were largely presented in political terms, and were somewhat remote from the day-to-day issues affecting private sector decision-makers involved in IT sourcing decisions. This situation was to change when the Auditor General’s Report of his inquiry into the first four of the Federal Government WOGITIOI contracts was released to the public in September 2000 (ANAO, 2000). The Australian Auditor General reports directly to Parliament, not to the Government, and has many statutory protections to ensure independence. His extensive 243 page review examined the goals, tender evaluations, implementation and outcomes of these first four arrangements, and was damning in its criticism of the IT outsourcing initiative. The Auditor General’s Report (ANAO, 2000) had enormous impact in public sector circles. Usually regarded as financially conservative, apolitical and on the side of the taxpayer, the Auditor General’s scrutiny shed light on what, in private sector organizations is normally a commercial-in-confidence arrangement. According to informants we interviewed, the impact of these criticisms was also felt in the private sector. Unlike earlier Senate Inquiries, the strong community perception was that the Auditor General’s Review findings were independent and highly credible. For the first time the shroud of secrecy and political point-scoring that surrounded both public and private outsourcing arrangements had been pierced (Mitchell, 2000), allowing the public to examine how the promised “savings” being reported by vendors, consultants and governments were being calculated.
The negative elements of the Auditor General’s report were highly publicized, with vocal public criticism, coming from both the press and parliament, finally forcing the Federal government to act to avoid further political damage2 . In response to both the Auditor General’s findings and the negative publicity, the Federal government established another review of the initiative headed by Richard Humphry, Chairman of the Australian Stock Exchange, and a former member of the group that had initially recommended the outsourcing strategy - the 1997 IT & Telecommunications Advisory Committee (Humphry, 2001, p. 22). This review in turn generated negative public reactions, and the Review of the Whole of Government Information Technology Outsourcing Initiative (the “Humphry Report”) released in January 2001, led to the public abandonment of key aspects of the strategy. Initially announced in April 1997, the WOGITIOI strategy was abandoned after four years when the Government announced that it would accept the recommendations of the Humphry Review (Humphry, 2001) and allow individual departments to decide whether to, and how to, outsource their IT services. The outsourcing experiment ended with the subsequent release of the Report of the Senate Finance and Public Administration References Inquiry in 2001.
outsourcing expectations Australia was a leader in public outsourcing during the 1990s, and the strategy was promoted on the basis of several arguments. First, outsourcing would save taxpayer funds (cost saving), perhaps even with better business service operations, and second, outsourcing would lead to the development and enhancement of an effective IT industry (Industry Commission, 1996). The industry development objectives were positively received by small Australian companies, but interviews with industry personnel revealed that the major
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Analysis of a Large-Scale IT Outsourcing “Failure”
rationale for outsourcing in the Federal arena was expected cost reductions, in both the long and short term (Rouse, 2002)3 . The Federal Government sought savings of 20% or more by outsourcing IT infrastructure. This expectation was based on the advice of an industry-based expert panel, the IT Review Group (ITRG, 1995). The source for the Federal Government’s bold announcement of savings of the order of $1 billion appears to be an economic business case for outsourcing undertaken in 1996. The Minister for Finance and Administration explained in 1998 “across budget funded agencies, potential savings in the order of $1 billion are realizable, over the term of multiple, seven year contracts.” The Minister was confident, further stating that “the savings to the budget are robust and they are conservative” (Fahey, 1998, p. 1). In the end, a more conservative cost-savings target figure of 15% was adopted by government for a strategy that encompassed outsourcing and the consolidation and standardization of data centers and infrastructure services (ANAO 2000, p. 11, p. 195). To this end, groups of departments (“clusters”) that supposedly shared similar IT needs were created. This “clustering” appears to have been based on vendor arguments that consolidating similar service requirements into one contract would achieve greater economies of scale (Humphry, 2001). It was also, according to informants, heavily influenced by the analysis done by Lacity, Willcocks, and Feeny (1996) of the strategies that are likely to lead to cost savings: that is, consolidating data centers or standardizing other services. The Federal government was thus following Lacity, Willcocks, and Feeny’s (1996, p. 17) “best practice” advice to “empower [management] to overcome the resistance of users” by encouraging users to “manage demand by consolidating data centers into one site or by standardizing software”. An important part of the strategy was that the government would not outsource “totally,” as this
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was perceived as a high-risk strategy. Instead, it would selectively outsource infrastructure services, which at that time accounted for “about half of the Commonwealth’s total IT expenditure of approximately $2 billion” p.a. (SFPARC, 1997 Chapter 2, final paragraph). The infrastructure to be outsourced included mainframe and midrange operations, operations of distributed servers and desktops, and in some cases, data networks. Government decision-makers saw this as a conservative strategy, consistent with Lacity, Willcocks and Feeny’s (1996) “best practice” recommendations that selective outsourcing (less than 80% of IT expenditure), and outsourcing of commodity-like services, would be most likely to achieve significant savings. The contracts were kept short, ranging from three to five years, in response to the “best practice” recommendations at the time4 (e.g., Lacity, Willcocks and Feeny, 1996). The shorter contracts covered fast changing technology such as networks, while the longer contracts covered mainframe services. Building on a belief that there were considerable inefficiencies in the delivery of IT services in many areas, and the reassurance that cost savings would be made, decision-makers within the government required agencies to accept budget reductions up front. They saw this strategy as consistent with practices suggested by Lacity and Hirschheim (1995) who demonstrated that organizations, whether in-sourcing, or outsourcing, can save considerably on their IT budgets by instituting unpopular reforms, like consolidating data centers, and restricting the rate of technology change by sticking with equipment that is one to two generations behind.
Key Findings After several inquiries and assessments, and the analyses conducted by Rouse (2002) and Rouse and Corbitt (2003), a number of central findings have emerged.
Analysis of a Large-Scale IT Outsourcing “Failure”
1. Large Cost-Savings Promised for the Initiative Were Not Delivered The Auditor General (ANAO 2000) found that expected costs had blown out substantially. As Rouse and Corbitt (2003, p. 82) put it, “Most of these cost blow outs were related to the costs of specialist international consultants, including “Big 5” accounting firms, outsourcing advisors, and the outsourcing legal specialists, Shaw Pitman …”. While many reported outsourcing cases (e.g., those in Lacity & Hirschheim, 1993) have involved cost blowouts, the Auditor General also found that, contrary to the results of initial modeling, only one of the first four contracts, the contract for “Cluster 3”, would ever have been likely to deliver any savings. In their analysis of the auditor general’s report, Rouse and Corbitt noted that despite relying on world-class consulting advice, the cost and savings projections were flawed. The Auditor General reported that decision makers had failed to take into account additional cash streams associated with equipment that would have been available at the end of the a contract if the services were not outsourced. They had also underestimated the costs of leasing risks absorbed by the agencies. As a consequence of this, the Auditor General determined that “only Cluster 3 was likely to make any substantial savings from the outsourcing arrangements” (ANAO, 2003, p. 83). The Auditor General also reported that actual savings for the Cluster 3 contract amounted to around 12% rather than the 28% initially projected on the basis of detailed cost models. These had been prepared by the Office of the Asset Sales and IT Outsourcing organization (OASITO), with the help of specialist consultants. Whilst 5% of this discrepancy was accounted for by unexpectedly high initial redeployment costs, there was still a substantial gap between the remaining projected 23% savings and the actual 12% achieved (Rouse, 2002).
An important issue is that these cost savings calculations did not include the significant outlays spent by OASITO in searching out, briefing, and selecting vendors. These costs were viewed not as an additional cost to these four contracts, but as a separate sunk “overhead”. Had these transaction costs been amortized over the life of the outsourcing contracts (as the costs were directly related to the decision to outsource) the costs of outsourcing the IT infrastructure would almost certainly have exceeded the cost of keeping the services in-house by a substantial margin. A contemporary survey of other large organizations in Australia (Rouse, 2005) revealed that the Australian Government was not alone in failing to reap savings from IT outsourcing. Only a minority of the survey respondents (n = 240, from a survey of 1000 of the largest 1000 organizations in the country) reported any savings at all from outsourcing IT. The proportion reporting substantial savings from IT outsourcing (seen by focus group informants and interviewees as being about 12% or more of the IT budget) was only 7%. Furthermore, there was no statistical difference between organizations from the public and private sector in relation to financial outcomes (Rouse, 2005). Hence, the experiences of the Federal Government appear to be no different to those of other large Australian organizations.
2. “Failure” was Almost a Text Book Case of ‘Best Practice’ Outsourcing Industry analysts have suggested that a range of good practices will ensure that outsourcing failures are avoided. Seddon (2001) for instance defined a series “ten commandments” for succeeding at outsourcing, based largely on earlier work by Lacity and Hirschheim (1993, 1995). He implied (but did not provide evidence) that the WOGITIO was a failure because decision makers did not follow good practice. However, a detailed investigation of the case carried out by Rouse as part of her doctoral studies (2002) revealed
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that decision makers in this case study went to considerable trouble to follow “best practice” and recommended procedures. The very fact that the Australian government spent $AUD 25 million on specialist consultant advice suggests that they were keen to make the arrangement work well. All the advice from the IT Review group (ITRG), the Information, The IT and Telecommunications (IT&T) Policy Advisory Committee, panels of industry specialists, and from the Australian Industries Commission supported the notion that if the process was carefully managed, the government could succeed in achieving the target 15% savings (and possibly more). More recent empirical data (Hodge, 2000) has revealed that cost savings of this order are common only for very simple, well-codified services, such as cleaning, catering, refuse collection. Considerable time and effort went into planning for and implementing the initiative. Indeed, of Seddon’s ten practices, nine were essentially followed (Rouse, 2002). These included: • • • • • • • •
selective outsourcing (of around 50% of the IT budget), targeting of only “non-core” infrastructure services, short (three- to five-year) contracts, detailed contracts prepared under the advice of international and local specialists, retaining highly skilled staff to manage the arrangement, involving both line and IT management in decision making, conducting detailed analyses of vendor offerings, and implementing comprehensive post-contract management and monitoring structures.
The single practice not followed related to the option of allowing internal service groups to bid against external vendors. This option was judged as expensive, and it is easy to see that this practice would have been politically risky as well.
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The adoption of recommended outsourcing practice in this case study was in marked contrast to many of the negative IT outsourcing cases reported in the early to mid-’90s. At that time, organizations often engaged in naïve behavior such as failing to know their own market costs and signing long term contracts with a single vendor for a large proportion of their IT budget (Lacity & Hirschheim, 1995). The Australian case study findings cast doubt on the plausible and attractive proposition that IT outsourcing fails to reap benefits largely because of poor management.
3. In Practical Terms, Large-Scale Outsourcing is Difficult to Reverse A third key finding, stemming largely from the individual interviews, is that in practical terms, outsourcing on this scale is almost impossible to reverse, even if it involves only “selective” outsourcing. It is essentially a one-way option, because the timeframe and costs (both financial and organizational) involved in re-establishing the arrangement are prohibitive. At the end of the WOGITIOI contract periods, all of the reported outsourcing arrangements have now either been rolled over with the existing vendor, or have been broken up into a number of smaller contracts — described by consultants to the government as a “best in breed strategy” (Gartner, in ANAO, 2001). Smaller contracts are frequently reported in the press as examples of good management, as “selective” outsourcing is seen, almost ubiquitously, to be best practice, and by implication, expected to lead to greater cost savings. Yet the empirical evidence we do have on this is that, if anything, larger IT outsourcing contracts tend to lead to better outcomes than smaller contracts (Rouse, 2005). Certainly when the transaction costs associated with multiple, short-term contracts are taken into account, cost savings are by no means guaranteed. However, the evidence for whether or not this multiple-vendor “best of breed” approach will
Analysis of a Large-Scale IT Outsourcing “Failure”
lead to better outcomes than keeping the programs in-house, or in fact than the original larger contracts, will never be made available. There is no longer a base line for comparisons, and the costs and difficulties of auditing the plethora of new arrangements are prohibitive. Furthermore, such an audit would be politically unattractive. In intimating, in the press announcements, that selective outsourcing will be “better,” no real evidence has been put forward. Economic theory (such as transaction cost economics) and practical experience suggests that these arrangements will prove substantially more expensive than the larger-scale prime-vendor arrangements they have replaced, because of the substantial transaction costs associated with managing multiple vendors and negotiating the gaps between them. Rather than being examples of mature management strategy, as described by consultants, these new contracts reflect the reality that re-insourcing their IT services was practically and financially impossible for the government agencies involved. Several informants pointed out to us that, having let go their key IT staff to the vendor, and having spent substantial once-off sums associated with staff retrenchment, they were faced with prohibitively costly and time-consuming processes to regain the skills involved. Furthermore, new recruits would command a salary premium (as the agencies could no longer trade on their reputation as reliable and long-term employers). Thus, the costs of delivering the services in-house after re-insourcing would be substantially higher than the original in-house costs, and probably than the outsourced arrangements that were revealed to be more expensive than in-house delivery. There would be no simple reversal. In several cases informants reported that the organizational knowledge embodied in the lost staff could not be retrieved once lost. In fact, this was an issue that vendors raised themselves in submissions to the Humphry report (Humphry, 2001, Appendix 1) — the vendors had wanted the Australian government to “force” skilled staff to
join them to preserve organizational knowledge, but this was at odds with the industrial awards negotiated with unions. In addition, the business disruption and elapsed time to re-implement the lost functions “from scratch” were seen by all but one of the informants to be so great that reinsourcing (or “backsourcing”) the outsourced functions were not organizationally possible. Other informants advised us that they were effectively forced to renew the existing contracts with their existing vendor because of a thin vendor marketplace. This was because other potential vendors were unwilling to bid against the incumbent, whom competitors believed had an inside advantage in knowing the true business requirements and costs. The higher level of uncertainty for non-incumbent bidders required them to charge risk premiums, so effectively pricing them out of the market. Without competition, incumbent vendors could then afford to charge high premiums. The net effect was that seven (or in one case, nine) years after entering into the initial IT outsourcing arrangement, the purchaser had no choice but to continue with the existing vendor at prices that were tied to the original contract.
dIscussIon The Australian case study raises a number of cautionary points for organizations that are considering entering into, or rolling over existing, outsourcing arrangements.
the problems of Inaccurate costing models Much outsourcing is entered into on the basis of faith — because it is difficult and costly to accurately project the cash flows associated with the new outsourcing arrangement. When such cash flow projections are made, they tend to be inaccurate, because of the likelihood of major changes during the life of the contract. It is even
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more difficult to project the costs that “would have” applied had the services not been outsourced (the “status quo” situation). Even where organizations devote the time (and expense) to carry out such projections, the experience of the case reported here is that the figures are subject to large error margins of over 100%. It needs to be remembered that the Australian government had access to the best and most expensive technical advice available internationally (at a cost of many millions of dollars); as well as a highly skilled audit and review group (in the form of the Australian Auditor General’s office). Few organizations have access to, or can afford, this level of advice and skill. Yet even with these resources, according to the Auditor General, their original business case was flawed. It has been suggested that by entering into smaller “selective” outsourcing arrangements, the errors associated with projections are lower, and potential savings more accurately pinpointed (Lacity & Willcocks, 1998). However, on the basis of the focus group data gathered by the authors, the opposite seems to be true. This is because those organizations that entered into substantial outsourcing contracts brought in highly skilled accounting and costing specialists when contracts were large and strategic. On the other hand, focus group informants reported that smaller contracts were often “costed” by staff without the requisite managerial accounting skills to capture and allocate costs, particularly coordination and transaction costs. What’s more, many focus group informants (both vendor and purchaser) reported that without technical expertise what they eventually understood would be delivered by an outsourced vendor was very different from what was initially specified. So the economic models ended up comparing “apples” with “oranges”, even for selective outsourcing. Another area in which outsourcing costing models are inaccurate is the quarantining of certain costs, particularly transaction costs associated with the initial investigation and search for
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partners. These were treated by the Federal Government (and many of the focus group members, who were not part of the case study) as outside the economic business case for comparing different sourcing options. The argument for doing this seems (as with the WOGITIOI case above) to be that these “search” “market testing” “contracting” and “analysis” costs are once-off, and are part of general good management. In fact, as the case has illustrated, these costs are entered into every time that a contract is terminated or renegotiated, and the shorter the contract length, and the greater the number of “selective” contracts, the higher the search and contracting costs. Furthermore, at the renewal of a contract, the vendor can hold a substantial advantage over the purchaser, who faces major disruption and un-planned for costs if it does not renew the existing contract, even though the prices originally negotiated (uplifted for inflation) are by that stage substantially more expensive than market rates. In the Australian case study, although there was a great deal of cautious academic research information available to government prior to the WOGITIOI initiative, this was discounted in the rush to contract-out IT to external providers. The economic business cases were complex and comprehensive, but also assumed idealistic “best case” outcomes rather than assuming a spread of more realistic outcomes. The adoption of such assumptions in the business cases led, according to the Auditor General, to overoptimistic, and essentially incorrect, predictions of the likely outcomes.
Why are outsourcing risks downplayed? It appears that outsourcing is often entered into with the expectation that, for well-managed organizations, it is a relatively low-risk undertaking, particularly if it is not the highly-condemned “total” outsourcing (Rouse, 2002). Yet this case
Analysis of a Large-Scale IT Outsourcing “Failure”
study illustrates that the risks of outsourcing IT services can be substantially higher than is commonly acknowledged. Potential risks raised by the case include loss of organizational knowledge, redirection of organizational attention away from core business, loss of flexibility (because of contractual obligations), and financial risks (associated with blowouts in costs, or failure to achieve expected benefits). These risks need to be factored into the economic business case. The case study also raises the question of why, since the risks of outsourcing IT have been known for some time, were they discounted by organizations as well advised as the Australian government? Our analysis of this case study suggests several reasons: There is a heavy reliance in the literature on theory, particularly economic theory, which is frequently misinterpreted to justify outsourcing. For example, transaction cost economics theory suggests that outsourcing will lead to reduced costs only where the production cost savings are not outweighed by additional transaction costs. The identification of all transaction costs requires substantial skill and training, as well as an open mind. Ang and Straub (1998) have reported that proponents of outsourcing tend to focus mainly on production cost savings, and to ignore the oftensubstantial transaction costs. Another source of theory is resource-based theory, which suggests that outsourcing IT will allow an organization to refocus on its core business. Yet the evidence provided to the various public reviews above suggested the opposite was true: unsatisfactory IT outsourcing drained organizational attention from core business — the major reason behind Humphry’s recommendation that the WOGITIO initiative be discontinued. Another reason is the dominance of illustrative or inappropriately-aggregated case studies in the literature. Large numbers of our informants told us that “selective” outsourcing was relatively low risk because they could cite example “successes”. Often they referred to the aggregated
cases reported by Lacity and Willcocks (1998). Yet most “successes” are reported publicly at the time an organization enters into the outsourcing arrangement; few are ever evaluated after the fact. Even fewer are evaluated systematically as was done with the WOGITIOI. Anecdotal individual successes, or even the ratios of success and failure for aggregations of opportunistic cases, provide no indication of success rates that could be expected in the field, despite the seductive appeal of numbers and proportions. A striking feature of the IT outsourcing literature (and in fact, the outsourcing literature as a whole) is the shortage of theory-testing studies. As a result of this trend, so-called “proven practices” go unchallenged, leaving decision makers with a false understanding of the likelihoods of success and failure even if they follow these practices. Thus, the subtle, but generally unwarranted, messages coming from much outsourcing research to date — that well managed outsourcing is largely successful — leads many decision makers to be over-optimistic about their chances of making outsourcing work well. The empirical research conducted by Rouse and Corbitt (2003b), and by Aubert, Rivard and Patry (1996) indicates that well managed outsourcing arrangements can still be problematic.
the seductiveness of simple solutions The failure of an organization that went to such trouble to manage its risks also raises questions about the “recommended practices” OASITO followed. These recommendations were drawn largely from the case studies carried out by Lacity and Hirschheim in the early ’90s, and the post-hoc cross-case analyses done when Lacity and Willcocks began reviewing their combined research (c.f. Lacity et al., 1996; Lacity & Willcocks, 1998). Examination of the original case descriptions (for example, those in Lacity & Hirschheim, 1993) reveal complexity and richness, yet this
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Analysis of a Large-Scale IT Outsourcing “Failure”
richness was eventually distilled (Lacity et al., 1996; Seddon, 2001) into a number of relatively simple prescriptions that may not have captured the underlying causal factors. As an example, the recommended practice “involve line management and IT management in the decision” came about because some of the problematic cases studied by Lacity and Hirschheim (1993) excluded one or other of these groups from the decision. In the Federal initiative, the Government did involve both line management and IT in their decisions. There was extensive consultation and discussion amongst OASITO and line and IT staff in all the agencies involved. Not all agreed with the decision, but stakeholders had many opportunities to express their reservations through this consultation, and through the Senate Inquiry that took place during 1997. When seeking to reconcile this observation it becomes apparent that the term “involvement” is very general. It does not, for example, necessarily imply that active support from all parties is required for success. There are many examples in the IS and management literatures of senior management instituting ultimately successful organizational programs that encountered disagreements and dissent. Furthermore, such simplicity is not apparent in Lacity and Hirschheim’s original discussion of this practice, which was concerned, with the problems of excluding one or other viewpoint. The impact of this imprecision is that it is likely to be only in those (probably rare) organizations that actively exclude one or other group that decision-makers would not perceive themselves as involving both IT and line management. Consequently, the practical usefulness of this recommended practice is limited. This case study suggests that many of the practices recommended by researchers are necessary, but not sufficient for achieving success, particularly as the probability of their not being followed at all is low. For example, it is unlikely that an organization involved in a multi-million dollar venture would not establish post manage-
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ment structures and processes of some kind, yet the federal initiative has illustrated that such processes, even when based on “international best practice” advice do not guarantee success. A similar observation can be made about careful market testing and crafting of detailed contracts. The conclusion that such practices are not sufficient to guarantee success implies that decision makers may be unwittingly led to under-estimate their own risks when outsourcing IT, because most would be able to reassure themselves that they were following recommended risk-minimizing practices.
conclusIon And FInAl observAtIon While the trade press, and some analysts (e.g., Seddon, 2001) generally viewed the WOGITIO case as an example of naivety and foolishness, the authors do not view the case as a “failure”. Instead it reveals a strategic and far-reaching decision that was predicated on research and advice that was overoptimistic about likely benefits if IT outsourcing, and unrealistically confident that good management could overcome the associated risks. Many of the outcomes experienced by the Australian government were typical of those of contemporary Australian organisations, and probably of many large organisations elsewhere. The Australian case study suggests that IT outsourcing is far more risky than is commonly acknowledged. The case study also confirms Ang and Straub’s (1998) suggestion that those choosing to outsource frequently pay less attention to the transaction costs and risks associated with the strategy than to the expected production savings they will make. Although there was a great deal of academic research urging caution that was available to the government prior to the WOGITIOI initiative, this was discounted in the rush to contract-out IT to external providers. The economic business cases
Analysis of a Large-Scale IT Outsourcing “Failure”
were complex and comprehensive, but also assumed idealistic “best case” outcomes rather than a spread of more realistic outcomes. The adoption of such assumptions in the businesses cases led, according to the Auditor General (ANAO, 2000), to incorrect predictions of the likely outcomes. In other words, cost savings were predicted which in fact would not occur. The Australian case implies that decisionmakers need to be much more focused on the relative risks and returns from IT outsourcing, which are far less optimistic than the proponents (often not disinterested players) suggest. The case reveals considerable uncertainty surrounding likely outcomes, and highlights the possibility that key assumptions about costs, savings, managerial effort, or the effects of outsourcing on operational performance might be incorrect. The case also implies that organizations should consider their exit strategy when planning to outsource. This advice has particular implications for those deciding whether to outsource offshore or not. It is important that decision makers plan for (and cost into their economic model) the potential need to move their operations either back in-house, or to another vendor (and perhaps another country) should economic, political, or social conditions change, or should the vendor prove not to meet expectations. Outsourcing offshore only where there is a deep and vigorous marketplace of alternative vendors will help avoid this situation, though at the time the Australian government began its bold IT outsourcing initiative, they too thought that if arrangements proved problematic they would have the option of moving to alternate vendors. In real life, this may not be a realistic option.
AcKnoWledgment This research was funded in part by the management consultants Simsion Bowles & Associates and by the University of Melbourne’s Department of Information Systems.
reFerences Ang, S., & Straub, D. (1998). Production and transaction economics and IS outsourcing: A study of the U.S. banking industry. MIS Quarterly, 22(4), 535-552. Aubert, B. A., Rivard, S., & Patry, M. (1996). Assessing the risk of IT outsourcing. Proceedings of the Thirty-Fifth Annual Hawaii International Conference on Systems Sciences, Hawaii [CD ROM]. Australian National Audit Office (ANAO). (2000). Implementation of whole-of-government information technology and infrastructure consolidation and outsourcing initiative. Audit Report No 9. Canberra, Australia. Dalcher, D. (2005). From fixed contracts to dynamic partnerships: Successful outsourcing in a changing world. In P. Brudenalle, Technology and offshore outsourcing strategies (pp. 9-36). Basingstoke: Palgrave McMillan. Davis, I. (1998, July 25). IT shifts from costs to better service. Australian Financial Review, 54. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102. Fahey, J. (1998, July 29). An address to the IT outsourcing seminar. IT Outsourcing Seminar at Freehill, Hollingdale and Page. Melbourne, Australia. Hodge, G. A. (2000). Privatisation: An international review of performance, theoretical lenses on public policy series (P. A. Sabatier, Ed.). Colorado: Westview Press. Humphry, R. (2001). Review of the whole of government information technology outsourcing initiative (Humphry Report). Canberra, Australia.
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Industry Commission (Australian). (1996). Competitive tendering and contracting by public sector agencies. Report No. 48. Melbourne: AGPS. Information Technology Review Group (ITRG). (1995). Clients first: The challenge for government of information technology: Report of the minister for finance’s information technology review group. Canberra: Australia. Kern, T., & Blois, K. (2002). Norm development in outsourcing relationships. Journal of Information Technology, 17(1), 33-42. Kern, T., Willcocks, L., & Van Heck, E. (2002). The winners’ curse in IT outsourcing: Strategies for avoiding relational trauma. California Management Review, 44, 47-69. Lacity, M. C., & Hirschheim, R. (1993). Information systems outsourcing: Myths, metaphors and realities. Chichester: Wiley. Lacity, M. C., & Hirschheim, R. (1995). Beyond the information systems outsourcing bandwagon: The insourcing response. New York: Wiley. Lacity, M. C., & Willcocks, L. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363-408. Lacity, M. C., Willcocks, L., & Feeny, D. F. (1996, Spring). The value of selective IT outsourcing. Sloan Management Review, 37(3), 13-25. Loh, L., & Venkatraman, N. (1992). Stock market reaction to IT outsourcing: An event study. Working paper. Sloan School of Management, Massachusetts Institute of Technology. Mitchell, S. (2000, December 9). Audit report slams federal outsourcing. Australian IT: The Australian, 31. Myers, M. (2004). Qualitative research methods in information systems. Retrieved November 21, 2004, from http://www.qual.auckland.ac.nz/
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Rouse, A., & Corbitt, B. (2003). The Australian government’s abandoned infrastructure outsourcing program: What can be learned? Australian Journal of Information Systems, 10(2), 81-90. Rouse, A. C. (2002). Information technology outsourcing revisited: Success factors and risks. Unpublished doctoral thesis. Melbourne: Department of Information Systems, University of Melbourne. Rouse, A. C. (2005). Testing some myths about outsourcing: Analysis of a survey of Australia’s Top 1000 organizations. Unpublished working paper. Deakin Business School. Available from http://www.deakin.edu.au/dbs Rouse, A. C., & Corbitt, B. (2003b). Revisiting IT outsourcing risks: Analysis of a survey of Australia’s Top 1000 organizations. Proceedings of the 14t h Australasian Conference on Information Systems, 26-28 November, 2003, Perth, Australia. Seddon, P. (2001). The Australian federal government’s clustered-agency IT outsourcing experiment. Communications of the Association for Information Systems, 5(13), 1-33. Senate Finance and Public Administration References Committee (SFPARC). (1997). Contracting out of government services: First report: Information technology. Canberra: Australia. SFPARC. (2001). Rebooting the IT agenda in the Australian public service: Final report on the government’s information technology outsourcing initiative. Canberra: Australia. Verspaandonk, R. (2001). Politics and public administration group: The whole-of-government IT outsourcing initiative. Retrieved July 1, 2001, from http://www.aph.gov.au/library/intguide/pol/ IT_outsourcing.htm Walker, R., & Walker, B. C. (2000). Privatisation: Sell off or sell out? Sydney: ABC Books.
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endnotes 1
2
3
This statement is based on a review of newspaper reports, as well as the findings of the first Senate Inquiry into IT outsourcing (SFPARC, 1997). This statement is made on the basis of newspaper reports at the time. According to informants, the industry development goal, while important, was secondary to the cost savings goal. This observa-
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tion was also supported by the reduction in attention paid to industry development in later WOGITIOI contracts (ANAO, 2000). While “short contracts” were described in Lacity et al (1996) as less than four years, informants suggested vendors could not accept such short contracts for many services, as they did not allow time for the vendor to recoup the significant cost of winning the contract.
This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 447-464, copyright 2006 by IGI Publishing (an imprint of IGI Global).
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Section VIII
Emerging Trends
This section highlights research potential within the field of outsourcing while exploring uncharted areas of study for the advancement of the discipline. Chapters within this section highlight developments in China and India’s outsourcing practices, e-sourcing relationships, and the 24-hour knowledge factory. These contributions, which conclude this exhaustive, multi-volume set, provide emerging trends and suggestions for future research within this rapidly expanding discipline.
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Chapter 8.1
New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China Suresh Sharma JS3 Global, LLC Yuanyuan Chen JS3 Global, LLC
AbstrAct With the rapid rise of globalization, the challenge of global outsourcing today is not “Why and what to outsource?” but “How to outsource?” The theme today is “Let us do it right the first time.” The barriers to outsourcing are companies’ own mind-sets, local regulations, and the robustness of their internal processes. The domain knowledge in many industries has gone fully global. Likewise, new product development and R&D must be global in order to compete in emerging economies and to tap into global talent to compete globally. Software development and IT outsourcing can be done from anywhere, virtually! The availability of mobile technology and superior digital infrastructure is
giving way to “distributed IT,” making “homes” as the future nodes of outsourcing factories. China and India have emerged as the major leaders in this industry due to their capacity, talent pool, and lower cost structure. This chapter compares their strengths, challenges, and growth potential based on the authors’ own hands-on experience of doing outsourcing in these countries for the past 15 years.
IntroductIon With the rise of globalization, the world has witnessed a spectacular growth in offshore outsourcing. The offshore information technology
outsourcing (ITO) market continues to grow at a remarkable rate. Worldwide offshore IT spending will reach U.S. $29.4 billion in 2010.1 Offshore business process outsourcing (BPO) is estimated to grow at a compound annual rate of 37%, amounting to U.S. $55 billion by that time, according to a McKinsey study. This market is bound to increase exponentially. No industry or size of business is untouched by outsourcing anymore. The availability of low-cost communications and transportation, the commoditization of Industrial Era technologies, the availability of baseline education across emerging economies, and the easy access to global human resources have collectively enabled many businesses to successfully do the same job better somewhere else. Apart from major corporations, small and medium enterprises (SME) are realizing that the opportunities related to globalization are not limited to selling their goods in global markets, but also include tapping into global talent to enhance their competitiveness and profitability. The debate today is not about “Why and what to Outsource?” but “How and where to outsource? How to do it right the first time.” The remaining barriers to outsourcing emerge largely from companies’ own mind-sets, local regulations, and weaknesses of internal processes. India and China are among the top players in the offshore outsourcing market. The two countries have taken very different trajectories as they evolve and mature in the offshore outsourcing arena. India took a more independent approach, encouraging local entrepreneurship and free enterprise. This constituted a bottomsup approach, a type of worker-driven revolution, in which people learned the IT skills and offered their services globally to improve their quality of life (Meredith, 2007). The development of this skill set created an opportunity that was further capitalized and accelerated by free enterprises. China, on the other hand, depended more on foreign direct investment (FDI) in economic development. Initially focusing more on export-
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driven manufacturing and infrastructure, it is now moving forward to grow its services sector in a top-down driven way. Although the theme of this chapter is new trends in global outsourcing, especially relating to India and China, this chapter does not make any predictions as to which country will overtake the other, but instead offers a high-level comparative assessment that is more focused on analyzing the on-going evolution of their offshore outsourcing services. The next section, Section 2 briefly introduces the new trends in global offshore outsourcing, followed by Section 3, which outlines the nature and competitive advantages of offshore outsourcing in India and China. Section 4 identifies the respective challenges of offshore outsourcing in India and China. In the final sections, we conclude by providing strategic and policy agenda for the governments and offshore enterprises, and offer our thoughts for future research directions.
neW trends In globAl oFFshore outsourcIng Nearly one-fifth of all organizations are currently using offshore service providers (Computer Economics 2006). Here are some of the principal trends: •
Growing importance of distributed IT outsourcing: If a company knows how to manage a distributed workforce, has reliable network connectivity, and provides a good mobile phone to its people, then it should be able to do IT–based work at any place any time. In the long-term, IT outsourcing is going to go to homes. Future IT factory nodes will be the homes of the workers. Future competition is not going to come from a particular country, but from enterprises that have mastered the art of delivering through distributed IT. Efficient global project management skills among team leaders
New Trends in Global Offshore Outsourcing
•
•
will become an essential core competency. Several companies are launching major rural area initiatives to overcome challenges of scarce urban resources, infrastructure, attrition, real estate costs, and rural-urban digital divide. This trend will bring the frontend customer-care functions back onshore, closer to the customer. . Customer care is being recognized as a core competency that businesses ought to keep in-house rather than outsource, because of the immense potential to do data mining and to improve services; these benefits offset the temporary cost benefits driven by labor-arbitrage (Robinson, Kalakota, & Sharma, 2005). Domain knowledge has gone global: Only a few years ago, corporations classified low-end jobs for offshore outsourcing and retained the domain knowledge in-house. That perception is changing. Increasingly, companies are realizing that although it is important to understand local issues, there is very little difference, at least structurally and functionally, between the operations of most industries at home vs. in another country. A utility is a utility (almost a cost-plus business model all over the world), a bank is a bank, and a telecom service provider is not much different either; therefore, many offshore functions are being outsourced as complete solutions. One sees innovative solutions coming mainly from offshore vendors, not from clients. Further, global product development is essential to offer variable price points in emerging markets, and to capture a full spectrum of innovations: technology, usage, marketing, and talent. Product innovation alone is not a sustainable business growth strategy: The commoditization of design and engineering knowledge has reduced the gap the competition faces in innovating the next and improvised version of the product. Note that soon after iPod came to the market, several other
•
models were introduced by competitors at a much lower price. Accordingly, one needs to be creative in all aspects of launching new products and services. The impact of mobile business on outsourcing is radical: Mobile business is altering outsourcing in a profound manner. Organizations must incorporate emerging convergence of mobility in usage, content creation, and delivery. Emerging economies have already adopted the mobile phone and related technologies. Just as the mechanical advantage of the Industrial Era enabled the western world to become prosperous in the last century, some developing countries will utilize mobile technologies to accomplish similar goals at this stage.
the rAce For globAl resources: IndIA And chInA offshore outsourcing in India Since 1990, India’s government has pursued the strategy of economic reforms through privatization and liberalization to encourage the development of domestic entrepreneurship. The breakdown of monopoly by the state-owned telecom companies in the early 1990s spurred the golden era for the IT industry and the BPO industry. Since then, the software and IT industries in India have been growing at around 50% annually, and are expected to account for 7% of GDP by 2008 (NASSCOM-McKinsey 2002 report). The sector consists of more than 3,000 companies and employs a half-million software engineers; 85% of the IT products and services are exported. Companies from English-speaking countries are among the major clients (http://www.nasscom.org). Since the early 1990s, Indian companies have been heavily involved in the business process outsourcing (BPO) arena. Today, India is the hub for process outsourcing, especially from the U.S.
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and UK. The government has identified BPO as a key contributor to economic growth, and has prioritized the attraction of foreign direct investment in this segment by establishing software technology parks and export enterprise zones. BPO providers enjoy tax benefits and assistance from local governments in manpower recruitment, retention, and training. In addition to government support and a positive policy environment, the major reasons for India’s success in this industry are the availability of large pools of English-speaking talent, high quality at low cost, increasing domain expertise, and more sophisticated performance metrics and program management skills2. As the second most populous country in the world with a population of 1 billion, India also has the largest English-speaking population in the world. India’s 380 universities and 11,200 highereducation institutes produce 3.1-million graduates every year3. The number of working-age people in India is expected to reach 250 million in 2020. Surveys by NASSCOM reveal that Indian companies are better focused on maintaining quality and performance standards. In 2003, among the 80 software centers that were assessed at CMM Level 5, 60 (75%) were in India. In recent years, organizations that achieved ISO 9000 certification are migrating to the ISO 9000:2000 standards; further companies on the CMM framework are realigning themselves to the CMMI model. The Indian IT service industry is making inroads into the global marketplace and competing with global giants like IBM, Accenture, EDS, and Deloitte. In 2005, the big three Indian IT firms, Infosys, Tata Consultancy Services (TCS), and Wipro, reported a combined annual growth rate of more than 30% and surpassed $2 billion in revenue. Indian companies are expanding in the U.S. to create the closer customer relationships required to compete in providing high-end consulting services. In fact, big Indian IT companies are acquiring U.S. consulting firms and hiring hundreds of software professionals from within the U.S. to reduce their disadvantage in terms of
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cultural alignment and customer relations with American clients. At the same time, they are opening branches in lower-cost countries like China and Vietnam to leverage the labor arbitrage. In terms of service provided, Indian firms have developed capabilities for providing a wide range of products and services, such as vertical solutions. They have developed a reputation for successfully managing small- and medium-size projects in the $1 million to $50 million range using the global system. Currently, the Indian firms are moving to capture high-end and large-scale projects (Konana, 2006). Finally, overseas Indians possess years of experience in IT-enabled services; nearly 35% of Silicon Valley startups are by Indians.
offshore outsourcing in china China, the giant neighbor and closest competitor to India, adopted a different development track. From 1979 to 2005, China’s GDP grew at an average annual rate of 9.6%. China’s economic boom is largely the result of inflow of foreign capital, which totaled U.S. $61 billion in 2004, and a rapid growth in productivity. In the past 2 decades, China has established itself as a leader in the hardware industry, and is also doing well in the field of offshore software development. China’s outsourcing companies are aiming to replicate the success of their Indian competitors to attract a larger share of U.S. companies seeking to diversify business beyond India. Low labor cost, huge labor pool, surging domestic demand, and government support are the major factors driving the economic boom. Similar to India, China has low cost as its key competitive strength. In China, salaries of information technology professionals are roughly one-sixth (or even less) of those earned by their U.S. counterparts (Hoffman & Thibodeau, 2003). China’s promising market opportunities make it a strategic location for multinational companies planning to serve new markets in the future.
New Trends in Global Offshore Outsourcing
China’s market accounts for 10%to 15% of sales for many of the larger multinational IT firms. For example, FedEx did about $9 billion in sales in China in 2005, and P&G has bought out 88 jointventure partners in China. To benefit from the world’s largest cell phone consumer market, cell phone companies like Motorola, Siemens, Nokia, and Samsung have invested heavily in R&D. Other high-tech companies, including Cisco Systems, Airbus, and GE Capital, are also moving business processes or expanding their existing China operations, with the objective of providing support to their operations in Asian countries. Today, the nature of offshore outsourcing in China has moved up the value chain from the manufacturing of goods, to business-process outsourcing and knowledge-process outsourcing. Telecom manufacturing operators, in particular, have benefited from this increased involvement. France Telecom, for example, opened its first wholly owned R&D facility in China. For software development, China is the world’s number two destination, trailing India. China’s offshore software outsourcing market totaled U.S. $1.4 billion in 2006, an increase of 48% compared to that of the previous year (IDC, 2007). IDC anticipates that China’s offshore software market will grow five-fold over the next 5 years. The BPO service providers include support for back-office processes, such as call centers, finance management and accounting, payables, and some research and development. In 2003, China’s BPO market was U.S. $20 million; it is growing by 20% to 30% annually. China-based ITO and BPO providers are strongest in the Asia-Pacific market due to geographic proximity and cultural affinity with nearby nations. More than 60% of offshore software development revenue is from Japan and Korea. Due to a large population of northeastern Chinese who speak Japanese, multinational companies such as Dell Computer, General Electric, or CSK Group opened Japanese-language call centers in China. In addition to the built-up network in the
Asia-Pacific market, the domestic IT market offers tremendous potential. China’s IT spending totaled $119 billion in 2005, about four times that of India. Most of this went toward telecommunications equipment and services (79%), reflecting the priorities of a growing infrastructure. China’s IT spending is expected to grow 6.5% annually through 2009, significantly; most of this amount will be spent on the purchase of software (17.5%) and IT services (14.5%). As the IT and BPO markets expand, leaders of Western corporations and Indian companies are moving into China. For example, in February 2007, Tata Consultancy Services, India’s number one outsourcer, began operation of a new joint venture (JV) in Beijing’s Zhongguancun Software Park (zPark). Similarly, Infosys Technologies announced that it intended to increase its presence in China to 6,000 employees by 2010 with centers in Shanghai and Hangzhou and a total investment of U.S. $65 million4. The development of China’s IT industry is a top priority for China’s political leaders. In the “Summary of the Tenth Five-Year Plan (2001-2005) – Information Industry,” the Chinese government included a commitment to build, in China, an IT industry “comparable to those in the United States and Japan.” This plan includes policies to make this growth a reality by offering tax breaks and space in high-tech parks to startups, expanding universities, and providing funding to software vendors for international-standards certification. The Ministry of Science and Technology’s Torch Program funds the China Offshore Software Engineering Project (COSEP) and invites foreign outsourcing and project management service experts to join the program.
chAllenges oF It development In IndIA And chInA The success of economies is dependent on five ingredients: political stability, infrastructure,
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level of economic development, local and export markets, and human resources (Pempel, 1999). Table 11.1 compares the two countries on these five perspectives. India is a democratic country and has better political stability. In contrast, China’s offshore prospects are tempered by the regulatory and political climate; concerns about its political regime, private property protection, contract enforcement, and intellectual property rights are among the top risk management challenges for many offshorers (Chen, 2007; Zanatta,
2007). When comparing the infrastructure in the two countries, China rates higher: it has built up an ultramodern infrastructure, offers 10 times as many express highways, and power costs 40% less than in India. The edge also goes to China when it comes to local markets. Its per capita GDP is more than twice that of India, and it has more consumers with buying power. As for exports, China’s manufacturing productivity and process-improvement skills overwhelm India’s in most industry sectors. With respect
Table 11.1. Comparison between India and China Indicators Political System
India
China
Parliamentary Democracy
Authoritarian Communism
Regulatory and Business Climate Ranking (2007)1 Starting a business Dealing with licenses Registering property Protecting investors Paying taxes Ratio of long-term economic growth expectation in the world’s total in 2010
134 155 110 33 158 6.3%
93 153 21 83 168 17.7%
Infrastructure Broadband subscriber (per 1,000 people) Mobile phone subscribers (per 1,000 people) Railways, goods transported (million ton-km) Information and communication technology expenditure (% of GDP)
1 82 407,398 6
29 302 1,934,612 5
Market Size (Local) Population (billion, 2005) GDP (billion $, 2005)
Human Resources Annual salary of software engineer Salary growth rate Literacy rate (age 15 and above)
$10300 11.5% 59.5%
$13400 7.5% 90.9%
Sources: Official statistics of China and India, UNDP (human development index), WTO (exports and imports), UNCTAD (FDI, inward FDI potential index), Mercer Human Resource Consulting LLC, World Bank. i
Countries are ranked on their business climate rankings, from 1-175, with first place being the best. For example, a high
ranking on the ease of doing business index means the regulatory environment is conducive to the operation of business (The World Bank’s “Doing Business Project”).
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to human resource, both countries have their own strength: China excels at process creativity, India at innovation (Welch, 2007). Given these advantages and disadvantages, Indian and China face dissimilar issues with respect to the global sourcing market. •
challenges in India India is the most popular offshoring destination. The country currently holds 80% to 90% of the ITO and BPO offshoring market, and is now aspiring to emulate Chinese-style exports in laborintensive manufacturing. Certainly in comparison to China, India has weak domestic demand (only 15% of IT service clients are from India) and has a disadvantage in competing against China in the Japanese and Korean markets due to the cultural difference and language barriers. As India prepares to become an economic superpower, it must expedite socioeconomic reforms and take steps to overcome two major economic barriers (Panagariya, 2007) discussed next. •
Wage inflation, rising turnover rate, and shortage of talented manpower: In recent years, India has had double-digit wage inflation. Large IT companies like Wipro, Infosys, and TCS saw average wage increases of 15% and turnover rates of 10%to 12% in entry-level positions and 15%to 20% in middle management in 2006 (http://www.cio.com). In addition, a recent McKinsey-NASSCOM report indicates that India will face a shortfall of 500,000 IT staff members equipped with the skills to work in the offshore outsourcing industry in 2010. China has an advantage when it comes to education and talent supply. Roughly 15% of China’s population aged 18 to 23 is enrolled in higher education, compared to 7% in India. In addition, 91% of Chinese adults are literate, vs. 61% in India, according to the CIA World Factbook. China adds
600,000 new engineers a year, whereas India produces about 350,000 new engineers per year (National Academies, 2006). Indian companies will have to adapt their value proposition to retain their cost advantages in the competitive market. Infrastructure: Although India’s political leaders intend to use the IT industry to create the next IT superpower, India faces the paradox of change and development due to inadequate power-generation capacity and weak communication infrastructure (Gardner, 2000). At the beginning of the 1990s, India’s highway and railway infrastructure was ahead of those in China in terms of total route kilometers (km), route km/square km, and route/km/population. During the period of 1992 to 2002, China’s highway and railway development overtook that of India’s. China’s overall railway route km extended by 24%, adding 13,797 km to the system. In contrast, over this period, the railway network in India grew by only 682 route km (1%). In India, while road network grew by 600,000 kilometers in 10 years, virtually all of the increase was in low-standard roads in rural areas. High-standard arterial highways to connect the four main cities of India were largely neglected. During the same period, China emphasized the development of arterial networks, and built 25,130 km of access-controlled expressways with a minimum of four lanes and another 27,468 km of four-lane dual carriageway highways (World Bank, Transport Notes 2005). With a coastline of 7,500 kilometers, India has only 12 major ports, which handle 75% of port traffic. Only 15% of India’s traffic is container-based and the capability to manage cargo is very limited. Power networks, roads, transportation systems, and ports are facing huge demands from India’s rapidly growing economy. For example, the total cargo at Indian ports is expected to grow from 395
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billion tons in 2004 to 800 billion tons by 2009. However, shortages in infrastructure are eroding the country’s competitiveness and hurting the growth of labor-intensive enterprises, particularly export-oriented manufacturing ones that hold the potential to absorb India’s fast-growing working population.
challenges in china The challenge for China is how to move up the global value chain to the commanding heights of innovation and global marketing prowess. In IT, the particular challenge is whether China can transfer its demonstrated expertise in low-margin, high-volume hardware manufacturing into highmargin software and IT services. •
•
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Fragmented industry: Compared to India’s software/IT industry, the Chinese IT sector is fragmented and under development. Most of the Chinese software companies are small: only two firms have more than 3,000 employees, and the number of firms with more than 1,000 employees is less than 20. The top 10 IT service providers account for only 30% of the market share. India’s IT industry is heavily concentrated, with the top 20 players accounting for 48% of the total IT service and software revenue, and the top three companies having sales in excess of U.S. $2 billion. Lack of experience and high-level talent: Chinese IT service companies are inexperienced in global business and enterprise IT. The whole industry lacks project managers and senior-level talent. In the software and IT industry, 50% of China’s IT market is controlled by foreign companies. Although several of China’s companies are gaining a significant share of international markets, most of them lack the experience with the scale and deliverability of large and compli-
cated projects compared to India’s IT companies. There are few Chinese companies capable of meeting the full standards of the Carnegie Mellon Software Institute’s capability maturity model (CMM)5. Although more than 100 companies in China have undertaken and achieved CMM certification at various levels, 80% of them are at level 2 or 3. Only one is capable of level 5.6 Japanese clients account for 60% of the total offshore business, and most of the offshore outsourcing projects are for low-end application development, maintenance, and testing. Even in manufacturing outsourcing, foreign investors have controlled a major share of the domestic market. In 2005, an OECD report showed that China briefly overtook the U.S. as a high-tech exporter in 2005, but the Chinese government reported that 90% of these exports were made by foreign firms operating in China. In fact, Motorola, Nokia, and Ericsson control 70% of the total output of mobile phones. Therefore, Chinese companies have a long way to go to compete with foreign companies, especially in the ITO and BPO offshore outsourcing market.
strAtegIc ImplIcAtIons For oFFshore outsourcIng IndustrIes In IndIA And chInA Although the world is getting “flatter” by the day (Friedman, 2005), the one who runs faster will always win. It is more about competitiveness than about “flatness.” A flat world only enables a lot more people to gather at the starting line. One has to be able to manage projects globally and profitably in an open environment to win the race. Therein lays the future growth of both countries and the companies that opt to operate there. Indian enterprises are feeling the heat of global cost-competitiveness. They are learning the reali-
New Trends in Global Offshore Outsourcing
ties of the impact of rising costs, wage inflation, resource attrition, and currency exchange rates in a relatively unprotected business environment. On the other side, China is nurturing a more cautious, protected, but directionally correct approach for its own historical, cultural, and social reasons. Indian companies are more likely to move freely outside India to penetrate globally, while the city GDP-driven services-sector approach by the local mayors in China tends to feed local growth first. It is not surprising for a foreign company to be approached by representatives of several cities in China for setting up their facilities in the respective cities. In the case of India, it is enterprise centric; while in the case of China, it is location centric. The execution of the project through effective global managers will be a key differentiator. Although China and India both have large domestic markets to provide resilience over time, their abilities to innovate global products will ultimately decide their ability to gain dominance in global markets.
Future reseArch Three broad areas of future research are suggested in the following paragraphs. This chapter highlighted the trends based on the authors’ own experiences of doing outsourcing activities on an extensive basis. More rigorous research is needed to understand the underlying drivers that are leading to the current set of challenges in India and China. More study is needed on interdependence of various factors; what makes it work in one company, location, or country and not in the other. This can best be done through rigorous comparative studies , an option seldom utilized so far. Such studies will also help to identify new hubs of sourcing. The impact of global sourcing is now widely spread across most business functions: IT, product support, human resource, product development,
marketing research, sales, design and engineering, production, manufacturing, and even R&D. Global sourcing of these business functions is fundamentally changing the way that new innovative products are being developed in today’s world. New enterprises will need to seriously rethink their structure and processes. This is going to lead to a new round of global innovation across all functions. The key questions are: How will it impact future growth of businesses? Is core competency really core to a company anymore? A very small set of companies is now at the forefront of being truly global enterprises where the work does not seem to stop; round-the-clock global factories. How to start and sustain a new enterprise of this type that can leverage the best talent, resources, time, and locations in the most competitive way? This is a fundamental question that needs to be explored as we proceed forward.
reFerences Chen, Y. (2007). Intellectual property rights protection in IT outsourcing contracts: The impacts of transaction costs and institutional environment. Emory University Working Paper. CIA World Factbook. (2007). Retrieved from https://www.cia.gov/library/publications/download/ Communist Party of China (CPC) Central Committee. (2000). Summary of the Tenth Five-Year Plan (2001-2005)—Information Industry. Computer Economics. (2006). IT spending, staffing, and technology trends 2006/2007. Retrieved from http://www.computereconomics.com/article.cfm?id=1161&gclid=CLfDhPTGu4wCFQI pFQodjSVBaQ Friedman, T. L. (2005). The world is flat: A brief history of the twenty-first century. New York: Farrar, Straus and Giroux Press.
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Harral, C., Sondhi, J., & Chen, G. Z. (2006). Highway and railway development in India and China, 1992-2002. The World Bank Transport Notes #TRN 32. Hoffman, T., & Thibodeau, P. (2003, April 28). Exporting IT jobs. Computerworld. Retrieved from http://www.computerworld.com/ managementtopics/management/outsourcing/ story/0,10801,80661,00.html Jain, P. (2006). Offshore outsourcing “India vs China”: An empirical investigation. The Business Review, 6, 316-325. Konana, P. (2006). Can Indian software firms compete with the global giants? Computer, July 2006. Meredith, R. (2007). The elephant and the dragon: The rise of India and China and what it means for all of U.S. W. W. Norton & Company. Panagariya, A. (2007). Why India lags behind China and how it can bridge the gap. The World Economy, 2, 229. Pempel, T. J. (1999). The politics of the Asian economic crisis. Cornell University Press. Qu, Z., & Brocklehurst, M. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of Information Technology, 18, 53-67. Robinson, M, Kalakota, R., & Sharma, S. (2005). Global outsourcing: Executing an onshore, nearshore and offshore strategy. Mivar Press. Schwankert, S. (2007). India and China outsourcing: Trading places? Computerworld Hong Kong (April 01, 2007). Retrieved from http://www. cw.com.hk/computerworldhk/article/articleDetail.jsp?id=416089 Welch, S. (2007). Choosing China or India; Here’s a way to figure out which, if either, is right for your business. Business Week, 4026, 110.
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Wu, Y. (2007). Service sector growth in China and India: A comparison. China: An International Journal, 5(1), 137-154. Zanatta, (2007). The role of national policies on the attraction and promotion of MNEs’ R&D activities in developing countries source. International Review of Applied Economics, 21(3), 419.
AddItIonAl reAdIng books Corbett, M. F. (2004). The outsourcing revolution: Why it makes sense and how to do it right. Kaplan Business. Gu, Z. (2006). China’s global reach: Markets, multinationals, and globalization. Fultus Corporation. Lacity, M., & Willcocks, L. (2001). Global information technology outsourcing: Search for business advantage. Chichester: Wiley. Robinson, M, Kalakota, R., & Sharma, S. (2005). Global outsourcing: Executing an onshore, nearshore and offshore strategy. Alpharetta, GA: Mivar Press. Sheth, J., Sisodia, R. S. (2005). Tectonic shift: The geo-economic realignment of globalizing markets. New Delhi, India: Response Books. Willcocks, L., & Lacity, M. (2006). Global sourcing of business and IT services. London: Palgrave Macmillan.
Journal papers Chandra, A., Fealey, T., & Rau, P. (2006). National barriers to global competitiveness: The case of the industry in India. Competitiveness Review, 16(1), 12-20.
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Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, 14(3), 291-314.
O’Connor, T. (2006). China, India and the U.S. rail industry: Overview and trends. Journal of Transportation Law, Logistics, and Policy, 73(4), 510-521.
DiRomualdo, A., & Gurbaxzni, V. (1998) Strategic intent for IT outsourcing. Sloan Management Review, 39(4), 67-1998.
Qu, Z., & Brocklehurst, M. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of Information Technology, 18, 53-67.
Filippo, G. De, Hou, J., & Ip, C. (2005). Can China compete in IT services? McKinsey Quarterly, (1). Gopal, A., Sivaramakrishnan, K., Krishnan, M., & Mukhopadhyay, T. (2003). Contracts in offshore software development: An empirical analysis. Management Science, 49(12), 1671-1683. Hall, J., & Liedtka, S. (2005). Financial performance, CEO compensation, and large-scale information technology outsourcing decisions. Journal of Management Information Systems. 22(1), 193-205.
Rottman, J., & Lacity, M. (2004). Proven practices for IT offshore 0utsourcing. Cutter Consortium, 5(12), 1-27. Susarla, A., Barua, A., & Whinston, A. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-124. Vogel, J. H. (2007). Why India is not the next China. Real Estate Finance, 23(5), 3-8.
Kern, T., Willcocks, L., & Lacity, M. (2002). Application service provision: Risk assessment and risk mitigation. MIS Quarterly Executive, 1(2), 113-126.
Zainulbhai, A. S. (2005). What executive are asking about India. McKinsey Quarterly, 2005 Special Edition.
Lacity, M., Feeny, D., & Willcocks, L. (2003). Transforming a back-office function: Lessons from BAE Systems’ experience with an enterprise partnership. MIS Quarterly Executive.
business press and White papers
Lee, H.-S., & Anderson, B. B. (2006). Automobile industry in China and India: Backgrounds, trends and perspectives. The Business Review, 6(1), 308-315. Lee, B. L., Rao, D. S. P., & Shepherd, W. (2007). Comparisons of real output and productivity of Chinese and Indian manufacturing. Journal of Development Economics, 84, 378-416. Levina, N., & Ross, J. (2003). From the vendor’s perspective: Exploring the value proposition in information technology outsourcing. MIS Quarterly, 27(3), 331-364.
Economist Intelligence Unit. (2007). Country commerce report (China). New York: The Economist. Economist Intelligence Unit. (2007). Country commerce teport (India). New York: The Economist. Lewis, J. A. (2007). Building an information technology industry in China: National strategy, global markets. Washington, DC: The Center for Strategic and International Studies (CSIS) Press. New IBM research quantifies the long-term impact of IT outsourcing on three business metrics. 12/05 press release.
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endnotes 1
2
3
4
“Worldwide and U.S. Offshore IT Services 2006-2010 Forecast,” IDC Market Analysis DOC #202411. “India maintains outsourcing advantage,” by Anthony Mitchell, E-Commerce Times. 05/30/05. http://www.ecommercetimes. com/story/42781.html http://forum.simplyhired.com/archive/index.php/t-223.html “India and China outsourcing: trading places?” by Steven Schwankert, Computerworld Hong Kong. http://www.cw.com. hk/computerworldhk/article/articleDetail. jsp?id=416089
5
6
CMM is based on quality standards defined by the Software Engineering Institute (SEI). CMM ensures that various software processes are clearly defined to ensure quality control and delivery. Its scope covers the software development process and definition of project scope, time, software design, development, and testing. The highest CMM level—level 5—means that a company can ensure predictable, consistent results when it undertakes a software project. Of the 70 level 5 companies in the world, 50 are in India. “Outsourcing in China,” Insidernews, October 3, 2004. http://sherman.linuxhall. org/?q=node/view/216
This work was previously published in Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy, edited by A. Gupta, pp. 203-214, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 8.2
Comparing China’s and India’s Evolution of Broadband Internet in the Developing World Nir Kshetri University of North Carolina at Greensboro, USA Nikhilesh Dholakia University of Rhode Island, USA
AbstrAct
IntroductIon
Telecommunications networks of India and the People’s Republic of China are among the largest in the world. The two economies have a number of areas for broadband use ripe for exploration. Broadband networks in some regions in these two economies are even more developed than in some parts of the industrialized world. There are, however, a number of reasons to believe that these two countries may exhibit distinct and varied patterns of broadband diffusion. This chapter compares and contrasts the diffusion patterns of broadband technology in the two economies. We examine factors driving broadband diffusion in the two economies in three major categories: demand and cost conditions, industry structure, and export conditions.
Telecommunications networks of India and the People’s Republic of China (henceforth, China) are among the largest in the world. Both have a number of areas for broadband use ripe for exploration. One estimate suggests that thanks mainly to rapid broadband diffusion in China and India, broadband revenue in the Asia-Pacific region will cross $55 billion by 2011 compared to $20 billion in 2005 (Indiantelevision.com, 2006). As of 2005, in terms of the numbers of the Internet users as well as broadband users, China ranked the second in the world—only after the U.S. One study suggested that by the early 2006, a Chinese Internet user was more likely to be on broadband connections than U.S. counterparts (Koprowski, 2006). By the early 2006, over half of
Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
Chinese Internet-users had broadband compared to only 6.6 percent at the end of 2002 (Special report, 2006).1 By the early 2004, China had 10.95 million DSL (a form of broadband) users, the highest in the world.2 Moreover, China’s broadband network growth rate is among the fastest in the world (Country growth rates, 2004). By the end of 2006, China is expected to have more Internet users and broadband lines than any other country in the world (China.net, 2004).
Currently, India is far behind China in terms of broadband and other related indicators (Table 1). A report released by Forrester Research in May 2006 indicated that the top three socioeconomic classes in urban India had only a 3% adoption rate of the broadband technology (zdnetindia. com, 2006). Nonetheless, India is rapidly catching up in the broadband race. India’s Ministry of Communications and Information Technology hopes that broadband will reach 12 million homes
Table 1. Indicators related to broadband development in China and India Indicator
China
India
Personal computers (PCs) in use(‘000) (2004)
62241.13
12627.19
Online households (million) (2004)
20.42
5.85
PC households online (% of PC households) (2004)
70.97
53.17
Number of Internet users (‘000) (2004)
162097.46
54159.55
ISDN subscribers (‘000) (2004)
1615.74
37.53
45
6
Number of broadband households (2005-end)
30 million
550,000
Composition of broadband access modes (mid-2006)
70% via DSL, 18% via fiber to the premises (FTTP), 12% via cable or other means (e.g., fixed wireless, WiFi or satellite)e
Average monthly broadband charges ($, 2004)a
16
20
Digital main lines % of telephone main lines (2004)
100
100
Capital investment in telecommunications (million, $) (2004)
26033.78
5036.52
Telephone lines in use (‘000) (2004)
282524
47188
National telephone calls (million minutes) (2004)
66339.08
36.52
International outgoing telephone calls (million minutes) (2004)
1263.16
680.81
Mobile telecom revenues (% of telecom revenue) (2004)
57.8
17.95
Mobile telephone users (‘000) (2004)
334082
40323.45
Mobile SMS messages sent, million (2004)
93156.85
NA
Number of television sets (2005) c
400 million
Number of cable TV subscribers (2005) c
150 million
Broadband users as a percentage of Internet users (2005)d b
Sources: a Mishra (2004); b Burrows et al. (2005); cBasu (2006); dNeed to revolutionize (2005); e Lindstrom (2006). All other data are from Euromonitor International’s Global Market Information Database.
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Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
in the country by 2010 (Burrows, Kripalani, & Einhorn, 2005). Broadband networks in some regions in these two economies such as Shanghai and other coastal towns of China (Mallaby, 2005) and Bangalore and Hyderabad in India are more developed than in some parts of the industrialized world (COMMWEB, April 26). Sperling (2004) notes that “there is better broadband in Bangalore than [in] Buffalo.” Likewise, citing an experience of a U.S. based firm, Wilson (2005) has observed that it is easier to get a broadband connection in some cities in India and China “than to get one to [a] factory 70 miles away in Batesville, [Mississippi (USA)].” Thanks to broadband and other information and communications technology (ICT), skilled manpower in the two economies have been able to actively participate in the design and development of innovative new products thus breaking traditional geographical barriers (Skills gap survey, 2006). For instance, broadband has been among the major drivers of India’s rapidly growing outsourcing industry. Some analysts argue that the theory of comparative advantage may need modification when developing countries such as China and India start competing with industrialized countries with high skilled workers that have access to broadband and the Internet (How America can meet, 2004) There are a number of reasons to believe that these two countries may exhibit distinct and varied patterns of broadband diffusion. First, the two economies differ widely in terms of the potential of possible broadband applications such as multimedia and animation, business-to-business (B2B), business-to-consumer (B2C) e-commerce, and IT enabled services. Second, they differ widely in terms of the level and composition of base technologies for the development of different varieties of broadband (Table 1). For instance, broadband access in the forms of ISDN/DSL, cable modems and wireless depends on the penetration rates of fixed phones,
cable TV, and wireless phones respectively. China is ahead of India in terms of the penetration rates of all these technologies (Table 1). Third, China and India differ in terms of the degree and type of liberalization of telecom sectors. While a stronger economy is driving the demand of broadband related applications in China, competition for broadband and traditional telecom services is considered to be “healthier” in India than in China (Pyramid Research, 2001). Fourth, other supporting infrastructures required for broadband development are not equally developed in the two economies. For instance, the Chinese initiative to launch its version of national information infrastructure (NII), known as the “Golden Projects” in response to similar initiatives in the developed countries (Tan, Meuller, & Foster, 1997), has put in place a very developed backbone telecom infrastructure in China than in India (Pyramid Research, 2001). What are the sources of similarity and differences in broadband diffusion pattern of India and China? In this chapter, we examine in depth the factors that could shape the patterns of diffusion of broadband telecommunications technologies in the two countries.
FActors ImpActIng the broAdbAnd potentIAl Following Beise (2001), Lehrer (2004), and Lehrer, Dholakia, and Kshetri (2002), we divide factors influencing the diffusion of broadband in the two economies into three groups (Table 2): demand and cost conditions (Linder 1961; Vernon 1966), industry structure (Porter, 1990), and export conditions (Beise, 2001; Tilton, 1971) (Figure 1).
demand and cost conditions Demand and cost conditions include factors such as consumer preferences, income level, input costs, and prior national experience with related
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Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
Table 2. Sources of leadership in broadband technology: China vs. India Dimension Demand and cost conditions
China
India
•
Higher income
• Higher proportion of TV household connected to cable
•
Mobile and fixed line penetration rates higher
•
Better infrastructure than India
• Position as a global capital for IT and BP outsourcing.
• About 75% of mobile phones based on GSM standard, requirement to build new 3G networks from scratch •
•
Sophisticated rail network.
Higher International bandwidth
• Produces most IT products (including broadband equipment) domestically •
Industry structure
Lower monthly subscription rate
•
Wider and deeper adoption of the Internet
• •
Reengineered the telecom sector in the 1990s Opening the telecom market for competition.
• Ahead of China in telecom liberalization • Some telecom equipment manufacturers have programs focused on India
Export conditions
• Export of hi-tech products as a proportion of total exports much higher • Heavy inflow of FDI in technology sector facilitated export via inward internationalization • Higher market size
•
Heavy exporter of software
• Taking several measures in recent years
Sources: Beise (2001), SinoCast (2004, March 9), Lehrer et al. (2002), Lawcommerce.com (2001), Pyramid Research (2001), Business (2002), and authors’ research.
or previous generations of technology. China and India have favorable environments in terms of some of these factors. For instance, governments in both countries subsidize technology and innovation (Newman, Hook, & Moothart, 2006). Next, consider technical workers needed for the broadband industry. China and India graduated over 600,000 and 350,000 engineers in 2004 compared to 70,000 in the U.S. (Broad, 2005). According to a survey, the annual cost to employ a chip design engineer in 2002 was $28,000 in Shanghai, $24,000 in Suzhou (China) and $30,000 in India compared to $300,000 in the
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U.S. (Ernst, 2005). The Bangalore unit of the Intel team has planned to launch microprocessor chips for high-speed broadband wireless technology in 2006 (Mehra & Padmanabhan, 2006). Regarding the quality of technology workforce, Intel CEO Craig Barrett argues that the Chinese are “capable of doing any engineering, any software job, any managerial job that people in the United States are capable of” (Segal, 2004). Indeed, Chinese telecom equipment vendors Huawei and ZTE have supplied most of the network equipment needed for deploying broadband and related applications such as IPTV in China. Likewise, India
Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
Figure 1. A framework to explain broadband diffusion in developing countries Consumer characteristics impacting broadband demand o Income o Innovativeness o Adoption of related technologies o Related infrastructure o Existence of domestic standards o Input characteristics o Quality of IT workforce o Cost of hiring
Industry structure o Competitive rivalry o Horizontal collaboration
Related infrastructure • Export orientation of industry • Market size
and China haven’t invested heavily in the legacy systems that most industrialized countries have (Vance, 2005). Nonetheless, there are some factors that are likely to hamper the growth of the broadband network. First, shared broadband access is relatively more common in China and India than in other industrialized countries, which is likely to hamper the demand for broadband (SinoCast China IT Watch, 2006). Second, limited authorized content on the Internet may act as a roadblock to a faster diffusion of this technology (Clendenin, 2005). Both countries’ laws prohibit contents that are politically and/or culturally objectionable. So far, broadband has penetrated only a tiny fraction of the population in both economies. Broadband subscription is beyond the reach of the majority of Chinese and Indians (Chotrani, 2002). Demand and cost conditions, however, favor China compared to India. First, China has a higher income level than India and the income is growing
more rapidly. For instance, the Chinese economy grew by 7% annually in the 1980s, 8.5% annually during 1990-20033 and the material consumption per capita increased by over 100% during 19781992 (Sklair, 1994). These numbers are reflected in China’s market size for IT products in general and broadband in particular. For instance, China became the Asia’s largest IT market in 2000. In 2004, China became the world’s biggest ICT exporter. In 2004, the China’s ISDN market was about 43 times bigger than India’s (Table 1). Second, “technological innovativeness” or the propensity to adopt modern technologies such as broadband is higher in China than in India. For instance, in the mid-1980s, the penetration rates of consumer durables in China were about the same as South Korea, Japan, and then USSR (Sklair, 1994). Thanks to such “technological innovativeness” of Chinese consumers, in terms of the technology achievement index recently constructed by the UNDP (2001), China’s rank
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Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
of 45 (out of 72 economies considered) puts it in the group of “dynamic adopters” of new technologies and ahead of other developing countries with higher per capita GDP such as Bolivia, Colombia, Peru, Paraguay, Jamaica, and Tunisia. The same study ranked India 63rd out of the 72 economies. Chinese also have a wider and deeper adoption of the Internet compared to Indians (Kshetri, 2002), which is likely to boost broadband demand. For instance, estimates suggested that the numbers of blogs in China were in the range of 1-2 million in 2005 and growing fast (French, 2005). Third, China has made much heavier investment in telecom sector (Table 1). For instance, in the mid-1980s, annual investment in the telecom infrastructure averaged $300 million (30% of revenue) which resulted in an annual network growth of 14% (Kelly 2000). During the early 1990s inflation in the Chinese economy, the government cut off investments in other sectors, but not in the telecom sector. During 1992 and 1993, investment was again doubled which resulted in telecom growth rates of 36 and 48% respectively (Kelly, 2000). The telecom investment experienced similar level of growth rate during and after the Asian financial crisis. Its telecom investment in 1999 was about eight times as much as that of India (International Marketing Data and Statistics, 2001). Similarly, China’s capital investment in the telecom sector in 2004 was over five times as big as India’s (Table 1). Fourth, a high proportion of the telecom investment in China went to the “most modern” available infrastructure because the government aspired for “nothing but the best.” For instance, consider Shanghai, the most populous Chinese city. In the late 1980s and early 1990s, Shanghai Telecom undertook projects to lay under the city’s streets one of the world’s largest fiber optic cable networks that contained much more bandwidth than needed for simple telephone services (McGill, 2001). The huge surplus in bandwidth accelerated the diffusion of broadband technology. The investment in the “most modern” infrastruc-
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ture is a part of Chinese national initiatives to develop telecom infrastructure and high-speed data networks. China launched its version of national information infrastructure (NII), known as the “Golden Projects” in response to similar initiatives in the developed countries (Tan et al., 1997). There are six network organizations that operate international telecommunication circuits and network facilities: China Public Computer Network (CHINANET), China Golden Bridge Network (CHINAGBN), Unicom’s UNINET, China Netcom (CNCNET), Chinese Science and Technology Network (CSTNET), and China Education Network (CERNET) (Anderson 2001). China received better marks than India for infrastructure (Pyramid Research, 2001). Fifth, China has developed its own version of a 3G cellular standard known as time divisionsynchronous code division multiple access (TD-SCDMA), which has been approved by the International Telecommunications Union (ITU). The existence of a home-grown standard is likely to accelerate the growth of cellular broadband in China. Sixth, although higher percentage of India’s television is cable ready, the absolute number is much higher in China. Thus, the potential of cable broadband is also higher in China. Seventh, government agencies in China are among the early adopters of most IT applications including broadband. China’s e-government performance, in fact, is rated ahead of global IT leaders such as Switzerland, UK, Singapore, and Germany (West, 2002). Federal and local government agencies are rapidly adopting a wide range of broadband applications. For instance, Motorola is working with the Chinese Ministry of Public Security (MPS) in an ambitious project to deploy video surveillance systems connected via fiber in major cities in the country (Lindstrom, 2006). While China fares better than India in several dimensions related to demand and cost conditions, India has some relative advantages as well. India’s position as a major supplier of global IT
Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
and business process services is likely to trigger the demand of broadband services. An estimate suggests that global IT services will employ 1.1 million Indian white-collar workers generating nearly $19 billion in annual revenues by 2008 (Dhume, 1999). Thanks to improved telecommunications and the Internet, multinationals such as GE Capital, British Airways, Swiss Air, and American Express are utilizing India’s vast pool of English-speaking and computer-literate workers to perform white-collar tasks remotely from India (Dhume, 1999; Ebusinessforum.com, 2001). Similarly, to relocate its accounting division from Washington D.C., World Bank evaluated several countries in terms of the availability of IT manpower at reasonable cost, and chose Chennai, India (Goonewardene, 2001). By 2004, India’s ITrelated software and service industries revenue had touched $9 billion and was expanding at a steady clip of 30-40% annually. Another estimate suggests that IT outsourcing brought India more than $7 billion a year in revenue in 2003, which is expected to double by 2007 and quadruple by 2012 (Donlan, 2005). In the fiscal year 2004-2005, the Indian offshore outsourcing industry generated an estimated $17.3 billion and employed 695,000 people (Fairell, Kaka, & Stürze, 2005).4 According to a NASSCOM/KPMG study, in 2004, the Indian business process outsourcing (BPO) industry grew by 40% to reach $5.8 billion and is expected to reach $64 billion in 2012, employing 3 million people (Hamm, 2005). What is more, companies based in industrialized countries are outsourcing more cutting edge works to India such as medical outsourcing (e.g., CT scans and other images transmitted via broadband) (Waldman, 2004) and R&D. The following example illustrates how broadband has facilitated the outsourcing of sophisticated works to India: Narayana Hrudalaya, a Bangalore heart hospital, has links to affiliates throughout India, in Kuala Lumpur and Mauritius, and a medical school in Hannover, Germany. The Indian doctors consult with patients over broadband
connections, on which they can see X-rays and angiogram results. Future plans include robotic surgery by remote control, perhaps the ultimate in outsourcing. (Singh, 2004) India’s well developed rail network is expected to be another major driver of broadband. India is using its rail network to bring broadband access economically and quickly to the rural population (International Telecommunication Union, 2003).
Industry structure Industry structure includes the market openness for competition in broadband and traditional telecom sectors. China and India are taking several measures to increase competition in the telecom market. A study conducted by Pyramid Research (2001) indicated, however, that the competition for broadband and traditional services is better in India than in China. According to the recommendation provided by a high-powered IT task force, the Indian government privatized the national long-distance market, permitted ISPs to set up their own submarine cable landing stations and share bandwidth with other ISP, and allowed the use of Ku-band in both Indian and foreign satellites among other measures to liberalize telecom sector. These factors are bringing a bandwidth boom in India. During mid 2000 to mid 2002, an estimated $5 billion investment is expected in new fiber-optic systems (Erickson, 2000). MNCs such as Lucent Technologies and Airtel are laying fiber-optic lines. In October 2000, Singapore Telecom announced an eightterabit cable connection between Singapore and India (Lynch, 2001). Likewise, VSNL, the state owned telephone company, which listed on the New York Stock Exchange in the mid-2000, has proposed to increase its capacity to 13 gigabits by 2004 (Erickson, 2000). In mid 2004, the government issued a report which stressed the need for facilitating the expansion of broadband and emphasized especially the role of wireless broad-
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Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
band.5 In recent years, investment in programming and digital distribution has increased, which is likely to grow competition in broadband (BBC Monitoring International Reports, 2006). The Chinese government, on the other hand, designed a series of programs to accelerate telecom development in the 1990s which included extensive re-engineering of and intense competition in this sector. Telecom companies were also required to adapt to the rigorous disclosure requirements of the NYSE, NASDAQ, and Hong Kong’s Growth Enterprise Market (McDaniels & Waterman, 2000). Especially, ADSL rollout from China Telecom and China Netcom triggered the growth of broadband network in the country (BBC Monitoring International Reports, 2006). In India, horizontal collaboration, which entails combining selected elements from each business’s supply chain, is also facilitating broadband growth. An alliance formed by Microsoft, HCL (a manufacturer of computers and office equipment) and BSNL offers a case in point. The alliance makes a PC loaded with Microsoft software ready for BSNL’s broadband service for a monthly payment of less than $11 (Goyal, 2005). Thanks to such initiatives, new PC sales in India are also growing at 25% annually (Goyal, 2005).
export conditions Export conditions include factors such as trade policy, the export orientation of industry, strategic regulation, and market size. China fares better than India in terms of several dimensions of transfer and export conditions related to broadband technology. First, the ICT market size is higher in China than in India. Because of its higher market size, China is ahead of India in terms of several indicators related to broadband such the number of hosts, number of users, and total e-commerce transactions (Kshetri, 2002). Second, China’s high technology exports as a proportion of manufactured exports is much higher than in India. More to the point, Chinese telecom equipment
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vendors Huawei and ZTE have already sold fixed and mobile broadband equipment in a number of developing and developed countries across all five continents. China’s inward internationalization, to some extent, facilitated the export of high technology products. China’s post-Mao reform compounded by its billion plus market attracted huge inflow of foreign direct investment (FDI) in the technology sector (inward internationalization). The annual FDI inflow in China averaged $11.7 billion during 1985-1995 and $42 billion during 1996-1999, which compare with corresponding figures for India 0.45 billion and 2.7 billion respectively (UNCTAD, 2000). FDI in China averaged 13.9% of gross fixed capital formation during 1996-98 which is significantly higher than that of the world (8.1%) and developing countries average (10.1%) during that period (UNCTAD, 2000). Several factors restricted the internationalization of India’s ICT industry, particularly the hardware sector, in the 1980s and 1990s. The government protected the hardware industry from external competition. Its distorted tariff structure further hampered the internationalization of the hardware sector (Gopalan, 2002). Reduced access to foreign exchange and distorted tariff structure increased the transaction cost for exporting hardware which is more import-intensive (64% of sales volume was imports in the early 1990s) than software (40% import-intensity) (Tandon, 1991, p. 65) and encouraged even hardware companies to consider software exports to earn foreign exchange (McDowell, 1995). In recent years, liberalization in Indian economy has led to a decline of such barriers. Moreover, competitive threats from China and other neighboring countries have forced India to develop a strong hardware industry to support software and services sectors. Thanks to measures taken in recent years, the export of the information and communications technology (ICT) industry is, however, growing at a phenomenal rate in India. In the fiscal year 2000-2001, India’s export of hardware, software,
Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
and information technology (IT) enabled services amounted $1 billion (Elcina.com 2002), $6.2 billion, and $896 million (NASSCOM, 2002) respectively. By 2008, the Indian ICT industry is estimated to earn export revenues of $10 billion from hardware (Elcina.com, 2002), $50 billion from software and $17 billion from IT enabled services (NASSCOM, 2002) and provide employment to 7 million people.6
dIscussIon And conclusIon In this chapter, we examined several factors that are likely to influence the unfolding broadband potential in the two Asian giants. Our analysis indicates, in terms of the demand and cost conditions affecting the potential of broadband, many factors favor China. These factors include higher income, higher propensity of Chinese consumers to adopt new technologies, higher investment in telecom sector and a significant proportion of it going to the most modern technology, much higher mobile phone and cable penetration. On the other hand, India’s position in the global IT map as a major provider of IT services is likely to trigger the demand for broadband. The competition levels in the broadband and traditional telecom sectors are roughly comparable in the two economies. India, however, fares slightly better in terms of opening up the telecom sector to competition. As a result, the broadband subscription costs are declining rapidly in both economies. Such cost declines are likely to further drive the demand for broadband technology. Although China fares better in terms of several dimensions of transfer and export conditions, India has taken several measures in recent years to improve the situation. Our analysis in this chapter should be of value to broadband manufacturers and service providers as they devise appropriate strategies for these two giant Asian markets as well as for other emerging markets. For instance, this chapter provides insights into the nature of business and
consumer demands and performances current business models offered in the two economies. Furthermore, the insights provided by this study would help policymakers and industry lobby groups to craft appropriate policies to accelerate the diffusion of broadband technology in emerging and transition economies. For instance, the Indian case suggested that a properly formed horizontal collaboration could be an important trigger for driving broadband diffusion. It would thus be in the best interest of the government to encourage such collaborations.
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Mishra, P. (2004, June 28). India to drive broadband usage a la Korea. Asia Computer Weekly, 1. NASSCOM. (2002). Export destination. National Association for Software and Service Companies. Retrieved August 1, 2007, from http://www.nasscom.org/it_industry/export_destinations.asp Need to revolutionize IT sector. (2005, December 11). The Nation. Newman, R.J., Hook, C.S., & Moothart, A. (2006, March 27). Can America keep up? Why so many smart folks fear that the United States is falling behind in the race for global economic leadership. U.S. News & World Report, 140(11), 48-56. Pyramid Research. (2001). Broadband in Asia: The next big thing. Retrieved August 1, 2007, from http://www.pyramidresearch.com/research/ APBrdbnd01.asp Porter, M. (1999). The competitive advantage of nations. London: MacMillan. Segal, A. (2004, Nov/Dec). Is America losing its edge? Foreign Affairs, 83(6), 2. Singh, S. (2004, October 18). Doctor visits. Newsweek, 144(16), E20. SinoCast. (2004, March 9). China becomes top DSL country. SinoCast China Business Daily News, 1. SinoCast China IT watch. (2006, January 19). Latest report on China’s Internet. China: SinoCast LLC. 2275
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Skills gap survey: Begin now to attract, train and develop manufacturing workers. (2006). Plant Engineering, 60(1), 23-24. Sklair, L. (1994). The culture-ideology of consumerism in urban China: Some findings from a survey in Shanghai. Research in Consumer Behavior, 7, 259-292. Special report: The party, the people and the power of cyber-talk - China and the Internet (2006, April 29). The Economist, 379(8475), 28. Sperling, G. (2004, March 1). A new consensus on free trade. The Washington Post, p. A19. Tan, Z., Meuller, M., & Foster, W. (1997). China’s new regulations. Communications of the ACM, 40(12), 11-16. Tandon, A. (1991). Export or prish? Dataquest, 9, 63-65. Tilton, J.E. (1971). International diffusion of technology: The case of semiconductors. Washington, DC: The Brookings Institution. UNCTAD. (2000). World investment report 2000: Cross-border mergers and acquisitions and development. Geneva. UNDP. (2001). Human development report 2001. New York: United Nations Development Program. Retrieved August 1, 2007, from http://www.undp. org/hdr2001/completenew.pdf Vance, A. (2005, April 26). India, China poised to feast on US IT complacency. Retrieved August 1, 2007, from http://www.theregister. co.uk/2005/04/26/sun_schwartz_china/ Vernon, R. (1966). International investment and international trade in the product cycle. Quarterly Journal of Economics, 80, 190-207. Waldman, A. (2004, July 24). Indians go home, but don’t leave U.S. behind. Times, p. A1. West, D.M. (2002). Global e-government, 2002. Center for Public Policy, Brown University.
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Retrieved August 1, 2007, from http://www. insidepolitics.org/egovt02int.PDF Wilson, C. (2005, April 25). Municipal networks gain ground. Telephony, 246(8), 6-7. World IT Report. (2004, June 24). WebSky to set up JV for operation of wireless broadband system in India. World IT Report, 1. zdnetindia.com. (2006, May 10). India’s broadband penetration extremely low. Retrieved August 1, 2007, from http://www.zdnetindia.com/news/ communication/stories/147843.html
Key terms Digital Subscriber Line (DSL): A family of technologies providing digital data transmission over the wires of a local telephone network. Gross Domestic Product (GDP): The sum of the total value of consumption expenditure, total value of investment expenditure, and government purchases of goods and services. Information and Communications Technologies (ICTs): Technologies that facilitate the capturing, processing, storage, and transfer of information. Time Division - Synchronous Code Division Multiple Access (TD-SCDMA): A 3G mobile telecommunications standard being pursued in China. Internet: The “global information system that (i) is logically linked together by a globally unique address space based on the Internet protocol (IP) or its subsequent extensions/follow-ons; (ii) is able to support communications using the transmission control protocol/Internet protocol (TCP/IP) suite or its subsequent extensions/followons, and/or other IP-compatible protocols; and (iii) provides, uses, or makes accessible, either publicly or privately, high level services layered
Comparing China’s and India’s Evolution of Broadband Internet in the Developing World
on the communications and related infrastructure described herein” (The Federal Networking Council definition). Offshore Outsourcing: Subcontracting a company’s noncore business processes to an external service provider in a foreign country. Internet Protocol Television (IPTV): A system in which a digital TV service is delivered using the Internet protocol.
endnotes 1
2
3
4
E-Commerce: Any transaction in which at least one of the following activities– production, distribution, marketing, sale, or delivery–takes place by electronic means.
5
6
Another estimate suggested that about 60% of Internet users in 2005 went online via broadband (Internet use deepens, 2006). See “China Becomes Top DSL Country,” SinoCast China Business Daily News, March 9, 2004, p. 1. See http://hdr.undp.org/reports/global/2005/ pdf/HDR05_HDI.pdf The same estimate suggests that by 2007-08, this industry will account for 7% of India’s GDP employing 1.4-1.5 million people. See “WebSky to set up JV for operation of wireless broadband Internet system in India,” World IT Report, June 24, 2004, p. 1. See http://www.commonwealthknowledge. net/documents/Kummar/_Toc500136352
This work was previously published in Handbook of Research on Global Diffusion of Broadband Data Transmission, edited by Y. Dwivedi, A. Papazafeiropoulou, and J. Choudrie, pp. 841-852, copyright 2008 by Information Science Reference (an imprint of IGI Global).
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Chapter 8.3
Offshoring Entertainment and Media to India Alyssa D. Schwender Lions Gate Entertainment, USA Christopher J. M. Leet Intuit Inc., USA
AbstrAct This chapter explores opportunities for the offshoring of assorted processes in the global entertainment and media industry. Currently, this industry is experiencing incredible growth, much of it spurred by the increased digitalization of media production around the world. The rise of digital technology, faster global connectivity, an increased quality of downloads have been the driving factors behind this growth. The filmed entertainment, recorded music, and television networks and distribution sectors of the industry will undergo major technological changes in the coming years. These changes will provide opportunities for entrepreneurs to enter the global media industry. Using venture funding, startups are utilizing offshoring concepts to create a more efficient cost-effective means of doing business. The Asia Pacific market is currently the fastestgrowing region, with India leading the way with offshoring of film functions. The industry will
see a change from large media conglomerates as the sole owners of all media to smaller companies offering services, in which they specialize, to these larger companies, as digital media makes it easily accessible around the globe.
IntroductIon The global entertainment and media industry has changed drastically since the first printing press was invented, arguably the beginning of mass media distribution. This industry now includes video games, recorded music, Internet advertising, filmed entertainment, casino games, Internet access, television networks, and television distribution (Metrics 2.0, 2007). The global entertainment and media industry will continue to grow at a 6.6% compound annual growth rate (CAGR) to $1.8 trillion in 2010 (PricewaterhouseCoopers, 2006).
There are many opportunities to cut costs by moving activities to other places around the world. Specifically, the filmed entertainment sector in the Asia Pacific market will grow significantly in high-definition video, and a lower piracy rate will increase the sell-through video market. The sell-through market is reserved for rentals through stores or the Internet, which has recently become a rapidly increasing trend with companies such as Netflix and Blockbuster’s innovative rental programs. PricewaterhouseCoopers anticipates a global CAGR of 5.3% to $104 billion in 2010 (see Figure 7.1 for global growth potential in all sectors). The recorded music sector of this industry includes album and single sound recordings, music video distribution, licensed digital distribution, and mobile music. Mobile music includes ring tones and ring backs, which are growing in popularity due to the expansion of the cellular phone market to younger generations. In recent years, the recorded music sector of the entertainment industry has seen lower sales due to fewer revenues garnered from CDs and the rise of illegally downloaded music online. However, in 2004, this trend changed as the music sector grew to about $38 billion. Ring-tone spending and expansion in the digital distribution market are the factors that are driving growth the most
(see Figure 7.1). Recorded music spending is expected to rise 5.2% globally to $47.9 billion in 2010 (PricewaterhouseCoopers, 2006). The television networks sector refers to the global industry for any viewing of televised programming. This industry is also projected to grow rapidly around the world with Latin America as the fastest-growing region. Global spending for this sector will increase at a rate of about 6.6% to $227 billion in 2010 (Figure 7.1). The digitalization of this sector will be the main growth driver, as new analog channels, digital broadcasting, and high definition television are increasing in popularity and accessibility. Television distribution includes consumer spending on subscriptions to various services such as satellite, video on demand (VOD), Internet protocol TV (IPTV), and basic or premium cable. In the U.S. market, this includes advertising on local TV stations. The shift to digital distribution methods, as well as increasing average revenue per user (ARPU), will invigorate this sector’s further growth. This sector is projected to grow by 8.3% to $230.3 billion in 2010 (Figure 7.1). This market is somewhat different from other markets worldwide because the cable operators will be investing in infrastructure as a primary method of competition with the satellite carriers’ new IPTV technology. India is projected to
Figure 7.1. Based on information from PriceWaterhouseCoopers and the Ernst & Young Entertainment Report. potential grow th by sector
billions of dollars
250 200 150
2004-05 2010
100 50 0 Filmed Recorded Music TV Netw orks Entertainment sector
TV Distribution
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become the third-largest sector of the Asia Pacific region with about $5.4 billion in revenues (Ernst & Young, 2005). The Asia Pacific market is the fastest-growing area in the global entertainment and media industry with a 9.2% CAGR to attain about $425 billion in 2010, led by rapid growth in China and India (PricewaterhouseCoopers, 2006). In 2005, PricewaterhouseCoopers reported that the Indian entertainment industry grossed approximately $4.65 billion with the potential to increase to $10.46 billion in 2009. In 2004, both Spiderman 2 and The Incredibles were listed in the top five films of the year in terms of revenues generated in India. This demonstrates that India has a strong domestic market as well as international interest (Kapoor, 2005). All of these statistics highlight the potential for investment in different segments of this industry. In many cases, this shift in perspective towards offshoring entertainment processes has become possible because of the advances in information technology. The ability to transfer and process information faster allows for greater opportunities to offshore these processes.
Now we are seeing more entrepreneurs in the entertainment market. Take Digital Music Group Inc., a company that went public in February of 2006 and was acquired by The Orchard. Digital Music Group, Inc. operates as a digital media distributor; it buys only the digital rights to music and sells them via online retail stores such as iTunes. Anders Brown, the past COO of this company, stated that with the digitization, the economies of scale are gone for the major labels, and this allows for more entrepreneurial startups to enter the market (Anders Brown, personal communication, June 14, 2006). This shift in digitalization creates a change in industry standards. Previously, only physical sales were the norm. With the use of the Internet downloading (legally or otherwise) movies, music, and television shows; streaming video and music to handheld electronics; and releasing theatrical and DVD versions of films via the Internet is happening simultaneously and commonly. The entertainment companies must learn to adapt to the growing class of “digital consumers” (Deutschman, 2005) before they lose their customer base to the Internet technology.
motIvAtIons For oFFshorIng dIgItAlIZAtIon oF medIA In the early years of Hollywood, the 1920s through the 1940s, seven major studios controlled the industry because they exerted their influence over the theaters as well as the talent. Then in the 1950s, they were forced to adapt their strategy for market share, as many people were now staying at home to watch their televisions. When a new Hollywood emerged with the actors acting as free agents, six major media conglomerates ruled the industry, as they were combined with TV and cable networks as well as cable and satellite connections (Deutschman, 2005). Currently, this is changing because of the rise of digitalization worldwide. With the newfound digital world, the entertainment industry is changing completely.
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Both production and distribution processes are becoming increasingly digital. Already, 70% of all media production has become digital, providing corresponding opportunity for offshoring to reduce the associated costs. These digital technologies include aspects of all sectors of the media and entertainment industry, including online rental subscriptions and digital streaming in filmed entertainment, as well as licensed digital downloads and mobile music in recorded music. The significantly lower labor rate is a key driver to offshore to India. According to Maha Phillips (2004), a reporter for Global Investor, the Indian entertainment industry is growing at a rate of 25% per year. The majority of companies initially adopt outsourcing concepts for the sole purpose
Offshoring Entertainment and Media to India
of reducing costs (Farrell, 2005). This strategy changes in relation to the company’s business success and the strength of the economy. After attaining cost savings and when the economy has substantial growth, a company considers outsourcing as a way to decrease time-to-market and reduce cycle time (V Mishra, personal communication, April 25, 2007). The sooner the company enters the market, the sooner it can generate potential revenue. Decisions relating to maximizing revenue take precedence over decisions to minimize cost (Gupta, Seshasai, Mukherji, & Ganguly, 2006). As the company expands capacity and revenue opportunities, it can focus on enhancing the quality and reliability of its products in order to establish a stronger foundation for greater growth and to widen the company’s value chain. This strategy applies to entertainment firms too: when they outsource various functions that are now digital, they can focus on more vital activities such as marketing and publicity for the productions. This is a function of what is called the “outsourcing wheel.” The outsourcing wheel involves changing the direct focus of the outsourcer (Kamal Bhadada, presentation to Outsourcing course at the University of Arizona, January 19, 2007). When the economy is doing well, the company concentrates on time-to-market and quality with a fringe benefit of reduced costs. When the economy is doing poorly, the company’s key driver to source is to reduce costs. Table 7.1 demonstrates the shift in focus for companies that outsource,
where “TM” means time-to-market, “Q” means quality, and “$” means cost efficiency.
oFFshorIng In IndIA A feature unique to the Indian region of this industry is Bollywood. This is a combination of the words Bombay (the old name for Mumbai) and Hollywood. Movies in this sector typically have colorful scenery with a greater focus on the drama in the characters’ relationships. Typically, the Bollywood industry produces between 350 to 400 movies a year (Roy, 2001). The trend of offshoring tasks to India has grown to include tasks related to filming, postproduction, and animation. The opportunity in the country is extensive due to the wide availability of skilled professionals in the relevant fields. Many of these professionals contribute their efforts to making the domestic Indian film industry the largest in the world in terms of the number of movies made. Currently, this outsourcing work is done domestically, but producers, distributors, and entrepreneurs have begun to realize there is a huge possibility for growth abroad, particularly in India, for the filmed entertainment sector. In particular, entrepreneurs are finding that the talent abroad should be utilized for more efficient use of venture funds. Venture capitalists are seeing this too and now allowing for offshoring to take place at the beginning stages of the company in
Table 7.1. Based on information from TATA Consultancy Services Year Major Reasons for Outsourcing
Late 1990s
2001-2002
2002-2005
Future
#1
TM
$
$
TM
#2
Q
$
TM
Q
#3
$
$
Q
$
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order for the management team to focus on its core competency (Jonathan Deeringer, personal communication, April 27, 2007). As another consequence, companies now seek to attract highly qualified workers residing around the world at earlier development stages (Ho, Torres, & Vu, 2004). Entrepreneurs see the potential for success in this market in India and wish to outsource a portion of their business processes there. Aside from the talent pool, entrepreneurs and entertainment studios are interested in offshoring to India because it costs about one sixth of what it would cost in areas such as London or the United States (White, 2005). There are currently three identifiable and highly profitable trends in offshoring entertainment processes to India: filming, postproduction, and animation. By injecting better talent earlier in media production processes and avoiding costly and time-consuming logistics involved in moving foreign workers to the U.S., entertainment companies benefit in multiple ways; in addition, there are distinct advantages in letting foreign workers remain in familiar cultural settings. Once the right management team is in place, the question is what to outsource and to whom. This is the next step according to Vish Mishra, senior venture partner at Clearstone; he stated that venture capitalists expect a company to focus on the top two-thirds of the core competency and to outsource the last one-third (V. Mishra, personal communication, April 25, 2007). Even if a company decides to keep most proprietary work in-house, he believes that operations known as “hygiene” functions should be outsourced. Hygiene functions are those that are not part of a business’s core competency, but are needed to keep the business operating. Examples of hygiene functions include human resources, information technology, payroll, and bookkeeping. This reduces the cost of human capital, and may also limit regulatory costs associated with onshore employees.
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•
•
Filming: A movie can be filmed in India at much lower costs than in U.S. or Europe. Many domestic companies are available to assist the foreigners with such tasks as finding a crew and obtaining the proper visas needed to film in the country. These companies consist of locals that are familiar with the Indian film industry and possess experience with the production of movies and other entertainment platforms. There are examples of both discretionary and non-discretionary filming in India. Some movies, such as Gandhi, are necessary to film in India because the story centers on the features of the country itself. Another advantage of filming in India is the availability of beautiful settings and great palaces. However, significant travel time is involved, and it is not worth flying several persons to India for a shoot that takes only a week. Postproduction: Postproduction processes include editing, sound, and special effects. Indian technicians that work in this field are experts in producing and editing special effects for diverse projects including bigbudget blockbusters. Barrie M. Osborne, the producer of popular films such as Lord of the Rings, The Matrix, and Face-Off, has cofounded a visual effects studio with a partner in India; he saw the potential in India to make superlative films, especially when it comes to producing great special effects for such films (Srivastava, 2005). In contrast, Ian White, a reporter for International Business Engineer asserts that “It’s an attractive proposition [the offshoring of postproduction processes] but the likelihood is that most producers and directors in the west would rather stick with the personnel in post houses they know in familiar centers such as London or Paris” (2005). Obviously, Osborne feels otherwise; he has decided that his next film will be based on the book
Offshoring Entertainment and Media to India
•
•
The Alchemist and will have a budget of $100 million. Osborne is optimistic about the future of the special effects and animation markets in India, “with the huge talent pool in the subcontinent, it was possible for international productions to take work from them to produce great films.” His partner, N. Madhusudhanan, shares his enthusiasm for the new venture, and recognizes there is a need for future improvements, “…though Indian animation firms have the skill sets for visual or special effects, they lack the right direction. We are planning to hold a series of training workshops in digital visual effects to develop the talent pool under the guidance and supervision of Osborne” (Srivastava, 2005). Animation: The third principal opportunity for foreign film production companies is in animation. “The total cost for making a full-length animated film in America is estimated to be $100 million to $175 million. In India, it can be made for $15 million to $25 million” (Author unknown, 2006). Since the underlying processes are time-consuming and labor-intensive, it is ideal for them to be outsourced to trained Indian professionals; the studios in the U.S. can then focus on other aspects of the production. Companies such as Sony, IMAX, Viacom, and Disney are beginning to utilize this option for animation. The animation market in India is estimated to reach $950 million by 2009 from the current level of $285 million, according to the National Association of Software and Service Companies (NASSCOM, 2006). Films such as Shrek, Finding Nemo, and Cars have garnered as much money and media attention as non-animated blockbusters, and it will not be long before future full-length films such as these will rely on Indian studios to further enhance their appeal. Crossover movies: The emergence of the crossover movie industry between Bolly-
wood and Hollywood is personified by films such as Bend It Like Beckham, Monsoon Wedding, and Lagaan. These films blend talent resources in India with other resources from countries around the world. They are made with a global audience in mind because the filmmakers believe there will be greater interest if resources from diverse sources are used. The success of the crossover movies can be partially attributed to the growing number of expatriates from India who are located throughout the world, but long for traditions of their homeland. Accordingly, one should consider how effectively these movies are able to target the preferred audiences, particularly in terms of the ability to accurately portray the theme. Overall, the crossover movie sector presents a potential opportunity for Bollywood and Hollywood companies to merge their resources and appeal to a larger market than before. This means that studios must look for prospective partners within the industry to maintain a competitive edge; one such idea is to merge with a foreign entertainment company.
FIlm Industry dAtA And stAtIstIcs The film industry tracks successes and failures by box office numbers that are reported by studios and theaters across the United States. In order to determine whether a film is successful, one must consider domestic and international gross revenues, the production budget, and the profit margins associated with the film; this should be done for films that have been domestically produced and for films that have been outsourced. Table 7.2 shows the raw data collected from cross-referencing the Internet Movie Database and the Numbers Box Office Database; Table 7.2a presents data for productions that have been outsourced while 7.2b shows domestic production revenues. Films
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Table 7.2a. Outsourced Productions Title The Illusionist Capote Armageddon Black Hawk Down The Thin Red Line Dragonfly The Grudge Coach Carter The Truman Show Hostel Mean Std. Dev.
The Prestige 40.00 Infamous 13.00 Deep Impact 80.00 Tears of the Sun 75.00 Windtalkers 115.00 The Mothman Prophecies 42.00 The Ring 48.00 Glory Road 45.00 EdTV 60.00 Turistas 10.00 Mean Std. Dev.
Note: Based on information from the Internet movie database and the numbers
that have been partially outsourced were included in this data analysis, meaning that specific parts of production have been taken offshore such as postproduction editing or special effects. On average, the budget of an outsourced production is less than a domestically produced project (with the exception of big blockbusters such as Armageddon). In order to determine whether this affected the quality or appeal of the film, a t-test was run to determine if there was a statistically significant difference between the means of the profit margins of the outsourced and domestic productions. Table 7.3 displays these results.
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The small t-value shows that there is no significant difference between the two means of the two samples.
Table 7.3. Std. Error Degrees of Freedom t-value
228.28 14.00 0.22
Offshoring Entertainment and Media to India
recorded musIc oFFshorIng Sales of physical copies of music have dropped from 942.5 million in 2000 to 750.4 million in 2005. EMI Group, a major record company, has projected that by 2010, digital music will account for 25% of industry revenues (Goodchild, McNatt, & Merwin, 2007). Record companies are seeking new innovations in order to boost their revenues. One option is to outsource the tasks. EMI Group started this offshoring process in 2004 by moving the manufacturing of its products from Europe and the United States to Japan, Australia, and Canada (McDonough, 2004). As the trend shifts from sales of physical CDs to electronic distribution of music, especially to mobile phones, Indian entertainment specialists are more likely to get involved. Internet technology allows for faster downloads and easier global communication, thereby making music production more accessible to outside companies and individuals.
televIsIon netWorKs And dIstrIbutIon oFFshorIng According to Benson (2006), in-house orders for shows are gradually declining. This gives more incentives to independent producers. Since so much of media production is digital and can be easily outsourced, television networks can offshore appropriate parts of the endeavor. New Delhi Television (NDTV), an Indian television network, has created a joint venture with Genpact, a leading business process outsourcing (BPO) company, to offer media offshoring services to companies around the world. The main goals are to digitize archives, logging, metatagging, graphics, and set design for media outsourcers (PricewaterhouseCoopers, 2006). The television distribution industry will also grow rapidly, based in part on the development of Internet protocol TV (IPTV), which is a digital television service that is delivered over a network
infrastructure. For residential users, this service is generally bundled with other Internet services, and is combined with video on demand (VOD). According to the Metrics 2.0 site (2006), there is currently a 92.5% CAGR that will lead to an overall market size of $39.1 billion by 2011. “IPTV promises to add interactivity, personalization, integration of voice and data and value-added services to television entertainment,” said Frank Dickson, a principal analyst for multimedia content services at iSuppli (a global leader in technology value-chain market intelligence).
IntellectuAl property When work is outsourced to outside firms, even on a domestic basis, there is always the possibility that crucial ideas can be leaked out or misused. Also, local entertainment technicians may opt to derive personal advantage by taking ideas elsewhere. (This is a situation that can occur even when the work is not outsourced.) The Indian government has been actively working to reduce the probability of such occurrences as part of its efforts to encourage the entertainment offshoring market based partly on the fact that it provides a valuable link to developed nations. Many venture capitalists do not encourage outsourcing during the first 2 years of operation because the company’s activities consist of controlling operations and finding customers (J. Kim, personal communication, April 2, 2007). In the company’s formative period, some venture capitalists are nervous about disclosing processes that are valuable company intellectual property. For others, the fear of theft of intellectual property is less important because of the laws protecting these rights and the poor reputation that a raiding company acquires by improper behavior (V. Mishra, personal communication, April 25, 2007). Further, venture capitalists have an already existing network of relationships that serve to lower the probability of illegal practices.
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Intellectual property is also sacrificed through piracy. This is prevalent around the world. Many companies are currently working with the governments in each country in the Asia-Pacific region and elsewhere to develop stricter regulations to battle illegal distribution of films, music, and other media products, but the ultimate objective is difficult to accomplish, considering how much of production and distribution is now digital. The problem of piracy is prevalent in the U.S. and Europe too. For example, Brandon Drury and Luke Sample operated Web sites that enabled users to download movies and other media productions illegally. The bigger player in this case is Google, which allegedly allowed these two defendants to buy advertising space on the Web site and sold them search words such as “bootleg movie download,” “pirated,” and “download harry potter movie.” The illegal Web sites relied solely on the advertising provided by Google to drive their sales because they received a profit when someone would click on their advertising (Kamitschnig & Angwin, 2007). While Google has yet to be accused of engaging in illegal activity, media conglomerates such as Disney, Time Warner, and Viacom are upset with Google’s business practice of allowing Web sites to advertise pirated material on Google’s site. As companies opt for offshoring different media production processes, some observers believe that the danger increases, as there is less protection on this property, giving Web sites such as Google easier access to their material. Google’s easy accessibility has proven to affect more than just U.S. and European entertainment markets. Recently, Bollywood movies have been offered as free downloads via Google’s video application. If the situation was reversed and Hollywood films were being downloaded for free on Google, the perpetrators would be punished for copyright infringement due to the legal standards in today’s filmed entertainment. However, Indian film companies do not have the same legal representation as those in Hollywood do, which
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means that copyright infringement policies are much different for Bollywood films, and are not getting the attention they deserve. While it may be argued that these films are available on other peer to peer (P2P) networks and Google is not the only Web site that provides this service, it is important to remember that by offering them on Google Video, it provides easier access and allows more people to illegally download these titles due to the Web site’s widespread international influence. This greatly affects the international Bollywood markets in countries such as the U.S., Canada, and the UK, where high-speed Internet is cheaper, allowing faster downloads from public sites (Ravneet, 2006). Currently, it is more difficult to find free movies to download on these sites, which suggests that applications such as Google Video are working to remedy the situation. However, it is still possible to attain certain parts of Bollywood movies such as the second half or an hour clip of the film. This is yet another example of how the further digitalization of media allows free and easy access to more people around the world. In today’s digital society, it is easy to download movies, music, and television shows onto one’s laptop, handheld device, or other portable electronics, both legally and illegally. Accordingly, more research is needed to develop new technological and business approaches to combat piracy and to ensure equitable returns to the developers of the intellectual property. As an example, Morgan Freeman is teaming with Intel to launch Clickstar, a company that will distribute movies to computers at the same time that they are released in theaters; he plans to make this technology easier to buy than to pirate (Deutschman, 2005). Deutschman believes that companies such as Yahoo and Google will be the winners in this new digital media age because in the past 10 years, they have “help[ed] us search the vast array of digital content that’s out there, find what we want, [bought] it when it’s for sale, and [got] it onto our screens and hard drives” (2005).
Offshoring Entertainment and Media to India
Overall, piracy is a worldwide phenomenon, and even leading companies such as Google can be held accountable for fostering illegal downloading activity. Therefore, it is imperative for the larger media conglomerates, should they wish to maintain their current market share, to nurture and to adapt new information technologies that include adequate protection of their intellectual property.
evolvIng busIness models The evolving paradigms of business process outsourcing (BPO) and knowledge processing outsourcing (KPO) are changing the way the sponsor studio in the U.S. handles and shares risk with the offshoring host company in India. Sometimes the company and vendor buy equity in each other (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). This is done as an incentive: if the host company succeeds, the sponsor succeeds too. In the early days of outsourcing, a sponsor company would contract with the host company by task or project. The BPO host company would then, for example, handle the postproduction aspects of the film and earn the contracted fee without the need to work together in the future. With the desire to establish continuing working relationships, new business paradigms are evolving. With software development and use, for example, a BPO supplier develops and owns the animation software, then licenses the software, and charges a flat monthly or yearly rate to the company in the U.S. The model has changed further now, allowing a customer (offshoring company) to be charged for exactly what the offshoring company uses. This business model charges the customer for each use, called a “pay-per-drink” model (Kamal Bhadada, presentation to Outsourcing course at the University of Arizona, Jan 19, 2007). In this way, the BPO supplier retains a continuing relationship and becomes more integrated into the sponsoring company. Further, the BPO-sourcing company
relationship allows for the sourcing company to produce more films, resulting in more sales and better usage of the business process created by the BPO supplier (Vivek Shivpuri, presentation to Outsourcing course at the University of Arizona, Feb 2, 2007).
Future outlooK As mentioned, the entertainment industry has adapted its strategies to maximize the benefits derived from IT’s evolution. Historically, the entertainment industry has shown its resilience by embracing new technological advances leading to silent movies, “talkies,” and television. It is now adjusting further to digital and highdefinition forms of distribution of entertainment media. Clearly, the digital means are changing the entertainment industry (Eliashberb, Elberse, & Leenders, 2006). The digital age is allowing entrepreneurs to enter the market and capitalize on entertainment industries such as Barrie Osborne (Srivastava, 2005). IT creates a new level of thought; a shift away from development of IT to its adoption by entertainment companies as institutional standards. The future trend is to understand the new development and consumption process involved within the entertainment industry. Without IT, the entertainment industry would be incapable of communicating, distributing, and using on-demand distribution lines; the use of IT makes possible the discovery of a wealth of global talent that not only develops the infrastructure for, but also revolutionizes the process of how the world does business. An area that needs greater immediate attention is the creation of new technological solutions that will enable rapid dissemination of music, films, and other types of entertainment services, as well as ensure adequate economic returns to the creators of the intellectual property.
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conclusIon While there are some risks associated with offshoring entertainment practices, foreign production studios will increasingly benefit from contracting business processes and other services to India. In coming years, the global entertainment industry will see a substantial increase in the amount of services that are outsourced on an offshore basis, especially to India and other countries that can offer talented persons at lower costs than in the U.S. and Europe. The offshoring of entertainment and media tasks is taking place because of rapid growth in information technologies that enable such work to be transferred from one country to another, in fact from one continent to another, on an instantaneous basis and at insignificant costs. This applies to work-in-progress too. Further research in information technologies will lead to the adoption of more advanced workflow models, such as the notion of the 24-Hour Knowledge Factory, that enable work to be performed on knowledgebased tasks on a round-the-clock basis (Gupta et al, 2006). By allowing films and other types of entertainment endeavors to be completed in much shorter periods of time, studios will acquire a major competitive advantage over other companies that continue to rely exclusively on more traditional work models.
Future reseArch There are several sectors within the entertainment industry that have begun the process to outsource and will be making headline news in the future. The journalism sector, another part of the global media industry, is looking to increase efficiency while decreasing costs. Reuters, in 2004, became the first major news organization to cover stories about Wall Street from India. The company planned to employ between 1,200 and 1,800
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workers in the foreign subsidiary by mid-2006 (Chepesiuk, 2005). There has been resistance to this in the form of strikes to fight the movement of U.S. jobs abroad, but it is difficult to fight the evolution of outsourcing. Digitalization of media allows for easier flow of communication via the Internet. More firms are vertically integrated, that is, producing media and advertising that media. The task is becoming daunting as a global strategy is becoming more common for small and large businesses. Therefore, marketing organizations in foreign countries are gaining new clients to develop marketing media that will position ones brand in the U.S. and assist with a global strategy. Companies will continue to focus on core-competencies and outsource the bottom one-third of tasks. American Express and Allstate employees are mainly trained to perform other functions, and outsourcing routine activities, such as customer database maintenance and the upkeep of an online store, provides more time to focus on improving their core functions (McGovern & Quelch, 2005). In the near future, more firms will be outsourcing marketing functions to more specialized firms in the field to increase time-tomarket and quality while reducing costs. Lastly, another area to look into is the technological changes that allow for ease of transfer of data. MJPEG2000 or MJP2 (Motion JPEG2000) is becoming the digital film standard (Muramatsu, Ishida, & Kikuchi, 2002). It is the ability to compress a motion file (video) into a small file size while losing less video quality than past standards. This will lead to changes in video distributions on mobile phones, PDAs, and the ability to stream higher quality of video online (Fukuhara, Katoh, Kimura, Hosaka, & Leung, 2000). The IT presented has been developed and will play a role within many industries besides the entertainment. Look for technology to increase the likelihood of outsourcing and evolution of business structures and business models.
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reFerences Benson, J. (2006). Outsourcing the fall schedule. Broadcasting & Cable, 136(2), 18. Chadha, G., & Kumail, N. (2004). Outsourcing learning: Choosing the model for success. Retrieved Feb 1, 2007, from http://www. clomedia.com/content/templates/clo_webonly. asp?articleid=534&zoneid=78 Chepesiuk, R. (2005). Outsourcing the western media. Retrieved August 30, 2007, from http:// www.globaljournalist.org/magazine/2005-1/ outsourcing.html Deutschman, A. (2005). The new wave. Fast Company, 101, 50-59. Dibbern, J., Goles, T., Hirschheim R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. Advances in Information System, 35. Eliashberb, J., Elberse, A., & Leenders, M. A. (2006). The motion picture industry: Critical issues in practice, current research, and new research directions. Marketing Science, 25, 638-661. Epstein, E. J. (2006). Northern expenditure. The Hollywood Economist, February 13. Retrieved June 18, 2007, from http://www.slate.com/ id/2136064/ Ernst & Young Organization. (2005). News release: Ernst & Young entertainment report, 1-3. Retrieved May 9, 2007, from http://www.ey.com/global/download.nsf/India/ FastForwardPressRelease/$file/Fast%20Forward%20Mumbai%20Release.pdf
Aug 30, 2007, from http://ieeexplore.ieee.org/ iel5/7221/19473/00899225.pdf?tp=&isnumber= &arnumber=899225 Goldsmith, B., & O’Regan, T. (2005). The film studio film production in the global economy. Lanham: Rowman & Littlefield Publishers, Inc. Goodchild, H., McNatt, R., & Merwin, P. (2007). Record labels need a digital hit. Business Week Online. Retrieved May 21, 2007, from http://www. businessweek.com Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007, April). Offshoring: The transition from economic drivers toward strategic global partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, 5(2). Hershey, PA: Idea Group Publishing. Ho, L., Torres, M., & Vu, P. (n.d.). Dynamics of outsourcing: Offshoring, insourcing, and a case study—India. Retrieved Jan 9, 2006, from http://www.bangalore.com/ ban%5CDynamicsofOutsourcing.pdf India grows increasingly animated as graphicsheavy movie houses outsource. Financial Times, 1. Retrieved October 9, 2006, from Academic Search Premier Database, University of Arizona Library. Internet Movie Database. Retrieved November 18, 2006, from http://www.imdb.com Kamitschnig, M., & Angwin, J. (2007). Media firms say Google benefited from film piracy; accusation cloud talks on copyright licensing; imposing new controls. Wall Street Journal, February 12, A-1.
Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of Management Studies. 32(3).
Kapoor, D. (2005). The Indian entertainment industry: An unfolding opportunity. Media & Entertainment Insights, 1-8.
Fukuhara, T., Katoh, K., Kimura, S., Hosaka, K., & Leung, A. (2000). Motion-JPEG2000 standardization and target market. Retrieved
McDonough, M. (2004). Downstate city to lose jobs in EMI outsourcing. Chicago Sun Times. Retrieved May 21, 2007, from http://findar-
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ticles.com/p/articles/mi_qn4155/is_20040401/ ai_n12545952 McGovern, G., & Quelch, J. (2005). Outsourcing marketing. Harvard Business Review. Retrieved August 30, 2007, from http://www.tiama-fr.com/ Tiama_Blocnote_fichiers/HarwardBusinessRev. pdf Metrics 2.0: Business Market & Intelligence. (n.d.). IPTV rising: 92% CAGR to 103 million in 2011. Retrieved May 9, 2007, from http://www. metrics2.com/blog/2007/04/04/iptv_rising_92_ cagr_to_103_million_in_2011.html Metrics 2.0: Business & Market Intelligence. (n.d.). Retrieved May 9, 2007, from http://www. metrics2.com/blog/2006/09/19/global_entertainment_media_industry_will_grow_to_1.html Muramatsu, S., Ishida, T., & Kikuchi, H. (N.D.). A design method of invertible de-interlacer with sampling density preservation. ICASSP IEEE, 4. Retrieved Aug 30, 2007, from http://ieeexplore. ieee.org/xpl/freeabs_all.jsp?arnumber=1004611 National Association of Software and Service Companies (NASSCOM). (n.d.). Retrieved May 1, 2007, from http://www.nasscom.in The numbers: Box office data, movie stars, idle speculation. (n.d.). Retrieved June 18, 2007, from http://www.the-numbers.com Phillips, M. K. (2004). Backing Bollywood. Global Investor, 171, 8. PricewaterhouseCoopers. (2006). PricewaterhouseCoopers says entertainment and media industry in solid growth phase, will grow 6.6% annually to $1.8 trillion in 2010. Retrieved May 9, 2007, from http://www.pwc.com/extweb/ncpressrelease.nsf/docid/283F75E5D932C003852 57194004DDD0A PricewaterhouseCoopers. (2006). Global entertainment and media outlook: 2006-2010—Industry preview. Retrieved May 9, 2007, from http://
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www.pwc.com/extweb/industry.nsf/docid/CF0A 9E084894A5A85256CE8006E19ED?opendocum ent&vendor=#FE Ravneet. (2006). Google Video Opens eases Bollywood piracy. Retrieved August 22, 2007, from http://www.emergintex.com/blog/?p=133 Roy, S. (2001). Coming to America. A Magazine of Art and Culture, 1(1). Smith, E. (2007). Sales of music long in decline plunge sharply. Wall Street Journal, A1. Retrieved May 14, 2007, from http://online.wsj. com/article_email/SB117444575607043728lMyQjAxMDE3NzI0MTQyNDE1Wj.htm Srivastava, S. (2005). India animated by special effects outsourcing. Asia Times Online. Retrieved November 18, 2006 from http://www.atimes. com White, I. (2005). Sixth sense. IBE: International business engineer, 20-21.
AddItIonAl reAdIngs Adiga, A. (2004). The next big draw for India. Time South Pacific, 27, 38-39. Anderson, N. (2006). An introduction to IPTV. The art of technology. Retrieved August 30, 2007, from http://arstechnica.com/guides/other/ iptv.ars/2 Bhushan, N., Sutherland, M., & Butler, S. (2007). Business is blooming. Billboard, 119(8), 29-33. Dorfman, R. (2006). Venture capitalists warm to Hollywood for wrong reason. Venture Capital Journal, 46(1), 47-48. Ebenkamp, B. (2007). Hollywood redirects licensing; Snoopy couture is coming. Brandweek, 48(26), 8.
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Eskicioglu, A. M. (2003). Protecting intellectual property in digital multimedia networks. IEEE Computer Society. Retrieved May 8, 2007, from http://ieeexplore.ieee.org/iel5/2/27278/01212689. pdf?tp=&isnumber=&arnumber=1212689 Fisher, L. (2006). The big picture. Accountancy, 137(1354), 44-46. Gallaugher, J., & Stoller, G. (2004). Software outsourcing in Vietnam: A case study of a locally operating pioneer. The Electronic Journal of Information Systems in Developing Countries, 17. Retrieved August 31, 2007, from http://www. is.cityu.edu.hk/research/ejisdc/vol17/v17r1.pdf Grant, C. (2005). Outsourcing production and design will help to cut costs. Music Week, June 11, 22. Retrieved August 30, 2007, from http:// ezproxy.library.arizona.edu/login?url=http:// search.ebscohost.com/login.aspx?direct=true& db=bth&AN=17330939&site=ehost-live Hyman, P. (2005). Offshoring: The good & bad news. The Hollywood Reporter. Retrieved August 30, 2007, from http://www.hollywoodreporter. com/hr/search/article_display.jsp?vnu_content_id=1001178955
o?contentType=Article&hdAction=lnkpdf&con tentId=850009 Loos, J. (2005). Media and entertainment: New frontier for outsourcing. TVB Europe, 14(9), 52. On the Road Productions. (2007). Filming in India. Retrieved August 30, 2007, from http://www. otrproductions.com/?page=filminginindia Outsource2India. (2007). Outsourcing film services to India. Retrieved August 30, 2007, from http://www.outsource2india.com/creativeservices/film/default.asp Palmer, I., Dunford, R., Rura-Polley, T., & Baker, E. (2001). Changing forms of organizing: Dualities in using remote collaboration technologies in film production. Journal of Organizational Change Management, 14. Retrieved August 20, 2007, from http://www.emeraldinsight.com/Insight/V iewContentServlet?Filename=Published/EmeraldFullTextArticle/Pdf/0230140205.pdf Pike, G. H. (2007). Google, YouTube, copyright, and privacy. Information Today, 24(4), 15-16. Pomerantz, D. (2006). The digital redemption. Forbes, 178(1), 146-148.
IndianTelevision.com. (2003). India can be entertainment-outsourcing hub. Retrieved August 30, 2007, from http://us.indiantelevision.com/ headlines/y2k3/nov/nov188.htm
Seshasai, S., & Gupta, A. (2007). The role of information resources in enabling the 24-Hour Knowledge Factory. Information Resources Management Journal, 20(4), 105-127.
Khanna, P. (2007). Made-in-Hollywood Bollywood films get off the mark. Retrieved August 30, 2007, from http://www.indiaenews.com/bollywood/20070819/66224.htm
Subramanian, A. (2007). Indian animation coming of age. Business Today, 16(16), 20.
Kusek, D., & Leonhard, G. (2005). The future of music: Manifesto for the digital music revolution. Boston: Berklee Press. Lonsdale, C., & Cox, A. (2000). The historical development of outsourcing: The latest fad? Industrial Management and Data Systems, 100, Retrieved December 11, 2006, from http://www. emeraldinsight.com/Insight/viewContentItem.d
Subramanian, A. (2007). IT’s in the picture. Business Today, 16(5), 64-66. Tabesh, A., Bilgin, A., Krishnan, K., & Marcellin, M. W. (2005). JPEG2000 and Motion JPEG2000 content analysis using codestream length information. Computer Science: Data Compression Conference IEEE. Retrieved Aug 31, 2007, from http:// ieeexplore.ieee.org/iel5/9633/30443/01402194. pdf?arnumber=1402194
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Tan, C. (2007, June 21). India: That’s entertainment. Global Technology Forum. Retrieved August 30, 2007, from http://globaltechforum. eiu.com/index.asp?layout=rich_story&channeli d=4&categoryid=30&title=India%3A+That%92 s+entertainment&doc_id=10954
Thurston, R. (2006). BT awards $1 billion offshoring contract. Business Week Online. Retrieved August 30, 2007, from http://www. businessweek.com/globalbiz/content/dec2006/ gb20061222_112508.htm?chan=search
This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 4, edited by M. Khosrow-Pour, pp. 25-40, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.4
Transformation from the Information Age to the Conceptual Age: Impact on Outsourcing A. B. Patki Government of India, India Tapasya Patki University of Arizona, USA Mahesh Kulkarni Center for Development of Advanced Computing, India
AbstrAct The previous decades have seen the emergence of the Information Age, where the key focus was on knowledge acquisition and application. With the emergence of cross-domain disciplines like outsourcing, we are witnessing a trend towards creative knowledge, rational application, and innovation. We are now progressing from an era that was information-dependent towards the era that revolves around concept development. This age, referred to as the Conceptual Age, will be domi-
nated by six new senses--design, story, symphony, empathy, play and meaning--creating a need to diverge from the current reliance on linear and sequential algorithmic practices in outsourcing and to adopt cognition based engineering and management approaches. This article lays the foundation for offshore engineering and management (OEM) and discusses estimation issues in OEM that have their roots in software engineering. Also, this article identifies the limitations of the current methodologies from an outsourcing point of view, and delineates how they can be deployed effectively for an outsourced environment.
Transformation from the Information Age to the Conceptual Age
IntroductIon Professional outsourcing relies greatly on the attitude, innovation, and creative instincts of the taskforce involved. Pink (2005) highlights the transformation of the society from the Information Age to the Conceptual Age from the psychological point of view, and emphasizes that six new senses will play an important role in the Conceptual Age. While design, play, and meaning will be the prime senses for corporate outsourcing, story, symphony, and empathy will be the potential senses for personal offshoring (Gamerman, 2007). The development of the working components of the six parameters of Conceptual Age will occur by cultivating the skill set and education (Johnson, 2006). Corporate outsourcing will be driven by these conceptual components. The need for reorienting education has been justified for future success (Greespan, 2004). The criteria for economic success and increased productivity have been broadly classified as creativity, artistry, cultural diversity, and technical experience. Oversupply, outsourcing, and automation are perceived to be the defining characteristics of the evolving state of economy (Wikipedia, 2007). From the outsourcing perspective, softwareintensive systems will play a significant role in a variety of projects, creating the need for a new strategy to improve the dependability and trustworthiness of the software. This motivates the creation of offshore engineering and management (OEM) as an emerging discipline. The primary forces driving the emerging OEM trends are as follows: i.
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The competition between the left brain and the right brain will pose new problems of demands, supply, and satisfaction in the conceptual age (Pink, 2005). This will lead to greater emphasis on cognitive aspects of information processing and less dependence on routine conventional data processing
ii.
ii.
areas as manifested in the outsourcing activities of the current decade, like call centers, medical transcriptions, and claims processing. Personal offshoring will boost the e-service sector to meet the demand for new variants of existing products and services. Corporate outsourcing will be directed toward massscale and bulk capacity products through reoriention of knowledge workers (Lumb, 2007). This trend is imposed by the era of abundance and is mandated for the coexistence and survival of companies. The phenomenon of software aging is important in the context of cognitive support for outsourcing in the conceptual age. The detection of the onset of software aging can help to prevent dynamic failure events. Multivariate state estimation techniques (MSET) have been investigated for real-time proactive detection of software engineering mechanisms in operating environments involving multiple CPU servers (Gross, Bhardwaj, & Bickford, 2002)
oFFshore engIneerIng And mAnAgement (oem) OEM proposes the systematic and structured application of scientific, engineering, and management principles, through the use of proactive software engineering and information technology approaches, in the business process outsourcing arena. Proactive software engineering can be defined as a framework that extends the scope of conventional software engineering by incorporating additional concepts of fault tolerance, graceful degradation, software aging, adaptability, usefulness of software (pre/post-development) documentation, user manuals, and measure of module level machine intelligence quotient (MIQ) (Patki, 2006; Patki & Patki, 2007). MIQ is a measure
Transformation from the Information Age to the Conceptual Age
of autonomy and performance for unanticipated events and links the infrastructural needs of an outsourcing institution with its throughput. MIQ differs significantly from other indices like control performance, reliability, and fault-diagnosis (Park, Kim, & Lim, 2001). The use of a rule oriented approach for workflow control and design consistency checking has been illustrated in DPSSEE (Deng et al., 2003). The approach of semantics of software project for perception and cognition is broadened to introduce logic rules to all levels of the software life cycle. DPSSEE has limitations while addressing outsourcing projects. In the past, software engineering concentrated on the analytical philosophy and rarely addressed the issue from the viewpoint of design synthesis. Typically, problems were framed in terms of being algorithmically solvable instead of being intuitionally developed. For example, we have been using man-months as a measure to estimate the software development effort, neglecting to look at issues of manpower strength and profile of a software development house. It is still difficult to do systematic analysis to determine which software development project can execute effectively and which cannot, even with deployment of additional manpower. First generation outsourcing efforts, such as ones related to call centers and medical transcriptions, belonged to the automation class (algorithmic, semistructured or reasonably structured); they are primarily left brain oriented—logical, algorithmic, and analytical. These tasks were adaptable and could be effectively handled by a Web-based approach. The e-service oriented outsourcing in the conceptual age will be heavily cognitive informatics loaded. Cognitive informatics (Van Eck, Wieringa, & Gordijn;Wang, 2007) is motivating the move from the physical layer to the abstract level along the lines of the artificial mind system (Hoya, 2005). This leads to a corresponding shift in computer science with greater emphasis being placed on logical, data centric,
and algorithmic styles as well as on language and thinking modules. Nonlinear, intuitive, and holistic activities will gain importance, in place of sequential, logical, and analytical activities (Lumb, 2007; Pink, 2005). In the information age, the prevailing culture was to evolve business avenues by deploying computer systems and establishing information technology (IT) practices. Carroll (2007) identifies the concerns of engineering executives in outsourcing decisions and discusses how costs can be driven out of engineering analysis and decisions. After the board of directors opts for outsourcing, it is the engineering executives who have to ensure that the outsourcing partner will actually deliver what is promised. The situation is complicated, as engineering executives must control work quality, cost, and schedule in a situation that they cannot directly see. In the absence of adequate theory and practice of OEM, engineering executives rely on trust. Such issues cannot be satisfactorily handled with conventional software engineering practices or thru legal procedures. The current methodology of directly extending traditional software engineering techniques, such as the capability maturity model, to outsourced information technology projects, suffers from several drawbacks, as highlighted later in this article.
eXtendIng soFtWAre engIneerIng prIncIples to oem Offshore development has, so far, received inadequate attention in the software engineering literature (Meyer, 2006). The establishment of a large, complex BPO system that relies on a multiplexed architecture (Patki & Patki, 2007) calls for expertise from many different domains of engineering and requires a diverse, distributed team of people working simultaneously to ensure a stable operation. Such a team needs to
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be configured to support two distinct types of activities: (i) sequential, logical, and analytical activities; and (ii) nonlinear, intuitive, and holistic activities. The existing workforce must be reoriented to prepare for the cognitive challenges of the conceptual age outsourcing, in place of the watertight compartment philosophy of the past (Robert, 2006; Van Eck et al., 2005). In the subsequent sections, we discuss the limitations of existing software effort approaches in the context of outsourced projects.
software effort estimation The estimation of resources, cost, and schedule for a project requires experience, access to good historical information, and the courage to make quantitative predictions when qualitative information is all that exists. Cost models have a primary cost factor, such as size and a number of secondary adjustment factors or cost drivers. Cost drivers embody characteristics of the project, process, products, and resources that influence effort. Boehm derived a cost model called COCOMO (constructive cost model) using data from a large set of projects at TRW. COCOMO is based on inputs relating to the size of the system and a number of cost drivers that affect productivity (Pressman, 2001; Sommerville, 2000); the model takes the form:
The Intermediate COCOMO model computes effort (E) as a function of program size and a set of cost drivers: E = a (KLOC) b x EAF
The effort adjustment factor (EAF) is calculated using 15 cost drivers. The cost drivers are grouped into four categories: product, computer, personnel, and project. The product of all effort multipliers is the EAF. The factors a and b used in Basic and Intermediate versions of COCOMO are numeric quantities (Aggarwal & Singh, 2005). The Advanced COCOMO model computes effort as a function of program size and a set of cost drivers weighted according to each phase of the software life cycle. The advanced model applies the intermediate model at the component level, and then a phase-based approach is used to consolidate the estimate. The four phases used in the detailed COCOMO model are: requirements planning and product design (RPD); detailed design (DD); code and unit test (CUT); and integration and test (IT). Each cost driver is broken down by phase as in the example shown in Table 1. The use of COCOMO for analyzing outsourcing projects is hampered by two factors: i.
E = aSb x EAF
ii. where E is effort in person months, S is size measured in thousands of lines of code (KLOC), and EAF is an effort adjustment factor (equal to 1 in the basic model). The factors a and b depend on the development mode. The basic COCOMO model computes effort (E) as a function of program size: E = a (KLOC) b
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as opposed to conventional software development, the BPO environment calls for distribution of work force and infrastructure; some of the characteristics of the outsourced environment and the BPO methodology are inherently non-linear in nature.
Since the current set of cost drivers of COCOMO model does not cater to these non-linear factors, one approach would be to add a new set of parameters that are related to offshore development and deployment of software, including infrastructure and country specific parameters like cyber crime index (CCI), customer satisfac-
Transformation from the Information Age to the Conceptual Age
Table 2. Comparison of information centric and concept centric approach Discerning Factor
Information Centric (COCOMO)
Concept Centric (PROPOSED)
Modus Operandi
Sequential, Linear
Simultaneous, Non-Linear
Parameters Considered
Cost Drivers, which are primarily static (numeric)
CIS, CSR, and CCI which are dynamic (vector)
Concluding Methodology
Computational
Inferential
Resources Utilized
Databases, Files
Knowledge Base
Retrieval Algorithm
User Query Oriented
Pattern Oriented
tion rate (CSR) and civil infrastructure status (CIS) (Patki & Patki, 2007). Table 2 characterizes and compares existing COCOMO model and the additional features needed for the OEM environment. One study shows that linear scaling of existing COCOMO for outsourced effort estimation models may not be an effective solution (Patki, 2006).
capability maturity model Some observers attribute the success of outsourcing projects to the capability maturity model (CMM). CMM is a mixture of process and organization assessment schemes. The Software Engineering Institute (SEI) at Carnegie Mellon University conceived the CMM certification methodology, under the aegis of funding from the U.S. government. However, recent studies reported by Kitchenham, Jeffery, and Connaughton (2007) have questioned the myth of the direct relation-
ship between CMM and the success of software projects. The capability maturity level is a measure of the quality software development ability as per time schedule. However, it is erroneous to assume that all Level 2 organizations develop better software than Level 1 organizations. Using corporate project data, it has been shown that software engineering metrics can be misleading and that software measures are often not as useful as practitioners hope. The cited study concludes that it is inadvisable to characterize productivity, either for monitoring or prediction purposes, using mean and standard deviation techniques; further, one should avoid making any estimates. Pfleeger, Jeffery, Curits, and Kitchenham (1997) reports problems from the use of software metrics without keeping the development goals in mind; they also discuss the applicability of CMM. The role of third party (ESSI consortium) assessment is considered in Kitchenham, Linkman, and Law (1997). The applicability of CMM in outsourced environment is further eroded when
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one analyzes issues related to the product line concept for outsourcing (Patki et al., 2006). A shared set of software assets, including the software architecture, is the basis for the product line. The potential customer association for product line could be along the lines of Microsoft’s Government Security Program, where trust is established as a policy and principle of business. So far, such an integrated approach of customer association and product line methodology has not been effectively deployed in the context of outsourcing. Software product families can be considered to be related products that make extensive reuse of available components. The dynamic object roles are useful, both for conceptual modeling and implementation. The links among the objects and roles are used for conceptual modeling of business applications (Subieta, Jodlowski, Habela, & Plodzien, 2003). While extending the scope of outsourcing to production of such product family, the need has arisen to augment the existing software engineering theory (Desouza, 2003; Keung, Jeffery, & Kitchenham, 2004).
evIdence bAsed soFtWAre engIneerIng Evidence based software engineering (EBSE) is based on the premise that software engineering will advance by moving away from its current dependence on advocacy and analysis. The scope of the current cost models that primarily focus on activities of a single system has been expanded in the context of system-of-systems (SoS) development by researchers like (Lane & Valerdi, 2007). The limitations of using axioms in software metrics are discussed in the context of incorrect assessment of the validity of some software measures by Kitchenham and Stell (1997). EBSE lays emphasis on empirical based approaches for decision making and for evolving new practices (Kitchenham et al., 2004). The five
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steps involved in EBSE (Dyba, Kitchenham, & Jorgensen, 2005) approach utilize a continuously updated knowledge based mechanism. EBSE techniques for identifying, producing, combining and accumulating evidence, including metadata, are directly relevant for outsourcing (Jorgensen et al, 2005). In order to increase its relevance further, EBSE needs to be expanded to incorporate fuzzy logic inference techniques. Parameters like Cyber Crime Index (CCI), Customer Satisfaction Rate (CSR) and Civil Infrastructure Status (CIS) help to determine the trustworthiness of a particular unit, and the progress it has made towards attaining its targets. Independent agencies that employ EBSE principles should be setup to provide portals for assessment and periodic updates for these parameters, and the workforce should be retrained for such new jobs (Huitt, 2007; van Eck et al, 2005). Unlike Boehm’s cost driver multipliers for product, computer, personnel, and other project attributes that are more static in nature, the EBSE methodology must provide for continuously updated values for CCI, CIS, and CSR, using inference-oriented models. The five-step approach of EBSE can be applied here (Dyba, Kitchenham, & Jorgensen, 2005; Patki, 2006). Overall, we propose the use of a EBSE approach for CCI, CIS, CSR, and other evolving parameters, in place of COCOMO, CMM, and other conventional models. The factors like software aging mechanism (Gross et al., 2002) must be integral part of the software effort estimation process.
ebse ApproAch For outsourcIng contrActs Outsourcing contracts are developed for legal assurance and litigation based settlements. Reifer (2004) highlights that it is necessary to avoid legal conflict through contract administrations. The contractual relationship is a subjective in-
Transformation from the Information Age to the Conceptual Age
Table 3. Significant factors for EBSE based contract Description
Conventional Contract
EBSE Based Contract
Focus
Text, using standard vocabulary and grammar
Context and Trust, using mapping techniques after evidence collection
Basic Units
Clauses (for analysis)
Information (for synthesis)
Review
Mid Term Review in a faultdetection mode, projects unacceptability
Mid Term Review in fault-correction mode, projects acceptability and supports furtherance
terpretation of individual contract clauses, as text comprising of vocabulary and grammar in the psychological sense. In this context, fulfilling contractual obligations is a necessary but not sufficient condition for outsourcing projects, especially in mission-critical situations using COTS methodology with MIQ features (Patki & Patki, 2007). In the past, the study of outsourcing legal contracts had been focused on the customer perspective (Koh, Ang & Straub, 2004). We need to extend the scope of these contracts to include design, empathy, and meaning (Pink, 2005) as psychological dimensions, in order to establish context and trust in the entire outsourcing system. Table 3 highlights the major differences. The principles of Kansei engineering can be extended to drafting contractual documents for outsourcing applications. Kansei engineering refers to the translation of consumers’ psychological feeling about a product (like a digital contract) into perceptual design elements (Coleman, Pearce, Lottum, 2005). Kansei engineering is a step towards supporting the six-sense conceptual age philosophy in the outsourcing domain; significant scope exists for integrating the Kansei techniques with EBSE methods (University of Aizu, 2005).
conclusIon In the near future, outsourcing will promote innovation, shorten the research and development cycle, and prevent the deployment of overengineered architectures. The growing use of
proactive software engineering techniques in the outsourcing domain will lead to greater use of Evidence Based Software Techniques (EBST) and the new discipline of offshore engineering and management, signifying the move from the existing information centric approach to a new concept-centric methodology that emphasizes cognitive content. These are in the areas of providing cognitive support using proactive software engineering around EBSE methodology to integrate seamlessly the operations of outsourcing industry.
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International Symposium on Multimedia Software Engineering (pp. 124-1331). Desouza K. C. (2003). Barriers to effective use of knowledge management systems in software engineering. Communications of the ACM, 46(1), 99-101. Dyba, T., Kitchenham, B., & Jorgensen, M. (2005). Evidence based software engineering for practitioners. IEEE Software, 58-65. Gamerman, E. (2007, June 2). Outsourcing your life. Retrieved August 21, 2007, from http://online.wsj.com/public/article_print/ SB118073815238422013.html Greespan, A. (2004). The critical role of education in the nation’s economy. Retrieved August 21, 2007, from http://www.federalreserve.gov/boardDocs/Speeches/2004/200402202/default.htm Gross, K. C., Bhardwaj, V., & Bickford, R. (2002). Proactive detection of software aging mechanisms in performance-critical computers. In Proceedings of the Software Engineering Workshop (pp. 17-23). Huitt, W. G. (2007). Success in the conceptual age: Another paradigm shift. Retrieved August 21, 2007, from http://chiron.valdosta.edu/whuitt/ papers/conceptual_age_s.doc Hoya, T. (2005). Artificial mind system kernel memory approach. Springer Verlag. Johnson, D. (2006). Are 21st century skills right brain skills? Retrieved August 21, 2007, from http://www.education-world.com/a_tech/columnists/johnson/johnson006.shtml Jorgensen, M., Dyba, T., & Kitchenham, B. (2005). Teaching evidence based software engineering to university students. In Proceedings of the 11th IEEE International Software Metrics Symposium (METRICS 2005).
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Keung, J., Jeffery R., & Kitchenham B. (2004). The challenge of introducing a new software cost estimation technology into a small software organization. In Proceedings of the 2004 Australian Software Engineering Conference (ASWEC 04). Kitchenham, B. A., Dyba, T., & Jorgensen, M. (2004). Evidence based software engineering. In Proceedings of the 26th International Conference on Software Engineering (ICSE 04), IEEE Computer Society. Kitchenham, B., Jeffery, D. R., & Connaughton, C. (2007, March-April). Misleading metrics and unsound analyses. IEEE Software, 73-78. Kitchenham, B., Linkman, S., & Law, D. (1997). DESMET: A methodology for evaluating software engineering methods and tools. Computing & Control Engineering Journal (pp. 120-126). Kitchenham, B., & Stell, J. G. (1997). The danger of using axioms in software metrics. In Proceedings of the IEEE (pp. 279-284). Koh, C., Ang, S., & Straub, D. W. (2004). IT outsourcing success: A psychological contract perspective. Information Systems Research, 15(4), 356-373. Lane, A., & Valerdi. (2007). Synthesizing SoS concepts for use in cost modeling. Systems Engineering, 10(4), Lumb, I. (2007). The service oriented architecture (SOA): The key to recontextualizing the knowledge worker for the conceptual age. Retrieved August 21, 2007, from http://ianlumb.wordpress.com/tag/ conceptual-age/ Meyer, B. (2006). The unspoken revolution in software engineering. The Profession, 121-124. Park, H. J., Kim, B. K., & Lim, K.Y (2001). Measuring the machine intelligence quotient (MIQ) of human-machine cooperative systems. IEEE Transactions on Systems, Man and Cybernetics– Part A: Systems and Humans, 31(2), 89-96.
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Patki A. B. (2006, December). Adapting software engineering practices to outsourcing: Forthcoming trends. Lecture Series delivered to Engineering Apprentice Training.
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Patki, T., Khurana S., Patki R., Patki A. B., & Prithviraj V. (2006). Software obfuscation for information systems assets management: Egovernance perspective. In J. Bhattacharya (Ed.), Technology in government (pp. 75-84). New Delhi, India: GIFT Publishing.
Sommerville, I. (2000). Software engineering (6th ed.) Pearson Education India.
Patki, T., & Patki, A. B. (2007). Innovative technological paradigms for corporate offshoring. Journal of Electronic Commerce in Organizations, 5(2), 57-76. Pfleeger, S. L., Jeffery, R., Curits, B., & Kitchenham, B. (1997). Status report on software measurement. IEEE Software, 14(2), 33-43. Pink, D. H. (2005). A whole new mind: Moving from the information age to the conceptual age. Riverhead Books. Pressman, R. S. (2001). Software engineering: A practitioner’s approach (5th ed.). McGraw Hill. Reifer, D. J. (2004). Seven hot outsourcing practices. IEEE Software, 21(1), 14-16.
Subieta, K., Jodlowski, A., Habela, P., & Plodzien, J. (2003). Conceptual modeling of business applications with dynamic object roles. In Technology supporting business solutions: Advances in computation-theory and practice (pp. 49-71). University of Aizu, annual review 2005. (2005). Retrieved May 29, 2007, from http://www.u-aizu. ac.jp/official/researchact/annual-review/2005/ index.html Van Eck, P., Wieringa, R., & Gordijn, J. (2005). Risk driven conceptual modeling of outsourcing decision (LNCS, pp 709-723). Berlin, Germany: Springer. Wang, Y. (2007) Cognitive informatics: Editorial preface. International Journal of Cognitive Informatics and Natural Intelligence, 1-10. Wikipedia. (2007). Conceptual economy. Retrieved August 21, 2007, from http://en.wikipedia. org/wiki/Conceptual_economy
This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 2, edited by M. Khosrow-Pour, pp. 78-86, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.5
The Impact of New Trends in the Delivery and Utilization of Enterprise ICT on Supplier and User Organizations Jiri Vorisek University of Economics Prague, Czech Republic George Feuerlicht University of Economics Prague, Czech Republic
AbstrAct Enterprise information systems have rapidly evolved over the last decade. We expect these changes to accelerate during this decade as a result of new trends in enterprise computing. We argue in this chapter that information and communication technology (ICT) remains strategically important to organizations in the 21st century despite the prevailing trend to outsource ICT and related business processes. We have identified a number of important trends that include the move towards the software as a service (SaaS) model for enterprise applications, increased commitment to process orientation, and emphasis on managing the relationship between business and ICT using
services. These trends lead to more effective management of ICT and closer integration of ICT with entrepreneurial activities and business processes in organizations, resulting in improvements in return on investment. These trends will have dramatic impact on both the suppliers and users of ICT, and will necessitate the reevaluation of the approach to ICT education as both the composition and qualifications of ICT workforce will undergo a fundamental change.
IntroductIon The high cost of information and communication technology (ICT) solutions combined with the
The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
fast evolution of hardware and software necessitating frequent and costly upgrades has led some observers to conclude that investment in IT does not provide a competitive advantage to organizations and in some cases can detract from the core business in which the organization is engaged. Nicolas Carr (2003), in his controversial article titled “IT Doesn’t Matter,” sparked a wide-ranging discussion about the benefits of IT in the context of enterprise computing, and in his follow up paper titled “The End of Corporate Computing” (Carr, 2005) he further argues that “IT is shifting from being an asset companies own to a service they purchase.” Carr predicts a momentous shift from the present enterprise computing environment based on ownership of ICT infrastructure and licensed software to the world of utility computing where software services are delivered to organizations from a remote data center in much the same way as electricity. There is little doubt that enterprise computing is undergoing a dramatic transition driven by organizations looking for ways to reduce the cost of ICT solutions and at the same time to increase the effectives of ICT in supporting their business goals. Among the alternatives that are becoming increasingly more popular are various forms of outsourcing, including the software as a service (SaaS) model with enterprise applications and the corresponding infrastructure hosted by an external application service provider (ASP). Enterprise computing is being transformed from the traditional model based on licensed and on-site installed software towards subscription-based models with software delivered as a service by external providers. We have previously analyzed these trends (Feuerlicht & Voříšek, 2003, 2004) and concluded that the SaaS model will become a dominant form of delivering enterprise applications in the near future and that the use of externally provided information services will shape the ICT market and determine management decisions about deployment of enterprise ICT. This conclusion was supported by leading ICT professionals in
recent interviews conducted in the Czech Republic (M. Bednár, personal communication, May 2005; R. Hradílek, personal communication, April 2005; J. Kameníček, personal communication, May 2005; J. Polák, personal communication, June 2005). These experts confirm that the changes currently taking place will have dramatic impact on both user organizations and organizations supplying ICT products and services. Our analysis in this chapter is based on these interviews and other relevant literature sources. We first identify the main enterprise computing trends, and then discuss the impact of these trends on ICT user and supplier organizations, and finally comment on the resulting changes in university-level ICT education.
Key enterprIse computIng trends The claims about waning importance of ICT in the context of enterprise computing and the commoditization of enterprise applications (Carr, 2003, 2005) leading to the wide-spread adoption of the utility computing model requires a closer analysis in the context of the dominant ICT trends.
strategic Importance of Ict Direct comparison of ICT services with the supply of electricity by utilities ignores the rather complex relationship between software applications and business processes that these applications support or implement, treating ICT in isolation from entrepreneurial activities and company culture. In general, ICT has an important influence over the effectiveness of business processes and the success of the business model. Competitive advantage arises from close integration of ICT with business processes and entrepreneurial activities within the organization. The unique character of the combination of a product or a service with the supporting ICT infrastructure and business
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
applications can deliver significantly higher business value or a lower cost, giving the company a strategic advantage. It is possible to argue that hardware, operating systems, and some types of applications (e.g., office applications) have the characteristics of a commodity, but enterprise applications such as enterprise resource planning (ERP),customer relationship management (CRM), and business intelligence (BI) require extensive customization and integration with other business application and this can create a strategic advantage for an organization (J. Kameníček, personal communication, May 2005). While there are some types of applications that no longer provide strategic advantage to organizations over their competitors (e.g., e-mail, office automation applications, etc.) there are many other types of applications that support specialized business processes that are the very source of competitive advantage. It is important to differentiate between applications that support business processes (e.g., back office, logistics, CRM, etc.) and applications that directly implement business processes, that is, where the process exists only in the form of software (e.g., electronic banking, mobile telephony, etc.). Applications that support business processes can result in competitive advantage when combined with specialized business processes and knowledge within an organization. This unique combination can result in improved effectiveness and agility of business activities. Applications that directly implement business processes can produce competitive advantage by timely deployment leading to increased market share (M. Bednár, personal communication, May 2005). For example, the success of Czech Courier founded in 1999 to focus on express delivery of consignments can be largely attributed to their unique online application system, eKurýr (www.ekuryr.cz). As a result the deployment of this system the company has become a pioneer in utilizing the Internet as a new commercial platform for courier services and gained a significant market share.
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Another important factor that supports the argument for strategic importance of ICT is the increasing demand for timeliness and quality of information used for making decision by all levels of management. Largely due to globalization, reaction times to external events such as changed business conditions or new business opportunities are today measured in days; responding within such a short period of time requires an agile and highly effective ICT architecture. It can be concluded that strategic advantage cannot be achieved today by simply deploying new technology. However, strategic advantage can be derived from the close integration of ICT with organizational business processes and entrepreneurial activities that produces an environment which facilitates rapid responses to important business events, and at the same time reduces the cost and increases the quality of products and services.
process orientation An important prerequisite for maximizing the value of ICT investment is process orientation of the enterprise (Hamm, 2005; Hammer & Champy, 1993; Nevens, 2002; Scheer, 2000). It is becoming clear that managing an enterprise along functional boundaries results in difficulties that include problems with reconciling the interests of individual departments with organizational goals, ambiguous business processes, and poor predictability of response times to important events. Adopting process orientation addresses these issues and at the same time improves the strategic value of ICT solutions (Voříšek, Pavelka, & Vít, 2003). Figure 1 depicts a process-managed enterprise identifying key layers of the business architecture: • •
Business strategy formulation and implementation (layer 1) Business processes and metrics definition and optimization (layer 2)
The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
Figure 1. Business architecture of a process-managed enterprise legislation, political and economic situation, competitors
(4) Process and event monitoring, metrics and event evaluation
IS
/IC T
EN T
nd
M AN AG EM
(3) Process planning and control
ea
customers
Event for Resource Mng. Event for Operation Mng.
(2) Processes and metrics design and optimisation
wl ed g
n ti o e isa nc an na g r Fi o s, ce ur cs so isti re log ess sin Bu
Change of capacities or other process parameters
Kn o
OF PR OC ES S
Change of Strategy Change of Process Definition
n ma Hu
suppliers and other partners
(1) Goals, rules, what products, where, with whom, ...
(5) Operations - process workflow
AR E
AS
(6) Resources administration
MANAGERIAL AND OPERATIONAL PROCESSES
stockholders
•
•
Process planning and control, supply-chain management (from integrating with suppliers to connecting with customers) (layers 2, 4, and 5) Resources administration (acquisition, maintenance, utilization, etc.). (layer 6).
Implementing process management is a time-consuming activity that requires specific knowledge and skills. The success of processmanagement depends on a number of critical success factors. The most important of these are: •
A process-managed organization responds to events such as the arrival of an order, or a production line failure in real-time using active sensors (layer 4). As soon as the event takes place, a corresponding process is activated. Many enterprises are also adopting processmanagement of their ICT systems using methods such as ITIL and COBIT that are the de facto standards in this area. There is a relatively wide choice of tools for process modeling, optimization, monitoring, and management. The Organization for the Advancement of Structured Information Standards (OASIS) (“OASIS standards,” 2005) has defined several standards in this area.
•
Appropriately skilled managers. Process management requires different knowledge and skills than the classical functional management; some managers do not have these skills and are not able to accept new responsibilities in this area. Suitable process granularity and alignment of the process definition with the knowledge of the employees supporting the process (Voříšek, 2000). A detailed definition of a process enables less qualified but well-trained employees to support the business process. The disadvantage of this approach is that it prevents utilization of employees’ creativity and reduces the flexibility of the process.
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
•
•
Suitably selected process maturity level. Capability maturity model (CMM) defines six levels or process maturity (Software Engineering Institute, 2002). The lowest level is for a nonexistent process, the highest describes an optimizing process. However, it is not always required to plan for the highest level for each process, as this would result in excessive costs for processes that are not vital to the enterprise or are used infrequently. Utilization of process methods and standards. When implementing process management it is essential to use appropriate methods and standards (i.e., sector-based reference models of business processes, ITIL). Experience from process-oriented projects shows that it can be dangerous to apply standard methodologies mechanically, and that methods must be tailored to the specific conditions of the enterprise.
management of the relationship between business and Ict using services Since the early days of enterprise computing, computer professionals and end users have been looking for optimal ways to link business processes and ICT to facilitate the communication among ICT and business professionals, and to allocate responsibilities in order to minimize the costs and maximize the benefits of ICT projects. New methods that utilize the concept of ICT services described using service level agreements (SLAs) show potential for addressing this problem. For example, the SPSPR method illustrated in Figure 2 uses services to define the boundary between business and ICT (Voříšek & Dunn, 2001). An important benefit of the SPSPR method is that it defines the content of communications between end users and ICT professionals without undue use of technological concepts. Another benefit lies in the clear demarcation of respon-
Figure 2. SPSPR model business, It and sourcing strategies goals , business model, products and services , types of customers, partners ,...
strategic management layer
"S"
Suppliers for Core Processes
Core Process "p"
Product / Service "p"
Support Process 1
market of Ict services
ICT Service 1
ICT Process1
market of Ict resources
ICT Resource 1
Custmers
Product / Service 1
Core Process 1 market of products and services
business processes layer
market of company products
"P"
Support Process " pp"
ICT Service 2
ICT Process 2
ICT Resource 2
ICT Resource 3
ICT Service "s"
ICT Process j
ICT Resource "r"
Ict services layer
"S"
Ict processes layer
"P"
Ict resources layer
"R"
market of Ict services
market of Ict resources
Lease / sale of supefluous resources
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
sibilities of different types of managers (i.e., top managers, business line managers, owners of a business processes, CIOs, owners of an ICT processes, and managers of ICT resources) and their responsibilities for costs and benefits of ICT. Management of the relationship between business processes and ICT using ICT services has proved to be an effective solution to the longstanding problem of communication between business and ICT professionals (Hohpe & Wolf, 2004; OGC, 2007). However, the management of ICT services has a number of critical success factors. The most important of these are: •
•
•
Ability of the owners of business processes to define SLA that closely reflect ICT requirements. Focus on ICT services; ICT services should be derived from the requirements of business processes, and should not be based on the interests of enterprise departments. ICT services should focus on improving performance of the enterprise, on resolving business process bottlenecks, and on business continuity. When ICT service is not related to any specific business process, the requirements for the ICT service are often inappropriate and based on the interests of a particular department, not on the goals of the enterprise (e.g., the department requires a higher availability of the service than is absolutely necessary). The ability of ICT managers to specify and manage ICT infrastructure that facilitates provision of agreed-upon scalable ICT services.
emphasis on management of the return on Ict Investment The ICT crisis that occurred at the beginning of this decade resulted in increased emphasis on the management of the return on ICT investment. Well-managed enterprises no longer invest into
ICT without a thorough analysis of the return on investment and refuse to finance risk-prone longrunning ICT projects. Increasingly, management requires that investment into ICT correlates with enterprise turnover, and that no project is started unless an improvement in the performance of the enterprise can be assured. This requires a scalable ICT infrastructure and processes. When an enterprise operates its information systems using its own ICT infrastructure, scalability (up or down) is often limited. Typically, the ICT infrastructure is implemented to support the maximum anticipated load, and incremental increases and reductions in capacity (e.g., disposing of surplus hardware, software licenses, or reducing the number of ICT specialists) involve excessive costs. A potential solution to this problem is to purchase external services, as discussed in the next section. Improvements in the enterprise performance cannot be assured by the ICT department alone. This requirement can be met only by an appropriate allocation of responsibilities of ICT and business managers, for example using the SPSPR model (see Figure 3). According to this model, the ICT services are the responsibility of business process managers. The owner of the business process has to add the cost of each ICT service to other process costs and then evaluate the effectiveness of the business process. If the cost of an ICT service is too high, the requirements should be reconsidered (e.g., reducing functionality, the number of users or availability). The CIO is responsible for ensuring that the cost of an ICT service is competitive with respect to similar ICT services on the market. Global ICT trends, such as outsourcing the development of software, and manufacture of hardware to countries with lower labor costs, have resulted in reduced overall cost of ICT. However, the increased demand on ICT services will ensure that ICT investment will remain a significant component of expenditure in most organizations.
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
Figure 3. SPSPR model – responsibilities of business and IT managers TOP management Process Requirements
Integration of business with Ict
- product/service - customers - partners
Process Outcomes
Process Managers Ict service definition (slA): - content - volume - quality - price
Service Order
Delivered Service
CIO Who will deliver?
how sophisticated process to create?
service outsourcing
Ict market
In-house ICT Process Managers ICT processes creation and management
Ict services vs. Ict products The need to focus enterprise activities on core business combined with the requirement for scalable ICT services (i.e., the cost of services should reflect the level of their usage, based on the “pay as you go” principle), lead enterprises in the direction of outsourcing ICT of supporting processes. In 2004, PMP Research carried out a survey into the extent of ICT outsourcing in end user organizations (Sweet, 2004). The results of this research show that more than a fifth of end user organizations spend more than half of their ICT budget on outsourcing and almost two thirds of organizations expect equal or greater expenditure on outsourcing services. Deciding which software services to purchase from external services providers requires careful analysis. An enterprise should have a sourcing strategy to facilitate making such decisions. The development of a sourcing strategy as well as its use for decision making is a complex process
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since a large number of variants with different critical success factors need to be considered (Feuerlicht & Voříšek, 2003). The outsourcing variants include: 1.
2.
3.
Business process outsourcing (BPO), where the entire business support process is removed (e.g., layer “P”- Support Process in Figure 2), accounting or transport including ICT services and their support. Total outsourcing of IS/ICT, where a selected external partner takes over all the ICT services, processes and resources—see layers “S,””P,” and “R” in Figure 2. Partial outsourcing of ICT, where some ICT services, processes, and resources are provided externally. Partial outsourcing has a large number of variants, including the following: a. Traditional ASP, where the application is hosted and operated by an external provider, and used by many customers
The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
(companies). An example of such a service provider is SalesForce.com that currently supplies CRM applications for more than 38,000 customers. b. ASP that operates single-customer applications (e.g., SAP R/3) on its own ICT infrastructure. c. As b), but each customer has its own dedicated infrastructure. d. The customer operates an application on its own infrastructure but the administration of the infrastructure is outsourced. e. ICT infrastructure is outsourced by the customer who operates and administers its own applications. f. External administration of end-user workstations. g. External operation of a call centre. 4. Outsourcing the development of applications. Recent analysis (Dignan, 2005; Voříšek & Feuerlicht, 2004) and predictions (Cohen, 2004) show that the prevailing forms of outsourcing will be those described in 1), 2), and 3a) above. According to Hradílek (2005), IBM expects that most of their customers will move to complete outsourcing of their IS/ICT by 2010. Effective utilization of outsourcing depends on a number of critical success factors: • •
•
Choosing an appropriate variant of outsourcing. Choosing an appropriate granularity of ICT services. At one extreme an ICT service can be all of the functionality of an ERP system, at the other extreme a service could be single transaction (e.g., ordering an airline ticket using a Web service). Monitoring of ICT services to be able to carry out a detailed analysis of the cost of the services, processes, and resources. Without effective monitoring it is not possible to
•
compare the cost of internally-implemented services with the cost of externally-supplied services. Quality of information about the ICT market (services on offer) and the quality of the sourcing strategy.
According to M. Bednár (personal communication, May 2005), an outsourcing contract can significantly complicate enterprise restructuring and attempts at ICT innovation. When an enterprise disposes of all of its ICT expertise, it can find itself in a difficult situation regarding the future development of ICT.
ImpAct oF the trends on end user orgAnIZAtIons Given the above ICT trends and critical success factors we can anticipate the following impact on end user organizations: •
•
•
Increasingly, the decision about utilizing ICT will be made by the owners of business processes and within the context of strategic management. This will require changes in their qualification. Managers, who understand how to use ICT to develop new products or services, or how to gain new customers, will become indispensable members of the top management team in most enterprises (Santosus, 2001). ICT professionals will need to be able to demonstrate the value of ICT for the business and offer new ways of utilizing ICT by the business. This requires a good understanding of the company’s strategy, as well as marketing and commercial activities. Outsourcing will result in a decrease in the number of technical specialists (e.g., programmers, ICT administrators, etc.). However, the number of employees involved with the relationship between business and
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
•
•
ICT services (e.g., requirements definition for ICT, SLA specification, monitoring of the supply of services, etc.) will increase. This trend is already evident from the results of the research conducted in the Czech Republic by the CSSI, SPIS, and CACIO associations (Doucek, Novotný, Pecáková, & Voříšek, 2007). The integrative and innovative role of ICT departments will grow (Levy, 2004; McCabe, 2001). This is particularly the case for the ICT-based industries. This is because ICT processes are not like standard support processes such as accounting or purchasing; ICT processes tend to have an immediate impact on the effectiveness of most core business processes. The volume of ICT services will be scalable, and ICT costs will correlate with the level enterprise activities and the turnover.
• • •
ImpAct oF the trends on supplIer orgAnIZAtIons If the above trends are realized, particularly outsourcing of ICT services and effective monitoring of the relationship between costs and benefits, we anticipate the following impact on supplier organizations: •
Even though many ICT services will be purchased from external suppliers, the number of employees concerned with the utilization of ICT will not decrease, but the structure of their qualifications will change. An enterprise must maintain the following key expertise: •
• •
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How to gain a competitive advantage using ICT, that is, how to use ICT to create new products and services, gain new customers, improve the response of the enterprise to external events, and reduce process costs. This involves supporting business processes with appropriate ICT services, that is, ICT services that provide appropriate functionality, quality, and volume at a competitive cost. How to design the overall architecture for ICT services. Which services, processes, and resources should be owned and which should be outsourced.
Selection of the best supplier of an ICT service. Monitoring and control of the supply of ICT services. Monitoring of ICT services and measurement of the benefits of ICT for business processes.
•
The sale of new software licenses to end user organizations will decrease. The information provided in Table 1, 2, and 3, and compiled using company annual reports confirm this trend. We can observe a decline of license revenues during the period of 2002-2003; however, the support revenues had been growing during the same period. In the subsequent years (2004-2006) license revenues started to grow again, however, the ratio of license/maintenance revenues declined further. Haber (2004) came to similar results, concluding that 80% of software cost can be attributed to maintenance of applications and related activities. The increasing cost of maintenance is another factor that contributes to growing interest of end user organizations in outsourcing their enterprise applications. Because of the decrease in the sale of new licenses and the increase in outsourcing of enterprise applications, the total number of software companies is likely to fall. This trend is already well under way with many medium and small size software companies being bought out by large software vendors.
The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
Table 1. Oracle – license and support growth rates Oracle
1999
2000
2001
2002
2003
2004
2005
2006
20%
6%
- 25%
- 6%
8%
16%
20%
43%
42%
36%
34%
34,9%
34,7%
34,1%
27%
20%
8%
8%
15%
18%
25%
29%
33%
40%
44%
44,6%
45,2%
46,1%
License annual growth as a fraction of the total income
41%
Support annual growth as a fraction of the total income
27%
Table 2. SAP AG – license and support growth rates SAP AG
1999
2000
2001
2002
2003
2004
2005
Q3 2006
27%
5%
-11%
-6%
10%
18%
15%
39%
35%
31%
31%
31,4%
32,7%
28,4%
44%
27%
15%
6%
10%
12%
12%
27%
29%
33%
37%
37,6%
37,3%
40,1%
Licence annual growth as a fraction of the total income
38%
Maintenance annual growth as a fraction of the total income
23%
Table 3. SAP AG: Software revenue – old vs. new customers software revenue - old vs. new customers 100% 80%
23%
26%
24%
22%
77%
74%
76%
78%
2002
2003
2004
2005
34%
in % 60% 40% 66% 20% 0% 2001
Old customers
•
Hardware and software products are “returning” to their producers who use them to offer services on a large scale (Dubie, 2004). According to F. Hoch, the vice-president of the Software & Information Industry Association, “The software industry, as we
New customers
know it, is passing away and a new industry is being born” (Ulfelder, 2005). According to Hamm and Ante (2005), Accenture, thanks to BPO, added $2.2 billion to its revenue, 50% more than in the previous year, while IBM achieved an income of $3 billion from
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
outsourcing and related activities, representing an increase of 45%.
Lenovo Group, Palmisano cut off a large part of the company’s computer inheritance. At the same time he netted more than a dozen of companies in the area of support for entrepreneurial activities, including Daksh, an Indian customer relationship management company with six thousand employees.
The gradual transition of large ICT suppliers from products to services is evident in the information provided in tables Table 4, 5, and 6. Hamm and Ante (2005) provide further evidence about the transformation from product to service orientation of large ICT vendors: The change is tangible. The number of employees focused more on the commerce than on pure technology has risen from 3,500 in 2002 to the today’s more than 50,000 (out of the total of 330,000 worldwide), and this represents a growth of over 10,000 annually. As a part of a painful process, other employees are leaving in their thousands—for example from the administrative and computer maintenance divisions. With the sale of the loss-making PC manufacturing to
•
•
The approach to delivering ICT services to customers is changing. It is no longer a question of supplying as much as possible for the highest price without considering the real needs of the customer. The aim of the leading suppliers of ICT services is to understand what the customer requires, and then plan and manage the supply of ICT services accordingly. There will be changes in the structure and culture of ICT supplier companies that
Table 4. IBM IBM % revenue
2000
2001
2002
2003
2004
2005
servers
22,68%
22,32%
20,04%
18,72%
18,89%
14,2%
PCs
17,83%
14,51%
13,78%
12,97%
13,47%
12,48%
HW total
40,51%
36,83%
33,82%
31,68%
32,35%
26,68%
SW
14,81%
15,58%
16,10%
16,06%
15,68%
17,29%
IT services
38,96%
42,08%
44,79%
47,83%
47,99%
51,96%
Financial services
4,07%
4,12%
3,98%
3,17%
2,71%
2,64%
others
1,65%
1,39%
1,31%
1,26%
1,27%
1,43%
HP % revenue
2000
2001
2002
2003
2004
2005
servers
26,00%
25,26%
22,33%
21,03%
20,12%
19,26%
PCs
35,85%
33,04%
30,23%
29,03%
30,81%
30,84%
Printers, scanners
22,47%
24,01%
28,20%
30,89%
30,28%
29,02%
HW total
84,32%
82,31%
80,75%
80,95%
81,22%
79,12%
IT services
14,05%
15,84%
17,10%
16,91%
17,24%
17,92%
Financial services
2,00%
2,62%
2,89%
2,63%
2,37%
2,42%
Table 5. Hewlett Packard
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
Table 6. SUN Microsystems SUN Microsystems % revenue
2001
2002
2003
2004
2005
2006
Servers
67,88%
59,19%
54,60%
52,34%
52,63%
45,89%
Storage
14,39%
13,58%
13,56%
13,42%
11,74%
18,17%
Products total
82,27%
72,77%
68,16%
65,76%
64,37%
64,06%
Support services
11,99%
20,31%
24,87%
26,81%
27,38%
28,15%
Professional and Knowledge services
5,74%
6,92%
6,97%
7,43%
8,25%
7,8%
reflect the fact that supplying ICT services requires a different business model from the traditional business model used for the supply of products and software licenses.
IntervIeW WIth representAtIves oF Ibm, sAp, hp, And deloItte&touche Recent interviews conducted in Prague, Czech Republic with leading providers of ICT products and services confirm that the above trends are already taking place. The following is an extract from the discussion between representatives of IBM, SAP, HP, and Deloitte&Touche: According to J. Kameníček (personal communication, May 2005): “HP—formerly primarily a product company is increasing its focus on services. The traditional ASP is not yet part of the HP’s services portfolio, but outsourcing IS/ICT is our fastest growing service segment. Outsourcing services are offered as a part of the ‘utility computing’ concept, that is, the cost of services is derived from unit costs (per user in a particular category, per server, etc.). The customer can thus easily change the volume of the service as required and pay only for the actual number of users or supported servers in a given month. In the Czech Republic, the transfer to ASP will not happen quickly. The reason is the conservatism of customers and unwillingness to relinquish control of data and key ICT infrastructure.”
According to J. Polák (personal communication, June 2005), Deloitte&Touche has begun to offer ERP in the form of ASP. “From January 2005 we are offering SAP and Peoplesoft in this way. It will be possible to rent individual modules as an application service. However, it is still not a part of our core business.” According to R. Hradílek (personal communication, April 2005): “Recently, in the Czech Republic, there has been a decline in the demand for strategic and business consulting services, and an increase in the demand for ICT services and outsourcing. IBM has been strengthening its focus on supplying ICT services. We offer these under the label ‘On-demand Services’ and ‘Managed Services.’ In the near future large ICT companies, as well as offering ICT services, will be offering other types of services that require ICT (e.g., collecting parking fees and fines, accounting, etc.).” M. Bednár (personal communication, May 2005) “Agrees that the number of technically oriented specialists in end-users organization will fall. However, outsourcing results in new problems for which the customers should be ready.” According to Polák (2005), “The increase in the required number of specialists who integrate business processes with ICT services will not affect just end-user organizations. It will be an opportunity for new consulting firms that specialize in this area. I do not think there will be less demand for developers. I can imagine that there will be tens of new software houses, each
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
with tens of programmers. There are examples of outsourcing that involves a UK company that successfully bids for a development projects, but actual development will take place in the Czech Republic. Compared to China or India this form of outsourcing will have the advantage of the knowledge of cultural and legislative conditions in Europe.” J. Kameníček (personal communication, May 2005): “Agrees that there is a trend to decrease the number of ICT specialist in customer companies. However, this will not affect Czech economy in the next few years. Centralization and remote administration of ICT may make the operation of ICT more effective, but thanks to cheaper labor, there is a significant trend in relocating companies from Western Europe to Central and Eastern Europe. These transfers are creating many new work opportunities in ICT so that the number of ICT workers has been increasing, particularly in Prague and other large towns.” According to Bednár (2005), “The reduction in software implementation services is real. However, this is true more for financial and administrative business processes than for production and logistics.” R. Hradílek (personal communication, April 2005) agrees that the coming market changes will affect the organizational structure and company culture of large ICT suppliers. “Such changes have taken place in IBM during the merger with PWC. ICT companies will have to train many new specialists in the sale of services—we shall be looking at new graduates for this type of role.” According to M. Bednár (personal communication, May 2005), “The return of hardware and software products to their originators is more relevant for hardware than software companies. The question of who is interested in this sort of business depends on whether the service is focused on the operation of ICT infrastructure or whether it also includes a responsibility for outsourcing of business processes. In the latter case, there will be room for specialist companies. For example,
2314
outsourcing of payroll and human resources has consequences well beyond ICT. The main expertise of such providers will be in human resources and social sphere, not in ICT.”
ImpAct oF the trends on hIgher educAtIon The changes in the orientation of suppliers and users of ICT will be reflected in the number of ICT graduates that will be required and the type of qualifications they will need. The following changes can be anticipated: •
Lower demand for purely technical professionals due to the decrease in the number of such specialists in end user organizations. However, technically oriented graduates will continue to be in demand by the ICT suppliers. The knowledge and skills required will include traditional skills such as the ability to develop new applications, but also ability to deploy and manage secure and highly available applications used by thousands of users. There is some evidence of lower demand for technically oriented specialists. For example, in 2004, the average level of unemployment in Australia was 5.7%, but in the ICT sector it was over 10% and for programmers 18% (Philipson, 2004). While there was a recovery in ICT employment recently, the demand is mainly for professionals with a combination of business and technical skills, rather than purely technical specialists. The lower demand for technical professionals will not be so pronounced in the countries of Central and Eastern Europe. The reason for this is the transfer of a number of development and operations centers of large ICT supplier organizations to this area (including IBM, Sun Microsystems and Computer Associates International development and delivery centers).
The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
•
High demand for specialists who are able to integrate ICT with business processes has been noted above. Graduates with two specializations, for example, those who major in ICT and minor in production logistics are likely to be in very high demand.
conclusIon We have argued in this chapter that ICT remains strategically important to organizations in the 21st century despite the prevailing trend to outsource ICT and related business processes. We have identified a number of important trends that include the transition to the SaaS model for enterprise applications, increased commitment to process orientation, and focus on managing the relationship between business and ICT using services. These trends lead to more effective management of ICT, closer integration of ICT with entrepreneurial activities and business processes in organizations, and a corresponding improvement in the return on investment. These trends will have a dramatic impact on both the suppliers and users of ICT, and will necessitate the reevaluation of the approach to ICT education as both the composition and qualifications of ICT workforce will need to change.
Dignan, L. (2005). Outsourcing overseers needed. Retrieved January 15, 2005, from http://www. baselinemag.com/article2/0,3959,1526051,00. asp Doucek, P., Novotný, O., Pecáková, I., & Voříšek, J. (2007) Lidské zdroje v ICT—Analýza nabídky a poptávky po IT odbornících v ČR [Human resources in ICT—analysis of the demand and supply of ITCT professionals in the CR]. Praha: VŠE. Dubie, D. (2004). Vendors make the utility computing grade. Network World Fusion. Retrieved March 13, 2004, from http://www.nwfusion.com/ news/2004/0322dellsummit.html Feuerlicht, G., & Voříšek, J. (2003). Key success factors for delivering application services. In Proceedings of the Systems Integration 2003 Conference (pp. 274-282). Praha: VŠE. ISBN 80-245-0522-3. Feuerlicht, G., & Voříšek, J. (2004). Is it the right time for the enterprise to adopt software-as-aservice model. Information Management, 17(3/4), 18-21. ISSN 1080-286X. Haber, L. (2004). ASPs still alive and kicking. Retrieved January 30, 2004, from http://www. aspnews.com /trends/article.php/3306221 Hamm, S., & Ante, S. E. (2005). Blue world. BusinessWeek, 16, 82
reFerences Carr, N. G. (2003). IT doesn’t matter. Harvard Business Review, 81(5). Carr, N. G. (2005). The end of corporate computing. MIT Sloan Management Review, Management of Information Systems, 46(3), 67-73. Cohen, P. (2004). Twelve technical and business trends shaping the year ahead. Retrieved May 13, 2004, from http://www.babsoninsight.com/ contentmgr/showdetails.php/id/687
Hammer, M., & Champy, J. (1993). Reengineering the corporation: A manifest for business revolution. London: Nicholas Brealey Publishing. Hohpe, G., & Woolf, B. (2004). Enterprise integration patterns. New York: Addison-Wesley. Levy, A. (2004). What do enterprises want from ASPs? Retrieved February 13, 2004, from http:// www.aspnews. com/analysis/analyst_cols/article. php/2217411 McCabe, L. (2001). A winning combination: Software-as-services plus business consulting
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The Impact of New Trends in the Delivery and Utilization of Enterprise ICT
and process services (Summit Strategies market strategy report). Retrieved October 13, 2001, from http://www.summitstrat.com/store/3ss07detail Nevens, M. (2002). The real source of the productivity boom. Harvard Business Review, 80(3), 23-24. OASIS standards. (2005). Retrieved April 20, 2005, from http://www.oasis-open.org OGC. (2007). ITIL: Service strategy. London: TSO. ISBN 10: 0113310455. Oracle financial reports. Retrieved October 13, 2006, from http://www.oracle.com/corporate/ investor_relations/analysts/ Philipson, G. (2004) Time to accept the grim reality of IT. Retrieved March 3, 2004, from http://smh. com.au/articles/2004/03/01/1078117352254.html Santosus, M. (2001). Inferiority complex. Retrieved April 14, 2005, from http://www.cio.com/ archive/031504/ reality.html SAP financial reports. Retrieved October 13, 2006, from http://www.sap.com/company/investor/reports/ Scheer, A. W. (2000). ARIS—business process modeling. Berlin: Springer-Verlag.
Software Engineering Institute. (2002). Capability maturity model® integration (CMMISM)— version 1.1—staged representation (Tech. Rep. CMU/SEI-2002-TR-012). Retrieved October 15, 2003, from http://www.sei.cmu.edu/cmmi/ Sweet, P. (2004). Outsourcing is in PmP research. Retrieved October 13, 2001, from http://www. conspectus.com/2004/september/ article1.asp Ulfelder, S. (2005). Apps on tap. Retrieved May 13, 2005, from http://www.adtmag.com/print. asp?id=10535 Voříšek, J. (2000). Nová dimenze systémové integrace—integrace podnikových procesů a znalostí. In Proceedings of the Systémová integrace’2000, sborník mezinárodní konference (pp. 195-206). Praha,VŠE. ISBN 80-245-0041-8. Voříšek, J., & Dunn D. (2001). Management of business informatics—opportunities, threats, solutions. In Proceedings of Systems Integration 2001 Conference. Praha: VŠE. ISBN 80-2450169-4. Voříšek, J., Pavelka, J., & Vít, M. (2003). Aplikační služby IS/ICT formou ASP—Proč a jak pronajímat informatické služby. Praha: Graga Publishing. ISBN 80-247-0620-2.
This work was previously published in Business Web Strategy: Design, Alignment, and Application, edited by L. Al-Hakim and M. Memmola, pp. 46-60, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 8.6
Taking Information Systems Business Process Outsourcing Offshore:
The Conflict of Competition and Risk Georgia Beverakis University of New South Wales, Australia Geoffrey N. Dick University of New South Wales, Australia Dubravka Cecez-Kecmanovic University of New South Wales, Australia
AbstrAct As Business Process Outsourcing (BPO) moves offshore and now includes Information Systems (IS) Processes, there is a need to consider a combination of the two. This article explores the factors that a multinational organisation considered when it “offshored” its IS business processes to lower-cost destinations. It focuses on determining the driving factors and challenges faced during the offshore sourcing project. A single, in-depth interpretive case study approach was used to explore this research topic. The results of this study show that the organisation under
investigation was primarily driven to offshore its IS business processes in order to become more competitive in the marketplace. This was assisted by the organisation reducing its operational costs, and establishing a global presence in many lowercost locations offshore. A model was developed, which illustrates the interrelationships that exist between these concepts.
IntroductIon Offshore sourcing (the purchase of services from overseas) is not a new phenomenon; it has
Taking Information Systems Business Process Outsourcing Offshore
existed for the last 2 decades in many industries, particularly in the manufacturing industry, and more recently in the financial services industry. Despite being active for a number of years, offshore sourcing only gained momentum during Y2K when there was an abundance of capable professionals offshore, more “than those available in the first world” (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004, p. 13; Hirschheim, George, & Wong, 2004, pp.12-13). Since then, the phenomenon has gained increasing popularity in many varied industries. Offshore sourcing in Information Systems is defined as the handing over of “responsibility for [the] management and delivery of information technology services” to a vendor located in another country (Pfannenstein & Tsai, 2004, p. 72; Sabherwal, 1999). Business Process Outsourcing (BPO) is an additional outsourcing concept, which has developed in recent years. It is an outsourcing agreement “where a third party provider is responsible for performing an entire business function for the client organization” (Dibbern et al., 2004, p. 11). BPO, like offshore sourcing, is a concept familiar to both the manufacturing and financial services industries. Business processes that have typically been outsourced are IS/IT enabled business processes and not the actual IS/IT business processes themselves, making it apparent that the commonality of offshore sourcing and BPO is that the business processes and services targeted for outsourcing are those that are supported by IS/IT (Willcocks, Hindle, Feeny, & Lacity, 2004). As an example, loan approvals, debt collection, and data input are often sent offshore, but related IS/IT processes of reporting, modification of output, and database administration generally have not been. A diagrammatic representation of the evolution of these practices is included a little later in the article after some further explanation, as in Figure 2. In recent years, there has been a significant increase in the attention paid to BPO and offshore
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sourcing. While the concept of offshore BPO has been given some consideration, there is little literature on the newer offshoring of IS business processes. There is, however, some research that has been conducted into the offshoring of other business processes, for example, human resources services, finance and accounting services, and customer support functions, to name a few (Whinston, 2004). The offshoring of these business processes has typically been enabled by IS/IT (Hirschheim et al., 2004, p. 23). But, there is a further development—the offshoring of IS business processes themselves (such as customising and modelling SAP reports, changing management, and modifying work roles and tasks by sending certain components offshore). The research reported here has the aim of providing an in-depth understanding of its drivers and motivations and is based on an intensive case study of IS business processes offshoring by an Australian arm of a multinational organisation—ComputerInc (a pseudonym, as are the names of staff), a leading supplier of IT hardware, software, and services. This study identifies both the drivers (expected benefits) and challenges of offshoring IS BPO. It is perhaps relevant that one of the sites being considered for taking on some of the work was in fact on-shore—in Australia, but removed from the main office. This was seen as significant at the time as ComputerInc had several clients who were expected to have concerns about data and data interpretation going offshore. The resulting framework grounded in empirical data contributes to better understanding of the offshoring IS business processes which may aid organisations in their decision-making surrounding offshore sourcing. It is hoped that this framework will be employed in future research to develop a more general theory into offshore BPO. The authors firmly believe that the interplay between the benefits and challenges explored here will be useful for managers considering similar decisions.
Taking Information Systems Business Process Outsourcing Offshore
bAcKground outsourcing The outsourcing phenomenon has today evolved from arrangements, which involve one client and one vendor where the vendor is responsible for providing all IS-related services to the client; to arrangements that involve multiple vendors and clients and encompass more complex tasks. Moreover, we now see “significant partnerships and alliances … where client and vendor share risk and reward” (Dibbern et al., 2004, p. 8). Furthermore, outsourcing deals now entail “value-based outsourcing, equity based outsourcing, eBusiness outsourcing, and business process outsourcing” emphasising the evolution that has taken place in the outsourcing arena (Dibbern et al., 2004, p. 8). Further highlighting this evolution, IS outsourcing used to typically focus on “single-system contracts comprising a small portion of the IS budget” and now IS outsourcing spans multiple systems and embodies the “transfer of assets, leases, and staff to a vendor that assumes a profit and loss responsibility” (Lacity & Hirschheim, 1993a, p. 74). Additionally, there are no signs that indicate that this growth in IS outsourcing will cease, in fact it is likely to continue well into the future (Willcocks et al., 2004, p. 7). Motivations for outsourcing include cost savings and strategic benefits (Costa & Beaumont, 2001; Dibbern et al., 2004; Hirschheim et al., 2004; Jurison, 1995; King & Malhotra, 2004; Martinsons, 1993; McLellan, Marcolin, & Beamish, 1995; Quelin & Duhamel, 2003; Sobol & Apte, 1995, p. 270). Other commonly recognised motivations include the ability to leverage the IS expertise of its vendors (Lacity & Hirschheim, 1993b, p. 13; Martinsons, 1993, pp. 19-20) and the ability to focus more attention on its core competencies, making the organisation more efficient and effective in its operations (Grover, Cheon, & Teng, 1996; Harris, Giunipero, & Holt, 1998). Challenges
include the irreversibility of the outsourcing decision, loss of control, hidden costs, challenges associated with the vendor, and a loss of skills/ knowledge/expertise (Apte et al., 1997; Aubert, Rivard, & Patry, 2001; Earl, 1996; Jurison, 1995; King & Malhotra, 2000; Lacity & Hirschheim, 1993b; Lacity, Willcocks, Feeny, 1996; Martinsons, 1993; Quelin & Duhamel, 2003).
offshore sourcing Offshore sourcing, commonly known as offshoring, refers to the outsourcing of services to a third-party vendor in another country “as well as offshore insourcing to an internal group within a global corporation” (Carmel & Agarwal, 2002, p. 65). It thus does not necessarily mean “outsourcing” in the typical sense of the word, because it does encompass a wide range of options, including offshore insourcing, joint venture/cosourcing, and outsourcing (Bhide, 2005, p. 39). Offshoring grew in significance during the 1990s when organisations outsourced Y2K compliance work to offshore vendors (Pfannenstein & Tsai, 2004, p. 73). Since then, the offshoring phenomenon has continued to grow as it offers companies several benefits, including significant cost savings and access to a larger supply of more sophisticated skills than those available onshore (Dibbern et al., 2004, p.90; Hirschheim et al., 2004; Pfannenstein & Tsai, 2004; Tas & Sunder, 2004, p. 51). The term onshore refers to the location of the organisation from which the services are being sent. Typically, developed countries such as the United States of America, the United Kingdom, and even Australia offshore their services to lower-cost destinations in more developing nations, such as India and China (Devata, Kumar, & Stratopoulos, 2005, p. 102). The growth of offshore sourcing has not diminished and does not look likely to. In 2003, offshore sourcing contracts made up a mere 1.4%
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Taking Information Systems Business Process Outsourcing Offshore
of all total outsourcing contracts, however, in 2004 “the value of offshore outsourcing contracts rose 890% from the previous year to $1.66 billion” (Hirschheim et al., 2004, p. 8). Furthermore, the literature identifies that this growth is set to continue, with offshore sourcing growing in both use and popularity (Pfannenstein & Tsai, 2004, p. 75). There have been several factors that have enabled the move offshore to take place. The communications infrastructure available offshore has significantly improved and is being provided to organisations at a lower cost than is available onshore. Additionally, the availability of welleducated and talented staff in countries such as India and China provide companies with a large supply of vendors and significant costs savings of 30% - 50% (Tas & Sunder, 2004, p. 51). Moreover, the costs associated with coordinating the onshore client and the offshore vendor have significantly decreased, and there are technologies available to assist organisations in managing this relationship; which have also matured (Carmel & Agarwal, 2002, p. 66). In summary, an organisation offshores its services to achieve cost reductions, have access to more sophisticated skills and labour markets, improve its operational performance, achieve flexibility and operating efficiency, and to gain a strategic advantage in the marketplace (Aron & Singh, 2005, pp.135-136; Dibbern et al., 2004, p. 90; Gopal, Mukhopadhyay, & Krishnan, 2002, p. 193; Krishna, Sahay, & Walsham, 2004, p. 64; Pfannenstein & Tsai, 2004, p. 73; Tas & Sunder, 2004, p. 51). There are significant challenges too, which affect the risk associated with the offshoring project. Privacy and security can become problematic adding an extra dimension to the management process, as it is difficult to control and monitor the relevant activities of offshore vendors (Davison, 2004; Kleim, 2004; Tafti, 2005). There are a range of hidden costs associated with such
2320
arrangements, including, vendor selection, establishment of contracts, transitioning the work offshore as well as bringing it back onshore at the conclusion of the contract (Pfannenstein & Tsai, 2004; Tafti, 2005). A loss of control over factors associated with the project can affect quality of work, loss of business knowledge as experienced employees leave and take that knowledge with them, and resulting inability to re-build should the work come back onshore, all add to the risk (Herbsleb & Moitra, 2001; Pfannenstein & Tsai, 2004; Sobol & Apte, 1995; Tafti, 2005; ). Furthermore, cultural differences (Davison, 2004; Hirschheim et al., 2004), geographical distance, employee morale, and the political environment of the offshore location (Gupta & Raval, 2000; Krishna et al., 2004) are also of concern.
offshore business process outsourcing (bpo) BPO is an outsourcing agreement which sees a vendor perform an entire business function for a client organisation (Dibbern et al., 2004, p. 11). The premise behind BPO is to outsource IT enabled, noncore, largely back-office processes to a vendor who has “superior structural and human capital in the areas of business process and specific expertise” (Willcocks et al., 2004, p. 11). Business processes appropriate for offshoring are “well-defined, self-contained, and measurable,” as well as being stable processes with little variance (Tas & Sunder, 2004, p. 51). The BPO market has experienced significant growth in recent years, as an example in the UK and Europe and it was estimated that revenues from BPO will rise to 72 billion Euros (from 43 billion Euros) during the period from 2002 to 2005 (Willcocks et al., 2004, p. 7). Offshore BPO is simply a BPO agreement with a vendor located in different country to that of the client (Dibbern et al., 2004, p. 11). Offshore BPO has been “made possible by the dramatic
Taking Information Systems Business Process Outsourcing Offshore
fall in telecommunications costs and the ability to transform paper-based activities into digital ones requiring only a telephone and a computer” (Agarwal, Farrell, & Remes, 2003). Although it is now common for business processes to be offshored to lower-cost destinations, the literature identifies that there has been little focus on the offshoring of IS business processes, such as SAP functions, database administration, as well as problem and change management processes, for instance (Tas & Sunder, 2004, p. 51). Motivations for such offshoring are of an economic nature. First, a drastic difference in salaries—for instance, U.S. vs. Indian annual salaries are graphically illustrated by Figure 1—motivates organisations to undertake BPO offshoring. Second, many organisations find offshore BPO a desirable solution to become more efficient because it enables the offshoring of noncore business processes and thus lets the organisation focus on its core-competencies, thus facilitating the delivery of better products and services for its customers (Devata et al., 2005, p. 103). It should also be noted that the offshoring of BPO assists organisations in making fixed costs
variable, which gives the organisation greater flexibility in regards to the changing economy (Devata et al., 2005, p. 102). In addition to the challenges mentioned, an organisation looking to offshore its business processes is faced with extra problems, which are primarily focused on costs, as well as the loss of knowledge and expertise. Many organisations are in such a rush to partake in business process offshoring to remain on par with the competition, that these organisations do not realise there are greater benefits than simply reducing costs, such as opportunities to improve the quality of the organisation’s services. For the reason that reducing costs is often cited as the primary driver of offshore BPO, vendor organisations often focus on delivering a service for the clients at the lowest-possible rate, as opposed to providing the client with the most innovative and up-to-date solution, because the clients provide the vendor organisations with no incentive to do so. This can lead to challenges regarding a reduction in the quality of service, as well as additional costs for any amendments that need to be made (Devata et al., 2005, p. 117).
Figure 1. Comparison of US and Indian wges (adapted from Devata et al., 2005, pg. 103) 90,000
80,000
70,000
60,000
50,000
$U S
40,000
30,000
20,000
10,000
0 C hip D esigner
S oftw are P rogram m er
U S S alary
IT M anager
C all C entre O perator
Indian S alary
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Taking Information Systems Business Process Outsourcing Offshore
Additionally, an organisation also risks losing its knowledge and expertise in the areas for which it has offshored business processes, because the vendor has assumed responsibility for providing those services (Willcocks et al., 2004, p. 9). As with offshore sourcing and IS outsourcing, this can prove troublesome when the organisation brings the business processes back onshore, and can prove detrimental to the future health of the organisation (Tafti, 2005, p. 556). The evolution outlined above, in particular, as suggested by Hirschheim et al. (2004), Dibbern et al. (2004), Carmel and Agarwal (2002), and Tas and Sunder (2004), of the outsourcing concepts as well as the motivations behind these concepts can be illustrated as in Figure 2, showing the movement from outsourcing to parallel development of offshore sourcing and BPO to the eventual offshoring of the IS business processes themselves. At this point, it maybe useful to further distinguish between traditional business processes and IS business processes. Traditional business processes are those that are typically enabled by Figure 2. The evolution of outsourcing concepts
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IS/IT (Hirschheim et al., 2004, p. 23), such as human resources services, finance and accounting services, and customer support functions (Whinston, 2004), whereas IS business processes are the actual IS/IT business processes themselves, such as customising and modelling ERP reports, database administration, and modifying roles and tasks. While offshoring traditional business processes has been well researched, offshoring IS BPO as the most recent outsourcing concept is still quite unknown. As the processes of IS BPO offshoring are not well understood, the specific challenges and risks that an organisation is likely to face are largely unknown. Both the paucity of research in this domain and the relevance of these issues for IS practice motivated us to examine: 1.
2.
What are the motivations and driving forces involved in an organisation’s decision making to offshore its Information Systems business processes? What are challenges and risks encountered during such decision making?
Taking Information Systems Business Process Outsourcing Offshore
To answer these research questions (notwithstanding that the first may be driven by a management decree to do so) required an in-depth study of IS BPO offshoring decision making. To this end, we selected a case organisation that has just began its IS BPO offshoring decision making and where such offshoring phenomenon was present in its exemplary form (complex IS/IT operations managed globally). Such an in-depth case study, the first to authors’ knowledge in relation to IS BPO offshoring, enabled us to gain insights into managerial thinking and decision making and to achieve a deeper understanding of the interplay between different motivations and forces as well as challenges and risks..
research methodology O u r choice of t he ca se orga n i z at ion ComputerInc—a multinational company with over 300,000 people, operating in over 70 countries worldwide—was motivated by several key reasons. First, as ComputerInc competes and manages its IS/IT operations globally with clients ranging in size and vary across a number of industries, it experiences a full measure of global competition and pressures to lower costs. Second, at the end of 2005, ComputerInc made a decision to offshore its IS business processes to lower-cost destinations. They were aware of the long term importance of this decision and devoted the following 8 months of 2006 to determine how to do it and which processes to offshore. As such, ComputerInc’s decision making regarding offshoring IS business processes was an exemplar of the phenomenon we aimed to study. We were also fortunate that one of the authors gained access to ComputerInc and was granted permission to conduct an in-depth, intensive field study of its decision making processes that led to determining what IS business processes were suitable to be offshored (during 6 months Feb-Aug 2006).
The methodology adopted for this study was an interpretivist case study (Klein & Myers, 1999; Walsham, 1995). Data were collected from multiple sources, including semistructured interviews, documentary materials, and notes from field observation. The interview protocol followed was the preparation of a range of discussion questions (piloted and tested) which provided the interviewer with the opportunity of addressing certain topics in more depth. The transcriptions of the interviews were provided to the interviewees to ensure authenticity. Using multiple sources of information provided the authors with different interpretations of the same phenomenon, addressing the problem of construct validity, which is inherent in the use of case studies (Benbasat, Goldstein, & Mead, 1987, p. 374; Yin, 2003). The use of multiple methods of data collection has ensured the production of a high quality case study (Yin, 2003, p. 99). Semistructured interviews were conducted with a range of managerial staff covering the areas of IS management, Projects Operations, Service, International Programs, and Database Management in ComputerInc (10 in total) lasted between half an hour and 2 hours. Collected documents regarding the IS business process offshoring project were also examined as part of the research. These included spreadsheets, presentations, and meeting minutes. Most of these documents were confidential and available only on the premises of the company. The researcher in the field also made notes on events and impressions about the meetings and the people involved. The notes were useful in interpreting data and reconstructing the story afterwards. The collection and analysis of empirical data were inspired and governed by grounded theory. Although there are many relevant concepts and frameworks to analyse and explain processes of IS-enabled BPO outsourcing, they do not necessarily apply to IS BPO offshoring. Without an obvious conceptual framework available from
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the literature our in-depth study led of necessity to grounded theory (Strauss & Corbin, 1990, 1998). While grounded theory is broadly understood as an approach to developing a theory from the data and be “faithful to the evidence”, where “the researcher compares unlike phenomena with a view toward learning similarities” (Neuman, 2006, p. 60), the adoption of grounded theory as a method differs across studies. In this study, grounded theory was adopted in line with the principles and analytic guidelines proposed by Strauss and Corbin (1990) and reinterpreted by Charmaz (2000). Theory development is grounded in data in a particular way: through the observation and interpretation of researchers engaged in lives of subjects studied. Namely, by interacting with the subjects and by analysing and comparing the collected data, researchers develop understanding of subjects’ actions and meanings, which evolve into further, more abstract conceptual categories and interpretations. By defining (and refining) categories and deriving relationships between them, researchers develop a substantive theory of a particular phenomenon grounded in the data. As the research progresses, the researcher continuously interprets the collected data, which is then used to refine the proposed theory being developed (Charmaz, 2000, p. 509). In this study, the empirical data were gathered and analysed to identify themes, patterns, and common categories. The coding process involved three stages, open, axial and selective coding (Strauss & Corbin, 1998). Open coding included line-by-line examination and interpretation of texts (interviews and documents) during which interesting themes and ideas were identified and named (i.e., coded). Open coding enabled the authors to become familiar with the views of the research participants “rather than assume that we share the same views and worlds” (Charmaz, 2000, p. 515). Open codes reflected both the terms people in the field used (these are called “in vivo” codes) and the terms found in the literature. This
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approach to coding in grounded theory recognizes that researchers do not enter the field with a “blank slate” and that they are necessarily sensitised by the concepts and findings from the literature. While we aim to ground codes and categories in the empirical texts the coding process does not and cannot happen in a conceptual vacuum and is therefore inevitably linked to knowledge in the field of study. This is in fact beneficial when the codes are grounded in the empirical data as well as are related to concepts from the literature. This allows comparisons of a derived theory with literature or in some cases testing theories from the literature. It is important to emphasize that open codes were identified in close relation to the text and only later they had been compared, redefined, and restructured. Furthermore, as the open codes began to accumulate, they were grouped and regrouped under higher order categories (Strauss & Corbin, 1998, p. 113). To have a better overview of the open codes and how they can be interrelated a particular technique of graphical representation was used in this study. Each code and associated text was printed on colored paper (colors corresponding to different sources of texts) and arranged on a wall. Grouping and regrouping of the codes (and associated texts) under different categories on the wall provided a visual presentation and assisted in the sharing of ideas and discussion among researchers. During the next stage, axial coding, categories were analysed and constantly compared in terms of properties and dimensions, thus enabling the researchers in exploring the relationships between categories and identifying their similarities and differences. Having the codes and categories arranged on the wall was even more useful in this stage as it allowed hypothesizing and exploration of different relationships among the categories. By moving and re-organising the codes and categories around the wall, the discussion easily focused on their properties and dimensions thus enabling a
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grounded testing of axial codes, categories, and their relationships. As categories and their relationships emerged, the empirical data were seen in a new way, with each step going further from the raw empirical data and towards a substantive theory (Blaikie, 2000; Strauss & Corbin, 1998). This was followed by selective coding where the aim was to identify a central category or a main theme of the research. Strauss and Corbin (1998) define selective coding as the “process of integrating and refining theory” (p. 143). During the process of integration, a central category is decided upon, which represents the main theme of the research. This category must appear regularly in the data and as this category is related to other categories, the evolving explanation must be logical and consistent (Strauss & Corbin, 1998, pp.146-147). To assist the researchers in identifying a central category, a few techniques may be employed. One such technique, which was adopted for this article is that of writing a storyline, which involves writing a few sentences about “what seems to be going on here” (Strauss & Corbin, 1998, p. 148). The result of relating categories to the central category is illustrated in Figure 3. This process was employed for each of the higher-order categories that surfaced during open and axial coding. From this, two central categories emerged. As a result, the authors were able to develop an understanding of how each of the higher-order categories were interrelated and how they related to the central categories. By identifying the central categories as well as the interrelationships between them and other categories, we developed the substantive theory of IS business processes offshoring in ComputerInc. While the proposed substantive theory is context bound and applicable in a single setting, it may be a starting point for the subsequent development of a more general, formal theory applicable in a variety of settings.
Findings Table 1 gives the axial codes and categories that emerged from the open coding. An example of how a category is developed, starting from the comments and open coding, through the axial codes is given in Appendix A. Through the analysis of these categories and their interrelationships, the authors were able to understand why ComputerInc was driven to offshore its IS business processes to lower-cost destinations; and also understand the challenges that the organisation faced during the offshoring process. Becoming more competitive in the marketplace was the key finding relating to Research Question 1. Other key findings were that ComputerInc was also driven by reducing its operational costs and establishing a global capability. Although drivers themselves, these concepts enable ComputerInc to achieve its primary aim of becoming more competitive in the marketplace. Furthermore, there were a number of factors identified that had a significant influence on these drivers. These were management’s overriding decision to offshore the IS business processes, the skills and the type of work available in the offshore locations and the decisions surrounding the offshore location choice. It is evident that central to the offshore sourcing project is ComputerInc’s aim of becoming more competitive in the marketplace, that is, to hold the majority of the market share. our competitors are still holding more of the market share than what we are… so in order to remain competitive and be a leading force, then we need to go down that path and make it happen. (Janet, personal communication)
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Table 1. Emerging categories Axial Codes 24 Hour organisation Future offshoring Expand globally Global capability Virtual teams Region driven Contractual obligations Existing infrastructure Low cost Research driven Market research Past experience Management driven Behind competition Create competition Efficiency/effectiveness Remain competitive Cost driven Increase profit Risk mitigation Employee support and changes Public opinion issues Challenges Customer impact Team impact/morale Type of work Skills availability Improve onshore skills Offshore skills Access to more sophisticated skills Inferior skills
The company saw that in order to become more competitive, it must remain competitive and, further, that by reducing its operational costs, expanding globally and improving the efficiency and effectiveness of its operations. The organisation considered that offshoring its IS business processes would enable the organisation to achieve this goal as is highlighted through the statements of the respondents. ComputerInc has historically been the leading and dominant force within its industry. As such, it is imperative that the organisation at least maintains this status to ensure its success; this has been recognised by many of the service managers, who identify that “we need to be, as an organisation, competitive” (Andrew, Service
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Category Establish a Global Capability
Location Choice
Research
Management’s Decision Become More Competitive
Reduce Costs Challenges / Risks
Skills & Type of Work Available & Targeted
Manager, personal communication) and “we need to remain competitive in a very cost competitive business” (David, Service Manager). Janet, Service Manager (personal communication), further highlights this need as well as describing the reasons underlying it: the rest of the world is doing it [offshoring] so in order to remain competitive and be a leading force then you need to go down that path and I guess make it happen. Improving the efficiency and effectiveness of the organisation’s operations, which entails establishing a global set of processes, tools, and standards for the global organisation has also
Taking Information Systems Business Process Outsourcing Offshore
made it possible for ComputerInc to become more competitive in the marketplace for the reason that now there is only one way to operate and complete functions, the organisation has become more consistent, enabling the improvement and refinement its processes: If we can get it right and we get a global set of processes, then obviously we are going to be much more efficient and effective at what we do… and if we are more effective and we are more efficient, then that would mean we are more competitive in the marketplace. (Janet, Service Manager, personal communication) Reducing the operational costs of the organisation is not only a means to becoming more competitive, but it is also a key driver in itself, with all of the service managers identifying it as a core motivation for the organisation offshoring its IS business processes. For instance, Service Manager Peter went so far as to suggest that “the bottom line… is to reduce costs” (personal communication). Furthermore, Craig, Project Owner, identified that this offshore sourcing project enables the organisation to be successful in that respect, that it “allows us [ComputerInc] to reduce cost” (personal communication). These efforts are predominately focused on reducing operating costs and in particular, salaries and labour costs. [x] is a location where we have a series of centralised functions coming out of there and so if those functions that we are looking at up here could be centralised …. and the cost of living is cheaper down there and free up resources up here. (Janet, personal communication) by spreading our the processes and the knowledge base across various countries, obviously… this is meant to drive the costs down because the work
can be done at a lesser cost. (Vijay, personal communication) These countries, the salaries and cost to live is much lower than in other European countries as well as America and Australia. (Vijay, personal communication). For this particular project, the offshore locations that were chosen are India, Chin, and a lower-cost destination in Australia. Craig (personal communication) highlights the importance of establishing this global capability and electing to offshore to growing markets: where we see our strengths in the future, is supporting Shenzhen… China is very much a growing market, and the organisation needs to be able to demonstrate to the big businesses in China that from a service perspective that we have a capability in China. As observed by one of the authors, ComputerInc’s executive management team was directly involved in making the highly essential decisions for this project. The reduction of the organisation’s operational costs and becoming more competitive in the marketplace came as a decree from the executive management team. Furthermore, Craig (personal communication) highlights that “it’s not just an Australian decision… competitors are doing it; it’s a management decision, worldwide.” The skills that were being sourced and the skills that were available in the offshore locations worked in both ways to influence the key drivers of the offshore sourcing project, directly influencing the organisation becoming more competitive and establishing a global capability. ComputerInc has moved many processes offshore that were identified by a number of characteristics; some of these characteristics include “highly repetitive and standardised” processes (Janet, Service Manager, personal communication). However, the skills and the type of work targeted for offshoring directly
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influenced where the organisation was able to establish its global capabilities. These locations were dependent on many factors, including where the growing markets were and what locations had the correct skill sets available. ComputerInc decided on appropriate offshore locations based on a number of factors, one being the type of work these offshore locations specialised in and the skills they had available. ComputerInc’s research identified that the chosen locations, India, China, and the lower-cost onshore location in Australia are endowed with talented and educated resources, and these locations were advertising their skill sets to the world. The key findings relating to Research Question 2 were that during the offshoring of its IS business processes, ComputerInc were faced with a number of challenges. Employee changes, impact and support onshore affected staff—it not only impacted the employees who lost their roles, but the team also felt the impact of the changes because “a lot of the team members are nervous about what it would mean for them” (Andrew, Service Manager, personal communication). Many of the remaining team members struggled with “the survivor syndrome, when they say, why wasn’t it me? And they’re constantly looking over their shoulders” (Janet, Service Manager, personal communication). Furthermore, the overall team morale was impacted, which has been very difficult for the service managers to control (Janet, Service Manager). The geographic distance between the onshore and offshore locations, cultural barriers, and connectivity and infrastructure were challenges, too, in that relationship management became difficult, the language barrier was problematic, and if the network connectivity in the offshore location failed, there was no mitigation technique or backup plan in place. As David, Service Manager (personal communication), explains:
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no I don’t know of any other backup if we lose connectivity, the only thing is probably still having a number of people back in country to avert that. ComputerInc also faced difficulties in terms of security and privacy (some customers were reluctant to, or prohibited from, allowing data offshore), service delivery, and reduced quality of service (there was the possibility that during the early stages of the offshoring project, there would be dissatisfied customers and that the quality of service would diminish), the social and political environments of the offshore locations (potentially less stable than might be the case in Australia) and the impact of offshoring on the customer (some degree of dissatisfaction was to be expected). The following factors were identified as having a significant influence on the above challenges: the unavailability of skills or the substandard skills available in the offshore locations (there was not a complete match with what was desired), the research conducted during the pre-implementation phases of the project, and the decisions made surrounding the offshore location choices, in that tasks were chosen to fit predetermined locations.
discussion The selective coding and the in-depth analysis described above led to a substantive theory of IS BPO offshoring in ComputerInc, which we present in a form of a substantive framework in Figure 3. The substantive framework emerged through coding, analysis, interpretation, and constant comparisons of the data collected (interviews, observations and documents). The framework in Figure 3 describes specific relationships between the key eight categories that emerged from the data: Become More Competitive, Challenges/Risks, Reduce Costs, Establish a Global Capability, Skills
Taking Information Systems Business Process Outsourcing Offshore
Figure 3. A substantive framework of ComputerInc IS BPO offshoring
& Work Targeted & Available, Location Choice, Management Decision, and Research. Among them Become More Competitive and Challenges/ Risks emerged as central categories. Central to the framework is the inferred relationship between the goal of becoming more competitive and the challenges and risks involved in doing so. Becoming more competitive is driven by managerial decisions taking into account a desire to reduce costs establish a wider global presence and the skills and work available. The challenges and risks are dependent on where the offshoring takes place, what needs to be done, and the extent of research governing the decision. The framework demonstrates the relationships that exist between the categories. There are four types of relationships present in the framework— significant (heavy black arrow) illustrating the
concepts that have a direct influence on either of the central categories Become More Competitive or Challenges/Risks. The relationship between the central categories themselves—the impact of Challenges/Risks on Become More Competitive— is not directly observable from the data but is nevertheless implied, which we inferred from the broader analysis and insight (indicated by the heavy dashed black arrow). The red arrows represent relationships between concepts where concept A has a direct relationship with concept B and concept B is related to either Become More Competitive or Challenges/Risks. Finally, the blue arrows illustrate the remaining relationships presented by the framework, which do not directly impact the central categories. As a result of the data analysis and the model, two primary propositions are put forward.
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Proposition 1: The central driver of the offshore sourcing project is for ComputerInc to Become more Competitive. This concept came as a directive from ComputerInc’s executive management team, which additionally identified the organisation’s need to reduce its operational costs. Becoming more competitive not only focuses on improving the competitive standing of ComputerInc but also looks at improving how efficient and effective it is with its operations. ComputerInc was able to achieve its goal of becoming more competitive, with the assistance of two factors, namely reducing its operational costs, and establishing a global capability, which are acknowledged as two of the main advantages of offshore sourcing (Sobol & Apte, 1995, p. 274). Reducing operational costs is one key advantage of offshoring, but another is the ability for organisations to develop and operate global information systems (Sobol & Apte, 1995, p. 271). Establishing capabilities in locations around the world provided ComputerInc with access to a highly skilled and readily available work force allowing the organisation to “improve their ability to compete in their fast-paced domestic and international markets” (Wilson, 2003, p. 102). Furthermore, the skills and the type of work that are available in the offshore locations further enabled ComputerInc to establish its global capability as well as become more competitive in the marketplace because “having workers overseas in close proximity to a new pool of consumers can assist a company in expanding its global presence” (Pfannenstein & Tsai, 2004, p. 74). Proposition 2: The Challenges/Risks faced and anticipated by ComputerInc may prove to impede the organisation from Becoming more Competitive. This relationship is a research inference made based on the empirical data that emerged during analysis. Although there is no direct evidence in the data linking these concepts, the analysis of all the data and the observations indicated the
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existence of this relationship. Furthermore, the authors have identified this as one of the core note-worthy relationships present in the model presented. ComputerInc conducted a thorough analysis into the potential challenges the organisation might have been faced with, prior to partaking in this offshoring project, through in-depth market research and assessments of past experiences both within the organisation and externally. However, the organisation developed very few risk mitigation techniques and as a result, these challenges impeded its ability to become more competitive in the marketplace, that is, until these challenges were adequately managed. It is absolutely necessary for ComputerInc to act on the findings of the research it conducts, and to develop a series of techniques to assist the organisation in preventing, mitigating, and/or managing these challenges and risks, as is addressed by Hirschheim et al. (2004) who stipulate, “It is critical that an organization considering offshore outsourcing take the time to evaluate the challenges and study how other organizations have handled these challenges” (p. 22). This article has identified a number of challenges and risks that projects of this nature face. The authors believe that the list developed provides a useful starting point for other organisations considering a similar decision. The way an organisation is able to mitigate and/or manage these challenges and risks would to a large extend impact the goal of becoming more competitive in the marketplace.
conclusIon Based on a grounded theory study of the IS BPO offshoring in ComputerInc, the article proposes a substantive framework that identifies key categories and their relationships (as described in Figure 3). A key contribution of this research is
Taking Information Systems Business Process Outsourcing Offshore
that it highlights the complex relationship between the offshoring objectives and risk management. In this way, and with the development of the framework depicting the interrelationships, the study takes the prior research further. Offshore BPO is not a panacea. There are many variables involved and these will differ significantly from project to project. Organisations considering such action need to carefully evaluate the risks and their potential effects. A further contribution of this study is the identification of areas for further study. The impact of personal opinions and bias could prove to be an impediment to the success of such of an offshore sourcing project. A study of this impact could prove extremely valuable and make a significant contribution to the offshore sourcing field, in both theory and practice. Additionally, the principle researcher saw very little questioning of the decisions made by the executive management team. The decisions were simply accepted as fact even though many of the people involved had first-hand, on-the-ground experience with the roles being sent offshore. It may be that this could be the reason behind why a number of the employees did not fully comprehend the organisation’s reasons for going offshore. The authors believe management gathering ideas from those directly involved would be an extremely interesting area for research. Other limitations include the potential opportunity for the interviewees to mislead the researcher or push a point of view, the relatively brief time-frame in which the study was conducted and the organisation to which the tasks were outsourced being outside the scope of the study. The authors believe that the proposed substantive framework of IS BPO offshoring in ComputerInc provides a sound basis for the examination of such projects in other companies as it conceptualizes the key drivers associated with the offshore sourcing of IS business processes, as well as the challenges that are faced in such a situation. The framework suggests that
becoming more competitive in the marketplace primarily drove ComputerInc to offshore its IS business processes, and in order to achieve this, the organisation reduced its operating costs and established global capabilities. While this framework is grounded in the data and therefore context bound it is also found to be supported by the outsourcing and offshore BPO literature, which highlights its potential use in the development of a more general theory. For practitioners, the authors believe that the study has presented a series of potential challenges that may arise during an offshore sourcing project, has highlighted the importance of understanding the goals of the project and conducting thorough and appropriate research, and demonstrates the importance of communicating significant decisions and in considering the knowledge of all parties involved. As such, it is hoped that this study will go some way towards helping managers note and understand the pitfalls and provide a greater understanding of how the conflict between benefits and challenges might be resolved.
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AppendIX A: eXAmple oF support For A “cAtegory” Expand the organisation globally
24 Hour Organisation Future offshoring Expand the organisation globally Global Capability
Open code C
ode definition
This work was previously published in Journal of Global Information Management, Vol. 17, Issue 1, edited by F. Tan, pp. 3248, copyright 2009 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.7
The Governance Implications When it is Outsourced Anne C. Rouse Deakin University, Australia
AbstrAct This chapter considers the governance issues raised by the increasing use of external parties to supply IT resources (including packaged enterprise software). The chapter briefly reviews existing formal governance frameworks and their treatment of IT outsourcing, then introduces an analytical model for considering outsourcing benefits and risks. The chapter then goes on to highlight some strategic IT governance issues that become critical once a firm outsources a significant proportion of its IT services. The aim of the chapter is to alert decision makers to the fact that outsourcing IT incorporates residual risks even when widely recommended operational controls are implemented. It concludes that effective control processes are necessary, but not sufficient for good corporate governance and suggests that those responsible for corporate governance ensure that both operational and strategic governance
issues are considered when IT is substantially outsourced
IIntroductIon Despite ongoing debate about outsourcing’s risks and benefits, more and more firms are choosing to outsource significant proportions of their information technology (IT) and information systems. Several general frameworks and principles have been proposed for governing outsourced IT arrangements and, more recently, formal IT governance frameworks have begun addressing issues associated with outsourced IT services. Yet, while these guidelines help address some of the inherent complexity of an outsourcing undertaking, in some ways they can obscure the need to think through the long-term IT governance implications of an IT outsourcing strategy.
This chapter explores the governance issues raised by the increasing use of external parties to supply IT resources (including packaged enterprise software) and argues that the reliance by firms on external vendors for IT services raises more fundamental governance issues than just operational control of vendors – effective control processes are necessary, but not sufficient for good governance. The chapter briefly reviews existing formal governance frameworks and their treatment of IT outsourcing, then introduces an analytical model for considering outsourcing benefits and risks. The chapter goes on to highlight some strategic IT governance issues that become critical once a firm outsources a substantial proportion of its IT services. The basis of the chapter is a program of 10 years’ study into IT outsourcing beginning with the author’s PhD studies and extended by the work of Rouse and Corbitt (2001; 2003; 2007; see reference list). Studies by these authors have included a series of longitudinal IT outsourcing cases (in both the public and private sectors); a number of focus groups (with n=55 informants from vendors and purchasers of IT outsourcing), two case studies of business process outsourcing purchasers, and a survey of large IT outsourcing purchasers in both the pubic and private sectors (n=240).
bAcKground The effective management, control, and alignment (with business needs) of IT resources have been a topic of interest to the information systems discipline for decades (e.g., see Earl, 1988). However, it is generally only since the 1990’s (Loh & Venkatranam, 1992) that the term “IT Governance” has been used to describe this responsibility. Typically IT governance is seen as a subset of the corporate governance framework, which defines the institutional structures and processes for directing and controlling the firm in
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a way that encourages management to maximize the welfare of shareholders and other stakeholders (Tirole, 2001; Weill & Ross, 2004). Governance is understood to encompass authority, accountability, stewardship, leadership, direction, control, and, importantly, management of corporate risks (ASX, 2003; Tirole, 2001). IT Governance focuses particularly on getting value from the firm’s substantial investments in information resources and systems, including their performance, efficiency, and value for money. IT Governance also focuses on identifying, reducing, and managing the significant risks that IT and information systems pose to a firm. IT Governance occurs at different levels within an organization and so is part strategy (enabling value by integrating risk consideration into strategic IT decision making) and part tactical/operational, where it is concerned with effective IT management and minimizing identified risks (including risk of compliance failure). At the operational level, largely the responsibility of the CIO, governance is characterized by use of specific policies and procedures to improve IT performance, effectiveness and control. Operational IT governance is often reflected in application portfolio, infrastructure portfolio, project portfolio and sourcing portfolio policies and procedures. At a strategic level, governance is the concern of Board members and their delegates (e.g. Board subcommittees). Strategic governance addresses the context of specific IT governance processes and procedures, and the creation of an organizational environment where governance processes can be operated. Strategic governance thus needs to address interdependencies between the various actors, and the allocation of decision rights within the organization (Weill & Ross, 2004). Strategic level governance is also characterized by a substantially longer time frame than operational (or tactical) governance. Strategic governance affects operational governance largely indirectly, by the creation of context and clear goals, and by the allocation of specific responsi-
The Governance Implications When it is Outsourced
bilities. Once these are defined at a strategic level, operational processes that might seem problematic can be more easily managed. A central message of this chapter is that while IT outsourcing is addressed by some IT governance standards at an operational level, in view of the corporate risks associated with IT outsourcing IT governance also needs to be addressed at the strategic level. The notion of corporate governance (and hence IT Governance) has received substantial attention over the last few years following highly publicised corporate collapses like those of Arthur Andersen, WorldCom, Enron, and Tyco; and, in Australia, HIH and One-Tel (Clarke, Dean & Oliver, 2003). These failures alerted shareholders, regulators, and governments that the risks of malfeasance and poor management were much higher than was generally recognized. Partly as a reaction to this recognition, legislation such as the 2002 US Sarbanes-Oxley Act; European and Australian data privacy laws, the international banking framework, Basel II; and, in Australia, the Australian Corporate Law Economic Reform Program (CLERP9) now impose tougher regulatory conditions on firms to ensure accountability and adequate management of corporate resources and risks. One consequence of these more stringent frameworks is that individual officers responsible for firm governance now have substantially higher obligations than previously, and they are seeking to acquit these obligations by instituting effective governance structures.
It governAnce Because of the nature of IT, and its pervasive impact in modern organizations, the governance challenges for IT are complex (Weill & Ross, 2004). Both the size of IT investments and the risks associated with corruption, theft, or loss of information resources, demand particular attention on the part of organizations.
These services are usually now supplied by a mix of internal and external providers, but governance responsibility cannot be delegated to an external vendor. The US Sarbanes-Oxley legislation (and related legislation elsewhere) requires that purchasing firms have demonstrable programs in place to manage the operations, systems and risks associated with any outsourced process or function. This obligation is particularly important in relation to outsourced IT functions, because information systems themselves serve to embody many of the firms’ business control and governance processes. Under these new more stringent conditions, firms which have outsourced their information systems and IT are still responsible for protecting information resources, and for adequately controlling any outsourced arrangement (Coates, 2007). When IT activities are outsourced, control of IT resources moves from internal, hierarchical structures and processes (including day to day supervision) to contract-based controls (Mylott, 1995). These controls rely largely on the formal specification of outcomes and standards to be achieved, supported by detailed performance monitoring and regular market testing or benchmarking. The control of IT activities in this way calls upon quite different skills, and demands a substantially higher level of discipline on the part of purchasing firms. The costs of these controls are high, and often unplanned when the initial positive “business case” for outsourcing IT services is developed. Furthermore, the formality of this form of control can introduce unexpected side effects (such as increased complexity and bureaucracy), which can sometimes impede line business activities. There are many academic and trade publications outlining actions firms should take to effectively manage IT outsourcing, yet few of these recommendations have been subject to empirical test as to their practicality, and impacts. There is strong commonality amongst most of the recommendations for how firms should govern
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their outsourced arrangement, both in the wider literature, and, more recently, formal standards. However, in practical terms many common recommendations for successfully managing outsourcing, while plausible, are fundamentally unhelpful. Some common and apparently sensible recommendations are found in IT Governance guidelines, and many can be found in the trade literature to which corporate governance officers are exposed. While firms will not necessarily come to harm in following such recommendations, they may be left with a false sense of security that their outsourcing arrangements are consequently adequately managed and controlled. The research underpinning this chapter suggests that many of the recommended processes for managing outsourcing are in real life difficult to do ─ such as choosing which IT services are “core” to a firm’s business and which are not. Many others often have unintended consequences. An example of the latter—reported by Rouse (2002)—occurs when firms follow advice to keep outsourcing contracts short. While managing some risks, this also has the effects of increasing vendor’s and purchaser’s transaction costs, and in particular, of reducing a vendor’s capacity to recoup its initial bidding costs. As a consequence, short outsourcing contracts often discourage good vendors from bidding. The true costs of short contracts to both vendor and client are substantially higher than might at first be recognized. Furthermore, because transaction costs and nonbids are not easy to discern, the higher costs may not be visible, particularly to the purchaser, for some time. Despite this, the notion that to have shorter contracts involves no trade offs, and is “good management practice” has taken root in the business community (Rouse, 2002). The unintended consequences of apparently sensible recommended practices form part of a significant set of risks associated with outsourcing that need to be considered as part of IT governance.
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It outsourcIng rIsKs Outsourcing involves potential benefits, and also risks. In their study of empirical (rather than theoretical risks) Rouse and Corbitt (2003) categorized IT outsourcing risks into two types common risks (high probability but medium to low impact) and catastrophic risks (low probability, but high impact)– the latter, while very damaging, are hard to scope because they are rare, and often difficult to discern. Rouse and Corbitt found the incidence of common IT outsourcing risks (mostly related to unexpected costs, or failure to reap expected benefits) were much higher than the literature would suggest. Because they occur so rarely, and their consequences are often so difficult to observe, Rouse and Corbitt were unable to quantify the incidence of catastrophic risks, although in many cases if these risks eventuated, they would have far more fundamental effects on a firm’s overall performance. As an example of a potentially catastrophic risk, many of Rouse’s (2002) informants suggested that a real, but downplayed outsourcing risk is the loss of intimate knowledge of the organization’s business and the way the IT systems support this—highlighted by Earl (1996) and repeatedly mentioned in the academic and trade outsourcing literature. It is this organizational knowledge that enables firms to create innovative and strategic value from existing IT and information resources. While firms hope that they will still have access to this capability through their outsourcing vendor, they misunderstand the fundamental business of selling IT services (and in particular the risks to vendors of developing solutions that are “asset specific” to only one customer – see Fink, Edelman, Hatten & James, 2006). Vendor staff will rarely pursue an opportunity to use IT in novel ways to increase innovation in one particular customer firm, as they are rewarded for innovations that will appeal to (and be paid for by) a large number of customers. As a result, firms that outsource their IT usually lose the capacity to tailor innovative
The Governance Implications When it is Outsourced
IT solutions to the firm’s own particular needs and priorities. While this capacity might not be important to some firms, its loss generally has significant longer-term implications. Another downplayed risk of outsourcing IT-related services is the theft or exposure of confidential customer records, a risk that recent events suggest is much less rare than vendors and consultants admit (Musaji, 2005). Theft of confidential records not only exposes officers of the firm to litigation or sanctions; it can have a substantial impact on customer trust, which is difficult to regain. After-the-fact remedies (such as litigation, or moving to an alternative vendor) will rarely address the losses, and will inevitably involve substantial costs and organizational resources. Firms that rely on contractual provisions to protect their customers’ data often fail to recognize that if the data is held in foreign jurisdictions (an increasing practice), particularly if these are countries with high levels of corruption; legal contracts or threats to vendor reputation are likely to provide little protection. One of the problems decision makers face is that there is limited existing research into the outcomes of outsourcing IT, and most claims for benefits (and low risks) for the strategy are based on theory or cases which are, necessarily, unrepresentative. What research into outcomes and risks of outsourcing that does exist suggests that while following sensible management practices will reduce some risks by encouraging firms to identify, scope, and plan for these, there will still remain a number of residual risks to the purchasing firm when IT services are outsourced (Rouse & Corbitt, 2007). The true costs of a firm’s exposure to these residual, and often less concrete risks, can sometimes be substantially higher than recognized.
governAnce methods And models A range of methodologies have been promulgated for ensuring IT governance, in addition to more general approaches such as those developed by researchers such as Weill and Ross (2004) and Willcocks and Feeny (1998). The Australian standard for corporate Governance of ICT (AS8015) provides a framework for strategic IT governance by firm Directors (Standards Australia, 2005). Examples of formal methodologies aimed at the operational and tactical levels of governance include CoBIT (Lainhart, 2000) a set of standards and recommended activities developed by the American based IT Governance Institute (ITGI); and ITIL (the IT Infrastructure Library), developed by the UK Office of Government Commerce. These operational governance methodologies can be quite detailed, defining how the IT function should be organized and identifying key control processes. More recently ─ ITIL Version 3 (OGC, 2007) and ITGI’s “Governance of [IT] Outsourcing” (ITGI, 2005) ─ these tactical guidelines have begun recognizing that IT is now sometimes outsourced, although they do not yet recognize that outsourced service delivery (including the use of packaged software, where the development has been outsourced) is becoming the dominant form of IT delivery in many firms. Although most of these frameworks and methodologies include some recommended processes and actions to be taken when IT services are outsourced, at this stage these are largely concerned with tactical/operational governance. Consequently recommendations tend to miss many of the larger strategic governance issues introduced once a substantial part of the IT processes performed in a firm are sourced externally. Existing governance frameworks also tend to fail to recognize that many recommendations have downsides. For example, seemingly sensible control practices ─ such as renegotiating an outsourcing contract 12 to 14 months into the
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The Governance Implications When it is Outsourced
contract, as suggested by ITGI (2005) ─ are likely to be resisted by most vendors, unless the client has particular importance to the vendor. Other recommended processes (such as benchmarking vendor performance and costs) while desirable, may be impractical for all but basic commodity services. The ITGI (2005) has observed that most of approximately 200 firms it surveyed (around three quarters) failed to put in place what it saw as basic IT governance outsourcing controls. This is likely to be the case because many “good practices” have hidden downsides that are preventing their widespread adoption.
AssessIng outsourcIng decIsIons Figure 1, adapted from that developed by Rouse and Corbitt (2007) and based partly on the analyses of Aubert, Patry, and Rivard (2005), can be used to more rigorously assess the net benefits of outsourcing. Figure 1 articulates the factors that lead to net benefits, and is based on determining residual risks after good management practices (as suggested by governance standards) have been introduced. Figure 1. Net benefits of outsourcing taking into account transaction and risk exposure costs P ro d u c tio n cost sa vin g s
e a s y t o d isce rn
+
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O th e r stra te g ic b e n e fits ( coste d )
N e t b e n e fits o f o u tso u rcin g
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A d d itio n al transactio n costs
h a rd t o d is c e rn
R isk e xp o s u re c o sts
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On the benefits side, benefits incorporate the production cost savings enabled by the arrangement, plus the verified financial impact of other benefits, often described as “strategic” (such as access to the latest technology which might lead to new business capabilities). As Rouse and Corbitt have suggested, production costs are easy to discern (though often overstated by vendors and other proponents of an outsourcing arrangement). The value of other strategic benefits is often much harder to discern, and again, often overstated by proponents, who fail to acknowledge that most “strategic” benefits from outsourcing (business flexibility, access to evolving technologies and skills, etc.) are rarely obtained unless specifically contracted for, usually at a substantial cost premium. Figure 1 also illustrates that outsourcing benefits need to be discounted by the transaction costs associated with moving to an external, contractbased arrangement (c.f. Ang & Straub, 1998). Transaction costs include the costs of finding, choosing, and contracting with the vendor. These are usually substantial, and are rarely taken into account in reports of outsourcing “savings” (Rouse & Corbitt, 2007). Sometimes market-search and contracting costs are treated as sunk costs (and so ignored), even though these costs tend to occur whenever a contract is renegotiated. Search and negotiation costs are magnified if the firm changes vendors or decides to reinsource (Whitten & Leidner, 2006) and in this case transition (switching) costs can be sizeable, sometimes to the extent of countering all the earlier production cost savings. Transaction costs also include the costs of monitoring and continually evaluating the vendor’s performance, including regular benchmarking and market testing. Unfortunately, unless the IT services contracted for are generic, obtaining effective benchmarks is difficult and expensive, but without a check on vendor opportunism, almost certainly arrangements that are not market-tested will end up costing substantially more than market (or even in-house delivery) rates.
The Governance Implications When it is Outsourced
As shown in Figure 1, the expected benefits also need to be discounted by the increased risk exposure (Aubert et al., 2005) associated with outsourcing IT services. Risk exposure is a function of the costs incurred if a risk was to eventuate, multiplied by the likelihood of this happening. Risk exposure includes exposure costs for common risks (such as expected production cost savings being eaten up by changes to the contract, or the purchasing firm finding no alternative bidders at the end of a contract) as well as exposure to rarer, but potential major risks (such as theft or loss of critical records, or inability to adapt to changing business conditions because the knowledge of how to quickly redirect the firm’s IT resources has been lost) which Rouse and Corbitt (2007) labelled “catastrophic” risks.
the WIder It governAnce ImplIcAtIons oF outsourcIng Existing IT Governance standards (e.g., COBIT, ITIL) tend to concentrate on established processes for controlling individual IT outsourcing arrangements (such as formal tendering and evaluation, elicitation and agreement of service level standards, budget/timeframe/functionality management and benchmarking of costs and performance). These are important to successful outsourcing, and should be treated by purchasers as minimal management expectations. They should also be budgeted for, because some controls (particularly related to articulating service levels and to benchmarking performance) are costly. However, the empirical studies conducted by the author have revealed that outsourcing IT services on a large scale raises several more strategic issues that at this stage are not fully addressed by these processes. These issues relate both to threats to the expected value of IT outsourcing, and longerterm strategic risks that are often ignored in the early days of outsourcing when purchasers and
vendors alike are hoping their arrangements will be productive and satisfactory.
outsourcing outcomes Almost Always Involve trade-offs While academic research has tended to talk about “IT outsourcing success” (Grover, Cheon & Teng, 1996) as a single concept, the empirical evidence indicates that firms tend to seek multiple, usually contradictory, benefits from outsourcing. Despite suggestions to the contrary (e.g., Seddon, Cullen & Willcocks, 2002), most firms seek substantial efficiencies (cost savings) from outsourcing, at the same time that they seek improved levels of service, more sophisticated IT and high quality strategic advice (Willcocks & Lacity, 1998). There are inherent tensions here because vendors cannot easily provide both, even though many appear to suggest this is possible in their precontract marketing. In addition, purchasing firms tend to expect to gain greater business flexibility from outsourced IT, particularly the flexibility to quickly increase and decrease demand for services, as well as to change requirements to accommodate new business conditions. However, while most outsourcing contracts allow for some changes to demand within a narrow range, largescale changes in requirements (known as contract variations) are expensive for the vendor to service, and will normally attract a high financial penalty. The governance implications are that if firms are seeking cost savings, they should recognize that these normally come at the expense of customized service, and of, at least in the short term, business flexibility and adaptability.
many business cases supporting the outsourcing decision are Inadequate Once an IT outsourcing arrangement has been entered into, it is usually difficult to reverse the
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The Governance Implications When it is Outsourced
decision, because the costs, organizational attention, and time needed to re-insource the service are substantial. In at least two of the cases studied by the author, the purchasers became aware that the vendor’s prices were substantially higher than market rates, yet only one of these was able to address the problem by reinsourcing (at an expected transition cost of $3.5 million). The other was forced to remain with the existing vendor for several more years because of the absence of alternative bidders, and was able to sever the arrangement only by breaking up the contract amongst smaller vendors, at a substantial increase in transaction costs. Other cases studied by the author where the firm changed vendors were able to find at least one other bidder, but even if an alternative vendor is found, the additional transaction costs, and the costs of transition, are substantial for all but commodity IT services. Given the high cost of unsatisfactory arrangements, it is critical that the initial business case (the financial analysis used to support the decision to outsource) be carefully scrutinized, as the costs of getting out of an arrangement (switching costs) are typically so high. Rouse and Corbitt (2003) reported several IT cases where the original outsourcing business case was subject to external audit. In three of the four audited firms, the auditor determined that expected cost savings (the increased “value” that the arrangements would supposedly bring) would never eventuate. Furthermore, because many millions of dollars had been spent in going to market (a transaction cost) the three outsourcing arrangements that had gone ahead had actually cost these firms substantially more than in-house delivery. Unfortunately for these firms, they too were unable to bring the services back in house and in one case the firm received only a single bidder (the incumbent) for the follow-on contract. Unsurprisingly, this new bid involved a substantial increase in costs. The other two firms were forced to break up their contracts amongst a number of smaller, and ultimately far more expensive, “best of breed” contracts.
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Many business cases include overoptimistic assumptions about likely savings from outsourcing IT. The evidence from a number of studies is that outsourcing IT onshore leads typically to only modest savings of between -22% (i.e., a loss) and 9-11%. These savings do not take into account ongoing management costs, switching costs, nor the initial transaction costs for locating, selecting, and negotiating with the vendor (see Rouse & Corbitt’s (2007) meta analysis of reported savings). Possibly as a result, many firms are now seeking to outsource offshore in the belief that they will get better outcomes, though the evidence for sustainable long-term savings from offshoring is not yet available. Those charged with governing IT services need to treat projected savings sceptically, because the history of outsourcing is replete with examples of what Leslie Willcocks has described as “voodoo” economics (Willcocks & Graser, 2001, p. 187). At a minimum an outsourcing business case needs to justify in detail the source of expected savings, particularly those associated with economies of scale, or future improvements in technology, because existing research suggests that only a minority of purchasers report obtaining such benefits (Rouse & Corbitt, 2003). The business case should also allow for transaction costs, including the costs associated with risk management practices recommended by governance models like COBIT and ITIL (such as early renegotiation of contracts, and ongoing benchmarking). These costs can be high, and once they and other transaction costs are included in the business case the attractiveness of the outsourced option is often substantially reduced. Another cost that should be incorporated into the business case is that for conducting an early evaluation of whether both the estimated benefits and levels of risks were accurate, and if they were not, what this implies. While such a review will be expensive, it may save firms millions of dollars in the longer term. Finally, costing models on which outsourcing decisions are made should be subject to detailed
The Governance Implications When it is Outsourced
sensitivity analysis, as most are dependent on assumptions where values can vary considerably. Anecdotal evidence obtained by the author is that this rarely occurs.
many purchaser Firms underestimate the Impact of loss of Knowledge and expertise Since the mid-1990’s, academics have warned that one downside of outsourcing is the potential loss of knowledge and capabilities once IT staff leave the firm. Even if staff initially move to the vendor, skills and knowledge will not necessarily be available to the purchaser. However, the level of tacit knowledge held by staff is rarely apparent, and is often taken for granted until it is lost. Two important consequences occur with this loss of corporate knowledge and skill. The first is that the purchasing firm loses its source of strategic IT advice, as purchasers cannot rely on existing vendors to provide disinterested advice because of potential conflicts of interests and priorities. While advice can be purchased from alternative vendors, this is expensive and often unsatisfactory, as outsiders lack knowledge of both the firm’s business and its IT environment. After substantial outsourcing, purchasers often find that they no longer provide an environment where the sophisticated skills required can be grown and rewarded, and where skilled staff can be retained. Second, a finding revealed by Rouse’s (2002) focus groups and case studies is that an additional, and usually unexpected, increase in consulting fees tends to accompany outsourcing of IT. These costs are associated with the need to externally access capabilities like independent strategic IT advice.
Firms must Identify, and plan to Avoid “vendor lock In” The issue of long-term dependence on vendors is one of the most intractable and difficult-to-
evaluate downsides of outsourcing IT. The current industry-based solution – that firms manage their risks by contracting with multiple vendors – is not practical for many IT services, and results in much higher transaction costs (both those associated with contracting, and those associated with solving problems that fall “between vendors”). Other recommended solutions, such as to create a “risksharing” mutually interdependent relationship with vendor(s) are possible only for the handful of purchasers who have unique capabilities that the vendors themselves need. And while careful tendering and vendor evaluation processes are crucial for minimising the risks of dependence on an inadequate vendor, these practices do not negate the need to allow for the substantial switching costs that would be incurred if an arrangement proved unsatisfactory. Current empirical evidence suggests that unsatisfactory arrangements are a relatively frequent outcome (Kern & Willcocks, 2000; Rouse & Corbitt, 2003; Whitten & Leidner, 2006). Realistic switching costs should be estimated when initial outsourcing arrangements are entered into, and incorporated as “risk exposure” into the costing model, because once a sourcing arrangement is in place, without such a risk “reserve” of funds, options for the purchasing firm are limited. Given the widespread dependency of firms on IT-based business processes, IT outsourcing arrangement should be entered into as carefully and with as much preparation as a joint venture or takeover, because like those arrangements, the likelihood of failure is high, and the consequences substantial.
Future trends Given the increasing adoption of IT outsourcing, as well as quasi-outsourcing in the form of packaged enterprise software and application service providers (ASPs), it is likely that formal IT governance frameworks will continue to be adapted to the purchaser-vendor delivery model. They will also
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The Governance Implications When it is Outsourced
begin to address the additional risks associated with offshore outsourcing. However, in future, IT governance frameworks will need to adapt to the fact that outsourcing IT usually involves residual risks that will not easily be managed by established control processes. In future, it is hoped that IT governance frameworks will also begin to treat outsourcing in a more integrated way, reflecting the growing (and largely irreversible) dominance of the purchaservendor form of delivery. This is already happening, as indicated by the growing recognition of outsourcing in the most recent ITIL standards (OCG, 2007). In contrast to trade writers, many academic authors have adopted a more cautious view of outsourcing, and have warned that assumptions about outsourcing are often not supported by empirical data. Governance frameworks, in particular, will need to acknowledge that good control practices are expensive, and so reduce the cost-benefits of outsourcing arrangements. They should also acknowledge that many control practices have downsides as well as desirable consequences. However, it is unlikely that specific governance guidelines will be able to address the more intractable difficulties of outsourcing, and it is here that individual officers charged with firms’ governance will need to become more informed, and to adopt a more critical view of the benefits and risks of outsourcing IT. Future corporate governance committees will probably highlight to a much greater extent the need to avoid being locked into unsatisfactory arrangements, by providing for switching costs as an integral, and foreseeable, cost of outsourcing. However, governance officers will also need to address the issue of ensuring independent access to knowledgeable technical advice for planning IT investments and longer term IT strategy, and for specifying contract requirements. This too will add substantially to the transaction costs of outsourcing. It will also be up to governance officers within firms to ensure the firm does not heavily rely on a small number of vendors whose
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interests will only partly overlap those of their purchasers. Unless there is a large and competitive market of vendors, firms risk having only one bidder in future, i.e. the incumbent, as many vendors are deterred from bidding against an incumbent vendor, whose risks are much lower because of prior experiences with the purchaser. Governance committees will also need to ensure higher quality business case development, and more critical analysis of underlying assumptions associated with outsourcing.
conclusIon The last 15 years of research into IT outsourcing (including the author’s own research) have resulted in several key principles that should inform IT governance when IT is outsourced. The first is that most outsourcing arrangements are poorly thought through, and only superficially analysed. Many decisions to outsource rest on unexamined assumptions (for example, that the vendor can get economies of scale unavailable to the client, and will pass these on in the form of lower costs). The qualitative outsourcing research suggests that, overwhelmingly, unexamined estimates of benefits and cost savings are strongly overoptimistic. The nebulous nature of known risks of outsourcing (hidden costs, loss of innovative capacity, risk of vendor lock in, security threats to data and intellectual property) must compete with seemingly “hard” estimates of large financial benefits (which in real life may never be attained). Because to emphasise risks is often portrayed as negative, these known risks then get left out of the outsourcing business case, leading to further unrealistic inflation of expected benefits. The second observation is that many “good outsourcing practices” (including governance practices) have substantial downsides, including, but not always restricted to, unforeseen costs. In a large number of the cases reported above, the transaction costs associated with good practice
The Governance Implications When it is Outsourced
had invalidated the increased value supplied by the outsourcing arrangements. Because, once entered into, an IT outsourcing arrangement is difficult to reverse, purchaser firms do not have incentives to later institute expensive controls that may worsen a difficult purchaser-vendor relationship, and add to the costs of the arrangement, particularly if these controls may reveal a poor initial decision. So, unless these practices are allowed for in the costing model before the arrangement, they are not likely to be adopted. The third observation is that many firms fail to think through where they will get independent strategic advice about their IT services once they have outsourced their skilled IT staff, and how this advice will be incorporated into the IT governance framework. The costs of seeking this service from an external consulting group are likely to be high (and should be factored in as a further transaction cost). Related issues are how external advisors unfamiliar with the firm’s business, culture and processes will gain this familiarity so as to give valuable advice, and how these advisors will be integrated with the firm and its network of IT vendors. The final observation is that recognizing, and costing the risk exposure of outsourcing arrangements is critical to effective IT governance, particularly when higher risk variations, such as business process outsourcing (BPO) and offshore outsourcing, are adopted. Firms should obviously attempt to reduce as many risks as possible, but need to recognize that, except for commodity services, even well managed IT outsourcing arrangements incorporate high levels of risk. As with other risky ventures, the risk exposure associated with both common and catastrophic risks should be calculated, and assumptions about risk exposure, benefits, and transaction costs tested through sensitivity analyses before any substantial IT outsourcing arrangement is entered into.
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Theory and practice. The Journal of Strategic Information Systems, 9(4), 321-350. Lainhart, J. W. (2000). CoBIT: A methodology for managing and controlling information and information technology risks and vulnerabilities. Journal of Information Systems, 14(1 Supp.), 21-25. Loh, L., & Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the Kodak effect. Information Systems Research, 3, 334-358. Musaji, Y. (2005). Sarbanes-Oxley and business process outsourcing risk. Information Systems Control Journal, 5. Retrieved May 14, 2008, from http://www.isaca.org Mylott, T. R., III (1995). Computer outsourcing: Managing the transfer of information systems. Englewood Cliffs, NJ: Prentice Hall. OGC (2007). Information technology infrastructure library (ITIL): Version 3. London: Office of Government Commerce. Rouse, A. C. (2002). Information technology outsourcing revisited: Success factors and risks. Unpublished doctoral dissertation, University of Melbourne, Melbourne, Australia. Rouse, A. C., & Corbitt, B. J. (2001). The Australian government’s abandoned infrastructure outsourcing program: What can be learned? Australian Journal of Information Systems, 10(2), 81-90. Rouse, A. C., & Corbitt, B. J. (2003). Revisiting IT outsourcing risks: Analysis of a survey of Australia’s Top 1000 organizations. In Proceedings of the 14th Australasian Conference on Information Systems 2003, Delivering IT and E-Business Value in Networked Environments (pp. 1-11). School of Management Information Systems, Edith Cowan University, Perth, Western Australia
Rouse, A., C., & Corbitt, B. J. (2007). Understanding information systems outsourcing success and risks through the lens of cognitive biases. In Proceedings of the 15th European Conference on Information Systems (ECIS), St. Gallen, Switzerland. Seddon, P. B., Cullen, S., & Willcocks, L. P. (2002). Does Domberger’s theory of “the contracting organization” explain satisfaction with IT outsourcing? International Conference on Information Systems (ICIS), Barcelona. Standards Australia (2005). AS8015-2005 corporate governance of information and communication technology. Canberra: Standards Australia. Tirole, J. (2001). Corporate governance. Econometrica, 69, 1-35. Weill, P., & Ross, J. W. (2004). IT governance: How top performers manage IT decision rights for superior results. Boston: Harvard Business School Press. Whitten, D., & Leidner, D. (2006). Bringing IT back: An analysis of the decision to backsource or switch vendors. Decision Sciences, 37(4), 605-621. Willcocks, L. P., & Feeny, D. (1998). Core IS capabilities for exploiting information technology. Sloan Management Review, 39(3), 9-21. Willcocks, L., & Graser, V. (2001). Delivering IT and eBusiness value. Oxford: ButterworthHeinemann. Willcocks, L. P., & Lacity, M. (1998). Strategic sourcing of information systems: Perspectives and practices. Chichester: Wiley. Willcocks, L., Lacity, M., & Kern, T. (1999). Risk mitigation in IT outsourcing strategy revisited: Longitudinal case research at LISA. Journal of Strategic Information Systems, 8, 285-314.
This work was previously published in Information Technology Governance and Service Management: Frameworks and Adaptations, edited by A. Cater-Steel, pp. 285-296, copyright 2009 by Information Science Reference (an imprint of IGI Global).
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Chapter 8.8
Supplier Capabilities and eSourcing Relationships:
A Psychological Contract Perspective Vanita Yadav Management Development Institute, India Mahadeo Jaiswal Management Development Institute, India
AbstrAct The forces of globalization have influenced organizations to extend the concept of IT outsourcing to IT-intensive business process outsourcing (eSourcing). Most of the research on managing outsourcing relationships has focused either on legal contracts or on strategic partnerships. Advocating a different viewpoint, researchers like Rousseau (1995) found that in reality everyday working of contractual relationships was governed by individual’s subjective interpretation and was fundamentally psychological in nature. The objective of this paper is to posit a relationship step model which projects a vital relationship management capability plus psychological contract perspective for eSourcing. It incorporates the stance of relational contract, interorganizational relationship and psychological contract theories. Using the qualitative research paradigm, the research model is preliminarily explored with case studies of two eSourcing suppliers. The
exploratory results of this research indicate that relationship management capability of suppliers is an important factor shaping the outsourcing value proposition. [Article copies are available for purchase from InfoSci-on-Demand.com]
IntroductIon The concept of outsourcing has spread from traditional informational systems (IS) outsourcing structures into new outsourcing service configurations, like IT-intensive business processes. This kind of outsourcing has been defined as ‘eSourcing’ by Carnegie Mellon University’s eSCM-SP. The primary drivers for this trend are increasing competitive pressures, a need to access world-class capabilities and a desire to share risks. The eSourcing relationship begins with a contract between two parties - the client and the supplier. Both these parties must possess certain
capabilities in order to make the engagement successful. Kern and Willcocks (2001) in their study on IT capabilities for clients found that supplier capabilities are critical for outsourcing success. Despite the growing interest in vendor capabilities, there has not been an in-depth examination of these capabilities and how they generate value in outsourcing relationships (Levina & Ross, 2003). Additionally, most of the prior research on outsourcing relationships has focused either on legal contracts or on advocating strategic partnerships for managing the relationship. But in reality, everyday working of contractual relationship is governed by individual’s subjective interpretation, because all contracts, whether written or unwritten, are fundamentally psychological, i.e. existing in the eye of the beholder (Rousseau, 1995). Rousseau’s 1989 seminal research triggered much of the contemporary empirical work on the employment psychological contract. Adopting Rousseau’s view, Koh, Ang and Straub (2004) have defined a new perspective on managing IT outsourcing relationships. They state that it is the individual’s beliefs and perceptions of these obligations rather than written contract that drive their behavior. Hence to get a complete picture, it becomes relevant to view the sourcing relationships from the psychological contract perspective. Addressing these gaps, this paper aims to propose a relationship step model for eSourcing suppliers using a psychological contract lens. This study aims to explore how relationship management capabilities of suppliers help in fulfilling supplier obligations and hence add business value. The paper proceeds as follows. In the next literature review section, we discuss the main concepts of the paper. We then move towards development of a model by delineating the theoretical foundations and the dimensions of relationship management capabilities. Next, we examine the relationship management capabilities via the psychological contract lens and posit a relationship step model for eSourcing suppliers. We then describe the methodology adopted for exploratory
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research and discuss the two case studies. We conclude with our initial findings, limitations and directions for future research.
lIterAture revIeW esourcing eSourcing or IT-intensive sourcing, uses information technology as a key component of service delivery or as an enabler for delivering services (Hyder, Heston & Paulk, 2004). It includes traditional IT sourcing, and task and business process sourcing (see Figure 1). eSourcing is often provided remotely, using telecommunication or data networks. Carnegie Mellon University’s eSCM-SP states that these services range from routine and non-critical tasks that are resource intensive and operational in nature to strategic processes that directly impact revenues. Adopting this view, we define eSourcing as “the delegation of one or more IT-intensive business processes to an external provider that, in turn owns, administers and manages the selected processes based on defined and measurable performance metrics.”
capabilities Organizational capabilities are the abilities underlying high performance in specific spheres of business (Dawson, 2005). They are the result of deliberate investments in organizational structure and systems to make important improvements in those routines and practices (Zollo & Winter, 2002).
client-supplier relationships Outsourcing relationship can be defined as a state where client and supplier organizations are connected or related to via individual managers for the duration of the contract period of an
Supplier Capabilities and eSourcing Relationships
Figure 1. Types of eSourcing Services (Source- Hyder et al. 2004) eSOURCING
Human Resources Engineering Services
Data Capture Integration &
Customer Care
TASK & BUSINESS PROCESS SOURCING
Medical/Legal Transcription Finance & Accounting
Purchasing Application Service
Desktop Maintenance
IT SOURCING
Applications Management
Data Center
Telecommunications Network Support
outsourcing venture (Kern & Willcocks, 2001). A survey based study conducted by Goles (2001) highlights that higher vendor-client alignment, teamwork, balance of control, and process agility in the relationship will lead to more successful outcomes. Most of the research on managing outsourcing relationships has focused either on legal contract, with tight contractual mechanisms recommended to reduce opportunistic behaviors (Ang & Beath, 1993; Lacity & Hirschheim, 1993) or on advocating strategic partnerships for managing the relationship (Kern & Willcocks, 2001). Relationship management depends on carefully planning and formulating the contract, devising operational structures, outlining the interactions and leveraging and forming relational behaviors (Kern & Willcocks, 2001). From literature we learn that informal (interpersonal trust) and formal (contractual) aspects of the relationship are equally important (Poppo, 2002; Sabherwal, 1999) and need to be developed (Levina & Ross, 2003).
business value IS research on the value generation potential of an outsourcing relationship has considered three fac-
tors: client characteristics, vendor characteristics, and the vendor-client relationship (Goles, 2001). An important factor shaping the outsourcing value proposition is the vendor’s own capabilities (Goles, 2001; Saunders, Gebelt & Hu, 1997). Thus from the supplier perspective, business value addition would depend, to a great extent, upon the relationship management capabilities. Business value addition can be operationalized via overall satisfaction with the contract, the desire to retain the outsourcing partner (Saunders, Gebelt & Hu, 1997) and increase in the level of trust (Lee & Kim 1999). Satisfaction is a common measure of success in IT outsourcing research (Susaria, Barua & Whinston, 2003; Koh, Ang & Straub, 2004), and is used as a proxy for the perceived effectiveness of the relationship. Satisfaction is also predictive of future actions (Poppo & Lacity 2002), and is closely related to the parties’ intention to continue the relationship, either in the current contract or in subsequent repurchase (Koh, Ang & Straub, 2004). Also, it is more costly for suppliers to acquire new customers than to retain existing ones (Koh, Ang & Straub, 2004). Trust is an indicator of partnership quality (Lee & Kim, 1999) and can be used to measure
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Supplier Capabilities and eSourcing Relationships
business value addition as the increase in the level of trust is more likely to result in the increase in the success of the relationship. Trust has been defined by Mayer, Davis and Schoorman (1995) as the “willingness of a party to be vulnerable to the actions of another party, based upon expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party”. In simple words it is an expectation that a certain party can be relied upon even if there is a possibility of opportunism. Trust is rather an abstract and intuitive construct which is individual centric and is likely to have psychological connotations.
iii.
theoretIcAl FoundAtIons Client and supplier relationships can be studied from varied theoretical perspectives. In this research paper we focus on three theories from literature. These are – relational contract theory (RCT), interorganizational relationship (IOR) theory and psychological contract theory. Together these theories cover an organizational, behavioral, legal and psychological perspective of the sourcing relationship: i.
ii.
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Relational Contract Theory (RCT): RCT states that all contracts include contractual relations (Macneil, 1974). The core of the theory contains two key elements: the description of contract behaviors, which are the norms that arise in exchange relations and the dimensions of contract discreetness, which can be from discrete to relational. Interorganizational Relationship Theory (IOR): IOR is concerned with the reasons and conditions for forming relationships (including socio-political and economic aspects) and their structural behavioral and process dimensions (Oliver, 1990; Van de Ven & Ring, 1994). IOR theory provides a useful approach for understanding and
analyzing the causes and conditions for the formation of a relationship, and the structural behavioral and interaction dimensions (Kern & Willcocks, 2001). Psychological Contract Theory: A psychological contract refers to an individual’s mental beliefs about his or her mutual obligations in a contractual relationship (Rousseau, 1995). Koh, Ang and Straub (2004) assert that a psychological contract perspective offers a more inclusive view of mutual obligations between the contracting parties in outsourcing. Mutual obligations imply that the supplier agrees to make specific contributions to the customer in return for certain benefits from the customer. Their research findings highlight that fulfilling customer-supplier obligations explained a significant amount of variance in outsourcing success.
toWArds development oF A relAtIonshIp step model relationship management capabilities We extend and adapt some of the IT outsourcing relational dimensions, identified by Kern and Willcocks (2001), to eSourcing relationships and posit the following four dimensions of relationship management capabilities of eSourcing suppliers (see Figure2). i.
Contract: Contracts are essentially vehicles for ‘relational development’ (Macaulay, 1963). RCT offers the theoretical foundation for investigating the contract dimension of eSourcing relationships. Ang and Beath (1993) in their study of outsourcing contracts demonstrate that unlike the suggestions of discrete contracts, parties in real-life dynamically interact, commit to,
and reinterpret their agreements with one another to assure necessary flexibility. Further, depending upon the complexity of the contract, anticipating all future events and covering them by making them present is impossible (Macneil, 1974). Structure: IOR theory offers a lens for examining the structural dimension of an eSourcing relationship. Buyer-supplier relationships entail a set of structural properties such as, size, centralization, specialization and configuration (Hakansson & Snehota, 1995). In outsourcing several individuals from different functional areas, at different levels in hierarchy, and fulfilling different roles generally become involved (Kern & Willcocks, 2001). Therefore, the interface points of the supplier and customer should be clearly defined. For the supplier interface roles of SLA management, leadership and business understanding are critical for coordinating, developing and facilitating the relationship (Kern & Willcocks, 2001). Knowledge: IOR theory says that exchange is the dominant process underpinning interorganizational relations (Kern & Willcocks, 2001). Exchange does not necessarily involve elements of economic value, but may also include services, information and knowledge. The knowledge dimension can be described in terms of sharing service related knowledge
KNOWLEDGE
iv.
BEHAVIOR
and industry best practices with the client. Behavior: Both RCT and IOR theories identify the major elements in representing behaviors in interorganizational relationships. Interactions among cooperating parties may cast a positive, neutral, or negative overtone on the relationship, influencing the parties’ behaviors toward each other (Kern & Willcocks, 2001). The behavior dimension can be described in terms of taking ownership, supplier-client business goal alignment and a good working relationship.
Applying the perspective of psychological contract Psychological contract theory focuses on the contracting parties’ mental beliefs and expectations. Using grounded theory approach Koh, Ang and Straub (2004) generated a list of customer-supplier obligations and identified six major components of what clients’ believe are supplier obligations (see Table 1). The supplier obligations were drawn from the customer sources and they point out precisely ‘what the customers expects’ from their suppliers. If the supplier is able to fulfill these obligations it is more likely to lead to customer satisfaction. This would in turn help in adding business value. Next, we map the supplier obligations with the
Project Scoping: Clear definition of the nature and range of the services covered in the contract and flexibility in handling clients’ requests for changes in the scope of the services
2.
Clear Authority Structures: Delineation of the decision-making rights and reporting structures in the project, in terms of the roles and responsibilities of all the parties involved.
3.
Dedicated Project Staffing: Assignment of high quality staff to work on the project, and minimization of staff turnover during the project.
4.
Effective Knowledge Transfer: Educating clients in terms of the necessary skills, knowledge, and expertise associated with using the outsourced system or service.
5.
Taking Charge: Completing the job and solving problems independently, with minimal customer involvement.
6.
Building effective interorganizational teams: Investing time and effort to foster a good working relationship among the team of customer and supplier staff working on the project
5. Taking Charge 6. Building Effective Interorganizational Teams
relationship management capabilities required to fulfill these obligations (see Table 2). Contract capability is required to fulfill project scoping and flexibility obligation. Structure capability is required to fulfill clear authority structures and dedicated project staffing obligations. Knowledge capability is required to fulfill effective knowledge sharing and transfer obligation. Finally, behavior capability is required to fulfill taking charge and building effective interorganizational team obligations.
relationship step model for esourcing suppliers After combining the relational capabilities and psychological contract dimensions we posit that eSourcing suppliers possessing relationship
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management capabilities (input) are more likely to fulfill supplier obligations (intermediate outcome). As a result, the service provider will be more likely to achieve business value addition (final outcome). Figure 3 displays the relationship step model for eSourcing suppliers. The first step is the achievement of relationship management capabilities. These relationship management capabilities would help the service provider to proceed to the second step of the model, which is the fulfillment of supplier obligations (intermediate outcome). After fulfilling the supplier obligations, the service provider ascends to the third step of the model, which is the achievement of business value addition (final outcome). As we move up in the vertical axis, the level of relationship also increases from a contract-based relationship to a trust-based relationship between the service provider and the client.
Supplier Capabilities and eSourcing Relationships
Figure 3. Relationship step model for eSourcing suppliers Trust-based Relationship
Business Value Addition Fulfillment of Supplier Obligations (Psychological Contract)
Relationship Management Capabilities
methodology
iii.
Case study research method was adopted for this study to carry out two exploratory case studies. Case study has been a common and widely accepted research strategy in psychology, sociology, political science, social work (Gilgun, 1994) and business (Ghauri & Gronhaug, 2002; Yin, 2003). Yin defines case study as an empirical inquiry to investigate a contemporary phenomenon within its real life context. Following Yin’s (2003) approach, we included all the five components of research design:
iv.
i.
Research Questions (RQ) RQ1: How do the relationship management capabilities help in fulfilling the supplier obligations (psychological contract dimension)? RQ2: How does the fulfillment of supplier obligations help in adding business value for the suppliers? ii. Research Propositions (RP) RP1: eSourcing suppliers who possess relationship management capabilities are more likely to fulfill supplier obligations. RP2: eSourcing suppliers who fulfill supplier obligations are more likely to achieve business value addition.
v.
Contract-based Relationship
Unit of Analysis: a relationship/engagement between the supplier and the client Logical linking of data collected with the propositions: pattern matching Criteria for interpreting the findings- logic model for analyzing case study evidence
dAtA collectIon In the last decade, the information technology and business process outsourcing industries have seen substantial offshoring. Two eSourcing suppliers were selected from India for the purpose of data collection. India has established itself as a popular outsourcing destination as it offers and delivers the best ‘bundle’ of benefits sought from global sourcing (NASSCOM, 2006; Yadav, Bhardwaj & Saxena, 2006). India has successfully leveraged its advantages of abundant talent, a keen focus on quality and low costs coupled with an enabling business environment to attain leadership position in the global sourcing space ((NASSCOM, 2006). According to NASSCOM’s report India accounts for 65 per cent of the global industry in offshore IT and 46 per cent of the global Business Process Offshoring (BPO) industry. Given trends in globalization and the increasing prevalence of
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Supplier Capabilities and eSourcing Relationships
offshore outsourcing (Carmel & Agarwal, 2002) and the relative dearth of eSourcing research outside the United States and selected parts of Europe (Barthelemy & Geyer, 2001; Koh, Ang & Straub, 2004), we believe that this dataset is useful in helping the Information Systems (IS) community understand eSourcing practices in other countries like India. The two organizations selected for the study are well-established eSourcing suppliers based around the National Capital Region of India. Both service different domains- one provides knowledge-intensive eSourcing services in the Telecom domain and the other provides operational eSourcing services in the Travel Services domain. Their clients are located in USA. Due to high level of confidentiality and legal clauses involved in offshore outsourcing contracts the names of the organizations have been disguised in the paper. Hence in the rest of this paper Travel Services supplier will be addressed as TravelWiz and Telecom Services supplier will be addressed as TeleWiz. We conducted interviews with the senior level managers from operations, finance, and business development; and middle-level project managers. Two members from the research team (one of the authors and one research assistant) took extensive field notes at the interview session to make the
transcripts as complete as possible. During the interviews, the first author focused on conducting the interview using an interview script, which was transcribed from interview notes the same day. The interview questions (see Appendix 1) of the script were guided by our research propositions. Our research propositions provided the theoretical orientation to guide our case study analysis. Secondary data from sources such as company documentations, company press releases, presentations, official websites, news articles etc were also collected. Notes from informal observation were also taken during the site visits. All relevant information was stored as softcopies and hardcopies to create a case study database. The case study evidence was analyzed using the ‘logic models’ data analysis technique. The use of logic models as an analytic technique consists of matching empirically observed events to theoretically predicted events. The events are staged in a repeated cause-effect-cause-effect pattern (Figure 4), whereby a dependent variable (event) at an earlier stage becomes the independent variable (causal event) for the next stage (Yin 2003). Thus according to our relationship step model (Figure 3), the presence of relationship management capabilities (input) leads to fulfillment of supplier obligations (intermediate outcome) and eventually to business value addition (final outcome).
Project Scoping Clear Authority Structures Dedicated Project Staffing Effective Knowledge Transfer • Taking Charge • Building effective Interorganizational teams
(INTERMEDIATE OUTCOME)
Business Value Addition • Satisfaction • Trust • Intention to continue business
(FINAL OUTCOME)
Supplier Capabilities and eSourcing Relationships
case study- travelWiz TravelWiz is a fully owned subsidiary, set up in India in 2001, of world’s leading Travel and Real Estate Corporation based in USA. The parent company is listed among the fortune 500 companies and has clients in over 100 countries around the world. The offshore eSourcing unit in India provides a myriad range of services to its parent company. It operates as a niche player in the eSourcing arena and provides end-to-end solutions in the travel vertical. The outsourcing services provided by TravelWiz fell under three categories: Contact Centre Services, IT Services and BPO Services in the travel domain (Figure 5). The Contact Centre Services included customer-facing (pre and post sales) services. Customer support was provided via email and phone in the caller’s native language, e.g., calls from France would be routed to the agent in India handling French calls. IT Services included web design development and maintenance. This included support for enterprise management packages; website content management system; and ticketing engine used by the company and its clients. BPO Services covered back office administrative services and financial services. TravelWiz provided seamless integra-
Figure 5. Services provided by TravelWiz
Contact Centre Services
BPO Services
TravelWiz
IT Services
tion of all these three services. Thus providing end-to-end travel domain specialized services which would help in achieving higher revenues and savings. TravelWiz had a multicultural staff of over 1500 people with about 12% of them being Europeans. The expatriate staff was from 9 different countries in Europe. This offered unique opportunity to the Indian as well as expatriate staff to indulge in cross-cultural knowledge sharing. The expatriate staff was recruited and trained by TravelWiz clients from their native countries through advertisements posted on websites and employee referrals. During the span of six years TravelWiz had developed a robut multi-lingual support model to service voice and non-voice processes. TravelWiz had signed detailed contracts with its client which allowed minimum flexibility related to scope changes. The process to be handled and the services to be provided by TravelWiz were defined in a very structured manner. The client and TravelWiz identified the interfaces in their relationships even before the project started. A formal organizational structure of their outsourcing value chain was drawn up to track the flow of the project. TravelWiz worked in a 24/7 mode and staffing was based upon seating capacity of their unit. For every project people were assigned based upon the required expertise and availability. The roles and responsibilities were clearly explained to the staff and were also documented in the company manuals. There were in-house ad-hoc training programs for new staff that joined in the middle of a project when there were situations of staff turnover or changes in the project scope. The services provided by TravelWiz were operational in nature and there were formally documented standards for every process and its delivery methodology. TravelWiz had a formal relationship management team assigned to the eSourcing project. They interacted with the client on a regular basis via various modes- online chat, email, and videocon-
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Supplier Capabilities and eSourcing Relationships
ferencing. Scheduled face-to-face client meetings were also planned to report progress to the client and handle any project-related issues. This team was responsible to oversee any bottlenecks that would occur during the project and acted as a link between the client team and supplier team.
case study- teleWiz TeleWiz was a 60 percent owned subsidiary, in India, of a leading Telecom Corporation based in USA. TeleWiz was setup in the year 2002 as a technology and consulting group to provide pre-sales support on new technology to its parent company and business partners. The parent company was a global leader in communication systems, applications, and services. They designed, built, deployed and managed networks for enterprises. Customers ranged from small businesses and nonprofit agencies to the FORTUNE 500 companies, and the government. TeleWiz provided knowledge-intensive eCommunication services to its parent company which included consulting support, technical expertise support, design support and request for proposal (RFP) support (see Figure 6). These services fell under the pre-sales category. TeleWiz provided these specialized services through a team of area specialists. TeleWiz signed contracts with its client on basis of the nature of services and the range of services required. As a result, flexibility in contract scope changes was allowed to a great extent. The client team and TeleWiz team had clearly identified the interface structure for every project. Staff assignment for outsourcing projects was based upon the required expertise and availability of human resources. This was more critical in this case as the task at hand was highly complex and required expertise of specialized people. Communication skills of the team members were also considered as an important factor in staff assignment. The
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Figure 6. Services provided by TeleWiz
Consulting Support
Technical Expertise Support
TeleWiz Design Support
RFP Support
roles and responsibilities were clearly defined and documented in the company manuals. In-house extensive training programs for new staff were conducted for every project. People with prior experience in such projects were used as trainers in such programs. They motivated people to invest time in documentation by offering awards and prizes for building documentations during and after the projects. TeleWiz did not have a formal relationship management team assigned to the projects. But their team leads interacted with the client on a regular basis via various modes- email, teleconferencing and videoconferencing. Scheduled faceto-face client meetings were planned by senior project managers to report progress to the client and handle any project-related issues. Thus the structure of the relationship management team was defined as ‘informal in nature’ by TeleWiz. They informally spent time in educating the project team regarding the client’s business goals and work culture. This was conducted during project meetings which were attended by team members, team leads and project managers. They emphasized that the service being provided by them was highly specialized in nature and there were no industry best practices available.
Supplier Capabilities and eSourcing Relationships
results Data analysis was guided by our case analysis model (Figure 4). The summary of the results for each research proposition are outlined in Figure 7 and explained as follows:
Thus the presence of contract capability in the case of TeleWiz helped in the fulfillment of project scoping and flexibility obligations whereas the partial presence of contract capability in the case of TravelWiz resulted in partial fulfillment of the project scoping and flexibility obligations.
RP1a: eSourcing suppliers who possess ‘contract’ capability’ are more likely to fulfill ‘scoping & flexibility’ obligations
RP1b: eSourcing suppliers who possess ‘structure’ capability are more likely to fulfill ‘clear authority structure & staffing’ obligations
Both the eSourcing suppliers believed that the project scope in the contracts should be clearly defined covering the nature and range of the services to be provided. They both also believed that some amount of flexibility should also be present in the outsourcing contracts. TeleWiz believed in signing very flexible contracts to the extent that project monitoring was loosely stated as per mutually agreed processes in the contract whereas TravelWiz believed in lesser amount of flexibility and greater amount of formality in the contracts. Both the suppliers had signed long term contracts which were reviewed on a yearly basis. Greater flexibility in the TeleWiz case can be attributed to the fact that the nature of the job was complex and was difficult to state explicitly beforehand whereas the TravelWiz case was more operational in nature that required lesser amount of flexibility.
Both the suppliers assigned dedicated staff with the required expertise to the projects. An interesting finding was that even in highly technical roles, as in the case of TeleWiz, it was mandatory to possess good communication skills apart from having the required technical expertise. People were kept on-bench to mitigate the risk of staff turnover in the projects. Additionally, both companies had good HR practices consisting of a good salary structure and a healthy work environment. The interface points and roles and responsibilities were clearly defined for both the companies. But only TravelWiz had a dedicated relationship management team. The presence of structure capability in the case of TravelWiz helped in the fulfillment of clear authority structure & staffing obligations whereas the partial presence of structure capability in the case of TeleWiz resulted in
Figure 7. Results summary
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Supplier Capabilities and eSourcing Relationships
partial fulfillment of clear authority structure & staffing obligations. RP1c: eSourcing suppliers who possess ‘knowledge’ capability are more likely to fulfill ‘effective knowledge sharing & transfer’ obligation The level of service related knowledge sharing with the client was high for both the companies. TeleWiz also offered awards for documentation and building content on service related knowledge. Industry best practices were shared by TravelWiz with its client (parent company). But TeleWiz shared none as they believed that there were no industry best practices in such a specialized domain. The services of TravelWiz were delivered with comprehensive and complete documentation whereas the services of the TeleWiz were delivered with brief and to-the-point documentation. It can be attributed to the fact that they were providing highly customized services and building extensive documentation separately every time could have cost implications in terms of time and effort. On the other hand TravelWiz tasks were mainly operational and repetitive in nature. This brought in a great amount of standardization and easy documentation for TravelWiz. Hence the presence of knowledge capability in the case of TravelWiz helped in the fulfillment of effective knowledge sharing & transfer obligations whereas the partial presence of knowledge capability in the case of TeleWiz resulted in partial fulfillment of effective knowledge sharing & transfer obligations.
fort to develop business understanding and a good working relationship. The team members working on the project were also given informal training on client-supplier goal alignment. Thus the presence of behavior capability in the case of TravelWiz as well as TeleWiz helped in the fulfillment of taking charge & building effective interorganizational teams obligations. RP2: eSourcing suppliers who fulfill supplier obligations are more likely to achieve business value addition. Fulfillment of most of the obligations for both the companies illustrated high level of satisfaction in the relationship with their respective clients. Also, both believed that the business with their client is likely to grow in future. The level of trust at the time of commencement of the eSourcing relationship was low in both the cases and was mainly contract–based. In the case of TeleWiz there were negative feelings about the project’s success initially. The level of trust had risen in both the cases and was rated as very high in the present scenario by TravelWiz. This research proposition is strongly supported in the case of TravelWiz and partially supported in the case of TeleWiz. It is important to bear in mind that TravelWiz was a 100 percent owned subsidiary engaged in the relationship for the past six years whereas TeleWiz was a 60 percent owned subsidiary engaged in the relationship for the past five years. Trust had grown in both the cases but with varying levels. The ownership structure could have also impacted the level of trust.
RP1d: eSourcing suppliers who possess ‘behavior’ capability are more likely to fulfill ‘taking charge & building effective interorganizational teams’ obligation
dIscussIon
Both the companies scored high on this dimension and believed in taking ownership of the project by completing the job and solving problems independently, with minimal client involvement. Also, both the companies invested time and ef-
Overall our exploratory results show considerable agreement in terms of our research model and propositions. They also highlight that the levels of the capability dimensions may vary from case-to-case. Researchers such as Poppo
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Supplier Capabilities and eSourcing Relationships
(2002) and Sabherwal (1999) stress on the importance of formal (contractual) as well as informal (interpersonal) aspects of the relationships. Our research model adds an interesting element of psychological contract to the informal aspect of the relationships. Further, our study revealed that communication skills of employees involved plays a major role in building relationship management capability. Our results support Koh, Ang and Straub’s (2004) view of psychological contract in outsourcing arrangements. Our research is advancement in this regard as it has moved beyond IT outsourcing and has studied the psychological contract perspective in eSourcing arrangements. Another important contribution of this study is that using the unique lens of psychological contract we were able to explore the gap between possession of a capability and achievement of business value for the firm. In literature outsourcing value proposition in terms of vendor’s own capabilities was stressed by Goles (2001) and Saunders et al. (1997). Our findings clearly indicate that relationship management capability of suppliers is an important factor shaping the outsourcing value proposition. The suppliers possessing these capabilities are more likely to fulfill the supplier obligations and hence are more likely to develop trust-based relationships with their clients. This study provides practical contributions to the outsourcing industry by recommending a comprehensive, yet easy to apply, relationship step model. The model can act as a relationship-checklist for the contracting process starting from planning for eSourcing contracts to post-contract management.
frequently for case study research - “How can you generalize from a single case?” The answer, as argued by Yin (2003, pp. 10), is that “case studies like experiments are generalizable to theoretical propositions and not to populations or universes”. We adopt Yin’s viewpoint and try to generalize our results to our theoretical propositions and not to the population in general. Hence the results of this exploratory study should be considered as probable indicators for the phenomenon under study. Secondly, due to time constraints for the interview sessions, the authors had to focus their questions strictly around the theoretical propositions. As a result, other dynamic and static perspectives of eSourcing relationships could not be explored. We would like to put forward this as a future research direction for researchers examining sourcing relationships. Thirdly, the research is purely from a supplier’s perspective. Hence results from this study should be treated with caution. An ideal condition would be to study the client-supplier dyad. However, we would like to state that since this is one of the initial steps in this direction, insights from the supplier perspective are also important. The insights from this research can be taken forward to study the client’s perspective to get the complete picture. Finally, the case studies were of successful eSourcing suppliers. An alternate viewpoint is also essential for progress of research. The case studies do not highlight negative examples of eSourcing relationships. Future research in this area can explore such dimensions as well.
lImItAtIons
The outsourcing industry is posed for phenomenal growth and this area has high potential for research. Future research in this area can involve further validation of the proposed relationship step model by undertaking case studies of third party eSourcing suppliers in India. Additionally, the
Like most qualitative studies, this research has some limitations. Firstly, the study tries to derive results from two exploratory case studies. Yin (2003, pp. 10) clearly highlights a question posed
Future reseArch dIrectIons
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Supplier Capabilities and eSourcing Relationships
framework proposed in this paper can be used by other researchers to carry out empirical research from the vendor perspective in other popular service provider countries, like China. An ideal endeavor would be to have client-supplier dyads as the unit of analysis. An alternative viewpoint for looking at our research model (Figure 3) can be by viewing it in the reverse direction. In other words, what are the likely consequences of moving down the steps of the relationship step model? In what situations can this occur? A probable situation can be a case where projects do not reach their intended targets. Simulating such an example, a client and supplier start an outsourcing venture on a high note but due to high attrition at the supplier’s end a large pool of team members engaged in the project leave in the middle of the project. With the urgency to meet deadlines the supplier hires a new talent pool. The new employees are unfamiliar with the current project and hence take more time in understanding the process and completing the project deliverables. As a result the supplier organization is unable to fulfill some of the supplier obligations which instigate dissatisfaction within the client team. In such situations, does a trust-based relationship collapse? Does it result in a stricter contract–based relationship? Or there exists a middle path. How can suppliers ensure that they move up the steps and not down the steps of the relationship step model? An interesting extension of our research would be to compare and contrast our case studies with companies that have failed in outsourcing ventures using the relationship step model. Additionally, comparison between companies in a more variegated spectrum of industries can be carried out. Further, longitudinal studies can be carried out to establish causality effects in the proposed model. Future research can also explore other obligations that are important from the service provider perspective. Also, whether the supplier obligations evolve or change over time can be examined. Additionally, the impact
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of communication skills on relationship building can be studied by researchers.
reFerences Ang, Soon & Cynthia M. Beath (1993). Hierarchical elements in software contracts. Journal of Organ. Computing, 3(3), 329-361. Barthelemy, J. & D. Geyer (2001). IT Outsourcing: Evidence from France and Germany. European Management Journal, 19(2), 195-202. Carmel, E. & R. Agarwal (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 1(2), 65-76. Dawson, R. (2005). Developing Knowledge-based Client Relationships: Leadership in Professional Services. Oxford: Butterworth-Heinemann, Second Edition. Ghauri, P. & K. Gronhaug (2002). Research Methods in Business Studies: A practical guide. England: Pearson Education. Gilgun, J. F. (1994). A Case for Case Studies in social work Research. Social Work, 39, 371-380. Goles, T. (2001). The impact of Client-Vendor Relationship on Outsourcing success. Unpublished Ph.D. dissertation, TX: University of Houston. Hakansson, H. & I. Snehota (1995). Developing Relationships in Business Networks. London: Routledge. Hyder, Elaine B., Keith M. Heston, & Marck C. Paulk (2004). The eSCM-SP v2: Model Overview. Carnegie Mellon University. Kern, T. & L.P. Willcocks (2001). The Relationship Advantage: Information Technologies, Sourcing and Management. Oxford: Oxford University Press. Koh, Christine, Soon Ang, & Detmar W. Straub (2004). IT Outsourcing success: A Psychologi-
Supplier Capabilities and eSourcing Relationships
cal Contract Perspective. Information Systems Research, 15(4), 356-373. Lacity, Mary C. & Rudy Hirschheim (1993). Information Systems outsourcing bandwagon,” Sloan Management Review, 35(1), 73-86. Lee, J. N. & Y. G. Kim (1999). Effect of partnership quality on IT outsourcing success: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29–61. Levina, N. & Jeanne W. Ross (2003). From the Vendor’s perspective: Exploring the value proposition in Information Technology outsourcing. MIS Quarterly, 27(3), 331.
ing: Enduring Themes, Emergent Patterns and Future Directions, Hirschheim, R., A. Heinzl, & J. Dibbern (eds.). Netherlands: Springer, Dordrecht, 253–276. Rousseau, Denise M. (1989). Psychological and implied contracts in organization. Employee Responsibilities Rights Journal, 2(2), 121–139. Rousseau, Denise M. (1995). Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Thousands Oaks, London: Sage Publications. Sabherwal, R. (1999). The role of trust in IS Development Projects. Communications of the ACM, 42(2), 80-86.
Macaulay, S. (1963). Non-Contractual Relations in business: A Preliminary study. American Social Review, 28(1), 55-67.
Saunders, C., M. Gebelt, & Q. Hu (1997). Achieving success in Information Systems Outsourcing. California Management Review, 39(2), 63-79.
Macneil, I. R. (1974). The Many Futures of Contracts. Southern California Law Review, 47(3), 691-816.
Susaria, Anjana, Anitesh Barua, & Andrew B. Whinston (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quartertly, 27(1), 91–123.
Mayer, R. C., Davis, J. H. & Schoorman, D. F. (1995). An Integration Model of Organizational Trust. Academy of Management Review, 20(3), 709-730. NASSCOM (2006). Strategic Review 2006: The IT Industry in India. Retrieved February 19, 2006, from http://www.nasscom.org. Oliver, C. (1990). Determinants of Interorganizational Relationships: Integration and Future Directions. Academy of Management Review, 15(2), 241-65. Poppo, L. (2002). Do formal contracts and Relational Governance Function as substitutes or Complements? Strategic Management Journal, 23(8), 707-725. Poppo, Laura & Mary C. Lacity (2002). The normative value of transaction cost economics: What managers have learned about TCE principles in the IT context, in Information Systems Outsourc-
Van de Ven, A. H. & P.S. Ring (1994). Development Process of Cooperative Interorganizational Relationships. Academy of Management Review, 19(1), 90-118. Yin, Robert K. (2003). Case Study Research: Design and Methods. Thousands Oaks, London: Sage Publications. Zollo, M. & S. Winter (2002). Deliberate Learning and the evolution of dynamic capabilities. Organization Science, 13(3), 339-351. Yadav, Vanita, Bharadwaj, S.S. & Saxena, K.B.C. (2006). Tecnovate: Challenges of Business Process Outsourcing. Asia Case Research Center (ACRC), University of Hong Kong. Retrieved March 19, 2007, from http://www.acrc.org.hk/ search/case_showlist.asp?ct=advancedsearch&s t=ath&a=906 .
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AppendIX 1. cAse study QuestIonnAIre Research Dimension
Interview Questions
Capability Dimensions Contract
o o
Why did the client decide to outsource? What is covered in the contract?
Structure
o o
What is the governance structure? What is your outsourcing team structure?
Knowledge
o o o
How critical is the process to the client’s business? How do you deliver services to the clients? What kind of knowledge transfer takes places?
Behaviour
o o o o
How do you manage the relationship with your client? How much client involvement do you require/expect during the project? How does the client hope to benefit from the arrangement? How do you, as a service provider, hope to provide benefits to the client?
o o
How do you define the contract scope for an outsourcing project? How much flexibility do you incorporate into the contract to accommodate contract scope changes?
o o
How do you define roles and responsibilities for the team members? How are the interfaces points for the project defined between the client organization and your organization?
o o
How do you assign staff for a project? How do you deal with staff turnover, for example, situations where people have left in-between projects?
o o
How do you share service related knowledge with your client? Do you share industry best practices with your client? How do you share them? How do you educate the client in terms of the necessary skills, knowledge, and expertise associated with using the outsourced system or service?
How do you tackle problems encountered during the projects? How involved is the client in the project functioning in terms of: Monitoring ability Monitoring frequency Task observability Outcome measures
o o o
Do you spend time in understanding the client’s business? What steps do you take to understand your client’s business? Do you share the details of your client’s business with the team members involved in the project? How does this take place?
o
How has been your sourcing experience with the client?
o o
How would you describe the level of trust between you and your client at the time of signing the contract? How would you describe the level of trust between you and your client now?
o o
How do you foresee your business with the existing client? How long is the relationship expected to last?
Taking Charge
Building effective Interorganizational teams Value Addition Dimensions Satisfaction Trust Intention to Continue Business
This work was previously published in Journal of Information Technology Research, Vol. 2, Issue 2, edited by M. Khosrow-Pour, pp. 11-27, copyright 2009 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.9
The Grid as a Virtual Enterprise Enabler Bill Vassiliadis Hellenic Open University, Greece
AbstrAct
IntroductIon
Modern information systems are extending the traditional boundaries of organizations incorporating external recourses in the form of data and services. The need to support increasing client demands has led to dynamic and more complex business processes. Complex workflows in networked organizations are much more difficult to manage since traditional approaches are not suited for distributed environments. Service-Oriented approaches in the form of Web or Grid services bear the potential of increased performance and flexibility. In this work, we discuss the use of a relatively new computing paradigm that leverages distributed service-oriented business models: the Grid. We discuss how the Grid can facilitate efficient intra-business processes in highly dynamic virtual enterprises and present a high level architecture for managing complexity of business functions using Grid services.
Future trends in Information Systems technology suggest that systems will be designed and driven by business and enterprise knowledge models supported by repeatable work processes and managed in open layered architectures. New business models favor the formation of dynamic alliances expanding the borders of the traditional enterprise to include resources (people, knowledge, processes) from other participants (Nilsson, 2005). In order to efficiently utilize networked business models, new paradigms that significantly increase connectivity, communication, coordination and collaboration must be adopted. Cooperation introduces communication in the form of information transfer between elements through data links (dataflow model) and method invocation (workflow model). Service-based operations will support the process enaction and automation inside and outside a company.
Industrial R&D are in the business to develop new processes and services with an increasing use of computing power, the need to analyze large volumes of data, and a required synergy from geographically distributed groups. Company and site wise integration is an essential part behind the vision of sustainable enterprises. Grids can be employed to transform conventional manufacturing sites into virtual sites easy to manage, monitor, and understand. Grids can further support the development of novel products and services with means of visualization, better management of computer experiments, and decision support with the analysis and processing of data. The integration of industrial functions will take the form of virtual spaces for communication, management, and for designing computing environments that address complex industrial problems. Such problems account for industrial challenges in operations (scheduling, tactical and strategic planning, supply chain management and control), design (synthesis, integrated design, distributed computing experiments), and integrated workflow environments in R&D groups, operators and maintenance teams. Grid Computing, or simply the Grid, is a new computing paradigm that enables access to distributed and heterogeneous computational resources (CPU cycles, storage, services, sensors, data) in a transparent, simple and on-demand way (Foster et al., 2001; Foster & Kesselman 2003). The basic vision of the Grid resembles that of the Electric Grid where resources (electric power) are offered to the users transparently, efficiently and cost effectively; the final goal is to enable the provision of computational resources as commodities. To enable this vision, several technologies have already been made available: coordination and virtualization of resources, management of heterogeneous resources, security, autonomy and others. Recent advances in Grid frameworks enable its application in many areas, especially e-science, enterprise computing, e-Commerce and e-learning. The use of Grid technology among
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large companies is not widespread, although several examples of efficient use are available: Wachovia is using Grid technology to speed up financial transaction processing (Wells, 2008), Shell Petroleum bases a part of its information workflow infrastructure on the Grid (Weidong et al., 2006) and Ford Motors performs fast ‘what-if analysis’ on Grid engine software. Currently there is a lack of agreement among researchers on what a Grid really is (Stockinger, 2007). In the last few years, the Grid concept has borrowed some characteristics of the ServiceOriented model in order to be able to be applied to Business needs. The definition of Grid services that are actually extended web services is such a move. The Grid was supposed to have a profound impact on the way computing is used. Such a revolution did not take place since the success of this new technology relies not only on the definition of the appropriate technological standards but user acceptance as well. The latter depends on a combination of social, cultural, legal, ethical, organizational, political and economic parameters (Goyal & Lawande, 2007). However, the vision of using the Grid’s Service-Oriented Architecture for the implementation of intra-enterprise communication has not died. In this article the initial ideas presented in (Votis et al., 2004) are extended in order to present a Grid architecture for the implementation of large information systems that encompass several participants. We discuss how the Grid is emerging as a major enabler for networked organizations and relating technologies are used to support complex information systems. A three layered architecture is presented that uses workflow engines and Grid services to support the execution of complex business processes. A more holistic view of business infrastructures is supported where services are metadata enabled and ontologically principled. An Enterprise Resource Planning application is used to highlight in more detail the specific aspects of such a schema.
The Grid as a Virtual Enterprise Enabler
netWorKed busIness models And neW computIng pArAdIgms the virtual enterprise In recent years, the phenomenon of globalization has affected not only the economy but the way that enterprises are doing business as well. New business models for cooperation set forward by the recent advances in communications and computer networks have risen, like Virtual Enterprises, Extended Enterprises and Value Networks (Vanderhaeghen & Loos, 2007). For most businesses, strategic partnerships have become central to competitive success in the fast changing global market. Since some of the knowledge and resources essential to an enterprise’s prosperity may be located outside its boundaries, strategic partnerships are rather a necessity than an option especially in Supply Chain Management (Handy, 2000; Gunasekaran et al., 2008). Virtual Enterprises (VEs) are a special case of the Extended Enterprise (EE) business model: the organization’s boundaries are shifted to include elements of other organizations, thus creating a “virtual organization” of much greater complexity. VE model aspects are under investigation and current research aims to gain a proper understanding of the complex environment within which this new model can reach the maximum of its efficiency. Organizations involved in VE partnerships are held together because of perceived mutual benefit. VE partnerships such as supply chains provide flexibility and opportunities for innovation through a synergetic combination of previously separated resources, skills and knowledge. Although such business models respond to the great concern for adaptation to the fast changing market, there are several requirements to be fulfilled. Technical performance factors including reliability, safety and risk must be efficiently addressed since they have a direct impact on
production costs and delays. The concept of “quicker, better and cheaper” is continuing to be a challenge in the first years of the third millennium and as a result, the VE business model must increase its reliability in order to assure a wider adoption. VEs, are designed to overcome time-and-place constraints associated with rigid bureaucratic structuring and can be distinguished from existing organizations because they are based on a different design philosophy with regard to how, where and when work is done. Thus, workflow management remains an essential factor. In a VE, the problem of sequencing processes goes beyond the technical risks linked to the product development itself, but also the managerial risks expressed in terms of development delays and development and recurring costs. Resource optimization, sharing of infrastructure, market knowledge and R&D effort between partners, is a key strategic goal in order to manage processes in such a distributed environment. This requires the definition of reference architecture, information management, security prioritization and supporting tools for managing shared information originating from different sites. The concepts of dynamic networked organizations and VEs address these needs. A VE actually consists of partners acting as nodes in a network, connected via a high speed network VE infrastructure, sharing knowledge of processes, resources and business tasks. Sequencing and coordination of business processes in distributed environment is difficult. Recent studies on the application of workflow management in VEs have showed promising results. Canavesio & Martinez (2007) present a conceptual model for SMEs organized in a virtual network to facilitate production. Chen (2008) uses ontologydriven mechanisms to enable knowledge sharing between organizations. Liu et al. (2005) present a workflow support system for supply chain management. Prodan et al. (2005) and Cavalcanti et al. (2005) discuss the experience of using the Grid for scientific workflow management. New trends
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in the field also include agent-based workflow enactment (Buhler et al., 2005; Yu et al., 2005) and web service standards such as BPEL (Fisteus et al., 2005). They all rely on Service-oriented architectures. The work of Yang et al. (2005) is one of the few efforts that focuses especially on the design of a workflow management system (WFMS) based on Grid services. Although the conceptual business model of networked schemes have been described, only recently appropriate technological solutions have appeared to overcome problems posed by distributed processes, security, heterogeneity and dynamic nature.
grid technology revisited The Grid started as a concept rather than a technology. Initially designed to support the processing of large e-Science data sets using heterogeneous computer sources, it was later promoted as promising technology for disciplines including Business, Economics and Life Sciences (Berman et al., 2003). Grid technology relies on the dynamic coordination of highly distributed, heterogeneous resources (computer, storage, services) in order to support large scale computing and data management. Computation jobs can be distributed across several nodes in a Grid and executed in parallel, resulting in shorter execution times. The benefits of Grid computing extend to the provision of resource virtualization already supported by developing standards of the Open Grid Services Architecture (OGSA) (OGSA, 2008). The use of such models can shift the boundary of traditional networked models out to dynamically include/ exclude elements of other organizations, thus increasing management and economical complexity. The use of Grid services permits the direct or indirect participation of enterprises in large vendor networks, which constitute very large dynamic systems. In this context, services are viewed as Grid- services that allow, amongst others, dynamic service instantiation and interaction, lifetime
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management and handling of complex activity requests from clients (Foster et al., 2001). The Grid has already been proposed for supporting very large data processing tasks, efficient use of idle resources, and lately as a VE enabler. In this model, Grid technology is used for coordination, sharing and reuse of services, knowledge and data across the geographically dispersed nodes of the VE. VE nodes are mapped onto the physical Grid nodes (computers or clusters of computers) and predefined workflows are used for service execution and data management; the physical geographic distribution of an enterprises and its departments and/or partners (organizational level) is mapped to corresponding nodes of a VE (VE level) and then to the Grid (Grid level). The next generation of Grid solutions will increasingly adopt the service-oriented model for exploiting commodity technologies. Its goal is to enable, as well as facilitate the transformation of Information into Knowledge, by humans as well as – progressively – by software agents, providing the electronic underpinning for a global society in business, government, research, science, education and entertainment. The most important benefit of this technology is its ability to meet major bursts of CPU demand using existing resources. By decoupling the services from the underlying h/w, resources are automatically allocated/ de-allocated as loads are increased / decreased (Foster & Tuecke, 2005). This increases Return On Investment (ROI) on h/w since idle computers are used instead of buying new ones. From a VE point of view and in contradiction to Grid technology, traditional technologies such as virtual private networks (VPNs) and Intranets/ Extranets based on HTTP provide just an infrastructure for their basic functionality. VEs need to be more dynamic, agile and able to extend automatically. The Grid reflects this philosophy by enabling on demand services, a step towards utility computing. A number of projects have proposed the use of Grid resources as computation utility include Globus (Foster et. al, 2002),
The Grid as a Virtual Enterprise Enabler
NetSolve (Arnold et al., 2003) and Cactus (Allen et al., 2001). In order to efficiently leverage a service oriented architecture for a VE, the concept of Grid services is available. The vision of integrating Grid and Web service concepts and technologies has been proposed as the WSRF. With efforts in OGSA implementation and standardization, application services are expected to be widely deployed and achieve higher interoperability (Foster et al., 2001). Conceptually, the Grid can be thought of in terms of three layers where different kinds of services are offered: the computational/data Grid, the information Grid and the knowledge Grid (Figure 1). Underlying everything is the computational and data grid: the computer hardware and data networks upon which the work will be conducted. Above this is the ‘information grid’: the databases of information to be accessed by the hardware, and systems for data manipulation. On top is the ‘knowledge grid’, where high-level applications mine the data for the knowledge that can form the basis of semantic understanding and intelligent decision making. A data/computational grid forms the fabric of the Grid to provide raw computing power, highspeed bandwidth and associated data storage in a secure and auditable way. Diverse resources are
represented as a single computer so the way that computational resources are allocated, scheduled and executed and the way that data is shipped between processing resources, is handled there. A knowledge Grid using knowledge based methodologies and technologies for responding to high-level questions and finding the appropriate processes to deliver answers in the required form. This last layer may include data mining, machine learning, simulations, ontologies, intelligent portals, workflow reasoning and problem solving environments for supporting the way knowledge is acquired, used, retrieved, published and maintained. A knowledge Grid should provide intelligent guidance for decision makers and hypothesis generation. Workflow in the Knowledge Grid may be supported through meta-models. Meta-models are object-type definitions that describe a view, a domain, a situation, content, a tool/method or a solution. The meta-model is the logical language of the situation or any of its aspects as mentioned. In the industry most users talk about descriptive knowledge rather than meta-knowledge, e.g. instructions of how to perform certain tasks. For computing systems to handle descriptive knowledge (how, why, what, where, when and who) the latter must be separated from the operational values as meta-models.
Figure 1. Three layered Grid abstraction (Adapted from Chen-Burger, 2003) Knowledge Grid (Semantic Grid) Data to Knowledge
Information Grid
Computational/ Data Grid
Process Models (meta-models)
Control
Processes
Transactions (data visualization)
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The Grid as a Virtual Enterprise Enabler
dIstrIbuted busIness models We envisage two distinct business models for the VE network configuration: the client-server and the point to point. In the first model (depicted in figure 2), an enterprise extends its networks in order to include suppliers, customers and contractors to perform one or more operations. This creates a virtual network where the enterprise plays the major role and the other participants contribute. In order for this configuration to work efficiently, both the enterprise and the participants need to share information and resources. The name “clientserver” does not refer to the technology per se but rather denotes a single enterprise is in the lead, and other enterprises contribute. The ‘point-to-point’ model is highly distributable and more temporal in nature. Numerous enterprises cooperate (on equal terms more or less)
to perform a function or functions. This kind of dynamic collaboration may end when the function is complete and take another form in the future, depending on business needs. Information and resources are shared without a specific central control, although in business terms an organization should be in charge of the function being performed. This business model resembles the Peer-to-Peer (P2P) computing model, a relatively new, highly distributed computing paradigm that enables sharing of resources and services through direct communication between peers. Extending the traditional model where most computers on a network act as clients, P2P introduces the concept of the simultaneous client/server mode: peers act both as clients and as servers. This form of collaborative networking is based on dynamic and failure-tolerant architectures. The characteristic of P2P is that a node does not necessarily has knowledge of the information of a neighbor node.
Figure 2. The ‘client-server’ model
Suppliers
Contractors
Enterprise
Clients
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The Grid as a Virtual Enterprise Enabler
Similarly, in the point-to-point business model, an enterprise shares only specific resources to other, specific nodes, not necessarily to all the others nodes that constitute this temporal VE. The difference with the ‘client-server’ model is that in the first, the leading enterprise shares much more resources and information to its peers. The latter is more tight in terms of sharing. Furthermore, nodes may cooperate with each other to perform a subset of an operation without any central supervision. This model can be mainly used by small and medium size companies. The ‘point-to point’ model is depicted in Figure 3. So, since business processes may encompass external partners either in an equal partnership or a contractor partnership, the information systems must support such operations. Let us consider a demanding application such as the Enterprise Resource Planning (ERP) system. A possible scenario that adheres to the ‘client-server’ model includes a large company that needs to include in its ERP system divisions of its subcontractors. In this case the EPR must be expanded to include
these divisions. In another scenario that follows the ‘point-to-point’ model, an enterprise makes available ERP services to customers, that is smaller companies that do not have the capability to own an ERP solution. In the following sections the case of conventional use of an ERP system usage is examined in the light of these two scenarios and a new, high level architecture is proposed for their more efficient implementation.
A conventIonAl erp solutIon ERP systems are complex information systems that constitute a complete enterprise-wide business solution. They integrate all departments and functions of a company into a single information system. (Lee et al., 2003). An ERP system may consist of several software modules, one for each business areas such as marketing and sales, field service, product design and development, production and inventory control, procurement, distribution, industrial facilities management,
Figure 3. The ‘point-to-point’ model
Enterprise 1
Enterprise n
Enterprise 2
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The Grid as a Virtual Enterprise Enabler
process design and development, manufacturing, quality, human resources, finance and accounting, and information services. The main set of services that can be provided by an ERP solution within distributed enterprises can be, however, identified in the following three main sectors (Figure 4): Enterprise Management, Financial & Accounting and Reporting. The aforementioned core components of the ERP constitute the minimum set of services for such a system. This is a typical example, in which an organization tries to optimize the complete set of activities – such as order entry, purchasing,
production, and shipment – in order to minimize the lead time and costs for production, and at the same time maximize value for the customer. Figure 5 shows four business processes, each spanning a number of applications or sub processes. The grey area depicts the organization in question. Rectangles depict applications or sub processes. Process no. 1 takes place completely inside the organization. Process no. 2 starts inside and finishes outside. Process no. 3 starts outside and finishes inside. Process no. 4 leaves the organization at one point, but comes back before finishing, such as may be the case if a separate company takes care
Figure 4. Main ERP components
Enterprise Management
Financial & Accounting
Reports
Figure 5. Business processes affecting various applications and processes within (light grey area) and outside an organization
1
2
4
3
1
4
3
2
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The Grid as a Virtual Enterprise Enabler
of delivery before the original company checks that the invoice has finally been paid. In the course of the process, queries and one-way messages are sent; answers and one-way messages are received, and timers are set and run out. An overview of a simplified and reduced version of the ordering business process that needs to be executed when a new order is applied can be seen in the example depicted in Figure 6. Upon the reception of an order by the sales department, an enterprise internal request is forwarded to the warehouse department. There, the availability of the ordered items is checked. If the stock in the
warehouse cannot satisfy the order, the enterprise manufacturing chain needs to be activated. It is also mandatory to have an estimation of the availability of the resources involved in the manufacturing process before the manufacturing chain is activated. In the traditional one-to-many ERP model, clients, partners and suppliers interact with a single provider (Figure 7). Additional financial, data and content service provision is required in special cases. This paradigm permits the integration and collaboration of provider and user resources using
Figure 6. Order business processing Customers
Orders
Locations
Products
Orderlines
Productstores
Figure 7. Provisioning of ERP tools through a web portal in a one-to-many model
External Partner Data Tools
WorkFlow Engine
Web Portal
ERP Server Customer
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The Grid as a Virtual Enterprise Enabler
workflow engines that coordinate simple business processes. In this context, application intercommunication is necessary to carry out complex business workflows and reduce the overall load of the system. In order to execute businesses workflows, applications must be able to exchange data according to predetermined workflow rules. This is a challenge since many interoperability issues need to be solved. Repositories or services located in different sites (internal departments of the ERP provider or external partners) may have different configurations. Although certain interfaces between resources do exist, the need for supporting dynamic service provision requires flexible coordination of data and tasks. To solve this challenge, different approaches are possible. The first possible approach is to assume that all vendors’ applications provide methods to exchange standardized business objects and are therefore able to exchange these objects directly. Another approach is to program all application interfaces according to customer requirements, a method which is often used by many ERP vendors.
grId-enAbled erp And vIsuAlIZAtIon oF the supply chAIn components A high level Architecture The high cost of development and ownership has excluded industry-specific ERP products from the small and medium enterprise marketplace. The ERP software is expensive because the business logic is tightly linked to the user interface. This means that even relatively small changes, such as changing the terms presented on the screen to match those used in a particular industry, requires significant effort. The solution to this problem may lay in the adoption of new application architectures that separate the core functionality from the user interface. The basic principle of
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this architecture is that ERP applications as well as Customer Relationship Management (CRM) applications are for the most part transactionbased. The new approach involves the separation of transaction functionality or business logic from the presentation logic. This segregation is achieved by migrating business logic into database-stored procedures, triggers and views and using an engine to store the presentation logic consisting of rules, layouts and screens in the database as metadata. This configuration closely resamples Web service and Grid service functionality. We propose a new VE high level architectural approach for scenario 1 that could also be used in a more distributed situation such as scenario 2. Different departments or geographically dispersed divisions of a company along with external partners comprise the nodes of a VE. Resources used by the ERP (including ERP servers, databases and services) are assigned to corresponding Grid nodes. Grid workflow engines are then responsible for handling coordination, security and unified access to heterogeneous resources. Complex queries are possible: for example the request for data mining from a client to the ERP system (reporting) triggers multiple data mining tasks to distributed, heterogeneous information repositories that may be internal or externally located. External nodes use the Grid in order to rent services not available to them due to development costs. This configuration makes use of an earlier business idea, the one of renting software through networks to companies, the so called Application Service Providers (ASP). Although the concept “ASP” is not used anymore, terms such as Cloud Computing or Software as a Service use some of its core ideas. In the proposed configuration, the clients are small business and the provider a large company (or a coalition of large companies) that rent expensive software services. In order to facilitate a flexible and secure environment where dynamic requests for distributed resources take place, the Grid could be an approach worthwhile to investigate. Similar approaches have already
The Grid as a Virtual Enterprise Enabler
been proposed by research projects like GRASP (GRASP, 2008). Figure 8 illustrates the VE approach for a VEs ERP’: components of the proposed solution are based on existing applications, traditional models and technologies in order to make them Grid-aware. In this general view, the main focus of the proposed solution in the ERP management domain is focused on assessing how workflow creation and management services can assist in handling different and complex business management tasks.
This involves task coordination on multiple set of distributed servers, different ERP components, different customization to suit different markets, different scheduling and optimization technologies, etc., in order to satisfy the numerous requests by the Clients/Users. Overall, this is an integration architecture, bringing together multiple systems that require complex interactions. The current configuration is not a coherent architecture, but an integration of different standalone systems supported by Grid services.
Figure 8. Three layer abstract architecture and mapping to GRID layers
...
Customer
Customer
Grid Portal
GRID
Portal services
Application Layer
Presentation Layer Collective Layer
WorkFlow coordinator
Workflow server
Ontology Mapper Resource Layer
Application Layer
ERP Server 1
DB
ERP Server n
Services
...
Data Layer
DB
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Connectivity Layer
Fabric Layer
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description of the Architecture The abstract architecture is comprised of the following three layers: First layer (data layer) - Data stores, which contains the data repositories such as relational databases, directories and files. These repositories include information stores that are used by ERP and other distributed enterprise applications. An enterprise stores lots of its vital information in databases – often there are many databases, each serving a single application. There is a need to effectively create views of all the relevant data for a given scenario – data stored (hidden) in databases are often very hard to visualize (get an overview of). The principle for visualizing the data is to use a mapping table that describes how to map the data in the database to the meta-model used by modeling tools. An information Grid provides homogeneous access to heterogeneous distributed information by dealing with the way that all forms of information are represented, stored, accessed, shared and maintained. This layer orchestrates data and applications to satisfy the request, including toolkits for composing workflows, accessing metadata, visualization, data management and instrumentation management. The web and other well-known and current middleware technologies are incorporated into one framework. Second layer (middleware) –a workflow coordinator which manages the internal processes (workflow composition) between the different organizations (different ERP sites). This workflow coordinator comprises a workflow management system and also an Agent Engine that handles all the requests produced by the users of the Presentation Layer and forwards them to the modules interested. Each request is forwarded to the corresponding server while users are notified by a subscription service. Hence, users are notified when a particular event of interest occurs. Events can be produced by users’ actions or automati-
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cally by the system when an activity or process state is modified. The workflow coordinator service can be utilized as a server application that performs workflow management of work processes and project activities. The actual work management is based on a process definition as the representation of a business process in a form that supports automated manipulations, such as modeling, or enactment by a workflow management system. The process definition consists of a network of activities and their relationships, criteria to indicate the start and termination of the process, and information about the individual activities, such as participants, associated IT applications and data. Workflow management is performed through the concept of work-lists. A work-list consists of a set of tasks to be performed with priorities, due dates etc. A task represents a piece of work that needs to be done. The task may be of different kinds – on the one end there are tasks that must follow a strict procedure and needs process support to carry out the task. On the other end, there are tasks that cannot be given any process support because of their nature as unstructured or emergent. Nevertheless, an overview of the context and the resources that may be relevant to the task may be supported. Ontology Mapper - In order to cope with the heterogeneity of information (both in type and descriptions) that is stored in the various nodes of the VE (actually, the distributed ERP servers) an ontology mapper is used to facilitate workflow and searching tasks. These tasks are carried out in the metadata level, where information concerning information is published, managed and stored in the form of a scalable description of knowledge domains. A three layer semantic description of content is used: the Upper Search Ontology layer, describes the basic concepts of the domains of knowledge of the content, a set of Domain Description Ontology layer that represent a more detailed description of each domain and
The Grid as a Virtual Enterprise Enabler
the Semantic Metadata layer where the different semantic description of the heterogeneous ERP servers lay. This scheme may include additional mapping information between the ontologies in the three layers providing the necessary information to search engines in order to navigate inside the ontology-based index. Also, the model utilizes a lexical ontology that comprises a set of lexical and notational synonyms reinforcing the searching among the various ontology instances of content representation. Third-layer (presentation layer) - A front End Grid Portal, could be utilized as a java based customized portal for accessing services based on user needs, roles and permissions. It enables the virtual view of the data for knowledge navigation. A key concept behind this approach is the virtualization that making disparate resources appear and function as a single entity.
grid vs. Web services The architecture presented in the previous section uses Grid Services (GS) instead of Web Services (WS). But where is the difference between the two. According to the definition given in OGSA (Open Grid Services Architecture), “a Grid service is a Web service that is designed to operate in a Grid environment, and meets the requirements of the Grid(s) in which it participates” (OGSA, 2006). So a GS is actually an extended WS and Grids are currently employing a service-oriented architecture described as OGSA-Web Service Resource Framework, which has actually replaced the older OGSI (OGSA-WSRF, 2006). There are two main differences between the two kinds of services: Web services are stateless and non-transient while Grid Services are not. When a Web service is invoked, data from its previous execution are lost. In order to solve this problem in a sequence of invocations, where a web services calls other web services, intermediate data must be passed on as input parameters from one service to another. The use of Web Service
containers to solve this problem creates a new one, the problem of keeping client data even when the client has stopped using the service. This means that there is a possibility that a new client of the service may access or alter another client’s data. Grid services use factories as interfaces with the clients. Instances of a service instead of the service itself are invoked by the clients. This is actually a stateless implementation of a web service with the use of a stateful interface to resource (the factory). This “object-oriented” approach is suitable for business applications since there are increased security concerns and an equally increased need for individual nodes to access and manage remote resources.
conclusIon The advent of networked business models has given rise to virtual enterprises, organizations comprised of geographically dispersed divisions and partners. In such situations, workflow management complexity has increased since processes use heterogeneous and dispersed resources. This situation entails the expansion of traditional workflow management practices, by taking into account the advantages of new computing paradigms such as the Grid and Service Oriented Computing. In this article we discussed the importance of workflow processing for enabling networked business models. We proposed a mapping procedure that corresponds the different divisions of a coalition of distributed enterprises to VE nodes and then to the Grid. A high level architecture for enabling efficient workflow of a complex information system (namely an ERP) was presented. We argued that federated vendors may behave as virtual enterprises raising issues such as interoperability, distributed resource management and quality of service using Grid services. Currently the Grid is being deployed mainly in research institutions but as technology matures the business sector can also benefit. As the Grid
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technology model evolves new service models that enable access of resources on-demand are proposed. Utility Computing is a service and not a leasing of infrastructure and/or applications and uses a pay-as-you- use policy. In order for such models to be operational, further specification of how the workflow model itself is affected by the use of Grid architecture is necessary.
reFerences Allen, G., Dramlitsch, T., Foster, I., Karonis, N., Ripeanu, M., Seidel, E., and Toonen, B. (2001). Supporting Efficient Execution in Heterogeneous Distributed Computing Environments with Cactus and Globus. Supercomputing 2001. Arnold, D., Casanova, H., and Dongarra, J. (2003). Innovation of the NetSolve Grid Computing System. Concurrency and Computation: Practice and Experience. Berman, F., Fox C.G. and Hey A. (2003). Grid Computing: Making the global infrastructure a reality: Wiley Press. Buhler, P.A., Vidal, J.M. (2005). Towards Adaptive Workflow Enactment Using Multiagent Systems. Information Technology and Management, 6(1), 61 – 87. Canavesio, M., Martinez, E., (2007). Enterprise modeling of a project-oriented fractal company for SMEs networking. Computers in Industry, 58(8-9), 794-813. Cavalcanti, M.C., Targino, R., Baião, F., Rössle, S.C., Bisch, P.M., Pires, P.F., Campos, M.L.M., and., Mattoso, M. (2005). Managing structural genomic workflows using Web services. Data & Knowledge Engineering, 53(1), 45-74. Chen-Burger, Y.H. (2003). A Semantic Based Workflow Management in a Virtual Organization. E-Science Workflow Workshop.
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Chen, T.Y., (2008). Knowledge sharing in virtual enterprises via an ontology-based access control approach, Computers in Industry, 59(5), 502-519. Fisteus, J.A., Fernández, L.S., Kloos, C.D. (2005). Applying model checking to BPEL4WS business collaborations. ACM Symposium on Applied computing, 826- 830. Foster, I., and Tuecke, S. (2005). The different faces of IT as a Service. ACM Queue, 3(6), 27-34. Foster, I., Kesselman, C., Nick, J. and Tuecke, S. (2002). The Physiology of the Grid: An Open Grid Services Architecture for Distributed Systems Integration. Open Grid Service Infrastructure WG, Global Grid Forum, [on line] http://www. ggf.org/ Foster, I., Kesselman, C., and Tuecke, S. (2001). The Anatomy of the Grid: Enabling Scalable Virtual Organizations. International Journal of High Performance Computing Applications, 15(3), 200-222. Foster, I., Kesselman, C., (2003). Grid 2: Blueprint for a New Computing Infrastructure. The Elsevier Series in Grid Computing. Goyal, B., Lawande, S., (2007). Grid Revolution: An Introduction to Enterprise Grid Computing. McGraw-Hill. GRASP (2008). Grid Application Service Provision Project Web Site. [on line] www.eu-grasp. net. Gunasekaran, A., Lai, K., Cheng, T.C., (2008). Responsive supply chain: Acompetitive strategy in a networked economy, The International Journal of Management Science, 36(4), 549-564. Handy, C. (2000). Understanding Organizations: Penguin. Lee, J., Siau, K., Hong, S. (2003). Enterprise integration with ERP and EAI. Communications of the ACM, 46(2), 54 - 60.
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Liu, J., Zhang, S., Hu, J. (2005). A case study of an inter-enterprise workflow-supported supply chain management system. Information and Management, 42(3), 441 – 454.
Vanderhaeghen, D., Loos, P., (2007). Distributed model management platform for cross-enterprise business process management in virtual enterprise networks. J. Intell. Manuf., 18, 553–559.
Nilsson, A.G., (2005). Information Systems Development (ISD): Past, Present, Future. Information Systems Development: Advances in Theory, Practice and Education Edited by O. Vasilecas et al., Springer, 29-40.
Votis K., Vassiliadis, B., Alexakos Ch., Likothanassis S., Tsakalidis A. (2004). Workflow Coordination in Grid Networks for Supporting Enterprise-wide Business Solutions. IADIS International Conference on E-Commerce, 253-260.
Open Grid Services Architecture (OGSA), [on line] http://www.ggf.org/ogsa-wg/
Wells , A.J., (2008). Grid Application System Design. CRC Press.
Open Grid Services Architecture (OGSA) Glossary of Terms v. 1.5 (2006). [on line] http://www. ogf.org/documents/GFD.81.pdf
Weidong, L., Gaishan, Z., Hailiang, W., Xianghui, X., Yujing, W., Huiqing, Z., (2006). Application of Grid Computing in Petroleum Exploration. Grid and Cooperative Computing Workshops, 27 – 34.
Open Grid Services Architecture Web Services Reference Framework (OGSA WSRF) (2006) [on line] http://www.ogf.org/documents/GFD.72. pdf Stockinger, H., ( 2007). Defining the grid: a snapshot on the current view. J Supercomput 42, 3–17.
Yu, H., Bai, X., Marinescu, D.C. (2005). Workflow management and resource discovery for an intelligent grid. Parallel Computing, 31(7), 797-811. Yang, M., Liang, H., Xu, B. (2005). S-WFMS: A Service-Based Workflow Management System in Grid Environment. 19th International Conference on Advanced Information Networking and Applications, 293 – 297.
This work was previously published in International Journal of Information Systems in the Service Sector, Vol. 1, Issue 1, edited by J. Wang, pp. 78-92, copyright 2009 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.10
The Fifth Perspective:
Extending the Balanced Scoreboard for Outsourcing Preeti Goyal Management Development Institute, India Bhimaraya A. Metri Management Development Institute, India
AbstrAct Today, alliances, collaborations, and networks are synonymous with strategy. Business process outsourcing (BPO) is one such type of alliance. With increasing reliance on outsourcing, the organizational boundaries are blurring. The implications for the client organization can be tremendous, as it now relies on an outside organization to fulfill its operational objectives. Currently, there is no single framework that can effectively measure performance for BPO arrangements. In its present form, the balanced scorecard (BSC) only addresses the performance measurement needs of a single enterprise and any perspective on any external relationships is completely missing. The traditional BSC does not suffice as a performance measurement framework for BPO. While both the client and the vendor can use a BSC for their respective organizations, the strategic objectives of the organizations may not
be met. In this article the authors propose a new perspective as an extension to the BSC, namely, the goals alignment perspective. Goals alignment of the two organizations will enable creation of performance measures that will help participating organizations to achieve their respective goals.
IntroductIon And motIvAtIon Maturity of the marketplace, rapid developments in telecommunications and infrastructure, new offshoring destinations, and so forth have catalyzed the growth of the business process outsourcing (BPO) industry. Outsourcing has become synonymous with corporate policy and strategy (Pati & Desai, 2005; Quelin & Duhamel, 2003) and companies are realizing the strategic role it can play in maintaining global competitiveness. The global BPO spending was expected to increase from $773,657 million in 2002 to $1,079,054
million in 2006. The worldwide compounded annual growth rate percentage was expected to be 13% for the same period (NASSCOM, n.d.). Despite the importance of the BPO industry, there is a dearth of a performance measurement system (PMS) that can effectively address the needs of the BPO industry. The objective of this article is to develop a performance measurement framework for organizations involved in BPO. The terms outsourcing and BPO have been used interchangeably in this article. Balanced Scorecard (BSC) is a widely accepted and most frequently cited performance measurement framework (Neely, 2005), and in its present form is applicable to single organizations (Bititci, Mendibil, Martinez, & Albores, 2005). The BSC has been taken as a base and then extended for the needs of the outsourcing industry. In this article, the BSC, which is used as the basic performance measurement framework, is extended to meet the specific needs of the outsourcing industry. To achieve this, the article integrates existing concepts in strategy, performance management, and extended enterprises. These are then applied to outsourcing. The competitive landscape of the business world is changing (Bititci et al., 2005). Bottomline pressures on service delivery organizations have forced managers to come up with innovative solutions to meet the challenges of reducing costs while maximizing stakeholder value (Bititci et al., 2005). Organizations are strategically combining core competencies and capabilities to create unique competencies and a competitive advantage through collaboration (Bititci et al., 2005). Among the collaborating enterprises, a number of organizations participate in the decision-making process. This demands knowledge integration and deep change in power structures in the organizations concerned (Bititci et al., 2005). With continuing pressure on cost bases, it is becoming difficult for companies to fulfill their own needs and this is driving companies to look at innovative collaborations as strategic alternatives. A PMS
integrated across organizations becomes critical when alliances form the basis of success. BPO is an example of one such type of alliance. It has been defined as the delegation of some part or all of a business process by a client organization to an external service provider, who, in turn, owns, administrates, and manages the selected processes based upon defined and measurable business performance metrics (Puccinelli, 2003). While it promises great returns on the bottom line, it is transforming the way businesses are being run the world over. This has led companies to examine their organization structures and to realize that creating the greatest value does not require them to own, manage, and directly control all of their assets and resources. Strategic alliances and partnerships with those who provide expertise in a particular area are being viewed as the most efficient way to gain results. Access to global talent, economies of scale, process engineering and enhancements, wage arbitrage, increased profit margins, and improvements in quality are some of the gains that companies have realized (Fjermestad & Saitta, 2005). The implications for client organizations— processes move to an outside firm, customers are being served by an outside firm and above all, execution of strategy is being entrusted to an outside firm (Vining & Globerman, 1999). The complexity of the system makes performance measurement a difficult and challenging task, at the same time, making performance measurement critical.
lIterAture revIeW The importance of an effective PMS cannot be overstated. A PMS is critical in translating organizational strategy and goals into reality. Performance measurement is a means to make strategy come alive (Bauer, Tanner, & Neely, 2004). It provides the essential link between strategy, execution, and value creation. With the
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increased pressure on businesses to perform, an effective PMS will go a long way to measure the success of strategy. A PMS can be defined as “the set of metrics used to quantify both the efficiency and effectiveness of actions” (Neely, Mills, Platts, Gregory, & Richards, 1994). Measuring what is easy to measure and making it important is an easy trap to fall into. The metrics misalignment thus created will be the primary source of inefficiency and disruption (Marr & Stephen, 1994). It has long been recognized that performance measures can be used to influence behavior and, thus, affect the implementation of strategy (Skinner, 1971). Therefore, having bad metrics can be worse than having no metrics because bad metrics will drive dysfunctional behavior that can set an organization in the wrong direction—after all, what gets measured gets done. An effective use of the PMS is in providing input to maintaining alignment between strategy and the metrics used to measure its implementation. An effective PMS should be able to achieve just that. As plans are implemented and move from the strategic through the tactical and the operational stages of the planning process, alignment enables consistency between strategic goals and metrics (Melnyk, Stewart, & Swink, 2004). Effective performance measures will make success
concrete for everyone. The research community draws only on a limited set of influential works in the area of PMS. The challenge for the research community is to take the PMSs forward. Among the many items on the performance measurement research agenda, one of the key items is to measure performance across networks rather than within organizations. In literature, the popularity of the BSC (Kaplan & Norton, 1992, 1996) (Figure 1) is evident by the extensive referencing it has attracted and among practitioners. BSC has been one of the most successful PMSs (Neely, 2005). At its core is a systematic link between a firm’s strategy, its goals, and the measures used to determine if the goals are being met. The approach is based on the argument “What you measure is what you get” and that any “measurement system strongly affects the behavior of managers and employees.” Kaplan and Norton (1992) argue that traditional financial accounting measures like return on investment and earnings per share can give misleading signals for continuous improvement and innovation. In implementing the BSC approach, senior executives establish a scorecard that takes multiple non-financial measures into account. The scorecard is called balanced as all its perspectives achieve balance, which leads to progress against pre-determined objectives.
Figure 1. Balanced scorecard (Kaplan & Norton, 1992) Financial How do we look at our shareholders?
Customer How do our customers see us? Vision and Strategy
Learning and Innovation How can we continue to improve?
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Internal Business Process At what must we excel?
The Fifth Perspective
The BSC has been augmented in the past to better meet the needs of specific industries/ businesses. Bremser and Chung (2005) have augmented the BSC in two dimensions: (1) scope of external constituents, and (2) domain of ebusiness models. Plant, Willcocks, and Olson (2003) extended the customer perspective of the BSC to include four additional factors for the ebusiness channel. Urrutia and Eriksen (2005) have added a social demographic factors/environmental indicator perspective for the Spanish healthcare industry in the nonprofit segment. While work has been done to specify performance measures to manage extended enterprises, it has not been integrated into any strategic performance management framework (Beamon 1999, Gunasekaran, Patel, & Tirtiroglu, 2001, Neely, 2005). The need to measure performance with external alliances has been widely recognized (Bititci et al., 2005; Guansekaran et al., 2001; Neely, 2005; Van Hoek, 1998). Yet, little guidance is available on performance measurement frameworks that consider inter-enterprise coordinating measures, as the development in the field of performance measurement has been from a single enterprise point of view (Bititci et al., 2005). The BSC, in its current form, does not have a provision to capture the measurement of the alliance performance including organizations involved in outsourcing. Hence, there is a need to develop a new performance measurement framework or to extend an existing framework for measuring performance in outsourcing. An outsourcing relationship, being a specific type of alliance, does not currently have a framework that could adequately address its performance measurement needs. Nor is a framework available from other collaborative organizations that could be adapted for outsourcing. Since BSC is a widely accepted framework, in this article it has been taken as a base and then extended for the needs of the outsourcing industry.
proposed FrAmeWorK For bpo Strategy as a driver for performance measures has been at the core of BSC (Kaplan & Norton, 1996). Thus, performance measures are a natural outcome of organizational strategy. Traditionally, the alignment between strategy and performance has been for single organizations. With the increased dependence on outsourcing, processes are moving outside the organization. It can be a challenge to monitor organizational performance, which is dependant on processes that are no longer being performed within the firm. Lacity and Hirschheim (1995) suggest that while outsourcing has often been described as a “strategic alliance,” the parties to the outsourcing contract have potentially conflicting interests. Therefore, if the overall goals of the client and the vendor are not aligned (Lacity & Hirschheim, 1995), there is a likelihood of the two organizations moving in different directions, thereby causing a misalignment of process goals and organizational goals, leading to failure of strategy implementation. In such an event, both the organizations will not only lose in terms of the invested resources but also fail to achieve the desired benefits from the relationship. To overcome these difficulties the authors are proposing an extended BSC (E-BSC) that is augmented with a fifth perspective, namely, the goals alignment perspective. The proposed E-BSC framework is shown in Figure 2. E-BSC measures the goals alignment of the organizations to achieve organizational goals for outsourcing. Strategy alignment is not a new concept. The notion of fit has been an important theme in strategic management theory (Kishore, Rao, Nam, Rajagopalan, Chaudhary, 2003; Lassar & Kerr, 1996; Stanek, 2004; Venkataraman & Camillius, 1984). In strategic HR literature, goals alignment as part an integrated high performance work system has been at the crux of achieving corporate goals. In a study of goal alignment of top leaders an online tracking system has been
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cited as being instrumental in the success of a global specialty materials company (Layman, 2005). In this case, the goal alignment resulted in increased stock prices validating research that goal alignment leads to improved performance. In a study by Parker and Idundun (1988), goal alignment is the concurrence of overall corporate goals as perceived by the management team with the goals of the department being studied. In their study of IS managers in UK Parker and Idundun (1988) identified goal alignment as the top ranked issue by IS managers. Apart from other factors, goal alignment is an important component of risk management (Jorgensen, 2005). The importance of goal alignment is evident in the other areas too. Measurement programs in software organizations provide an important source of control over quality and cost in software development. Gopal, Krishnan, Mukhopadhyay, and Goldenson (2002) in an empirical study of determinants of software development success have supported goal alignment as a key success factor. Leading companies keep managers aware of IS issues and facilitate goal alignment through means such as planning cycles, seminars, and meetings (Parker & Idundun, 1988). Fjermestad and Saitta (2005) state that business strategy alignment is one of the critical success factors in outsourcing.
Research by Hamilton has indicated that more than 20,000 cross-border alliances were formed between 1996 and 2003. Yet, the majority of alliances are considered failures (“Create Successful International Mergers,” 2006) and one of the important reasons for these failures being that they lacked the clarity in objectives and measurement of achieving goals. These are simple but important steps that decide the success of alliances (“Create Successful International Mergers,” 2006). Strategic goal alignment has also received attention in extended enterprises (Bititci et al., 2005). Particularly in supply chain management, one of the initial steps is to align the organizational strategy with that of the supply chain (Chopra & Meindl, 2001; Gattorna, 2001; Johnson & Scholes, 1999; Marr & Stephen, 2004). The essence of “strategic fit” has been that when forming alliances there must exist an alignment of goals of the participating organizations. In a study of 215 North American manufacturing firms, Narasimhan and Jayaram (1998) concluded that supplier integration, strategic integration, and customer integration across the supply chain determine customer responsiveness. Building on this study Roethlein and Ackerson (2004) examined the quality goal alignment in a connected supply chain. They concluded that while the entities in the studied sup-
ply chain had dissimilar quality goals, they were perhaps successful due to the inherent minimum level of quality communication and goal alignment necessary to exist within their relatively mature and stable product market. Strong and frequent unidirectional communication existed between the manufacturer and the supplier and between the manufacturer and the distributor making the supply chain successful. Mangiameli and Roethlein’s (2001) study of multiple entities imposing quality requirements on each entity recognized the need for multi-directional quality awareness. Even though this provides a vital link between collaborating organizations, it has still not found its way into PMS. The proposed E-BSC framework includes the following five perspectives: •
•
Customer measures: How do the customers see us? This perspective captures the ability of the service provider to provide quality services, the effectiveness of their delivery, and overall customer service and satisfaction that the service provider is able to provide to its client and customer. The BSC demands that client and service providers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to clients and customers. For the alliance to be successful, the customer service goals must be aligned. Internal business process measures: What must we excel at? This perspective is primarily an analysis of the service provider’s internal processes that help it to achieve its organizational objectives and in turn help the clients to achieve their organizational aims. Service provider must decide the processes and competencies it must excel at that would lead to customer satisfaction and financial success for both the client and the service provider organizations. Measures for each of these must be specified. The
•
•
•
organizational objectives for the client and the service provider need to be aligned to achieve alliance objectives. Innovation and learning measures: Can we continue to improve and create value? Customer and internal business process perspectives identify parameters that the service provider and clients consider most important for success. Changing success targets and increasing competitive intensity requires client and service provider organizations to continually improve and innovate. Innovation and learning perspective allows organizations to look at what needs to be done to become/remain competitive. Financial measures: How do we look at shareholders? The financial performance measures indicate weather the organization’s strategy and execution is contributing to the bottom-line in the desired manner. It is the culmination of the results of the strategic choices made in the other perspectives. Making improvements in the other perspectives will lead to the financial numbers taking care of themselves. Goals alignment perspective: Our focus is the business process outsourcing industry. As stated earlier, the authors propose that a goal alignment perspective be included as part of the PMS to measure the goals alignment between the client and the service provider. Measuring goals alignment between the client and the service provider, literature suggests, would lead to long-term and successful relationships between the client and their service providers. In the BPO industry, currently process performance expected from the service provider is defined using service level agreements (SLAs) (Lacity, Willcocks, & Feeny, 2004; Misra, 2004). The purpose of the SLAs is to ensure that there are no gray areas in terms of the services expected from the service provider. They are aimed at meet-
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ing the service needs of the client (Misra, 2004). Hence, by definition, SLAs are at the operational level and do not provide insight into goals alignment between the client and the service provider and would therefore be inadequate in measuring the goals alignment for the participating organizations in the outsourcing arrangement.
•
In designing metrics that measure goals alignment, the following metric characteristics provided by Misra (2004) are useful: •
• • • •
metrics that lead to the desired behavior or outcome by both the client and the service provider, metrics that are within the service providers’ and clients’ control, metrics that are easy to collect, early selection of fewer metrics with higher stakes, and set realistic and achievable baseline values to selected metrics.
•
In addition, several design characteristics and their tradeoffs need to be taken into account to address how they will be measured. Assimilating the writings of writers such as Kaplan and Norton (1996) and Mohrman and Mohrman (1997), these design characteristics can be grouped into four categories: •
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Goals alignment criteria: The best criteria with which to measure goals alignment will depend on the intended purpose of the performance metric. Literature (Bititci et al., 2005; Childe, 1998; Gunasekaran et al., 2001; Segil, 2005; Stanek, 2004) suggests the following in measuring business strategy and alignment of alliance partners: alignment of the long term goals of the client and service provider; overall corporate strategy for client and service provider; cash flow and ability to raise capital; agreement upon predefined
•
objectives; level of strategic understanding; changes involved at one or more firms that may impact alliance; changes in economy that may impact alliance; political climate that may impact alliance; efficiency of alliance; effectiveness of alliance; and partner culture. Sources of measurement: Where will the metric come from—what is the source of the metric? For goal alignment criterion, the best source of the metric needs to be selected. First of all, this will depend on the appropriate level of measurement, for example, is it an organization, process, or individual metric? Is it possible to collect the metric as a part of the regular process? Will both primary and secondary data be used in measuring goal alignment? Is only one source needed or will multiple sources be used to measure the metrics. If multiple sources, how will they be selected. Collection method: After the measurement criteria and source are determined, design decisions pertaining to the methods to collect the data may still need to be carefully assessed. Some of the design choices may depend on the type of measure—for example is the measure a quantitative or qualitative measure. Additionally, will the data be collected through interviews, surveys, or from goal-setting sessions, annual planning meetings, and training seminars? Frequency: The frequency with which to collect a given metric is a design consideration with major cost implications. While some metrics may be collected on an annual basis as part of an annual performance review process others may be collected as part of the quarterly financial reporting process. Other metrics may be collected on a monthly basis.
To what extent should the goals be aligned? Not all outsourcing arrangements will warrant
The Fifth Perspective
the same extent of goals alignment. The strategic impact sought from the outsourcing relationship will form the basis for the extent of goals alignment. The strategic impact will be reflected in the type of outsourcing alliance formed. The alliance type between the client and the vendor will depend on strategic impact and extent of substitution (Kishore et al., 2003); strategic intent and technical capability (Kern, Willcocks, & Van Heck, 2002); and strategic importance and financial impact (Gattorna, 1998) and is the operationalization of the benefits that the participating firms are hoping of achieve. The goal alignment would be to the extent of strategic benefits sought from this relationship. This can be represented as a continuum. On one end of the continuum would be transactional benefits, which would mandate operational goal alignment. On the other end of the continuum, the benefits sought are more transformational (Kakabadse & Kakabadse, 2003; Linder, 2004) and the alignment should be of strategic goals. Therefore, more strategic the benefit sought from the relationship, the greater the extent of strategic alignment.
conclusIon Today, alliances, collaborations, and networks are synonymous with strategy. BPO is one such type of alliance. With increasing reliance on outsourcing, the organizational boundaries are blurring. Peculiar to this industry is the fact that internal business processes now move outside the firm. The implications for the client organization can be tremendous as it now relies on an outside organization to fulfill its operational objectives. Currently, there is no framework, which can effectively measure performance for BPO arrangements. In its present form, the BSC only addresses the performance measurement needs of single enterprises and any perspective on any external relationships is missing. Having said this, the traditional BSC does not suffice as a performance
measurement framework for BPO. While both the client and the vendor can use a BSC for their respective organizations, the strategic objectives of the organizations may not be met. In the past the BSC has been augmented to meet the needs of individual organizations. In this article a new perspective, namely, the goals alignment perspective, has been proposed as an extension to the BSC. This perspective would include the extent of the alignment, which will depend on the benefits sought from the relationship. Including the goals alignment perspective in a PMS will enable organizations to better achieve their strategic objectives from outsourcing. Therefore, it is important to measure and monitor client and service provider goal alignment. In the present study, the proposed model has not been empirically tested. Hopefully, the framework will be validated in future research by dyadic studies of client and service provider organizations.
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This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 1, edited by M. Khosrow-Pour, pp. 47-56, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.11
The Rationale Behind Strategic Alliances in Application Service Provision D. E. Sofiane Tebboune Manchester Metropolitan University, UK
eXecutIve summAry
orgAnIZAtIon bAcKground
Application service provision, which consists of deploying, managing, and remotely hosting software applications through centrally located servers, is emerging as a new form of application outsourcing that is attractive to many sectors. Partnering in this context has gained major importance among practitioners and researchers. Although this article demonstrates the importance of strategic alliances for the development of the ASP model, the included cases display relatively contradicting ideas, where in one of the two illustrated cases strategic alliances were not part of the business model. This article establishes a discussion on the pre-formation phase of strategic alliances, focusing on the rationale behind entering strategic alliances, and offers a set of guidelines for ASPs to consider when entering the partnering arena.
Company A is an e-business solution provider, specializing in front office applications for sales, marketing, and customer service. It also focuses on four key vertical markets, being financial services, life sciences, retail and distribution, and telecommunication, media and technology. Founded in 1999, Company A aimed at targeting the ASP model for delivering integrated front office and e-commerce. The company has also targeted WAP-enabled mobile Internet services, becoming Europe’s first wireless ASP. Its offerings consisted, therefore, in offering both mobile and desktop users access to managed e-commerce and front office services for a fixed monthly fee. Company B is a leading provider of administrative software to performing arts venues and organisations, as well as the conferencing and banqueting industry, stadium and sports venues,
The Rationale Behind Strategic Alliances in Application Service Provision
local authorities, and councils. Initially, Company B’s products began by a simple product, which was designed by one of the company’s founders, for a classical music agency. The product offered an interesting solution that most music agents were looking for; it consisted in easing the administrative burden that this concert agency’s staff was suffering. As Company B’s product grew further, and started being seen by others, it was expanded, developed, and was eventually adopted by most of the leading artists’ managers and concert agents in the UK and subsequently by many in Europe, the USA and the Far East.
settIng the stAge Application service provision (ASP), a new form of application outsourcing, emerged as a solution to the ever increasing burden of maintaining software applications, and the time required to install and implement new software (Susarla, Barua, & Whinston, 2003). Being essentially, and ideally, Internet-based, ASP promised a variety of benefits, such as cost reduction, and reduced management difficulties (Currie, 2000; Kern, Willcocks, & Lacity, 2002). As the new wave of delivering software as a service began to take off, many companies tried to exploit the opportunity of entering this embryonic market, which led to an excessive number of competitors. As a result, these companies found difficulties in making profits, and therefore adding value to their offering became indispensable. As a result, many entered into strategic alliances as leverage for their business. Strategic alliances are not a new concept. Corporations have often adopted structures that were large and centralized and based on hierarchical modes of communication. Such corporations used various methods for eliminating competitors, such as, mergers, price wars, and the weight of large advertising budgets (Alter & Hage, 1993). For several reasons, such as the pressure for the
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globalisation of business, organizations began focusing more on cooperating with others. In this context, Alter and Hage (1993, p. 2) argued that “… many companies are developing structures that are smaller, decentralized, and based on strategies of cooperation and horizontal relationships.” Moreover, such relationships developed between organizations in the same product market niche, which led previously competing companies to collaborate, thus marking an important institutional change (Alter & Hage, 1993). The purpose of the present article is to investigate the concept of strategic alliance as applied to ASPs. It starts by a brief account of ASP as a field of research, then a brief account on the concept of strategic alliances in the management literature. Focusing on the pre-formation phase of strategic alliances in ASP, this article illustrates two cases of UK-based ASPs, from which data is extracted, and a discussion is established. Finally, a conclusion and future research directions are presented.
Application service provision Application service providers (ASPs) have created a new form of outsourcing that can be seen as ‘application outsourcing..’ In its simplest form, the model consists of deploying, managing, and remotely hosting software applications through centrally located servers (Kern, Kreijger, & Willcocks, 2002). Customers use the hosted applications through a ‘rental’ arrangement. This model represents a very new approach to software distribution and effectively results in the delivery of software as a service. According to the ASP Industry Consortium (ASPIC), an ASP “manages and delivers application capabilities to multiple entities from a data centre across a wide area network” (Cherry Tree & Co., 1999). As a result, the ASP model gives organizations the opportunity to focus on their core functions, without being distracted by issues such as systems management (Columbus, 2000).
The Rationale Behind Strategic Alliances in Application Service Provision
There have been many stimuli to the emergence of the ASP model. Most notably, the small and medium sized enterprise (SME) segment of the market was virtually excluded from the enterprise applications market, largely due to their inability to afford them. The ASP model offers SMEs the possibility of leveraging these costs because of the economies of scale that ASP vendors can enjoy. In fact, based on the principle of one-to-many, the ASP model is believed to create enormous cost savings of the order of 20-50 percent (Miley, 2000). Furthermore, Miley (2000) argued that the ubiquity of the Internet, its integral and open standards, and the devaluation of computers led this media—the Internet—to revolutionize business practices, and delivering applications through the Internet is only a natural. This is further enhanced by the increasing acceptance of browsers as the new application interface (Kern et al., 2002). The original ASP model, as defined above, presented many weaknesses. The model suffered lack of product differentiation (Porter, 1985), as different ASP vendors focused mainly
on hosting applications. In fact, the similarity of offerings in the market place was fuelled by low entry barriers, and caused an explosion of similar services provided by look-alike ASPs (see Figure 1). According to the competitive forces model, illustrated in Figure 1, it should be noticed that the ASP market is highly accessible; entry barriers are low. This left the market wide-open to new entrants. The high number of competitors made profit a difficult target to achieve. Consequently, many players in the ASP market felt the need for differentiating their product(s) by offering value-added components. Thus, for ASPs, simply hosting and managing applications did not (in general) provide sustainable strategies. Instead, “companies that ultimately build sustainable ASP related businesses will also offer a value-added component(s) to their service that is simultaneously difficult for competitors to replicate and customers to replace” Cherry Tree and Co. (2000, p.8). The ASP market witnessed major changes with the emergence of different variations of the
Figure 1. The competitive forces of the ASP model initially (Tebboune, Weerakkody, & Currie, 2002) Differences between competitors are significantly reduced, as no value is added. Therefore, m any competitors join t he m arket, l owering, then, profits.
Power of Suppliers
Threat of Substitutes
Rivalry
Threat of substitution is very high, as p roducts a re n ot d ifferentiated. Therefore, o fferings c ould easily be s ubstituted for others b ased o n criteria like price.
Power of Buyers Could b e high, as switching costs a re l ow. H owever, it could a lso be c onsidered as low, as the market i s driven by ASPs themselves.
High a s the market i s driven b y them, however low switching costs due to low barriers t o entry, c an shift power over to buyers.
Threat of New Entrants
As n o value is a dded , the market i s widely open for new entrants, and thus t he threat of new entrants is high.
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initial concept, classified as (Currie & Seltsikas, 2000; Lehman Brothers, 2000): Enterprise ASPs where ISVs deployed their own ASP strategy, choosing to offer their services directly to their customers, accessing thus a wider segment; ASP Enablers who support the infrastructure through which ASPs deliver their offerings; Pure Play ASPs characterized by owning their delivered resources, and acting as a single point taking responsibility of all the requirements for delivering their resources; Vertical ASPs, targeting industryspecific applications and processes; Horizontal ASPs offering, mainly, collaborative applications such as e-mail; and full service providers (FSP) providing an end-to-end solution. These variations are, significantly, supported by the focus on leveraging partnerships to create differentiation, and thus raising barriers to entry (Columbus, 2000). Alliances are developed for the benefit of two partners or more where these benefits consist of acquiring skills and resources that are unlikely to be developed by a single organization. Thus, strategic alliances can be an important enabler for creating a differentiated product or service. Furthermore, ASP can be seen as a complex technology. Singh (1997, p. 340) defines a complex technology as “an applied system whose components have multiple interactions and constitute a nondecomposable whole.” From this definition, Singh (1997) deduced that firms commercialising complex technologies face the challenge of developing multiple capabilities, but few firms have the ability to develop the broad set of competencies required. As a result, alliances could be seen as a particularly important solution for having access to these competencies (Hagedoorn, 1993; Singh, 1997). To further support this idea, the dynamics of the ASP market (Tebboune, Weerakkody, & Currie, 2003; Weerakkody, Tebboune, Currie et al., 2003) should also be taken into consideration; as McKenna (1985) previously suggested, strategic alliances are found to be a particularly suitable
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strategic option in fast-changing industries in order to compete effectively, and to share the costs of developing new technologies. In general, it could be argued that the poor take-up of the ASP model has been aggravated by the lack of differentiated product offerings. To overcome this lacuna, many ASPs have entered into a set of partnerships and alliances that allow them to acquire additional skills and resources for differentiating themselves (Columbus, 2000). However, as different ASPs have different backgrounds, and thus different skills, they need to partner with companies with different skills in order to bring additional resources, where according to Columbus (2000, p. 171), “[m]any ASPs today are partnering for access to technology, while many others with strong technical expertise are partnering to get access to distribution channels.” Moreover, partnerships are also becoming an important part of an ASPs’ strategies as the ASP market grows, where customers’ expectations concerning an ASP’s performance will grow, and therefore partnerships will be adopted at an enormous pace in order to ensure the highest level of performance (Columbus, 2000). However, such achievements cannot be guaranteed, as partnering has to be successful in order to bring advantages. Gartner Group (2001) forecast that 60% of ASPs created before 2001 will fail due to poorly developed business models, the wrong choice of partners, an inability to execute high levels of service, and consolidation in the ASP market. This is indicative of recent progress in the ASP industry. What is emerging is an understanding (that is demonstrated in sucessful ASPs) that partnering issues are among the most important to the success of ASP.
strategic Alliances Strategic alliances are not a new concept, as they were very commonly practiced between firms in
The Rationale Behind Strategic Alliances in Application Service Provision
oil extraction and petroleum refining (Pekar & Allio, 1994; Powell, 1987). However, in recent years strategic alliances formation has exploded in an unprecedented way (Buckley, Glaister, & Husan, 2002; Dacin, Hitt, & Levitas, 1997; Dyer & Singh, 1998; Geringer, 1991; Gulati, 1995; Hoffmann & Schlosser, 2001; Kumar & Andersen, 2000; Murray & Mahon, 1993; Powell, 1987), which increasingly attracted academics’ attention. As a consequence, strategic alliances began gaining tremendous importance, to the extent of being seen as a vital key to success in many fastevolving industries, such as computer hardware and software (Pekar & Allio, 1994). Gulati (1998) defines strategic alliances as “voluntary arrangements between firms involving exchange, sharing, or codevelopment of products, technologies, or services.” This is a situation where two companies, or more, forge an agreement to leverage combined resources, knowledge, and capabilities in order to achieve, enhance, or maintain competitive advantage for each participant (Clarke-Hill, Robinson, & Bailey, 1998; Mohr & Spekman, 1994; Spekman, Forbes III, Isabella, & MacAvoy, 1998), in a way that neither partner could achieve it alone (Borys & Jemison, 1989; Mohr & Spekman, 1994). The benefits that each partner receives from such a relationship are not equal in all situations, but are proportional to the contributions made (Murray & Mahon, 1993). Firms enter into strategic alliances for different reasons. The main, and frequently cited, reason is the focus on core competencies. As Nooteboom (1999, p. 43) states it, “firms need to concentrate on core competencies, to outsource more activities and use outside partners as sources of complementary knowledge and competence..” Other reasons for entering alliances could be the scarcity of resources necessary for the well functioning of the firm (Oliver, 1990); learning, particularly in fields of rapid technological development (Powell, Koput, & Smith-Doerr, 1996); penetrate or expand
in new or existing markets (Borys & Jemison, 1989; Hitt, Dacin, Levitas et al., 2000; Mockler, 1999; Spekman, Isabella, MacAvoy, & Forbes, 1996); the need to access rapidly developing and increasingly complex technology (Singh, 1997; Sulej, 1998). Even though strategic alliances are very important for the development of today’s businesses in creating value for all partners, where Spekman et al. (1998, p. 758) highlighted that value is created “through synergy as the partners achieve mutually beneficial gains that neither would have been able to achieve individually,,” failure among those formed was not rare. In fact, it was argued by authors, such as Brouthers et al. (1995), that strategic alliances could be a very risky business solution, as many firms see them as “potential traps” that may lead to mediocrity (Murray & Mahon, 1993). The reasons for such failures are usually linked to the conflicting management styles and motivations between partners (Hitt, Tyler, Hardee, & Park, 1995); the tension that could evolve between partners with similar core businesses, geographic markets, and functional skills (Bleeke & Ernst, 1995); disproportionate share of the value of the alliance (Powell, 1987).
Strategic Alliances as a Process Many academics used the organic growth perspective to explain “development in an organizational entity from its initiation to its termination.” (Van De Ven & Poole, 1995, p. 513) This has also been applied for studying strategic alliances. In viewing a strategic alliance as a process, many authors (Borys & Jemison, 1989; Lorange, Roos, & Brønn, 1992; Ring, 2000; Ring & Van De Ven, 1994; Spekman et al., 1998) described the phases through which strategic alliances evolve. However, even though these phases are described differently, according to different authors’ perspectives and views, and according to the nature of the research undertaken by these authors, the
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major steps seem to be similar. At the general level of defining strategic alliances as a process, the latter can be divided into two major stages: pre-formation phase and post-formation phase. The pre-formation phase is the one that involves the initial steps that firms would make before the alliance is formed. Such steps include the rationale behind the sought alliances, choosing partners, choosing the appropriate alliance type or structure. The post-formation phase begins after that the alliance is formed, and includes managing and evaluating the alliance. As mentioned above, Gartner Group (2001) predicted that the wrong choice of alliance partners is among the most important reasons for ASPs to fail. It should, also, be noticed that due to the lack of experience with the ASP model – as it is still developing – potential ASPs and their partners might still be unsure of the overall conception of the ASP model. Moreover, due to the dynamic character of the ASP model (Tebboune et al., 2003; Weerakkody et al., 2003), the understanding of the components of the ASP model is altered continuously, adding, thus, to the difficulty of identifying the required elements. As a result, potential ASPs are constantly facing the challenge of finding an appropriate way of designing their business model, including determining the value-added components necessary for differentiating their offerings. It is, therefore, to be concluded that potential ASPs are still encountering problems in dealing with the pre-formation phase of strategic alliances, where they face issues of justifying the alliance, choosing the right partners and choosing the right governance structure. The focus of this study will be the pre-formation phase of strategic alliances in the context of ASP.
The Pre-Formation Phase of Strategic Alliances The pre-formation phase of strategic alliances consists of all the steps that a firm should go
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through before the alliance is formed. Being a way of business development that a firm may choose to improve or change its competitive advantage, it is indispensable that the firm analyses the alliance according to its overall objectives and strategic intents, and compare it with other strategic alternatives (Das & Teng, 1997; Devlin & Bleackley, 1988; Forrest, 1992; Ring, 2000). In other words, the firm must evaluate whether the alliance is the most suitable strategic option, compared to other potential solutions such as vertical integration and market-based transactions (Das & Teng, 1997). As a result of such analysis, the firm would have had the opportunity to identify the potential benefits and risks of such a decision. The reasons behind firms adopting the strategic alliance are several; the main, and obvious, reason for is the unavailability of a valid alternative that permits the firm to pursue its objectives (Murray & Mahon, 1993). Moreover, the objective behind any alliance is to “ further the strategic business objectives of the firms involved.” (Medcof, 1997, p. 720). Other reasons for forging strategic alliances include resources scarcity, where if resources are scarce and the firm is unable to generate them internally, establishing ties with other firms is a strategy for overcoming this problem (Nohria & Garcia-Pont, 1991; Oliver, 1990); learning, particularly in fields of rapid technological development, is frequently cited among the most important drivers for entering alliances (Child & Faulkner, 1998; Inkpen, 2000; Lei & Slocum, 1992; Powell, 1998; Spekman et al., 1996); penetrating or expanding in new or existing markets (Borys & Jemison, 1989; Hitt et al., 2000; Mockler, 1999; Spekman et al., 1996); Having decided on an alliance as the most suitable strategic option, the choice of the right partners is a natural following step (Das & Teng, 1997; Ring, 2000). It has, also, been frequently concluded that alliances’ success is strongly linked to the choice of partners (Beamish, 1987; Dacin et al., 1997; Hitt et al., 2000; Medcof, 1997).
The Rationale Behind Strategic Alliances in Application Service Provision
The following stage in the pre-formation phase is the choice of the governance structure of the alliance (Das & Teng, 1997). It consists in the shape that the partnership between two or more firms takes. In this context, Lorange et al. (1992, p. 11) argued that “the parents’ desires regarding input and output resources are the basic determinants of the type of strategic alliance a firm is going to enter into.” 1: Alliance structures In the case of ASPs, very little is known about the way strategic alliances are developed. As explained above, the need for ASPs to differentiate their offerings gives a solid base for expecting such firms to form strategic alliances at high rates. Moreover, the dynamic nature of the ASP model, as explained above, could translate into ASPs being faced with major difficulties in the pre-formation phase of these alliances. The objective sought in this article is, therefore, to investigate the rationale for ASPs and potential ASPs behind their decisions to forge or not to forge strategic alliances with their partners. In the following section, two UK companies, that have exploited the ASP model, are studied. Being purely exploratory, the objective of these cases is to analyse the preformation phase of strategic alliances in the ASP context, with a focus on their rationale behind their partnering strategies.
cAse descrIptIon The case study approach is very useful for exploratory research (Yin, 2003), and especially appropriate for understanding the practical environment in organisations and the objectives and attitudes of people that work in them. The data for the two cases described in this article were gathered from interviews with senior executives and from secondary sources mainly documents and Web-based sources. The names of the studied companies are kept anonymous for confidentiality reasons, as requested by the interviewees.
The conducted interviews were semi-structured, and lasted between 60 and 90 minutes. These aimed at capturing the executives’ opinions on the different aspects of their partnering strategies. In support to the data collected from these interviews, secondary sources were of a very high importance, where they allowed other background information to be collected. The conducted interviews were transcribed, and the information collected was combined with the data collected from the secondary sources to develop the following cases.
company A In 2001, Company A launched its managed services division, which was in response to a growing demand for application management outsourcing. Through this division, Company A delivers and manages integrated front office applications, including CRM, e-business applications, and workforce management applications. The launch of the managed services division came as a result of low customer acceptance of the one-to-many ASP model, and the success of Company A in providing one-to-one managed services to customers. Based on their ASP experience, Company A decided to offer cost effective managed services to customers, based on shared infrastructure and shared network. According to an executive at Company A, although the infrastructure is shared, each customer is offered a separate virtual network, which distinguishes this service from their original ASP service. However, the benefits derived here are based on the fact that the infrastructure and the network are shared, and thus Company A is able to offer its customers very competitive rates.
Partnering Strategies On the partnering strategy adopted by Company A, a list of partners, as published, demonstrates
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the strong importance of partnering for Company A’s business model, and the variety of the aspects in which Company A needs partners for. The large number of partners also enhanced this idea, where the commitment of Company A to exploit partnering strategies is clearly shown. Company A developed ties in four different categories; infrastructure, application, implementation, and technology. Therefore, several business processes in Company A’s business model are achieved by companies other than Company A itself, making from its business more of a one delivered by a network of companies from different backgrounds. Moreover, Company A adopted different strategies for building its business model; apart from those activities performed internally, Company A partnered with other companies in different ways. It has not only developed relationships with several companies but also acquired others. Through these acquisitions, Company A aimed at reinforcing its capabilities in providing leading e-business solutions, and at enhancing its strategy of offering a workforce management product. On the partnering side, even though the publicised list of partners seems very diversified and long, an interviewed executive at Company A not only argued that the real partners are not as many as those publicized, but also confirmed that for their managed services, there is only a single partner being the one that provides the data centre and the hosting environment. The executive further enhanced his statement by adding that the other partners are more of suppliers than real partners. Moreover, he further supported his view by stating that firms are called partners when “… your dependency on them becomes critical…” and when “… there is a two way flow of commercial transactions going on…” The strategy of Company A concerning partnering has been deeply altered since the company was launched. The company started gradually taking control of some of their business model com-
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ponents that were previously outsourced; elements like database, operating system, and hardware, are all performed internally, but were previously outsourced. The given reason for such changes is that Company A preferred to control such activities in order to reduce the burden of managing their suppliers. Furthermore, an economic rationale for such a change was given, explaining the cut of the margin being taken by external providers of each component. Concerning the data centre and hosting provider, the situation seemed different, where not only the costs of building or owning a data centre were impossible to afford, but also the capabilities offered by the provider were impossible to be matched internally. In the words of an interviewed executive, this firm “… is a telecom provider, so their real expertise is around network, so we have outsourced that to them, because for us to get the breadth of expertise they have, we have to hire an army of people…” There are, thus, costs limitations and capabilities limitations that pushed Company A to enter into an alliance with this provider. The case of Company A shows a reduction in the number of ties that were forged before, and gives important insight in the way ASPs develop their business strategies, particularly in the partnering arena.
company b When Company B was launched, their products were EXE-based applications running on MSDOS. With their EXE-based applications, the software gained a tremendous number of customers in the venues market, becoming thus a leader, particularly with concert halls and theatres. Due to the saturation in this market, where the company’s co-founder stated that “…there is like two concert halls in this country that have not got our software…,” Company B needed to diversify into other markets. As a result of a strong interest in exploiting the Internet, Company B developed
The Rationale Behind Strategic Alliances in Application Service Provision
a new path for developing and distributing software, in parallel to their traditional EXE-based solutions. This path consists in using the concept of ASP for software distribution. This solution, being still in the event management sector, is “ fully web-enabled with no EXE-based interface” (according to the co-founder). This solution is offered both hosted and as a deliverable. In other words, this solution can either be taken in charge completely by Company B, or installed in the customer’s server and therefore ran internally in the customer’s premises. However, according to the interviewed co-founder, no customer has expressed any interest in the deliverable version of the ASP solution.
Partnering Strategies As explained previously, Company B has embraced the ASP model for their new Web-based offering. Expanding on their strategy towards the ASP model, the company’s co-founder stated: “… our ASP provision is going to be delivered in a Web browser, with us taking all the responsibility for database services, for user interface services, for backups… so everything is done locally and everything is done centrally…” Company B’s ASP solution is, according to this statement, is completely managed by the company. Initially, the company did not even use co-location for running their solution. The servers were managed internally, and the company was paying for a permanent network into its premises, costing around £14,000 a year. For financial reasons, Company B decided to move to co-located services, which proved to be more cost effective, and with extra benefits. So today, apart from their servers being co-located, all the ASP solution is run by Company B itself; they provide the application, provide support to customers, and manage their applications on the co-located servers. Expanding on the co-location service, one of Company B’s managers explained that the co-
location service they get from their ISP can only be qualified as excellent. However, the relationship they undertake between themselves is far from being that of a partnership. It was explained to be more as a customer-supplier type of relationship. Even though the service that Company B is getting from their ISP is critical to the well functioning of their model, it is only a merely bought service. According to Company B, they do not need to develop a stronger relationship with their ISP, as the latter’s service suits their needs perfectly, and therefore no need for altering that. Credit card validation is, also, another service that Company B buys from third parties. According to a company’s executive, it is a process that they do not know about and they do not want to know about, so they buy it. The ASP solution offered by Company B is, then, a self-managed service, with no particular ties with external firms, apart from the services they buy from third parties, particularly the ISP. Even though Company B is very optimistic about the future of their ASP product, they still think that their traditional EXE-based applications will still be demanded for. Therefore, Company B predicts to see both types of their offerings going along side by side, at least in the near future.
current chAllenges / problems FAcIng the orgAnIZAtIons From these two cases, a few ideas can be drawn concerning the development of the ASP model. To begin with, both cases describe rather contrasting views on the model. The case of Company A displays a firm that was born with the idea of exploiting the ASP model, which was part of their initial strategy. Contrarily, the case of Company B is that of a firm that was established well before the ASP model emerged, and then noticed the usefulness of this model for further developing and expanding their business.
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On the partnering strategies adopted, both cases illustrate different situations. In the first case, when Company A was launched, it relied heavily on strategic partnering. This was the case, as Company A, initially, did not have all the required capabilities for successfully building its ASP model. By the time it gained more experience, Company A started internalising some of the previously outsourced business processes. The rationale for these changes was mainly economic and strategic; economic in that comparisons, for each process, were affected between the options of continuing to outsource or producing in-house. The strategic rationale was mainly linked to the feasibility of internalizing a particular process. Therefore, for Company A, a process that would be less costly to perform internally than by a third party, and would be feasible to internalise in terms of the resources–tangible and intangible–needed, is preferred to be performed internally. This justifies perfectly why the interviewed executive was considering the network and hosting provider to be the only real partner, as the breadth of expertise offered – the tangible and intangible resources offered–was difficult, if not impossible, to match, and moreover very expensive to internalize. On the other hand, the case of Company B illustrates a relatively different situation. Their partnering strategy was very limited; in fact they did not forge any particular relationship with any other firm, except that they bought few services–on a market transaction basis – from third parties. The two cited processes that were outsourced to third parties were hosting and credit card processing. The former process–hosting–was evaluated by Company B, and compared the options of performing it in-house or outsourcing it, where the company’s co-founder stated: “… we worked out that it is a lot cheaper to run it co-located, literally about half the price, because of the cost of having an always up line…” Therefore, the economic factor for justifying the alliance is, again, present in this case. Furthermore, the company was not considering ‘hosting’ as a particularly strategic component of their business; the
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co-founder stated:“… they give us a service… first of all certain support we get from them is 24x365, and is excellent, their support is absolutely superb, and they keep the network up all the time and know exactly what is going on, they really are excellent…” Concerning the second business process–credit card processing –Company B preferred to outsource it to a third party mainly for feasibility reasons, where an interviewed executive stated: “… that is something we neither know anything about nor want to know anything about… and even that it is not a partnership, it is a service…” Therefore, the rationale behind the decision to outsource was the difficulty, or impossibility, of acquiring the required resources for performing this process internally. As a summary of the issues on the rationale for partnering, three important dimensions were found. The first dimension is that of economics, where cost comparison between internalisation and outsourcing was critical in deciding on whether to enter a strategic alliance. The second dimension is that of feasibility, where depending on the difficulty of acquiring the required resources, a decision of whether to enter an alliance can be made. Finally, the third dimension is the strategic importance of the considered process. Figure 2 puts these dimensions in a matrix, detailing, according to this study, the decisions that ASPs should consider in relation to these three dimensions. If the considered process is very important strategically but with low feasibility of internalization, the ASP should consider entering a strategic alliance as in the case of Company A with its network and hosting provider. If the considered process has a low strategic importance and a low feasibility of internalisation, the ASP should consider buying from the market, as was the case with Company B, and the company that does credit card processing. In the two remaining cells of the matrix, the third dimension – economics – should be considered. If the considered process has a low strategic importance but high feasibility of internalisation, then the ASP should internalise the process only if it is more cost
The Rationale Behind Strategic Alliances in Application Service Provision
Figure 2. Rationale behind strategic alliances in ASP
Feasibility of Internalisation
High
Consider cost comparison: if internalisation is more costly, then buy from market, otherwise perform inhouse
Consider cost comparison: if internalisation is more costly then enter into a strategic alliance, otherwise perform inhouse
Buy from market
Enter into a Strategic Alliance
Low Low
High
Strategic Importance of the Process
effective than giving it to a third party, otherwise the ASP should buy form the market, as was the case with Company B with their hosting provider. Finally, if the considered process is highly important strategically, and its internalisation is highly feasible, then the ASP should internalise the process only if it is more cost effective than giving it to a third party, otherwise a strategic alliance should be forged due to the high importance of the process. In the theoretical part of this article, it was demonstrated that the concept of strategic alliances was of tremendous importance for the surviving of the ASP model. Based on the lacuna of the model, as initially conceived, it was suggested that strategic alliances are key component of the ASP model, allowing ASPs to differentiate their product offerings from those of their competitors. It was also demonstrated that existing and potential ASPs are still facing the challenges of the pre-formation phase of strategic alliances. After that the two case studies were analyzed, it was shown that the situation is not as simple as established theoretically. The case of Company B demonstrated that the ASP model could exist based uniquely on market transactions and in-
house processes, as opposed to the use of strategic alliances. On the basis of this analysis, a model for deciding on whether to forge an alliance, buy from the market, or perform in-house, was established (see Figure 2). This study has attempted to investigate the relationship between the ASP model and strategic alliances as a strategic option. Although it contributes to the field of ASP, and offers important insight on issues of partnering strategies, it still lacks strong empirical support. It, thus, logically opens new windows on areas of research in the ASP context. This study particularly suggests that the collection of more empirical data that not only help to validate its findings, but also expand more on the less developed issues, such as the choice of partners and the choice of governance structures, as well as alliances management.
lessons leArned This article has described an important model that represents a new way of distributing software applications, which consists of acquiring applica-
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tions using a rental mode. It was explained that from a vendor’s perspective, delivering applications using the ASP model requires several technologies that are very different in nature, which makes it a complex model that is difficult for any organization to offer using in-house resources. Therefore, it was concluded that partnering, in order to acquire these resources and capabilities, is core to the ASP model, and that strategic alliances can be considered as fundamental to the model. The two case studies, however, displayed a rather different picture. Company A relied heavily on vertical integration in order to offer the required ASP components, whereas Company B relied almost completely on the market for sourcing its needed ASP components. The most important lesson learned from these two cases is that although partnering is core to the ASP model, this can be achieved by organizational forms other than strategic alliances such as market based transactions. Consequently, a partnering model was displayed (see Figure 2) in order to help ASPs to decide on the appropriate sourcing form for their required resources and capabilities.
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This work was previously published in Journal of Cases on Information Technology, Vol. 10, Issue 3, edited by M. KhosrowPour, pp. 72-85, copyright 2008 by IGI Publishing (an imprint of IGI Global).
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Chapter 8.12
Flexible Global Software Development (GSD): Antecedents of Success in Requirements Analysis Vanita Yadav Management Development Institute, India Monica Adya Marquette University, USA Varadharajan Sridhar Management Development Institute, India Dhruv Nath Management Development Institute, India
AbstrAct Globalization of software development has resulted in a rapid shift away from the traditional collocated, on-site development model, to the offshoring model. Emerging trends indicate an increasing interest in offshoring even in early phases like requirements analysis. Additionally, the flexibility offered by the agile development approach makes it attractive for adaptation in globally distributed software work. A question
of significance then is what impacts the success of offshoring earlier phases, like requirements analysis, in a flexible and globally distributed environment? This article incorporates the stance of control theory to posit a research model that examines antecedent factors such as requirements change, facilitation by vendor and client site-coordinators, control, and computer-mediated communication. The impact of these factors on success of requirements analysis projects in
a “flexible” global setting is tested using two quasi-experiments involving students from Management Development Institute, India and Marquette University, USA. Results indicate that formal modes of control significantly influence project success during requirements analysis. Further, facilitation by both client and vendor site coordinators positively impacts requirements analysis success.
IntroductIon Globalization has resulted in software development being outsourced to emerging and developing nations (Edwards & Sridhar, 2005). An increasing range of services and processes are being delivered by global vendors as per quality, price, and requirements independent of geography, suggesting a growing capability and acceptance of global service delivery (NASSCOM, 2007). Outsourcing is the largest and fastest growing category within worldwide IT services spending. In 2006, the total spending on IT outsourcing was estimated at over USD 170 billion (more than 36% of the total) with an above average growth at 7.3 % (NASSCOM, 2007). Accordingly, software development has moved away from the traditional colocated model, often called on-site development, to the offshoring model (Edwards & Sridhar, 2006) in which global virtual teams collaborate across national borders (Carmel, 1999). Global software development (GSD) presents abundant business opportunities as well as challenges in terms of control, coordination, communication, culture, and technology. To address these challenges, many researchers propose that firms must have ambidextrous capabilities (Lee, Delone, & Espinosa, 2006) and combine the flexibility offered by the growing agile development approaches with the traditional plan-based approaches (Agerfalk & Fitzgerald, 2006; Lee, Banerjee, Lim, Hillegersberg, & Wei, 2006; Ramesh, Cao, Mohan, & Xu, 2006). As organizations
become more virtual, distributed development will become increasingly apparent throughout the entire software development life-cycle, particularly so in early stages such as requirements analysis (Evaristo, Watson-Manheim, & Audy, 2005). Despite the abundance of literature on globally distributed virtual teams (see Powell, Piccoli, & Ives, 2004) and IT outsourcing (see Dibbern, Goles, Hirschheim, & Jayatilaka, 2004; Yadav & Gupta, 2008), very few studies address the critical requirements analysis phase of GSD (Yadav, Nath, Adya, & Sridhar, 2007). Requirements analysis refers to that stage of the system development life cycle wherein the information and information processing services needed to support select objectives and functions of the organization are (i) determined and (ii) coherently represented using well defined artifacts such as entity-relationship diagrams, data flow diagrams, use cases, and screen prototypes (Hoffer, George, & Valacich, 1999). Typically in GSD this phase is conducted at the client location since this phase requires significant interaction between users and developers. Business and systems analysts are physically located at the client site to perform this activity. Depending on the nature of the project, high-level design is conducted in both on-site and off-shore mode due to comparatively lower interaction needs with the client. Detailed design, coding, and testing are executed at the off-shore site (Carmel & Tijia, 2005). Damian and Zowghi (2002) report that in global projects consultant teams from the offshore location travel to the user site to gather and analyze requirements in face-to-face meetings. The consultants then communicate the requirements to the development staff at the offshore locations. An emerging stream of research, on the other hand, puts forward the phenomenon of distributed requirements engineering (Bhat, Jyoti, Gupta, & Murthy, 2006; Edwards & Sridhar, 2005; Evaristo et al., 2005; Nath, Sridhar, Adya, & Malik, 2006). An interesting alternative being considered by software companies is the possi-
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Flexible Global Software Development (GSD)
bility of off-shoring a larger part of the software development process. Specifically, is it possible to effectively conduct the requirements analysis phase from offshore location which is traditionally done on-site? In such a scenario, analysts and developers located at the off-shore location would interact in a virtual mode with the clients located at their premises to determine and structure the requirements. Such a shift could potentially improve the cost arbitrage of the projects for instance, by cutting down the travel costs incurred for sending analysts to the client site for face-toface meetings and reduced staffing needs at the client end. It would also provide an opportunity to build client and developer relationships using computer-mediated communication. Recent years have also witnessed growth of the agile movement that focuses on producing a working solution in conjunction with changing user requirements. The flexibility and responsiveness of the agile approach makes it attractive for adaptation in globally distributed software work. Flexibility in GSD can be incorporated by adapting some of the principles of agile development like simplified project planning, acknowledging requirements change, lesser emphasis on processes and documentation, and supporting informal as well as formal communication (Yadav et al., 2007). In the requirements analysis phase of offshore GSD projects, the absence of analysts and developers at customer premises is likely to create a need to exercise control even in a flexible environment to ensure that the project meets defined goals. Offshore vendors often deploy liaisons who coordinate activities between on-site users and offshore development team. These liaisons are critical for effective communication and coordination between users and developers (Battin, Crocker, Kreidler, & Subramanian, 2003). This study proposes to examine two research questions related to flexible GSD: what are the antecedents of requirements analysis success in a flexible GSD environment? How do these anteced-
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ents impact success? Founded on control theory, this article posits a research model examining relationships between process facilitation (by client/vendor site-coordinators), computer-mediated communication, control, change in requirements, and requirements analysis success. Our interactions with managers in client and vendor firms engaged in GSD indicate that “total” offshoring of requirements engineering is still uncommon. However, they assert that in some smaller projects, up to 75% of the requirements analysis is carried out in offshore mode. For this reason, it might not be feasible to analyze “total” offshoring of requirements analysis phase in a real-life setting. Furthermore, as client nations face a growing shortage of business and systems analysts, organizations may be compelled to consider offshoring of early GSD phases. Given these arguments, we designed exploratory quasiexperimental research studies in an academic setting involving management students enrolled in a graduate level information systems course at Management Development Institute (MDI), India, and management students enrolled in a graduate level IT Project Management course at Marquette University (MU), USA. MU students role-played clients while MDI students role-played systems analysts. The chapter is organized as follows. In the next section we review the background literature. Subsequently, the theoretical foundation, research hypotheses, and conceptual model are presented, followed by research methodology, and an overview of the findings. The article concludes with implications and directions for future research.
reQuIrements AnAlysIs In FleXIble gsd proJects One of the most challenging aspects of system development is ascertaining “what the system should do,” that is in determining the system requirements (Crowston & Kammerer 1998, p.
Flexible Global Software Development (GSD)
227). Globally distributed requirements analysis generally includes a team of analysts and users working together using technologies like computer-mediated conferencing, instant messaging, e-mails, teleconferencing, and Web-based group support systems. There is a growing debate on what can be and what cannot be offshored? One school of thought suggests that certain activities, like coding, are a better fit for offshore locations while other activities, like requirements gathering, are better to be carried out onshore within the client’s country (Carmel & Tijia, 2005). On the other hand, there is a growing stream of researchers who reason in favor of distributed requirements engineering. Few studies have examined the use of virtual and globally distributed teams for requirements analysis. Edwards and Sridhar (2005) studied the effectiveness of virtual teams in a collaborative requirements analysis practice. In this study virtual GSD teams at near and far locations participated in requirements analysis phase of the project. This typically is applicable in collaborative global product development exercises as described in Battin et al. (2003). However, in our research we study the requirements analysis phase of off-shored software projects consisting of (i) users of the client who specify the requirements, and (ii) developers/analysts of the vendor located at an offshore development center who determine and document these requirements. We define a virtual GSD team to comprise these two protagonists who rarely meet face-to-face and who work together using computer mediate communications. Damian and Zowghi (2002) studied the interplay between culture and conflict and the impact of distance on the ability to reconcile different viewpoints with respect to “requirements negotiation” processes. They find that lack of a common understanding of requirements, together with reduced awareness of local context, trust level, and ability to share work artifacts significantly challenge effective collaboration among remote
stakeholders in negotiating a set of requirements that satisfies geographically dispersed customers. Damian, Eberlein, Shaw, and Gaines (2000) examined the effect of the distribution of various stakeholders in requirements engineering process. They found that highest group performance occurred when customers were separated from each other and collocated with the facilitator or system analyst. Our study aims to contribute to the literature on globally distributed virtual teams engaged in off-shored software requirements analysis.
FleXIbIlIty In gsd Continued dissatisfaction with the traditional plan-driven (heavyweight) software development methodologies have led to the introduction of various agile (lightweight) methodologies, like eXtreme programming, Scrum, Crystal, and so forth (Fruhling & Vreede, 2006; Lindstrom & Jeffries, 2004). Practice-led agile methods have been proposed as a solution that addresses problems, such as budget/schedule overruns and poor quality levels, by promoting communication, flexibility, innovation, and teamwork (Agerfaulk & Fitzgerald, 2006; Augustine, Payne, Sencindiver, & Woodcock, 2005). The agile alliance movement was motivated by the observation that software teams in many corporations are entrapped in an ever-increasing amount of process and documentation (Fruhling & Vreede, 2006). Agile approaches focus on fast deliverables, dynamic management of requirements, and fast iterations and increments (Fruhling & Vreede, 2006). While many benefits of these newer approaches have been proposed, very few field studies have empirically operationalized agile GSD (Fruhling & Vreede, 2006) and developed theories in this area (Agerfaulk & Fitzgerald, 2006). Our informal interactions with client and vendor organizations in the U.S. and India also indicate that in reality what exits is something in
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Flexible Global Software Development (GSD)
between the spectrum of the traditional and agile approaches. Though industry continues to debate whether or not agile processes are appropriate for distributed teams, let alone large and offshore distributed teams, organizations like Sapient have been successful in tailoring the agile approach to incorporate flexibility using a mixed focus on people, process, and tools (Barnett, 2006). Therefore on a spectrum, flexible GSD can be visualized as an “agile-rigid” approach that lies in between the traditional and agile approaches (see Figure 1). To highlight the differences, the key characteristics of the traditional, agile, and flexible GSD environments adapted from a current stream of research (Furhling et al., 2006; Holmstrom, Fitzgerald, Agerfalk, Conchuir, & Eoin, 2006; Lee, Delone et al., 2006; Lee, Banerjee et al., 2006; Ramesh et al., 2006; ) are presented in Table 1. Flexible GSD offers “rigor” of the traditional approaches and “flexibility” of the agile approaches within the teams (Yadav et al., 2007). Rigor is provided by incorporating formal structures of the traditional approach, such as development of a project plan, communication plan, and project status tracking. Agility is allowed through simplified project planning. Elaborate project management techniques are tailored to make them “lightweight.” “Simple rules” (Augustine et al., 2005) are adopted. Formal as well as informal channels of communication are encouraged. Additionally, it adopts the agile philosophy of embracing requirements change. The agile principle states that we should welcome changing requirements in software projects as they harness change for the customer’s competitive advantage (Lindstrom
& Jeffries, 2004). However, Fruhling and Vreede (2006) indicate that the impact of requirements change has not been studied empirically.
underlyIng theoretIcAl FoundAtIon Global software development is not just a technical process of building software or information systems but also a social process involving stakeholders from multiple organizational units. Our article draws upon control theory to study the impact of antecedents on success during requirements analysis in a flexible GSD setting. Academic (Kirsch & Cummings, 1996) and practitioner (PMBOK, 2000) literature suggests that control plays an effective role in managing projects. Control theory attempts to explain how one person or group ensures that another person or group works toward and attains a set of organizational goals. Aligned with prior research on control (Choudhury & Sabherwal, 2003; Kirsch, 1997), our study views control broadly as attempts to ensure that individuals act in a manner consistent with achieving desired project goals. Control modes can be “formal or “informal” (Crisp, 2003) in nature, where former are documented and initiated by management, and the latter are often initiated by employees themselves. Control theories suggest that controllers utilize two modes of formal control: behavior and outcome (Eisenhardt, 1985; Kirsch, Sambamurthy, Dong-Gil, & Russell, 2002). In behavior control, appropriate steps and procedures for task performance are defined by controllers and then
Figure 1. Flexibility spectrum Traditional Approach (Rigid)
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Flexible GSD Approach (Agile-Rigid)
Agile Approach (Agile)
Flexible Global Software Development (GSD)
Table 1. Characteristics of the traditional, agile, and flexible approaches Traditional Development Approach
Fundamental Assumption
Communication
Systems are fully specifiable, predictable, and can be built through meticulous and extensive planning.
Agile Development Approach
Flexible GSD Approach
High-quality, adaptive software can be developed by small teams using principles of continuous design improvement and testing based upon rapid feedback and change.
High-quality, adaptive software can be developed by globally distributed teams using principles of continuous improvement based upon feedback and change having some amount of planning and control.
Formal
Informal
Formal and informal
-Process-centric -Processes over people -Extensive milestone planning - Extensive documentation
-People-centric -People over processes -Respond to change over following a plan - Lack of documentation
-Equal importance to people and processes - Medium project planning -Medium documentation
Requirements
-Knowable early; largely stable -Detailed specification of requirements
-Largely emergent; rapid change - Iterative development that produce working solutions at the end of each iteration to capture emerging requirements
- Emergent - Use prototypes or incremental working solutions to capture emerging requirements
Size
Larger teams (>10 team members)
Smaller teams (2-8 team members).
Smaller teams or large teams broken down to small sub-teams (<10 team members).
Project Management
controllees’ performance is evaluated according to their adherence to the prescribed procedures. In outcome control, controllers define appropriate targets and allow controllees to decide how to meet those output targets. Controllees’ performance is evaluated on the degree to which targets were met, and not the processes used to achieve the targets (Kirsch et al., 2002). In this study, we focus on the impact of formal modes of control (outcome and behavior) on success of GSD projects during the requirements analysis phase. Kirsch et al. (2002) extended the control theory to the role of client liaisons/coordinators exercising control of IS project leaders to ensure that IS projects meet their goals. Lee et al. (2006) also proposed assigning “point persons”/ coordinators to offshore sites for effective management of GSD projects. We draw upon this literature to study the
effect of process facilitation by both the client and vendor site coordinators.
reseArch model To reiterate, this chapter proposes to examine the following research questions—what are the antecedents of requirements analysis success in a flexible GSD environment? How do these antecedents impact requirements analysis success? Specifically, we explore how incorporating discipline through formal modes of control, process facilitation by site-coordinators (at both the client and vendor sites), and task related computer-mediated communication in a flexible GSD environment impacts requirements analysis success. We also explore how change in require-
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Flexible Global Software Development (GSD)
ments, which is an inherent assumption behind the agile philosophy, impacts requirements analysis success. Control theory guides our hypotheses and model development process (see Figure 2). The research model variables and hypotheses specifying relationships between these variables are presented in the subsequent sections.
GSD projects is likely to help in achieving success (Yadav et al., 2007). H1: Formal modes of control are positively related to requirements analysis success in a flexible GSD environment.
control
computer-mediated communication
Outsourced projects in GSD pose unique problems that make the task of controlling them particularly challenging (Choudhury & Sabherwal, 2003). In the case of outsourced GSD projects, the controller and controllee may not be single individuals but teams of individuals representing the client and vendor organizations at globally distributed locations. Lee, Delone et al. (2006) suggest that agile methods should be tailored to embrace more discipline in GSD. Derived from control theory, we hypothesize that incorporating discipline by using formal modes of control (outcome and behavior) during requirements analysis in flexible
Computer-mediated communication uses computers to structure and process information, and uses telecommunication networks to facilitate its exchange (e.g., e-mails, computer conferencing, e-groups). Rice (1987) indicates that computermediated communication is preferred in crosslocation interdependency tasks because of greater freedom from temporal and geographic constraints (e.g., offshoring). Computer-mediated communication allows group members to collaboratively create meaning out of diverse sources of information leading to better outcomes (DeSanctis & Gallupe, 1987).
Figure 2. Research model
PROCESS FACILITATION (Vendor)
H3a + H4a
+
H5a
+
H1+
H2+ H4b+ H5b +
COMMUNICATION (Computer-mediated)
REQ ANALYSIS SUCCESS -�Client Satisfaction -�Quality of Artifacts -�Success of Process
H3b +
PROCESS FACILITATION (Client) ENVIRONMENT: Flexible GSD (Requirements Analysis)
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Flexible Global Software Development (GSD)
The virtual GSD environment presents considerable challenges to effective communication including time delays in sending feedback, lack of a common frame of reference for all members, differences in salience and interpretation of written text, and assurance of participation from remote team members (Crampton, 2001). Hulnick (2000, p. 33) noted that “if technology is the foundation of the virtual business relationship, communication is the cement.” Information processing perspective of communication indicates that task uncertainty and work flow interdependence lead to higher frequency of interaction between work units (Putnam & Cheney, 1985). Extending this to a GSD scenario during requirements analysis there exits work flow interdependence between the remote client and the vendor teams for accurately capturing and documenting requirements. This is likely to lead to frequent task related computer-mediated communication between globally distributed team members for successful completion of requirements analysis. Thus we hypothesize that:
be provided by assigning point persons/liaisons/ site-coordinators at both the client and vendor sites. We hypothesize that process facilitation provided by site-coordinators at offshore sites (client/vendor) can be a considered as a structure that is more likely to assist productive outcomes (Yadav et al., 2007).
H2: Task-related computer-mediated communication is positively related to requirements analysis success in a flexible GSD environment.
H4a: Process facilitation by vendor site-coordinator is positively related to formal modes of control during requirements analysis in a flexible GSD environment. H4b: Process facilitation by client site-coordinator is positively related to formal modes of control during requirements analysis in a flexible GSD environment.
process Facilitation Lee, Delone et al. (2006) indicate that assigning “point persons” in offshore software development plays pivotal role in sensing and responding to emergent problems on a real time basis. Borrowing from IS Literature on Group Support Systems (GSS) process facilitation is defined as the provision of procedural structure and general support to groups (Miranda & Bostrom, 1999). Our research acknowledges Crisp’s (2003) view on structuring borrowed from control theory and applies it in the context of GSD process facilitation where structuring refers to “any explicit or implicit means of developing structures for control.” In the case of outsourced GSD projects, process facilitation can
H3a: Process facilitation by vendor site-coordinator is positively related to requirements analysis success in a flexible GSD environment. H3b: Process facilitation by client site-coordinator is positively related to requirements analysis success in a flexible GSD environment. Structures are formal and informal procedures, techniques, skills, rules, and technologies that organize and direct group behavior and processes (Anson, Bostrom, & Wynne, 1995). We therefore hypothesize that process facilitation provided by site-coordinators (client/vendor) at offshore sites can be a considered as a structure that is more likely to assist in formal modes of control:
Ramesh et al. (2006) report that a primary “point of contact”/a project lead, for each location in GSD helped in facilitating communication across the teams. Griffith, Fuller, and Northcraft (1998) assert the fundamental role of a process facilitator is to improve the effectiveness and efficiency of communication and interaction of group members in order to help the group achieve outcomes. Therefore, we hypothesize that process facilitation by vendor site-coordinator and also by client site-coordinator is likely to lead to increased
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Flexible Global Software Development (GSD)
computer-mediated communication: H5a: Process facilitation by vendor site-coordinator is positively related to task-related computermediated communication during requirements analysis in a flexible GSD environment. H5b: Process facilitation by client site-coordinator is positively related to task-related computermediated communication during requirements analysis in a flexible GSD environment.
incorporated. Therefore, it is likely that changes in requirements would probably lead to increase in control and task-related communication. H6b: Members of teams that have changes in requirements will perceive a higher level of control than those who have no changes. H6c: Members of teams that have changes in requirements will perceive a higher level of task related communication than those who have no changes.
requirements change The task of specifying requirements has “high dynamic complexity” (Briggs & Gruenbacher, 2002). This complexity stems from the evolutionary nature of requirements, which are clarified only through multiple iterations of information gathering (Evaristo et al., 2005). As organizations become more global and stakeholders more distributed, getting the requirements right will pose a greater challenge (Damian et al., 2000). Flexible perspective borrowing from Agile philosophy states that “changing requirements are not necessarily bad but are welcomed as an opportunity to satisfy customer needs even better than inflexibly sticking to old requirements” (Turk et al., 2005). Although many positive benefits have been speculated for dynamic management of requirements and fast iterations, few have been empirically examined (Fruhling & Vreede, 2006). Founded on the agile philosophy of considering requirements change as good opportunity to satisfy customer needs, we hypothesize: H6a: Members of teams that have changes in requirements will perceive higher level of requirements analysis success than those who have no changes. When requirements change, it is assumed that client team members are likely to experience a greater need to communicate and monitor vendor team members’ behavior to ensure changes are
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Tan and Teo (2007) recently pointed out that project team using agile methodology could be effective in responding to change in user requirements if it stressed collaboration among members and users; thus it is likely that changes in requirements leads to increased process facilitation by site coordinators (client/vendor). H6d: Members of teams that have changes in requirements will perceive a higher level of process facilitation by vendor site-coordinator than those who have no changes. H6e: Members of teams that have changes in requirements will perceive a higher level of process facilitation by client site-coordinator than those who have no changes.
reseArch methodology Faculties in many universities and business schools have set up distributed software engineering laboratories for conducting virtual team exercises in their courses (Edwards & Sridhar, 2006; Nath et al., 2007). Powell et al. (2004) have listed a number of studies involving students in global virtual teams. A controlled experimental approach provides three benefits. First, it makes available several teams that work in parallel thereby generating rich data for drawing conclusions. Second, it permits researchers to experiment with newer approaches which may not yet have been explored by
Flexible Global Software Development (GSD)
the industry. Finally, it equips and trains software engineering students to understand and to handle the challenges of working in global software teams (Favela & Pena-Mora, 2001). We conducted a quasi-experiment in a globally distributed academic setting involving MBA students from two countries—India and the USA. Students from MDI, India, posed as analysts from vendor side while those from MU, USA, posed as clients. Vendor role was assigned based upon the rationale that India is still the preferred sourcing destination with a 58% share in worldwide offshore IT-BPO market in spite of the expansion of global sourcing arena (NASSCOM, 2007). Similarly, client role was assigned based upon the rationale that the U.S. alone accounts for about two-thirds of the software and services exports from India (NASSCOM, 2007). Defining quasi-experimental designs, Campbell and Stanley (1966, p. 34) state that there are many natural settings in which a research person can introduce something like experimental design into his scheduling of data collection procedures (e.g., the when and to whom of measurement), even though he lacks full control over the scheduling of experimental stimuli (the when and to whom of exposures) which makes a true experiment possible. We designed a post-test control group quasiexperiment design of the following form: M X O1 M O2 “M” stands for matching (a priori equalization of the two groups for the factors that have to be controlled), “X” stands for treatment and “O” stands for observation or measurement. Marquette University has a service learning office which obtains IS development projects from nonprofit organizations and small businesses in and around Milwaukee. These real life projects at Marquette University were used to create the simulated flexible GSD requirements analysis
projects. This enabled the projects to closely mirror real business environments. Examples of these projects include a donation management system for a nonprofit organization, a volunteer management system, an alumni Web site, a tracking system for battered and abused women, and a book inventory management system. Only high level requirements were provided, such as that the system must be secure and accurate, it must track certain information, and so forth. Many of the detailed level requirements were expected to emerge only through remote team member communications for requirements gathering and analysis.
the experiment The clients in the U.S. enrolled for a course in IT Project Management and the analysts in India enrolled for Management Information Systems (MIS) course, having comprehensive coverage of systems analysis and design, in January 2007. This quasi-experiment was designed as a part of the course project and its duration was 8 weeks. Students developed project artifacts iteratively using structured software development methodology. A flexible offshore GSD project environment was simulated based upon characteristics highlighted in Table 1. Each client team was paired with an analyst team. The teams were controlled in terms of age and work experience of team members and team size (see Table 2). MDI teams elicited project requirements from MU teams using Web-based communication technology like e-groups (Google/yahoo groups), text/voice/video chat (Skype/msn/yahoo), and e-mail (see Table 3 and Figure 3). The gathered requirements were then structured using the process modeling tools such as Context Analysis Diagram (CAD), Data Flow Diagrams (DFDs), and Process Specifications. MDI teams also modeled the data and associated relationships using Entity Relationship Diagrams (ERDs). Further, to give the users a feel of what the final system would
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Flexible Global Software Development (GSD)
Table 2. ANOVA results Variable
Levene Test (p>.05)
F-value
Significance*
Age (years)
.908
0.782
0.726
Total Work Experience
.286
1.592
0.908
IT Work Experience
.083
0.490
0.964
* Significance >.05 indicates no difference between the GSD teams for the variables that were controlled
Table 3. Experiment setting and treatment
Setting
Non-control Group (Treatment: Changes in Requirements)
Control Group (No Treatment)
Flexible GSD All teams matched in terms of age, size, work experience, technology, standard development methodology
Sample Size= 90 Analysts=59, Clients=33 10 client-analyst GSD teams, each team having 5-6 analysts (1 analyst appointed, by consensus, as MDI site-coordinator) and 3-4 clients (1 client appointed, by consensus, as MU site-coordinator)
Sample Size= 91 Analysts=56, Clients=33 10 client-analyst GSD teams, each team having 5-6 analysts (1 analyst appointed, by consensus, as MDI site-coordinator) and 3-4 clients (1 client appointed, by consensus, as MU site-coordinator)
Week 1: Simplified Project Management Plan (to MU clients with a copy to MDI faculty and researcher). No formal resource allocation at the analyst end.
Week 1: Simplified Project Charter, Project Schedules, Resource Allocation and Communication Plans (to the MU faculty).
Week 3: Simplified Project Status Reports to MU Clients.
Week 3: Simplified Risk Assessment and Contingency Plans (to the MU faculty).
Week 4: First Iteration (Context Analysis Diagrams, Data Flow Diagrams, Entity Relationship Diagrams, Process Specifications and Screen-based Prototypes of the business IS) to MU Clients.
Week 4: Feedback to MDI analysts.
End of Week 4 Main Experiment : TREATMENT- Changes in Requirements for the Non-control Group Week 6: Simplified Project Status Reports to MU Clients.
Week 6: Simplified Project Status Reports to MU faculty.
Week 8: Second Iteration (Context Analysis Diagrams, Data Flow Diagrams, Entity Relationship Diagrams, Process Specifications, and Screen-based Prototypes of the business IS) to MU Clients.
End of Week 8: Simplified Project Closure Report to the MU faculty.
look like, MDI teams also created screen-based prototypes as part of the requirements analysis exercise. All these artifacts were submitted by the MDI teams to MU user teams in two iterations (see Table 4). All the GSD teams had appointed site-coordinators at both the client (USA) and vendor (India) sites. The quasi-experimental design was a posttest control group design. The treatment for this experiment was “requirements change” where noncontrol groups had major changes in requirements and control groups did not have changes in requirements. The analysts in the noncontrol group developed the first iteration artifacts based on a set of high level and ambiguous requirements. A second set of more detailed requirements were then given to the MU client teams in the noncontrol group by the course faculty and the analysts then created the second iteration incorporating the changed set of requirements. The control group teams also developed the projects in two iterations but they were given detailed and clearly specified requirements at the start of the project.
measures Requirements Analysis Success: Mahaney and Lederer (2006) developed a comprehensive instrument for measuring IS project success based on three dimensions—client satisfaction, perceived quality of the project, and success with the implementation process. Baroudi and Orlikowski (1988) presented a short-form measure of User Information Satisfaction (UIS). Extending the dimensions of project success to the success of a particular phase of a project (requirements analysis), we define requirements analysis success in terms of client satisfaction with the requirements analysis phase, perceived quality of the requirements analysis deliverables, and perceived success of the requirements analysis process. This research refers to the items developed by Mahaney and Lederer (2006) and Baroudi and Orlikowski (1988) to measure requirements analysis success. Specifically, this study proposes to measure team members’ perception of success in flexible GSD requirements analysis projects. Control: Items to measure control for this study have been adapted from literature on formal modes of control (behavior and outcome) in information
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Flexible Global Software Development (GSD)
systems development projects (Kirsch, 1996; Kirsch et al., 2002; Piccoli et al., 2004). Computer-mediated communication: We extend the task related communication items developed by Espinosa (2002) to measure task related computer-mediated communication for this study. Process Facilitation: Items to measure process facilitation for this study have been adapted from GSS literature on process facilitation (Anson et al., 2004; Miranda et al., 1999). The items on process facilitation were used twice. First, the items were used to measure process facilitation by the client site-coordinator and then they were used to measure process facilitation by the vendor site-coordinator. Requirements Change: This variable was introduced as a treatment in the experiment to study whether there is an impact of changing requirements on the proposed model variables. Requirements change was thus treated as a dichotomous variable (1=changes in requirements and 0=no changes).
AnAlysIs A survey instrument was used to collect data pertaining to the above measures at the end of the quasi-experiments. Two separate versions were developed for client and vendor team members. Both versions included the same items for each construct but were worded differently to conform to the participant roles. The items were derived from available literature as described earlier and adapted for this study. Questions were randomized prior to instrument administration to counter possible order effects in the responses. All items were measured on a seven point Likert-type scale, where one indicated strong disagreement and seven indicated strong agreement with the item. Items of the vendor version are given in Appendix 1 for reference. Demographic data was also collected through direct questions and analyzed.
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Our unit of analysis was at the individual level. We measured the effect of predictor variables on the outcome variable as perceived by the individual team members. A majority of research in organizational behavior had been conducted at the individual level of analysis (Schnake & Dumler, 2003). For example, leadership style had been examined at both individual and group levels in leadership research, but primarily at the individual level in organizational citizenship behavior research (Schnake & Dumler, 2003). Similarly, task scope (Griffin, 1982) and work context (Comstock & Scott, 1977) have individual and group level effects. Our view is consistent with the assertion by Choudhury and Sabherwal (2003) that in an outsourced software project although the overall context is the contract between the two firms (client and vendor), the focus is still on individual(s) evaluating and influencing the actions of other individual(s). Standard psychometric techniques were employed to validate measures. For construct validity Cronbach alpha was used and all constructs that had Cronbach alpha closer to or greater than 0.7 confirmed construct validity (Cheung & Lee, 2001). Factor analyses was conducted to examine convergent and discriminant validity. Principle component method of extraction with varimax rotation was used. The items that did not load well were removed (see Appendix 1). For ensuring convergent and discriminant validity we retained the indicators that loaded onto their proposed factors for the study.
pilot testing As a first step, we carried out a pilot study to gain an initial understanding and to pilot test the questionnaire items. Subsequently, we conducted the main experiment to test our hypothesized model. The pilot study was designed as a part of MU and MDI course projects and its duration was 8 weeks (see Table 5). The client teams in the U.S. enrolled for an undergraduate course in
Flexible Global Software Development (GSD)
Table 5. Pilot study setting Setting
Sample Total Sample Size= 102 Analysts=52, Clients=50 (16 client-analyst GSD teams. Each having 3-4 analysts and 2-3 clients)
Flexible GSD Requirements Analysis All teams matched in terms of age, size, work experience, technology, standard development methodology
Table 6. Descriptive statistics Total
Std. Dev.
Analyst
Client
Sample Size (Control + Non-control)
181
0.48
115
66
Age (mean value in years)
22.8
1.9
23.5
21.6
Total Work Experience (mean value in years)
2
2
1.2
3.3
IT Work Experience (mean value in years)
0.7
1.3
0.72
0.76
Table 7. Correlation matrix and reliability Items
1
2
3
1.
CONTROL
6
(0.837)***
2.
COMMUNICATION
3
.178*
(0.828)***
3.
PROCESS FACILITATION (CLIENT)
2
.168*
.464**
(0.755)***
4.
PROCESS FACILITATION (VENDOR)
2
.584**
.207**
.178*
5.
SUCCESS
7
.612**
.337**
.584**
4
5
(0.789)*** .504**
(0.790)***
*** Reliability Analysis (Cronbach alpha) on the diagonal ** Correlation is significant at the 0.01 level (2-tailed) * Correlation is significant at the 0.05 level (2-tailed)
IT Project Management and the analyst teams in India enrolled for a graduate course in Systems Analysis and Design in October of 2006. Each client team was given a set of requirements and the analyst team was required to develop project artifacts and screen-based prototypes of a business information system requested by the client team. This study was a simple post-test quasi-experiment design intended to pilot test the data collection instrument and to comprehend the flexible GSD environment.
the experiment Subsequently, in our main experiment, we estimated the complete hypothesized structural model using Arbuckle’s (2006) AMOS 7.0 program. A common practice used in conducting SEM analyses with latent variables involves creating “item parcels” based on sums or means of responses to individual items and then using scores on these parcels in the latent variable analysis (Russell, Kahn, & Altmaier, 1998). We created item parcels for success and control based upon rationale
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Flexible Global Software Development (GSD)
grounds (Kline, 2005) for our structural model analysis. For success (total seven questionnaire items) we created three item parcels—client satisfaction (two items), perceived quality (three items), and success of implementation process (two items). For control, measured by a total of six questionnaire items, we created two parcels— behavior control (three items) and outcome control (three items).
results Survey responses for 20 items were generated from 181 respondents (client team members and vendor analysts) for the experiment. Demographic data was also collected through direct questions and examined. Four items to measure process facilitation and two additional items to measure control were added to the same instrument used in the pilot study. The descriptive statistics is outlined in Table 6 and Pearson’s product-moment correlation matrix and reliability analysis is shown in Table 7. Reliability of the measures of (i) success, (ii) control, (iii) communication, (iv) process facilitation (vendor), and (iv) process facilitation (client) had Cronbach Alpha values above 0.70 indicating construct reliability. The dependent variable perceived success showed significant correlations with all the antecedent variables proposed in the model, that is, control, communication, process facilitation vendor, and process facilitation client. There are significant correlations between the antecedent variables themselves which needs to be explored further.
multigroup Analysis As stated earlier, our experiment was a control group quasi-experiment design. One of the methods to incorporate group membership (treatment vs. control) into the model involves separating the
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data from members of the treatment and the control groups and conducting a multiple-group analysis (Russell et al., 1998; Sorbom, 1981). We referred to the multigroup analysis specified by Byrne (2001, pp. 226-243) to test for invariant latent mean structures and Ho (2006, pp. 321-356) to estimate our hypothesized structural equation model for the control group and noncontrol groups. Byrne (2001) suggests that the usual test for multigroup comparisons typically focuses on the extent to which differences are statistically significant among observed means (calculable from raw data) representing the various groups. In contrast, means of latent variables, as in our case, are unobservable. Thus, our focus is on testing for differences in the latent means for hypotheses 6a-e, that is, team members having changes in requirements will have higher perceptions of the latent variables than team members having no changes in requirements. Specifically, we test for differences in the latent means of control, computer-mediated communication, process facilitation by vendor site-coordinator, process facilitation by client site-coordinator, and requirements analysis success across control and noncontrol groups. In testing for differences in latent means, our baseline measurement model for each group is shown in Figure 4. The variances of the five latent factors are freely estimated in each group. Means of the error terms are not estimated and remain constrained to zero. Except for those fixed to 1.00, all factor loadings are constrained equal across groups. All intercepts for the observed measures are constrained equal across groups. The five factor means are freely estimated for noncontrol group and constrained equal to zero for the control group. The latent mean estimates indicate that team members having changes in requirements have significantly higher perceptions of control (H6b), computer-mediated communication (H6c), process facilitation by vendor site-coordinator (H6e). But there appears to be
Flexible Global Software Development (GSD)
Figure 4. Structured means model for control and noncontrol groups
little difference in perception for requirements analysis success (H6a) and process facilitation by client site-coordinator (H6d). These results are summarized in Table 8. For our multigroup analysis, there were two data sets (control and noncontrol groups), each having 11 measurement variables. The two covariance matrices generated from the two data sets contained 132 sample moments. In multigroup confirmatory factor analysis (measurement) model, the critical ratio test for control and noncontrol group differences among regression weights yielded no significant difference for the 16 regression weights. Therefore, we constrained 16 regression weights to equality in the multigroup path analysis model. The computation of degrees of freedom and chi-square goodness-of-fit statistics for the group-invariant and group-variant model are outlined in Appendix 2. The baseline comparison fit indices of NFI, RFI, IFI, TLI, and CFI for both the models are close to or are above 0.90
(see Table 9). These values show the improvement in fit of both models relative to the null model. Root mean square error of approximation (RMSEA) fit index values for group-invariant (0.074) and group-variant path models (0.077) indicated adequate fits for both the models. RMSEA values ranging from 0.05 to 0.08 are deemed acceptable (Ho, 2006, pp. 349). The nested model comparisons statistics indicate that chi-square difference value for the two models is 8.847. This value is not significant (p< .05) with eight degrees of freedom (see Table 10). Thus the two models do not differ significantly in their goodness-of-fit. The AIC measure for groupinvariant model (261.380) is lower than that for the group-variant model (268.532), indicating that group-invariant model is more parsimonious and better fitting than the group-variant model. Hence we refer to the estimates of the group-invariant model for our analysis.
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Table 8. Results summary (latent mean estimates) Hypothesis
Latent Variable
Estimate
Sig.
Critical Ratio (CR>+1.96)
(p<.05)
Hypothesis Supported?
H6a
Requirements analysis success
.232
1.760
.078
Not Supported
H6b
Control
.364
2.337*
.019*
Supported
H6c
Computer-mediated communication
.510
2.227*
.026*
Supported
H6d
Process facilitation (vendor site-coordinator)
.334
2.186*
.029*
Supported
H6e
Process facilitation (client site-coordinator)
-.036
-.217
.828
Not Supported
Table 9. Baseline comparisons NFI Delta1
Model Group Invariant Group Variant Saturated model
RFI rho1
.859
.811
.867
.802
IFI Delta2
1.000
Independence model
TLI rho2
CFI
.925
.897
.927
.887
1.000
.000
.000
.000
.923 .924 1.000
.000
.000
Table 10. Nested model comparisons (assuming model group variant to be correct) Model Group Invariant
DF
CMIN
8
8.847
P .355
Figures 5 and 6 present the path models for the control and noncontrol groups together with standardized regression weights (beta coefficients) associated with the hypothesized paths. First, we analyzed critical ratios for differences test for experimental treatment impact on the path coefficients. Table 11 shows results of the individual hypotheses for both control and noncontrol groups. Appendix 2 presents the control and noncontrol group estimates in detail. H1 was supported which posits that formal modes of control are positively related to perceived success during requirements analysis in a flexible GSD environment (control group β= .55 and noncontrol group
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NFI Delta-1
IFI Delta-2
RFI rho-1
.008
.008
-.009
TLI rho2 -.010
β= .43). Surprisingly, as proposed in H2, frequent task-related communication was not found to be significantly related to perceived success (control group β= -.13, noncontrol group β= -.13). Though process facilitation by vendor site-coordinator did not have a positive impact on success (H3a: control group β= .08, non-control group β= .05), the positive impact of process facilitation by client site-coordinator was found to be significant (H3b: control group β= .60, non-control group β= .71). The proposed positive relationship between process facilitation by vendor site-coordinator and control was found to be significant (H4a: control group β= .70, noncontrol group β= .60)
Flexible Global Software Development (GSD)
Figure 5. Noncontrol group (req. change) structural path model
*Standardized estimates and significant relationships (p<.05, CR>+.96)
Figure 6. Control group (no req. change) structural path model
*Standardized estimates and significant relationships (p<.05, CR>+.96)
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Flexible Global Software Development (GSD)
Table 11. Experiment 2 results summary Hypothesis
H1
H2
H3a
H3b
H4a
H4b
H5a
H5b
Path
Hypothesized Relationship
control → req analysis success Control Group: Noncontrol Group:
+
computer-mediated communication → req analysis success Control Group: Noncontrol Group:
+
process facilitation(vendor) → req analysis success Control Group: Noncontrol Group:
+
process facilitation (client) → req analysis success Control Group: Noncontrol Group:
+
process facilitation (vendor) → control Control Group: Noncontrol Group:
+
process facilitation (client) → control Control Group: Noncontrol Group:
+
process facilitation (vendor) → computer-mediated communication Control Group: Noncontrol Group:
+
process facilitation (client) → computer-mediated communication Control Group: Noncontrol Group:
+
Critical Ratio (CR>+1.96)
.547 .434
4.079* 4.079*
Sig.
Hypothesis Supported?
(p<.05) Supported .000* .000* Not Supported
-.131 -.131
-1.746 -1.746
.081 .081 Not Supported
-.079 -.054
-.607 -.607
.544 .544 Supported
.599 .710
6.754* 6.754*
.000* .000*
.702 .603
6.509* 6.509*
.000* .000*
.088 .132
1.274 1.274
.203 .203
Supported
Not Supported
Not Supported .177 .120
but was insignificant for process facilitation by client site-coordinator and control (H4b: control group β= .09, noncontrol group β= .13). Again, process facilitation by vendor site-coordinator did not have a positive impact on frequent taskrelated communication (H5a: control group β= .18, noncontrol group β= .12) but the positive impact of process facilitation by client site-coordinator was found to be significant (H5b: control group β= .40, noncontrol group β= .47). Based on the results displayed in Table 11, it can be concluded
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Path Coefficient (Standardized beta)
1.768 1.768
.077 .077 Supported
.399 .471
4.631* 4.631*
.000* .000*
that for both the control and noncontrol groups, process facilitation by vendor site-coordinator is related indirectly to perception of success, being mediated by formal modes of control. Furthermore, the greater the process facilitation by client site-coordinator, the greater is task-related communication, and perception of success.
Flexible Global Software Development (GSD)
dIscussIon This study was driven by the need to better understand which antecedent factors impact requirements analysis success in flexible GSD projects and how. We proposed a conceptual model grounded in control theory to find preliminary answers to our research questions—what are the factors that are of importance in the requirements analysis phase of flexible GSD projects? How do they relate to requirements analysis success? We find that control (both behaviour and outcome) positively impacts success during requirements analysis. Prior studies have primarily focused on behavior and outcome controls in internal software projects. Few studies, such as Choudhury and Sabherwal (2003), reported that outcome control in outsourced IS projects resembled that of internal IS development projects. They also state that behavior control entailed monitoring behavior that was “explicitly” as well as “not explicitly” prescribed and requires further investigation in other contexts. Consistent with their view, in a flexible GSD context, our study reports that having some amount of structure in the form of formal modes of controls positively impacts success. Applying the information processing perspective of communication (Putnam & Cheney, 1985) to a GSD scenario, we suggest that there exits work flow interdependence between the remote client and the vendor teams for accurately capturing and documenting requirements. This is likely to lead to frequent task related computer-mediated communication for successful completion of requirements analysis. Surprisingly, the results show that increased task-related communication did not positively impact success. A likely explanation for such a finding can be that informal means of communications across the teams could have probably sufficed the need of task-related online information exchange. Consistent with prior literature and practice, we find that increased process facilitation by client
site-coordinators in a flexible GSD environment increases task-related communication and also leads to greater success of requirements analysis projects. However, increased process facilitation by vendor site-coordinators did not lead to greater task-related communication. Rather, increased process facilitation by vendor site-coordinators lead to increased control which further impacted requirements analysis success. Consequently, the effect of process facilitation by vendor sitecoordinators on requirements analysis success is found to be mediated by control whereas process facilitation by client site-coordinators has a direct impact on requirements analysis success. Further, increased process facilitation by client site-coordinators did not lead to increased control. An inherent assumption behind flexible (agile) philosophy is that changes in requirements are good since requirements evolve over time and are best clarified through multiple information gathering iterations. In our experiment we introduced “changes in requirements” as a treatment for the noncontrol group. Our findings suggest that team members who experienced changing requirements also experienced greater control, greater computer-mediated communication, and greater process facilitation by vendor sitecoordinator. However, these team members did not experience greater process facilitation by client site-coordinator. Since changes in requirements are client initiated, it is likely that the increased role of the client site-coordinator was perceived to be less significant. The latent mean scores also indicated lower difference in perception of requirements analysis success. A probable explanation in this regard could be that changes in requirements might not have a direct impact on the success of requirements analysis phase. However, it is likely that the changes have greater impact on subsequent phases of software development and hence on the complete project. Also, there is likely to be an indirect impact via mediating factors like control, communication and process facilitation. This needs to be further
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Flexible Global Software Development (GSD)
explored by including requirements change as a model variable.
lImItAtIons And Future proposItIons use of experiments Literature in the area of virtual teams has mainly followed three research methodologies—case studies, industry survey, and experiments. Experimental methods make possible the careful observation and precise manipulation of independent variables, allowing for greater certainty with respect to cause and effect, while holding constant other variables that would normally be associated with it in field settings (Damian et al., 2000). They also encourage the investigator to try out novel conditions and strategies in a safe and exploratory environment before implementing them in the real world (McGrath, 1984). The industry is yet to adopt off-shoring of the requirements analysis phase. This precludes the use of case study or industry survey for this research. Hence, we used experiments where we can try out this new method. While this limits the generalizablity of our findings, our approach provides a foundation from which to build a future empirical industry assessment as the time is ripe.
use of students as surrogates There are criticisms for the use of students in academic experiments as surrogates. However, MBA students have been used as surrogate users in experiments conducted by Hazari (2005) and Briggs, Balthazard, and Dennis (1996). Even in the requirement negotiation phase, students with work experience were taken as users for developing a small system (Damian et al., 2000). Remus (1986) argued that graduate students could be used as surrogates for managers in experiments on busi-
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ness decision making. Students often represent a typical working professional and organizational member due to the variety of backgrounds and goals (Dipboye & Flanagan, 1979). Studies in industrial organization psychology and organization behavior suggest that results obtained from students are similar to those from managers (see for example, Locke, 1986). Despite the fact that clients and analysts in our experiments had 2-4 years of work experience, limitations of using students as surrogates are still applicable in our study. The potential lack of realism in laboratory experiments using student surrogates can be addressed through multiple methods (McGrath, 1984) so that the strengths of some compensate weaknesses of others (Jarvenpaa, 1988). Simulated laboratory negotiations could be complemented by field studies or validations, if the lack of realism is an issue. As a next step in our research, we plan to complement the findings of our laboratory experiments with field validations.
project complexity We acknowledge that requirements analysis is an intensive phase and hence is not possible to completely replicate it in student experiments. However, our objective was to study the research questions on comparable relatively well-defined small projects in which complexity of requirements analysis is not high. Though the experiments were carefully designed, the projects done were limited in scope and size compared to large scale industrial projects. However, no formal measures of complexity were used in the study so that we could compare the projects used in the experiments with real world industrial projects. Further research is needed to assess the impact of these findings on large scale industrial projects with complex requirements.
Flexible Global Software Development (GSD)
communication technology The communication technology used in our experiment was mainly freely available Internetbased information and communication technology like chat, e-mail, e-groups, and Web conferencing. Moreover, in industry, other technologies like teleconferencing and video conferencing are also used. Further research is required to study the impact of different communication technologies during requirements analysis.
ImplIcAtIons For prActIce The use of GSD in organizations is becoming increasingly commonplace as corporations seek to take advantage of geographically dispersed talent for multilocation operations. This study yields several interesting implications for practice that can assist organizations in managing their offshore GSD projects more effectively. Despite evidence of successful agile software development, its application in GSD warrants some planning. Although there exists some preliminary research on applications of Extreme Programming (XP) in GSD (Nago-The, Hoang, Nguyen, & Mai, 2005), it is a common perception that agile methods are not applicable in GSD. There is a need for increased understanding of the characteristics of agile methods and how they can be applied to mitigate the negative influence of distance (Holmstrom et al., 2006). There are emerging examples of organizations like Sapient that have demonstrated the ability to run complex, large-scale distributed projects and have leveraged the benefits that agile processes offer (Barnett, 2006). Prior studies indicate that creation of flexible environments by incorporating the principles of agile development can help organizations mitigate communication and control related risks inherent in GSD. Our study also finds that client as well as vendor organizations need to pay adequate
attention to incorporating discipline even in flexible GSD projects, specifically during requirements analysis. Our article makes an important contribution of delineating the differences of the traditional, agile, and flexible approaches. In an attempt to portray reality, we explain the hybrid “flexible GSD” approach which most organizations are adopting. This hybrid approach incorporates the discipline offered by the traditional approaches and the flexibility offered by the agile approaches. Companies that are engaged in offshore GSD have developed strong processes around their global delivery model. However, whether the same processes and project monitoring discipline (control) will lead to success of projects conducted in “flexible and pure offshore mode” in virtual team setting during the early stages of system development work has not been explored. Hence, we examined the antecedents of success during requirements analysis in such an environment. Our research indicates that client site-coordinators play an important role in increasing task related computer-mediated communication and requirements analysis success. Further vendor site-coordinators play a critical role in increasing control which indirectly impacts requirements analysis success. Agile philosophy advocates that requirements change is a business world reality. Our study provides empirical support for the impact of requirements change even in the early phases of software development like requirements analysis. The results indicate that changes in requirements resulted in greater control, greater computermediated communication, and greater process facilitation by vendor site-coordinator. These factors are likely to further impact requirements analysis success in a GSD setting. Another important message that this study conveys is that site-coordinators need not be project managers or team leads. Any experienced team member who gets nominated by consensus can facilitate project processes and impact success of
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Flexible Global Software Development (GSD)
distributed projects. Further research is needed to confirm our exploratory findings.
ImplIcAtIons For reseArch Contributing to existing research, this study empirically demonstrates the direct and indirect relationships between antecedent factors (control, computer-mediated communication, process facilitation by vendor site-coordinator, and process facilitation by client site-coordinator) and success in flexible offshore GSD projects. It may not always be feasible to make experimental and control groups adhere to experimental requirements in a classroom setting, hence a flexible approach is needed in experimental design. The findings highlight the key role that formal modes of control play even in a flexible GSD environment. The scope of our research was limited to examining only formal modes of control whereas agile philosophy can probably also support informal modes of control, such as self and clan control. Future research is needed to understand the conditions under which self and clan control is used in flexible GSD projects, and hence their impact on success. By implementing dedicated client as well as vendor site-coordinators at each distributed site we also empirically determined the direct and indirect (via control) effects of process facilitation on success. Contrary to our belief, we found that there was no significant impact of task-related computer-mediated communication on success. Informal communication and socialization is one probable explanation that could have met the need for such information exchange. Also, given the fact that students were used as surrogates, informal online interaction is more likely to occur rather than planned formal interaction. This needs further investigation by researchers in field settings.
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Although several benefits have been speculated, our research is one of the first studies to empirically validate the impact of changes in requirements, which resulted in greater perception of control, computer-mediated communication, and process facilitation by vendor site-coordinator. However, requirements change calls for more detailed investigation as we studied this using a dichotomous variable in our multigroup analysis. Future research can involve measuring the level of requirements change and further adding it as a variable in our research model. Moreover, to further our knowledge about success of flexible offshore GSD projects and their subphases, additional studies are needed that move beyond presently conceptualized variables, such as impact of motivation, cohesion and trust between offshore GSD team members, and emotional intelligence of individual team members.
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AppendIX A: QuestIonnAIre Items Two separate versions of the same questionnaire were created having identifiers, such as “MU” for the client questionnaire and “MDI” for the vendor questionnaire. The items were the same; only the identifiers (MU/MDI) were different for the client and vendor team members. The items presented in the appendix are from the MDI vendor questionnaire. Response Scale: “Please answer each of the following questions related to the globally distributed development project by encircling the appropriate response” Seven point scale, with 1= “Strongly Disagree,” 4= “Neutral,” and 7= “Strongly Agree”
process FAcIlItAtIon process Facilitation- vendor 1. 2. 3.
The MDI site-coordinator helped coordinate the workflow between MDI and MU team members. My team members could have prepared as good project deliverables even if the MDI site-coordinator had not been present.* The MDI site-coordinator constructively responded to our team’s needs for assistance.
process Facilitation- client 1. 2. 3.
The MU site-coordinator helped coordinate the workflow between MDI and MU team members. My team members could have prepared as good project deliverables even if the MU site-coordinator had not been present.* The MU site-coordinator constructively responded to our team’s needs for assistance.
computer-medIAted communIcAtIon 1. 2. 3. 4.
We had frequent online-meetings with MU team members for coordination and planning. We had frequent online-meetings with MU team members for requirements analysis. We had frequent online formal review meetings with MU team members. I participated actively in the online discussions with MU team members.*
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control behavior control** 1. 2. 3.
The MU team members insisted on complete and on-time submission of project status reports. The MU team members insisted on complete and on-time submission of intermediate project deliverables. The MU team members insisted on complete and on-time submission of final project deliverables.
outcome control** 4. 5. 6.
The MU team members regularly monitored the project progress. A detailed project management plan was developed between our MDI team members and MU team members. The communication process between our MDI team members and MU team members was well defined.
success perceived Quality** 1. 2. 3.
MDI team members have been able to come out with the best possible deliverables for capturing MU client requirements. The final project deliverables were readily accepted by the MU team members. The project deliverables clearly specified MU client requirements.
client satisfaction** 4. 5.
The MU team members clearly understood the project deliverables submitted by MDI team members. The commitment of the MU team members in favor of the project directed goals and tasks were positive.
success of Implementation process** 6. 7.
The virtual team project was completed within its original schedule. MU client was satisfied with the process by which this project was completed.
* Item dropped from analysis ** Entered as item parcels in the model for analysis
2432
Flexible Global Software Development (GSD)
AppendIX b: results oF multIgroup AnAlysIs Computation of Degrees of Freedom and Chi-Square Goodness-of-fit Statistics for the Models Model (Group-Invariant)
Model (Group-Variant)
Computation of degrees of freedom (Group-Invariant) Number of distinct sample moments :132 Number of distinct parameters to be estimated: 50 Degrees of freedom (132 - 50) : 82 Result (Group-Invariant) Minimum was achieved Chi-square = 161.380 Degrees of freedom = 82 Probability level = .000
Computation of degrees of freedom (Group-Variant) Number of distinct sample moments :132 Number of distinct parameters to be estimated: 58 Degrees of freedom (132 - 58) : 74 Result (Group-Variant) Minimum was achieved Chi-square = 152.532 Degrees of freedom = 74 Probability level = .000
CONTROL GROUP (No Req. Change) Scalar Estimates (Maximum Likelihood Estimates) Regression Weights
ncv5
ncv4
ncv6
ncv1
ncv3
ncv2
nc2
nc5
nc8
nc7
nc4
nc3
nc6
nc1
Label
Flexible Global Software Development (GSD)
Estimates (Group Invariant)
Fac Vendor Fac Vendor
<--<--<--<--<--<---
Contrl Com Success Success Success Success
Com Success
<--<--<--<--<--<--<--<--<---
fac1 fac2 fac6 Beh cnt com4 com3 sat proc qlty
Success
Success
Com
Control
Fac Vendor
Fac Client
Fac Client
Contrl
<--<---
fac2 Out cnt
Fac Client
Com
Contrl
Fac Client
Fac Vendor
Fac Client
Fac Vendor
<--<---
Com Contrl
.808
.962
.611
.892
.864
.797
.877
.726
.761
.717
.819
-.079
.599
-.131
.547
.399
.702
.088
.177
qlty
proc
sat
com3
com4
Beh cnt
fac6
fac2
fac1
Out cnt
fac2
Success
Success
Success
Success
Com
Contrl
Contrl
Com
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
<---
Success
Success
Success
Com
Com
Control
Fac Vendor
Fac Client
Fac Client
Contrl
Fac Vendor
Fac Vendor
Fac Client
Com
Contrl
Fac Client
Fac Vendor
Fac Client
Fac Vendor
Standardized Regression Weights
Standardized Regression Weights Estimate
NONCONTROL GROUP (Req. Change)
CONTROL GROUP (No Req. Change)
.926
.923
.691
.925
.904
.831
.742
.788
.824
.742
.717
-.054
.710
-.131
.434
.471
.603
.132
.120
Estimate
Flexible Global Software Development (GSD)
Estimates (Group Invariant) continued
2435
2436 .769 .580 .527
fac6 fac1 fac5
.747 .672
fac2
.652
qlty com4
.635
.514
Out cnt
.373
.795
sat
proc
.925
proc com3
Beh cnt
Success
.649
Success
fac5
fac1
fac6
fac2
com4
qlty
sat
Beh cnt
Out cnt
com3
.621
.680
.551
.514
.817
.858
.478
.690
.551
.856
.852
.735
.427
.270
.522
Com
.216
Com Control
Control
Estimate
Squared Multiple Correlations
Squared Multiple Correlations Estimate
NONCONTROL GROUP (Req. Change)
CONTROL GROUP (No Req. Change)
Flexible Global Software Development (GSD)
Estimates (Group Invariant) continued
This work was previously published in Journal of Global Information Management, Vol. 17, Issue 1, edited by F. Tan, pp. 1-31, copyright 2009 by IGI Publishing (an imprint of IGI Global).
1
Index
Symbols σ-constraint 2194 ψ-criterion 2193 ψ-map 2191 ω-mapping 2191 A abstract process graph 2166 academic community 1169 academic technology (AT) 1111 access 497, 1382 access control 1825 access to large markets 493 accountability 506 activity tracking 1178 actual organization (AO) 940, 942 actual performance data 746 ad hoc on-demand distance vector routing (AODV) 943 adaptation advice repository (AAR) 2183 adaptive enterprise service computing 81 added value 1829, 1837 ad-hoc collaboration processes 365 administrative computing services (ACS) 1111, 1112, 1120, 1121 advanced planning systems (APSs) 693, 858 advertised recruitment 503 agency theory 160, 970, 987, 1672, 1694, 1759, 1760, 1761, 1775, 1777, 1778, agility 853 alignment 2385 alliance networks 732 allocation of roles and responsibilities 508 American Production and Inventory
Control Society (APICS) 861 analytic hierarchy process (AHP) 271, 708, 709 analyze purchasing markets 739 annual salary for developer 514 annual salary for entry level developer 514 annual salary for project manager 514 ANOVA test 2010, 2012 application management 1876 application portfolio matrix (APM) 1140, 1147 application service providers (ASPs) 11, 135, 164, 206, 232, 921, 927, 929, 933, 934, 936, 1098, 1199, 1705, 2389, 2390 application utilities 138 applications development (AD) 535 ARIS 740 Arizona Correctional Industries (ACI) 1191 ASP Industry Consortium (ASPIC) 2390 ASP model 2400 ASP sourcing decision process 1098 ASP, Local/Regional 928 aspect-oriented programming (AOP) 2183 ASPE-MSC 1434 assessing outsourcing decisions 2340 asset/liability management (ALM) 1801, 1802 Association of Southeast Asian Nations (ASEAN) 444 asymmetric information 1830, 1832, 1837 atomic rules 639 auctions 78 Australian Federal Government Outsourcing Initiative 2240
automatic call distributor (ACD) 432 automation 656, 1859 automation “lights out” processing 1861 autonomy 2188 B back office 140 backsourcing 138 balanced scorecard 1817 Baldrige, Malcolm 1812 Baltic states 496 Bangalore 516, 1596 banner system 1112, 1120 base station (BS) 942 behavioral uncertainty 1478 Beijing 516 benchmarking 499, 870, 1814, 1826 bench-strength 493 benefit analysis 870 benefit-based relationships 139 benefits realization 1332 best practices 853, 854, 856, 858, 859, 869, 870, 871, 873, 1170 biggest info tech companies 516 bill of material 746 bill-of-material-explosion 749 bioinformatics 1210 biopharmaceuticals 1209 black box 600 blog 1377 bobby test 1377 boilerplate 1813 bonding 1586 BPO cultural misunderstandings 1652 BPO risks 1650, 1651 BPO risks, interception of 1650 BPO, selective 192 brand management 1382
Volume I, pp. 1-617 • Volume II, 618-1246 • Volume III, 1247-1856 • Volume IV, 1857-2436
Index
branding 1377 Brazil 496 broadband Internet in the developing world 2265–2277 broadband potential, factors 2267 build to stock (BTS) 858 build-to-order (BTO) 853 Bureau of Economic Analysis (BEA) 1038 business benefit contracting 139 business case justification (BCJ) 239, 1678 business climate effects 174 business continuity 1077, 2148 business ecosystems 367 business environment 319 business model 923 business opportunities 78 business process 2305, 2307, 2316 business process and data models 740, 746 business process execution language (BPEL) 85 business process execution language for Web services (BPEL) 2167, 2170 business process for planning conversion of material strategies 742 business process for the introduction of a material group code 741 business process modeling language (BPML) 85 business process modeling notation (BPMN) 85 business process outsourcing (BPO) 877, 1199, 1200, 1202, 1203, 1204, 1369, 1648, 1705, 1809, 1923, 2317, 2254, 2318, 2320, 2321, 2322, 2323, 2328, 2329, 2330, 2331 business process outsourcing (BPO), India 1975–1996 business process reengineering (BPR) 211–228, 371 business process reengineering tenets 215 business process risks 508 business processes 82, 284, 2181 business strategies 477 business structure 2188 business to employee (B2E) 856 business transformation 1389 business webs 732 business-process distribution 859 business-process life cycle 2166, 2167 business-process management (BPM) 82, 84
2
business-process model 2166, 2180 business-to-business (B2B) 477, 699, 855 business-to-consumer (B2C) 855 buyer 489 buyer power (BP) 1487, 1489 buy-in 915 C call centers 910–917 CANON 516 capability development strategy 142 capability maturity model (CMM) 356, 525, 612, 1812, 2297, 2298 capacity building 1170 CCID 954, 955, 956, 959, 962, 963 centers of excellence (COE) 1031 Central American Free Trade Agreement (CAFTA) 429 certain monetary equivalent (CME) 272 Chandigarh 516, 1596 change control 1811 change management 500, 1827 changing workforce 5 characteristic-based trust 1585 Check 21 1791, 1801, 1802 Chennai 516 chief information officer (CIO) 1111 China 496, 516, 947, 948, 950, 951, 952, 953, 954, 959, 961, 962, 963, 964, 965 China Next Generation Internet (CNGI) 433 CIGNA Corporation 373 CISCO SYSTEMS 516 classification of purchasing goods 738 classify purchasing goods 740 client 127, 489 client company 997, 999, 1001 client organization 2045 client perspective 1760, 1762 client readiness 1770 client trust 1770 client/supplier interdependency 1101 client-entity 489 ClientLogic 914, 915 client-supplier relationships 2348 close a contract 746 CMMI2sm 1538–1556 CMMI-DEV 1449 CMMI-SVC 1449, 1454 CNO, grasping-opportunity driven 370 collaboration 365, 493, 855, 860
collaboration structure model 568 collaboration technologies, evolving 844 collaborative commerce 1012 collaborative development environment (CDE) 1399 collaborative network (CN) 364, 370 collaborative networked organizations (CNOs) 365, 370 collaborative planning, forecasting, and replenish (CPFR) 687, 723, 1476 collaborative relationships 263 collaborative technologies 895 collaborative technologies in global virtual teams adoption of 893 collaborative technology adoption, instrumental view 895 collaborative technology adoption, social view 896 collaborative tools 507 collaborative tools, a case study 1405 collaborative tools, characterization and classification 1399–1408 collaborative tools, classification frameworks 1401 collaborative tools, groupware typologies 1401 collaborative transportation management (CTM) 721 co-location 1860 commercial focus 1515 commercialisation 1859 commodity supplier 437 common intermediate language (CIL) 2183 common language runtime (CLR) 2183 communication 494 communication plan 500 communication technologies 493 communications management 1845 communities of practice (CoP) 1968 comparative analysis 980, 986, 987, 988, 990, 991 competence theory (CT) 388 competency-critical success factor 9 competitive intensity 1267, 1276, 1277, 1278, 1279 complex monitoring object 746 complex sourcing 141 compliance management principles 1073 component-process model (CPM) 82, 83 composite persona (CP) 839
electronic government (e-government) 1360, 1369 electronic marketplaces 1021 electronic patient records (EPRs) 1252, 1254, 1255, 1257 electronic portfolio 1179 electronic prescription 1257 electronic procurement 698 elementary monitoring object 746 emerging legal challenges 1073 emotional challenges 499 emotions 499 employee outsourcing 1898 employee turnover 1979–1983 encryption 1813, 1827 English is a second language (ESL) 1174 enterprise alignment 1419, 1421, 1424, 1425, 1426 enterprise application integrations (EAIs) 85 enterprise applications 929 enterprise ASP 928 enterprise computing 2302, 2303, 2306 enterprise management 387 enterprise network structure 732 enterprise resource planning (ERP) 97, 684, 688, 697, 856, 929, 936, 1307, 1560, 1565, 1566, 1740, 2369 enterprise service computing 71, 84 enterprise service computing infrastructure, aligning business processes with 2164 Entity Relationship Diagrams (ERDs) 2413 entrepreneurs 1596 environmental uncertainty (EU) 1486 e-procurement 698, 1008 equity holding deals 152 e-retailer pricing 78 ERNET 1599 ERNET 1599 ersonal digital assistants (PDAS) 1822 e-services 78 e-sourcing 2348 e-sourcing, business value 2349 establishing trust 2099 Estonia 496 European Union (EU) 103, 429, 515 evaluate outcomes 491 evaluate quality of supply network 736 evaluate strategic supply networks 745 evaluating outcomes 508 evaluation 736
evaluation criteria 748 evaluation methods 748 evidence based software engineering (EBSE) 2298, 2299 evidential reasoning (ER) based approach 272 evolving business models 2287 e-work concepts, analysis 378 e-work elements 381 exact view 2191 execution challenges 499 exit node 2181 expatriate friendliness 497 expatriates 502 expert systems (ES) 1565, 1566 exploratory factor analysis (EFA) 1487, 1488 export conditions 2268, 2272 extended enterprise (EE) 366, 2365 extended enterprises (EEs) 392, 1648 extensible markup language (XML) 85, 371, 856, 2054 external service providers 127, 489 externalization 1199, 1200, 1201, 1202 extranet Web sites 1820 F face-to-face (F2F) 1602 face-to-face (F2F) interaction 1604 face-to-face (F2F) meetings 432, 1587 facilities infrastructure 500 facilities management outsourcing 145 facilities sharing 146 faculty activities system 1114, 1121 Family Hospital Corporation (FHC) 2031 Farshore 101 fastest time to market 493 FDA 304 Federated States of Micronesia (FSM) 1175 film industry data and statistics 2283 finance activities outsourcing, drivers 1859 financial data 746 financial distress 1337 financial process outsourcing (FPO) 1979 financial/economic risks 509 first generation outsourcing oriented corporate models (FG-OOCM) 816 first national bank (FNB) 611 fix and keep in-house 127 Flash Paper 1377
Index
flexibility 857 flexible GSD projects, requirements analysis in 2406 flexible sourcing 151 focal company 1475 Ford Motor Company 373 foreign direct investment (FDI) 1299, 2220, 2254 foreign procedures encouragement 1505 Fotogenika 1284–1297 fragmented industry structure 1249 framework 426 freight consolidation 730 FUJITSU 516 future outsourcing rank (FOR) 271 fuzzy group decision-making (FGDM) 2113 fuzzy logic (FL) 820 fuzzy logic inferences per second (FLIPS) 821 G gaming industry 1740 General Electric 515 general outsourcing 147 genetic algorithm 660 geographical borders 127 geographical distance 132 giga floating point operations per second (GFLOPS) 821 global activities 3 global banking systems 2232 global business process sourcing (global BPS) 408, 409, 411, 416, 418, 422 Global Command Center (GCC) 1045 global competition 5 global delivery 147 global delivery model 145, 147, 505 global development software operations 1728, 1729 global economy 5, 229 global ecosystem 75 global employment market 2232 global environmental issues 447 global industry value chain 3 global integrity 2192 global IT outsourcing 231 global IT Workforce 488 global logistics system models 270 global outsourcing index (GOI) 271 global positioning system (GPS) 856 global project management office 1728 global reengineering, benefits 222
global reengineering, lessons learned 219 global resource race, India and China 2255 global SCM 679 global software development (GSD) 837 1534–1556, 2405 global sourcing 132, 1923 global sourcing, current levels 1207 global supply chain (GSC) 721 global supply chain forum 686 global supply chain model (GSCM) 269 global supply networks 267 global trade 1593 global transparency 2192 global understandability 2192 global virtual team 895 global-insourcing 490 globalization 5, 267, 399–407, 426, 429, 680, 856, 1815, 1882 globalization, with mobile business 398–407 globalized economy 2084 globally distributed teams 1657 globally distributed teams, sharing 1656–1663 global-outsourcing 490 global-sourcing 490 goal programming (GP) 708, 709 goal-oriented network 365, 370 goals 477, 869 goals and strategies 477 good business environment 354 good software engineering practices (GSEP) 1429 Google 515 governance 1369, 1593 governance methods and models 2339 governance structure 1250, 1256 gray market informatics 2022, 2045–2051 grid computing 930, 936, 2364 grid services 2363 grid technologies 628, 2364 GSD, flexibility in 2407 Guangzhou 516 Guanxi 443 Gurgaon 516 H HABIO framework 1148 handcrafting traditions 1249 hardware-based approaches 2072 Harvard Business Review (HBR) 872 health care organizational environment 1252
health care supply chain 1257 healthcare data, analysis 1224 healthcare industry, outsourcing 1223–1246 healthcare records, management 1226 heterogeneous computing services 86 Hewlett-Packard 516, 2312, 2313 hidden action 1830, 1832 hidden costs 1340 hidden information 1831 hierarchical organization structures 1249 hierarchy of finance activities 1857 high-tech production cycles 1882 Hindustan Computers Limited (HCL) 429 HIPAA 2025 histogram 1679, 1680, 1681, 1686, 1687, 1688 historical perspective 474 horizontal supply chains 857 hosting SLA 1814 hourly rate for developer 514 How to insource from offshore 491 HR consultancy firms 498 Human Capital Theory 2216 human resources (HR) management 494, 1847, 1871, 1877, 1879 human resources information system (HRIS) 1872, 1878, 1879 hybrid organizational structures 732 hybrid tree-based approaches 2073 Hyderabad 516 I IBM 516 IBM WBI Modeler, business-process model in 2170 ICT industry, international 2084 ICT investment 2304, 2307 ICT network 2082, 2087 ICT products 2303, 2308, 2313 ICT sector 2089 ICT services 2306, 2308, 2310, 2312, 2313 identification process 745 implementation phase 488, 2166 incentive theory 1837 income distribution effects 173 India 496, 1593 India, why? 1216 Indian government 616, 1218 individual and team successes 508 individualism 100 indivisible rules 639 induction training 503
5
Index
industrial district 367 industrial partnerships 1597 industry cluster 367 industry structure 2268, 2271 information accuracy 499 information age to the conceptual age, transformation 2293–2301 information and communications technology (ICT) 364, 427 information communication technologies 1740, 1757 information delay 856 information distortions 1481 information economy 1968 information monopoly 520 information security 1819, 1825 information sharing 2103 information systems (IS) 127 information systems (IS) outsourcing 21 information systems and technology (IST) 2100 information systems processes 477 information systems, evolution of 475 information technology (IT) 158, 311, 426, 534, 696, 1360, 1392, 1448, 1741, 1754 information technology outsourcing (ITO) 30, 230, 1140–1167, 2253 Infosys 496 infrastructure 497 infrastructure development 324 infrastructure weaknesses 1825 innovation diffusion theory 972, 990 insources work 490 insourcing 102, 127, 490, 1335, 1706, 1874, 1875, 1876, 1878, 1879 insourcing, domestic 490 insourcing, total 129, 153 integrated development environments (IDEs) 845 integrated forwarding 1137 integrated logistical center (ILC) 757 integrated outsourcing 260 integrated product development (IPD) 694 integrated SC planning 864 integrated scheduling 657 Integrated Systems Solution Corporation (ISSC) 1704 integrated value chain 458, 459, 465, 466, 467 integration 2191 integration capability maturity model (CMMi) 1812
6
integration proposal 1724, 1726, 1727, 1735, 1737 integrity 2192 INTEL 516 intellectual property (IP) 231, 255, 2285 intellectual property rights (IPR) 494, 1144, 1218 intelligent manufacturing system 656 interagency public key infrastructure 1923 interconnection 1049, 1053, 1059 intercultural coaching 1627 intercultural collaboration 1617–1647 intercultural teamwork 1822 interdependence 1483 internal controlling instrument 2082 internal negotiations 1766, 1771, 1772, 1774 internal service providers 489 internalization 1202 international business (IB) 1924, 1925 International Data Corporation (IDC) 167, 168, 438 International Monetary Fund (IMF) 444 International Organization for Standardization 1812 international outsourcing 876, 2021, 2020–2028, 2045 international subcontracting, concept 1925 international subcontracting, strategic management 1924–1934 International Telecommunication Union Telecommunication Standardization Sector (ITU-T) 1050 International Trade Agreement (ITO) 11 Internet 493 Internet bandwidth 514 Internet protocol (IP) 433 Internet technology framework 816 inter-organizaional relationships (IOR) 410 Interorganizational Relationship Theory (IOR) 2350 interpretive structural modeling (ISM) 1957, 1961 interviews 503 intranet Web sites 1820 introduction of conflict management 740 inventory analysis agent (IAA) 665 inventory carrying costs 730
IOR, control mechanisms in 408, 409, 410, 414, 415, 416, 418, 424, 425 IPD 694 IPv6 1057, 1058 irreducibility 2168, 2180 irreducible facts 639 IS department, future of 478 IS departments, internal 127 IS outsourcing decision processes 169 IS research, research paradigms 21 ISO 9000 1812 IT 696 IT benefits realization methodologies 1326, 1332 IT consulting 78 IT development offshoring 2214 IT development offshoring, issues within levels 2215 IT governance 1248 IT infrastructure 1880 IT Infrastructure Library (ITIL) 1447, 1448 IT Insourcing 164 IT investment evaluation methodologies 1325, 1332 IT managers 629 IT offshore outsourcing, project management issues 1839–1856 IT outsourcing (ITO) 11, 165, 284, 1332, 1649, 1670, 1671, 1673, 1674, 1677, 1678, 1679, 1680, 1681, 1682, 1683, 1685, 1686, 1687, 1688, 1689, 1690, 1691, 1692, 1693, 1694, 1695, 1696, 1700, 1782–1789, 1841, 1916, 1923, 2157, 2347 IT outsourcing practices 1324 IT outsourcing risks 2338 IT outsourcing, growing importance 2254 IT outsourcing, motivation 1329 IT process integration 1390 IT processes 477 IT resources 1872, 1873, 1875, 1876, 1877, 1878, 1879 IT strategy 1390, 1872, 1878 IT, and organization development 1419, 1420, 1421, 1422, 1423, 1424, 1426, 1427 IT/IS offshore outsourcing, industry analysis 51 IT-based business processes 477 IT-driven manufacturing business 72 IT-driven system deployment 87 IT-enabled service (ITeS) 356
Index
IT-enabled service industry 1073 ITIL 1447, 1448, 1449, 1450, 1451, 1452, 1453, 1454, 1455 IT-supportive systems 83 J Java virtual machine (JVM) 1042 joint solutions procurement 1370 joint ventures (JV) 152, 200, 409, 411, 419, 421, 422, 424, 1876 Journey to New Lands 488 just-in-time (JIT) 680, 1481, 2183 K KDDI 516 key business processes 859 key performance indicators (KPIs) 2166 KM strategy 1664 KM strategy, challenges of 1664–1669 KM success factor model 1959 KM success factors 1954–1965, 1959 KM, organizational performance 1956 knowledge creation 1745, 1755, 1957 knowledge management (KM) 629, 1394, 1664, 1665, 1666, 1667, 1668, 1955, 1956, 1957, 1958, 1959, 1960, 1961, 1962, 1963, 1964, 1756 knowledge management (KM) tools 913–916 knowledge management (KM) tools decision tree 914–915 knowledge management (KM) tools online help tool 914 knowledge process outsourcing (KPO) 1979 knowledge processes 1798 knowledge sharing (KS) 1745 knowledge sharing, social aspects 1659 knowledge systems 1798 knowledge transfer 495, 500, 1656– 1663, 1958 knowledge transfer, and defect control 846 knowledge transfer, collaborative technologies 1658 knowledge worker 912, 917 knowledge workers 1420, 1424 knowledge-based economies 430 knowledge-based trust 1585 knowledge-based work 876 Kodak effect 1064, 1069 Kolkata 516
L labor-intensive services 75 lackeys 99 language 505 language differences 98 larger scale development 616 lateral communication 841 Latvia 496 legacy system 2188 legal consultants 498 legal remedies (NC6) 1488 Lewin’s “unfreeze-change-refreeze” 507 LG ELECTRONICS 516 life cycles 857, 1027 life-long learning 1169 Lifestream 847 lights out processing 1861 line of business (LOB) 1031, 1040 Lithuania 496 living forces 367 local area network (LAN) 697, 698 local government 1372 local integrity 2192 location-specific risks 1759, 1777, 1778 Logitech 1815 long-term productivity 464, 466, 470 LotusNotes 1820 M Malcolm Baldrige National Quality Award 1812 manage change 499 managed capacity 1064, 1066 managed offshore facilities 147 management communication 500 management information base (MIB) 1051 management information system (MIS) 1558, 1560, 1561, 1562, 1565, 1567, 1568, 1569, 1570, 1571, 1572, 1573, 1575, 1577, 1578, 1579, 1580, 1581, 1582, 2413 managerial outsourcing competence (MOC) 1790, 1792, 1793, 1794, 1795, 1799, 1800, 1802, 1803 managing change 488 manufacturability analysis agent (MAA) 665 manufacturing flexibility (MF) 1490 manufacturing goals achieved (MG) 1487 mapping 2194 market conditions 731
marketing management 862 marketing theories 160 masculinity 100 masculinity-femininity 2106 mass customization 865 material resource planning (MRP) 858 materials company 2382 mathematical formulation based approaches 269 mathematical modeling 272 measurement of employee performance 508 measurement of work quality and financial performance 508 media 500 media images 443 mediator 663 medical outsourcing, American perspective 1506 medical outsourcing, Indian perspective 1507 medical outsourcing, malpractice issue 1508 medical outsourcing, technological innovations 1509 medical tourism 102 Merkle Hash Trees (MHT) 2135 MESOPYME 1438 message exchange 1049 meta-tool 599 metrics 681, 694, 871 MICROSOFT 516 military-science-industrial complex 2235 mindset change 1515 Misinterpreted body language 98 MIT 1599 MiTAK-SYNNEX Group 11 mixed integer programming (MIP) model 270 MMS model (multiple data ownermultiple clients-service provider) 2059 mobile business, and globalization 398–407 mobile commerce 433 mobile data networking 433 mobile Internet 1054 mode 1706 model transformation 2168 modeling complex business processes 85 modeling of strategic supply networks 735 modeling phase 2166 modular design 493 modular organization design 1795
7
Index
modular sourcing 151 monitoring dashboard 1704 monitoring phase 2166 MOTOROLA 516 MS model (multiple data owner-service provider) 2059 multi-agent system (MAS) 654–678 multi-criteria decision making (MCDM) 275 multicriteria decision making (MCDM) 708 multicultural team 1621 multi-jurisdictional 1073 multimedia, multilingual network operating software (MISNOS) 817 MultiMind 847 multinational company (MNC) 1127, 1258 multinational enterprises (MNEs) 1924 multi-national organization 238 multi-objective optimization 275 multi-party business collaboration models (MBCMs) 566 multi-party computation (MPC) 2070 multiple data sale 2048 multiple-supplier sourcing 150 multi-sourcing 149, 150 multisourcing 1705 multi-sourcing continuum 127, 142 multi-supplier outsourcing 150 multi-vendor outsourcing 149 Mumbai 516 MU-MDI projects 2007 N Nanjing 516 narrowcast 2046 Nash solution 799 National Institute of Standards in Technology (NIST) 1812 national issue 1593 naturity of associated processes 495 nearshoring 131, 132, 133, 1860, 1861 nearsourcing 912–913 neo-liberalism 2235 nested B+-Tree (NBT) 2074 nested Merkle B+-tree 2074 net generation 1171, 1185 net-sourcing 138, 1705 network economy 692 network infrastructure 1813 network management 1048, 1049, 1051, 1054, 1055, 1058, 1059, 1060, 1062, 1063, 1064, 1065, 1068, 1069
8
network resource 1049 network structures 732 New Delhi 516 new innovative processes 865 node identifier (NID) 2137 node-based XML document, transformation 2073 node-splitting techniques 2169 Noida 516 non-core business processes 408 nonfunctional adaptation 2180, 2181 non-government organizations (NGOs) 1593, 1596 normative contracts (NC) 1487 North American Free Trade Agreement (NAFTA) 9, 10, 291, 307 NPEGEL 1600 NTT DOCOMO 516 O obsolescence 6 ODBS 2055 ODBS model, security issues in and outsourced XML databases 2056 ODBS model, security-related research questions in the 2056 ODBS models, overview of existing solutions to 2060 OECD 682 OEM 680, 689 offered contract 749 offshore country 489 offshore development center (ODC) 245, 246, 1684, 1685 offshore engineering and management (OEM) 2293, 2294, 2295, 2297 offshore implementation team 497 offshore insourcing 133 offshore insourcing, big players of 514 offshore insourcing, emerging destinations of 515 offshore IT outsourcing 1841 offshore IT professionals, availability of 495 offshore outsourcing (offshoring) 2, 30, 91, 131, 133, 165, 283, 284, 340, 452, 489, 453, 490, 464, 466, 467, 471, 472, 473, 490, 815, 877, 1409, 1410, 1411, 1412, 1413, 1414, 1415, 1416, 1417, 2021, 2099, 2212 offshore outsourcing, challenges of IT development in India and China 2257
offshore outsourcing, in India 2255 offshore software outsourcing 2099 offshore, where to 491 offshoreing 2317, 2321, 2322, 2323 offshore-insourcing 488, 490 offshoring business performance 114 offshoring in the pharmaceutical industry 1206–1222 offshoring intensity, business-related determinants 110–125 offshoring risks and concerns 1215 offshoring, business costs of 114 offshoring, business size and 113 offshoring, concerns about 494 offshoring, distribution 2285 offshoring, financial risks 56 offshoring, in India 2281 offshoring, motivations for 2280 offshoring, operational risk 54 offshoring, personal 102 offshoring, security problems of 2320, 2328 offshoring, security risks 55 offshoring, strategic risk 54 offshoring, success factor analysis 56 offshoring, what to insource from 491 offshoring, why to insource from 491 oil and gas industry 1743 on-demand business 2180 on-demand business environment 74 on-demand computing 930 on-demand service 138 one-sided education 1249 online (video) meetings 1822 online retailing 866 online shopping 2103 onshore insourcing 133, 490 onshore outsourcing (onshoring) 131, 133, 490 onshore sourcing 131 onshore-offshore rapport 508 onshores work 490 Open Grid Services Architecture (OGSA) 2366 open source software (OSS) 876 open system 1048 operational framework 739 operational procedures (NC8) 1488 operations research 80 operations support systems 1004, 1005 optimal supply chain 657 optimization phase 2166 option to reverse 129 order fulfillment 861 order management agent (OrderMA) 664
Index
order-to-delivery cycle time 858 organization chart 501 organization development (OD) 1419, 1420, 1421, 1422, 1423, 1424, 1425, 1426, 1427 organization to organization 2108 organizational borders 127 organizational competitiveness 269 organizational learning 1754 organizational strategy 1381 original equipment manufacturing (OEM) 680, 689, 1473 out tasking 602 outsource partners 1811 outsource, what to 1 outsource, when to 8 outsourced database service (ODBS) model 2053, 2130 outsourced development center (ODC) 1004 outsourced governance, implications 2335–2346 outsourced projects 484 outsourced tree-indexed/XML data, query assurances for 2068 outsourced XML data trees, oblivious basic operations on 2067 outsourced XML database service (OXMLDBS) model 2052, 2055, 2066 outsourced XML databases, security issues in 2054 outsourcer, selecting an 1812 outsources work 490 outsourcing 91, 128, 158, 490, 602, 654, 730, 853, 857, 860, 864, 911–912, 917–919, 930, 934, 936, 1370, 1409, 1410, 1412, 1413, 1417, 1418, 1456, 1457, 1898, 1899, 1900, 1901, 1902, 1904, 1905, 1906, 1907, 1908, 1909, 1910, 1911, 1912, 1913, 1914, 1915, 2021, 2231, 2236, 2318, 2385 outsourcing and virtual teams 1954 outsourcing arithmetic 350–363 outsourcing as a natural evolutionary step 475 outsourcing business functions 168 outsourcing company 666 outsourcing contracts 474, 479, 483, 484 outsourcing contracts model (paylater) 796 outsourcing database model, hostingbased 2053 outsourcing database model, housing-
based 2053 outsourcing decisions 29 outsourcing expectations 2241 outsourcing finance and accounting (F&A) functions 12 outsourcing implementation 40 outsourcing IT work 434 outsourcing logistics from virtual logistics 754–762 outsourcing management agent (OMA) 664 outsourcing MIS 1814 outsourcing of customer care functions 12 outsourcing of finance activities 1858 outsourcing of human resource (HR) functions 12 outsourcing of information technology functions 11 outsourcing of pharmaceutical functions 12 outsourcing overview 1840 outsourcing partners, selection of 1811, 1821 outsourcing reasons 352 outsourcing research 161 outsourcing software development 1815 outsourcing teleradiology at FHC, case study 2031 outsourcing trade-offs 2341 outsourcing vendor(s) selection 1000 outsourcing, advantages of 34 outsourcing, best-of-breed 476 outsourcing, body shop 140 outsourcing, business process (BPO) 21, 140, 159, 164, 188, 189, 271, 284 outsourcing, business process (BPO) 409, 412, 419, 422, 428, 432, 438 outsourcing, determinants and drivers 342 outsourcing, domestic 490 outsourcing, extent and implications 343 outsourcing, information systems 475 outsourcing, IT 534, 535, 536, 537, 541, 547, 548, 550, 552, 553 outsourcing, large-scale 161 outsourcing, management of 38 outsourcing, managing 481 outsourcing, nearshore 2, 131, 133 outsourcing, research in 19–28 outsourcing, risks of 8, 35 outsourcing, strategic 258, 708 outsourcing, tactical 153
outsourcing, total 129, 153 outsourcing, traditional 153 outsourcing, transformational 154, 1202 outsourcing, transitional 142, 154 outsourcing, types of 353 out-tasking 102, 153 ownership 101, 1706 OXMLDBS models 2054, 2069 OXMLDBS models, state-of-the-art approaches to security issues in 2065 P P2P architecture 627 P2P computing 628 Palau Community College (PCC) 1183 partnership 152 pay difference 2231 pay-later 797, 798 payments 1106 pay-now 796, 798 peer-to-peer (P2P) 579, 619 Peregrine 1809 performance criteria and metrics 1808 performance levels 1813, 1814 performance metrics 1807 performance specifications 1807 permanent hiring 501 personal data 2020–2028, 2045 personal digital assistants (PDAs) 1822 Pfizer Global Pharmaceuticals (PGP) 1040 pharmaceutical industry offshoring 1206–1222 physical distribution 730 picture archiving and communication systems (PACSs) 1252, 1257 pilot project 616 piracy 876 PIR-like protocols 2134 plan conversion of material strategies 742 plan strategic demand 736 political climate and support 497 political-economic philosophy 2235 Porter’s 5 Forces 1146 power distance 100, 2104 power politics theory 973, 991 practice incident response 2041 price satisfaction 78 principal-agent 1830, 1831, 1836, 1837 PRISMS 1437
9
Index
prison operations at Televerde, first person case study 1192 privacy 1921 privacy concerns 2056 private information retrieval (PIR) 2134 privatization 282, 285 process analysis 870 process graph 2166, 2168 process innovation 857 process planning agent (PPA) 665 process reengineering 94 process-based approach 1918, 1923 processes 500 processes, national differences in 1249 procurement 860, 1370 procurement function 1008 procurement management 1844 procurement systems 1011 procurement vs. purchasing 1010 product design 860 product launch flexibility 691 product range 746 product-definition management (PDM) 860 production costs 285, 1067, 1348 professional services outsourcing 452, 453, 457, 458, 459, 471, 473 professional virtual community (PVC) 368, 370 program activity matrix 1178 project allocation 1727, 1730, 1734, 1738 project execution 2006 project management 1842 project management information system (PMIS) 1820 Project Management Institute (PMI) 873 project management office (PMO) 246 project management outsourcing 150 project management skills 495 project management tools 1822 proof of completeness 2057 proof of correctness 2057 proof of freshness 2058 proprietary software 879 protecting patient information 2029–2044 protocol 1048, 1049, 1050, 1051, 1052, 1053, 1054, 1055, 1056, 1057 prototype implementation of SSND 750 prototypes 433, 750 Psychological Contract Theory 2350 psychological contract, applying the
10
perspective of 2351 psychological contracts 1703, 1709, 1711 public marketplaces 865 public policy theories 160 public-private partnership (P3 or PPP) 1299, 1370 Pune 516 purchasing policy 737 purchasing price (NC9) 1488 purchasing strategy 736 Q qualitative reasoning based approaches 270 quality function deployment (QFD) 1432 quality management 1848 quality models 1812 quality of life 497 quality of service (QoS) 939, 1048, 1050, 1056, 1059, 1153, 2180 quality processes 1812 quality standard 2082 quantity flexibility (QF) 693 query assurance 2052, 2057, 2077 query assurance, ensuring 2062 R radio frequency identification (RFID) 432, 856 Raytheon Six Sigma 681 really simple syndication (RSS) 1377 real-time delivery 138 recorded music offshoring 2285 recruitment 503 recruitment & induction training 503 reengineer, selecting a process 216 reengineer, visualizing the process 218 reference model 731, 734 reference models as a technique 734 registry server agent (RSA) 664 regular expression (RE) 2170 regular expression language (REL) 2171, 2181, 2182 regulatory frameworks 1073 regulatory policy 1267, 1268, 1276, 1278, 1279 rehabilitation and return strategy 142 related model-transformation methods 2169 relational contract theory (RCT) 2350 relational dimension 584 relationship management 1382 relationship step model, towards development of 2350
relative advantage 1267, 1269, 1270, 1278 remote control and virtual management 1825 remote diagnosis 1230 repatriates 515 request for proposal (RFP) 482, 1101, 1370 requests for quotation (RFQ) 698 required proximity 1524, 1525 requirements change management 495 rescheduling 668 research labs 515 research process outsourcing (RPO) 1979 resilience 1077 resource dependency theory 159 resource-based view (RBV) 159, 1474, 1477, 1480, 1794, 1806 response times 1808, 1814 responsiveness 685 return-on-investment (ROI) 854, 855, 1678 revenue model 232 revenue sharing 1063 rhetoric 1609, 1610, 1616 right sourcing 151 risk 1831, 1832, 1833, 1835 risk exposure 285 risk factors 241, 1823 risk management 739, 857, 1385, 1540–1556, 1708, 1759, 1760, 1762, 1763, 1775, 1778, 1780, 1825, 1849 risk mitigation strategies 1073 role of prisons in offshoring, human rights perspective opposition 1194 role of prisons in offshoring, security issues opposition 1195 root passwords 1906 S salary arbitrage 165 sales and operations planning 861 Samsung Elec. 516 San Diego State University (SDSU) 1175 SAP 2313 SC visibility 863 scalability 493 scanner 188 scheduling agent 663, 666 science, engineering, and technology (SET) 1595 science-military-industrial complex 2232
Index
SCM businesses processes 858 scope management 1843 search tree, oblivious operations on outsourced 2066 secure and efficient storage 2058, 2064, 2078 secure and efficient storage model 2052 secure auditing 2052, 2058, 2064, 2077 secure multi-party computation-based approaches 2070 security 1807, 1813, 1815 security architecture 1827 security breaches 1824 security consultants 1825 security framework 1826 security implications of outsourcing clinical services 2030 security procedures 1826 seed selection 658 selective outsourcing 1335 selective sourcing 129, 151 selling management 862 semantic data model 749 semantic data model for purchasing goods 743 semantic heterogeneity 2190 semi-OXMLDBS model 2065, 2066 service availability 1059 service level agreement (SLA) 84, 96, 98, 252, 324, 482, 1067, 1692, 1808, 1809, 1813, 1815, 1817, 1923, 2165, 2188, 2193 service life cycles 4 service performance management 1920 service providers 39 service quality 160 service-business modeling 76 service-delivery models 79 service-enterprise engineering 71 service-enterprise-engineering research 76 service-line capabilities 497 service-oriented architectures (SOAs) 82, 782, 930 service-oriented business 71, 76 service-oriented business components based on business-domain functions 81 service-oriented business value net 75 service-oriented component-network architectural model 82 service-oriented enterprise 81 service-oriented IT 81, 86
service-oriented IT computing architecture 81 service-oriented IT systems 85 services design and engineering 78 services design and engineering processes 78 services innovations framework and modeling 79 services modeling and innovation framework 79 services offered and the industries targeted 517 services offered by Infosys 517 services operations 79, 80 services operations and management 79 services, additional 797 services-enterprise engineering 74 services-led total solution 77 shadow economy 2232 Shanghai 516 shared service center 1201 SHENYANG 1261 Shenzhen 516 shoring strategies 129 short-term orientation 100 shrinkage in product 4 Siemens Corporate Research 1534– 1556 simple object access protocol (SOAP) 86 simulation phase 2166 single european electronic market (SEEM) 1023 site specificity (SSI1) 1488 skilled professionals 515 SLA, application 1814 SLA, network 1813 Slashdot 1899 small and medium enterprises (SMEs) 679, 682, 818, 1098 Small Business Federation (SBF) 1103 smart sourcing 151 Smithsonian Institute 611 SMS model (single data owner-multiple clients-service provider) 2059 SOAP (simple object access protocol) 856 social capital 1392, 1394, 1396 social capital theory 1392 social constructionist view 894 social effects 174 social exchange theory 972, 990 societal, political, and ethical factors 6 Society for Information Management (SIM) 169
socioeconomic issues, India 1865 socioeconomic issues, U.S. 1867 socio-economic status 1594 soft financial analysis 1155 software as a service 2302, 2303 software configuration management (SCM) 1403 software development 1344 software development company (SDC) 610, 611 software development distribution model 1730, 1733, 1735 Software Engineering Institute (SEI) 525, 1812, 1813 software engineering principles to OEM 2295 software exports 514 software process 1428 software process assessment 1428 software process improvement 1428 Software Process Matrix 1432 software quality 1428 software tools 1825 software-as-a-license approach 930 software-as-a-service (SAAS) 138, 206 software-as-a-service model 929, 930 source code 432 sourcing decision 1257 sourcing management system 1022 Specialist ASP 928 specify the contract terms 746 Spedition Chur AG (SCA) 1125–1139 Speech Acts Theory 848 spin-offs 151, 1336 spiral effects 174 spot checks 1809 SPSS, definition 1332 SRM processes 867 SS model (single user-service provider) 2059 staff concerns on offshoring 499 staffing budget 501 staffing projection 501 stage model 1117, 1122 standardization 94 state machine controller (SMC) 2174 stochastic dynamic programming formulation 270 strategic alliance 152, 733, 2392 strategic alliances, as a process 2393 strategic decision making 267 strategic demand planning 735, 736, 737, 740 strategic imperatives 1075 strategic management theories 160 strategic networks 732, 1013
